Eligible Investor in the Capital Market: What This Status Really Means and Why It's Not Just a Benefit

1. “Eligible investor” is a precise legal definition established by the Regulation of Investment Advice Law, 1995. It is not an honorary title-it is a category that fundamentally changes which legal protections apply to you.
2. Once you are classified as an eligible investor, your portfolio manager is exempt from disclosure obligations, documentation requirements, and transparency duties that the law imposes regarding ordinary clients. The manager is also permitted to charge success fees-compensation that is strictly prohibited for non-eligible clients.
3. To be considered an eligible investor under the law, an individual must meet two of the following three conditions: liquid assets exceeding approximately 12 million shekels, expertise in the capital market, or execution of an average of 30 transactions per quarter.
4. Did you sign an eligible investor declaration? You are bound by it even if you claim you didn’t read it, even if you claim you didn’t understand it. There is a presumption that a person who signed knows what they signed.
5. The “hindsight profit-chasing” defense: the court will not award you compensation merely because the market rose and your portfolio did not. Investment management is not an insurance policy.

Why the “Eligible Investor” Definition Exists

The rationale behind the definition: an investor holding substantial capital, with experience and expertise, is capable of protecting themselves. Therefore, the law eases requirements for both the investor and those serving them: it is permissible to offer investments without a prospectus, to charge success fees, and there is no obligation to maintain the same level of documentation and disclosure required for ordinary clients.

The flip side: those classified as eligible who later discover that management was deficient will struggle to claim they didn’t know, that the risks weren’t explained, or that they didn’t understand. They waived certain legal protections by virtue of their classification.

The Three Eligibility Conditions as Established by Law

Section 9 of the First Schedule to the Investment Advice Law stipulates that an individual will be considered an eligible investor if two of the following conditions are met, and if written consent was provided in advance:

Condition 1-Liquid Assets: The total value of cash, deposits, financial assets, and securities exceeds approximately 12 million shekels. Note: real estate, executive insurance policies, and pension funds are not liquid assets for this purpose.

Condition 2-Expertise: The client possesses expertise and skills in the capital market, or was employed for at least one year in a professional role requiring expertise in the field.

Condition 3-Trading Activity: Execution of an average of 30 transactions per quarter in the four quarters preceding consent, excluding transactions executed by a portfolio manager on their behalf.

The Ruling That Clarifies Everything: CA 63767-07-20 Richani v. Quantum Capital Markets Ltd. et al.

The ruling was issued in a case in which the Tidhar Tzur law firm represented the defendants and prevailed both in the District Court and on appeal to the Supreme Court.

Background

Prof. Uri Richani, a retired ophthalmologist, signed a portfolio management agreement in 2015 with Quantum Capital Markets Ltd. After approximately six months, his portfolio was transferred to another company, IQ Finances, which operated without a portfolio management license. Both companies were effectively managed by the same individual, Daniel Arad. The compensation mechanism in both agreements included a success fee of 10% of the portfolio’s appreciation. Richani deposited approximately two million dollars for management.

Richani filed a claim for compensation in the amount of approximately 6.6 million shekels. At the end of January 2024, the claim was dismissed in its entirety. The appeal to the Supreme Court was also dismissed in January 2026.

First Question: Was Richani Actually an Eligible Investor?

Richani argued that the defendants had him sign an eligible investor declaration without verifying that he actually met the conditions and without explaining the implications. He claimed that his liquid assets amounted to only approximately 9.3 million shekels-less than the required 12 million.

The court, presided over by Judge Magen Altuvia of the Economic Division in Tel Aviv, determined that the question was not unequivocal, but that the defendants acted reasonably. Richani undoubtedly met the third condition-he executed over 307 independent transactions, a volume that makes it difficult not to regard him as a person with commercial knowledge. Furthermore, the defendant was impressed by Richani’s persona as a senior, experienced physician who described himself in conversations as “precise” and “understanding the matter.” Additionally, Richani signed the eligibility declaration twice-first with Quantum and again six months later with IQ-and in both declarations confirmed that he had over 12 million shekels and expertise in the capital market.

Under cross-examination, Richani admitted that he signed “hastily” and “at my own fault.” The court determined that a person who signed a document-especially one who presents himself as precise and examines “four decimal points”-cannot claim he did not know what he signed.

Second Question: What Is an Investor Entitled to When Investment Management Fails to Meet Expectations?

Richani sought compensation for the difference between the portfolio’s actual performance and what it would have yielded had it been invested according to the S&P index-approximately 6.4 million shekels.

The court rejected the claim entirely. The ruling adopted the precedent established in Netzer, CA 3510/21, according to which “loss of opportunity” refers to an alternative transaction of a similar nature-not to an entirely different investment that proved itself in hindsight. Investing in stocks is not an insurance policy. Anyone who invests assumes informed risk. Loss of profits in itself-when the portfolio yielded a positive, albeit low, return-is not grounds for negligence.

It was further determined that Richani himself bore responsibility: he monitored the portfolio’s management over the years, expressed his disappointment on multiple occasions, and yet did not seek to terminate the agreement, which was open to termination at any time without penalty. The court determined that he bore significant contributory fault.

The Outcome: A claim for 6.6 million shekels was dismissed. Richani was ordered to pay 90,000 shekels in costs.

What Are the Lessons for Anyone Involved in the Capital Market?

If you are an investment manager: classification of a client as eligible must be well-founded. Although there is no explicit documentation requirement for eligible clients, case law indicates that proper practice involves documenting explanations with signatures from both parties. The defendants prevailed, but at a high legal cost.

If you are an investor: before you sign an eligible investor declaration, read it. Understand that with this declaration, you are allowing success fees to be charged and waiving certain disclosure obligations that the law grants you. If you do not meet the conditions, do not sign. Signing because someone asked and you didn’t know what to answer could prove costly.

Regarding success fees: a compensation mechanism based on a percentage of profits is permitted only when the client is an eligible investor. Anyone managing a portfolio for a non-eligible client and basing compensation on success violates the law and may expose themselves to liability.

Are you engaged in managing client portfolios, considering classifying a client as eligible, or have you received an eligible investor declaration for signature? It is worth examining the circumstances before signing.

© Tidhar Tzur Law Firm | This article is for general information purposes only and does not constitute individual legal advice.