SEBI Recommends Scrapping 200-Investor Cap On Angel Funds

In an effort to refine the regulatory landscape for Angel Funds, the Securities and Exchange Board of India (SEBI) has released a consultation paper suggesting that Accredited Investors (AIs) be classified as Qualified Institutional Buyers (QIBs). This proposed amendment seeks to broaden investment opportunities in start-ups by allowing Angel Funds to attract a more diverse pool of verified investors while ensuring thorough risk assessment.

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Objective

Angel Funds, a subset of Alternative Investment Funds (AIFs), serve as a crucial investment channel for start-ups by aggregating capital from Angel Investors. However, SEBI has expressed concerns regarding the clarity of operational guidelines, particularly in verifying the financial stability and risk tolerance of investors. Currently, many Angel Funds rely on self-declarations or social media profiles to assess investor eligibility, which may expose individuals to risks they might not fully comprehend due to the inherent uncertainties of early-stage investments.

To mitigate these risks, SEBI had previously suggested that only Accredited Investors—who meet predefined financial criteria and undergo verification by an independent accreditation body—should be permitted to invest in Angel Funds.

Building on this earlier proposal, SEBI now recommends recognizing AIs as QIBs exclusively for Angel Fund investments. This change would exempt them from the 200-investor cap imposed by the Companies Act, 2013, thereby increasing participation in Angel Funds while maintaining necessary regulatory protections.

Key Proposals

Expanding the Definition of QIBs: SEBI aims to revise the Issue of Capital and Disclosure Requirements (ICDR) Regulations, 2018, to incorporate Accredited Investors within the QIB category. This would allow Angel Funds to onboard a greater number of experienced investors without violating the Companies Act’s private placement restrictions.

Eliminating the 200-Investor Cap: SEBI proposes removing the existing limit on the number of investors contributing to a single Angel Fund investment. This adjustment is expected to boost capital inflows into start-ups while ensuring that only financially knowledgeable investors with adequate risk tolerance participate.

Harmonization with the Companies Act: Since the Companies Act permits private placements for up to 200 investors but excludes QIBs from this limit, SEBI argues that AIs, possessing similar financial expertise, should also be exempt.

Potential Impact on Start-Ups and Angel Funds

If adopted, these regulatory changes would significantly widen the investor pool for Angel Funds, granting start-ups greater access to capital. By ensuring that only financially sophisticated individuals invest, SEBI aims to strike a balance between investor protection and fostering a dynamic start-up ecosystem.

Public Consultation

SEBI has invited stakeholders to submit their feedback on these proposals by March 14, 2025. Comments can be shared through an online form available on SEBI’s official website.