The Securities and Exchange Board of India (Sebi) has proposed several changes to angel funds rules, which could adversely impact certain angels or funds but also benefit others.
In a consultation paper released on November 13, the market regulator proposed changes to the angel fund regime, which falls under a category of asset management companies called Alternative Investment Funds(AIFs). Moneycontrol takes a deep dive into the changes and the need for them.
Who will get impacted due to the tweaks?
The tweaks, if implemented, will apply to all the so-called angel funds or angel networks which pool investments from ultra-high-net worth individuals (UHNIs) to invest in early-stage startups. These angels typically invest in early stages of a company. before private equity and venture capital investors step in.
The move will impact 82 angel funds registered with Sebi which raised investment commitments of Rs 7,053 crore as of March 31, 2024, the regualtor data shows.
Market participants say there are hundreds of wealthy individuals who pool their investments with other angels through private networks that are akin to crowdsourcing but they make these investments by registering with Sebi as AIFs.
Crowdsourcing with more than 200 investors is prohibited under the Companies Act. Angel funds are exempt from this rule. Also, until the FY25 budget, only investments made into startups via Sebi registered angel funds were exempt from angel tax. The government has now done away with the tax.
What does mandatory investor accreditation mean for potential angels?
In the paper, Sebi proposes that angel funds only onboard clients whose net worth has been accredited by a registered third-party organisation such as CDSL or BSE. The move is aimed to ensure that only those investors who are aware of the high risks take the route.
It also aims to weed out the angels who don’t meet the minimum net worth criteria. This standardised methodology will force out several angels who have been participating in the funds without fulfilling the net-worth criteria, market participants say.
For a person or family to be eligible as an accredited investor, they should have a minimum annual income of more than Rs 2 crore or an annual income of over Rs 1 crore and a net worth of more than Rs 5 crore. Alternatively, an angel with a net worth of over Rs 7.5 crore is eligible for accreditation, irrespective of their annual income.
How do accreditation criteria affect angel funds?
Sebi has proposed that angel funds, which have clients who don’t fulfil the accreditation criteria, be given a one-year transition time to ensure compliance with rules.
All angel funds will have to ask their investors to get their accreditation done and submit a report on their net worth.
If a fund has unaccredited investors, during the one-year transition time, the fund won't be allowed to offer investment opportunities to more than 200 angels, in line with the public issuance rule of the Companies Act.
Fund experts say some of the existing clientele of angel funds may be impacted due to the rejig but the changes would provide more regulatory certainty to verified angels.
Which are the rules that Sebi proposes to ease?
In the discussion paper, Sebi has suggested easing several operational norms for angel funds. The idea seems to be to enhance the entry criteria into the segment and to make it easier for verified angels to invest in startups.
Earlier, angel funds could invest a minimum of Rs 25 lakh and a maximum of Rs 10 crore. Sebi has proposed to reduce the minimum investment in a startup to Rs 10 lakh and raised the maximum to Rs 25 crore.
It has also proposed that angel funds be allowed to invest in follow-on offerings of startups in which they are already invested, even if the company is no longer categorised as a startup.
Sebi also wants to relax the investment diversification rules that say no angel fund can invest more than 25 percent of its investment in a single company.
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