The Secret Sauce That Goes into Angel Funds
Angel funds were introduced by the Securities and Exchange Board of India (SEBI) with effect from September 16, 2013, by inserting chapter IIIA in the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (SEBI AIF Regulations). Angel funds are a sub-category of Venture Capital Funds, one of the various types of Alternative Investment Funds (AIF) under Category I. However, angel funds are very different from not only Category II and Category III AIFs, but also from other sub-categories of Category I AIF.
The note below is a ready reckoner for understanding the scope of an angel fund and compliances involved in setting up and operating an angel fund. Additionally, the document also compares IFSCA Angel Fund Regulations with SEBI AIF Regulations .
A. Who can invest in angel funds?
The SEBI AIF Regulations provide that only an ‘Angel Investor’ can invest in angel funds.
Angel Investors are defined by the SEBI AIF Regulations to be individuals or body corporates who meet the following criteria:
In case of an individual, the Angel Investor must have net tangible assets of at least INR 2,00,00,000 (Indian Rupees Two Crores) excluding the value of his/her principal residence, and who:
In case of a body corporate, the Angel Investor must have a net worth of at least INR 10,00,00,000 (Indian Rupees Ten Crores).
Any AIF registered under the SEBI AIF Regulations, or a Venture Capital Fund registered under the SEBI (Venture Capital Funds) Regulations, 1996 would also be an Angel Investor.
The SEBI AIF Regulations do not contain a similar prescription regarding eligibility to invest in the case of other sub-categories of Category I AIFs or Category II or Category III AIFs.
B. Where can angel funds invest?
Regulation 19F(1) of the SEBI AIF Regulations provide that angel funds can invest only in startups. A startup has been defined as follows:
“startup” means a private limited company or a limited liability partnership which fulfills the criteria for startup as specified by the Department of Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, Government of India, vide notification no. G.S.R. 127(E) dated February 19, 2019 or such other policy of the Central Government issued in this regard from time to time;
As per the aforementioned notification, an entity shall be considered as a startup only if it meets the following criteria:
The SEBI AIF Regulations further provide that an angel fund shall not invest in a startup which is:
Other sub-categories of Category I AIFs, Category II AIFs and Category III AIFs too have various investment restrictions. However, such restrictions are not as narrow or as strict as that applicable for angel funds. For example, venture capital funds (which are a subcategory within Category I) can invest upto 75% of their investable funds in unlisted equity shares or equity linked instruments of a venture capital undertaking or in companies listed or proposed to be listed on a SME exchange or SME segment of an exchange. Category II AIFs are required to invest primarily in unlisted companies directly or through investment in units of other AIF. The term ‘primarily’ has been interpreted by SEBI to mean that more than 50% of the investment by a Category II AIF has to be in unlisted entities. Category III AIFs face the least amount of investment restrictions.
C. How much diversity should investments by angel funds have?
Regulation 19F(5) of the SEBI AIF Regulations provide that an angel fund shall not invest more than 25% (of the total investments under all its schemes in one venture capital undertaking.
Category I AIFs and Category II AIFs also have a similar restriction. Category III AIFs cannot invest more than 10% of their investable funds in an investee company. However, if an AIF is a “large value fund for accredited investors”, this restriction is relaxed to 50% for Category I AIFs and Category II AIFs and to 25% for Category III AIFs. An angel fund, however, cannot be a large value fund for accredited investors and does not have any relaxation in this regard.
D. Are there minimum and maximum limits for investments by angel funds?
No investment by an angel fund can be less than INR 25,00,000 (Indian Rupees Twenty-Five Lakhs) and shall not exceed INR 10,00,00,000 (Indian Rupees Ten Crores). In the case of other categories of AIFs, there ae no such minimum or maximum limits.
E. Minimum and Maximum Fund Size for angel funds
The SEBI AIF Regulations mandate angel funds to have a corpus of at least INR 5,00,00,000 (Indian Rupees Five Crores). It is worth noting that social impact funds are also subject to a similar minimum limit. For all other categories of AIFs, the minimum corpus is INR 20,00,00,000 (Indian Rupees Twenty Crores). The SEBI AIF Regulations do not prescribe any maximum limit for any AIF in any category, including for angel funds.
