Angel Funds Get a Makeover

Area

What was before / what has changed

Implications ‒ what it means for funds & investors

Investor eligibility

Earlier: Angel Funds could have non-accredited investors.

Now: Angels Funds must raise capital only from Accredited Investors. If you’re an existing Angel Fund (registered before this circular), you have a transition period until 8 September 2026 to move completely to this model. Until the transition is completed, existing funds can have up to 200 non-accredited investors, but after that date, no new contributions from non-accredited investors will be accepted.

Helps ensure investors are better able to understand/absorb risks; raises the bar on due diligence & transparency. But also means some Angel Funds must adjust their investor base.

First Close requirement

Change: Angel Funds must onboard at least five Accredited Investors before declaring their first close. The first close must happen within 12 months of when SEBI takes the PPM (Private Placement Memorandum) of that fund on record.

For existing Angel Funds that haven’t declared first close yet, the same deadline applies (8 September 2026).

Forces speed and ensures there’s a minimum credible backing before investments begin. Helps ensure there’s enough investor commitment.

Schemes / Term Sheets

Earlier: Angel Funds might have operated through schemes for soliciting funds; term sheets had to be filed, etc.

Now: 

• Angel Funds cannot launch separate “schemes” for raising money or making investments. All investment activity must happen at the “fund level”.
• The requirement to file term sheets with SEBI is discontinued. However, Angel Funds must internally maintain term sheets for each investment (who invested, how much) for record-keeping.

Reduces regulatory burden in some respects (fewer filings), but places more responsibility on internal record-keeping and transparency.

Follow-on Investments

Changed: Angel Funds may invest further in existing portfolio companies, even if those companies are no longer startups, subject to conditions:

• Post-issue shareholding of the Angel Fund doesn’t exceed its pre-issue shareholding.
• Total amount invested in that company by the Angel Fund (initial + follow-on) is capped at ₹25 crore.
• Only investors who contributed earlier in that particular company can contribute again, pro rata to their earlier contribution. If some decline, remaining investors can have an opportunity.

Gives flexibility to support existing companies longer; prevents over-investment in a single company; ensures fairness among previous investors.

Lock-in period / Exits

New rules:

• Investments by Angel Funds must be locked in for one year.
• If exit is by a third-party sale (not via buyback or purchase by promoters or associates), the lock-in can be shortened to six months.

Aims to discourage very short-term speculative investments; still allows quicker exit in some cases.

Overseas investment

Clarified: Angel Funds are permitted to invest in companies outside India.

• The limit of 25% overseas investment (as per SEBI/RBI norms) will now be calculated on the total investments made (at cost) by the fund at the time of application. Other existing rules (RBI / SEBI AIF Master Circular) continue to apply.

Offers clarity. Important for Angel Funds that want to diversify into global startups. They must plan with cost basis in mind.

Allocation & Transparency among investors

New requirement:

• The fund manager must clearly disclose in the PPM a non-discretionary, defined method for how investment opportunities will be allocated among investors who agree to them.
• This methodology must be adhered to; the manager cannot pick and choose on a case-by-case basis.
• From 15 October 2025, all allocations must follow what is disclosed in the PPM.
• Returns/distributions to investors must be pro rata to their contribution, except where there is a carried interest or similar arrangement to pay manager/sponsor/employees.

Improves fairness, avoids favouritism. Important for investor confidence.

Reclassification of Angel Funds

Big structural change: Angel Funds will now be a standalone subcategory under Category I AIFs. They are no longer under the Venture Capital Fund subcategory.

Makes regulatory identity clearer; avoids confusion about which rules apply. Likely simplifies the interpretation of obligations.

Audit, Benchmarking & Reporting

Added/strengthened requirements:

• If an Angel Fund has total investments (at cost) exceeding ₹100 crore, it must annually audit compliance with the terms of its PPM.
• All Angel Funds must report to benchmarking agencies: investment-wise valuations and cash flow data.
• If past performance is ever mentioned (in promotions or marketing), it must be accompanied by a benchmark comparison from those benchmarking agencies.
• Applicability of these rules will be effective from the financial year 2025-26 onwards.

Enhances transparency & accountability. Helps investors compare, evaluate performance. Funds with large portfolios have more oversight.

For New Funds (post-circular)

For Existing Angel Funds

Must only accept Accredited Investors from day one. Must ensure at least 5 Accredited Investors before first close and do that within 12 months of SEBI taking the PPM on record. Must follow new rules on follow-on, lock-in, overseas investment, etc. Must set out and follow the non-discretionary allocation method in PPM. Comply with audit/benchmarking if crossing the ₹100 crore investment threshold.

Have until 8 September 2026 to transition investor base (stop accepting contributions from non-accredited after that). If the first close is not yet declared, you must do so by that date. Must adapt allocation methodology, maintain necessary internal records of term sheets, etc. Prepare for additional compliance (audit, reporting) if over thresholds. Must calculate limits (overseas, etc.) based on investments made (at cost) rather than corpus or other basis, where required.