SEBI Proposes Key Reforms for Angel Funds to Boost Capital Flow to Start-Ups

The capital market regulator, the Securities and Exchange Board of India (SEBI) has released a consultation paper suggesting that Accredited Investors (AIs) be included in the definition of Qualified Institutional Buyers (QIBs). This proposal refines the the regulatory framework for Angel Funds and aims to broaden investment opportunities for start-ups by allowing Angel Funds to onboard a larger pool of verified investors while ensuring proper risk assessment.

Objective of New Proposal

Angel Funds, a subset of Alternative Investment Funds (AIFs), facilitate investments in start-ups by collecting capital from Angel Investors. However, SEBI has expressed concerns about the lack of operational transparency in these funds, particularly around assessing the financial stability and risk tolerance of investors.

SEBI previously proposed that only Accredited Investors should be allowed to invest in Angel Funds to address these concerns. Accredited Investors are individuals or entities that meet specific financial criteria and are verified by an independent accreditation body.

The latest proposal takes this a step further by recommending that, for the limited purpose of Angel Funds, AIs be recognized as QIBs. This would exempt them from the 200-investor limit set by the Companies Act, 2013, thereby allowing more participation in Angel Funds while maintaining necessary regulatory safeguards.

What are the Key Proposals?

• Redefining QIBs: SEBI proposes an amendment to 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 experienced investors without exceeding the private placement cap under the Companies Act.
• Removal of the 200-Investor Limit: SEBI suggests lifting the cap on the number of investors in a single Angel Fund investment. This change is expected to increase capital flow to start-ups while ensuring that only investors with adequate financial knowledge and risk tolerance are involved.
• Alignment with the Companies Act: The Companies Act permits private placements to up to 200 investors, excluding QIBs. SEBI argues that AIs, like QIBs, have the necessary financial acumen to independently assess risks, making their exemption from the cap justifiable.

Conclusion

The proposal could significantly expand the investor base for Angel Funds, offering start-ups greater access to capital, If implemented. SEBI aims to strike a balance between protecting investors and fostering a thriving start-up ecosystem by ensuring that only financially sophisticated investors are involved.

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