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What is a Special Purpose Vehicle (SPV)?
A special purpose vehicle (SPV) is not an automobile, but rather “vehicle” refers to the objective of an SPV company. A special purpose vehicle (SPV) is also called a special purpose entity (SPE), or a bankruptcy-remote entity, and is essentially a mode of transport for company operations like day-to-day business operations, asset sales, investments, and more.
An SPV has a separate legal identity from its parent company, which gives the SPV its own legal status. As such, the SPV's assets are maintained separate from the parent company's assets. Most SPVs are created by limited liability companies, or a private limited company, and are often created by financial institutions to legally isolate it from the parent company's operations.
What is an SPV Company For?
The main objective for setting up an SPV is to protect the company from any financial risk brought by the parent company. An SPV is a separate legal entity created to isolate financial risk. For instance, if the parent company declares bankruptcy, the SPV may carry on business operations as normal as a separate legal entity.
For the most part, SPVs help companies conduct high-risk financial transactions, speculative and highly-leveraged investments, and other business activities while minimising risks. However, some companies have used special purpose vehicles to hide losses and corporate fraud, as with the case of the Enron Scandal in 2001.
Why Do Companies Set Up SPV Companies?
Limited Financial Risks
The main purpose of SPV companies is to reduce financial risk, which is a major advantage for the SPV. This is often done in cases of high-risk investments or business decisions, as well as financial transactions. An SPV is protected from the debts of the parent company, and is used to reduce negative financial impact through risk sharing.
Debt Securitization
Companies may opt to consolidate future accounts receivable from various sources into one group to sell to investors or other companies. This can be done through an SPV, in which the parent company delegates its future cash in-flows, and sells to interested parties.
Banks and financial institutions may create SPV companies for debt securitization of mortgage-backed securities and loans, which the buyer may then convert the loans into marketable security.
Property Sale
Companies may also create SPVs for the purpose of minimising the property sales tax of a sold property. If the property sales tax is higher than the capital gain of the sale, then a company may opt to set up a special purpose vehicle, or SPV, to register the properties under the SPV company.
The parent company may then sell the SPV as a whole, including its properties, and pay taxes on the capital gain from selling the SPV instead of paying for property sale taxes. Besides properties, creating SPVs can also be done to sell other assets without having to pay tax higher than capital gain.
Investment Pooling
Besides acting as a subsidiary company for the parent company, SPV companies are popular among the investment fund industry, as groups of venture capitalists tend to put up SPV companies to pool in capital together to invest in an idea, company, or startup ventures.
Asset Transfer
Some companies may consider transferring their assets to the SPV for the sole objective to sell the SPV and its assets as a whole. Not only does this optimise the taxes that need to be paid, but this also makes asset transfer simpler and easier.
Companies May Hide Losses
In Singapore, private limited companies, limited partnerships, and other companies looking to create special purpose vehicles must indicate the assets and liabilities of the latter on the financial statements of the parent company, particularly when the parent company is listed on SGX.
This is done to prevent companies hiding toxic assets, debt burden, and losses, and avoid scandals that happen with SPVs in other companies, such as with the Enron Scandal. Enron used SPVs to deceive investors into believing the company was profiting, hiding their debt and specific assets in SPVs. The scandal later led to the downfall of the Wall Street giant.
How to Set Up an SPV in Singapore
Step 1: Create the Business Structure
There are no special requirements to incorporate an SPV in Singapore, but you will need to assess your business structure first to understand if and how creating SPVs will help your business. In Singapore, only private limited companies, limited liability companies, and corporations may create SPVs.
Consider the business structure of the SPV: will the SPV act as a subsidiary for the parent company, or will it become a holding company for various businesses? Once you've narrowed down the objective and structure of the SPV, you can proceed with incorporation.
Step 2: Incorporate the SPV
In Singapore, an SPV acts like a private limited company, where the liability of each shareholder is limited by the amount they invested in the company. The SPV also follows the requirements of incorporating a private limited company, such as its number of shareholders (between 1 to 50 shareholders), resident director/s, corporate secretary, and the like.
Tip: Check out our article on incorporating private limited companies for more details.
Step 3: Create the Company Constitution
The Accounting and Corporate Regulatory Authority (ACRA) of Singapore requires SPVs to create their own company constitution, which indicates the objective, nature of business, and operations of the SPV. If the SPV was created for a limited time, such as with certain projects or transactions, then the document must also include the time frame in which the SPV operates.
Step 4: Wait for Incorporation
If all requirements and documents are submitted correctly, then you will simply need to wait for ACRA to approve of your application. This may take anywhere from 1-5 days, which will give ACRA time to evaluate your application, and have related organisations review your documents. Once approved, the SPV may operate as per its objective.
Expand Your Business
When utilised properly, SPVs can help companies make risky decisions while limiting potential liabilities. However, SPVs may also be used for fraudulent cases and scandals, in which the reputation of the parent company may be tarnished.
Don't make a mistake when expanding your business, and choose to incorporate your company with WealthBridge - we'll help you create your SPV properly, and securely! Expand your business the right way, and make incorporation simple with our corporate services.
Checking if special purpose vehicles are right for your company? Send us a message at WealthBridge, and we can discuss pros and cons with you!