Fintechs, or companies that offer financial solutions through technology such as mobile applications, are relatively new to Egypt, and as a result the groundwork for their operations is not as clearly defined as is that for traditional brick-and-mortar companies.
To help clarify the rules of the game for fintechs in Egypt a roundtable discussion was organised at the American University in Cairo (AUC) last week to discuss innovative investment and finance agreements for fintech startups. The event was a collaboration between AUC’s Innovation Hub (I HUB), which aims to connect industry and academia to drive innovation, and the Egyptian FinTech Association (EFA), a non-profit organisation which enables members to engage with multiple stakeholders to find solutions to issues facing the industry.
With the participation of fintech entrepreneurs, fund managers, law professionals involved with startups, policymakers and regulators and academics with an interest in the finance of startups and entrepreneurship, the roundtable tapped into the various contractual arrangements for fintech startups in Egypt and the options available within current local regulations.
It also tackled which contractual arrangements to choose and how to assess risks and valuation. It looked at recommendations to be made for the industry, notably to Egypt’s regulators and legislative body.
A growing number of fintechs are adopting Simple Agreements for Future Equity (SAFE), Convertible Loan Notes (CLN), Keep it Simple Security (KISS), and other similar arrangements. KISS is an “open source” document for use in early-stage private company financing deals. SAFE is an agreement between an investor and a company that provides rights to the investor for future equity in the company without determining a specific price per share at the time of the initial investment. CLN is a type of short-term debt that is converted into equity shares later.
Such contracts, unknown to the Egyptian legal system and in some ways contradicting certain laws, present a dilemma to both investors and investees, a press release on the event said. This could be one of the reasons why numerous startups presently raise funds via holding entities based outside Egypt in friendlier jurisdictions.
According to the press release, many startups, particularly in the field of fintechs, are resorting more and more to relatively new types of agreements for investors to accommodate the fact that at early stages there are lots of unknowns and it is difficult to agree on a valuation for the entity.
Nihal Abbas, manager of payment systems and the business technology sector at the Central Bank of Egypt (CBE), said that existing startups should be legally registered first so that they could be legally assisted if needed and their efforts did not turn out to be in vain. She said that existing laws did not cover cash exchanges through mobile applications.
In addition to such legal challenges, more clarity was required for all stakeholders to more objectively assess such contracts, from both a risk and value perspective. “All parties should make sure that they understand what is written in the contracts, ” said Sherif Sami, an investment and financial markets advisor. In the meantime, legal amendments were needed to cater for the needs of such entities.
The problem with the form of present contracts was that they did not always give the project owner a fair share of the profits, Sami said. The documents should also mention the percentage each party should be accountable for in case of financial losses, he added.
Areej Ali, a lawyer, said that in the early stages project owners and investors sometimes left out important details in the contracts they signed and ended up losing their rights in the process. “They sometimes don’t have the resources to draw up decent documentation,” she pointed out, suggesting that a local form of KISS could be the solution.
Aly Al-Shalakani, chairman of Cairo Angels, Egypt’s first formal angel investment network that invests in and supports early-stage startups in Egypt and across the Middle East and North Africa (MENA) region, agreed. “Some people don’t bother to write their own terms in a contract. They just print one off the Internet ready-made,” he said. He stressed that all the parties should know their rights and obligations and suggested adapting legal templates to local situations.
EFA Secretary-General Noha Shaker agreed, adding that fintech entrepreneurs should be able to draw up such documents efficiently to save time and money. When it comes to starting a business, there should be a single place that entrepreneurs can go to for technical and legal support, she said, giving the example of Mauritius, where the government was helping the local fintech ecosystem to turn it into the biggest fintech hub in Africa.
She also gave the example of the Netherlands, where investors could be assigned an advisor by e-mail who would help to guide them through the investment process, including finding office space and opening bank accounts.
“Some of the current laws [in Egypt] apply to a different age,” Sami said, pointing out that there were currently no laws governing e-signatures or e-transactions, or that they were still in the works.
*A version of this article appears in print in the 27 February, 2020 edition of Al-Ahram Weekly