What Is a Special Purpose Vehicle (SPV)?

An SPV is a distinct legal entity formed to achieve a narrow and specific objective – it has a special dedicated purpose.

Setting it up as a legal entity will mean that (at least ostensibly) it operates independently of its parent company or other owners.

There are however legal concerns that you must take care of already when setting up the SPV in order not to risk losing control over the entity or not achieving the benefit you are aiming for.

Key Characteristics of an SPV

1. Independent Legal Identity

   
   

   • SPV is not a legal structure in itself. This might be confusing, but it is actually how a separate legal entity is used that makes it an SPV.

   • The SPV is often structured as a limited liability company (LLC), corporation, or limited partnership (LP).

     
     

2. Asset Isolation

   • The SPV holds specific assets or liabilities and can function to shield the parent company/owners from financial risks as well as to protect the assets it holds from claims related to liabilities that its parent company/owners have.

   • The SPV can, due to the asset isolation, function effectively for financial pooling and separating of specific assets.

     
     

3. Limited Scope

   • SPVs are created for one specific purpose, such as holding real estate, raising capital, doing an M&A transaction, or managing risk.

     
     

4. Not a fund

   • An SPV should not be confused with a fund – a fund is pooling of capital into a "blind" pool. The money is placed with the fund manager without the investors knowing what exact companies or other assets that will be invested into. The SPV on the other hand is used when the investment objective, or other objective, is identified. In fact, many funds use SPVs for their portfolio companies.

     
     

When should you use an SPV?

1. Pooling Capital – making an investment happen!

SPVs provide a vehicle for raising capital without affecting the parent company’s financial statements or credit rating.

Here are two often seen ways that an SPV is used in relation to investments into startups:

• Example: You want to invest into a startup, but the ticket size is 100 000 USD and you can only pony up 10 000 USD – so instead of loosing out, you turn to your friends and ask them to also provide 10k. With the ten of you, setting up an SPV, and then offering to invest 100 000 USD – suddenly you are in.

• Example: You are offered to invest into a super hot startup that focuses on health data gathering. You are enticed and you have the money. Ticket size is 100 000 USD. But that is all of your dedicated angel investment money. Are you willing to miss the opportunity? Are you willing to put all of your money in one startup? Again, why not set up an SPV where you pool money, and you can do that with other startup investments as well. This way you spread the risk and get exposure to more startups without having to give up the hottest ones.

  
  

2. To keep the cap table clean (by placing the minority shareholders in an SPV)

Avoiding too many small shareholders on the cap table will facilitate the decision making. With an SPV structure you can pool the minority shareholders and have the minority appoint one joint representative that they give the power to vote in accordance with the majority owners´ wishes.

The SPV structure can be a great way to let employees become shareholders in your company without forfeiting to much control, or transparency to them by having them one step removed, but still fully entitled to the economic dividends/exit proceeds as if they where shareholders directly on your cap table.

3.      Risk Isolation

SPVs are also commonly used to isolate specific risks or liabilities from the parent company.

Here in an often seen way that an SPV is used in relation to risk isolation:

• Example: A company that focuses on medtech is developing a high-risk product aiming to prevent the next pandamic. The company creates an SPV to house the project. If the project fails, the parent company’s other assets are protected.

• However: Be aware that if you intend to isolate risk and debt by setting up an SPV any experienced lender will do a credit assessment of your SPV. If they see that you have separated it from your assets while controling it, and taking on debt on its balance sheet? Well sure, we might give the loan to the SPV – but will require that you, as the parent company, sign as jointly liable or guarantee the debt. So in relation to the loan, you have no risk isolation.

   

4. Real Estate Transactions

In real estate, SPVs are often used to hold specific properties, isolating the financial and legal risks of each property. This can also serve tax planning purposes.

• Example: A real estate developer forms separate SPVs for each property project to limit exposure to liabilities.

  
  

5. Joint Ventures and Partnerships

SPVs are an effective way to structure joint ventures, allowing multiple parties to collaborate on a project while clearly defining ownership and liabilities.

• Example: Two construction companies form an SPV to build and operate a housing project, sharing profits and liabilities.

  
  
  
  

Benefits of Using an SPV

1. Risk Management

   • Isolating high-risk projects or liabilities in an SPV can serve to protect the the parent company’s financial health. It can also help to protect the parent companies reputation as you can have it one step removed (however as noted above the parent company might need to accept or guarantee the SPV:s liabilities).

2. Flexibility in Financing

   • SPVs allow for innovative and bespoke financing options, such as securitization or equity fundraising, without impacting the parent’s balance sheet.

3. Legal Separation

   • SPVs create a clear boundary between the parent company and the project, minimizing legal entanglements - so called ring fencing.

4. Tax Optimization

   • SPVs can provide flexibility also in relation to tax matters as they can be structured in jurisdictions with favorable tax laws, reducing the overall tax burden.

5. Enhanced Investor Appeal

   • Investors may find SPVs attractive because of their focus on specific assets or projects, making it easier to channel the right ownership and financial structure, and at the same time making it easier to evaluate and manage risks as compared to investing into a project that is an integral part of a operating company with other activites in focus.

