This article is an extension of Lebanon’s Circular 331: The birth of an industry piece, published here yesterday.
On February 22 of this year, BDL passed Intermediate Circular 452, which puts limitations on how startups could invest the money they received under Circular 331. It stipulates that any investment, direct or indirect, must be made in Lebanon. The amendment came after rumors of misguided investments by some beneficiaries of 331.
Between spending and investment
The amendment fails to differentiate between spending and investment. This means, for example, that startups cannot spend money on Google Ads, as the expense would go to a non- Lebanese company, outside of Lebanon. “The amendment is good for boundaries, but it doesn’t make sense that 100 percent should be invested in Lebanon,” explained Nizar El Hachem, founder of Azure Fund.
With this amendment, BDL was actually trying to make sure that the spirit of the 331, which is to create employment in the Lebanese knowledge economy, was respected. The VCs interviewed, namely Berytech, MEVP, Leap, Azure, B&Y, said that they met with BDL and asked about the amendment. They reported that the BDL said that expenses outside the country were allowed as long as they respected the spirit of 331, which is to foster employment in Lebanon’s knowledge economy.
Permission of the BDL?
This stance puts the startups and funds in the position of having to request permission from the BDL before spending anything abroad.
“The fact that we need to ask the BDL about investment is not comfortable,” said Cyril Hadji-Thomas, co-founder and CEO of Bookwitty. “It’s as if we were still teenagers and not grownups, and had to request permission from our parents. We need more transparency and clarity from all sides.”
At the very beginning, BDL envisaged that it would engage in very limited oversight when it came to 331 spending.
“Originally, the guideline specified that the money should be spent in Lebanon in the knowledge economy, and very basic reporting was asked from us,” explains El Hachem.
Additionally, the new regulations governing startups’ accountability, were not always easy for them to meet.
“The BDL used the capital calls of the funds to ask for more information from the startups,” explained Leap Ventures’ partner, Herve Cuviliez. This would impact negatively the capital injection process as it prolongs it and causes delays. “Within this cycle, money would require a longer time to be approved. A two to five month delay is a long time for a startup, which can die while waiting for the money.”
Amendment revisited, but...
The uproar and the intense lobbying by the industry led to suspending 452 on March 17, and replacing it by amendment 454.
The latter permits startups to buy services and equipment abroad should they be unavailable in Lebanon. Additionally, it allows that further exceptions can be granted by BDL on a case-by-case basis.
Yet this keeps the startups at the mercy of BDL.
“It’s better than the previous amendment,” acknowledged Fadi Bizri, a partner of B&Y Ventures, ”but it’s still very vague.” Funds’ representatives still need to visit the DL on a regular basis just to make sure that they’re following the guidelines.
Lebanese startups abroad
The situation of startups founded abroad by Lebanese citizens remains unclear under both amendments. These ventures are already functioning and will not relocate to Lebanon. But they will be interested in opening offices in Beirut and recruiting engineers, designers, etcetera. Do they fall under the 331 rule? For now, each fund has a different answer, and BDL is also deciding on a case-by-case basis.
Unfortunately, Amendment 452 has had a somewhat chilling effect:it showed a lack of trust in startups, and no one knows for sure what will happen next. BDL Governor Riad Salameh’s term ends this June. As it happens, 331 was Salameh’s brainchild. His reappointment is not guaranteed. Until then, the industry is holding its breath.