Angel Funds and Angel Investors

Angel Funds and Angel Investors

As per Regulation 19A(1) of SEBI AIF Regulations, 2012 (“AIF Regulations”) “angel fund” means a sub-category of Venture Capital Fund[1] under Category I- Alternative Investment Fund that raises funds from angel investors and invests in accordance with the provisions of this Chapter 3A of SEBI AIF Regulations. Regulation 19A (2) defines “angel investor” to mean- “any person who proposes to invest in an angel fund and satisfies one of the following conditions, namely:

1. an individual investor who has net tangible assets of at least two crore rupees excluding value of his principal residence, and who:
2. has early stage investment experience, or
3. has experience as a serial entrepreneur, or
4. is a senior management professional with at least ten years of experience;

Explanation: For the purpose of this clause, ‘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 copromoted more than one start-up venture.

1. a body corporate with a net worth of at least Rs. 10 crore; or
2. an Alternative Investment Fund registered under these regulations or a Venture Capital Fund registered under the SEBI (Venture Capital Funds) Regulations, 1996.”

Registration of Angel Funds

As per the Reg. 19C (1), an applicant may apply for registration as an angel fund in accordance with the provisions of Chapter-II (Registration of Alternative Investment Funds) of AIF Regulations. As per Reg. 3(1) read with Reg. 19C(4), for an applicant to act as an Angel Funds, it must obtain a certificate of registration from SEBI under the category called, “Category-I Alternative Investment Fund”[2]. Regulation 19C (2) says that even an AIF already registered under these regulations, which has not made any investments, may apply for conversion of its category into an ‘angel fund’ and the provisions of Chapter-II shall apply as they apply to a fresh registration.

Application Process for Registration

The applicant is required to submit the complete Form-A (annexed with the Regulations) along with all supporting documents, including, draft placement memorandum,[3] to SEBI. All answers must be legible and all the pages must be numbered with signature/ stamp on each page of the form.[4] The application must be signed and all signatures must be original.[5] In this Form-A, details of infrastructure for conducting activities as an AIF (Angel Funds in our case) also need to be provided. The precise details of the applicant to be provided in the application would depend on whether the applicant is a trust, company, LLP, or body corporate. In addition, the details of sponsor(s), manager, business plan and investment strategy, regulatory actions taken against the applicant in the past (if any), among others, also need to be provided in accordance with the directions given in the Form-A.

Cost of Registration

The application for setting up an angel funds is Rs. 1 lakh, as specified in the Second Schedule to the Regulations. Part-A of this schedule further provides a registration fee of Rs. 2,00,000 for registration of Angel Funds.[6]

Necessary Conditions and Restrictions for Angel Funds to Comply with:

1. An angel fund must have a corpus of at least Rs. 10 crores.[7]
2. The Sponsor or Manager of AIF is required to appoint a custodian registered with the Board for safekeeping of securities, if the corpus of the AIF is more than Rs. 500 crores.[8]
3. An Angel fund cannot accept (up to a maximum period of 3 years) an investment of less than 25 lakh rupees from an angel investor.[9]
4. Angel funds can invest only in VC undertakings which: (a) have been incorporated during the preceding 3 years from the date of such investment; (b) have a turnover of less than Rs. 25 crores; (c) are not promoted or sponsored by or related to an industrial group[10] whose group turnover[11] exceeds Rs. 300 crore, and (d) are not companies with family connection with any of the angel investors who are investing in the company.
5. Investment by an angel fund in any VC undertaking cannot be less than 50 lakh rupees or more than Rs. 5 crore rupees.[12] Furthermore such an investment amount, once invested, cannot be taken out for a period of 3 years (locked-in).[13]
6. Angel funds cannot invest in a company or a LLP or a body corporate in which a director or trustee or partner or Sponsor or Manager of the AIF or a director or partner of the Manager or Sponsor holds (whether individually or collectively), more than 15% of its paid-up equity share capital or partnership interest, as the case may be (collectively “Associates”).[14]
7. Angel funds cannot invest more than 25% of the total investments under all its schemes in one VC undertaking.[15]
8. The manager of the angel fund is required to obtain an undertaking from every angel investor proposing to make investment in a VC undertaking, so as to confirm their approval for such an investment, prior to making such an investment.[16]
9. Units of angel funds cannot be listed on any recognised stock exchange.[17]
10. Angel Funds, as Category-I AIF, is required to undertake valuation of their investments, at least once in every six months, by an independent valuer appointed by the AIF.[18]

Effect of Non-registration

Sub-regulation 3(3) says any entity which fails to obtain certificate of registration within the period specified therein cannot carry on any activity as an AIF.

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[1] Venture Capital Fund under this Regulation means- “an Alternative Investment Fund (“AIF”) which invests primarily in unlisted securities of start-ups, emerging or early-stage venture capital undertakings mainly involved in new products, new services, technology or intellectual property right based activities or a new business model”. This shall include an angel fund as defined under Chapter III-A.

[2] Reg. 3(4)(a). Category-I AIF are those AIF which “invests in start-up or early stage ventures or social ventures or SMEs or infrastructure or other sectors or areas which the government or regulators consider as socially or economically desirable and shall include venture capital funds, SME Funds, social venture funds, infrastructure funds and such other Alternative Investment Funds as may be specified.” For the purpose of this clause, Alternative Investment Funds which are generally perceived to have positive spill over effects on economy and for which the Board or Government of India or other regulators in India might consider providing incentives or concessions shall be included and such funds which are formed as trusts or companies shall be construed as “venture capital company” or “venture capital fund” as specified under sub-section (23FB) of Section 10 of the Income Tax Act, 1961.

[3] Form A, Serial No. 1(i)

[4] Form-A, Instruction No.5

[5] Form-A, Instruction No.7

[6] Inserted by the Securities and Exchange Board of India (Alternative Investment Funds) (Amendment)

Regulations, 2013 w.e.f. 16.09.2013.

[7] Reg. 19D

[8] Reg. 20(2); This corpus is only applicable only to Category-I and II AIF.

[9] Reg. 19D

[10] Explanation-I to S.19F; “Industrial group” shall include a group of body corporates with the same promoter(s)/promoter group, a parent company and its subsidiaries, a group of body corporates in which the same person/ group of persons exercise control, and a group of body corporates comprised of associates/subsidiaries/holding companies.

[11] Explanation-II to S.19F; “Group turnover” shall mean combined total revenue of the industrial group.

[12] Reg. 19F(2)

[13] Reg. 19F(3)

[14] Reg. 19F(4)

[15] Reg. 18

[16] Reg. 19G(3)

[17] Reg. 19H

[18] Reg. 23(2); Provided that such period may be enhanced to one year on approval of at least 75%  of the investors by value of their investment in the AIF.