Angel funds see red in Sebi's new accredited investors-only proposal

Total accredited investor count stood at just 200 at the end of 2023

The Securities and Exchange Board of India’s (Sebi’s) proposal to allow only “accredited investors” to invest in angel funds has raised concerns in some quarters, even as most fund managers believe the overall ecosystem was set for a boost.

 

This week, the market regulator suggested about two dozen measures, which include greater flexibility in the investments by angel funds with reduced investment limit, higher investment thresholds and lower lock-in requirement.

 

The regulator has also sought suggestions if only “accredited investors” should invest in angel funds. Accredited investors are required to fulfil net worth criteria and get it verified by a third-party agency. The proposal keeps out investors without the necessary wherewithal of investing in startups, which is seen as highly risky and thus necessitate assessment of investor’s risk appetite.

 

 

“Investors, who met the existing angel investor criteria, now would have to meet the new norms of ‘accredited investors’ in a new angel fund, which many may not fulfil. On-boarding of new investors may become difficult for a new fund,” said Brijesh Damodaran Nair, founding and managing partner, Auxano Capital.

 

As of 2023, there were only around 200 accredited investors in India.

 

Sebi has recently provided more flexibility in the registration of accredited investors. However, industry players believe that it has not resulted in significant jump in the number of accredited investors.

 

Lowering the barrier

 

However, there is hope that lower investment limits will prompt more to get accreditation.

 

In its consultation paper, Sebi has pointed out that angel fund managers often rely on self-declarations and social media profiles to verify investor eligibility at present.

 

“While entry might be tightly regulated, but once the investor is on-boarded, the process and operations after that are smooth,” added another fund official.

 

Experts also suggest that non-accredited investors may directly invest in startups, without the angel fund route.

 

Sebi’s proposal “lowers the entry barrier. It offers more flexibility and greater structuring investments. It opens up new opportunities to small investors. Sebi is committed to angels; they can use norms to build base,” said Sanjay Mehta, Founder, 100X.VC.

 

The working group by Sebi has also suggested expanding the definition of angel investors to include Hindu Undivided Family (HUF), family offices and trusts.

 

“One of the considerations for new investors entering this space could be a higher commitment to this asset class. Lowering it to Rs 10 lakh will allow more people to participate in this asset class. These investors will bring not just their capital but also connections and knowledge which would be good for the ecosystem,” said Ankur Mittal, Partner, Physis Capital & Co-Founder, Inflection Point Ventures.

 

Another major proposal by Sebi is to mandate angel funds to report investment wise valuation and cash flow data to benchmarking agencies periodically for performance benchmarking.

 

They may even be directed to disclose past performance of the angel fund and the benchmark report by the agencies in their private placement memorandum (PPM).

 

Sebi has already prescribed a framework for valuation of the portfolios of alternative investment funds (AIFs). Sebi may also mandate PPM Audit requirement for angel funds having total investments more than Rs 100 crore.  

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