     
     

What are the biggest risks of using an SPV?

While SPVs offer significant advantages, they also come with risks that require careful planning and management;

1. See-through risk

• Risk: If the SPV is poorly structured or its operations blur the lines between the SPV and its parent, courts may disregard its separate legal identity (known as piercing the corporate veil).

• Example: If a parent company is deemed to be using the SPV to hide liabilities or commit fraud, creditors can pursue the parent for the SPV’s obligations.

• Solution: Ensure the SPV operates independently, maintains separate accounts, and adheres to all legal formalities.

  
  

2. Lack of Transparency

• Risk: SPVs have been criticized for enabling financial opacity, particularly in cases like Enron, where SPVs were used to hide debt and inflate reported profits.

• Solution: Maintain clear and accurate financial reporting to avoid regulatory scrutiny or reputational damage.

  
  

3. Tax and Regulatory Issues

• Risk: SPVs may inadvertently trigger tax liabilities or regulatory violations, especially in cross-border transactions.

• Example: A multinational company sets up an SPV in a tax-friendly jurisdiction but fails to comply with local tax laws, resulting in penalties (issues with so called "permanent establishment" will often be one of the key issues).

• Solution: Engage tax and legal experts to navigate jurisdiction-specific requirements.

  
  

4. Operational Complexity

• Risk: Managing multiple SPVs can create administrative burdens and increase the complexity of governance and reporting.

• Example: A real estate firm with multiple SPVs for different properties may face challenges consolidating financial data.

• Solution: Use technology and clear governance structures to streamline SPV management.

  
  

5. Credit and Investor Risks

• Risk: If an SPV’s assets underperform, investors and creditors may face losses, leading to reputational harm for the parent company.

• Solution: Ensure thorough due diligence, solid governance structure with clear separation of the legal structure and its liabilities as far as possible, and have realistic projections for the SPV’s assets or projects.

  
  

6. Exit Challenges

• Risk: Dissolving or transferring SPVs can be legally and operationally complex, especially if disputes arise over assets or liabilities.

• Solution: Plan exit strategies in advance and document them in the SPV’s governing agreements.

Checklist

What You Must Address Legally Before Using an SPV

Make sure you draft robust agreements defining the purpose, ownership, and operational rules for the SPV. Below is a check-list of key considerations that you should make sure to adress before you set-up the SPV. If the SPV is used to pool investors you should in particular check-off the following;

(1)   DECISIONS Ensure clear decision-making powers for efficiency and to best protect the investment made – can you appoint a “manager”? If the SPV is for minority shareholders such as employees; ensure clear governance and that the shareholders of the SPV appoint one representative that makes the decisions in relation to their shareholding in the target company.

(2)   LEAVERS Ensure clear provisions if someone wants out – RoFR/RoFO etc. Ensure that you have a change of control if someone owns through a private Holdco instead of directly Ensure that you have a no-assignment clause.

(3)   EXIT Ensure strong provisions if the target company is to do an exit. Sometimes it is helpful if the SPV is sold in its totality instead of the SPV selling shares in the target company and then distributing the proceeds. Ensure clear provisions in relation to an IPO of the target company. Make sure you have a clear structure for how to dissolve the SPV and how to divide the distribution (and/or assets).

(4)   SENSITIVE INFORMATION

Consider it you should limit the degree of transparency in cases where the SPV is for employees or other minority shareholders. This can be done by not giving them access to the full SHA that is applicable in relation to founders and majority owners of the target company.

(5)   TAX

Review tax matters, in particular for cross boarder holdings. Chose jurisdiction carefully.

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(6)   MORE CASH?

Ensure that - in cases where the SPV has more than one shareholder - it is clear if you are expected to provide further financing into the underlying target company/the project/the assets held, or not, and how such decisions should be made.

(7)   REGULATORY

Be mindful so that you adhere to all relevant regulation. Therefore also ensure that you don’t move from an SPV proposition to a fund-structure where the investors put money into a blind-pool since this will most likely be subject to heavy regulation.

(8) SEPARATE GOVERNANCE

Ensure the SPV has its own board, bank accounts, and governance framework to maintain legal independence. Setting up an SPV does come with administrative costs to some extent and need to be thougth through, in particular with dispersed ownership.

Conclusion

A Special Purpose Vehicle (SPV) is a powerful tool for isolating risks, raising capital, and executing complex transactions. It is particularly effective for projects with high risk, unique financing needs, or specific asset management requirements. However, the benefits of an SPV come with significant risks, including legal, compliance, and operational challenges.

To maximize the advantages and mitigate the risks, it is essential to structure the SPV properly, maintain transparency, and seek professional legal and financial advice. When used correctly, an SPV can be a highly effective strategy for achieving targeted business goals while protecting the parent company and its stakeholders.

This is not legal advice, only information sharing. If you have further questions, or if you need help with structuring your business you are welcome to reach out on kat@stgcommerciallaw.com

Stockholm; 2025-02-04

Author: Kat Strandberg