In a bid to revamp regulations surrounding Angel Funds, the Securities and Exchange Board of India (SEBI) has issued a consultation paper proposing new rules aimed at balancing investor protection with the flexibility needed to support startups. Angel funds are a subset of Category I AIFs.
SEBI is seeking public feedback on 24 proposals that cover key areas such as investor eligibility, fund structure, and operational practices. This review is particularly timely following the government’s recent removal of the Angel Tax, which has raised questions about the need for further oversight of Angel Funds.
Highlights of the proposals follow.
1. Investor Criteria: SEBI proposes limiting Angel Fund investments to "Accredited Investors" — individuals or entities with demonstrated financial resources and experience, ensuring they understand the high-risk nature of startup investments.
2. Investment Limits: SEBI suggests raising the maximum investment per startup from Rs 10 crore to INR 25 crore, while the minimum would be reduced from INR 25 lakh to Rs 10 lakh.
3. Operational Flexibility: Angel Funds would no longer need to maintain a fixed minimum fund size (corpus) but would be required to onboard at least five Accredited Investors before starting investments.
4. Follow-On Investments: SEBI may allow Angel Funds to make additional investments in portfolio companies that no longer qualify as startups to protect initial stakes.
5. Transparency and Governance: SEBI wants all investments to be offered to all fund investors, with allocation methods clearly stated. It also mandates third-party performance benchmarking and regular reporting to maintain transparency.
6. Skin-in-the-Game: Fund managers would be required to invest a small amount (0.5% or INR 1,00,000) in each deal, aligning their interests with those of the investors.
7. Exit Period: Proposals include reducing the lock-in period from one year to six months, allowing Angel Funds to exit investments sooner.
SEBI’s proposals signal a proactive approach to fine-tuning regulations, enhancing investor confidence while supporting the startup ecosystem. The consultation is open to public comments until November 28, 2024.
For full details, read the SEBI consultation paper here.
