Angel funds need approval from all before investing

NEW DELHI: The Securities and Exchange Board of India (Sebi) has said the fund manager of an angel fund must take the consent from every investor in the fund syndicate prior to making an investment.

The clarification from the markets regulator, in effect, bans ‘blind pooling of capital’ — a practice undertaken by angel funds and their managers in a bid to close a large number of investment deals. In its letter to angel investment platform LetsVenture, dated September 17 and which ET has reviewed, the regulator has said under regulation 19 3 (G), of the Sebi Alternative Investment Funds (AIF) Regulations, 2012, “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.”

Blind pooling of capital is defined as taking investment decisions by the lead angel or a syndicate lead on behalf of all the investors in an angel fund.

Founded in 2013, LetsVenture is a growth platform designed specifically for ultra-wealthy individuals and family offices to access investments across growth-stage private companies, unicorns and global funds.

Startups on the platform have raised Rs 1,174 crore across 290-plus rounds. The marketplace has 29 syndicates, more than 6,500 angel investors from 52 countries and 100 micro VC funds. Its Sebi-registered Angel Fund AIF has assets under management of more than Rs 238 crore, and close to 900 accredited investors. It is backed by VC firms such as Accel Partners and Chiratae Ventures, as well as angel and high net worth individuals including Nandan Nilekani, Ratan Tata, Rishad Premji and TV Mohandas Pai.

Angel funds usually work on the principle that there is a contribution agreement between investors and the person setting up the angel investment platform, who will also share various opportunities to invest, while ensuring there is consent from the investors for every identified opportunity.

“An angel fund, compared to a venture capital fund, has much smaller capital requirements, and will see smaller or individual investors taking part, instead of institutional capital which typically backs VC funds, and that is why consent is required,” 100X.VC founder Sanjay Mehta said.

According to Mehta, angel fund AIFs were envisioned to be different in spirit from other Category-1 AIF structures and therefore the need to seek individual consent.

Sebi’s letter to LetsVenture further clarified that there were no provisions in the AIF Regulations that provided for a waiver of investors’ rights. LetsVenture had reached out to Sebi in November last year, seeking the clarification.

“The latest clarifications are to make sure that every investor knows what the terms are, and says yes to investments being driven through the fund. Sebi wants to ensure that even if there is a contractual agreement between the lead angel and the sole investor, the latter still has given the necessary consent to every deal and knows what he or she is signing up for. This is the crux of investor protection,” Sunitha KR, president - early-stage investment at LetsVenture, told ET.

The markets regulator has also clarified that a limited liability partnership, an entity created to make investments, should meet the minimum net worth criteria of Rs 10 crore. An LLP not meeting that criteria will, therefore, not be an eligible angel investor, even if its partners qualify as angel investors in their individual capacity, for which the minimum net worth has been set at Rs 2 crore.