A Guide to Setting Up a Special Purpose Vehicle Entity
You are probably not familiar with creating a Special Purpose Vehicle (SPV) for your company structure if you have not been into the finance or real estate sectors before where SPVs are typically used.
Well, there are some ways having an SPV will help in your business journey and this article should give you more information on what an SPV is, if you should consider using it, and how to start one.
What is a Special Purpose Vehicle?
Simply put, having a Special Purpose Vehicle allows your company to go into higher-risk projects such as investments, certain business transactions, separate projects, mergers, acquisitions and more.
An SPV is a separate legal entity created by your parent company and is usually in the form of a private limited company in Singapore. It has its own assets, liabilities and balance sheets that are not linked to the parent company. When you create an SPV, it works as any normal company would.
Vincent is a new business owner with a startup company - Vincent Consultants. He decides to use an SPV for his investments and to attract new investors. It was all going well for the past few years. However, in the past year, Vincent realises that his company business is going downhill and he may need to close down. In Vincent’s case, even if Vincent Consultants goes bankrupt, the SPV, although affected, can still carry on running and will still be under Vincent’s name.
Protection against bankruptcy is one of the main advantages of using an SPV in Singapore for foreign companies as well. An SPV is set up in Singapore, so as to ensure that the business in Singapore can continue even if the parent overseas company faces any problems.
When is an SPV a good idea for new business entrepreneurs?
Tips for pitching to investors.
As you prepare for your pitch, figure out which investors to contact and what points to cover. Understand what phase of development your startup is currently in.
In the last few years, it has been getting really popular for startups to create an SPV to help with company financing. Using an SPV can help the parent company attract investors to invest funds and receive equity when investing in the startup. What this means is that the SPV is used as an investment vehicle where investors pool their money. That sum of money is then used to invest in the parent company or in other ways.
Some investors or sponsors who do not want to take on a lot of risks can have the other option to fund the SPV instead of the parent company, as the amount needed will be lower compared to funding the parent company.
If you are just starting out in your company formation and need an easier and more secure way to gain funding, you may consider using an SPV to attract more risk-averse investors.
What should startups look out for when using a Special Purpose Vehicle?
Like all businesses, there are risks involved. This is also true for SPVs, as the financial details and condition of the SPV may not be included in the parent company’s balance sheet.
If you are an entrepreneur, be honest in your balance sheet statements for your SPV. This would help you gain trust from investors, and in the long run, attain more funding for your startup.
If you choose to close your SPV, the parent company will have to take back the assets, which will involve substantial costs for you. The parent company’s balance sheet will also be affected.
Things investors should look out for when investing in a Special Purpose Vehicle
For investors, one important risk factor to keep in mind is that you may not be getting the entire view of the company’s financial situation. Less seasoned investors are more likely to fall into the trap of investing in the wrong company or SPV, resulting in huge cash loss.
One significant example of the misuse of an SPV is Enron Corporation, in 2001.
- Enron Corporation was an up and rising energy company;
- Its stock price was rising too fast;
- Enron then transferred the majority of its parent company’s stock into an SPV;
- The SPV was used to hedge assets that were on the parent company’s balance sheet;
- The stock price of the parent company dropped;
- So did the value of the SPV;
- Enron owed huge sums of money to creditors and investors;
- This resulted in the bankruptcy of the company.
What you need to create an SPV
1. Decide if an SPV is right for your business structure
Firstly, you should ensure that your business structure is right to form an SPV. Some points to look out for include:
- You are a startup 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.
2. Incorporation of your SPV
Usually in Singapore, an SPV is structured as a Private Limited Company. This means that it should follow the usual practices and limitations as a normal PTE LTD Company. If you’re unsure on incorporation steps, we can help you with registering a company in Singapore.
3. Create a company constitution
The company constitution is a document stating the company’s regulations, purpose, business structure, functions and specifics. Just like how you would register your parent company, all information about the structure of your SPV should be listed clearly.
Conclusion
Although creating a Special Purpose Vehicle has its benefits, especially for new startups companies, it does have its limitations as well. If you, as an entrepreneur, are just starting out and are still unclear on the implied risk, it will do you good to study more on the risks involved before diving into creating an SPV for your parent company.
However, if you are looking to first register a new company in Singapore, feel free to drop us a question! We help with company incorporation for foreign investors and the local ones and are also able to help with accounting matters!
