[By Mayank Upadhyay and Atharv Sharma]
The authors are students of Hidayatullah National Law University.
INTRODUCTION
Following India’s goal to foster a nurturing environment for start-ups, the Securities and Exchange Board of India (‘SEBI’) has recently announced a seismic overhaul of the Angel Funds Framework. These funds are a sub-category of Alternative Investment Funds (AIF – Category I), which provides foundational support to a start-up during the early stages. These funds function by pooling capital from high-net-worth individuals (Angel Investors), to invest in early-stage start-ups, providing the start-ups with both capital and mentorship during the initial turbulent period. This reform seeks to achieve a dual goal: fostering a conducive environment for start-ups by encouraging investments in them and limiting the risks involved in such investments exclusively to individuals having commensurate risk appetite.
To achieve this dual goal, SEBI, via circular dated 10th September 2025 (‘Circular’), has introduced a fundamental ‘regulatory bargain’ by drawing inspiration from the US qualified purchaser rule. This bargain offers unprecedented flexibility to Angel Funds registered under the SEBI (AIF Regulations) 2012 (‘AIF Regulations’), in exchange for restricting investment rights exclusively to independently verified Accredited Investors (‘AI’). This shift aligns with the thriving angel ecosystem, showcasing a Compound Annual Growth Rate (CAGR) of 106% in investments, opening the possibility of attracting ultra-wealthy investors who hesitated from investing due to outdated rules.
However, these changes necessitate examination of how the underlying objectives can be better realised by studying practices across different jurisdictions. Therefore, this blog examines various issues surrounding the Circular. First, it analyses the changes introduced by the Circular. Next, it reveals the hidden flaws in the new framework. Finally, it evaluates and proposes additional reforms that could aid this overhaul by drawing lessons from other jurisdictions.
THE CORE BARGAIN: CHANGES AND INTENT
First and foremost, the Circular has limited the investor base of Angel funds exclusively to the AIs. This entails that only those individuals/body corporates are capable of investing in start-ups, through the instrument of Angel funds, who have been accredited by independent third-party recognised as accreditation agencies by the SEBI. Prior to these, any investor who fulfilled the wealth-based criterion laid down in the AIF regulations was entitled to participate in the investment schemes rolled out by Angel Funds. This fulfilment was attested entirely through self-declarations by investors. However, in an attempt to limit the risk to only those having a commensurate risk appetite, SEBI has laid down a strict wealth-based criterion for these accreditations. This change ensures that only reliable investors are permitted to invest in the start-ups, and also supports the ecosystem by channelling vetted and trustworthy capital.
Second, the Circular has granted upon the AIs, the status of a Qualified Institutional Buyer (‘QIB’) as defined in SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018. Prior to this, Reg. 19E(2) limited investments via Angel Funds to no more than 200 investors to bring the limit in line with the restriction placed upon private companies under the Companies Act, 2013. However, upon combined reading of S. 42 of the Companies Act 2013 with R. 14(2) of the Companies (Prospectus and Allotment of Securities) Rules, 2014, this manoeuvre effectively excludes the AIs from the calculation of the numerical limit, which is placed on the membership of private companies.
Third, the circular eliminates the restriction placed on the Angel Funds in the Reg. 19F(5) of AIF regulations, which mandates that not more than 25% of the total investments of an Angel Fund can be made in a single venture capital undertaking and must be within the limits specified, i.e., 25 lakhs to 10 Cr. Furthermore, the Circular permits Angel Funds to make Follow-on investments in companies even after they cease to be start-ups, as defined by the Department for Promotion of Industry and Internal Trade (‘DPIIT’). This change effectively permits an Angel fund to invest any proportion of its corpus into any start-up and continue to invest in it, regardless of it ceasing to be a start-up. This regulatory change has been introduced to safeguard the pre-emptive rights of angel investors in their portfolio companies and to preserve the value of their investments.
THE NEW REGIME: FULFILLING OR SELF-DEFEATING?
Firstly, a high wealth-based threshold for accrediting investors suggests the prioritisation of wealth over expertise. The new framework jeopardises seasoned entrepreneurs and domain experts in possession of invaluable industrial knowledge, but lacks the wealth-based criteria set up by the new regulations. This prioritisation of wealth condenses the quality of guidance and network available to the early-stage startups. Furthermore, reportedly, India has only around 650 registered Accredited investors (AIs) while the US has about 24 million of them due to the high threshold and transactional cost of accreditation, directly translating into a shrinking of the available pool of capital to the startups and stifling the benevolent intent of the Angel investors. This was the main concern raised by the NASSCOM during the consultations phase, which advocated against a wealth-based definition of Angel Investor to avoid adversely impacting the startup ecosystem.
