Many investors want to invest in innovative Israeli startup companies before they go public. But some don’t have the high amounts of capital necessary to participate in a venture capital fund, and others don’t want the high risk associated with investing in a small private company with little regulatory oversight and financial transparency. But that all may change soon.
In a recent interview given by the Vice Chairman of NASDAQ, Mr. Proctor describes the strengthening of cooperation between the Tel Aviv Stock Exchange (TASE) and the U.S. NASDAQ stock exchange. The Exchanges are discussing creating an Israeli stock exchange to allow easily investment in Israel startups on the TASE.
The recent interview in Israel was conducted by Ido Asayag from Funder, one of Israel's economic newspapers. Meyer (Sandy) Procter is the Vice Chairman of the NASDAQ, and is responsible, among other things, for the working relationship between the NASDAQ and other stock exchanges around the world. He is also advisor to NASDAQ's senior management group on various subjects including the financial industry, national and international regulation. Sandy joined NASDAQ in 2008 after serving as Chairman and CEO of the Philadelphia Stock Exchange (PHLX) and successfully led the restructuring of that stock exchange and its merger with the NASDAQ stock exchange.
Question: Sandy, thank you for honoring us on a visit to Israel. What brings you to Israel?
Answer: I come to Israel often for personal reasons (I have family in Israel) and business. This time I came to Israel to examine cooperation between NASDAQ and TASE, following a meeting of the heads of the NASDAQ with the Minister of Finance, Mr. Moshe Kahlon. The Minister of Finance emphasized to us the great importance he sees in globalizing the Israeli capital market, and in order to keep the center of operations of technology firms in Israel instead of transferring their operations abroad. He expressed concern over the phenomenon that many Israeli companies are literally exported abroad, and as a result the State of Israel loses jobs and growth. The minister spoke of the importance of the Tel Aviv Stock Exchange as the generator of growth as it fulfills its purpose in the Israeli economy, which is to encourage competition with banks over sources of capital, and to contribute to economic growth. Mr. Kahlon encouraged the examination of cooperation to set up a joint enterprise with the NASDAQ stock exchange.
I believe that cooperation between the Exchanges can be a game changer and change the current situation in the Israeli capital market. In my estimation, there is now a special window of opportunity to jointly promote a new market that meets the needs of growth companies and technology companies that are in the stages prior to a possible listing on the NASDAQ market. I believe this new market can be an attractive and unique market for Israeli companies, and in particular growth companies and high-tech companies, which would increase their visibility to global investors, who are already showing great interest in Israel. The high-tech industry in Israel is very important to the Israeli economy, and therefore there is great importance to diversifying its funding sources. The new common platform to both exchanges can facilitate the existence of an exciting market which will contribute to the growth of the Israeli economy, especially if we can help them refrain from an "exit" event too quickly, and continue to develop in Israel as international companies.
Question: I understand from your words why such a market is important to the Israeli economy. Can you explain to us why this is good for NASDAQ?
Answer: The NASDAQ stock market is a competitive stock market that operates in a very challenging environment. We are always looking for new opportunities and further growth engines. Given the fact that almost 20% of the foreign companies listed on NASDAQ are Israeli companies, NASDAQ certainly sees Israel as an important growth potential for the future. A simple examination of the number of IPOs on the NASDAQ market in 2015 shows that various fields of technology are very prominent among these Israeli companies on the NASDAQ, and the proportion is very large compared to other capital markets around the world. Israeli technology companies are very interested us, and I feel proud to be part of the Israeli economy with about 90 Israeli companies whose shares are listed for trading on the NASDAQ market. My vision is to fill in the gaps through a new market which would be attractive to Israeli firms that do not today list on the the TASE nor the NASDAQ. The new market could enable Israeli companies to take advantage of both worlds: easier access to more sources of capital, an internationally-renowned stock exchange, dual listing of securities on the TASE and NASDAQ, and the use of NASDAQ's technology which is familiar and friendly to the investor. All these will facilitate the attraction of more investors from Israel and abroad and encourage liquidity on the TASE.
