What Is a Special Purpose Vehicle (SPV)?

A Special Purpose Vehicle (SPV) is a legal entity created for a specific

purpose. In the context of raising capital, a SPV (usually structured as LLC)
can be used as a funding structure, by which all investors (or investors under
a given investment threshold) are pooled together into a single entity.

What Is a Special Purpose Vehicle (SPV)?

A special purpose vehicle, also called a special purpose entity (SPE), is a
subsidiary created by a parent company to isolate financial risk. Its legal status
as a separate company makes its obligations secure even if the parent company
goes bankrupt. For this reason, a special purpose vehicle is sometimes called a
bankruptcy-remote entity.

If accounting loopholes are exploited, these vehicles can become a financially

devastating way to hide company debt, as seen in 2001 in the Enron scandal.

KEY TAKEAWAYS

 An SPV is created as a separate company with its own balance sheet.

 It may be used to undertake a risky venture while reducing any negative
financial impact upon the parent company and its investors.
 Alternately, the SPV may be a holding company for the securitization of
debt.
Special Purpose Entity/Vehicle

Understanding SPVs
A parent company creates an SPV to isolate or securitize assets in a separate
company that is often kept off the balance sheet. It may be created in order to
undertake a risky project while protecting the parent company from the most
severe risks of its failure.

In other cases, the SPV may be created solely to securitize debt so that investors
can be assured of repayment.

In any case, the operations of the SPV are limited to the acquisition and financing
of specific assets, and the separate company structure serves as a method of
isolating the risks of these activities. An SPV may serve as a counterparty for
swaps and other credit-sensitive derivative instruments.
A company may form the SPV as a limited partnership, a trust, a corporation, or
a limited liability corporation, among other options. It may be designed for
independent ownership, management, and funding. In any case, SPVs help
companies securitize assets, create joint ventures, isolate corporate assets, or
perform other financial transactions.

How an SPV Works

The financials of an SPV may not appear on the parent company's balance sheet
as equity or debt. Instead, its assets, liabilities, and equity will be recorded only
on its own balance sheet.

An investor should always check the financials of any SPV before investing in a
company. Remember Enron!

Thus, the SPV may mask crucial information from investors, who are not getting
a full view of a company’s financial situation. Investors need to analyze the
balance sheet of the parent company and the SPV before deciding whether to
invest in a business.

How Enron Used the SPV

The massive financial collapse in 2001 of Enron Corp., a supposedly booming
energy company based in Houston, is a prime example of misuse of an SPV.

Enron's stock was rising rapidly, and the company transferred much of the stock
to a special purpose vehicle, taking cash or a note in return. The special purpose
vehicle then used the stock for hedging assets that were held on the company’s
balance sheet. To reduce risk, Enron guaranteed the special purpose vehicle's
value. When Enron's stock price dropped, the values of the special purpose
vehicles followed, and the guarantees were forced into play.1

Its misuse of SPVs was by no means the only accounting trick perpetrated by
Enron, but it may have been the greatest contributor to its abrupt fall. Enron
could not pay the huge sums it owed creditors and investors, and financial
collapse followed quickly.

Before the end, the company disclosed its financial information on balance
sheets for the company and the special purpose vehicles. Its conflicts of interest
were there for all to see. However, few investors delved deep enough into the
financials to grasp the gravity of the situation.
Frequently Asked Questions
What are special purpose vehicles used for?
A special purpose vehicle (SPV) is a subsidiary company that is formed to
undertake a specific business purpose or activity. SPVs are commonly utilized in
certain structured finance applications, such as asset securitization, joint
ventures, property deals, or to isolate parent company assets, operations, or
risks. While there are many legitimate uses for establishing SPVs, they have also
played a role in several financial and accounting scandals.

Do an SPV's assets and liabilities appear on the parent company's balance

sheet?
No. Special purpose vehicles have their own obligations, assets, and liabilities
outside the parent company. SPVs can, for example, issue bonds to raise
additional capital at more favorable borrowing rates than the parent could. They
also create a benefit by achieving off-balance sheet treatment for tax and
financial reporting purposes for a parent company.

What are the mechanics of an SPV?

The SPV itself acts as an affiliate of a parent corporation, which sells assets off
of its own balance sheet to the SPV. The SPV becomes an indirect source of
financing for the original corporation by attracting independent equity investors to
help purchase debt obligations. This is most useful for large credit risk items,
such as subprime mortgage loans.

Not all SPVs are structured the same way. In the United States, SPVs are
often limited liability corporations (LLCs). Once the LLC purchases the risky
assets from its parent company, it normally groups the assets into tranches and
sells them to meet the specific credit risk preferences of different types of
investors.

Why would a company form an SPV?

There are several reasons why SPVs are created. They provide protection for a
parent company's assets and liabilities, as well as protection against bankruptcy
and insolvency. These entities can also get an easy way to raise capital. SPVs
also have more operational freedom because they aren't burdened with as many
regulations as the parent company.

