No person is allowed to offer securities without publishing an orderly prospectus. This is what Article 15 of the Securities Law states. But the law has an exception – it is allowed to propose to 35 people a year at most. The exception is intended to balance the large costs of issuing a prospectus, which may not make sense to impose on ‘small’ people.
But can someone who conducts courses on investing in real estate, or stocks, break the law? No. The Penta Ray Inhouse company, controlled by Ilan Boyko and his wife (who also serves as CEO), were fined NIS 350,000 because they broke the law and offered securities To the public – without publishing a prospectus, at the same time the company was imposed a conditional fine amounting to an additional NIS 350. The condition will be activated if during the next two years the company commits a similar violation.
Inhouse marketed real estate investment courses during the years 2009-2016, connecting investors and real estate entrepreneurs. Since 2015, the company has been working to locate investments in the field of real estate in the USA, and to raise funds from Israeli investors for the purpose of financing investments. The fundraising was done by Inhouse, through an appeal to Israeli investors, through publications on the company’s website and other websites.
According to the Authority, Inhouse raised funds from hundreds of investors in Israel, amounting to NIS 38 million, for the activities of a single American entrepreneur named Ilan Koenig. The investors’ funds were raised through limited partnerships incorporated in Israel, seemingly adhering to the number of investors permitted in each partnership (up to 35 for the purpose of a prospectus exemption).
but – Unlike the model accepted in the market, where the contractual agreement is between the fundraising fund (partnership) directly with the foreign property company, in Inhouse’s model the contractual agreement was made directly between the various partnerships and between the FMB Development company owned by Koenig himself, which routed the investors’ money to real estate projects which were required for this – in exchange for a high return of 15% for the investors. The securities given to each partnership are: a second lien on a specific real estate asset in which the investors invested in the partnership, a promissory note and Koenig’s personal guarantee for the partnership.
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The Authority explains that the separation between the partnerships, according to the Inhouse model, is “artificial”, since “the risks and prospects of all fund investors are similar in essence, and at the end of the day it is one overall activity – raising loans for a single entrepreneur (Koenig) in exchange for a high interest rate for the partnership investors “. Therefore, according to the Authority, every year all investors in partnerships in the management of Inhouse should be counted together, so that counting them together results in the fact that securities without a prospectus were offered and sold to more than 35 investors between the years 2016-2018.
The Securities Authority stated: “The legislator takes a serious view of the offer and sale of securities to the public that is not based on a prospectus, which also constitutes a criminal offense with not a light punishment on the side. The prospectus is the basic disclosure document in the offering that the company carries out, and without which the reasonable investor considering his investment will be denied information essential.
So why was only a light punishment given and the fine applied only to the company and not to the owner?
According to the authority, “the violations were committed by the respondent out of negligence only. The respondent fully admitted to everything attributed to her, and entered into a settlement at an early stage, even before the statement of claims was submitted, and this in accordance with the policy detailed in the document ‘Structure of punishment in administrative enforcement’ published by the authority. Also, the respondent shared Action all along the way with the authority, and actions were taken by it to correct the violation and change the legal structure. The respondent is now focusing on managing the existing projects only and returning investments to investors.”
What is a prospectus?
A company’s prospectus is the document that companies publish to present the full information to the investing public, so that they can make the right decisions for them. Partial information or a lack of information may harm investors. The prospectus is intended for the purpose of “providing information by the company in order to make rational decisions regarding their investments, creating deterrence among the company and its managers from inappropriate behavior, strengthening public confidence in the securities market and increasing the efficiency of the securities market.”
In practice, a company’s prospectus is reviewed by the Securities Authority and criminal, administrative and civil liability applies. The offering of securities, to more than 35 investors, is prohibited without the publication of a prospectus, approved by the Securities Authority, in order to provide comprehensive disclosure regarding the investment offered by the company.
The exception in the Securities Law that permits the offering of securities without publishing a prospectus to up to 35 investors resulted from cost versus benefit considerations. The law states that there is no place for the investment offeror to incur heavy expenses and tasks involved in publishing a prospectus, when he offers securities to a limited number of investors.
The Securities Authority says that “the assumption underlying this section is that a limited number of investors is an indication of cases in which there is no fear of power differences between the issuing company and public investors. Therefore, the law provides for an exemption from the obligation of the prospectus and the costs associated with it; this is based on the assumption that the power differences are not large In transactions with a limited number of investors, in which fair negotiations are possible. In addition, the sale of securities to a small number of investors – which is exempt from the obligation to publish a prospectus – has a lower chance of creating a “secondary market”.
It is worth mentioning that the connection made by the Authority between a limited number of investors and ‘no power differences’ is not necessarily correct – The fact that an investment proposal is offered to a relatively small number of people really does not mean that “there is no fear of power differences between the issuing company and investors from the public”. After all, these are offers for private individuals. So it is true that they may have a few hundred thousand shekels to invest, but that does not mean that they are investment experts and can examine the data of the investment proposals they receive for themselves. Beyond that – usually the marketer will count the person as one of the 35 only after he is quite certain that the person will join the investment, since any loss of one of those 35 is significant for him.