By Ari Rabinovitch and Steven Scheer
JERUSALEM, May 14 (Reuters) - Medical cannabis could become an investment bubble in Israel, the country's market regulator warned, as cash floods into a rapidly-expanding industry where few companies yet make money.
A special unit has been formed by the Israel Securities Authority (ISA) to ensure investors are protected and not being misled, agency chair Anat Guetta told Reuters.
Guetta also said Israel may expand its dual-listing arrangements to include Australia as it tries to connect with more foreign markets and draw investors to recover trading volumes lost a decade ago.
One of the fastest growing segments on the Tel Aviv Stock Exchange (TASE) is medical cannabis and the sector got a boost in January when the government approved exports.
About 26 listed companies have a link to medical cannabis, up from 19 in December, with a combined market value of 3.4 billion shekels ($952 million). Most are at an early stage without revenues. Some shares are up hundreds of percent since the start of 2018.
"I don't think that we can avoid a bubble," Guetta said. "Bubbles are part of the nature of markets, of capital markets, but we can provide our investors the right tools to manage those risks properly."
Though the onus ultimately lies with investors, she said the ISA had formed a special unit to monitor the sector while tightening disclosure requirements from companies in the field.
Benefiting from a favorable climate and expertise in medical and agricultural technologies, Israeli companies are among the world's biggest producers of medical cannabis. Two former prime ministers and an ex-police chief are among high-profile individuals to join companies' ranks.
Cannabis stocks may be high, but overall trade volumes are sluggish and have not recouped the flows lost when MSCI upgraded Israel to developed market status from emerging in 2010.
Tel Aviv share volumes averaged 1.1 billion shekels a day between January and April, down 19 percent from a 2018 average and half levels of a decade ago. In the same period, the TASE lost more than 150 listed companies.
To help lure new issuers, the bourse has forged dual-listing partnerships with markets in New York, Toronto, London, Singapore and Hong Kong.
"We are considering the ability to have such an arrangement with the Australian stock exchange and currently it's under consideration," Guetta said before flying to Sydney for a regulators conference. "Our visit will give us better knowledge about this issue."
Twenty Israeli companies are listed in Australia and Australian groups own about 10 percent of the TASE, which was demutualized last year.
Separately, Guetta on Tuesday signed an agreement with her French counterpart to cooperate on innovation, investor protection and regulatory issues related to blockchain, crypto-assets and artificial intelligence.
The ISA has come under fire from some companies and investors for being heavy-handed, but Guetta, who took office last year, said the agency has eased the burden on companies.
More worrisome is that Israel's own high-tech sector, widely regarded as second only to Silicon Valley, has bypassed the local bourse.
"The fact that money is very cheap and there is no regulation makes the private capital market very attractive for issuers," Guetta said.
At the same time, institutional investors in Israel, who manage more than $500 billion of public savings, are unfamiliar with and so have largely stayed away from tech investments.
Now the ISA is forming a committee with industry leaders to try to bridge the gap, Guetta said, to coach them on pricing and research of tech companies.
To entice foreigners, Guetta said she was accelerating plans to allow companies to report in English in addition to Hebrew, and move to a more friendly reporting format.
($1 = 3.5683 shekels) (Editing by Mark Potter)