New Policy Actions Triggered by ITIDA to Boost Startup Ecosystem and Facilitate VC Investments in Egypt

8 April 2022

The Information Technology Industry Development Agency (ITIDA) has signed a Cooperation Protocol with the General Authority for Investment and Free Zones (GAFI), and the Financial Regulatory Authority (FRA) to formulate attractive regulations and suitable proceedings that would support startups’ growth and operations, and facilitate global and local VC investments in Egyptian startups.

The CEO of the Information Technology Industry Development Agency (ITIDA), Amr Mahfouz stated: “The new proceedings have already entered into force and are being implemented,”. He added that this cooperation protocol is initiated and triggered by ITIDA out of its keenness to promote the growth of this promising sector.

“These proceedings aim to address and resolve any obstacles that impede the growth of investments in startups, as it represents a starting point to develop the entire startup ecosystem, and ensures strong ties and opportunities between startups and investors.”, Mahfouz affirmed.

The protocol signing was attended by Egypt’s Prime Minister and Minister of ICT. The protocol is a result of the efforts of a team comprising of members from ITIDA, headed by Engineer Amr Mahfouz, GAFI, FRA and Venture by Shahid, a department within Shahid Law Firm specialized in providing legal services for startups and venture capitalists.

The team prepared a legal memorandum that included the provisions and principles commonly used by startups in their joint ventures and agreements with investors and their compliance with the Egyptian laws aiming for developing an encouraging ecosystem for entrepreneurs and venture capital firms to invest and fund Egyptian startups. The memo also included proposals that would facilitate investing in startups, among its highlights are:

  1. -   The process of evaluating startup companies, is to be handled among the two parties, the startup and the investor, without any intervening from      the state, except for as to ensure the application of a recognized methodology using risk assessment and evaluations.

 -  The use of convertible instruments, that would convert into shares upon the occurrence of certain events or at the discretion of the holder of the note.

 -  Adopting a standardized form for the companies’ articles of association, that would allow shareholders to add the terms of the shareholders’     agreement to it.

 -  Facilitating the transfer of equity in startup companies, and exempting share transfers from depositing the purchase price in banks for revaluation companies.

 -  Carrying out share transfers in accordance to the shareholders’ agreement.

 -  Appointing Misr for Central Clearing, Depository and Registry as a mediator, being an escrow agent in stock transfers to ensure their implementation.

The protocol stipulates encouraging investment in Egyptian start-ups; attracting capital and financing to them; and fostering more local, regional, and international partnerships in a way that contributes to increasing the added value of the Egyptian economy, making Egypt a global hub for high-tech and innovation-based entrepreneurship.

According to the protocol, GAFI will prepare a unified form for the shareholders’ agreement to establish start-up companies; verify the validity of the initial evaluation of startup companies by estimating the investment required to operate and start the activity; and determine the appropriate timing and method for pumping new investments through public offerings, mergers, or acquisitions.

The FRA will also establish facilitating controls for the transfer of ownership of companies and entities that engage in venture capital activity by investing in start-up companies through financing tools that can be converted into shares and will also define procedures for transferring ownership of shares in startup companies in order to ensure the implementation of ownership transfers in the stock exchange.

Meanwhile, ITIDA will provide more protection for minority investors in startup companies through new mechanisms, such as including appropriate clauses in shareholder agreements and for start-ups to join them.

It is worth noting that the ITIDA has formulated a comprehensive five-year strategy in cooperation with Deloitte and funded by the U.S. Agency for International Development (USAID), to further support the local ecosystem capabilities and ensure greater access to finance, access to talent, access to markets, and an enabling environment.

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