F. Minimum Sponsor Commitment for angel funds
The sponsor of an angel fund is required to have a continuing interest in the angel fund of not less than 2.5% of the corpus or INR 50,00,000 (Indian Rupees Fifty Lakhs), whichever is lesser. In the case of other Category I AIFs and Category II AIFs, the sponsor’s continuing interest should not be less than 2.5% of the corpus or INR 5,00,00,000 (Indian Rupees Five Crores) whichever is lower. In the case of Category III AIF, the continuing interest shall be not less than 5% of the corpus or INR 10,00,00,000 (Indian Rupees Ten Crores) whichever is lower.
G. Maximum number of investors
The SEBI AIF Regulations permit angel funds to have upto 200 (two hundred) investors whereas other categories of AIFs are permitted to have upto 1000 (thousand) investors.
H. Lock-in period for investments
The SEBI AIF Regulations require investments by angel funds to be locked-in for a period of 1 (one) year. Such a lock-in period is not imposed on investments made by other categories of AIFs.
I. Investor’s Right to Opt-Out of Investments
The definition of an AIF given in the SEBI AIF Regulations requires the AIF to be a privately pooled investment vehicle which collects funds from investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors. Therefore, once an investor invests in an AIF, such investor has no control over investments to be made by the AIF, other than to demand that investments be in accordance with the investment objectives provided in the Private Placement Memorandum (“PPM”). All investors in an AIF share the rewards and losses from investments made by the AIF in proportion to their share of the total corpus. Opting out of investments is not an option for investors in an AIF, other than in a few exceptional circumstances, as per a very recent SEBI circular, which provides that an AIF may excuse its investor from participating in a particular investment in the following circumstances:
However, in the case of Angel Funds, Regulation 19G(3) of the SEBI AIF Regulations states as follows:
“The manager of the angel fund shall obtain an undertaking from every angle investor proposing to make investment in a venture capital undertaking, confirming his approval for such an investment, prior to making such an investment.”
The impact of the aforementioned Regulation 19G(3) is that before an angel fund makes any investment, it needs to obtain the consent of each investor in the angel fund. The corollary to this is that every investor in an Angel Fund has the right to opt out of investments being made by the angel fund.
J. Impact of Investor’s Opt-Out Right
Since investors have the right to opt out of investments:
K. Application and Registration Fees
When applying to register an AIF, all applicants, irrespective of the category being applied for, pay an application fee of INR 1,00,000 (Indian Rupees One Lakh). Once the application is approved, a registration fee becomes payable. This registration fee for angel funds is only INR 2,00,000 (India Rupees Two Lakhs), whilst it is much higher for other categories of AIFs, as shown below:
|AIF Category||Registration Fee|
|Category I AIF||INR 5,00,000|
|Category II AIF||INR 10,00,000|
|Category III AIF||INR 15,00,000|
L. Angel Funds in GIFT City
The International Financial Services Centres Authority (Fund Management) Regulations, 2022 (IFSCA FM Regulations) do not provide for the formation of angel funds. However, Regulation 18 which defines Venture Capital Schemes states that- Venture Capital Schemes also includes an angel fund. A few months after the IFSCA FM Regulations came into effect, vide Circular F. No. 645/IFSCA/Angel Schemes/2022-23 dated July 1, 2022 (IFSCA Angel Fund Regulations), the IFSCA provided for the setting up of angel funds in the GIFT City. The IFSCA Angel Fund Regulations are very similar to the rules applicable to angel funds in the SEBI AIF Regulations in many respects, though on certain aspects, the IFSCA Angel Fund Regulations diverge from the SEBI AIF Regulations.
– Angel funds set up in GIFT City require investor consent for every investment proposed to be made by the angel fund. Investors can opt out of an investment if they so wish;
– Angel funds set up in GIFT City can invest in early-stage venture capital undertakings, which are defined in a manner which is almost identical to the definition of a startup under the SEBI AIF Regulations;
– Maximum number of investors in an angel fund permitted under both the regimes is the same i.e., 200 (two hundred) investors;
– Both regimes impose a maximum limit on each investment by an angel fund. However, the limit imposed under the IFSCA Angel Fund Regulations is USD 1,500,000 (US Dollars One Million Five Hundred Thousand) whereas the SEBI AIF Regulations impose a limit of INR 10,00,00,000 (Indian Rupees Ten Crores) which is approximately USD 1,200,000 (US Dollars One Million Five Hundred Thousand);
– Each investment by an angel fund shall be locked in for 1 (one) year under both regimes;
– The IFSCA Angel Fund Regulations mandate angel funds to have a minimum corpus of USD 1,000,000 (US Dollars One Million) whereas SEBI AIF Regulations mandate a minimum corpus of INR 5,00,00,000 (Indian Rupees Five Crore), which at current exchange rates, works out to approximately USD 600,000 (US Dollars Six Hundred Thousand);
– Under the IFSCA Angel Fund Regulations, angel investors do not have to meet any net worth requirement. As mentioned above in Paragraph 1, angel investors in a SEBI registered AIF are required to have a certain minimum net worth.
