Are you looking to take your crowdfunding platform to the next level?
Special purpose vehicles (SPVs) might be exactly what you need.
This highly diverse form of financing provides more flexibility than traditional methods, allowing projects and initiatives to raise funds in new and inventive ways.
As white label crowdfunding platform provider specialists here at Fundraisingscript.com we’ll discuss why introducing special-purpose vehicles into your crowdfunding platform can benefit project sponsors and investors alike.
We’ll talk about how they work, their advantages over other types of financing, whether it’s a good investment opportunity, and crucially, how it can benefit Crowdfunding.
So before we dive into a little more detail, let’s get the takeaway first so you can understand more about this type of investment vehicle.
SPVs shield investors from potential liabilities and losses, simplifying regulatory compliance, optimizing taxation, building trust and credibility, and fostering a culture of collaboration and innovation in crowdfunding campaigns.
Ok, so with the brief answer in place, let’s start by discovering more about this legal entity.
What is a Special Purpose Vehicle?
According to recent figures,
A huge $17.2 billion is generated yearly through crowdfunding in North America, with an impressive increase of 33.7% during the last year.
So it’s not surprising that many investors are looking at the benefits of a Special Purpose Vehicle, but what exactly is it?
A Special Purpose Vehicle (SPV) is a legal entity that is set up to carry out a specific financial purpose.
The SPV is a separate legal entity from the parent company, with its own directors and legal structure.
In crowdfunding, an SPV is formed to protect investors from the risks associated with the underlying investment.
The SPV may be a limited liability company, limited partnership, or trust.
“In crowdfunding, an SPV is formed to protect investors from the risks associated with the underlying investment.”
How does a Special Purpose Vehicle work?
Before investing in an SPV, it’s essential to understand how they work. Let’s break it down.
- An SPV is a type of company that is often formed for a particular project or transaction. This company structure is usually created for tax efficiency and better risk management.
- An SPV can acquire assets, raise capital, and undertake business ventures under the guidance of a management team. For example, an SPV can be created to purchase real estate assets, manage funds, or invest in startups.
- The parent company sets up the SPV, and investors are invited to invest in the SPV rather than the parent company.
- The investors are issued with shares or units in the SPV. The funds raised by the SPV are then invested in the parent company.
- The SPV acts as an intermediary between the parent company and the investors, shielding the investors from any risks associated with the underlying investment.
- Once the SPV is set up, it is managed by a board of directors, who are responsible for making investment decisions on behalf of the investors.
- The parent company appoints the directors, but once appointed, they operate independently. They are also responsible for ensuring that the investment stays within the scope of the SPV’s objectives.
So is it worth using? Read on to discover more.
Is SPV is good investment opportunity?
Firstly, it’s essential to understand that investing in an SPV can be lucrative, but it depends on the investment structure, the target assets, and the investors’ capability to assess risk.
For instance, investing in an SPV with a rigorous business plan and a proven track record can be a profitable investment strategy.
However, it would be prudent to do your due diligence and conduct thorough research before investing in an SPV, although there is no question that it can add a level of diversification to a portfolio.
An SPV can be created to invest in different assets with varying degrees of risk, which can help mitigate risk for investors.
A Special Purpose Vehicle can also provide investors access to deals that would be challenging to acquire individually.
The investment may also have a higher return potential due to economies of scale and the identity of the investors attached to the project.
Another great reason for investing in an SPV is it can be an excellent opportunity for entrepreneurs looking to raise capital.
SPVs give entrepreneurs access to a broad-based investor pool to fund their projects, which can be an excellent alternative to traditional fundraising.
“A Special Purpose Vehicle can also provide investors with access to deals that would be challenging to acquire individually.
What is SPV’s role in crowdfunding platforms?
SPVs are essential to crowdfunding platforms, providing a safe and secure way to invest in businesses.
By creating a separate legal entity to hold and manage funds, investors are protected in case of legal issues, while entrepreneurs benefit from a clearer understanding of their financial position.
Additionally, the improved transparency that SPVs provide gives investors more confidence in their investment decisions.
Overall, SPVs play a critical role in the success of crowdfunding platforms, helping to facilitate the growth of new businesses and providing investors with opportunities to support promising startups.
Why is it important for Crowdfunding?
The primary reason for using an SPV in crowdfunding is to protect investors from the risks associated with the underlying investment as we mentioned above.
When investing in a start-up or an early-stage business, the risks are normally high, and the financial returns are uncertain.
In the event of a business failure, investors’ exposure is limited to the capital they invested in the SPV.
The SPV shields investors from potential liabilities and losses, keeping the parent company intact.
Another benefit of an SPV is that it allows a pool of investors to invest in a single entity rather than each individual investing directly in the parent company.
This creates a more structured and organized investment vehicle, which can attract investors.
Simplifying regulatory compliance
One of the biggest challenges of crowdfunding is regulatory compliance.
Issuers need to meet several regulatory requirements to launch a crowdfunding campaign, including:
- Anti-fraud regulations
However, forming an SPV can simplify this process by consolidating the assets and investors of a crowdfunding campaign into a single entity.
This allows the SPV to register and comply with securities laws on behalf of the investors, reducing the regulatory burden on individual investors.
Another significant advantage of using an SPV for crowdfunding is optimizing taxation.
By structuring investments tax-efficiently, SPVs can help investors enjoy tax benefits, such as capital gains, dividends, and deductions.
This can help reduce the tax liability for investors and crucially, support long-term returns on investment.
SPVs can also help simplify tax reporting and compliance for investors, reducing their administrative burden.
“Another significant advantage of using an SPV for crowdfunding is optimizing taxation.”
Building trust and credibility
Finally, an SPV can help build trust and credibility for your crowdfunding campaign.
Creating a separate legal entity for your venture can demonstrate your commitment to transparency, accountability, and governance, attracting more sophisticated and experienced investors.
An SPV can help you to:
- Maintain investor relations
- Communicate your vision and strategy
- Align the interests of different stakeholders
- Foster a culture of collaboration and innovation.
How can SPV Benefit Crowdfunding? – To End
Crowdfunding is a rapidly growing area of finance that should continue to flourish due to the flexibility of SPV structures.
SPVs facilitate more companies to capitalize quickly without worrying about red tape or safety hazards involved with investing.
You can make the best crowdfunding efforts with the right knowledge and understanding of these deals and how they fit into your business strategies.
Don’t forget to check back to our weekly blogs for more crowdfunding advice that can help guide you in the right direction.