A New Chapter in Startup Funding: Unpacking SEBI's 2025 Reforms for Angel Investing

The Securities and Exchange Board of India ("SEBI") has introduced a new SEBI (Alternative Investment Funds) (Second Amendment) Regulations, 2025 (SEBI/LAD-NRO/GN/2025/265) dated 09.09.2025 along with SEBI/HO/AFD/AFD-POD-1/P/CIR/2025/128 ("Circular") on September 10, 2025, to regulate Angel Investing by making several key changes to how Angel Funds operate under the Alternative Investment Funds (AIF) Regulations, 2012. This article delves into the intricacies of these changes, providing a detailed analysis of the new regulations.

What is Alternative Investment Fund?

The term Alternative Investment Funds ("AIF") refers to a regulatory framework that governs privately pooled investment vehicles that collect funds from investors for investment purposes. AIF regulations aim to ensure transparency, protect investor interests, manage systemic risks, and promote the development of a fair and efficient investment ecosystem.

What are Angel Funds and Category I Funds?

Angel funds are SEBI registered funds that invest in early-stage startups, raising money from Accredited Investors to provide capital and support new companies. They registered as Category I AIF with SEBI and gather resources from Accredited Investors to invest directly in early age startups, while maintaining transparency compliances etc. ("Angel Funds").

Category I (venture capital funds, SME funds, infrastructure funds, social venture funds) Angel Funds are a type of AIF in India that pool money from angel investors to invest in small or early-stage startups in order to promote innovations and entrepreneurship in the country. These funds are meant to support new businesses with high growth potential ("Category I Funds").

Eligibility of Angel Funds for Fund Raising

Before diving into the eligibility criteria for an Accredited Investor, let's first understand who an "Accredited Investor" is?

As per the Regulation 2(1) (ab) of the SEBI (AIF) Regulations, 2012, an Accredited Investor is defined as a person or entity meeting specific financial criteria i.e. individuals, HUFs, family trusts, or sole proprietorships must have either an annual income of at least Rs. 2 crore, or a net worth of INR 7.5 crore with Rs. 3.75 crore in financial assets, or an income of Rs. 1 crore with a net worth of INR 5 crore including Rs. 2.5 crore in financial assets. Corporates and non-family trusts require a net worth of INR 50 crore, and each partner in a partnership firm must qualify individually. Certain entities like governments, government funds, qualified institutional buyers as defined under the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018, Category I FPIs, sovereign wealth funds, and multilateral agencies are deemed accredited investors without certification ("Accredited Investors").

From now onwards, as per the Regulation 19A, the words and symbols venture capital fund under shall be omitted from sub regulation 1(a) and from the sub regulation (2) the word Angel Investor shall be substituted with word Accredited Investors and henceforth the definition of "Angel Investor means an Accredited Investor, or key management personnel of an angel fund or its manager who invests in an Angel Fund" ("Angel Investor").

Henceforth, as per Regulation 19D (1) of AIF Regulations, Angel Funds must raise funds exclusively from the Accredited Investors only by way of issuing the units in the manner as prescribed by the SEBI from time to time. Provided that the key management personnel of an Angel Fund or its manager may invest in the Angel Fund.

Guidelines on Existing Angel Funds (Transition Period till September 08, 2026)

The new amendment requires Angel Funds registered before the Circular Date to limit onboarding non-Accredited Investors to a maximum of 200 during a transition period, with no fresh contributions accepted from them after September 8, 2026 ("Deadline"). Investments made before this deadline remain valid per the fund's Private Placement Memorandum (PPM) or governing documents. Angel Funds registered after the Circular Date must immediately onboard only Accredited Investors. Fund managers must verify investor accreditation before accepting investments, either through a valid accreditation certificate or by confirming the investor qualifies as a deemed Accredited Investor under Regulation 2(1) (ab) of the AIF Regulations.

As per Regulation 19D (6) of the AIF Regulations, an Angel Fund must onboard a minimum of five Accredited Investors before declaring its first close, which must occur within 12 months from the date SEBI takes the fund's PPM on record. Existing Angel Funds that have not declared their first close must do so by September 8, 2026. Failure to meet this timeline will require the fund to refile its PPM with SEBI and pay the applicable fee.

Investment Framework

As per Regulation 19E, Angel Funds are not permitted to launch schemes for soliciting funds from Angel Investors or for making any investments. Instead, they are required to invest directly in investee companies without the need to launch separate schemes for each investment. Consequently, the AIF Regulations applicable to schemes will now apply at the fund level for Angel Funds, unless specified otherwise. Furthermore, the earlier requirement to file a term sheet with SEBI for launching a scheme or making an investment has been removed however, Angel Funds must maintain comprehensive records of term sheets for each investment, including details of the participating investors and their respective contributions internally.

