April Edition 2022 IsraelDesks Presented by In Partnership with
Barely a week goes by when we are not learning about another unicorn - a private company with a USD 1 billion valuation - and in this sizzling edition of IsraelDesks, we speak to the most prominent thought leaders in Israel to find out what factors help Israel account for some 8% of global unicorns, with just 0.1% of the global population. From Herzog, Meitar, and EBN to Yigal Arnon, Naschitz Brandes Amir, and Gornitzky, experts share their views on the opportunities and challenges today, and where the next batch of unicorns will come from. As the world spins ever faster, remember that once notorious topic of Brexit? We catch up with Ashurst and Fladgate, who share their insight on the Israel-UK relationship going forwards. With SPACs in Israel on the rise during the pandemic, Davis Polk &Wardwell shares insight on the impact of new SPAC rules today. With the vibrant cannabis industry in Israel continuing to gather pace, Carter Ledyard & Milburn examines the initiatives over in New York to kickstart the cannabis industry for adult use. A team from Dechert examine the Executive Order issued recently by President Biden to ensure the responsible development of Digital Assets. Lee Saunders, Editor IsraelDesks
Jurisdiction in the Spotlight | Brexit Fireside Chat - the relationship burns bright Recent Market Trends » » SEC proposes new SPAC rules that are expected to significantly reduce SPAC activity » » New York’s Attempts To Jump Start The Adult-Use Cannabis Industry Through Social Equity » » Biden Executive Order on Ensuring Responsible Development of Digital Assets » » US-Israel Legal Review 2021 Industry Focus | Israel's Unicorn Success Story Table of Contents 04 16 22
Industry Focus Israel's Unicorn Success Story
5 What does the future hold and which sectors will produce the next batch of USD 1 billion companies? Israel accounts for some 8% of global unicorns, but for just 0.1% of the global population Ancient Greeks and Romans once described unicorns as extremely quick and light on their feet, with a horn that was highly prized by merchants and investors. It’s a characterization that can also be applied to today’s ‘unicorn’ companies – the term used since 2013 to describe private companies with valuations of over USD 1 billion. Then, there were only a few dozen such companies in the whole world. Today, barely a month goes by where we are not reading about another story of a start-up being a disruptor, turning markets and industries on their heads. In February 2022, Bloomberg reported over 1,000 unicorns globally and more than 500 of these companies became unicorns over the course of 2021 alone, a staggering number. That Israel has more unicorns per capita than any other country is not new but why, and especially why now? We caught up with the most prominent thought leaders to ask them to look through their economic looking glass and outline what developments they are witnessing in relation to Israel’s ever-growing club of ‘unicorns.’ Set against the backdrop of an ongoing pandemic, a conflict in Ukraine and a global economy plagued by uncertainty, the Israeli tech industry continues to adapt, innovate, even thrive. “Israel accounts for some 8% of global unicorns, but for just 0.1% of the global population. So, we are punching some 100 times our weight in the world,” said Aharon Aharon, a former CEO of the Israel Innovation Authority. Many of these Israeli founded unicorns are being set up in Israel and managed from Israel, which was not the case before when they would get a US manger and move their HQ to the U.S to be near investors.
6 An in-depth report by StartupBlink shows how Israel, in 3rd place, has substantially closed thegapon theUK, in2ndplace,both trailing theU.S.While Tel Aviv is renowned as the start-up hub, the report highlights a number of other cities in Israel doing well. Behind Jerusalem and Haifa comes Yokneam, ranked 5th nationally, “a particularly inspiring case study of a small town relatively far from other cities in Israel that has received tax benefits and used them in a cost-efficient way to create a strong hub that produced a unicorn in its vibrant tech park.” Ashdod, ranked 6th nationally, shows that “building a strong seed ecosystem while being situated relatively close to a hub like Tel Aviv is possible.” Eilat, ranked 7th nationally, also climbed in the table, an inspiring example of an ecosystemwhich is primarily focused on agro-tourism, and has managed to create an interesting hub deep in the desert. While four more cities joined the rankings: Nazareth, Caesarea, Modiin-Maccabim-Reut and Nahariya, there is also a potential to fulfil in the Galilee, with star city Kiryat Shmona already home to several start-ups – many of them operating in the food-tech space – as well as the recently-launched Margalit Start-Up City Galil, named after its founder Erel Margalit, founder and chairperson of venture capital fund Jerusalem Venture Partners. Last year, over USD 100 billion entered Israel through start-ups, with 33 new companies joining the unicorn club in 2021 and Israeli IPOs growing by 520% from 2020. Some of it relates to global trends including the COVID-19 digital disruption and a dearth of attractive investment options. Use the big budgets in the US and Europe to leverage Israeli innovation Gap shrinks between UK and Israel
7 Every massively successful ecosystem has institutions which took a leading role in its creation. In many cases, it is either a university, an accelerator or a massive corporation. In Israel, it is the army, which became one of the world’s top startup accelerators, by accident. Roy Caner, Head of High-Tech at Erdinast, Ben Nathan, Toledano & Co.With Hamburger Evron (“EBN”), points out: “service in certain large technological units in the Israeli army provides the founders with unequivocal experience.” Furthermore, there is also a tradition and mentality geared towards innovation, where success stories attract more talent and failures generally do not discourage, but encourage additional attempts.” Daniel Damboritz, partner at Yigal Arnon adds: “Israel is, ultimately, a very young country - just shy of 75 years old. Israel has had to be creative in securing its future from the day it announced its independence. So innovation has essentially always been a crucial factor for Israel’s ability to, literally, survive. This sense of need to be innovative has forced people to take responsibility over their own destiny. Israeli’s learn at a young age that if they want to achieve a goal, they will likely need to ‘figure it out’ it themselves.This results in early adulthood and a deep senseof responsibility, also brought upon by a mandatory military service.” Meitar partner Assaf Oz added: “We are living in an era of low interest rates, which has been so for, perhaps, longer than ever before. With that comes tons of money that needs to be deployed, and a significant part of such investments is being allocated to the high-tech industry.” Pointing to “thepandemic,governmental cash injections and the low interest rates in the financial markets,” Noga Devecseri Spira, partner at Naschitz Brandes Amir also highlights the fact that “Israel has seen a significant growth in founders willing and able to build significant organizations. It is about serial entrepreneurs, as well as executives in start-ups or global companies and first-time founders that are aiming to build start-ups that reach the market fast or are based on deep technology with a worldchanging vision.” Oded Uni, partner at Gornitzky, said: “We see very young students taking computer science and cyber-security courses at school with a view to be Why does Israel have a disproportionate amount of success in this field?
