How is a Special Purpose Vehicle Formed?

Businessmen discussing ideas

As an investor, or perhaps a participant in financial management, you are undoubtedly aware of special purpose vehicles, or more commonly known as SPVs. However, if you have not been involved in one yourself, or are less than familiar with the process, you might have some lingering questions about how SPVs work, what they are designed for, and how you would go about forming one.

While special purpose vehicles have been around for some time, they have been gaining popularity because of their less regulatory model and eased oversight, compared to some more traditional investing types.

But there are many additional considerations that come into play when dealing with or thinking about forming a special purpose vehicle. One important factor to note is that SPVs and special purpose vehicle agreements can be tailored and constructed to work for the investing party involved, as well as the intended outcome. Simply put, all SPVs are not the same.

What are Special Purpose Vehicles Used for?

SImply put, a special purpose entity is essentially a subsidiary company formed for a specific business purpose or activity. A common purpose is to structure finance applications, for example, such as asset securitization, joint ventures, or property deals. Another popular concept is to isolate assets, risks, or operations from the parent company. 

In this way, special purpose vehicles provide protection for a parent company’s assets and liabilities. This makes them attractive for those looking to undertake a project that includes a level of risk that they want to protect the parent company from. Whether you are considering acquiring new assets to diversify your business, or raising capital for an upcoming project, SPV investing can introduce a wide range of benefits. 

Breaking Down a Special Purpose Vehicle

A special purpose vehicle is often formed when a parent company creates a subsidiary company that operates as an independent legal entity from the parent company. This is commonly done because an SPV can withstand additional risks that the parent company could not, as the investors in the parent company might have concerns for one reason or another.

Since a special purpose vehicle has its own legal status, it also has its own balance sheet and assets, and this means financial reporting and filing of its own financial statements. In this way, it provides the SPV with a bit more freedom to operate without the parent company’s oversight. Additionally, since the SPV financials are not part of the parent company’s balance sheet, it can shield parent companies from the perceived risk.

And even if your firm is small, or perhaps even a startup, that is just fine, since SPVs are designed to be accessible and advantageous for small startups as well as large corporations. Similarly, they are established for a variety of reasons. 

Common Reasons for a Special Purpose Vehicle

As mentioned, there are many reasons why you might be considering forming a special purpose vehicle, but here are some common examples:

1. Avoiding Regulatory Burdens

While it would vary from SPV to SPV, there are some types of special purpose vehicles that can take advantage of more relaxed tax regulations than their parent companies are able to do. 

2. Isolating Financial Risk

If participating in a venture that the parent company might find is too risky, some investors will choose to isolate this risk in the form of an SPV. Therefore, if something were to disrupt the SPVs receivables, causing it to be unable to meet its debt obligations, the parent company would not be impacted.

3. Attracting Other Investors

Investors or companies forming an SPV might be looking to diversify their investment pool. Since SPVs are often affiliated with lower investment minimums than other investment vehicles, they could be more appealing or accessible to young investors.

Forming a Special Purpose Vehicle

Whether you are a professional investor or a younger partner with your company’s financial management team, there are many details and considerations at play for starting a special purpose vehicle. And the only way to be certain that it is done in a way that will maximize your intentions is to bring in the professionals. 

Businessman working at a computer and taking notes

Whether the SPV is being set up by means of trusts, corporation or limited partnerships, there are too many ins and outs to not rely on innovative software to help you keep track and manage the process. In fact, with Glassboard, you can manage the entire life cycle of a special purpose vehicle. And while there are finer points to consider, the process is greatly simplified and secure.

You can implement the details, the goals, and the type of special purpose vehicle you are wanting to establish, and invite the investors you want through the same platform. This process will require paperwork and information from all parties.

And since the SPV is a legal entity of its own, it will be necessary that all taxes and financials are managed, which our innovative software can do throughout the duration of the SPV’s lifespan.

To learn more about how Assure can help you ensure the success of your next venture, click here and start your SPV today!