Simplifying Your SPV: Avoiding Common Mistakes and Headaches

This VC Lab guest article was contributed by our partners at Assure. For more, get Assure's full guide on the Anatomy of an SPV here.

This post examines the simplest way to manage the Legal, Accounting, Tax, Compliance, and Administration requirements of an SPV, to avoid some common mistakes and unnecessary complexities we've seen in more than 6,400 deals that result in headaches later on.

LEGAL

Simplify Legal Tasks and Issues Within SPVs

Legal is a core area where simplicity or complexity can be introduced or avoided. We will focus on the legal documents and structuring required for a fundraising vehicle that historically were completed by or advised on by a lawyer or law firm.

Legal issues are sometimes intimidating to a lot of people, but are actually pretty straightforward when it comes to keeping your SPV simple. Essentially, it comes down to documents and structure — if you choose each of those things correctly, then your SPV will be simple and avoid common headaches that come with extraneous complexity. 

SPV Documents

VC fund documents are designed to be complex. They're designed to be tailored to the very specific situations,  specific assets, and specific investors of a VC fund.  SPVs, on the other hand — particularly single-asset SPVs — are designed for simplicity. You can use basic SPV documents, which are “set it and forget it” and can be drafted once for all of your SPVs, with just a few minor changes.

The key characteristics of simplified SPV documents provide a structure that is flexible, easy to scale, and cost-effective:

• Manager managed
• Investment decisions are made by the Organizer/Advisor
• The Organizer/Advisor receives carried interest
• No management fee
• Long-term investment with no redemption rights given to investors
• All capital is contributed at closing
• SPV pays for expenses
• No financial statements

Creating SPV or Fund Documents require legal expertise in structuring investment vehicles. Traditionally these docs required you to hire a law firm, but there is a proven and more cost-efficient way to create the documents for your SPV: Use document templates that have been proven and refined in creating thousands of SPVs.

Starting with the right doc templates will save you time and money, but can still be reviewed and modified with your attorney for the specifics of your deal. Here are a couple of examples:

We had a client come to us with 60 pages of fund documents that had been prepared by his attorney (who came highly credentialed) at a cost of $30,000. We told him that while these documents were amazing, they won’t work for your SPV as they are too complex. The client ended up using the Assure Doc Templates in the end and had a very positive experience.

Another client said, “Hey, I went to my attorney and he drafted these SPV docs and I'd like you to use them”. We said, "great, no problem". As we started looking through them, we recognized them right away as there were actually the templates that we have for free on our website. Their attorney had found them, edited them a bit and gave them to his client. 

Going to an attorney is a good thing; however, you should be consulting with an attorney who is well-versed in SPVs. More than 80% of our clients use our templates, which are constantly vetted, updated, and reviewed by hundreds of reputable law firms and attorneys.

SPV Structure

When considering an SPV, our recommendation is to use  a Limited Liability Company (LLC), rather than a Limited Partnership (LP). While similar, the limited partnership introduces complexities. An LP must have a general partner, requiring entity setups, plus management companies and so on, which creates complex entities and relations. On the other hand LLCs are manager managed and introduce simplicity.

You can use either an LLC or LP to accomplish what you need, but many times an LLC is the preferred entity for a Special Purpose Vehicle (SPV). It is important to keep in mind the key differences between an LLC and LP as you make this decision.

Although most venture capital and private equity funds are setup as LPs, most SPVs are setup as LLCs. The SPV makes one investment and is formed solely for that purpose. Although LLCs are common when holding one asset, there is no reason why to use an LP over an LLC to hold multiple investments other than familiarity from investors with LPs. An LLC provides the benefits of limited liability to all members and not just limited partners and is a simpler structure to manage, and is universally accepted in all 50 states.

Legal Bottom Line: Simplify by using our templates and a LLC structure. 

ACCOUNTING

Simplify the Tracking and Reporting of Money

Accounting tasks are geared toward the tracking and reporting of money. If money comes in or goes out, an accounting of that money must happen.

Single-asset SPVs are the simplest in terms of accounting, and are probably the best way to start out if you want to become a syndicate lead. The financials for single-asset SPVs are incredibly simple and accounting occurs when the money moves in or out. The accounting to close a single-asset SPV is usually complete at the time you wire the money to acquire the asset. Once you acquire the asset it goes on the shelf and you don't have any activity to account for until there is a need to move money, ideally in the form of a lucrative exit.

Starting with a simple single-asset SPV structure will save you time and money in accounting. For example: 

We had a client that insisted  and insisted and insisted that they receive quarterly SPV financials, which is normally not a part of our service. When we provided them, they were disappointed. In the second second quarter their financials looked exactly the same as the first quarter, and exactly as they did at the time of the SPV close because nothing happened, and there was nothing to account. The same financials can be provided every quarter, with the fees an accounting firm would charge, but there’s no good reason to do this with a single-asset SPV. 

If there are no financial activities during the lifetime of your SPV, no accounting is needed between close and exit. It is important to remember that adding complexities like multiple closes, raising additional money, or acquiring additional assets will require additional accounting. The goal is to not incur additional fees, time, and risk by keeping the activity and subsequent accounting to a minimum.