– The SEBI AIF Regulations restrict angel funds from investing more than 25% of the total investments under all its schemes in one venture capital undertaking. Such a restriction is not present under the IFSCA Angel Fund Regulations. This is possibly because it is expected that many angel funds registered under the IFSCA Angel Fund Regulations would be feeder funds which would invest their entire corpus into a domestic AIF.
– The SEBI AIF Regulations provide that an investment by an angel fund in any venture capital undertaking shall not be less than INR 25,00,000 (Indian Rupees Twenty-Five Lakh). The IFSCA Angel Fund Regulations do not contain any such requirement.
– The IFSCA Angel Fund Regulations allow angel schemes to invest not only in early-stage venture capital undertakings, but also in other regulated angel schemes or angel funds set up in IFSC, India or foreign jurisdictions. The SEBI AIF Regulations permit investment by angel funds only in startups.
– Unlike the SEBI AIF Regulations, the IFSCA Angel Fund Regulations give exemptions for accredited investors in angel funds. Though the SEBI AIF Regulations give exemptions for accredited investors in other categories, they receive no special privileges in angel funds. Under the IFSCA Angel Fund Regulations, accredited investors are exempt from meeting the minimum commitment requirement.
– The IFSCA Angel Fund Regulations in certain cases provide an exemption to the FME from maintaining a continuing interest in the angel fund. Such cases are:
No such exemption is provided under the SEBI AIF Regulations.
– The IFSCA Angel Fund Regulations require the FME of an angel scheme to structure each investment as a close-ended segregated portfolio by issuing separate classes of units to the consenting angel investor under each segregated portfolio. Further the FME must ensure that assets and liabilities of each segregated portfolio are ring-fenced from other segregated portfolios. This condition is absent under the SEBI AIF Regulations.
– The SEBI AIF Regulations do not permit an angel fund to exceed the maximum investment limit even in any subsequent round of funding. The IFSCA Angel Fund Regulations permit angel funds to invest in excess of the maximum limit USD 1,500,000 (US Dollars One Million Five Hundred Thousand) during subsequent rounds of fund raising by the venture capital undertaking upon satisfaction of the conditions mentioned below:
We trust you will find this an interesting read. For any queries or comments on this update, please feel free to contact us at firstname.lastname@example.org or write to our authors:
 Early stage investment experience means prior experience in investing in start-up or emerging or early-stage ventures.
 Serial entrepreneur means a person who has promoted or co-promoted more than one start-up venture.
 Industrial group shall include a group of body corporates with the same promoter(s)/promoter group, a parent company and its subsidiaries, a group of body corporates in which the same person/ group of persons exercise control, and a group of body corporates comprised of associates/ subsidiaries/ holding companies.
 Group Turnover means combined total revenue of the industrial group.
 Investable Funds means corpus of the scheme of Alternative Investment Fund net of expenditure for administration and management of the fund estimated for the tenure of the fund.
 venture capital undertaking means a domestic company which is not listed on a recognised stock exchange at the time of making investments.
 SEBI Circular bearing number CIR/IMD/DF/14/2014 dated June 19, 2014
 Even though Regulation 19F(5) uses the phrase “venture capital undertaking”, Angel Funds are bound by the rule in Regulation 19F(1) of the SEBI AIF Regulations that Angel Funds can invest only in startups.
 “large value fund for accredited investors” means an Alternative Investment Fund or scheme of an Alternative Investment Fund in which each investor (other than the Manager, Sponsor, employees or directors of the Alternative Investment Fund or employees or directors of the Manager) is an accredited investor and invests not less than seventy crore rupees
 Regulations 2(b) of the SEBI AIF Regulations
 SEBI circular bearing number SEBI/HO/AFD-1/PoD/P/CIR/2023/053 dated April 10, 2023.
 Paragraph 8 of the IFSCA Angel Fund Regs
 The minimum commitment requirement is detailed in paragraph 12.a.vii
 The maximum investment limit is detailed in paragraph 4
Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.