Angel Funds 2.0: Navigating the New Regulatory Landscape

Payal Agarwal, Partner & Jayesh Rudra, Executive | corplaw@vinodkothari.com 

The 2025 Amendments to the AIF Regulations has brought substantive changes to the regulatory landscape for angel funds, moving the same as a category of Cat I Funds, as against a sub-category of Venture Capital Funds. However, regulatory oversight strictens, with the access exclusively limited to accredited investors only. In view of the redundancy of a “scheme” in the context of angel funds (see below), the same has been omitted and replaced with each investment based participation of investors. 

Angel Funds, a unique type of start-up friendly investment vehicle, was formally recognised by SEBI in the year 2013 with the introduction of Chapter III-A to the SEBI (Alternative Investment Funds) Regulations, 2012. As on 31st March 2025, there are 103 registered Angel Funds with a total commitment of Rs. 10,138 crores. The regulatory landscape for angel funds has been substantially revamped with the notification of SEBI (Alternative Investment Funds) (Second Amendment) Regulations, 2025, dated 8th September, 2025. The Amendment Regulations are further supplemented with a Circular dated September 10, 2025 prescribing the specific conditions and modalities pertaining to the provisions applicable to Angel Funds. 

The amendments are based on the Consultation Paper dated 13th November, 2024, released post the Union Budget announcement of abolishment of angel tax (see a brief presentation here), for operational clarity and strengthening the governance and disclosure requirements for angel funds. 

Uniqueness of structure 

The uniqueness of Angel Funds lie in its structure. Unlike a typical AIF, in the case of Angel Funds, the investors provide specific consent to each investment opportunity. As such, there is no proportionality between the contribution of the investors in a scheme of AIF vis-a-vis the indirect contribution made in an investee company by such AIF scheme. As such, as against the usual “scheme” structure, an Angel Fund follows an “investment” structure. 

Applicability 

The Amendment Regulations are effective from the date of publication of the same in the Official Gazette, viz., 8th September 2025. The Circular was issued on 10th September, 2025. Further, in order to facilitate transition of the existing Angel Funds, additional timeline has been provided for compliance in some cases.  

Exclusive to AIs: eligibility to act as an angel investor 

Pursuant to the amendments, it is only an Accredited Investor who is eligible to be onboarded as an angel investor in an angel fund. The difference between the eligibility conditions are tabulated below:

Particulars	Angel Investors (Erstwhile Framework)	Accredited Investors (Amended Framework)
Categories of investors	Individual/Body corporate/AIF/ VCF	IndividualHUF Family trust Sole proprietorship Body corporate Trust other than family trust Partnership firm Government, Govt development agencies, QIBs, FPIs, Sovereign Wealth Funds etc – exempt from accreditation requirement
Eligibility criteria	In case of individual, Net tangible assets > Rs. 2 crs (excluding principal residence) andHas experience of Early stage investment or Serial entrepreneur or SMP with at least 10 years’ experience	In case of 1 to 4, either of the following: Annual income > Rs. 2 crs or Net worth > Rs. 7.5 crs out of which at least Rs. 3.75 crs is in the form of financial assets.Annual Income ≥ Rs. 1 cr + Net Worth ≥ Rs. 5 crs, out of which at least Rs. 2.5 crs is in the form of financial assets.In case of 7, each partner to separately meet aforesaid criteria
	In case of body corporate, networth > Rs. 10 crs	In case of body corporate, networth > Rs. 50 crs
		Trust other than family trust, networth > Rs. 50 crs
Independent accreditation	Not applicable	Applicable

Not only the eligibility conditions are stringent in case of AIs as compared to erstwhile concept of angel investors, but the mandatory “accreditation” criteria would be a primary factor that may lead to elimination of many investors who were earlier eligible for acting as an angel investor. 

Transition period

For angel funds registered on or before 10th September 2025 (the date of issue of Circular), a timeline of 1 year, that is, upto 8th September 2026 has been specified, for transition into the new framework. During this period, offers can be made to upto 200 non-AIs. 

No new contribution can be accepted from non-AIs post 8th September, 2026, though the investors continue to hold their existing investments already made in the angel fund. 

