June 18, 2022

Egypt Regulates the Enforcement of Startups Share Transfer under Convertible Instruments

The Egyptian Financial Regulatory Authority (FRA) issued Decree 68 for 2022 to amend the Rules of Trading of Unlisted Shares issued by virtue of Decree 94 for 2018 (the “Rules”).

The amended Rules allowed Misr for Central Clearing, Depository & Registry (MCDR) to act as an escrow agent to enforce the transfer of the shares of an Egyptian startup to private equity investors (PEs) and venture capital entities (VCs) under a convertible instrument.

A Convertible instrument is an instrument issued by a startup company evidencing receipt of money initially as debt, which is repayable at the option of the holder, or which is convertible into a number of equity shares of such startup, within a period of time or upon the occurrence of specified events.

Startups and VCs or PEs can now agree in their shareholder agreement to appoint MCDR as an escrow agent to enforce the transfer of shares under the convertible note as per its terms and conditions. MCDR is the national depository as well as the securities clearing agent for listed securities and it is also entrusted with facilitating trading of the shares of unlisted joint stock companies.

The FRA will issue the terms and requirements for the transfer of the shares through MCDR and will exclude such transfers from the requirement under the Rules to pay the price of the transferred shares through an Egyptian bank.

The amended Rules came in implementation of the cooperation protocol signed a couple of months ago between FRA, General Authority for Investment and Free zones (GAFI), and the Information Technology Industry Development Agency (ITIDA). The three main regulatory entities agreed to formulate attractive regulations that would support startups growth and encourage global and local VCs and PEs to invest in Egyptian startups directly in the Egyptian jurisdiction.

GAFI is tapped to prepare a standard shareholder agreement and articles of incorporation for startups to include the provisions and principles common globally to be used in joint venture agreements between startups and VCs or PEs, such as claw-back clauses, preferred shares, reserved matters and ESOP.

Egypt’s move to amend the Rules seems to be another push from the government to boost the Egyptian startup ecosystem. It aims at bolstering entrepreneurship and assisting emerging startups financially as VCs and PEs usually demand protection for their minority stakes.

For more information about the amended Rules and how it should impact startups investment arrangements, shareholders agreement and convertible notes, please contact Dr. Fatma Salah, and Mohamed Riad

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