Private Placement, Distribution and Investor Onboarding
What the exam tests
This domain tests how AIF units may be offered, who may be approached, what a distributor must check, and what conduct is prohibited. It is the highest-risk area for distribution misconduct.
Private placement rules
AIF units may be offered only through private placement to a select group. Public advertising, newspaper notices, television promotions, social-media broadcasts and public webinars are prohibited. Minimum investment is Rs 1 crore per investor, with a Rs 25 lakh exception for employees and directors of the fund or manager; angel funds have separate norms. Schemes are also subject to investor-count and concentration norms, including a commonly tested baseline of at least 20 investors per scheme and a 25% single-investor cap, subject to specified exceptions.
Onboarding and the distributor’s role
A distributor is not a guarantor of returns. Before onboarding, the distributor should obtain KYC/AML documents, record risk profile and investment horizon, verify accredited-investor status where applicable, and ensure the investor receives the private placement memorandum. The PPM should disclose strategy, fees, expenses, risk factors, conflicts, valuation, tax treatment and redemption terms.
Worked example
A distributor is asked to send a WhatsApp broadcast to 500 contacts showing a Category II fund’s past returns and inviting them to invest. This is public solicitation, is inconsistent with private placement, and uses performance claims without proper context. The correct approach is a one-to-one private discussion with eligible investors, followed by PPM delivery and documented suitability.
Traps that cost marks
Do not accept a subscription below Rs 1 crore from an ordinary investor; do not treat “friends and family” as an exemption; do not promise assured returns; do not skip KYC or accredited-investor checks; do not circulate performance figures without period, benchmark and risk disclosure.