The Financial Regulatory Authority (“FRA”) pioneers the introduction of modern-day transaction concepts in transfer operations of start-ups in its Decree no. 68 of 2022, dated 16 March 2022 (the “Decree”).
Introduction and Background
On 13 July 2018, the FRA initially published Decree no.94 of 2018 to govern the rules and procedures for transacting on unlisted financial securities and transferring ownership. The rationale of the FRA was that a special regime should be issued to manage such transactions due to their specific nature. The regime was thus aimed at granting security to persons transacting on unlisted securities and facilitating the exchange thereof by using automated technology systems of the Egyptian Stock Exchange (“EGX”). To this end, the 2018 Decree covered a wide array of aspects ranging from transfer mechanics to broker and EGX diligence obligations in executing said transfers.
In extension to this effort, the Decree issued in 2022 provides for the addition of an Article (9) to the 2018 Decree effective on the day following its publication (the “Effective Date”). In this regard, the Decree has been officially published in Al-Waqa’i Al-Masryah on 6 April 2022 and will be effective as of 7 April 2022.
The Decree mainly addresses venture capital companies and entities investing in start-ups via convertible instruments where such investment entails (i) the entry into a shareholders’ agreement for the start-up; and (ii) the transfer of ownership of the start-up shares to such Entities (the “Venture Capital Entities”) after a defined period as governed by the said shareholders agreement.
Overview of the Decree: What is New?
In brief, the Decree provides for the possibility for a central depository and registry company to enter into an escrow arrangement with the transaction parties in its capacity as an escrow agent in view of facilitating the transfer of the start-up shares to Venture Capital Entities resulting from convertible instruments (and so in line with the shareholders’ agreement entered into in this respect). The aim is to guarantee that transactions of this nature are executed via the EGX.
The conditions and requirements for the effectuation of the said share transfers are to be issued by the FRA.
The Decree further provides that the aforementioned transfer of share operation may – after obtaining approval from the FRA – be exempt from the requirement to submit a document evidencing the deposit of the transaction value at one of the banks under the supervision of the Central Bank of Egypt.
An interesting consideration is to generalize the approach adopted by the FRA beyond the current scope of application of the Decree. Indeed, the introduction of an escrow agency of central depository companies can extend to (i) the transfer of ownership of shares in companies that are registered with central depository companies; and (ii) to stakeholders other than Venture Capital Entities. This would be particularly useful as central depository companies are already involved in the share transfer process of such companies and are in charge of updating the shareholding structure of the same post-transaction.