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Limiting Innovation

The Legal Framework Regulating Startups in Palestine

By Yara Abu Meizer

In an ideal ecosystem, laws and policies function as startup enablers and investment attractions. In Palestine, the situation is far from ideal. Although Palestinian entrepreneurs continue to innovate and inspire, a number of legal limitations are imposed on them. This article briefly discusses the limiting impact of the Palestinian legal framework on Palestinian startup founders, the alternatives, and the way to move forward.Palestinian political history and political divide have resulted in the existence of two separate legal frameworks that are applied in two different jurisdictions in the occupied state, one in the West Bank and another one in the Gaza Strip.It is worth noting that the law regulating companies applied in the West Bank is the Law by Decree (42) of 2021. Whereas in the Gaza Strip, up until 2012, the applied law was the Companies Law of 1929, that was later amended by the new Companies Law that the effective government in Gaza adopted in 2012.Startups are neither defined nor regulated in any of these laws. The main consequence of this absence of definition and lack of regulation is that startups are treated as companies or small businesses. In reality, however, startups differ from other forms of companies: A startup is “a temporary organization designed to look for a business model that is repeatable and scalable,” whereas a company is “a permanent organization designed to execute a business model that is repeatable and scalable.” This distinction between the nature and objectives of these two types of organization means that their regulatory needs differ as well.*1
Furthermore, because the applied laws are outdated, many areas surrounding the work of startups remain undiscovered and unregulated. Startups are all about innovation and aim to bring to life new products/services in response to a specific demand or provide creative solutions to today’s problems. Outdated legal frameworks do not respond to the “advanced” needs of today’s startups.According to the Genome Global Startup Ecosystem report of 2022, “artificial intelligence and big data” is a leading subsector in the MENA region.*2 With legal frameworks failing to recognize the existence of such subsectors and not offering much protection or stability to startup founders and/or investors, it is extremely risky and challenging for founders to establish a startup in Palestine.Ecosystem stakeholders have long criticized the Palestinian legal framework for limiting innovation. For example, most founders view the registration and other official processes as slow and bureaucratic. In addition, due to the outdated applicable intellectual property laws, tech-based startup companies face major problems when initiating the intellectual property registration process, and the legal framework does not provide for or regulate flexible financing options that would respond to the nature and needs of startups at various stages. Palestinian entrepreneurs, moreover, suffer from a lack of e-government or e-payment systems that would facilitate processes and enable entrepreneurs to act swiftly and, in some cases, ensure compliance with government and donors’ demands – to name just a few of the existing impediments and challenges.

It is evident that the Palestinian government in the West Bank is taking steps to achieve some sort of legal and administrative reform, attempting to create a nurturing environment for the business and entrepreneurial ecosystems. Just recently, the Palestinian legislature abandoned the 57-year-old legislation that regulated Palestinian companies up until March 2021 by adopting Law by Decree (42) of 2021 Regarding Companies.  Furthermore, the Palestinian government has also adopted Law by Decree (41) of 2022 regarding national payments, which is a step forward towards the regulation of e-payments and fintech technologies.

The introduced laws are still hard to digest for Palestinian startups, as they are not specifically designed to respond to their legislative needs, nor do they take into consideration the financial and business structure of startup companies. For example, the newly adopted companies law does not provide a clear definition of a startup company. The law regulating national payments does not take advantage of innovative technologies and does not encourage or facilitate the creation of new e-payment systems by Palestinian entrepreneurs. As a result, Palestinian entrepreneurs are part of the brain drain and are moving to more business-friendly alternative jurisdictions such as Saudi Arabia, Egypt, Qatar, Dubai, and the United States (Delaware).

Palestinian entrepreneurs should not have to rely on alternatives. A profound political and legal reform needs to take place in order to allow the law to act as a business enabler rather than a business limitation. This means that all stakeholders in the ecosystem must collaboratively play an active role to make this happen. Government and state officials should take serious steps to reform and update the applied laws. Lawyers need to understand the specific legal and business needs of startups, and entrepreneurs and startup founders need to be more vocal about the need for change in the legal system.

A step forward in legislative reform could be the adoption of a Startup Act that would be complementary to the new companies law (Law by Decree (42) of 2021). A preliminary step for the adoption of a Startup Act is to make sure that the new companies law is validated and properly implemented by various business stakeholders, including investors, business practitioners, public sector employees, and lawyers.

In the event that a Startup Act is adopted, it should be designed to support the establishing, financing, governance, organization, structuring, expansion, IP protection, and internationalization of Palestinian startups. This act should be attractive to all Palestinian entrepreneurs, including marginalized groups such as people with disabilities, Palestinian Jerusalemites (Palestinians holding Israeli IDs), and Palestinian women living in conservative environments.

The design of the Startup Act should depend on a bottom-up participatory process, which means that it should asses and take into consideration the various legislative and administrative needs of all relevant stakeholders within the startup ecosystem – starting with entrepreneurs, founders, accelerators, incubators, and entrepreneurial hubs and ending with donors and different types of investors – and the Palestinian government’s readiness to respond to these needs.  The figure below explains the bottom-up approach that should be used when developing a Palestinian Startup Act.

In conclusion, the current Palestinian framework does not respond to the Palestinian startup ecosystem’s legislative needs. Given this reality, a legislative reform process should take place in order to create a business-friendly legal environment for startups in Palestine. In order for the legislative reform process to be beneficial, legal practitioners must collaborate with innovative businesses to create enterprise opportunity and value in order to drive quantifiable and impactful results for the Palestinian startup ecosystem and the Palestinian economy as a whole.

i Steve Blank, a serial entrepreneur and professor at business schools such as Stanford, Berkeley and Imperial College.

ii “Global Startup Ecosystem Report 2022: MENA Insights, Rankings & Ecosystem Pages,” Startup Genome, available at https://startupgenome.com/article/mena-insights-rankings-and-ecosystem-pages.

  • Yara Abu Meizer is a certified attorney and a member of the Palestinian Bar Association. She is an Associate II (Senior Associate) and the head of the Entrepreneurship and Startups Department at Andersen in Palestine.

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