8 drafted to Israel’s elite technological military units (which,many times,would open the door to a successful hi-tech career). Another reason is what I call ‘the practicality of the invention.’ While in other places we sometimes see a race for the coolest technology, in Israel the unicorns are usually focused on solving real problems which could yield an unbelievable value. Another explanation is that considering Israel’s small size, Israeli startups are set up from inception with an eye towards the global markets. That dictates awareness of market trends and strategic planning customarily found only in more mature companies.” As Caner of EBN points out: “the leading multinationals, growth and earlystage global VCs are now identifying Israel as an unparalleled place of talent and successful innovation. In addition to multinationals such as Google, Meta, Amazon, Intel, Motorola, Medtronic, and many others opening hubs in Israel (often after or through local acquisitions), now prominent VCs such as Insight Partners, Tiger Global and lately Blackstone and the Vision Fund are having people on the ground and investing significant and disproportionate efforts in Israel, compared to other places.” Indeed, according to a report published in December 2021 by Start-Up Nation Central, an Israeli nonprofit that promotes the local technology sector, the most active foreign investor in Israeli companies in 2021 was Insight Partners, a New York-based firm that invested in 49 rounds in 2021, up from 17 in 2020. The company’s portfolio includes Israeli success stories like Wix and Monday.com, as well as Shopify and Twitter. American investment firm Tiger Global Management participated in 16 funding rounds in Israeli start-ups in 2021, up from just three in 2020. Foreign VC funds make up four of the top 10 most active funds in Israel, according to the report. The most active Israeli VC company was OurCrowd, with 29 rounds in 2021. Viola is among Israel’s leading tech-focused investment groups with over USD 3 billion AUM. Founded in 2000, Viola has backed over 200 companies and11 unicorns, such as Payoneer, Lightricks,Outbrain, SimiliarWeb and ironSource. Investor interest in climate tech is climbing; new fund almost once a month Who is doing the investing?
9 ironSource 2014 AdTech 2010 Tel Aviv Went public: 2021 Armis 2015 Cyber 2015 Tel Aviv Acquired: 2020 Infinidat 2015 Cloud storage 2011 Herzliya Taboola 2015 AdTech 2007 Tel Aviv Went public: 2021 Gett 2016 Auto/Transport 2010 Tel Aviv Payoneer 2017 FinTech 2005 Petach Tikva Went public: 2021 JFrog 2018 DevOps Software 2008 Netanya Went public: 2020 Landa 2018 Digital Printing 2002 Rehovot OrCam Technologies 2018 HealthTech 2010 Jerusalem WalkMe 2018 Digital Adoption Platform 2010 Tel Aviv Cybereason 2019 Cyber 2012 Tel Aviv Fabric 2019 Micro-Fulfilment 2015 Tel Aviv Lemonade 2019 FinTech 2015 Tel Aviv Went public: 2020 Lightricks 2019 App Developer 2013 Jerusalem Monday.com 2019 Project Management Software 2012 Tel Aviv Rapyd 2019 FinTech 2016 Tel Aviv Riskified 2019 FinTech 2012 Tel Aviv Trax 2019 Artificial Intelligence 2015 Tel Aviv AppsFlyer 2020 AdTech 2011 Herzliya BigID 2020 Cyber 2016 Tel Aviv Cato Networks 2020 Cyber 2015 Tel Aviv Unicorn Unicorn Founded Where? Exit Industry
10 eToro 2020 FinTech 2007 Bnei Brak Forter 2020 FinTech 2013 Tel Aviv Gong 2020 Revenue Intelligence 2015 Ramat Gan InSightec 2020 HealthTech 1999 Kiryat Ono Moon Active 2020 Social gaming 2012 Tel Aviv Next Insurance 2020 FinTech 2016 Kfar Saba Redis Labs 2020 Database Management 2011 Tel Aviv SentinelOne 2020 Cyber 2013 Tel Aviv SimilarWeb 2020 AdTech 2007 Tel Aviv Sisense 2020 Big Data 2004 Ramat Gan Snyk 2020 Cyber 2015 Tel Aviv Tipalti 2020 Accounting Software 2010 Herzliya Vast Data 2020 Data and Management Analytics 2016 Tel Aviv Via 2020 Auto/Transport 2011 Tel Aviv K Health 2021 Digital Health 2016 Tel Aviv Melio 2021 Financial Services 2018 Tel Aviv DriveNets 2021 Network Cloud 2015 Ra’anana OwnBackup 2021 Cloud Data Protection 2015 Tel Aviv Earnix 2021 IT & Services 2001 Givatayim YOTPO 2021 E-commerce marketing 2011 Tel Aviv Aqua Security 2021 Cloud Security 2015 Ramat Gan Axonius 2021 Cyber 2017 Tel Aviv Orca Security 2021 Cloud Security 2019 Tel Aviv Wiz 2021 Cloud Security 2020 Tel Aviv Source: TechAviv; News sources and Nishlis Legal Marketing. Table continues to be updated.
