A Special Purpose Vehicle, or SPV for short, is a subsidiary company of a larger established company that is used to alleviate any risk associated with the aforementioned parent company. The SPV is a separate entity that assumes all the risk for the other company. Sometimes this happens when the company wants to attempt a high-risk high-reward project, or it could come in the form of a completely separate startup company looking for investment. In either case, these SPVs can be used to gather investments and grow without being on the books of the parent company.
Also known as a Special Purpose Entity, or SPE for short, these branched-off companies hold extreme value in both their flexibility and ability to take away any liability from their parent company.
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Besides an attempt at a new startup or project, SPVs can also be used to secure debt in order to give their investors’ confidence that their investments will be paid back regardless of the future of the company. SPVs have a limited scope of business in that they mainly acquire and finance. Anything beyond that isn’t the focus of their existence.
An SPV can come in the form of a limited partnership, LLC, or a corporation depending on the needs of those creating the SPV. When it comes to financials, an SPV will not show up on the balance sheet of a parent company. It still provides its own balance sheet for all intents and purposes. For this reason, it is vital that any potential investors into an SPV make sure they analyze the SPV behind a company to maintain transparency about investor relationships.
SPVs have a wide range of uses as a subsidiary company. Not only can they be used to secure assets, but also to handle property deals, joint ventures, and other related business activities.
A short and sweet explanation of an SPV is that it acts as an indirect source of financing for the parent company without assuming any of its liabilities in order for other investors to invest. More often than not, an SPV is used for large operations such as subprime mortgage loans or high-risk projects.
Most people at some point in their lives have heard the term venture capitalist, especially when related to investment in a company or a group of companies. Investment in SPVs is different from these other traditional types of investments, and because of this, it is important to understand these differences.
An investor can invest in a startup through an SPV or a Venture Capital Fund, however, there are differences. Venture Capital Funds gather investments from a lot of different investors and pool them together in order for the venture fund to invest in a group of companies with that money. An SPV usually only invests in one single startup with its investment money. This is a strong advantage for investors that invest in an SPV because they know exactly where their investment goes.
Venture funds are extremely expensive to invest in. Even smaller venture funds can cost an arm and a leg to the normal person. However, with SPVs, the ability to get investing comes at a much lower price point. This means that you don’t have to be a millionaire to invest in an SPV.
Perhaps most importantly, venture funds are designed to diversify a wealthy investor’s investment into a group of assets, but with an SPV being devoted to a single-use, every investor has the time and ability to analyze and evaluate the SPV investment so that they know exactly what they are getting into.
In addition to the SPV, there is the SPAC. These two are distinctly different ways of investing and should be treated as such. They should both be carefully analyzed before taking any further steps.
A SPAC, or special purpose acquisition company, is a corporation formed for the sole purpose of raising investment capital through an initial public offering (IPO). The SPAC gives investors the opportunity to invest in a fund that will eventually acquire a business. The invested money is held safe in a trust until either the purchase of another company goes through or a deadline of time passes.
In the event that the time deadline hits, the SPAC has to return all investments to the investors. The SPAC itself has no intrinsic value, as it is just a holding place for the future purchase of a company. Because of this, the investors are investing in the businessmen or businesswomen who are choosing which company to bring to their investors to acquire. Most of the time, these businessmen or women are also investors in the SPAC and will stand to make money with the future company.
Banks are heavily involved in a SPAC due to the IPO. They charge fees to take everyone through the IPO, and they hold all the money made from the IPO until a potential buyer is on the horizon.
Once the capital has been raised, the SPAC has two years to do its job and purchase another company. The purchased company must be closely related to the SPAC’s value.
While SPACs are valuable to many people looking for investment, they do have to go through a public offering, which can always have hiccups along the way. SPVs don’t have as many loopholes to jump through in order to reach the goal but to each their own. Both of these entities can be solid ways to make investments in other companies.
As with any potential investment vehicle, there are rules that must be followed. Not only are there rules, but there are restrictions that everyone must weigh out for themselves in an SPV.
The largest and probably most defining restriction on an SPV is the number of people who can invest in an SPV. There is something called the 99 rule. Only 99 people can invest in a single SPV. At first glance, 99 people might seem like plenty of room to squeeze your investment into, but that isn’t always the case. If you are interested in an SPV that either is popular or has the volatility to become popular, you will want to jump on it quickly, as if you aren’t in the first 99, then you don’t get to invest in the SPV.
