What is Angel Fund?

“Angel fund” is a sub-category of Venture Capital Fund under Category I Alternative Investment Fund that raises funds from angel investors and invests in accordance with the provisions of Chapter III-A of AIF Regulations. In case of an angel fund, it shall only raise funds by way of issue of units to angel investors. "Angel investor" means any person who proposes to invest in an angel fund and satisfies one of the following conditions, namely, (a) an individual investor who has net tangible assets of at least two crore rupees excluding value of his principal residence, and who: (i) has early stage investment experience, or (ii) has experience as a serial entrepreneur, or (iii) is a senior management professional with at least ten years of experience; ('Early stage investment experience' shall mean prior experience in investing in start-up or emerging or early-stage ventures and 'serial entrepreneur' shall mean a person who has promoted or co-promoted more than one start-up venture.) (b) a body corporate with a net worth of at least ten crore rupees; or (c) an AIF registered under these regulations or a VCF registered under the SEBI (Venture Capital Funds) Regulations, 1996. Angel funds shall accept, up to a maximum period of 3 years, an investment of not less than `25 lakh from an angel investor.

Angel Fund Registration Requirements:

1. Categories of AIF

  • Category I AIF: These are funds that invest in socially or economically desirable sectors, as recognized by the government. Sub-categories include:
    • Venture Capital Funds
    • SME Funds
    • Social Venture Funds
    • Infrastructure Funds
    • Angel Funds
  • Category II AIF: These funds invest in a variety of assets but do not undertake leverage except for day-to-day operational requirements. Examples include private equity and debt funds.
  • Category III AIF: These funds employ complex trading strategies and may leverage investments. Hedge funds are typical examples.

2. Eligibility Criteria

  • Entity Structure: The applicant must be established as an Indian entity, such as a company, LLP, trust, or body corporate.
  • Key Personnel: The key personnel should have a minimum of five years of experience in fund management or capital market activities.
  • Fit and Proper: The applicant and its directors should meet SEBI’s ‘fit and proper’ criteria, with no record of conviction for economic or moral offenses.

3. Angel Fund Registration Requirements

  • Minimum Corpus: An Angel Fund must have a minimum corpus of ₹10 crore.
  • Angel Investors: Angel investors must meet the following criteria:
    • Must be an individual investor with a minimum net tangible asset of ₹2 crore (excluding the value of his principal residence).
    • Alternatively, investors may be a corporate entity with a net worth of at least ₹10 crore.
  • Investment Criteria:
    • Investment in an investee company should not be less than ₹25 lakh and not more than ₹10 crore.
    • The investee company must be an unlisted company, not more than three years old, and should not have a turnover exceeding ₹25 crore.
    • The company should not be promoted, sponsored, or related to an industrial group with a turnover in excess of ₹300 crore.
  • Investment Period: The Angel Fund must invest in companies for a period of three years.

4. Furnishing of Information

  • Application Details: The application must include the structure of the fund, investment strategy, key personnel details, and the target investor group.
  • Disclosure of Risks: The application should provide detailed information about the risks involved, particularly for Category III AIFs, where complex strategies are involved.
  • Key Personnel: Detailed resumes, qualifications, and experience of the key investment team must be furnished.

5. Procedure for Grant of Certificate

  • Submission of Application: The application should be submitted to SEBI in Form A, accompanied by the prescribed fee.
  • Review by SEBI: SEBI will review the application to ensure compliance with eligibility criteria and completeness of information.
  • Grant of Certificate: Upon satisfaction, SEBI may grant a certificate of registration, subject to conditions such as ongoing compliance with regulations.

6. Conditions of Certificate

  • Compliance Obligations: The AIF must adhere to SEBI’s regulations and any conditions imposed by SEBI at the time of granting the certificate.
  • Investment Restrictions:
    • Category I and II AIFs: Cannot invest more than 25% of their corpus in a single investee company.
    • Category III AIFs: Can employ leverage but must adhere to specified limits and ensure adequate risk management.
  • Reporting Requirements: Regular reporting to SEBI on fund performance, investments, returns, and changes in key personnel or strategy is mandatory.

7. Procedure Where Registration is Refused

  • Grounds for Refusal: SEBI may refuse registration if eligibility criteria are not met, if the application is incomplete, or if any false or misleading information is found.
  • Notice and Response: SEBI will issue a notice of refusal, providing reasons, and the applicant may respond or provide additional information.
  • Final Decision: After reviewing the response, SEBI may finalize the refusal. The applicant can appeal this decision to the Securities Appellate Tribunal (SAT).

8. Compliances for Different Categories

  • Category I AIF (including Angel Funds): Must invest in start-ups or SMEs that are not more than three years old and should adhere to specific restrictions regarding investment amounts and periods.
  • Category II AIF: Must comply with investment restrictions, including prohibitions on leverage beyond day-to-day operational requirements.
  • Category III AIF: Must adhere to regulations on leverage and complex trading strategies, ensuring compliance with SEBI’s risk management guidelines.

9. Additional Considerations for Angel Funds

  • Investor Limitations: Angel Funds are typically structured to cater to high-net-worth individuals or corporate entities that meet the eligibility criteria.
  • Diverse Portfolio: While investment in early-stage companies is encouraged, diversification within the portfolio is crucial to mitigate risks.
  • Exit Strategies: Angel Funds must outline clear exit strategies for investors, which could include IPOs, mergers, or acquisitions.

Conclusion

  • Registering an Alternative Investment Fund (AIF) in India is a structured process governed by the Securities and Exchange Board of India (SEBI) under the AIF Regulations, 2012. The process involves meeting stringent eligibility criteria, including the establishment of a legal entity in India, possessing a qualified and experienced investment team, and ensuring compliance with the regulatory framework set forth by SEBI.
  • The AIF regulations categorize funds into three distinct categories—Category I, II, and III—each with specific compliance requirements tailored to the type of investments they make. Among these, Angel Funds, under Category I, have their unique set of requirements, particularly focusing on early-stage investments in startups and SMEs. The minimum corpus, investment limits, and investor eligibility criteria ensure that only serious and capable investors participate, thereby fostering a secure investment environment.
  • SEBI’s rigorous process for granting registration, including the submission of detailed information and adherence to specific conditions, ensures that only qualified and compliant funds are allowed to operate. In cases where the registration is refused, applicants are provided with a fair opportunity to address concerns, and the option to appeal ensures transparency and fairness in the process.
  • Overall, the AIF registration process in India is designed to promote responsible investment practices, protect investor interests, and support the growth of socially and economically desirable sectors. By adhering to these regulations, AIFs can effectively contribute to the financial ecosystem while ensuring compliance and fostering investor confidence.