Interviewer: You're touching one of the critical points in terms of the Israeli market. Over two years ago I initiated the establishment of two committees: the Liquidity Committee and the R&D Committee. Regarding Research and Development companies, in the coming weeks a law will be discussed in the Knesset Finance Committee which will ease reporting requirements to allow English reporting, which would report using U.S. GAAP standards, and allow tax breaks designed to make the capital market in Israel, and especially the Tel Aviv Stock Exchange, more attractive for them. The Liquidity Committee recommended a series of recommendations and foremost among them is restructuring the Israeli stock market similar to other global markets to make them more effective and more attractive. At the same time, TASE CEO Mr. Yossi Beinart and TASE Chairman Mr. Amnon Neubach are promoting new reforms to encourage liquidity, reducing commissions and the creation of appropriate infrastructure for international cooperation, such as a joint venture with the NASDAQ stock exchange.
Question: Why do you think that the completion of these steps, together with a joint venture with NASDAQ, are important to Israel?
Answer: Israel is a country of dreams, entrepreneurship and innovation. But the "start-up nation" isn't succeeding to become the "scale-up nation". It is a fact that many companies have chosen the path of "exit" (such as M&As) in the early stages relative to the global competition, and do not fulfill their potential of growth and profitability. Some of the reasons for this is the desire of developers to see cash from their initiative. The new market is designed to precisely meet this need - to enable entrepreneurs to obtain sufficient financing so that they can grow and manage their companies. Financial support and the financing of these companies in their later stages (late stage) will serve everyone: entrepreneurs, investors, angel investors and venture capital funds alike. This will also help Israel's economy in general as well as facilitate employment in Israel.
Question: One of the important questions that arise in the discussion on the future of the Israeli capital market is the problem of the high fees of Israeli investors in the capital market, especially in comparison with developed capital markets like the U.S. What do you think could have an impact on the Tel Aviv Stock Exchange trading fees through the cooperation with the NASDAQ?
Answer: I expect that our cooperation will lead to a significant reduction in commissions. But I want to emphasize that the drop in fees should not be because of this regulatory provision or that. I come from the United States where the business culture is to encourage competition and the war to the heart of investor, by reducing the costs of trade. I expect that cooperation, and the process of opening up the stock market to new Stock Exchange members through which transactions are executed on the TASE, from Israel and abroad, will lead to almost immediate results of increasingly fierce competition among the TASE member firms that will reduce the costs of trading. This is what happened on the NYSE, NASDAQ and other stock markets after undergoing similar processes.
Question: In 2008, the crisis in international capital markets also affected the Tel Aviv Stock Exchange and led to a decline in trading volumes on the TASE. Despite the improvement in trading volumes since, volume is still low. What have you done to tackle the problem of the decline in trading volumes in the U.S. and what do you suggest we do?
Answer: The phenomenon of the decline in trade volumes is correct for all capital markets, especially in Western capital markets. This was the case in the U.S. and on the NASDAQ. We at NASDAQ, among other things, expanded the supply of services that we offer, we increased our profit centers, including through various collaborations with some of the world's stock exchanges. In today's globalized world, these collaborations are very important because of the need to increase investors' access to different markets. There is intense competition between stock markets and the decline in commissions for investors increased demand for investor-friendly technology and cheaper access to exchanges around the world. I am here because I believe that there is great importance to cooperation between the Tel Aviv Stock Exchange and NASDAQ.
Question: A few months ago, in one of our meetings on the technology industry in Israel, we spoke both about the high-tech industry in Israel and agreed that it considered, unfortunately, a "candy store". In our conversation, we talked about Israel being a nation of start-ups that supports R&D, training young people in the Army and elsewhere, and then sell their startups abroad. These startups are the "candy" for investors and it seems that investors around the world consider them low-cost "sweets". Can you expand on that?
Answer: I meant that the phenomenon of the "exit" is concerning from the standpoint of the Israeli economy. Its not for nothing that Israel is called the startup nation. It has the world's second largest concentration of innovation after the Silicon Valley. Like any market of growth companies, some develop and some make an early exit, and this is natural. But what is different in Israel is that most companies are sold to foreign investors too soon, and a new generation of new large companies isn't grown. Each such "exit" detracts from economic growth in the Israeli economy because these companies prevent themselves the possibility of their development as international companies located in Israel. These companies are seeking financing in the early stages when they are not yet ripe to raise capital on NASDAQ, and therefore they are sold as "candy at cheap prices." I believe that cooperation between our Exchanges can be an excellent solution for many Israeli companies. I also believe that the new R&D law soon to pass the Israeli legislature - thanks to the efforts of the Ministry of Finance - will allow, among other things, corporate reporting in English, reported under U.S. accounting rules and will engender tax breaks. These are very important to the success of the public offering of Research & Development companies in Israel.
