What Is an SPV and When Does a Company Use One?

The short answer

A special purpose vehicle (SPV) is a separate entity, usually an LLC, formed to pool several investors into a single investment. The company sees one name on its cap table instead of dozens, and the SPV’s organizer handles the investors, documents and distributions.

How an SPV works

An organizer forms an LLC for one purpose: to invest in a specific company or asset.
Investors buy interests in the LLC, usually through a private placement under Regulation D.
The LLC makes a single investment in the company.
When the company sells or pays distributions, proceeds flow back through the SPV to its investors under its operating agreement.

Why companies and investors use them

Cleaner cap table. One line instead of many small holders, which later investors and buyers tend to prefer.
Simpler governance. Voting and consents run through one manager.
Access. Investors who could not meet a minimum alone can participate together.

The rules that usually apply

Interests in an SPV are securities, so the offering needs an exemption, most often Rule 506(b) or 506(c). Many SPVs also rely on the Investment Company Act exclusion in Section 3(c)(1), which generally limits the vehicle to 100 beneficial owners, or Section 3(c)(7), which requires all investors to be qualified purchasers. People who are paid to sell interests may raise broker-dealer questions, and the manager may raise investment adviser questions. These are the points counsel works through before anyone is invited in.

Documents an SPV usually needs

Certificate of formation and operating agreement
Private placement memorandum or offering summary
Subscription agreement and investor questionnaire
Form D and state notice filings
Tax setup: EIN, partnership returns and K-1s for investors

Questions owners ask

Is an SPV the same as a fund?

No. A fund invests in many companies over time. An SPV is usually formed for a single investment.

How many investors can an SPV have?

It depends on the exemptions used. An SPV relying on Section 3(c)(1) of the Investment Company Act is generally limited to 100 beneficial owners; one relying on Section 3(c)(7) can have more, but all must be qualified purchasers.

Sources

This guide is general information, not legal, tax or investment advice for your situation, and it may not reflect changes in the law after the date above. Talk to a qualified professional before acting on it.

What is an SPV, and when does a company use one?