Here are some of the pros and cons of investing through a special purpose vehicle…

PROS

  1. First Steps of an Investment Strategy: The initial benefits of using a special purpose vehicle is that an SPV can be a great initial step into a broader investment strategy for LPs (limited partners). The reason for this is that an SPV gives LP investors enough financial leverage to get pro rata rights, which give investors the right to be involved in further rounds of funding so that they can continue to own the same percentage of a company.
  2. Gain Access to Other Deals: Using an SPV allows for investors that want to gain access to specific industries to get their foot in the door and participate in deals that they wouldn’t otherwise be able to negotiate into. In this way, some investors use SPVs to start investing in different sectors of the market to diversify their portfolios for future growth.
  3. Quickly Invest in Growing Companies: Because an SPV is able to buy up more shares in early stage companies at a faster rate than each individual investor would otherwise be able to purchase, it enables LP investors to quickly invest more into companies that are growing quickly. 
  4. Invest with a Smaller Amount: Because an SPV will pool funds from a number of investors, using an SPV allows for investors to commit a smaller amount than if they went directly to the company.  Companies prefer to have the fewest number of investors on their cap table and an SPV allows for the pooling of small investors.

CONS

  1. Lack of Control: One of the advantages of an SPV is pooling funds such that the SPV is a more meaningful investor; however, the members of the SPV don’t have individual rights and are subject to the SPV terms and agreements. Additionally, an SPV might be managed by the third party of an organizer and any individual SPV member may disagree with actions of the administrator or manager but will have few rights to control the group. 
  2. ProRata Rights/Pay to Play: Investing through an SPV may create a more meaning investor for the company and the SPV might receive prorate rights and other major investor rights.  However, many of these rights may require additional investment, in order to maintain privileges, which require the members of the SPV to invest additional funds. If the members fail to invest sufficient additional funds then the SPV may lose its privileges originally gain by investing through the SPV.