11 Which sectors are particularly hot? With a handful of exits and some SPAC mergers pending, today’s entrepreneurs also feel less pressure to seek an exit, as long as they can continue to raise the money they need from private funders. Staying private allows many companies to avoid the additional scrutiny and potential loss of control that comes with an initial public offering. Israeli high-tech covers all spheres of life, from technologies that will protect our computers and smart phones, to digital medicine that finds innovative ways to treat patients all the way to a lab made hamburger that will revolutionize what and how we eat. According to the SNC report, the sectors that drew the most capital in 2021, like in 2020, were enterprise IT and data infrastructure, cybersecurity, and fintech. About 65% of the total funding went to companies in these sectors, compared to 52% of the total raised by the same sectors throughout all of 2020. In fact, In March 2022, Glilot Capital, one of Israel’s leading VC funds, raised USD 220 million for its fourth Seed fund, in order to invest in young companies in the fields of cybersecurity, enterprise software and developer tools.
12 Israel’s unicorns span a range of verticals. Assaf Oz of Meitar said: “The hottest sector seems to be cyber security, and with the number of cyberattacks growing exponentially, and the catastrophic impact that a mega attack can create, I believe it will continue to be super-hot.” In Cyber, there is a growing raft of unicorns, including Armis, Axonius, BigID, Cato Networks, Cybereason, SentinelOne and Snyk, with Armis acquired in 2020. In FinTech, there is also a large presence: eToro is the Israeli-founded insurance company that had a valuation of USD 10.4 billion in 2021, making it the highest valued private tech companies in Israel. There is also Forter, Next Insurance, Rapyd, Riskified, Melio, Lemonade, and Payoneer, which went public in 2020 and 2021 respectively, and just inMarch 2022, Capitolis joined the unicorn club,cementing Israel’s position as leader in the FinTech sector.As Oz says: “Fin-tech is also very strong, and there is no doubt it would continue to grow. I believe that we are just in the beginning of the road for block-chain and cryptocurrency technologies and companies. Finally, since we are already "living on the cloud", anything related to that will only get bigger.” EBN’s Caner adds: “Hot sectors include food-tech. Examples includes FutureMeat,which just raisedUSD320million round (wherewe represented its major investors including S2G, Tyson Food, ADM capital and many others, since inception), Redefine Meat, where we represented some of its investors, Amai Proteins, where we represented some of its investors, and The Mediterranean Food Lab, which we represent. Key sectors include ag-tech, AI, enterprise software and FinTech, where we were involved in numerous transactions representingboth the companiedand their investors. As always, Cyber, where we were involved in many transactions including the representation of the investors in Cymulate, and the representation of Waterfall, Kaymera and RecoLabs (including on its recent round led by Insight Partners).” “Israeli technology companies raised an all-time high of USD 26.6 billion last year. That was more than double the level raised in 2020” (SNC Report, December 2021) Which sectors would you expect to produce the next set of unicorns?
13 Damboritz at Yigal Arnon agrees: “There is no question that in Israel it’s mainly cyber today. Nonetheless, we see companies growing beautifully also in other spaces such as FinTech and SaaS, and I am not disqualifying any deep tech company from making a good unicorn run. If I had to guess what would be the next up and coming verticals, I would probably guess we are going to see more and more interesting food-tech and ag-tech companies catching the investor eye but who really knows what the future holds.” Hanan Haviv, partner and head of High-Tech at Herzog Fox & Neeman (“Herzog”), said: It is fair to assume that with declining valuations in public markets, especially for companies that recently became public, and the general sense of anxiety in the markets, the next wave of unicorn will be more "humble." Even without that, start-ups and the next generation of unicorns have plenty of challenges to go around. The commercial challenges start with finding “The Right” Idea/need, gaps in skills and business management, heavy competition and of course one of the biggest challenges is hiring andmanaging a team- finding hardworking, resourceful, and skilled professionals may very tough especially with the Israeli tech sector suffering a chronic shortage of tens of thousands of skilled employees. At the end, all of it boils to execution at the right timing. Damboritz at Yigal Arnon: “The commercial challenges that companies are going to find, I believe, are the need to scale quickly and justify the tremendous amounts of money invested in them. In terms of regulatory challenges, we obviously see an increasing requirement to meet global privacy and data protection standards. These are issues that didn’t interest investors just a few years ago, and today are the first questions companies are being asked. However, with innovation being so fast, we mainly see the strong ventures challenging the regulator to keep up with their innovation, forcing the regulator to understand the innovative advancements and adopt relevant policies.” “In terms of the regulatory challenges, lawmakers and regulators often have good intentions when they propose new rules and regulations,” says Haviv at Herzog. “However, the accumulation of regulation over the past If the unicorn club is to grow, what commercial, financial or regulatory challenges do unicorns face?