Regulatory regime for Angel Funds: old v/s new 

Topic	Old Framework	New Framework	Rationale
STRUCTURE OF THE FUND
Category of AIF [Reg 19A(1)]	Sub-category of VCF under Cat -I	Sub-category of Cat – I	In view of the unique features of Angel Funds as compared to VCFs. See differences below
Schemes under Fund [Reg 19E]	Allowed	Not allowed	Since there is practically no distinction between a “scheme” and an “investment” in the context of an angel fund, hence, the concept of scheme is not relevant for an angel fund.
Filing of placement memorandum with SEBI [Reg 19D(4)]	Not applicable	PPM to be filed along with application for registration through merchant banker for comments of SEBI	Previously, term sheets for each Schemes were filed with SEBI for “informational” purposes. The requirement has been substituted with filing of PPM at the time of registration itself.
Filing of the term sheet for schemes with SEBI [Reg 19E]	Mandatory, 10 days from launch of scheme	Not applicable	Term sheet is filed for material information of each Scheme, not relevant since scheme structure is omitted for angel funds
Minimum continuing interest of Sponsor/ Manager [Reg 19G]	2.5% of corpus or Rs. 50 lacs, whichever is lower	0.5% of investment amount or Rs. 50,000, in each investee, whichever is higher	To ensure that manager/sponsor has interest in every investment
INVESTMENT IN ANGEL FUND
Eligibility of investor [Reg 19D(1)]	Angel Investor based on certain eligibility conditions specified therein (see later in this article)	Accredited Investor KMP of Angel Fund/ Manager	To ensure proper verification of the risk appetite and informed decision making capabilities of the investor, since investment in start-ups are highly risky. To enhance skin in the game
Minimum corpus [Reg 19D(2)]	Rs. 5 crore	NA	NA since each investment is based on prior consent of investor, the concept of a common corpus is irrelevant
Minimum investment per investor [Reg 19D(3)]	Rs. 25 Lakhs	NA	No minimum limit since only AIs are allowed to invest
Minimum number of investors [Reg 19D(6)]	Not specified	At least 5 AIs prior to disclosing first close	To ensure sufficient investor interest prior to starting to make investments, in the absence of any minimum corpus requirement.
Maximum number of investors	200 in a scheme [Reg 19E(2) – omitted]	No limit	Since only AIs are eligible who are independently verified, sufficient guardrails exist. No cap on number of investors facilitate scaling up of the industry and enhance capital flow to start-ups.  Further, ICDR Regulations have been amended to include AIs within the meaning of QIBs for the purpose of investment in angel funds, accordingly, the limit of 200 as per section 42 of the Companies Act, 2013 shall also not apply in case the AIF is formed as a company.
INVESTMENT BY ANGEL FUNDS
Prohibition from investment in certain investees [Reg 19F(6)]	Companies with family connection with any of the angel investors.	No investments from such investors who are related party to an investee	See below.
Follow-on investment in existing investee [proviso to Reg 19F(1)]	Not permitted once the investee ceases to be start-up	Allowed subject to the condition that the Fund’s post-issue shareholding percentage does not exceed pre-issue shareholding percentage	To protect and preserve the value of the existing investments of Angel Funds in an investee. Investment cap is to ensure that while pre-emptive rights can be exercised by angel funds, does not result in dilution of the regulatory intent behind angel funds
Minimum investment in an investee [Reg 19F(1)]	Rs. 25 Lakhs	Rs. 10 Lakhs	The increase in range is to reflect the growth of angel ecosystem, providing more flexibility to the Angel Funds
Maximum investment in an investee [Reg 19F(1)]	Rs. 10 crores	Rs. 25 crores (including upon follow-on investment)
Lock-in on investments [Reg 19F(3)]	1 year	6 months – if sold to a third party subject to AoA of investee. 1 year – in other cases, including buyback, sale to promoters of investee/ associates of promoters	To maintain stability of investments while providing flexibility of favourable exit to the angel fund
Minimum number of AIF investors in each investee [Reg 19F(5)]	No such limit	2  investors	Also serves as a check against misuse of angel fund structure for facilitating investments from single investor
COMPLIANCES APPLICABLE TO ANGEL FUNDS
Exception from application of certain provisions of the Regs [19B (2)]	Reg 10(a), (b), (c), (d), (f) – Conditions w.r.t. Investment in AIFReg 12 – Filing of Scheme Reg 14 – Listing of unitsReg 15(1)(a), (c), (e) – Conditions w.r.t. Investment by AIFReg 16(1)(b) – OmittedReg 16(2) – Additional conditions applicable to VCFsReg 20(21) – Rights of investors pro rata to their contribution	Following additional exceptions: Reg 15(da) – AIFs making investments through multiple layers of AIFsReg 16(1)(a) – Types of investeeReg 17 – Conditions for Cat II investments Reg 18 – Conditions for Cat III investments	The exceptions are majorly in alignment with the non-Scheme structure of the Angel Funds
Annual audit of compliance with terms of PPM	Not applicable	Mandatory, if total investment (at cost) exceeds Rs. 100 crs	Exemption to continue for smaller Angel Funds, larger Angel Funds be subject to audit of PPM
Reporting in relation to performance benchmarking	Not applicable	Applicable from FY 25-26	To improve transparency

Related Party v/s Family Connection

Angel Funds are not permitted to accept contributions from such investors, who are related parties to the investee company in which the investment is to be made. Here, the definition of “related party” is to be taken from Reg 2(1)(zb) of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. The definition, in turn, refers to Companies Act and applicable accounting standards as well. 

Various questions arise:

• Who prepares the list of related parties as per LODR definition? Is it the prospective investee that is responsible? 
• Can the investment manager and investor be absolved of their responsibilities of verification of whether or not the investor is a related party to the investee?
• What if the investor becomes a related party of the investee entity, subsequent to making such investments? 

The change from the term “family connection” to “related party” seems to simplify the identification for the prospective investee company, since such companies would have already identified related parties in terms of section 2(76) of CA, 2013 and applicable accounting standards. The only additional categories for such investees would be: 

1. Promoters and members of promoter group, and 
2. Shareholders holding 10% or more equity shares in the company on a beneficial interest basis. 

Concluding Remarks 

The amended regulatory framework makes it stringent for angel funds to raise funds from angel investors, restricting the access to accredited investors only. With the limited number of investors “accredited” registered in India (649 as on May 2025), early stage start-ups might face obstacles in startup funding. While SEBI has proposed ease of accreditation requirements, the same has not been made effective yet. As on 30th June 2025, data shows that the number of VCFs are much higher than the number of angel funds, and with the amended requirements, it might so happen that the investors would prefer VCFs over angel funds, as a means of investing in start-ups.

See our other resources on AIF:

• CIV-ilizing Co-investments: SEBI’s new framework for Co-investments under AIF Regulations
• FAQs on specific due diligence of investors & investments of AIFs
• RBI bars lenders’ investments in AIFs investing in their borrowers
• Capital subject to ‘caps’: RBI relaxes norms for investment by REs in AIFs, subject to threshold limits
• Can CICs invest in AIFs? A Regulatory Paradox
• Trust, but verify: AIFs cannot be used as regulatory arbitrage