Nasscom submission on SEBI Consultation Paper on review of regulatory framework for Angel Funds in AIF Regulations

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Nasscom submission on SEBI Consultation Paper on review of regulatory framework for Angel Funds in AIF Regulations

Swapnil

@swapnilyadavsy

December 1, 2024

Public Policy

SEBI released a Consultation Paper on review of regulatory framework for Angel Funds in AIF Regulations. The paper aimed to seek views from public on the need for channelizing capital from Angel investor pools through a regulated structure. In response to SEBI's public consultation nasscom provided industry feedback via submission portal on SEBI website. Here are our overall observations on the proposals:

Angel Funds should continue to be regulated by SEBI under the AIF Regulations as this would strengthen investor confidence in Angel Funds.
Existing Angel Investor definition must be retained as moving to ‘Accredited Investor’ will substantially reduce the number of angel investors in the market and adversely impact the startup ecosystem.
- Additionally, this may push investors to invest directly with larger amounts, low diligence, little peer review and hence little or no risk mitigation.
- This may also subdue an asset class which is just starting to emerge and, as a first stop for start-ups, is the most critical element of the funding ecosystem.
- Current net-worth Criteria may be retained as below:
  - Individuals: INR 2 cr
  - Body Corporates: INR 10 cr
- Additionally, we may also Include:
  - HUF/ Family Trusts @ INR 10cr
  - Sole proprietorships @ INR 2cr
Like other SEBI Cat-I funds, Angel Funds should be allowed to have up to 1000 investor-members.
We welcome the proposal to allow employees and directors of Angel Fund and its manager to invest in Angel Fund with minimum investment amount of INR 5 lakh and removal of Regulation 19(D)(3) of AIF Regulations specifying minimum investment amount and commitment period for angel investors.
On the proposal to make follow-on investment in its existing portfolio investee company for investees which may or may not be startup, we observe that:
1. Investors in a scheme should be allowed to exercise their pre-emptive/ follow-on round investment.
2. Additionally, any LP of the Angel Fund should also be eligible to participate in a follow-on round
The lock in requirement for investment by Angel Fund in a start-up may be reduced to 6 months in case that Angel Fund sells the investment to a third party.
The proposal on the rights of investors of an Angel Fund in an investment and in distribution of proceeds of such investment, on pro-rata basis to their contribution to the said investment may not be the best suited approach.
- Angel Funds, for the benefit of investee companies have different economics for investors/ professionals adding strategic value to the companies including participation in carried interest. This is disclosed to all investors.
- Thus, such distribution should be as per the Private Placement Memorandum (PPM) and Contribution Agreement.
The proposal that Sponsor/manager of Angel Fund to maintain minimum continuing interest of 0.5% of the investment amount or INR 1,00,000 whichever is higher, in each investment of Angel Fund. We hold the view that while the Sponsor should be committed to investment in each investment of the Angel Fund there should be no minimum limit prescribed. This, recommendation is driven by the following considerations:

The concept of ‘skin-in-the-game’ does not apply here as the Sponsor/ Manager does not take investment decisions.
Its role is only that of a co-ordinator. It presents investment opportunities to the angel investors who make individual decisions on where and how much they would like to invest.
In fact, many opportunities presented are declined by all angel investors.
The Sponsor commitment itself is INR 50 lakhs and will be used up in the first 25-50 investments which could be in just a year or two. However, the Sponsor needs to continue to invest through the life of the fund which could be 30-40 years.

We agree that the regulation 19(E)(1) for filing term sheet may be deleted from AIF Regulations and consequently, any reference to the word ‘scheme’ may be either removed or suitably modified to reflect an ‘investment’, as the case may be.
On the proposal to prescribe template PPM for Angel Funds by suitably modify the existing template PPM for Category I AIFs and to mandate requirement of merchant banker of filing of PPMs of Angel Funds with SEBI.
- A thinned-down template PPM may be provided for Angel Funds. However, existing funds may be grandfathered.
- Angel Funds should be allowed to directly file the PPMs with SEBI, without requiring Merchant banker.
We agree that Angel Funds may conduct their first close, by on-boarding minimum 5 Accredited investors, within 12 months from the date of SEBI communication for taking their PPM on record.
On the proposal that post the 1 year period, Angel Funds to ensure that the investments are made only out of capital contributed by Accredited Investors (those having valid accreditation certificate or those deemed as Accredited Investors) and during the aforesaid 1 year period, Angel Funds, having non Accredited Investors, shall ensure that the investment opportunity is not offered to more than 200 investors, we recommend that
- We should keep the current definition of Angel Investors and not introduce Accredited Investors.
- As with other AIFs, Angel Funds may have upto 1000 angel investors. Any opportunity can be shown to all the 1000.
- However, each scheme may not have more than 200 investors.

For any queries regarding this submission, please write to Swapnil Yadav (swapnil@nasscom.in) or Tejasvi Gupta (tejasvi@nasscom.in).

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Swapnil

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