SEBI to expand investors pool for Angel Funds

The Securities and Exchange Board of India (SEBI) has unveiled a proposal that could reshape the funding landscape for startups by expanding the definition of qualified institutional buyers and lifting the 200-investor limit for Angel Funds. 

These changes are designed to encourage more sophisticated investors to enter the market and boost the flow of capital to young companies.

In its consultation paper, SEBI proposes recognizing accredited investors as qualified institutional buyers for the limited purpose of Angel Funds. This revision would allow Angel Funds to accept investments from an unlimited number of accredited investors without running into the restrictions of the Companies Act, 2013.

Under current rules, private placements cannot exceed 200 investors unless those investors are qualified institutional buyers. By including accredited investors in this category, Angel Funds would gain access to a broader pool of wealthy individuals and institutions.

What are Angel Funds?

Angel Funds are a category of Alternative Investment Funds that channel money into startups, typically when these ventures are in their early stages. While this approach fuels innovation and economic growth, concerns have emerged about the verification of investors’ financial strength and their understanding of the risks involved.

Some Angel Funds have been relying on self-declarations or social media profiles to assess potential backers, raising questions about whether all participants truly understand the high-risk nature of early-stage ventures.

To address these issues, SEBI previously suggested allowing only accredited investors to participate in Angel Funds. Accredited investors must meet specific financial criteria and pass verification by an independent accreditation agency, ensuring they have the financial means and knowledge to bear the risks of investing in startups.

By classifying these accredited investors as qualified institutional buyers, SEBI hopes to strike a balance between attracting fresh capital and safeguarding investors from excessive risk.

Removing the 200-investor limit could be a game-changer for Angel Funds, which are often constrained by regulations on how many people can participate in each investment. Under SEBI’s proposal, there would no longer be a maximum cap on the number of investors in an Angel Fund, and the 200-investor limit per company could be lifted. This change could significantly increase the amount of money available to promising young businesses, while still ensuring that those who invest have the financial strength and expertise to evaluate the risks.

SEBI has opened the door for public comments on these proposals until March 14, 2025, through an online submission form on its website. By gathering opinions from stakeholders, the regulator aims to refine its approach and ensure that the final rules promote healthy growth in the startup ecosystem.