14 several years has often slowed technological innovation, especially for technology start-ups that operate in more heavily regulated industries, like Fintech or Medical Devices. However, this could be an opportunity to leverage compliance against competitors. Start-ups have significant competitive advantage over established companies when it comes to compliance in a changing regulatory landscape – they are more agile and less stuck on the old way of doing business. They can make changes much more rapidly, and can build a product with the needed capabilities in mind, at the outset. Factoring nimble compliance into product design will attract perceptive investors and, perhaps more importantly, smooth entry into established markets. Uni at Gornitzky adds: “Regulatory challenges are mostly affected by sector and should be examined case by case-by-case. For example, start-ups in the crypto-currency and financial services industry could be subject to a close review by the regulator, while other sectors can enjoy a relatively convenient regulatory environment.” “The fact that the Israeli market is small sometimes leads Israeli companies to focus on global markets. Therefore, in some industries, Israeli regulation may become less relevant. For example, in the medical aesthetic industry, certain companies will not make efforts to obtain an “Israeli FDA” because they do not intend to sell in Israel anyway. They will probably work to obtain a CE mark and FDA approval. Investors should also bear in mind that there are Israeli companies that receive grants from the Israeli government and are therefore subject to certain restrictions on their ability to transfer their know-how and IP out of Israel and this could impede a future sale of the company. However, the law provides for ways to relax or lift these restrictions. In any event, before an investment is made it is advisable to check whether the company has received governmental grants. In terms of investment regulation, it is quite easy to invest in Israeli start-ups. There are no restrictions on nominating non-Israeli individuals as directors in Israeli companies and receiving dividends as shareholders (subject to certain standard tax laws).” Regulatory challenges will depend on the sector
15 Funding is available for those who earn it Regarding financial challenges, Haviv at Herzog adds: “Funding is available for those who earn it. Today, in the Israel only, there is over 400 Venture Capital funds not including foreign-based VCs, CVC, Angels, incubators and accelerators. Even when funding is pouring in, it is not easy for startups to grow, survive and let alone successfully exit. As the landscape is highly saturated with a number of similar solutions or companies. Today’s entrepreneurs and startups required to work extra hard to differentiate them self and prove they are the next unicorn. It’s important to note that companies big or small can face capital constraints. It’s not only for selffunded companies or early-stage ventures but startups and companies the plan for the long run and In order to succeed in a competitive business world, start-ups need to have high but realistic expectations, keeping view of the resources available, the extent of growth potential, and other market factors as well." As Gornitzky’s Uni states: “The market’s climate was very welcoming in 2021 and it currently seems that the trend continues into the first quarter of 2022. The year 2021 was a fantastic, record-breaking year in terms of the aggregate fund-raising amount by Israeli start-ups (whether through IPOs or straightforward investments) as well as in M&A value. Though in certain cases the value is now challenged (in particular in a few SPAC deals), we have seen once again, that if the technology is unique, the team is exceptional and the solution helps to address a real pain that is supported by a viable business model, the sky is the limit.”
Jurisdiction in the Spotlight Brexit Fireside Chat - the relationship burns bright
17 Alex Haffner, Partner, Fladgate: From our perspective here at Fladgate LLP, very good. The extremely strong ties which bind UK and Israel continue to hold. Moreover, we have found that the UK has not lost any of its luster as the primary location for Israeli companies looking to expand into the European continent, not least given the climate for investment in the UK which (Covid-19 aside) can best be described as buoyant. Etay Katz, Partner, Ashurst: The UK has a Trade and Partnership Agreement with Israel that has been fully in force from 1 January 2021. This free trade agreement is one of the UK’s trade continuity agreements – UK trade deals with countries, which had an agreement with the EU before 1 January 2021. With some modifications, these deals generally replicate the terms of EU trade agreements, which the UK enjoyed before leaving the EU. The agreement covers areas such as trade in goods, customs tariffs and tariff rate quota, rules of origin, trade in services, intellectual property rights, government procurement, and conformity assessment of pharmaceuticals The UK government subsequently announced that it will seek to upgrade the UK's trade and investment relationship with Israel. The UK has for a long period seen Israel as a strategic partner in matters of sciences, defence and technology. Given the continued prominence of Israel as a technology and science hub we would expect the relationship to strengthen with the UK trying to effectively compete in its chosen areas with former and emerging European industry hubs. In particular, the UK is keen to enhance its world leading software (e.g. cybersecurity), hardware (e.g. semiconductor chip industry) and in continuing to cement London as a global hub for FinTech innovators including established financial institutions and newcomers. The rapid pace of innovation that continues to flow from Israel is seen by the UK as critical in solidifying the UK in an Amidst the slew of global events to take place in the past two years, one of the more landmark ‘exits’ was that of Brexit, which may feel like on the backburner. Nonetheless, since the new relationship between the UK and EU started on January 1, 2021, we take a look at how this is unfolding and especially with regards to the Israeli companies in the UK. We sat down with two leading partners, from leading multinational law firm Ashurst and hugely prominent UK firm, Fladgate, for their insights and thoughts. We are over a year on from Brexit, and while overshadowed by the Coronavirus pandemic, how has the post-Brexit relationship been between Israel and the UK?