Question: In an interview with Globes in 2009, you said there would always be a market for new technology. How do you explain the fact that the State of Israel - the startup nation - cannot leave these innovative projects in Israel?
Answer: This is not a simple question. I think it's related to the fact that the capital market in Israel is still evolving. There are good companies in Israel, but the business environment is still in initial development stages, that require, among other things, companies to develop appropriate skills for technology companies. Thus, for example, the field of analysis of high-tech companies in the first-stage is not sufficiently developed compared to that in the U.S. This is one reason I believe that cooperation between the Exchanges can be a motivating factor for the development of these skills, attracting international players such as underwriters, analysts, and global investors, and be a key for real change for the rapid expansion of the business environment. All of these factors are likely to cause companies to get better pricing estimates and stop the phenomenon of companies being sold too early and not remaining in Israel to develop into international companies.
Question: Based on your experience, your role at NASDAQ, and your expertise in international stock markets, you can detail for us the potential of the Tel Aviv Stock Exchange, and the challenges it faces?
Answer: The main challenges are: to open the Tel Aviv stock market more to investors in the world, to change the ownership structure of the stock market, allow the Israeli stock exchange to cope well with heavy competition with stock exchanges in the modern world, to increase the number of local and foreign members of the Israeli stock exchange, to use user-friendly and available technology, increase liquidity, create regulatory conditions similar to the world, such as the U.S. Jobs Act and the R&D Law, in order to attract more companies to raise capital on the stock exchange, to add financial instruments, and more. I believe that if the cooperation between the Tel Aviv Stock Exchange and NASDAQ begin to take shape, as I hope, these challenges can be met.
Question: How do you propose to do that?
Answer: The most important change, which to the best of my knowledge is being examined by the Israel Minister of Finance, is the globalization of the TASE. Such a change was made in all the world's stock markets the past two decades, including the NASDAQ, and is unavoidable due to fierce competition between stock exchanges in the world. I myself led the Philadelphia Stock Exchange in such a change. A large part of the problems on the TASE must face are similar to those we faced with the PHLX, including dominant controlling shareholders, liquidity shortage and operational inefficiency. The change in the Philadelphia Stock Exchange increased the number of members of the stock exchange, increased the volume of operations, and liquidity increased significantly, which led to cooperation with NASDAQ. The PHLX Stock Exchange today is effective and much more interesting [to investors].
Question: Three years ago the Israel Securities Authority initiated a "road map" that includes the easing of supervised entities and the removal of obstacles to market development. Among the reliefs were the extension of shelf registration from two years to three years, a waiver on iSOX (Israeli Sarbanes Oxley regulation and compliance) for small and medium-sized entities (SMEs), easing of reports requirements, shortening of reports, and certain exemptions to corporate governance. All of these were approved. In addition, in the coming months we will complete the legislative exemptions for new issues, reliefs for R&D firms, the providing of additional relief for SMEs and more. However, it has often been suggested that general regulation, and regulation of the capital market in particular, is to blame for the low amount of IPOs due to over-regulation since 2008. What do you think about that?
Answer: First, I hear that argument also in the United States. In fact, I hear it in all the world's capital markets where I travel. I'm a big believer in the importance of quality regulation. I also believe that it is impossible to ignore these claims and see what can be done. There needs to be regulation balanced with uncompromising enforcement. I know that the Israeli Treasury Department is pushing for such exemptions for SMEs, and other technology companies. These measures are correct and desirable, and such steps are being made also in the rest of the world, including in the United States.
Question: Any last words?
Answer: I believe in the Israeli economy, in the excellent people that are here, and in the amazing companies that are developing here. I'm excited about the possibility of collaborating with Israel.
Israel Securities Authority responds
Chairman of the Israel Securities Authority Professor Shmuel Hauser's response: Sandy, this is good news for us. I am convinced that it is a window of opportunity for making the TASE an international financial center for technology companies.