Angel Funds Detailed Guide | Entering the World of Angel Funds

Fund Management Entities (FMEs), be it an Authorised FME, Registered FME (Non-Retail), or Registered FME (Retail), possess the ability to launch an Angel Fund or an Angel Scheme. In the diverse landscape of investment strategies, Angel Funds forge an essential path towards wealth generation and financial stability.

Defining the Angel Investor

Angel Fund investments accept commitments from Angel Investors. These investors are defined by their investment commitment of no less than USD 40,000 within a five-year period. Alternatively, Angel Investors can also be a Venture Capital Scheme or a Restricted Scheme set up in an International Financial Services Centre (IFSC), or a similarly regulated scheme or fund established in India or any foreign jurisdiction that pledges to invest an amount not less than USD 40,000 within five years.

Investment Boundaries of an Angel Fund

Every Angel Fund has its unique investment perimeters. Typically, Angel Funds target early-stage venture capital ventures or other regulated Angel Schemes or Angel Funds set up in IFSC, India, or foreign jurisdictions.

An early-stage venture capital undertaking refers to a company that:

• Was incorporated no more than ten years before the date of investment,
• Has not exceeded an annual turnover of USD 20 Million since its inception,
• Is actively working towards the innovation, development, or improvement of products, processes, or services, and
• Is not affiliated with, sponsored by, or related to an industrial group that boasts a group turnover exceeding USD 50 Million.

Certain restrictions govern the investments of Angel Schemes. For instance, these schemes are disallowed from investing in associates of FMEs or in early-stage venture capital ventures linked to angel investors who are investing in that particular business. It’s important to note that each investment made in an early-stage venture capital undertaking by an Angel Scheme should not surpass USD 1.5 Million. Moreover, investments made by an Angel Fund are subject to a lock-in period of at least one year from the investment date.

Understanding FME Investment Methods for Angel Funds

Before making an investment in an Angel Fund, the FME must acquire an express consent from each angel investor wishing to contribute to that investment. Subsequently, they must structure every investment as a close-ended segregated portfolio by issuing separate classes of units to the consenting angel investors under each segregated portfolio, through a private placement basis. The assets and liabilities of each segregated portfolio must be isolated from other segregated portfolios under the Angel Scheme – a rule the FME must ensure adherence to.

Participation Limit in a Segregated Portfolio of an Angel Fund

Under an Angel Scheme, the number of angel investors contributing to each segregated portfolio should not exceed 200.

Angel Fund’s Participation in Subsequent Fund-Raising Rounds

While an Angel Scheme’s investment in an early-stage venture capital undertaking is limited to USD 1.5 Million, the scheme may exceed this limit if that undertaking is raising more capital and investors wishing to shield their beneficial interest from dilution. The contribution by an angel investor in a subsequent round should keep their beneficial interest in the said undertaking both prior to and following the issue. Furthermore, the total exposure of the Angel Fund in a single undertaking, including investments made during subsequent rounds, should not surpass 50% of all investments made by the Angel Fund under all the segregated portfolios or USD 30 Million, whichever is lower.

Angel Fund and Leverage

Angel Funds are prohibited from undertaking leverage in any of their segregated portfolios.

Skin-in-the-Game Contribution Necessity for FMEs in an Angel Fund

The FME must ensure a contribution of a minimum of 2.5% of the investment size or USD 20,000, whichever is lesser, in each segregated portfolio. However, the FME may be exempt from this rule if:

• At least two-thirds of the angel investors in that segregated portfolio are accredited investors,
• At least two-thirds of the angel investors in that segregated portfolio by their investment value permit waiver of such a contribution, or
• When the investment made under a segregated portfolio is another regulated Angel Scheme / Angel Fund set up either in IFSC, India, or any foreign jurisdiction enforcing similar requirement.

Minimum Corpus Size for an Angel Scheme

It’s mandatory for each Angel Scheme to maintain a minimum corpus of USD 1 million.

Eligibility for Angel Fund Investment

Angel Funds are not a one-size-fits-all investment solution. Instead, they cater to a particular segment of investors with a minimum investment capacity of USD 40,000 within a five-year investment period. This pool of Angel Investors might include individual investors or Venture Capital Schemes and Restricted Schemes set up under IFSC regulation or similar funds in India or other foreign territories.

Critical Investment Considerations for Angel Funds

To maintain the purpose, integrity, and success of Angel Funds, it’s essential to ensure the right investment decisions—placing bets on early-stage ventures, innovation, and development-focused entities with a turnover not exceeding USD 20 Million since incorporation. The logic behind it is to support promising undertakings that are not yet a part of a large industrial group exceeding USD 50 Million in turnover.

However, the FME must avoid investing in any associate parties or any early-stage venture connected to the angel investors contributing to the fund. Further, each investment should not bypass the USD 1.5 Million mark to maintain a balanced and diversified portfolio.

Contribution Expectations from Angel Investors

Considering the high-risk nature of Angel Fund investments, the FME must ensure consent from each willing angel investor before investing. Additionally, a unique approach is applied to each investment by structuring it as a close-ended segregated portfolio. This approach ensures transparency and help maintain control over each investment.

The richness of an Angel Fund stands in its diversified portfolio. Therefore, while creating segregated portfolios, the number of investors should not exceed 200 per portfolio to ensure balance and maintain manageable risk levels across all portfolios.

Growth Opportunities and Limitations for Angel Funds

In some instances, an Angel Fund may invest beyond the USD 1.5 Million limit in an early-stage venture capital undertaking if they’re running additional rounds of funding. However, such contributions should only aim to protect angel investors’ beneficial interest without altering their total pre- and post-investment interest in the said organization.

Moreover, an Angel Fund’s overall exposure in a single investment undertaking, even when considering subsequent investments, should not exceed half of its total investments made under all segregated portfolios or USD 30 Million, the lower of the two.

Leverage Restrictions and Contribution Requirements

When it comes to leveraging, Angel Funds operate on strict restrictions prohibiting them from undertaking any leverage in their segregated portfolios. Likewise, they are required to comply with the skin-in-the-game contribution rule, stipulating a minimum contribution from the FME of either 2.5% of the investment size or USD 20,000—whichever is lesser.

While there are exceptions to this rule, such as situations where a majority of investors are accredited or have waived off such contributions, it helps ensure all investors have a vested interest in the performance of the fund.

Corpus Size: Maintaining a Healthy Angel Scheme

To ensure sustainability and investor confidence, each Angel Scheme must maintain a minimum base corpus of USD 1 million. This minimum threshold ensures that the fund operates with a sense of security and has enough financial coverage to survive unexpected market downturns or losses from its investment undertakings.

Wrapping Up

In conclusion, the exciting world of Angel Funds presents excellent opportunities for robust financial growth. However, these opportunities come with their share of intricacies and rules that need close adherence. By understanding these rules, potential Angel Fund investors can make better-informed decisions, ensuring investment security and potential growth.