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ISRAEL: An Introduction

Israel Overview 

For over twenty years, Israel’s economy has demonstrated continued strength, growth, and stability. Despite many internal and external challenges emanating from its unique position, Israel has evolved and matured to become a global centre of technological innovation, with a strong local currency, an active local economy and robust export industries.

Innovation and Technology 

In the innovation and technology spheres, the “Start-Up Nation” has matured into the “Tech Nation” and remains active and growing. Indeed, Israel is widely celebrated as a centre of technological excellence.

The maturity of the Israeli technology and innovation market was reflected in 2021 by a record of more than 60 Israeli technology unicorns, compared to 70 unicorns in all of Europe. A large number of Israeli companies are completing SPAC and IPO transactions, with more than 65 Israeli tech companies listing on Nasdaq and more than 44 on the Israeli TASE. There is also a wider trend of Israeli tech companies moving to acquire other smaller companies.

Alongside the growth of larger and more mature tech companies, Israel also continues to be on the radar of many leading international and multinational companies with an eye for investing in and acquiring innovative technology. This international interest in Israeli technological innovation is also reflected in the continued presence of more than 400 development centres of multinational top-tier corporations.

International interest in Israeli start-ups remained strong in 2021, exceeding the amounts invested in 2020 and demonstrating a shift from seed investments to larger investments in more established companies. Major financial institutions and strategic players continued to sponsor early-stage companies, recognising the potential opportunities for their own businesses.

The local high-tech economy is international in nature and greatly influenced by global trends. Companies working in cybersecurity, healthcare, artificial intelligence (including big data and deep learning), fintech, blockchain, foodtech and femtech are expected to continue to appreciate in value, reach the public markets and attract significant non-Israeli investment.

Traditionally, US companies have led the way in making investments in Israel. However, although US interest remains strong, in recent years entities from Europe, China and Japan have begun to catch up. Additionally, with the recent accords between Israel, the UAE and Bahrain, investors from these countries are looking to invest in Israeli companies and reap technological and economic benefits going forward.

The local technology ecosystem is now fully expanded. While Tel Aviv remains the centre of innovative technology, the tech ecosystem has branched out and now covers Jerusalem, Haifa, Herzliya, the Galilee and Be’er Sheva.

The Israeli government endeavours to support the technology ecosystem, including through the Israeli Innovation Authority (IIA). In addition, legislation has created government-guaranteed co-investment funds, to be led by large Israeli financial institutions. Ten Israeli financial institutions were elected to invest NIS 2 billion into Israeli start-ups within 18 months. As a result, 2021 has seen an exceptional surge in the participation of local financial institutions in venture capital investments.

Furthermore, the overhauled R&D Law has made IIA-sponsored technology more accessible to foreign investors and purchasers, allowing such sponsored technology to be transferred outside of Israel. Israeli taxation rules also provide benefits to multinational companies holding their intellectual property in Israel, offer capital gains exemptions to foreign investors and provide tax benefits for corporate restructuring.

In addition to the IIA, the Israeli government initiated new incentive programmes for local institutional investors. These are aimed at increasing their investment in the local innovation ecosystem through governmental underwriting for such investments.

Infrastructure – Electricity, Gas, and Transportation

Israel is in the midst of an infrastructure boom. Annual investment in infrastructure for the next 10 years is expected to more than double, from USD 6 billion to USD 14 billion.

In the transportation sector, major projects in almost all sub-sectors—railways, metro systems, new roads, tunnels and bridges, and seaport expansion—all saw a significant rise in volume, including the publication of new tenders.

Specifically, 2021 was marked by a slew of major tenders and awards in the rail industry (light rail, regular rail, and high-speed), including for projects in Jerusalem, Tel Aviv, and Haifa-Nazareth. In 2021, the new government adopted legislative steps to launch the largest and most ambitious infrastructure project in Israel, the metro line network, the cost of which is estimated at NIS 150 billion. These tenders and mega-projects are attracting major international players to Israel.

