In a consultation paper floated for public comments, Sebi said a review of the current regulatory framework indicates gaps in operational clarity and concerns about offering investment opportunities to a wide range of investors, some of whom may not have commensurate risk appetite.

Angel Funds, a type of Category I AIFs – Venture Capital Funds, provide capital to start-ups from Angel investors. Interest in this asset class has been growing, as seen in the rise of registered Angel funds and their investments.

However, the paper noted that existing norms and investment conditions also require revision to provide more flexibility and ease of operations.

“Considering these issues and the recent Budget announcement of abolishing Angel Tax, a question arises on whether Angel Funds structure should continue to be regulated at all,” Sebi said.

This paper aims to seek views from the public on the need for channelizing capital from Angel investor pools through a regulated structure.If the need for a regulatory environment for Angel Funds is acknowledged, the paper also sought views on proposals to streamline the regulatory framework for Angel Funds to rationalise their fundraising processes, strengthen disclosure and governance requirements, and provide operational clarity and investment flexibility.Among the proposals were expanding the scope of Angel investors to include HUFs, family trusts, sole proprietorships, trusts, accredited investors, third-party verification of investors’ eligibility, eligibility criteria to ensure that Angel Funds only on-board investors with the necessary risk appetite.

Further, Sebi also proposed that the number of investors who can contribute for investment in a particular investee company of an Angel Fund will not exceed 200 during a financial year, excluding investors who are institutional investors.

It is also proposed that the lock-in requirement for investment by Angel Fund in a startup be reduced to 6 months in case that the fund sells the investment to a third party.