Intro
We are preparing a series of periodic short articles providing an overview of various aspects relating to the venture lending and private credit industry in Israel, as it relates specifically to funding Israeli related technology companies. The main goal of this series is to equip readers with valuable knowledge and understanding of the venture lending landscape in Israel, helping them navigate and capitalize on the unique opportunities it presents, particularly for those looking to become stakeholders in the Israeli startup ecosystem. In this first installment, we provide an overview regarding the role of the Israeli Innovation Authority (the “IIA”) and the issues for foreign lenders to consider when extending loans to companies who have received or may look to receive funding from the IIA.
The IIA’s Role in Israeli Startups
The IIA plays a significant role in supporting Israeli startups by providing grants to Israeli companies under various programs, without taking equity. IIA grants are by design intended to create jobs in the Israeli economy and encourage innovation. These grants are repaid out of revenues from future sales by way of royalty payments. The IIA only provides grants to Israeli companies, and by law the intellectual property and related rights created with IIA funding (“IP”) needs to remain in Israel.
Impact on Taking Security Over IP
The IIA does not receive a pledge over the IP, but the grant of security over such IP requires the prior consent of the IIA. As part of the consent process, the beneficiary of such pledged rights must sign a standard undertaking to the IIA, in which it agrees to abide by the terms of Israel’s Encouragement of Research, Development and Technological Innovation in the Industry Law, 5744-1984. The consent process opposite the IIA can take a matter of weeks with respect to the approval of the pledge but can be initiated prior to negotiation of the final transaction documents. Enforcement of the pledge over IP is subject to additional approval from the IIA at the time of enforcement.
Transfer of IP out of Israel, even in the context of a liquidation or pledge enforcement, requires the approval of the IIA and triggers certain payments to the IIA. This payment can reach as much as six times the total grant amount in certain non-insolvency cases. There is, however, no requirement of the company to repay the utilized portion of the IIA grant money simply as a result of entering into liquidation proceedings.
Situations in which Payments may be Required and IIA Priority
If there are open/current files with the IIA (i.e. a certain project is still being performed using the IIA funds during the specified term), then the company is required to return to the IIA any money received for purposes of those specific files which had not be utilized. As a matter of law, the IIA has a first priority security interest over any unutilized funds granted to a company. Furthermore, if the company sold products in the past and has not paid the royalties due to the IIA as of the date of the liquidation proceedings, these amounts would be deemed ordinary debt.
If, while being liquidated, the company (or its receiver or trustee) transfers the IP to another Israeli company, that company will be required to pay royalties to the IIA as a percentage from future sales of products. This money is not deemed a current debt, senior or otherwise, but rather an undertaking for the future incumbent upon the buyer of the know-how.
However, if, while being liquidated, the company (or its receiver or trustee) transfers the IP to a foreign company, such transfer triggers payment to the IIA. These payments would be deemed expenses related to asset realization. The Research Committee at the IIA has the discretion to determine that these payments would be lower than those usually required under law upon transfer of IP to a foreign company, but only in cases of court mandated liquidation.
About Us
Arnon, Tadmor-Levy proudly stands among Israel’s most prominent law firms, with one of the largest and most respected banking and financial services departments. We have extensive experience in cross-border and other complex financing transactions, representing both lenders and borrowers. Our trusted reputation spans a vast clientele, including leading Israeli and international banks and other financial institutions.
Our venture lending and private credit team is led by Simon Weintraub, Avi Anouchi and Idan Adar. Should you have any questions, or are interested in learning more about the various aspects of the Israeli venture lending and private credit industry, please feel free to reach out to a member of our venture lending team, whose details are included below.
This publication is provided as a service to our clients and colleagues, with explicit clarification that each specific case requires individual examination and discussion in writing.
The information presented here is of a general nature and is not intended to answer the unique circumstances of any individual or entity. Although we strive to provide accurate and available information, we cannot guarantee the accuracy of the information on the day it is received, nor that the information will continue to be accurate in the future. Do not act on the information presented without appropriate professional advice after a comprehensive and thorough examination of the specific situation.
