Angel Fund

An ordinary AIF raises a pool first and decides where it goes later — investors buy into a blind pool. An angel fund does the opposite. It signs up angel investors, then brings each start-up to them one at a time, and only those who approve that particular deal put money into it.

That is why SEBI gave angel funds their own chapter of the rules. The workbook's reason is that angel money goes in at the very earliest point in a company's life, where the risk of the business simply dying is high and the ordinary fund machinery — schemes, blind pools, standard minimum tickets — does not fit.

It is still a Category I AIF. It must be registered with SEBI specifically as an angel fund, and a registered Category I AIF that has not yet made any investment may apply to convert into one.

The mechanics that separate an angel fund from every other AIF:

• No schemes. An angel fund shall not launch any scheme to solicit funds or make investments. It raises money only by issuing units to angel investors through private placement under a PPM, and its units may not be listed on any recognised stock exchange.
• No minimum ticket. The Rs 1 crore minimum that applies to other AIFs does not apply to an investment in an angel fund by an angel investor.
• First close. At least five accredited investors must be on-boarded before first close, and first close must be declared no later than 12 months from the date of SEBI's communication taking the PPM on record. Miss it, and the placement memorandum has to be refiled with SEBI.
• Deal size. Investment in any investee company is not less than Rs 10 lakh and not more than Rs 25 crore, including follow-ons.
• Deal approval. The manager must obtain prior approval from angel investors before investing, must disclose and offer every opportunity to all of them, and each investment needs contribution from at least two accredited investors.
• Continuing interest. The manager or sponsor must hold not less than 0.5% of the amount invested or Rs 50,000, whichever is higher — and not by waiving management fees.
• Lock-in. One year, reduced to six months where the exit is a sale to a genuine third party rather than a buy-back by the investee company or a purchase by its promoters or associates.

Saffron Angels, a SEBI-registered angel fund, on-boards 11 accredited investors and declares first close within nine months of SEBI taking its PPM on record.

It circulates a deal: Rs 3 crore into a logistics start-up. Seven of the eleven approve; four decline. Only the seven contribute, in the proportions set out by the allocation methodology disclosed in the PPM, and only those seven hold rights in that investment and in its proceeds — pro rata to what each put into that deal, not to the fund as a whole.

The manager must also put in its continuing interest: 0.5% of Rs 3 crore = Rs 1.5 lakh, against a floor of Rs 50,000. Rs 1.5 lakh is higher, so Rs 1.5 lakh it is — paid in cash, not netted off the management fee.

Two years later the start-up raises a Series A and the fund takes its pro-rata follow-on of Rs 4 crore. Total in that company is now Rs 7 crore, comfortably inside the Rs 25 crore ceiling, and the follow-on is offered only to the seven original contributors on a pro-rata basis. One declines; his share is offered to the remaining six.

If the exit is a secondary sale to an unrelated venture fund, the six-month lock-in applies. If the promoters buy the stake back, it is one year.

Chapter 2 (Alternative Investment Funds in India) gives the definition at 2.3.3, and Chapter 4 (Regulatory Framework — Indian Context) sets out the whole special dispensation at 4.1.12. This is one of the most heavily numbered sections in the paper, and questions come straight off the figures: the Rs 10 lakh floor and Rs 25 crore ceiling per investee company, five accredited investors before first close, 12 months to first close, two accredited investors per deal, 0.5% or Rs 50,000 continuing interest, and the one-year versus six-month lock-in.

• An angel fund is Category I, not a category of its own. It is a sub-category, but it needs its own registration as an angel fund — a plain Category I registration will not do.
• The Rs 25 crore ceiling is per investee company, not per deal. Follow-on investments count towards the same Rs 25 crore.
• There is no minimum investment by an angel investor into the fund — the Rs 1 crore AIF minimum is switched off here. The Rs 10 lakh floor is on what the fund puts into a company, which is a different thing entirely.
• Five accredited investors before first close; two accredited investors per investment. Two different numbers doing two different jobs.
• The manager's continuing interest is 0.5% or Rs 50,000, whichever is higher — not the "2.5% or Rs 5 crore, whichever is lower" that applies to a Category I or II AIF generally.
• Angel funds cannot invest in associates, and cannot take money for a deal from an angel investor who is a related party of that investee company.
• Start-ups promoted by, sponsored by or related to a corporate group with group turnover above Rs 300 crore are out of bounds.