Let me introduce you to the process of creating a Special Purpose Vehicle (SPV) that is commonly used in the finance and real estate sectors before SPVs became widely used as we know it today. SPVs are useful in different aspects of your business path, and our article will provide you with a more in-depth overview of what an SPV is, why you should consider using one, and how to start.
Special Purpose Vehicle (SPV)
A special purpose vehicle, also known as a special purpose entity (SPE), is a subsidiary set up by a parent company to protect the company from financial risk. Its legal status as a separate company makes sure its obligations are secure even if the parent company goes bankrupt.
The main reason why companies need a SPV is because;
- An SPV is a separate legal entity with its own balance sheet.
- It could be used to take on a risky project while minimising the financial effects on the parent company and its investors.
- Likewise, the SPV may be a joint venture for the debt securitisation.
Hence, a special purpose vehicle is sometimes called a bankruptcy-remote entity.
Features of a Special Purposes Vehicle (SPV)
- Risk Sharing – By creating an SPV the company will legally separate the project’s risk and share them with other investors.
- Securitisation – Loans Scrutinisation is a common reason to create an SPV
- Asset transfer – Certain assets can be difficult to transfer. As a result, a company can develop an SPV to hold these assets. They can easily sell the SPV as part of a merger and acquisition (M&A) process as they wish to move the assets.
- Property Sale – A company may create an SPV that will own the properties for sale. If the taxes on property sales are higher than the capital gain realised from the sale.
Instead of paying property income tax, it should sell the SPV instead of the assets and tax paid from the capital gain from the sale.
Things to consider when using a Special Purpose Vehicle
Every business has risk involved. Likewise, for SPVs, the financial details and status of the SPV might not be included in the partner company’s balance sheet.
As an entrepreneur, we should be honest in our SPV balance sheet statement. This would give you credibility and gain confidence from the investors which will help you gain other investors in the long run.
When you plan to close the SPV, the parent company will have to recover the assets, which will save you a lot of money. Resulting in the balance sheet of the parent firm which will be affected.
Important factors investors should look out for when investing in a Special Purpose Vehicle
Investors should pay attention to one important risk factor you may not be getting the overview of the company’s financial status. Investors with less experience is more prone to having the possibility of investing in the wrong company or SPV which will result in huge losses.
When will SPV be a good suggestion for new Business Entrepreneurs?
In recent years, establishing an SPV to assist with company funding has become increasingly popular among start-ups. Using an SPV will assist the parent company in attracting investors who can contribute capital and obtain equity in the start-ups. This means that the SPV is used as a tool for investors to pool their funds and invest. The proceeds are either invested in the parent corporation or used for other purposes.
Any stakeholders or sponsors who do not want to take on a lot of risk may choose to finance the SPV rather than the parent company because the amount required is lesser.
If you are just starting out in your business and need an easier and more simple and safe way to raise capital funding, you may consider using an SPV to aid in attracting more risk-averse investors.
What you need to create an SPV?
- Decide if an SPV is a suitable business structure that you would like to venture
Ensure that your business structure is suitable to form an SPV. We can look out for some points such as:
- You are a start-up business and need funding.
- Your investors are more likely to pool money and receive equity in a less risky manner.
- You want to use your SPV as an investment entity.
- You want to reduce financial risk for your parent company.
- You do not want to deal with numerous investors from your parent company.
- You want to protect your intellectual property rights.
- You wish to hold real estate property as assets under the SPV to save on taxes
- Establishment of your SPV
SPV is a Private Limited Company that is structured to follow the practices and limitations following a Normal Private Limited Company. We can help you register a company in Singapore by guiding you on the incorporation steps if you are unsure.
- Create a Company Constitution
The company constitution is a document that describes the company’s regulations, purpose, business structure, functions, and specifications, and also how their parent company is registered.
In conclusion, Special Purpose Cars have both advantages and disadvantages. If you’re a business owner, you can think more about the risks before creating an SPV for your parent company. If you would like to know more about setting up an SPV for your business, do reach out to us and we will be glad to guide you along your entrepreneurial journey.