How to start an SPV
How to Start an SPV
Starting a Special Purpose Vehicle (SPV) is a powerful way for investors to pool capital for specific ventures, from real estate to venture capital. Whether you're looking to invest in a single asset or a series of opportunities, an SPV can streamline the investment process.
The SPV process can be confusing and opaque and the consequences of getting it wrong may be expensive. In this guide, we’ll walk you through the process of setting up an SPV, highlighting key steps, considerations, and how our platform can help you manage the entire lifecycle of your investment.
SPV Defined
A Special Purpose Vehicle (SPV) is a legal entity created for a specific, limited purpose, typically to pool investments for a particular asset or project. SPVs are commonly used in venture capital, real estate, and private equity to separate the assets, liabilities, and risks associated with a particular investment from the rest of an investor's portfolio.
Step-by-Step Guide to Starting an SPV
- Identify the Purpose of the Investment
When starting an SPV, it’s essential to clearly define its intended purpose. SPVs can be used in various strategic ways, such as building a track record before raising a formal fund, maintaining pro-rata rights, pursuing co-investments, or acquiring secondaries. By aligning the SPV’s goals with your broader investment strategy, you can maximize its impact while demonstrating your ability to execute effectively.
- Clarify Investment Objectives: Are you an emerging manager building a track record? A fund manager leveraging pro-rata rights, protecting against dilution, or warehousing investments for a main fund? Perhaps you’re an angel LP or a startup seeking to streamline the cap table. Your objective will shape how the SPV is structured and presented to investors.
- Ensure Strategic Alignment: Consider how the SPV fits within your broader investment strategy and long-term goals. Does it complement your fund’s overall portfolio, enhance your credibility with LPs, or strengthen relationships with key stakeholders?
- Assess SPV Suitability: With the objectives defined and strategic alignment confirmed, evaluate whether forming an SPV is the most practical approach for achieving your goals. Consider whether it aligns with your current capital needs and constraints, such as limited dry powder, allocation caps, or regulatory requirements. SPVs can be particularly effective for filling in rounds, advocating for companies, managing liability, or capturing time-sensitive opportunities.
- Clarify Investment Objectives: Are you an emerging manager building a track record? A fund manager leveraging pro-rata rights, protecting against dilution, or warehousing investments for a main fund? Perhaps you’re an angel LP or a startup seeking to streamline the cap table. Your objective will shape how the SPV is structured and presented to investors.
- Determine How the SPV Will Be Managed
Once you’ve confirmed that an SPV aligns with your investment strategy, the next step is to plan for its setup and management. This includes considering how you’ll handle both the formation and ongoing administration of the SPV. Working with an experienced third-party provider can simplify the process and potentially minimize costs, but it’s not always an all-or-nothing decision—you may opt to manage some aspects internally while outsourcing others.
- Evaluate Management Options: Assess your internal resources and determine whether to manage the SPV entirely in-house or to engage a third-party provider. Consider the potential benefits of partnering with providers like Flow, which can offer resources, expertise, and operational support that help minimize costs and reduce the workload for internal teams.
- Assess Your Needs: As you vet potential providers, discuss your specific requirements, including legal structuring, compliance, investor onboarding, and administrative services. Understanding your core needs will help you decide whether a provider’s offerings align with your SPV’s goals.
- Confirm Provider Capabilities: If you decide to engage a third-party provider, ensure they offer the services that meet your specific needs—whether that’s legal document templates, compliance support, or investor relations management. Sometimes, a more tailored, cost-effective solution can be preferable to a comprehensive package, depending on the SPV’s scope and budget.
- Evaluate Management Options: Assess your internal resources and determine whether to manage the SPV entirely in-house or to engage a third-party provider. Consider the potential benefits of partnering with providers like Flow, which can offer resources, expertise, and operational support that help minimize costs and reduce the workload for internal teams.
- Establish the SPV’s Legal Foundation
With your management strategy in place, the next step is to build the legal foundation for the SPV. This phase is critical to ensuring compliance, protecting investor rights, and setting clear operational guidelines.
- Select the Entity Type and Jurisdiction: Choose the legal entity type for your SPV, such as an LLC, LP, or trust, based on factors like liability protection, tax implications, and investor needs. Jurisdiction selection should also be aligned with regulatory requirements, tax efficiency, and investor familiarity, such as Delaware for U.S.-based SPVs or the Cayman Islands for offshore setups.
