At some point, many private companies decide to become public companies. Usually, the company decides to become a public company due to capital raising considerations, because as a public company it is easier to raise funds from the public, in contrast to a private company to which regulatory restrictions regarding raising capital apply.
Once the initial decision to become a public company has been made, the company must decide on how to do this. A public Israeli company will usually prefer to be listed on the Israeli Stock Exchange, since through it, it can raise capital from the Israeli public with relative ease. It is important to note that listing a company on the stock exchange requires compliance with regulatory conditions that are even stricter than for every “regular” public company, but we will elaborate on this in a separate list.
Once the company’s certified organizations make the decision to go public and where to do it, there are two main ways it can register on the Stock Exchange: The first – an Initial Public Offering (IPO) and the second – a reverse merger takeover.
We will elaborate on the differences between these in this list:
The IPO is essentially listing a company to be traded on the stock exchange. In an IPO, the company writes a prospectus where it outlines its business dealings, business plan, details its shares and shareholders, and many other legally required details to inform the public and others about the company. The company sends the prospectus to the Israel Securities Authority for approval, and after a few rounds of corrections, the prospectus is approved by the Authority. Once it is approved, the company can be listed on the stock exchange. Here, the company must comply with the rules of the stock exchange, with significant equity requirements, and with distribution of at least 25% of its stocks to the public – in order to comply with the requirement of a public company.
This brief outline summarizes a long and arduous process vis-a-vis the various regulators, which aside from its significant costs, does not sometimes get completed for various reasons.
Subsequently, numerous companies found another way to make the company public and to list on the stock exchange, without needing to take the rocky road paved by the various regulators. Instead, these companies merge with a shelf company, which is a public company that is not actually active, or with a listed company, in a process known as a reverse merger takeover.
Without getting into the complexities of legal jargon, the shareholders of the private company transfer all of their options to the public company and in exchange, the public company allocates stocks to the shareholders of the private company. When the transaction is completed, the private company is liquidated, and the private company’s shareholders become, as stated, shareholders of the public company.
Since this is a merger with a company that is already listed on the stock exchange, the transaction becomes much simpler and requires fewer regulatory approvals.
Both an IPO and a reverse merger takeover are very complex transactions from a regulatory and taxation perspective.
MGR’s Capital Market and Companies Department has a great deal of experience in these fields, both in how to conduct affairs vis-a-vis the various authorities, and in the commercial conduct vis-a-vis the shareholders in both companies.
By: Moty Goldstein, Adv. – Partner and Head of the Capital Market and Companies Department