Understanding Special Purpose Vehicles (SPVs)

The private market – home to many innovative, potentially high-growth pre-IPO companies – offers exciting opportunities. However, it also can present challenges when it comes to liquidity and accessibility. For early shareholders, like startup employees, selling shares can be complex. For individual investors, gaining access can be difficult and require significant capital.

Enter the Special Purpose Vehicle, or SPV. More than just another financial acronym, SPVs play a crucial role in facilitating investment and liquidity opportunities in private companies. Whether you're an employee with stock options looking for potential liquidity or an investor seeking exposure to pre-IPO companies, understanding SPVs is key to navigating this market.

What is a Special Purpose Vehicle (SPV)?

A Special Purpose Vehicle (SPV) is a legal entity – typically a Limited Liability Company (LLC) or Limited Partnership (LP) – created for a single, specific purpose. Think of it as a temporary "holding company" designed for a particular transaction or investment.

Unlike a traditional venture capital fund that might invest in dozens of companies, an SPV is usually created to hold stock of just one specific company or manage a single asset.

SPVs in Private Markets?

The private market, by nature, is less structured than the public market. Trading of private company shares is not a near-instant process like it is for public companies. As a result, as private companies grow, their capitalization tables (cap tables) can quickly become unruly with thousands of investors each requiring separate legal documentation and ongoing communication. This administrative burden can be significant for a growing company, taking away its ability to focus on its core business.

SPVs help solve this problem by acting as an aggregation tool. Instead of a company having potentially dozens or even hundreds of individual investors on its cap table, the SPV serves as a single cap table entrant. All the individual investors become Limited Partners (LPs) within the SPV, and the SPV itself becomes the shareholder of record on the company's cap table, creating efficiency.

How SPVs Operate in the Private Secondary Market

This aggregation function is particularly vital in the private secondary market, where existing shareholders (like employees, founders, or early investors) sell their shares to new investors.

Here's a simplified look at how an SPV works in a secondary transaction:

1. Shareholder Seeks Liquidity: An existing shareholder of a private company seeks to sell some or all of their vested shares. Many of the shareholders looking to sell on EquityZen’s platform are looking to finance a life need like putting a down payment on a house or paying off student loans.
2. SPV Creation: An SPV is formed specifically to purchase the shares of a given private company from the existing shareholder. This is often done by platforms like EquityZen that specialize in secondary market transactions. EquityZen has facilitated over 45,000 private company investments¹, largely through its SPVs. EquityZen’s Growth Technology Fund SPV sits on the cap table of hundreds of private companies.
3. Investor Pooling: Prospective investors interested in buying shares in that specific company commit capital to the newly formed SPV, which gives them indirect access to the company’s shares. Each investor’s capital commitment and SPV pro rata ownership is formalized by signing a binding subscription agreement.
4. Company Approval: The private company typically needs to approve the transfer of shares to the SPV. They often have a Right of First Refusal (ROFR) which grants them the right to choose to buy back the shares being sold rather than allowing a new investor to purchase the shares. Because of this, investing via an SPV managed by a firm that already has a strong relationship with a given company can be a benefit.
5. Share Purchase: The SPV, using the pooled capital from the investors, purchases the shares directly from the selling shareholders. The SPV becomes the legal owner of the purchased shares and sits on the company's cap table. 
6. Investors Own SPV: The individual investors who contributed capital now own interests (typically LP units) in the SPV, which in turn owns the shares in the target private company.
7. Ongoing SPV Management: The SPV is then responsible for managing the relationship with its underlying investors (its LPs), managing the process if the company exits via an IPO or acquisition², and managing the relationship with the private company that it has invested in. In most cases, SPV investors should expect to hold their investment for 5 to 7 years until an exit. However, while not guaranteed, there may be nearer term liquidity options like Express Deals on EquityZen, depending on the SPV manager.

Benefits of SPVs for Buyers + Sellers

SPVs offer distinct advantages to both buyers and sellers in the private markets. 

For Selling Shareholders:

• Access to Liquidity: SPVs provide a pathway for shareholders to sell shares and realize value before a potential IPO or acquisition. 
• Simplified Process: Selling to a single entity (the SPV) is often less complex and time-consuming than managing sales to numerous individual buyers.
• Partial Liquidity: Shareholders can choose to sell only a portion of their holdings, retaining the rest for potential future upside.
• Anonymity: The selling shareholder remains anonymous to the investors in the SPV.

For Investors:

• Access to Opportunities: SPVs allow multiple investors to collectively invest in a company they might not otherwise have access to due to high minimum investment requirements or lack of direct connections. EquityZen enables investors to invest in leading private companies with as little as $5,000 through our SPVs.
• Diversification: Investors can potentially allocate smaller amounts across several SPVs focused on different companies, building a more diversified private market portfolio.
• Professional Management: The SPV structure and administration are typically handled by experienced third parties, managing the legal, administrative, and operational aspects of the investment.
• Clear Ownership Structure: Investors have a clear legal interest in the SPV, which holds the underlying company shares.

Key Considerations

While SPVs offer many benefits, there are also downsides. It's important to note that they add a layer of structure for investors versus buying shares directly. There are typically costs associated with setting up and administering an SPV, which are borne by the investors within it. Some SPVs charge ongoing management fees and a performance fee. EquityZen’s SPVs charge a one-time upfront fee. Different fee structures will impact the return potential of a given investment, so they should be carefully considered.

Investors are also reliant on the SPV's manager for information and management decisions. For these reasons, it's important for investors to do their due diligence on an SPV manager before investing.

How to SPVs Pay Taxes?

Since SPVs are typically structured as partnerships, they are taxed as pass-through entities. This means that they do not pay income tax at the corporate level. Instead, they pass earnings, deductions, and tax liabilities directly to their investors or members. Certain events that trigger a pass-through of gains or losses will necessitate a K-1 for tax reporting purposes. The K-1 reports each limited partner's share of income, deductions, and tax liabilities which then must be reported on each investors’ personal tax returns.³

How are SPVs Regulated?

SPVs, like those offered by EquityZen, are typically structured under the Regulation D of the Securities Act of 1933. The specific regulatory structure may limit the number of investors the offering can be available to or the investment minimums. SPV investments are predominantly only available to accredited investors.

The SPV: A Foundation for Private Market Access

Special Purpose Vehicles provide an important pathway for investors and shareholders to buy and sell private company stock. They enable the aggregation of investor capital while streamlining transactions for both sellers and private companies.

For selling shareholders, SPVs unlock potential liquidity. For investors, they open doors to exciting growth opportunities in companies before they hit the public markets. As the private market continues to evolve, SPVs will remain an important mechanism for facilitating efficient and accessible transactions.

Footnotes:

1. As of May 2025

2. Not all pre-IPO companies will go public or be acquired, and not all IPOs or acquisitions are or will become successful investments. There are inherent risks in pre-IPO investments, including the risk of loss of the entire investment, illiquidity, and fluctuations in value and returns. Investors must be able to afford the loss of their entire investment.

3. This information should not be construed as professional tax advice; consult with a qualified tax professional for guidance specific to your individual situation