- Prepare Core Legal Documents: Draft essential documents like the Operating Agreement, Private Placement Memorandum (PPM), and Subscription Agreement. These documents will define the SPV’s operating terms, investor rights, and investment strategy. You can use templated documents from providers like Flow to minimize costs, or consult with legal experts if custom documents are necessary.
- Set Up the EIN and Registered Agent: Obtain an Employer Identification Number (EIN) from the IRS, as it is required for banking, tax filings, and potential payroll management. Designate a registered agent in the chosen jurisdiction to handle official correspondence and ensure ongoing compliance with statutory requirements. Note: if you’re working with a provider like Flow, they will likely be able to manage these requirements on your behalf.
- Select the Entity Type and Jurisdiction: Choose the legal entity type for your SPV, such as an LLC, LP, or trust, based on factors like liability protection, tax implications, and investor needs. Jurisdiction selection should also be aligned with regulatory requirements, tax efficiency, and investor familiarity, such as Delaware for U.S.-based SPVs or the Cayman Islands for offshore setups.
- Set Up the SPV’s Financial & Operational Infrastructure
With the legal foundation established, the next step is to build the financial and operational systems necessary for effective SPV management. This involves creating a secure and compliant financial structure, implementing investor onboarding processes, and establishing operational workflows to support smooth SPV administration.
- Establish Banking and Custodial Accounts: Open dedicated bank or custodial accounts for managing investor funds, covering operational expenses, and handling distributions. Ensure that these accounts meet all regulatory requirements and provide full transparency for investors.
- Implement Investor Onboarding Processes: Develop a streamlined onboarding experience for investors, covering compliance requirements like KYC (Know Your Customer) and AML (Anti-Money Laundering) checks. Consider using digital solutions to facilitate information collection, document signing, and capital contribution, as they often provide greater efficiency and ease. An effective onboarding process not only ensures compliance but also creates a positive experience for investors, making it easier for them to engage with the SPV.
- Develop Operational Workflows: Define workflows for ongoing operations, such as investor communication, performance reporting, and compliance tracking. Implement tools and processes that ensure efficient management of the SPV, including document management, financial tracking, and automated alerts for compliance deadlines. Clear workflows help maintain transparency, strengthen investor relations, and ensure that the SPV operates efficiently from the outset.
- Establish Banking and Custodial Accounts: Open dedicated bank or custodial accounts for managing investor funds, covering operational expenses, and handling distributions. Ensure that these accounts meet all regulatory requirements and provide full transparency for investors.
- Step 5: Raise Capital & Onboard Investors
With the SPV fully established and operational systems in place, it’s time to bring in investors and secure funding. This step involves marketing the SPV, inviting investors to subscribe, and managing capital commitments through a compliant onboarding process.
- Market the SPV to Potential Investors: Actively promote the SPV to your target investors, emphasizing the strategy, expected returns, and unique value proposition. Use channels like your network, investor events, and virtual data rooms to securely share key information securely and generate interest.
- Invite Investors to Subscribe: Initiate the subscription process by inviting interested investors to review and sign the necessary documents. This includes providing information for KYC/AML checks, completing a qualified investor questionnaire, and signing key documents such as the Subscription Agreement and, where applicable, the Limited Partnership Agreement (LPA) or Operating Agreement. Flow’s digital onboarding solution streamlines this process, making it easier for investors to complete each step efficiently and accurately.
- Call Capital & Secure Funding: Once investor onboarding is complete, initiate the capital call—typically a one-time process for SPVs. Ensure that all committed funds are received according to the agreed terms and deposited into the SPV’s dedicated bank account set up in Step 4.
- Market the SPV to Potential Investors: Actively promote the SPV to your target investors, emphasizing the strategy, expected returns, and unique value proposition. Use channels like your network, investor events, and virtual data rooms to securely share key information securely and generate interest.
Getting Your SPV Off the Ground
By following the steps outlined above, you can establish a compliant and efficient SPV structure that aligns with your investment strategy and long-term goals.
While the process can be complex, leveraging tools and expertise—like those offered by Flow—can streamline setup, minimize costs, and ensure compliance at each stage. Whether you're an emerging manager building a track record or a seasoned investor seeking new opportunities, an SPV can be a powerful addition to your investment toolkit.
Ready to get started? Schedule a call with a Flow representative today to explore how our solutions can simplify your SPV setup, support investor onboarding, and help you achieve your investment objectives with confidence.