18 effective triangular relationship with the US and Israel. The US tech giants have significant activity in the UK due to availability of talent and favourable trading conditions. Moreover, the UK has for some time been looking to emulate the success of Israel in fostering innovative and entrepreneurial business spirits with a focus on small and medium type companies of a highly innovative nature. We expect these efforts to continue to intensify in the post Brexit era. Alex Haffner, Partner, Fladgate: We have not seen any significant impact from a logistical or bureaucratic viewpoint. Across the board UK authorities and industry bodies have very close working relationships with their Israeli counterparts and Brexit has done nothing to change this. On the contrary, in many areas it has enabled these organizations to strengthen existing ties. Legally, there are undoubtedly certain challenges to be overcome in specific areas, the most prominent example being the impact Brexit has had on the ability for financial services companies to obtain UK authorization and “passport” that to the EU. However, these have not had any discernible impact on the UK’s attractiveness as a destination for Israeli nationals and companies, and on the contrary we as a law firm have continued to see a significant uptick in work for Israeli domiciled clients. Etay Katz, Partner, Ashurst: We have seen little immediate impact on UK-Israel relationship following from Brexit and expect the real test to be whether or not the two countries would cease this windowof opportunity to create a more pervasive favourable trading and development environment now that the UK is not saddled with EU public policy considerations. Alex Haffner, Partner, Fladgate: We would be tempted to say anything “tech” related! We agree with the list provided. Fintech is a particular area of focus for us. We recently sponsored the UK Israel Tech Hub’s Fintech programme which showcased the UK as a destination for Israeli fintech companies and were struck by the quality of participants and the very From a legal, logistic, or bureaucratic point of view, has Brexit impacted the Israeli-UK relationship? We see a lot of activity in the realm of digital health, as well as cyber, fintech, and other areas. What fields do you see as being of interest today for UK and Israeli investors?
19 significant opportunities they have already been able to leverage from in the UK market. Outside of these industries, we are particularly excited at the prospects for sportstech, crypto/NFT, insuretech and the edtech which has seen a real surge since Covid-19 brought into sharp focus the need for the education sector to cater to the technological needs of students at all levels. Etay Katz, Partner, Ashurst: We see increased amplified interest in Israel by UK trade, venture and private equity investors. We expect this trend to continue to rise given the maturity of the Israeli market alongside its highly innovative nature. Focus on CleanTech to drive a broader adoption of Environmental Social and Governance agenda offers a rare opportunity for Israeli technology to lead a global revolution.Solar energy,water desalination and waste management are amongst areas that Israeli innovators are very focused on and these offer a great collaboration platform. On the other hand the continued growth of some of Israel's technology unicorns make them likely predators for small to medium size acquisitions of UK companies looking to break new grounds in the same fields of interest. We are seeing unprecedented interest in bolt on acquisitions by Israeli companies across Europe and with a focus on the UK. Alex Haffner, Partner, Fladgate: We deal with a lot of VCs and family office investment groups and we have noticed an increasing interest amongst all of themtoscout for opportunities in Israel.This in turnhas ledtomany investments by UK based investors in funding rounds in Israeli companies. However, the most notable transaction was the listing at the end of 2021 of Windward – the Israeli maritime technology company – on the London Stock Exchange. We were Windward’s legal advisors on the flotation, which marked the longawaited return of Israeli technology companies to London. Once the current market uncertainty dissipates,we expect to see other Israeli companies turning to London for growth opportunities and access to capital markets. In these and other fields, what have been themajor commercial transactions between the countries over the last year?
20 Alex Haffner, Partner, Fladgate: In early February the UK’s International Trade Secretary was in Israel to start formal talks on a new trade deal between the countries – a deal which is expected to be concluded by the end of 2022. This will undoubtedly have a significant impact on economic relations between the two countries and, we expect, a spur for greater opportunities for bilateral trade and investment. From our own perspective, we are looking forward to taking advantage of the (hopeful) retreat of Covid-19 to travel frequently again between the UK and Israel and hold more events like the one mentioned above in connection with the UK: Israel fintech programme. Etay Katz, Partner, Ashurst: We host a wide variety of events and thought leadership seminars that bring together representatives from across our client base, industry and legal experts to discuss a range of "hot topics "not only in this sector but across the board. If IsraelDesks members would interested in hearing more/have specific interests, we would be happy to discuss further. Which major events should Israeli or UK investors should be keenly aware of to stay up to speed? Do you have any specific events planned?
