{"id":545669,"date":"2022-04-07T04:00:32","date_gmt":"2022-04-07T04:00:32","guid":{"rendered":"https:\/\/enterpriseam.com\/egypt\/2022\/04\/07\/egypt-wants-vcs-to-invest-here-directly-and-is-looking-at-regulatory-changes-to-make-it-possible\/"},"modified":"2022-04-07T04:00:32","modified_gmt":"2022-04-07T04:00:32","slug":"egypt-wants-vcs-to-invest-here-directly-and-is-looking-at-regulatory-changes-to-make-it-possible","status":"publish","type":"post","link":"https:\/\/enterpriseam.com\/egypt\/2022\/04\/07\/egypt-wants-vcs-to-invest-here-directly-and-is-looking-at-regulatory-changes-to-make-it-possible\/","title":{"rendered":"Egypt wants VCs to invest here directly \u2014 and is looking at regulatory changes to make it possible"},"content":{"rendered":"

<\/a> A cooperation protocol signed yesterday could be a first step toward <\/strong>making it more attractive for VC firms to directly invest in Egypt<\/strong>, if our read on a cabinet statement is right.<\/p>\n

What\u2019s the news?<\/strong> Three key regulators have agreed to work together to make it easier for both local and international VCs to invest in Egyptian startups. On board are the General Authority for Investment and Freezones (GAFI), the Financial Regulatory Authority (FRA), and the Information Technology Industry Development Agency (ITIDA), according to a cabinet statement<\/a>.<\/p>\n

Why does it matter? <\/strong>VCs and private equity investors \u2014 local and international alike \u2014 have long invested in Egyptian companies via offshore structures that see them structuring funds as special purpose vehicles (SPVs) domiciled in other countries. They do this for tax efficiency (allowing each party to pay taxes in its own jurisdiction), but they are also very much driven by the unique terms in shareholder agreements they\u2019ve negotiated with the company in which they\u2019re investing.<\/p>\n

Uh, Enterprise \u2014 what do you mean, shareholder agreements? <\/strong>VC and PE investors alike demand minority rights protections, whether those are rights to invest in future rounds, the right to ride along on any future transaction (a \u201ctag along\u201d option), guaranteed board seats, etc. And company founders will often want rights including, for example, the ability to control a company long after they stop owning 50% plus one share.<\/p>\n

The problem is that those types of arrangements are either (a) untested in Egyptian law <\/strong>or (b) flat-out impossible. <\/strong>A study (pdf)<\/a> a few years back by the EBRD, PwC and the Egyptian Private Equity association noted that as matters stand today, the enforceability of \u201ctag-along rights, drag-along rights, call options and put options is untested \u2026 In Egypt, minority shareholders generally lack rights and cannot affect the day-to-day activities of a company. They are often unable to influence the strategic direction of a firm, unless they act as a voting bloc.\u201d All of this is anathema to venture investors, PE types and company founders alike.<\/p>\n

What\u2019s next? <\/strong>Lots of consultations with VCs (and PE firms), we hope. GAFI has been tapped to prepare a \u201cstandard shareholder agreement<\/strong>\u201d for startups (we hope this is a model agreement and not a one-size-fits-all prescription). Minority rights will be at the center of that contract. Meanwhile, the FRA is working on regulations that will allow the use of convertible notes <\/strong>to invest in startups. (A convertible is a debt instrument that converts into equity at some point in the future based on pre-agreed triggers.)<\/p>\n

Wait, wait \u2014 there\u2019s more.<\/strong> The memorandum also sets the stage for the regulators to explore ideas including:<\/p>\n