Attorney, Family Office

SPV (Special Purpose Vehicle) is a company, trust, or partnership established to achieve a specific objective. An SPV operates independently: its assets and liabilities are separate from those of the parent company.

Purposes of Establishment:

Asset securitization. For example, mortgage loans.
Financing specific projects. For large-scale projects (e.g., airport construction), an SPV accumulates investments, and repayment is ensured by the project’s future revenues.
Tax optimization. In certain jurisdictions, SPVs allow for a lawful reduction of the tax burden, such as through preferential tax regimes.
Risk isolation. All debts and liabilities of the SPV are limited solely to its operations and assets.
Circumventing regulatory restrictions. Companies use SPVs to comply with capital requirements or to move liabilities off-balance sheet.

Structure

Two types of participants are typically involved in the structure of an SPV — the General Partner and the Limited Partner.

General Partner (GP) — the director who manages the SPV and makes decisions regarding its operations. The GP bears full legal liability for the company’s obligations, including risks and losses, which may result in the use of personal assets to cover SPV debts.
Limited Partner (LP) — a shareholder who invests in the SPV but does not manage it. The LP’s risk is limited to the capital invested and does not include personal liability for the SPV’s obligations. Typically such shareholders are passive investors receiving a share of profits without risking personal assets.

The structure of an SPV also depends on certain criteria:

Ownership. May be controlled by a single company or a consortium of investors.
Management. Has a simple structure — without employees or an office, focused exclusively on fulfilling the designated purpose.
Financing. Raised through loans, bond issuance, or equity participation.

Investment

Depending on the amount of capital raised, an SPV may accept investments from:

up to 250 shareholders — for SPVs raising less than US$10 million
up to 100 shareholders — for SPVs raising more than US$10 million

Once an SPV completes its fundraising, it makes a single investment by transferring the capital to the target company ⇒ the SPV becomes the investor in the company and the shareholder is the investor in the SPV.

Income Distribution

SPV income is distributed to shareholders in proportion to their ownership percentage in the SPV.

For example, a shareholder invests US$10,000 in an SPV. The SPV receives US$10 million in returns. The shareholder receives 10% — i.e., US$1 million.

SPV vs. Fund

	SPV	Fund
Purpose of establishment	For a specific objective or project.	For long-term investment and asset management.
Legal structure	May be a joint-stock company, LLC, or partnership.	Typically a legal entity managing assets on behalf of investors (e.g., investment fund, trust).
Liability	Limited liability for shareholders.	Limited liability for fund participants depending on fund type (e.g., LPs in a venture fund).
Management	One or several directors.	A management company or trustees.
Source of capital	Usually raised from one or several LPs for a specific deal.	Capital raised from multiple LPs.
Risk	Limited to the specific project.	Spread across different assets and deals.
Lifespan	Until completion of the project/deal.	Years or decades (e.g., until fund goals are achieved).
Taxation	May be optimized depending on jurisdiction.	Typically subject to taxation based on fund type and jurisdiction.
Transparency and reporting	Fewer public reporting requirements; sometimes limited transparency.	Strict reporting and disclosure obligations to investors and regulators.
Capital contributions	One-time contribution to finance a deal/project.	May be one-time or recurring. Depends on the fund type.

Advantages

For Shareholders

Accessibility. SPVs allow to pool capital, enabling a shareholder to begin investing with as little as US$1,000. Direct investments usually require larger amounts.
Autonomous decision-making. Shareholders can independently choose projects for investment.
Limited liability. SPV losses do not extend to the shareholder.
Confidentiality. In some cases, shareholder identities may remain confidential.

For the Director

Opportunity for follow-on investments. A director may use the SPV for additional investments when the main fund lacks capital. This increases exposure to promising companies.
Proposal vehicle. For new directors, creating an SPV is a way to build an investment track record. An SPV allows them to present a concrete investment opportunity rather than an abstract thesis.
Administration. An SPV enables capital raising from a group of shareholders, recorded as a single entry in the target company’s shareholder register. In private companies with a shareholder cap (e.g., 50 in Hong Kong), this facilitates grouping investors in one entity, simplifying record keeping and protecting sensitive information.
Speed. SPV incorporation can take from one minute to a few days, unlike funds which may require up to a month to register ⇒ SPVs are a fast mechanism for pooling capital for a specific investment.
Credit enhancement. An SPV may raise debt secured by specific assets.
Flexibility. Allows tailoring of legal structure to suit the project’s needs.

Disadvantages

Lack of diversification. SPVs invest in a single company. If it underperforms, shareholders lose their investment.
No voting rights. Shareholders do not receive voting rights or access to information and must trust the director to act in their best interests.
Preferential access. Some deals are accessible only to vetted shareholders.
Abuse and reputational risks. SPVs may be used to conceal liabilities, as in the case of Enron (2001).

Legal Regulation

SPV regulation depends on the jurisdiction of registration and the specific objectives pursued. Regulatory aspects may include:

Transparency requirements. Certain jurisdictions require disclosure of beneficial ownership and activities (Cyprus, UK, Germany, USA, Denmark, Malta, EU, etc.).
Capital standards. In the financial and especially banking sector, institutions must account for SPV risk in their capital calculations. For example, under Basel III.
Restrictions on offshore use. Many countries (e.g., EU) seek to curb the use of SPVs for tax avoidance purposes.

Conclusion

An SPV is a separate legal entity established for a specific purpose, such as risk isolation or project financing. It helps minimize liabilities, simplifies deal structures, and protects shareholders from financial exposure. Despite advantages such as flexibility and asset protection, SPVs require careful jurisdictional selection and compliance with applicable regulations.

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