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Recent Market Trends SEC proposes new SPAC rules that are expected to significantly reduce SPAC activity
23 ISRAEL HAS 2020 VISION There has been an unprecedented run of initial public offerings by special purpose acquisition companies that raised nearly a quarter trillion dollars in the last two years, including a number that subsequently merged with Israeli companies to take them public. On March 30, 2022, the SEC proposed a sweeping set of rules in a 3-1 vote that the majority indicated would ensure “greater transparency and more robust investor protections” that “could assist investors inevaluatingandmaking investment,voting,and redemption decisions with respect to these transactions.” In contrast, the lone dissenting Commissioner indicated that the proposal “seems designed to stop SPACs in their tracks,” noting that while there are legitimate disclosure concerns, she would have supported “sensible disclosures around SPACs and de-SPACs.” We tend to agree with the dissent that if the rules are adopted as proposed, SPAC activity will be significantly reduced, making that exit opportunity less useful for Israeli companies. The proposals are in significant part motivated by Chair Gensler’s view that de-SPAC transactions in which a private target operating company completes a business combination with a SPAC are functionally the equivalent of a traditional IPO by that private operating company. He has regularly stated that the SEC needs to treat like cases alike, and investors in de-SPAC transactions deserve the same protections of traditional IPOs. But, the proposal goes further than treating “like cases alike” and, instead, extends the SEC’s regulatory authority by imposing a set of substantive requirements with respect to SPAC business combinations that go beyond what would be required in a traditional IPO. The proposal is open for public comment through at least May 31, 2022, reflecting another recent SEC trend of shrinking comment periods for major rulemaking. We plan to submit a comment letter on the proposal and hope that the SEC will be open to a dialogue with market participants. When a SPAC merges with a private company, that transaction is typically referred to as a “de-SPAC transaction.” The SPAC and private company must file a registration statement with the SEC that is similar to an IPO SEC proposes new SPAC rules that are expected to significantly reduce SPAC activity By Michael Kaplan and Lee Hochbaum of Davis Polk & Wardwell LLP
24 registration statement, but includes details about the merger and any projections shared by the private company with the SPAC. Enhanced Disclosures There are a number of rule changes that would require additional disclosure in the registration statement. The enhanced disclosure requirements focus on: » » the sponsor’s experience, the arrangements between the persons that control the sponsor, and all compensation that has or will be awarded to the sponsor or any affiliates or promoters; » » conflicts of interest between the unaffiliated security holders of the SPAC and the sponsor, its affiliates or the SPAC’s officers, directors or promoters; » » dilution that shareholders may experience in both the SPAC initial public offering and in the de-SPAC transaction; and » » the fairness of the consideration paid to the target equityholders and to the unaffiliated security holders of the SPAC, including: • a statement from the SPAC as to whether it reasonably believes that the de-SPAC transaction and any related financing are fair or unfair to unaffiliated security holders; and • disclosure of any outside report, opinion or appraisal relating to the fairness of the transaction. In addition the SEC proposal would require additional disclosure regarding projections in de-SPAC transactions, including disclosure of: » » the purpose for which the projections were prepared and the party that prepared them; » » the material bases of the disclosed projections and all material assumptions underlying the projections, and any factors that may materially impact such assumptions; and » » whether the disclosed projections still reflect the view of the board or management of the SPAC or target company as of the date of filing. Finally, the SEC proposal includes technical changes to the reporting requirements in de-SPAC transactions to harmonize the financial statement requirements with the analogous requirements for a traditional IPO. These changes are generally welcome.
25 Many of the SEC’s proposals for enhanced disclosures and harmonizing financial statement requirements are consistent with current market practice for disclosures in SPAC IPOs and de-SPAC transactions, and do not appear to be overly burdensome. The disclosure requirements with respect to the fairness of the transaction, while not specifically requiring a fairness opinion, are clearly intended to push market participants towards obtaining a fairness opinion more typical for public M&A transactions, including disclosure of the corresponding reports/opinions provided by outside advisors. Enhanced Liability The SEC also has issued a number of proposals that serve to enhance liability in SPAC transactions, and these are likely to have much more significant impact if adopted. First, the SEC proposal would require that all de-SPAC transactions, regardless of structure, be deemed to be a sale of securities to the SPAC’s shareholders. Israeli deals have typically involved an offer of target company shares to SPAC shareholders so this would not impact them, but for other issuers, where the SPAC issues shares to private company shareholders, this will have the practical effect of increasing the liability profile of the transaction so that all shareholders of the combined company can bring securities laws claims. Second, the SEC would require that the private company be a registrant and liable for the registration statement. Similar to the prior one, this will not impact Israeli deals where this is always the case, but will expose these companies and their directors and officers to additional liability in situations where the SPAC is the buyer. Third, the proposal includes additional rules that would remove the Private Securities Litigation Reform Act of 1995 (PSLRA) safe harbor that some practitioners believe provides a measure of protection against liability for the use of projections in de-SPAC transactions. The PSLRA provides a safe harbor for forward-looking statements under the Securities Act and the Securities Exchange Act, pursuant to which a company is protected from liability in any private right of action for forward-looking statements when, among other things, the forward-looking statement is identified as such and is accompanied by meaningful cautionary statements. The safe harbor is not available in initial public offerings and is also not available