In the electricity sector, the Israeli government continues to take measures toward reducing CO2 emissions. In a recent decision, the government reaffirmed that by 2030, 30% of the total energy production in Israel will be from renewable sources and 70% from natural gas. Accordingly, several initiatives and projects for photovoltaic power plants are being promoted. In late 2021, the tender for the construction in Dimona of one of the largest PV plants in the world (with a 300 MW capacity) was finally awarded. In July 2021, the Ministry of Energy and the Ministry of Agriculture jointly issued a call for pilots for the development of dual-use Agro-PV facilities, which was met with great success amongst Israeli players and international actors.

Most notably, the government launched a major reform in the electricity sector, offering for sale five of the Israel Electric Corporation's most aged gas power plants. In 2019, a Sino-Israeli consortium acquired the first power station and in 2020 an Israeli consortium acquired the second.

In the gas sector, Israel continues to benefit from the huge gas discoveries of the last decade. The development of the Tamar and Leviathan gas fields, the fourth and sixth largest gas discoveries in the past decade, has led to substantial investments in gas infrastructure and the entry of new global players, especially since the signature of the Abraham Accords with the United Arab Emirates. In September 2021, Mubadala Petroleum of Abu Dhabi purchased a 22% stake in the Tamar offshore gas field for USD 1 billion.

Investments and Capital Markets 

In 2021, the Israeli tech sector boomed through massive domestic and foreign investments, including from venture capital funds, private equity funds, hedge funds, strategic investors, institutional investors, and early-stage angel investors. Following the Abraham Accords, investors from GCC countries have also begun investing.

The 2020 IPO wave continued in 2021 and included a massive number of Israeli IPOs and SPAC transactions on the local Tel Aviv Stock Exchange (TASE), as well as on Nasdaq and other foreign stock exchanges.

For years, Israel’s TASE was considered to be less attractive and many Israeli companies chose to float IPOs in the USA and other international markets. The privatisation of the TASE, completed in 2019, has turned it into a more favourable venue for Israeli companies seeking access to international markets.

Furthermore, the Israel Securities Authority launched several new initiatives aimed at easing certain regulatory requirements that have received a tailwind from the new Israeli government sworn in since April 2021.

These processes bore fruit in 2021. Seven IPOs were completed in 2019, which increased to 27 in 2020, and to 90 in 2021. This wave of IPOs included companies from a variety of sectors, such as technology, green energy and foodtech, adding to newcomers from the real estate and finance sectors as has been the trend in recent years.

TASE has also established a new platform allowing start-ups and special purpose partnerships to raise funds from institutional investors without being subject to full-blown prospectus requirements. This platform, TASE UP, provides new early-stage financing options and also increases exposure of institutional investors to the start-up sphere. Another initiative worth mentioning is the establishment of a secondary stock exchange to the TASE, which will be aimed at small cap companies and is expected to be launched in 2022.

Regulatory Landscape 

After long-term stagnation due to political instability, with the approval of the national budget the Israeli Parliament is expected to focus on many long-awaited regulatory reforms in 2022.

Similar to other jurisdictions, navigating through the Israeli regulatory landscape remains a challenge for both local and international companies. Despite the Israeli government's initiatives to ease the regulatory burden, multiple governmental agencies and offices continue to require licences, approvals, and certifications to set up new ventures and operate existing ones. Securities, banking, competition, environment, public procurement, consumer protection, communications, health, importation, and standards are some of the areas covered by regulatory agencies. One of the initiatives to be promoted by Parliament in 2022 is a centralised regulatory authority, which should streamline some of the processes and oversee other regulators. Recent years have also seen the introduction of new regulatory requirements covering areas such as privacy and data protection and certain capital market niches, including cryptocurrencies and crowdfunding. Financial regulators are now encouraging the non-banking financial sector to compete actively with banks. It is expected in 2022 that the government will bring about an update to the Israeli Privacy Law, strengthening the enforcement powers of the Protection of Privacy Authority. Parliament is also expected to complete financial reforms related to payment services and open banking regulation.

Local Legal Environment 

Looking at 2021 as a whole, Israel’s economic conditions and business climate have experienced strong growth. Local law firms must continue to broaden their capabilities to service the international interest in Israeli companies, assets, and technologies; the complex infrastructure projects in planning and under construction; and the ever-complicated regulatory environment. Although Israel has a large per-capita concentration of legal professionals, the competence required to service cross-border clients is reserved to a smaller circle of law firms, namely those with an international mind-set.