SEBI Seeks Information On Pro-Rata Rights Of Angel Fund Investors

Market regulator Securities and Exchange Board of India (SEBI) in a communique to angel funds has asked to clarify how the pro-rata rights of all investors is being maintained in all the investments.

SEBI has asked the funds to share the number of investors in the pool, whether investors can exit before the tenure of the fund expires, ET reported.

Among other information, the market regulator has asked the angel funds to inform the ‘commitment period’ till when a fund can cut deals to buy into startups, the target corpus, and the timelines for initial and final closings of a fund. 

Further, the market regulator has asked details of angel funds which consist of single investors as well. SEBI is collecting the information for ‘regulatory purposes’.

Angel fund is a sub-category of venture capital funds, that raises funds from angel investors. Angel funding is usually done at the early stages of a startup. An individual investor in an angel fund is required to have net tangible assets of at least INR 2 cr excluding the value of his principal residence. 

Unlike VC and PE funds, it is not necessary for investors of angel funds to proportionately participate and have exposure in all the underlying investments made by the fund. Hence, angel fund managers are not required to showcase all their investment deals to all the investors in the fund, Tejesh Chitlangi, senior partner of IC Universal Legal, told ET.

According to Chitlangi, SEBI seems to examine this aspect of the angel funds currently. It is also analysing the decision-making process of angel fund managers from SEBI’s outsourcing guidelines perspective, especially in regards to the syndicate deals being carried out by angel funds.

Usually, lead syndicators invest in a startup at the initial stage. At the later stages, they walk out with a high ‘carry’ (a share of profit), when other investors back the startup at the next stage.

Almost two years ago, SEBI sent an informal guidance letter to angel investment platform LetsVenture. The regulator said that the fund manager of an angel fund must take the consent from every investor in the fund syndicate prior to making an investment. It put a stop on the ‘blind pooling of capital’ which was a standard practice in angel funds until then.

However, the current purpose of the latest communique is not clear yet, if it is aimed at making rules more stringent or if it plans to end some practices usually carried out in the angel funds.