Finding the right investment as an investor can be a process. From vetting the business model and founding team to reviewing financials and user traction, there are many different things to take into consideration before choosing to invest in a startup. Investors may also want to consider how the investment is structured, and one common example of this that investors may run into is a special purpose vehicle (SPV). In this blog, we will discuss what special purpose vehicles are, how SPVs are used, and how they differ from traditional VC funds.

Special Purpose Vehicles

What is a Special Purpose Vehicle?

An SPV, sometimes called a special purpose entity (SPE), is a legal entity that is formed for a very narrow and specific purpose. In the private market, they are commonly formed as Limited Liability Companies (LLCs) or Limited Partnerships (LPs) to facilitate a single investment in a startup. SPVs can be used for a variety of different purposes, some of which include securitizing loans and risk mitigation. For private market investors, SPVs can offer a streamlined way to gain exposure to promising startups without the high capital commitment traditionally required for direct investments.

Uses of SPVs

There are many reasons for using and creating SPVs, but today we are going to focus on the four main or most common ones:[1]

Risk Mitigation

A corporation’s project may entail significant risks, so creating an SPV can allow the corporation to legally isolate the risks of the project and therefor be able to mitigate the risk with other investors.

Securitization

Securitization of loans is another common reason to create an SPV. For example, when issuing mortgage-backed securities from a pool of mortgages, a bank can separate loans from its other obligations by creating an SPV. The SPV could then allow investors in the mortgage-backed securities to receive payments for these loans before other creditors of the bank.

Asset Transfer

Certain types of assets can be hard to transfer, so a company may create an SPV to own these assets. When they want to transfer the assets, they can sell the SPV as part of a merger and acquisition (M&A) process.

Property Sale

If the taxes on property sales are higher than the capital gain realized from the sale, a company may also choose to create an SPV that will own the properties for sale. The company can then choose to sell the SPV instead of the properties and pay tax on the capital gain from the sale instead of having to pay the property sales tax.

How to Invest via an SPV

When an investor invests in a company through an SPV, they are not purchasing equity directly from the startup. Instead, they purchase units in the SPV, typically an LLC, which, in turn, invests in the startup. This structure allows the SPV to act as a single entity on the startup’s cap table, helping to simplify the company’s ownership record. At MicroVentures, most Regulation D offerings, whether primary or secondary, are facilitated through SPVs, although this is not always the case. The offering documentation will detail the structure of each opportunity.

Advantages of Investing in SPVs

SPVs can offer several advantages for private market investors:[2]

• Lower Minimum Investment Requirements: SPVs often allow individuals to invest in startups with minimums as low as $5,000, as seen on MicroVentures, compared to direct investments which often start at $50,000 or more.
• Access to Exclusive Deals: SPVs can give investors access to investment rounds they wouldn’t otherwise be able to join individually.
• Simplified Tax Reporting: In most LLC structures, gains and losses pass through to investors according to their ownership share, which may simplify tax reporting.
• Limited Liability: Like other LLC members, SPV investors typically are not responsible for personal liability beyond their capital contribution.

Disadvantages of Investing in SPVs

While SPVs offer flexibility, they also come with limitations:[3]

• No Direct Ownership Rights: Investors do not hold direct equity in the startup and typically have no voting rights or governance power.
• Limited Communication: All interactions with the startup are handled by the SPV manager, which may reduce transparency for individual investors.
• Management Fees: SPVs may carry fees for setup, management, and administration, which can affect overall returns. These are disclosed in the offering documents and vary by platform.

SPVs versus Traditional VC Funds

While SPVs and traditional venture capital (VC) funds may appear similar in structure, their investment strategies, timelines, and investor experiences can differ significantly.

SPVs are typically formed to make a single investment in one specific startup. This allows investors to evaluate each opportunity individually and decide whether or not to participate. Because of their focused nature, SPVs are often short-term vehicles that dissolve after the investment matures, usually at the time of an exit event such as an acquisition or IPO.

Traditional VC funds, on the other hand, raise capital upfront with the intention of making multiple investments across a portfolio of startups over a set period—usually seven to ten years. Fund managers are responsible for sourcing, vetting, and managing these investments, and investors do not typically influence which companies receive funding. While VC funds may provide built-in diversification and professional management, they also could come with higher management fees, longer lock-up periods, and less visibility into individual deals.

Why Startups May Prefer SPVs

Startups benefit from SPVs primarily because of cap table simplification. Rather than tracking and updating dozens (or even hundreds) of individual investors, the startup records a single line item (the SPV) on its cap table. This may simplify administrative tasks, reduces legal complexity, and facilitates future fundraising or exits. Additionally, SPVs can help startups maintain greater control by minimizing investor involvement in governance decisions, which can be valuable during early-stage growth.

Why Investors Choose SPVs

SPVs can offer investors a flexible, lower-cost way to access private market deals. With minimums often starting around $5,000, they make startup investing more accessible compared to direct investments, which can require $50,000 or more. Investors also get to choose deals individually, rather than committing capital to a fund manager’s picks.

Additionally, SPVs typically limit personal liability and may offer tax advantages when structured as LLCs, but an investor should contact a qualified tax professional to determine their individual situation. For those who want targeted exposure to specific startups without the high barriers or long commitments of a traditional fund, SPVs could provide an option.

Final Thoughts

SPVs are an important part of the private investment ecosystem, offering flexibility, accessibility, and simplified structures for both investors and startups. While they are not without limitations, SPVs can allow private market investors to participate in startup opportunities that were previously limited to institutional investors or ultra-high-net-worth individuals.

Before investing, it’s essential to review all offering documentation, understand the fee structure, and consult a legal or financial advisor. As always, MicroVentures does not provide legal or tax advice, and individual investors should consider their own circumstances when evaluating investment opportunities.

Want to learn more about investing in private companies? Check out the following blogs to learn more:

• Untapped Potential: Investing in Emerging Sectors
• Common Pitfalls: Mistakes in Venture Capital Investing
• The Pros and Cons of Investing in Private Companies
• Investing in Crowdfunding as an Accredited Investor

Are you looking to invest in startups? Sign up for a MicroVentures account to start investing!

 

[1] https://corporatefinanceinstitute.com/resources/management/special-purpose-vehicle-spv/

[2] https://carta.com/learn/private-funds/structures/spv/

[3] https://carta.com/learn/private-funds/structures/spv/

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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.