SEBI Revises Regulatory Framework for Angel Funds under AIF Regulations

The Securities and Exchange Board of India (SEBI) has introduced stricter rules for angel funds, allowing them to raise money only from accredited investors. 

Effective immediately, these rules aim to make fund operations more transparent, ensure compliance, and provide stronger protection for investors under the Alternative Investment Fund (AIF) regulations.

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Existing funds have until September 8, 2026, to comply, and during this period, they cannot offer investments to more than 200 non-accredited investors. Current investors can keep their holdings as per the Private Placement Memorandum (PPM).

Angel funds must have at least five accredited investors before their first close, which must happen within 12 months of SEBI recording the PPM. 

Funds yet to declare their first close must do so by September 8, 2026 or refile documents with SEBI. Investments in companies will be made directly by the funds without needing a separate scheme, and term sheets no longer need SEBI approval, though records must be maintained.

Follow-on investments in companies that are no longer start-ups are allowed with conditions: post-issue shareholding should not increase, total exposure per company capped at Rs 25 crore, and only existing investors can participate proportionally. 

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Investments have a one-year lock-in, reducible to six months if sold to a third party. Overseas investments are allowed within the 25% AIF limit.

Angel funds will now be a separate Category I AIF instead of a sub-category of venture capital funds. Compliance audits are mandatory for funds with over Rs 100 crore in investments, and all funds must provide investment-wise valuation and cash flow data for benchmarking.

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