This can be an issue because it might force you into a rash decision that you haven’t researched or prepared for, which could be deadly to your finances. Any investment into an SPV should begin and end with proper research and background done on what your investment might be getting into once it is secured into the SPV.
Another important disadvantage to SPVs to note is that when dealing with a startup or especially risky business, investors aren’t likely to get timely and proper updates on the status of the company. This differs greatly from other investment options such as venture capital funds. This means you will have to go out of your way to stay up to date on what the company is doing and where it is going.
As previously mentioned, an SPV is an investment in one company or one opportunity. You do not get the chance to redo your investment. So, you will need to be confident in your approach and your ability to pick successful investments. If the company that your SPV invests in tanks, then it tanks, and you lose it. Of course, diversifying your investments is a great way to protect yourself from all-out loss in the event that something goes catastrophically wrong one time.
This is the most important question when it comes to potential investments into an SPV. Who can invest in an SPV? Can a normal average joe invest in an SPV? The short answer to the question is no. You need to be an accredited investor.
While there are rules on the books to allow for non-accredited investors to get in on an SPV, the reality of the situation is that all the investors need to be accredited. The main reason why this is the case is that the company usually requires all of the potential investors involved to be accredited investors, which means they also want the SPV as a whole to be an accredited investor. The easiest way for an SPV to be an accredited investor is to have only accredited investors inside the SPV. To complicate things would only decrease the SPV’s chances to score an investment.
In order to understand why an SPV needs accredited investors to make investments, it is vital to understand what an accredited investor is. An accredited investor is an individual or business that is allowed to trade securities but may not be registered with financial authorities.
An accredited investor has to meet one requirement from the categories of income, net worth, asset size, or professional experience. Most of the investments that are offered to accredited investors are not registered with the SEC. The reason to have the requirements to invest as an accredited investor is so that you can understand the potential risk you are taking so as not to be blindsided by something you do not understand.
Specific requirements to be an accredited investor include $200,000 in income or greater, a net worth of greater than $1 million or the investor is a partner for the company. Entities can also be accredited investors provided they reach the minimum requirements to do so.
Recently in 2020, Congress changed the definition of an accredited investor to include registered brokers and advisors. This now means that those who have the proper certifications or pass the relevant tests and prove their knowledge of the industry qualify to be accredited, investors. Because of this, a new door is opened to those people who do not satisfy the requirements to become an accredited investors. Instead, they can have someone who holds the proper knowledge, like a broker, to handle their investment so that they know what they are getting into and have a little bit of protection at the same time.
It is never a bad thing when more citizens get to invest their money into ventures assuming they understand the risks involved and are not being lied to.
A Special Purpose Vehicle, or SPV, is a subsidiary company of a parent company that is used to take away any associated risk with the said parent company. These SPVs can be used in a multitude of ways as investment strategies. A couple of examples of potential investments that SPVs account for are startups or risky projects the parent company doesn’t want to assume any risk for if it were to fail.
A great aspect of an SPV is that it is not included on the balance sheet of the parent company. This allows assets and liabilities to be separated at a point so that the two do not become mixed in between the companies.
There are other ways of investment similar to SPVs such as the SPAC, but each has its own rules and regulations to follow and are distinctly different. Not only should they be treated as such, but they should be closely analyzed and researched before any decision is made.
The SPV can be a strong investment tool but must be understood before putting any sort of investment on the table. Even after proper education, the law requires an accredited investor to be the one who actually invests in the SPV. Recently, Congress opened the door for more investors by allowing accredited investors to bypass certain requirements such as income and net worth in exchange for education-related requirements such as certification and the passing of the related exams.
With these new changes to the accreditation system, the average person can use professionals such as brokers to handle their investments into SPVs so that they know what they are getting into and don’t get put into a vulnerable situation.
About the Author
Jonathan Hung is one of the most active angel investors in Southern California, his mission is to drive value creation within each portfolio company. In support of this mission, he serves as Co-Managing Partner at – Unicorn Venture Partners.
Jonathan and his team target investments in US companies that have global market potential with a focus on long-term growth expansion to East Asian markets.
Jonathan developed his investing prowess as a Managing Member for his family office fund, J Heart Ventures, which made investments in start-up companies such as Gyft, ChowNow, Miso Robotics, Clover Health, Bitmain, to name a few startups he funded.
Jonathan has various degrees from the University of Southern California, London School of Economics, Massachusetts Institute of Technology, and The Wharton School at the University of Pennsylvania.