As per Regulation 19F relating to follow-on investments, Angel Funds can make additional investments in their existing investee companies even if those companies no longer qualify as startups, provided certain conditions set by SEBI are met. These include, the Angel Fund's post-investment shareholding must not exceed its pre-investment shareholding and the total investment in any investee company including all follow-on investments must not exceed INR 25 crore and all follow-on contributions must be made by the original investors on a pro-rata basis.

As per Regulation 19F (3) relating to lock-in provisions, a mandatory lock-in period of one (1) year is imposed on investments made by Angel Funds. However, this lock-in period may be reduced to six (6) months in cases where the exit is executed through a third-party sale, provided the exit is not by way of buy-back or purchase by the promoter. Previously, angel funds were required to invest a minimum of INR 25 lakh or more than INR 10 crore in any single investee company. The updated regulations have now lowered the minimum investment threshold to INR 10 lakh or raised the maximum limit to INR 25 crore per investee company. Therefore, removing the 25% cap lets Angel Investors invest more helping startups grow faster and have a bigger impact.

As per Regulation 19F (7) regarding overseas investments, Angel Funds are permitted to invest overseas, subject to compliance with applicable SEBI and RBI guidelines. Such investments are allowed up to a limit of 25% and all other conditions and procedures outlined in Chapter 7 of the AIF Master Circular shall continue to apply to Angel Funds.

Offering and Allocation of The Investment Opportunities

As per the Regulation 19G (4), henceforth, from October 15, 2025, investment managers of Angel Funds are required to disclose and offer every investment opportunity to all angel investors within the fund. Investments must be allocated solely among those Angel Investors who provide approval for such opportunities. The allocation methodology must be clearly outlined in the Private Placement Memorandum ("PPM"), ensuring a transparent and non-discretionary process. All allocations made after the specified date must strictly follow the methodology disclosed in the PPM. Furthermore, in accordance with Regulation 19G (6), investors shall retain pro-rata rights to returns, except where profit-sharing arrangements, such as carried interest, are applicable.

Revision of Categorization

After this Amendment all existing Angel Funds shall be considered to be registered as Category I AIF-Angel Funds, instead of being a sub-category under Category I AIF-Venture Capital Funds.

Audit and Co Investment

Angel Funds whose total investments (at cost) exceed Rs. 100 crore will be required to undergo an annual PPM compliance audit with effect from financial year 2025-26 and also provide the benchmark performance report of any mention of past performance.

Under sub-regulation (1) of Regulation 2 of the SEBI (AIF) Regulations, 2012, clause (fa) is substituted to define Co-investment means investment made by a Manager or Sponsor or investor of a Category I or II AIF in unlisted securities of investee companies where such a Category I or II AIF ("Co-investment").

(fb) Co-investment scheme means a scheme of a Category I or Category II AIF, which facilitates co-investment to investors of a particular scheme of an AIF, in unlisted securities of an investee company where the scheme of the AIF is making investment or has invested ("Co-investment scheme").

(ra) Shelf placement memorandum means a placement memorandum filed by an AIF for launching co-investment schemes ("Shelf placement memorandum").

The new regulation 17A outlines that co-investments by investors in Category I or II Alternative Investment Funds must be made either through a co-investment scheme under these regulations or via a Co-investment Portfolio Manager (17A (1)). Before offering such opportunities, a Shelf placement memorandum must be filed with SEBI through a merchant banker, along with the prescribed fee (17A (2)). Each co-investment requires a separate scheme aligned with the filed memorandum, except for Angel funds, which are not permitted to launch Co-investment schemes (17A (3)). Only Accredited Investors from these fund categories can participate (17A (4)). Each scheme can invest in only one company and cannot invest in units of other AIFs (17A (5), 17A (6)). Co-investments must follow conditions set by SEBI (17A (7)), and terms for Managers, Sponsors, co-investors, or schemes must not be more favorable than those for the main fund, with exit timing aligned accordingly (17A (8)). Finally, the Co-investment scheme must be wound up once the investment is exited, as required by these regulations (17A (9)).

Conclusion

The above changes bring a mix of opportunities and challenges for the early stage Startups. While stricter compliance, enhanced transparency, and tighter risk management may initially slow down the processes, particularly on accredited investors. But these measures are essential to strengthen investor protection and market integrity. However, these changes ultimately aim to create a more robust, trustworthy, and sustainable investment ecosystem. By fostering greater transparency and accountability, SEBI's amendments are expected to boost investor confidence and attract more capital into the AIF sector, paving the way for long-term growth and stability.

Reference

1. Securities and Exchange Board of India ("SEBI") (Alternative Investment Funds) Regulations, 2012

2. SEBI (Alternative Investment Funds) (Second Amendment) Regulations, 2025 dated 09.09.2025

3. Securities and Exchange Board of India SEBI/HO/AFD/AFD-POD-1/P/CIR/2025/128 ("Circular") dated 10.09.2025

4. Securities and Exchange Board of India SEBI/HO/AFD/AFD-POD-1/P/CIR/2025/126 ("Circular") dated 09.09.2025