ANGEL FUNDS

[Mr. M. GOVINDARAJAN]

Vide Notification No. LAD-NRO/GN/2013-14/24/6573, dated 16.09.2013 SEBI made the Securities and Exchange Board of India (Alternative Investment Funds) (Amendment) Regulations, 2013 to amend the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, which came into effect from 16.09.2013.   This amendment inserted Chapter IIIA after Chapter III of SEBI (Alternative Investment Funds) Regulations, 2013. The new Chapter IIIA deals with Angel Funds.

Regulation 19A(1) defines the term ‘Angel Fund’ as 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 this Chapter.

Regulation 19A (2) defines the terms ‘angel investor’ as any person who proposes to invest an angel fund and satisfies on the following conditions:

• An individual investor who has net tangible assets of at least Rs. 2 crores excluding value of his principle residence, and who-
  • Has early stage investment experience (‘early stage investment experience’ means prior experience in start up or emerging or early stage ventures); or
  • Has experience as a serial entrepreneur (‘serial entrepreneur’ means a person who has promoted or co-promoted more than one start up venture) ; or
  • Is a senior management professional with at least 10 years of experience;
• A body corporate with a net worth of at least Rs.10 crores; or
• An Alternative Investment Fund registered under these regulations or a Venture Capital Fund registered under SEBI (Venture Capital Funds) Regulations, 1996;

Regulation 19B (1) provides that the provisions of Chapter IIIA shall apply to angel funds and schemes launched by such angel funds. Regulation 19B(2) provides that all other provisions of these regulations except Regulation 10 (a), (b), (c), (d) and (f), Regulation 12, Regulation 14, Regulation 15(1)(a), (c) and (e), Regulation 16(1)(b) and Regulation 16(2) and the guidelines and circulars issued under these regulations, unless the context otherwise requires or repugnant to the provisions of Chapter IIIA, shall apply to angel funds, their sponsors and managers and angel investors.

Regulation 19C deals with the registration of angel funds.   An applicant may apply for registration as an angel fund in accordance with Chapter II of these regulations. An Alternative Investment Fund already registered under these regulations, which has not made any investment, may apply for conversion of its category into an angel fund under the provisions of this Chapter and the provisions of Chapter II shall apply as they apply to a fresh registration.

Regulation 19D deals with the investment in angel funds. Angel funds shall only raise funds by way of issue of units to angel investors. It shall have a corpus of at Rs.10 crores. It shall accept up to a maximum period of 3 years, an investment not less than Rs.45 lakhs from an angel investor.   It shall raise funds through private placement by issue of information memorandum or placement memorandum, by whatever name called.

Regulation 19E deals with the schemes. The angel fund may launch schemes subject to filing of a scheme memorandum at least 10 working days prior to launch the scheme with the Board.   The payment of scheme fees shall not apply to schemes launched by angel funds.   The scheme memorandum shall contain all material information about the investments proposed under such scheme.   The Board may communicate its comments, if any, to the applicant prior to launch of the scheme and the applicant shall incorporate the comments in the scheme memorandum prior to launch of the scheme. No scheme of the angel fund shall have more than 49 angel investors.

Regulation 19F deals with the investment by angel funds.

The angel fund shall invest only in venture capital undertaking which-

• have been incorporated during the preceding 3 years from the date of such investment;
• have a turnover of less than Rs.25 crores;
• are not promoted or sponsored by or related to an industrial group whose group turnover exceeds Rs.300 crores. The ‘industrial group’ shall include a group of body corporate with the same promoter(s)/promoter group, a parent company and its subsidiaries, a group of body corporate in which the same person/group of persons exercise control and a group of body corporate comprised of associates/subsidiaries/holding companies.   The ‘group turnover’ means combined total revenue of the industrial group; and
• are not companies with family connection with any of the angel investors who are investing in the company. Regulation 19A(3) defines the terms ‘company with family connection as-
  • if the angel investor is an individual,-
    • any company which is promoted by such an individual or his relative; or
    • any company where the individual or his relative is a director; or
    • any company where the person or his relative has control or shares or voting rights which entitle them to 15% or more of the shares or voting rights in the company.
    • if the angel investor is a body corporate,-
    • any company which is a subsidiary or a holding company of the investor; or
    • any company which is part of the same group or under the same management of the investor; or
    • any company where the body corporate or its directors/partners have control or shares or voting rights which entitle them to 15% or more of the shares or voting rights in the company.

Investment by an angel fund in any venture capital undertaking shall not be less than Rs.50 lakhs and shall not exceed Rs.5 crores.

Investment by an angel fund in the venture capital undertaking shall be locked in for a period of 3 years.

Angel Funds shall not invest in associates.

Angel funds shall not invest more than 25% of the total investments under all its schemes in one venture capital undertaking.  The compliance shall be ensured by the angel fund at the end of its tenure.

Regulation 19G deals with the obligations of sponsors and managers of angel funds. The sponsor shall ensure that the angel investors satisfy the conditions specified in Regulation 19A. The manager or sponsor shall have a continuing interest in the angel fund of not less than 2.5% of the corpus of Rs.50 lakh whichever is lesser and such interest shall not be through the waiver of management fees. The manager of the angel fund shall obtain an undertaking from every angel investor proposing to make investment in a venture capital undertaking, confirming his approval for such an investment prior to making such an investment.

Regulation 19H prohibited listing.   The units of angel funds shall not be listed on any recognized stock exchange.