On February 21, 2025, the Securities Exchange Board of India (“SEBI”), issued a consultation paper on expanding definition of Qualified Institutional Buyers (“QIBs”) under SEBI (ICDR) Regulations, 2018, to include Accredited Investors (“AIs”) for the limited purpose of investments in Angel Funds (“Consultation Paper”)[1]. The Consultation Paper invites public comments and suggestions, to be submitted at the latest by March 14, 2025.
I. Background:
- Angel Funds, a type of Category I Alternate Investment Fund-Venture Capital Fund, raises capital from angel investors through private placements to invest in start-ups.
- However, a regulatory review highlighted gaps in operational clarity and concerns about investment suitability, particularly in cases where Angel Funds were offered to a large number of investors, without necessarily ensuring their risk appetite.
- To address the same, SEBI had earlier proposed that only Accredited Investors be allowed to invest in Angel Funds, ensuring that participants have financial understanding and risk tolerance for such high-stakes investments.
II. Proposed Change:
The Companies Act, 2013, caps the number of investors in private placements at 200, with an exemption for QIBs. If AIs were classified as QIBs for Angel Fund investments, this cap would no longer apply, allowing Angel Funds to scale up and attract a wider pool of discerning investors while remaining within the regulatory framework.
The proposal seeks to strike a balance between investor protection and expanding funding avenues for start-ups. SEBI has invited public and stakeholder comments on the proposal, seeking insights on its potential impact on Angel Fund investments and start-up financing.
[1]https://www.sebi.gov.in/reports-and-statistics/reports/feb-2025/consultation-paper-on-expanding-definition-of-qualified-institutional-buyers-under-sebi-icdr-regulations-2018-to-include-accredited-investors-for-the-limited-purpose-of-investments-in-angel-funds_92102.html