Capital market regulator recently sought a slew of information from angel funds, in what seems to be an attempt to examine whether investors putting money in these pooled vehicles floated to bankroll startups, are getting a fair deal, reported The Economic Times.
In a communique to angel funds, which have easier rules compared to regular venture capital and private equity funds, the Securities and Exchange Board of India (Sebi) has asked them to spell out “in what manner the pro-rata rights of all investors is maintained in all the investments,” three persons familiar with the development said.
The funds have to also share the number of investors in the pool, whether investors can exit before the tenure of the fund expires, the ‘commitment period’ till when a fund can cut deals to buy into startups, the target corpus, and the timelines for initial and final closings of a fund, according to Sebi’s email sent last week.
The information, according to the email, is being collected for “regulatory purpose”, said a fund official.
Sebi has also sought details of investments by angel funds which have a single investor.
Instead of investing directly, some ultra-high net worth individuals (HNIs), according to fund circles, form angel funds and invest through them to mask their identities and strike a better deal.
The market regulator’s queries come after two years of active fundraising by startups, surge in investors betting on the next unicorn, emergence of ‘lead syndicators’ who act as brokers, and amid recent fears that the roaring party is fizzling out. So, what is Sebi planning?
But savvy HNI investors disapprove of this. “Lead syndicators make a killing by cutting sweetheart deals with startup founders who are desperate for funds. A syndicator invests initially. At the next stage when other investors come in through a platform, the syndicator invests little or no money, but nonetheless charges a ‘carry’ 5 to 15%. So, they simply monetise their right (to invest) and receive a high carry in return. Sebi-registered AIF platforms are happily lending their facility for this. Some deals are privately circulated among founders and directors of VC funds and platforms who invest in their personal capacity before the deal is displayed on the platforms to other investors,” said a senior banker who has investments in some of the angel funds. Carry is a share of profit.
Indeed, big-ticket investors, having sensed the game and scoffing at the idea of syndicators walking away with hefty carry, sponsor AIFs to directly invest in startups.
“Besides keeping their identities undisclosed, they get a better deal. Startups are also happy to have institutional investors in the cap table, even though behind such an angel fund is just one investor,” said an industry person.