Secondly, the new framework extends the status of QIB to individuals solely based on their personal wealth, ignoring the institutional grade due diligence and professional oversight that form the very core of QIB, thus creating a situation where wealth is used as a lazy proxy for institutional sophistication. It sets a risky trend that could be extended to other areas of security laws for example, Qualified Institutional Placements (QIPs), institutional allocation portion of an Initial Public Offering (IPO) etc. eroding the critical line of difference between the retail and institutional investors diluting investor protections and alter market dynamics in domains designed to rely on the sophisticated due diligence capabilities of institutions.
Thirdly, the removal of 25% concentration limit in one company acts as a dereliction of the regulator’s duty to protect investors for the reason that it fundamentally clashes with the fund manager’s fiduciary duty to manage risk and protect investors’ capital, as has been set out in the case of ILFS Investment Managers v. SEBI and Rukhadze and others v Recovery Partners GP Ltd and another. The 25% limit serves as a regulatory floor for diversification, which forms the basis of the prudent investor rule. The removal of this floor by the new framework sanctions a high level of concentration in one company that would, in normal parlance, be considered a breach of duty of care by the fund manager. It enables a manager to link the entire fund’s success or failure to the outcome of a single, inherently high-risk, early-stage company.
Fourthly, allowing AIs to follow-on investments in companies that have grown and are no longer classified as startups according to the definition of DPIIT dilutes the very purpose of angel funds, which is to invest and nurture nascent businesses. The new rule allows it to operate in the same space as a regular VC fund, investing in a de-risked, mature company by utilising capital raised under the “angel investing” umbrella to engage in late-stage venture or growth equity investing. The situation created by the new rules conceives mandate/mission creep, where a specialised entity deviates from its original, legally defined objective.
A NEW PATH: REIMAGINING THE REGULATORY FRAMEWORK
Firstly, regarding the infirmity of exclusion of expertise over wealth, it is recommended by the authors that SEBI should introduce a dual-pathway system of accreditation that recognises both financial capacity as well as professional expertise, which could be determined by various determinants such as professional certification, verifiable years of experience, etc. This system of dual recognition can draw parallels from the USA model of non-wealth-based accreditation defined by the Securities and Exchange Commission (SEC) under Rule 501 of Regulation D of the Securities Act of 1933, which was expanded in 2020 to include professional expertise.
Secondly, regarding the issue of using wealth to bypass institutional sophistication, it is suggested by the authors that instead of granting AIs full QIB status, a new, limited category of Restricted-QIB (R-QIB). This status will allow AIs to participate in specific markets like investing in angel funds while simultaneously restricting their participation in offerings that are designed for institutional players, such as IPOs and QIPs. For the AIs who wish to upgrade from R-QIB to full QIB, they require them to pass through an administered certification test in the same nature as the series 7 (for general securities representatives, i.e. stockbrokers) or series 65 (for investment adviser representatives) exams in the USA, which are used to determine professional qualification in the United States financial industry.
Thirdly, the issue of undermining the fiduciary duty of the fund manager due to the removal of the regulatory floor for diversification can be addressed by introducing a tiered concentration limit. Distinction could be drawn between the larger and smaller fund based on investable corpus and number of investor subsequently, larger funds with higher numbers of AIs might be subjected to stricter caps while the smaller, niche funds having very small number of highly sophisticated AIs could be permitted to higher concentration limits or even could be exempted based on the clear disclosure of strategy by the fund manager. It ensures that larger funds with a dispersed investor base are protected from the failure of a single high-risk bet, thus restoring the crucial principle of prudent risk management that was eroded by the complete removal of the cap.
Fourthly, to avoid the situation of mandate creep, there is a need to put a cap on follow-on investment, which would limit the amount of total investable corpus available to an angel fund that could be invested in follow-on rounds for a company that no longer qualifies as a startup. This follow-on investment cap would maintain the fund’s fundamental identity by preventing mandate creep, while still allowing investors to double down on their previous successful investments.
CONCLUSION
SEBI’s new regulatory overhaul demonstrates a drastic shift towards a more sophisticated operational landscape, benefiting all the players in the Angel Fund Framework. However, these changes also equate wealth with prudence, restricting valuable investment opportunities to those with substantial monetary resources. Furthermore, the Circular introduces the accreditation requirement, which increases compliance by the investors stifling the benevolent intent of the investors, which comprises the base for Angel investments. These changes risk defeating the purpose for which such an overhaul may have been brought.
Adopting a hybrid regulatory structure that accommodates educational qualification along with wealth-based criteria would truly allow expanding the investor base to those with commensurate risk appetite. Furthermore, limiting the default status of QIB to R-QIB, along with creating a tiered structure for concentration limit and compliance framework, would help in furthering the goal with which the circular has been passed. Thus, by incorporating the suggested reforms, a vibrant investment environment could be created to effectively aid upcoming startups in India.