26 to “blank check companies.” The proposal would amend the definition of “blank check company” to include SPACs, which would have the effect of making the safe harbor unavailable for disclosure in de-SPAC registration statements, including projections. The availability of the PSLRA safe harbor in connection with de-SPAC transactions has not been considered settled law and, even if the safe harbor were available, its availability would be subject to a number of conditions. Accordingly, while the potential benefits of the safe harbor for projections disclosure in the context of de-SPAC transactions has provided some comfort to parties to such transactions in the abstract, it has never operated as a complete shield from liability and therefore we do not expect that the absence of the safe harbor will have a substantial impact on current market disclosure practices. Most significantly, the proposal would deem a SPAC IPO underwriter that “takes steps to facilitate” or “otherwise participates (directly or indirectly)” in a subsequent de-SPAC transaction “or any related financing transaction” to be a statutory underwriter for purposes of the de-SPAC transaction, greatly expanding the liability profile for a bank providing services in connection with a de-SPAC transaction. In addition, as noted above, the proposed rules would require that the registration statement filed in connection with the de-SPAC transaction register not just the offering of shares to the target company’s shareholders but also register an offering to the existing SPAC shareholders, who are deemed to be electing to receive shares at such time. As a result, if the rules are adopted as proposed, SPAC IPO underwriters would be subject to liability to a broad set of plaintiffs for any material misstatement or omission of fact in the registration statement filed in connection with the de-SPAC transaction. The SEC commentary indicates that this would apply to investment banks acting in connection with de-SPAC transactions in a number of different capacities that have not historically been understood to result in underwriter status, including acting as M&A financial advisor or capital markets advisor to the SPAC or the private operating company and as placement agent in connection with any PIPE financing in connection with a de-SPAC transaction. The scope of this proposal “could” even apply to a SPAC underwriter that simply receives its deferred underwriting compensation from the SPAC IPO in connection with the merger, while undertaking no other activities, given this deferred underwriting fee was earned at the time of the SPAC IPO. Commissioner Lee, in her statement, flatly indicated that in her view, the proposed rule will make all SPAC underwriters liable as underwriters in a de-SPAC transaction. Importantly, the proposing release conveniently characterizes this novel change in the application of underwriter liability to de-SPAC transactions as a “clarification”, thereby suggesting that banks may have had underwriter liability for past de-SPAC transactions and, in turn, opening
27 the door to a retroactive application of the proposed rule. Of additional concern, the proposing release indicates that the new proposed rule is not intended to be an exhaustive assessment of underwriter liability in deSPAC transactions and that the SEC or federal courts may in the future find that other parties involved in a de-SPAC transaction, including financial advisors, PIPE investors or other advisors, are “statutory underwriters” if they are purchasing from an issuer with a view to distribution, selling for an issuer or are merely “participating” in a distribution of securities in a deSPAC transaction, regardless of whether they also acted as underwriter in connection with the SPAC’s IPO. Investment banks have historically avoided underwriter status for de-SPAC transactions for a number of reasons, including that registration statements for de-SPAC transactions frequently include projections and banks are uncomfortable assuming liability for that information due to its inherent uncertainty. For the same reason, company projections are not included in registration statements for traditional IPOs and instead information derived from company projections is conveyed to investors by other means. In a traditional IPO, the SEC does not mandate the inclusion of projections, and the SEC does not seek to impose liability on financial advisors, placement agents or banks who are simply paid pursuant to the terms of an existing engagement letter. Given that the registration statement in a de-SPAC transaction must include any projections provided to the SPAC’s board of directors under existing SEC rules and practice and a SPAC board of directors fulfilling its fiduciary duties has incentives to request and review target companyprojections,weexpect that thisexpansive interpretationwill cause many banks to simply refuse to participate in de-SPAC transactions and insist on receiving their full underwriting compensation in the SPAC IPO rather than deferring a portion of it, as is current market practice in many transactions. This would make executing de-SPAC transactions more difficult andwould increase the upfront costs of a SPAC IPO, thereby having a significant chilling effect on SPAC activity. At least one major bank has announced a pause on SPAC transactions pending clarity from the SEC. We are hopeful that the SEC will amend the proposals before adopting them, but if the Commission does not do so, it is likely that the alternative exit path offered to Israeli companies by SPACs will be significantly limited or eliminated. Michael Kaplan and Lee Hochbaum are partners at Davis Polk & Wardwell LLP and co-heads of the firm’s Israel practice. Michael is a member of Davis Polk’s Management Committee and head of the firm’s Corporate Department. Lee co-heads the firm’s SPAC practice.
Recent Market Trends New York’s Attempts To Jump Start The Adult-Use Cannabis Industry Through Social Equity
29 This month marks the one-year anniversary of former Governor Andrew Como signing theMarihuana Regulation and Taxation Act (“MRTA”) into law. Yet, a year on, it does not appear that proposed regulations – and licenses – for commercial adult-use cannabis market are on the near horizon. This likely means that sales under the MRTA will not begin in earnest until the first quarter of 2023, at the earliest. However, it does appear that New York is poised to issue some conditional licenses this year as part of its “Seeding Opportunity Initiative,” which seeks to prioritize individuals impacted by the war on drugs as part of the licensing process. In order to create the infrastructure for some limited sales in 2022, the initiative has three prongs. The Conditional Adult-Use Retail Dispensary License At the center of the initiative is a “Conditional Adult-Use Retail Dispensary” licensemeant to go to social equity entrepreneurswho have been convicted (or had a close family member convicted) of marijuana-related offenses and New York’s Attempts To Jump Start The Adult-Use Cannabis Industry Through Social Equity By Alex Malyshev, Carter Ledyard & Milburn LLP Alex Malyshev Author Guy Ben-Ami Contact, Israeli matters
