As an investor, finding the right investment can be tricky. From vetting the business model and founding team to digging into financials and user traction, there are many things to take into consideration before pulling the trigger on an investment. Another thing to consider is how the investment is structured. For venture capital, one common investment structure you’ll see as is the special purpose vehicle (SPV).
What is a Special Purpose Vehicle (SPV)?
A special purpose vehicle (SPV), sometimes called a special purpose entity (SPE), is a legal entity that is formed for a very narrow and specific purpose. Usually, they are formed as an LLC or LP. SPVs can be used for a variety of different purposes, from securitizing loans to risk sharing. In the context of venture capital, SPVs act as a fund through which individual investors are pooled to make one large, single investment in a startup.
How Investing in a Special Purpose Vehicle Works
When an investor invests in a company through an SPV, they are not investing directly in the company. Instead, they are purchasing membership units of the LLC or LP that will then make one large investment using the pooled investor funds. At MicroVentures, when you invest in one of our primary or secondary Regulation D offerings, you are usually (but not always) investing through an SPV.
Special Purpose Vehicles vs. Traditional VC Funds
While SPVs and traditional venture capital funds can be similar in the way they are structured, they differ in their aims and execution. While an SPV is used to make an investment in one single company, venture capital funds are used to make diversified investments across multiple companies. Venture capital funds select investments at the discretion of the fund manager. MicroVentures also offers investment in venture capital funds.
The offering documentation for an SPV or venture capital fund will describe its structure and purpose, risks associated with the investment, and to the extent possible, the company (or companies) and investment type (equity, debt, etc.) in which the SPV or venture capital fund was organized to invest.
Why Special Purpose Vehicles are Used
One major reason SPVs are used is that they can simplify a startup’s cap table. As a refresher, a startup’s cap table is a detailed document that includes each investor in the company as well as the terms by which they invested. Of course, if you have a lot of individual investors, this can get messy. By using an SPV, startups only have to add one new entry to the cap table, rather than say, 100. This makes things easier when it comes time to provide company updates, as the startup only has to reach out to the owner of the SPV to distribute the information, rather than each individual investor.
The Advantages of Investing in Special Purpose Vehicles
SPVs are advantageous not only to startups but to investors as well. Historically, investment minimums for direct investments in private companies have been prohibitive for the average investor, often starting at $50,000 or higher. Investment minimums in SPVs are often significantly lower. Here, minimum investments in our Regulation D offerings typically start around $5,000 for earlier stage companies.
The Drawbacks of Investing in Special Purpose Vehicles
The primary drawback of investing through an SPV is that individual investors don’t get individual rights in the company. As such, they don’t have a say in the direction of the company, nor do they have direct access to it. Everything is managed by the owner of the SPV, so if an individual investor does have concerns, they must bring them to the manager of the SPV to work with the company on their behalf. In addition, there are fees associated with an investment in an SPV that compensate the manager that should be detailed within the offering documentation.
Special Purpose Vehicles in Crowdfunding
Under current regulations, the use of SPVs is not permitted for Regulation Crowdfunding offerings. We believe this is unfortunate for a couple of reasons:
- SPVs can make it easier to manage smaller individual investors, creating a single point of communication for the issuer.
- A single entity can better manage investor rights to help prevent excessive dilution from occurring.
As regulation crowdfunding offerings have a large number of individual small investors, we believe that amending current regulations to allow for the use of SPVs would be in the best interest of both regulation crowdfunding issuers and small investors.
The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.
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