Given the continued and growing interest in special purpose vehicles (“SPVs”) as a means of accessing private market investments, we are publishing a series of posts that examine different aspects of these structures. This post is the first in that series and focuses on how a single-investment SPV is structured.
An SPV allows investors to gain economic exposure to private, pre-IPO companies through indirect ownership. Consider a hypothetical company, TechCo. Twenty years ago, a company with TechCo’s profile would likely already be public. It has substantial revenue, millions of daily active users, global brand recognition and a valuation exceeding $1 billion. Today, companies like TechCo often remain private for longer periods with ownership concentrated among founders, employees, venture capital firms, private equity sponsors and other institutional investors. Although there is no public market for TechCo’s securities, interests may trade on a limited basis in private secondary transactions. However, investors without access to those markets still seek investment exposure. A single-asset vehicle SPV provides such an investment opportunity.
At its most basic, a sponsor forms an entity that acquires shares of TechCo or creates synthetic exposure to its performance and then offers interests in that entity to investors. The vehicle does not pursue other investments. Investors do not directly own TechCo stock but they participate in the economic results of an investment. From a structuring perspective, key considerations include how control, economics and legal risk are allocated.
Choosing the Right Business Structure
The SPV is almost always organized as a Delaware limited liability company or limited partnership. That choice reflects flexibility but is also a consequence of established market practice and investor expectations. Limited partnerships remain the dominant structure for sponsor-led vehicles because institutional investors are accustomed to the general partner and limited partner model and its allocation of authority and liability. LLCs are often used for smaller or more bespoke SPVs, particularly if the investor base includes individuals or non-institutional participants, because they allow greater customization of governance and economic rights without relying on partnership constructs. The choice between the two can also affect tax characterization, internal governance mechanics and fiduciary duties.
The selection of Delaware as the jurisdiction of formation is similarly deliberate. Delaware offers a well-developed and predictable body of law governing alternative entities, including broad statutory freedom to modify fiduciary duties and define contractual standards of conduct. While other jurisdictions may offer advantages in specific circumstances, Delaware remains the default because it reduces uncertainty and execution risk.
The Why and How of Sponsor Control
Control of the SPV remains with the sponsor, which typically retains sole authority over key decisions and governance. In a limited partnership, the sponsor acts as general partner. In an LLC, it serves as managing member or manager. This concentration of control is functional. The SPV must be able to act quickly in response to developments at the portfolio company level including secondary sale opportunities, tender offers, recapitalizations and corporate actions. Increased investor control would make that difficult. Centralized authority also aligns the SPV with the expectations of the underlying issuer. Private companies like TechCo often impose transfer restrictions, consent rights and confidentiality obligations that require a single decision-maker at the vehicle level. From the underlying issuer’s perspective, the SPV must behave like a single stockholder. This is also important for the Section 12(g) Exchange Act threshold. Investor governance rights are typically limited and, where they exist, are framed as consent rights over a narrow set of major decisions.
That allocation of control is reinforced in the governing documents. SPV agreements generally address fiduciary duties expressly and often modify or eliminate them to the extent permitted by Delaware law. Investors receive negotiated economic exposure but have limited ability to challenge how the sponsor exercises its discretion except as specifically provided in the agreement. Remedies for breach are limited. Rather than relying on default fiduciary standards, SPV documents typically substitute contractual standards such as bad faith, gross negligence or willful misconduct. Many agreements include exculpation provisions and indemnification rights in favor of the sponsor. Investor remedies are often limited to equitable relief or damages subject to contractual caps and limitations. In practice, this means that absent clear contractual violations or egregious conduct, investors have limited recourse.
Use of Master-Feeder Structures in Single-Stock SPVs
The structure becomes more complex if feeder vehicles are used. Sponsors may aggregate investors through one or more feeders to accommodate different investor types, jurisdictions or tax profiles. Feeders can also simplify cap table management by consolidating multiple investors into a single equity holder at the SPV level. However, their use complicates the regulatory analysis, particularly with respect to how investors are counted and when look-through treatment applies.
Qualifying the SPV for a 1940 Act Exemption
Many SPVs rely on the exemption from registration under Section 3(c)(1) of the 1940 Act. That exemption limits the number of beneficial owners to 100 but the counting exercise is not straightforward. Sponsors must consider when to look through entities, how to treat investors that rely on similar exemptions and whether affiliated vehicles should be integrated. An alternative is Section 3(c)(7), which permits an unlimited number of investors but restricts participation to qualified purchasers, a threshold that requires at least $5 million in investments for individuals and $25 million for institutions. Sponsors choose between these exemptions based on their target investor base and capital raising strategy. A 3(c)(1) structure is often used for smaller, more tightly controlled SPVs while 3(c)(7) structures are used where a broader but more sophisticated investor base is desired.
Tax Reporting
The SPV is typically a pass-through entity for tax purposes with the sponsor responsible for tax reporting. While this allows investors to approximate the tax consequences of direct ownership, additional structuring is often required. Non-U.S. investors are frequently invested indirectly through blocker entities to address issues such as passive foreign investment company rules and other tax considerations.
SPV Liquidity Concerns: Transfer Restrictions and Valuation
Transferability is often intentionally limited. Unlike public equities, interests in an SPV are not freely tradable. Transfers are typically restricted to affiliates or subject to sponsor consent and applicable legal and contractual constraints. Governing documents frequently include drag-along and tag-along provisions to align investor outcomes in connection with a sale of the underlying asset. Liquidity is therefore event-driven and controlled at the vehicle level.
Because there is no public market for the underlying asset, the sponsor is responsible for determining and reporting the SPV’s value. The valuation methodology, frequency of reporting and degree of discretion afforded to the sponsor are set out in the governing documents. These choices directly affect investor reporting and fee calculations.
How SPV Sponsors Make Money
Sponsors frequently manage multiple vehicles and may co-invest alongside the SPV or allocate opportunities across funds and accounts. These practices introduce potential conflicts, particularly with respect to allocation and timing. While disclosure is the primary mechanism for addressing these issues, many sponsors also adopt internal allocation policies or other procedural safeguards.