30 have a background in owning and operating a small business. The Office of Cannabis Management (“OCM”) published proposed rules after its March 10, 2022, meeting. The rules are now in the public comment period. The OCM’s aim is to begin issuing these licenses towards the end of the Summer of 2022 (which means sales may occur by late 2022). Under the proposed rules, an applicant must demonstrate (1) a significant presence inNewYorkState,(2) that at leastoneof theowners (if theapplicant is an entity) was “justice involved” in New York (e.g. convicted, or had a close family member convicted, of marijuana related offense, prior to the MRTA coming into force), and (3) that the applicant held at least a ten percent ownership interest in, and control of, a qualified business for two years. Such “justice involved” individuals must own at least 51% of the applicant. Alternatively,an applicant canbe a non-profit organization recognizedunder Section 501(c)(3) of the Internal Revenue Code serving “justice involved” individuals and communities impacted by the war on drugs by operating a social enterprise that had at least two years of positive net assets or profits. Such an organization must have “justice involved” individuals on its board, and employ five full time employees. Considering federal prohibitions on cannabis, and the Internal Revenue Service’s general hostility to the industry, it remains to be seen whether this is a viable avenue for a license At the conclusion of this “conditional” period, licensees will be given the opportunity to transition into a fully licensed adult-use retail dispensary. In evaluating such an application the OCM will look at the licensees history of compliance with state and local laws, and service to the community in which it is located. The Conditional Adult-Use Cultivator And Processor Licenses Recognizing that adult-use dispensaries cannot open without supply, Governor Hochul signed Senate Bill S8084A into law, allowing certain hemp cultivators and processors to apply for “Conditional Adult-Use Cultivator” and “Conditional Adult-Use Processor” licenses this year. The legislation achieves this by allowing a subset of existing participants in the state’s “pilot” hempprogramto apply for these provisional licenses. The application portal is already open. To be eligible for a conditional cultivator license, an applicant must: (1) have been authorized to grow hemp under the Department of Agriculture
31 and Markets Industrial Hemp Research Pilot Program; (2) be in good standing with the Department of Agriculture and Markets; (3) have been authorized by Department of Agriculture and Markets to grow cannabinoid or “CBD hemp” as opposed to growing hemp for grain or fiber; (4) have grown and harvested cannabinoid or “CBD hemp” for two of the past four years (between 2018 - 2021) and be able to provide the Office with proof documenting such activities; and (5) hold at least a 51% or more ownership in the entity that held the industrial hemp grower authorization from Department of Agriculture and Markets. A conditional licensee may grow up to one acre of cannabis outdoors, or 25,000 sq/ft in a greenhouse, and may engage in “minimal processing and distribution” activities of their own cannabis flower products. The application fee is $2,000. To be eligible for a conditional adult-use processor license, a processor must (1) have applied for a cannabinoid hemp processor license before January 1, 2022, (2) hold an active cannabinoid hemp processor license, and (3) as an individual applicant have an ownership interest of 51% or more of the entity that is the licensee. The license will allow the processing and manufacturing of cannabis products at the same location as the previously authorized hemp processing (unless permission to relocate is obtained). The licensee will also be required to comply with various environmental mandates and requirements. Importantly, to avoid the need for a separate conditional distribution license, holders of conditional processor licenses will be allowed to distribute products until June 1, 2023, provided that the licensee complies with requirements imposed by the office. Both types of licenses have restrictions on changes in ownership and organizational structure during the conditional period. Support For Social Equity Applicants Finally, Governor Hochul’s FY 2023 Executive Budget proposes a $200 million public-private fund to provide direct capital and startup support for social equity applicants. In addition, as part of the initiative, the Dormitory Authority of the State of New York (“DASNY”) would provide support leasing and construction services to dispensaries. Because the plan is under active negotiation with the legislature the contours remain in flux. Still, this is a step in the right direction, as failure to support social equity applicants, both financially and through other resources, would simply set them up for ruin once better capitalized and organized applicants enter the field in 2023.
Recent Market Trends Biden Executive Order on Ensuring Responsible Development of Digital Assets
33 Authors: Andrew Boutros, Partner (Chicago, Washington, D.C.) Steven Engel, Partner (New York, Washington, D.C.) Mark Perlow, Partner (San Francisco) Timothy Spangler, Partner (Los Angeles, Silicon Valley) Chante Eliaszadeh, Associate (Los Angeles) Paul Kingsbery (Associate, New York) Andrew Schaffer (Associate, New York) Biden Executive Order on Ensuring Responsible Development of Digital Assets By Dechert LLP On March 9, President Biden issued an Executive Order entitled Ensuring Responsible Development of Digital Assets.1 The President’s Order represents the first time that the U.S. government has sought to develop a coordinated plan for the regulation of digital assets. The Order specifies key policy objectives, including protecting US consumers, investors, and businesses and preserving the stability of the U.S. and global financial systems. Although the Executive Order attempts to balance the risks and potential benefits of digital assets, it focuses on and prioritizes addressing the risks. The Order directs senior officials to participate in an interagency process that will produce reports on various topics relating to digital assets. The upcoming months will likely prove critical for developing digital asset policies for years. Policy Ambiguities Remain The Executive Order does not resolve digital asset policy questions. Instead, the Order recognizes policy goals and establishes a process to achieve those goals. TheOrder’s key policy goals reveal the Administration’s thinking on future policy development. It recognizes the potential value of a U.S.-issued Central Bank Digital Currency (“CBDC”) and expresses the 1 Exec. Order No. 14067 of Mar. 9, 2022, 87 Fed. Reg. 14143 (Mar. 14, 2022), available at https:// www.whitehouse.gov/briefing-room/presidential-actions/2022/03/09/executive-order-on-ensuringresponsible-development-of-digital-assets/.
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