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Who can invest into SPVs?

SPVs are designed for accredited investors. In order to be considered an accredited investor as an individual, the SEC requires you to have:

  • Individual net worth (or joint net worth with your spouse), excluding your primary residence, greater than $1,000,000
    or
  • Annual income greater than $200,000, or combined income with your spouse greater than $300,000, in each of the two most recent years, and a reasonable expectation of seeing at least the same level of income in the current year

Accreditation requirements are intended to ensure that investments involving higher amounts of capital or risk are accessible only to investors who understand and can “afford” the capital and the risks involved.

Accredited investors do not have to be individuals. Other ways in which the investing entity can qualify as an accredited investor include if the investor is a trust, employee benefit plan, or corporation with assets over $5,000,000; if the investor is a bank, insurance, or investment company; or if all equity owners of the investing entity are themselves accredited. 

Another qualification the SEC uses for some fund structures is that of qualified purchaser. An individual investor has a much higher bar to clear to be considered a qualified purchaser, and must have over $5,000,000 in investments.

Part of forming your fund involves deciding whether to structure it as a 3C1 fund or a 3C7 fund. Most funds are 3C1 funds, where every LP is an accredited investor.

The 3C1 exemption requires that all investors in the fund be accredited, and that the total number of investors does not exceed 100. This structure is a good fit for general partners looking to form SPVs with a lower number of individual investors.

The 3C7 exemption is less limited than 3C1, and allows for up to 2,000 investors, but those investors must be considered qualified purchasers (to be considered a qualified purchaser, the investor must have more than $5,000,000 in investments). The 3C7 structure is a good fit for general partners looking to form SPVs with over 100 high-net-worth individuals.

Common Economics

How do people who utilize SPVs make money? As we have now established that SPVs are essentially more specific VC funds, you can probably intuit that SPVs make money utilizing the same process that VC funds do. Most SPVs charge a management fee and carried interest structure, alongside an expense reserve. The management fee and carried interest charged vary based on the strategy and circumstance of the GP. That being said, it is typical to see a fee range between 3-10% and carried interest remaining most frequently at 20%. The expense reserve is a flat amount reserved for legal, accounting, or other administrative fees associated with the vehicle and is typically around $50k, depending on the size and anticipated needs of the fund. 

Want to learn about how you can get started with your first SPV? Read on in How to get started with SPVs.