Boost for startups: SEBI suggests removing 200-investor cap for Angel Funds

In a move to refine the regulatory framework governing Angel Funds, the Securities and Exchange Board of India (SEBI) has released a consultation paper proposing the inclusion of Accredited Investors (AIs) under the definition of Qualified Institutional Buyers (QIBs). This change aims to enhance investment opportunities in start-ups by allowing Angel Funds to onboard a broader pool of verified investors while ensuring adequate risk assessment.  

Objective

Angel Funds, a category of Alternative Investment Funds (AIFs), facilitate investments in start-ups by pooling capital from Angel Investors. However, SEBI has noted concerns regarding the operational clarity of these funds, particularly around the verification of investors’ financial strength and risk appetite. Many Angel Funds currently rely on self-declarations or social media profiles for investor eligibility, leading to potential risks for investors who may not fully grasp the inherent uncertainties of early-stage investments.  

To address these concerns, SEBI had previously proposed in a consultation paper that only Accredited Investors be allowed to invest in Angel Funds. Accredited Investors are individuals or entities who meet specific financial thresholds and are verified by an independent accreditation agency.  

The latest proposal takes this a step further by suggesting that for the limited purpose of Angel Funds, AIs should be recognized as QIBs. This would exempt them from the 200-investor cap imposed by the Companies Act, 2013, allowing for greater participation in Angel Funds while maintaining regulatory safeguards.  

Key Proposals  

• Redefining QIBs: SEBI proposes amending the definition of QIBs under the Issue of Capital and Disclosure Requirements (ICDR) Regulations, 2018, to include Accredited Investors. This would enable Angel Funds to onboard a larger number of sophisticated investors without breaching the private placement cap under the Companies Act.  
• Removal of the 200-Investor Limit: SEBI suggests eliminating the cap on the number of investors that can contribute to a single investment by an Angel Fund. This change is expected to facilitate increased capital flow into start-ups while ensuring that only investors with sufficient financial knowledge and risk tolerance participate.  
• Alignment with Companies Act: The Companies Act allows private placements to up to 200 investors, excluding QIBs. SEBI argues that AIs, like QIBs, possess the necessary financial acumen to assess risks independently, justifying their exemption from the cap.  

Impact on Start-Ups and Angel Funds

If implemented, the proposal would significantly expand the investor base for Angel Funds, providing start-ups with greater access to capital. By ensuring that only financially sophisticated investors participate, SEBI aims to strike a balance between protecting investors and fostering a thriving start-up ecosystem.  

Public Consultation

SEBI has invited public comments on the proposals until March 14, 2025. Stakeholders can submit their feedback through an online form available on the SEBI website.