A Special Purpose Vehicle (SPV) or Special Purpose Entity (SPE) is a legal entity created by a firm (sponsor) for a specific and limited purpose: harboring a risk, conducting some transactions, owning assets, minimizing risks, and maximizing profits for the sponsoring company, sometimes taking advantage of differences in the legal, regulatory or accounting environment.
Usually there are no offices, administration, or employees. SPE usually consist of a set of legal documents. They can be financial subsidiaries, a holding company, a limited liability company, a new corporation, a trust, or a partnership. Only the imagination is the limit.
SPE are typically “remote in the event of bankruptcy.” If the sponsoring company is in financial trouble, its creditors cannot divide the assets of the SPE.
Are Special Purpose Vehicles (SPV) Legal?
SPVs are perfectly legal and are used by almost every major (and highly respected) corporation. It is not the SPV itself; It is the way in which it is used that may be illegal.
Special purpose entities are used in financial risk management, as they are excellent ways to segregate specific activities (risks) from a company’s core operations. Isolating high-risk projects from the parent organization and giving new investors the opportunity to take a piece of a very specific risk in a company with a simple and clear balance sheet (since it is created for a single purpose and they exist without obligations debt), SPE can definitely help businesses and investors alike.
According to the European System of Central Banks (ESCB), the SPE can be investment funds, financial vehicle companies, financial companies engaged in the granting of loans, financial holding companies, securities and derivatives dealers and “others”.
SPE can be illegal and can be used for tax evasion, circumvention of regulatory restrictions, money laundering, false declaration of earnings and concealment of problems.
Red flags Is the SPE incorporated in a tax haven? Why? Is the SPE incorporated in a place where there is no sponsoring firm activity? Is the SPE increasing the debt without it being obvious to investors in the sponsoring company?
