New SEBI Rules for Angel Funds: Accredited Investors, Investment Limits, and Operational Changes

New SEBI Rules for Angel Funds: Accredited Investors, Investment Limits, and Operational Changes

Sub : Eco

Sec: Capital market

• SEBI’s new proposal recommends that only accredited investors be allowed to invest in angel funds.
• Accredited investors must meet specific net-worth criteria verified by a third-party accreditation agency.
• This change is intended to prevent investors without sufficient risk appetite from investing in high-risk start-ups through angel funds.
• First Close Requirement:
  • Angel funds must conduct their first close by onboarding a minimum of five accredited investors within 12 months from the date SEBI acknowledges their private placement memorandum.
  • Existing angel funds will have a year to comply with the new accredited investor requirement.
• Investment Limits:
  • The minimum investment by an angel fund in a start-up is proposed to be lowered to ₹10 lakh from the current ₹25 lakh.
  • The maximum investment limit is proposed to be increased to ₹25 crore from the previous ₹10 crore.
• Diversification and Lock-in Requirements:
  • SEBI proposes to remove the 25% diversification limit for angel funds, providing them with greater flexibility in investments.
  • The lock-in period for angel fund investments in start-ups may be reduced to six months from the current one year, if the fund sells the investment to a third party.
• Investor Cap:
  • The maximum number of investors contributing to a specific investee company of an angel fund will be capped at 200 in a financial year, excluding qualified institutional buyers (QIBs).
• Employee and Director Investment:
  • Employees and directors of an angel fund and its manager will be allowed to invest a minimum of ₹5 lakh in the fund, increasing their “skin in the game”.

Accredited Investors

• Definition: Investors meeting certain financial thresholds, allowing them to invest in high-risk, high-return assets like private equity and hedge funds.
• Criteria in India: Defined by the Securities and Exchange Board of India (SEBI) based on net worth or annual income. SEBI describes an institution or business entity trading securities through private placement as an accredited investor if their net worth is Rs 25 crore. Individuals who wish to qualify as accredited investors must have a liquid worth of Rs 5 crore and a total annual income of Rs 50 lakh.
• Purpose: Protects smaller investors by allowing only financially sophisticated individuals or entities to access complex investment products.

Angel Funds

• Definition: A type of venture capital fund that provides early-stage capital to startups and high-growth businesses.
• Investor Type: Usually high-net-worth individuals, known as “angel investors.”
• Regulation: Governed by SEBI under the Alternative Investment Fund (AIF) Regulations, 2012.
• Purpose: Supports startups in early stages with smaller, more flexible investments than traditional venture capital.

Qualified Institutional Buyers (QIBs)

• Definition: Large, financially capable institutional investors able to invest in large-scale or complex securities.
• Examples in India: Includes mutual funds, banks, insurance companies, and foreign institutional investors (FIIs).
• Privileges: Granted access to special securities offerings like Qualified Institutional Placements (QIPs), with fewer regulatory requirements.
• Purpose: Enhances market liquidity and stability by involving institutions capable of assessing and managing investment risks.