What is the function of SPVs in public-private partnerships?

Public-private partnerships are collaborations between a government agency and
a privately owned company. Many private partners in public-private partnerships
demand a special purpose vehicle as part of the arrangement. This is especially
true for capital-intensive endeavors, such as an infrastructure project. The private
company might not want to take on too much financial exposure, so an SPV is
created to absorb some of the risks.

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Special Purpose Vehicle

A legal entity created for a limited purpose. SPVs are used for a number of
purposes including the acquisition and/or financing of a project, or the set up
of a securitisation or a structured investment vehicle. They are usually used
because they are free from any pre-existing obligations and debts, and are
separate to the parties that set them up for accountancy, tax and insolvency
purposes.

What is an SPV?
An SPV—also called a special purpose entity (SPE)—is an investment structure that is technically a
subsidiary of the company that created it. That means it is reported on a separate balance sheet, has a
scope that is just a subset of the parent company’s activities and is financially independent of the
parent company and from other SPVs under the parent’s umbrella. Essentially, each investment
structured as an SPV is its own limited liability corporation (LLC).

In the case of Yieldstreet investments, Yieldstreet is the parent company. We set up a new subsidiary
—a new SPV—each time we add a portfolio to our marketplace. Investors who choose that portfolio
are pooled into the SPV. Yieldstreet acts as the managing member of each SPV, which in the
simplest terms means we service and distribute the funds and inform investors of any important
administrative matters. If any complications arise in the portfolio, Yieldstreet, as managing member,
will handle them. Usually, though, the SPV operates in “auto mode” and, once formed, simply
runs as initially outlined.

SPVs are able to operate in “auto mode” in line with investors’ expectations because each SPV is
formed with a clear and limited scope. Additionally, investments in Yieldstreet’s SPVs are never
recycled—which means that in addition to having a limited scope, they have a strictly limited
timeline. As soon as enough litigation within a portfolio settles to pay out all principal and interest
owed to investors or all real estate principal within a portfolio is paid down, the associated SPV
closes. We refer to this as self-amortization: each time there is a principal pay-down, the SPV
“amortizes” and gradually fades away until it naturally closes and investors’ initial capital and
returns are released back to them.

How tried and tested are SPVs?

SPVs are far from new. In fact, many types of companies have used SPVs extensively for three
decades. Because SPVs operate independently of their parent companies, they can be effective tools
for managing risk. Financial institutions and private businesses regularly use SPVs to finance and
trade assets ranging from cars to homes to college tuition to industrial equipment. Some
governments have even used SPVs to set up public-private partnerships for crucial but expensive
projects like infrastructure revitalization.

Why does Yieldstreet use SPVs?

Our decision to structure investment offerings this way hinged largely on two key features of SPVs:
clarity and bankruptcy remoteness. What do these benefits mean for you as a current Yieldstreet
investor or someone considering adding Yieldstreet investments to your portfolio?

First, because all capital is funneled directly into a select SPV, as an investor you know exactly
where your money is going. Each SPV is created for the specific and limited purpose of funding the
alternative assets listed in a single portfolio. That opportunity is completely independent of other
portfolios on our marketplace, so you can be sure that your money is financing—and your returns are
dependent upon—only the assets that you personally chose to participate in. Further, you have
certainty about the events that will trigger the release of your capital and returns. Because each SPV
is self-amortizing, money will never be recycled unless you actively choose to keep your money at
work and reinvest your funds into a new portfolio. Instead, as soon as the portfolio’s principal is fully
paid down, the SPV ends and the money therein is released.

Second, and most importantly, each Yieldstreet SPV—is bankruptcy remote from both Yieldstreet
as a whole and from other opportunities that we offer. In other words, the default risk on an SPV
extends only so far as that SPV’s underlying assets; the SPV does not absorb any default risk from
Yieldstreet or from assets grouped into other opportunities. If anything ever happened to Yieldstreet,
Yieldstreet would simply forfeit its role as managing member to another investor in the portfolio, and
the SPV would continue to generate interest and self-amortize as planned.
Limitations of SPV Structure
While the SPV structure is, in many ways, beneficial to Yieldstreet investors, it places certain
limitations on our investment process. For example, because each SPV is its own LLC (Limited
Liability Company), Yieldstreet is currently limited to accept no more than 99 investors in an
investment opportunity, per SEC restrictions. This cap, which is commonly known in the
crowdfunding world as the “99 Investor Problem”, has been in place since the 1940’s. Fortunately,
there is currently legislation being reviewed to raise it to 500 investors.

Next time you consider investing, keep these attributes of SPVs in mind. At Yieldstreet, we believe
that SPVs are a good way to offer innovative, high-quality investments while keeping investor risk
to a minimum.
This communication and the information contained in this article are provided for general informational
purposes only and should neither be construed nor intended to be a recommendation to purchase, sell or
hold any security or otherwise to be investment, tax, financial, accounting, legal, regulatory or compliance
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