Accounting Bottom Line: If you have a single-asset SPV and all of your expenses are capitalized at the time of close, you have nothing report year-to-year and financials are not needed. 

TAX

Take the “Taxing” Out of Taxes

Tax is a bit like a mirror. Every decision you make regarding simplicity or complexity is reflected in tax filings. There is a special tax code for partnership returns for an SPV, and although not foolproof, you can make decisions that make taxes more simple.

If there is complexity in even one area of the SPV, it can lead to tax complexities.

• Taxes reflect the SPV Accounting: If you capitalize all of the expenses on close, there is no need for accounting
• Taxes reflect the SPV Activity: Multiple closes cause more activity and result in more complex taxes
• Taxes reflect the Asset type: Interest bearing assets such as real estate, loans, or debt result in complex taxes
• Taxes reflect the Structure: A complex structure to your SPV or Fund, like multiple assets combined with different investors in each close, cause complex taxes
• Don’t add complexity on purpose.

If you have created the SPV correctly, you will receive a tax return the first year; however, you probably won’t receive another one until there’s activity; which is hopefully after a successful exit. 

Many investors think they MUST receive K-1s; however, you only need to file if there's a taxable event. Assure has pioneered the facts and reasons why you don’t need one. Filing or not filing a zero K-1 is busywork that will not affect your taxes. We have vetted this process and established that until there's some activity, such as an exit, you do not need to receive or file a return.

EXAMPLE:  We had some difficult conversations when some investors called and they wanted to see a stock certificate from the portfolio company with their name on the stocks to verify they personally own the shares — which is not really how SPVs work. In actuality, there was an added layer of complexity because they had invested into an LLC with another fund that actually held the shares in the name of that one. So, they were actually two steps removed from being on the cap table of this portfolio company. They were told by the syndicate lead that they were getting this many shares in the company and they wanted proof. 

Our most successful clients keep tight reins on the legal documents and structure of their SPV, because they understand the headaches that come during tax season when there is complexity in the SPV.

Tax Bottom Line: Complex SPV structure and activity results in complex tax filings.

COMPLIANCE

Simplify the Fees and Paperwork 

Compliance tasks include reporting to government agencies that charge fees and require paperwork in the form of filings as well as investor accreditation.

Regulatory filings with the government

Filings for an SPV are fairly simple and include a Form D with the SEC plus any state filings, commonly called Blue Sky fees. Whether simple or complex, SPVs require these filings with associated fees. The filings are done within 10-14 days of asset acquisition and then don’t need to be done again for a simple SPV. Some complexity can arise with the number of state filings required due the number of investors you have in different states. Some states have larger Blue Sky fees, which are an additional and sometimes unexpected cost to the SPV and its investors, which is why Assure is working to eliminate Blue Sky fees in as many states as possible.

Every time you add complexities like raising additional money, acquiring additional assets, or similar activities, you have to go in and amend the filings to ensure they are up-to-date. To keep your compliance simple, the goal is to not incur additional fees, time, and risk that comes with updating your regulatory filings.

Accreditation

All investors in an SPV must be accredited, and there are two ways to do this: 506(b) or 506(c). 

506(b) is the simplest way and relies on self-certification by each individual investor, and the organizer/issuer must be able to prove an existing relationship with an investor before the deal is presented to them.

506(c) adds additional complexity and a more stringent verification process, which requires proof of income and assets. Assure provides 506(c) service, but it can interrupt the flow and becomes another place where investors can get hung up. The most difficult thing is to get the investors to actually write you a check, so additional complexity becomes an inconvenience for the investor and can delay that check. 

Every time you add investors or have a close, accreditation is required. Keep your SPV-compliance requirements simple with a single-asset, single-close structure and use 506(b) for a simpler investor experience.

Compliance Bottom Line: Keep it simple with a single-asset, single-close structure for filings and 506(b) accreditation. 

ADMINISTRATION

Between Close and Exit, the Goal is Low Administration

Like tax, administration is another direct reflection on the complexity or simplicity of your structured vehicle. Complexity requires administration assistance to manage over the lifetime of the investment and the goal for a simple SPV should be low oversight by the organizer.

It is normal for your SPV to be "quiet" and no events are a good thing

Our clients sometimes go through FOMO — fear of missing out — when they are not experiencing a flurry of activity. However, it is actually a really good thing that the client isn’t experiencing membership transfers, don’t have redemptions, don’t have additional asset purchases, and so on. Basically, you want to avoid all those activities until the investment is writing you a check because those activities add more administrative tasks that require additional time and money.

We encourage people to understand that simple is better, as it's easier on your investor, it's easier on you as the organizer, and it allows you to take advantage of more opportunities in other deals, and that's really what this business is about. 

Administration Bottom Line: Keep the structure simple and don't encourage investor activity for little to no ongoing administration cost.

Thanks for reading. For additional perspective on the topic, watch the recording of the Masterclass by Assure Co-founder and CEO Jeremy Neilson here.

If you have a specific investment in mind and would like to create an SPV, fill out the Tell Us About Your SPV form for an Assure representative to contact you.