Securities and Exchange Board of India (SEBI) vide consultation paper dated November 13, 2024, proposed that only accredited investors (AIs) with commensurate risk appetite can be on-boarded as investors to angel funds. Accordingly, if only AIs are allowed to invest, there may not be any cap on total number of investors allowed to be on-boarded to an angel fund but the current cap under SEBI (Alternative Investment Funds) Regulations, 2012 (AIF Regulations), which restricts contribution to a specific investment of angel fund to 200 investors may be retained.
The current framework governing private placement under Companies Act, 2013 (Companies Act), restricts invitation to subscribe or offer or allotment of securities to not more than 200 investors, excluding Qualified Institutional Buyers (QIBs) as defined under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations). Under the AIF Regulations, since there is no cap on the number of investors that can be on-boarded and offered investment opportunities, it may be deemed to be a public issue (i.e. making an invitation to subscribe or offer to more than 200 investors) and consequently, undermining the regulatory intent of Companies Act. Accordingly, SEBI vide consultation paper dated February 21, 2025 (Consultation Paper), proposed to expand the definition of QIBs under ICDR Regulations to include AIs for the limited purpose of offering investment opportunities by angel funds because of the exemption enjoyed by QIBs from the cap of 200 investors for private placement.
Since AIs have commensurate risk appetite, are well informed about the risks involved in investing in start-ups and are expected to conduct necessary due-diligence before investing, a parallel can be drawn between AIs and QIBs for the limited purpose of offering investment opportunities and allotment of investments by angel funds. However, for the purposes of public markets, QIBs will not include AIs.
Additionally, since there is no cap on the number of QIBs which can be allotted securities through private placement under Companies Act, accordingly, the existing cap under AIF Regulations which restricts number of investors in a scheme of an angel fund to not more than 200 angel investors may be removed. Similarly, the cap will also not apply to key managerial personnel or managers, who may not be AIs, contributing to the investments of angel fund.
Conclusion
The recognition of AIs as QIBs and removal of the cap of 200 investors in a scheme of an angel fund would expand the pool of investors eligible to invest in investee companies through angel funds. This would enable angel funds to attract larger and well-informed investors without breaching the private placement framework under Companies Act.