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Call for Inputs: SEBI's consultation paper on review of regulatory framework for Angel Funds in AIF Regulations.
Call for Inputs: SEBI's consultation paper on review of regulatory framework for Angel Funds in AIF Regulations.

November 21, 2024

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SEBI has issued Consultation paper on review of regulatory framework for Angel Funds in AIF Regulations. This paper aims to seek views from public on the need for channelizing capital from Angel investor pools through a regulated structure. If the need for a regulatory environment for Angel Funds is acknowledged, this paper also aims to seek views on proposals to streamline regulatory framework for Angel Funds to

  1. Rationalise their fundraising processes,
  2. Strengthen disclosure and governance requirements, and,
  3. Provide operational clarity and investment flexibility.

SEBI’s Advisory Committee on Alternative Investments (AIPAC) has affirmed the need to regulate angel funds within the ambit of the AIF Regulations. In doing so, the consultation paper puts forth several proposals that include:

  • Investor Accreditation and Limits: SEBI has proposed allowing only accredited investors to invest in angel funds. However, the existing cap of 200 investors per angel fund company will remain, with certain exclusions for Qualified Institutional Buyers (QIBs).
  • Investment Threshold for Employees and Directors: Recognizing the need for inclusivity within angel funds, the paper suggests introducing a minimum investment threshold of INR 5 lakh for employees and directors associated with the fund and its investment manager.
  • Streamlining Minimum Investment Requirements: The existing regulation requiring a minimum investment of INR 25 lakh from an angel investor is under review. SEBI proposes to remove this stipulation, contingent on the implementation of the accredited investor-only framework.
  • Shifting from Corpus to Investor Onboarding: To modernize operations, SEBI recommends replacing the minimum corpus requirement of INR 5 crore with a criterion mandating that angel funds commence investments only after securing at least five accredited investors. This would also redefine the continuing interest obligations for sponsors/managers based on actual investments rather than corpus size.
  • Adjusting Investment Limits: To cater to startups' funding needs, the paper suggests modifying the current range of INR 25 lakh to INR 10 crore per investment. The revised limit would allow investments ranging from INR 10 lakh to INR 25 crore.
  • Redefining Diversification Norms: SEBI is considering eliminating the 25% diversification rule to mitigate operational challenges and improve compliance monitoring, emphasizing a balanced approach to managing concentration risks.
  • Collaborative Investments: To prevent single-investor dominance in angel funds, SEBI proposes that each investment be supported by contributions from at least three investors, excluding the sponsor/manager.
  • Follow-On Investment Flexibility: Recognizing the lifecycle of startups, SEBI recommends allowing angel funds to participate in follow-on rounds for existing portfolio companies under strict conditions, including maintaining proportional beneficial interest.
  • Reduced Lock-In Period: The lock-in period for investments is proposed to be halved, reducing it from one year to six months to enhance liquidity.
  • Clarity on Continuing Interest: SEBI aims to address ambiguities in maintaining sponsor/manager “skin-in-the-game” by suggesting a minimum continuing interest of 0.5% of the investment amount or INR 1,00,000, whichever is higher, for each investment.
  • Term Sheet Filing Requirements: SEBI proposes eliminating the need for angel funds to file term sheets, aligning their regulatory requirements with those of other AIF categories.
  • PPM Enhancements and Audit Requirements: The consultation highlights the need for standardized Private Placement Memorandum (PPM) templates for angel funds, mandatory filing through merchant bankers, and PPM audits for funds exceeding total investments of INR 100 crore.
  • First Close Deadline: To enhance fund operational efficiency, angel funds must achieve their first close by onboarding at least five accredited investors within 12 months of SEBI’s PPM acknowledgment.
     

Should this consultation paper be of interest to you, please reach out to us latest by November 25, 2024. You can write to: swapnil@nasscom.in [+91 7860797664] and Tejasvi@nasscom.in [+91 9899813727].

Given the limited time duration, we would encourage you to contact us over the phone, if that is convenient to you.

Please note that last date for submission of comments to SEBI is November 28, 2024.


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