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Special Purpose Vehicles

A Special Purpose Vehicle (“SPV”), also sometimes referred to as a Special Purpose Entity (“SPE”), is an off-balance sheet vehicle (“OBSV”) consisting of a legal entity created by the sponsor or originator to achieve an interim target of the sponsoring company.

Entities can be created to achieve narrow and well-defined objectives (e.g., to carry out leasing, research and development activities, or securitization of financial assets).

SPVs can be used to finance new ventures without increasing the debt burden of the sponsoring company or diluting existing shareholdings. The sponsor (or the entity that created the SPV) may provide a portion of the equity, with outside investors providing the remainder. This allows investors to invest in a particular project or business without investing directly in the parent company. These structures are often used to finance large infrastructure projects.

Sponsors often transfer assets to the SPV, obtain the right to use assets held by the SPV or provide services to the SPV, while other parties (“capital providers”) may provide funds to the SPV. Entities that deal with SPVs (usually creators or sponsors) can significantly control SPVs.

For example, an beneficial interest in an SPV can take the form of a debt instrument, an equity instrument, a participation right, a residual interest or a lease. Some beneficial interests may only entitle the holder to a fixed or stated rate of return, while others entitle the holder to or receive other future economic benefits from SPV activities. In most cases, the creator or sponsor retains a significant beneficial interest in the activities of the SPV, even though it may own little or no equity in the SPV.

SPV structure

An SPV can be structured in different ways, depending on what the originator is trying to achieve with the vehicle and its geographical location.

Such SPVs can take the form of corporations, trusts, partnerships, unincorporated entities, Stitching (i.e. foundations under Dutch law) or multi-user structures (e.g. protected cell companies).

In Canada, SPVs take the form of charitable trusts. In Europe, a typical SPV is a limited purpose company with a charitable trust owner under domestic (i.e. UK) or offshore (i.e. Jersey) law. In the United States, SPVs are usually in the form of LLCs.

SPVs are often created under legal arrangements that impose strict and sometimes permanent restrictions on the decision-making power of their management committees, trustees or management over the operation of the SPV. In general, this condition states that the policy governing the ongoing activity of the SPV cannot be modified except by its creator or sponsor (i.e., it is carried out on so-called “autopilot”).

Key benefits to sponsoring company

Freedom of jurisdiction

From a regulatory perspective, companies that start SPVs are free to incorporate the vehicles in the most attractive jurisdictions while continuing to operate outside those jurisdictions.

Minimal red tape

Depending on the choice of jurisdiction, setting up an SPV is relatively inexpensive and easy. This process can take as little as 24 hours and usually does not require government permission.

Legal protection

By structuring the SPV properly, the sponsor can limit legal liability in the event that the underlying project fails.

Asset ownership

SPVs typically allow multiple parties to have ownership of a single asset and allow easy transfers between parties.

Clarity of documentation

It is easy to restrict certain activities or prohibit unauthorized transactions in the SPV document.

Financial risk isolation

By structuring an SPV as an “orphan company”, the SPV’s assets may not be consolidated with the company’s balance sheet assets and be “bankruptcy remote” in the event of bankruptcy or default.

To set up an SPV, please contact us.

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