Singapore
  • Hong Kong
  • UK
  1. Osome Blog Singapore
  2. A Guide to Setting Up a Special Purpose Vehicle Entity

A Guide to Setting Up a Special Purpose Vehicle Entity

A Guide to Setting Up a Special Purpose Vehicle Entity

You are probably not familiar with creating a Special Purpose Vehicle (SPV) for your company structure if you have not been into the finance or real estate sectors before where SPVs are typically used.

Well, there are some ways having an SPV will help in your business journey and this article should give you more information on what an SPV is, if you should consider using it, and how to start one.

What is a Special Purpose Vehicle?

Simply put, having a Special Purpose Vehicle allows your company to go into higher-risk projects such as investments, certain business transactions, separate projects, mergers, acquisitions and more.

An SPV is a separate legal entity created by your parent company and is usually in the form of a private limited company in Singapore. It has its own assets, liabilities and balance sheets that are not linked to the parent company. When you create an SPV, it works as any normal company would.

Vincent is a new business owner with a startup company - Vincent Consultants. He decides to use an SPV for his investments and to attract new investors. It was all going well for the past few years. However, in the past year, Vincent realises that his company business is going downhill and he may need to close down. In Vincent’s case, even if Vincent Consultants goes bankrupt, the SPV, although affected, can still carry on running and will still be under Vincent’s name.

Protection against bankruptcy is one of the main advantages of using an SPV in Singapore for foreign companies as well. An SPV is set up in Singapore, so as to ensure that the business in Singapore can continue even if the parent overseas company faces any problems.

When is an SPV a good idea for new business entrepreneurs?

Tips for pitching to investors.

As you prepare for your pitch, figure out which investors to contact and what points to cover. Understand what phase of development your startup is currently in.

In the last few years, it has been getting really popular for startups to create an SPV to help with company financing. Using an SPV can help the parent company attract investors to invest funds and receive equity when investing in the startup. What this means is that the SPV is used as an investment vehicle where investors pool their money. That sum of money is then used to invest in the parent company or in other ways.

Some investors or sponsors who do not want to take on a lot of risks can have the other option to fund the SPV instead of the parent company, as the amount needed will be lower compared to funding the parent company.

If you are just starting out in your company formation and need an easier and more secure way to gain funding, you may consider using an SPV to attract more risk-averse investors.

What should startups look out for when using a Special Purpose Vehicle?

Like all businesses, there are risks involved. This is also true for SPVs, as the financial details and condition of the SPV may not be included in the parent company’s balance sheet.

If you are an entrepreneur, be honest in your balance sheet statements for your SPV. This would help you gain trust from investors, and in the long run, attain more funding for your startup.

If you choose to close your SPV, the parent company will have to take back the assets, which will involve substantial costs for you. The parent company’s balance sheet will also be affected.

SG SPV

Things investors should look out for when investing in a Special Purpose Vehicle

For investors, one important risk factor to keep in mind is that you may not be getting the entire view of the company’s financial situation. Less seasoned investors are more likely to fall into the trap of investing in the wrong company or SPV, resulting in huge cash loss.

One significant example of the misuse of an SPV is Enron Corporation, in 2001.

  • Enron Corporation was an up and rising energy company;
  • Its stock price was rising too fast;
  • Enron then transferred the majority of its parent company’s stock into an SPV;
  • The SPV was used to hedge assets that were on the parent company’s balance sheet;
  • The stock price of the parent company dropped;
  • So did the value of the SPV;
  • Enron owed huge sums of money to creditors and investors;
  • This resulted in the bankruptcy of the company.

What you need to create an SPV

1. Decide if an SPV is right for your business structure

Firstly, you should ensure that your business structure is right to form an SPV. Some points to look out for include:

  • You are a startup business and need funding.
  • Your investors are more likely to pool money and receive equity in a less risky manner.
  • You want to use your SPV as an investment entity.
  • You want to reduce financial risk for your parent company.
  • You do not want to deal with numerous investors from your parent company.
  • You want to protect your intellectual property rights.
  • You wish to hold real estate property as assets under the SPV to save on taxes.

2. Incorporation of your SPV

Usually in Singapore, an SPV is structured as a Private Limited Company. This means that it should follow the usual practices and limitations as a normal PTE LTD Company. If you’re unsure on incorporation steps, we can help you with registering a company in Singapore.

3. Create a company constitution

The company constitution is a document stating the company’s regulations, purpose, business structure, functions and specifics. Just like how you would register your parent company, all information about the structure of your SPV should be listed clearly.

Conclusion

Although creating a Special Purpose Vehicle has its benefits, especially for new startups companies, it does have its limitations as well. If you, as an entrepreneur, are just starting out and are still unclear on the implied risk, it will do you good to study more on the risks involved before diving into creating an SPV for your parent company.

However, if you are looking to first register a new company in Singapore, feel free to drop us a question! We help with company incorporation for foreign investors and the local ones and are also able to help with accounting matters!

Share this post:

Tips to run your business smarter.
Delivered to you monthly.

You'll receive a verification email you'll have to open and confirm the subscription.

You might like it

Should You Consider Using Cryptocurrency in Your Business Operations?
Running My Business

Should You Consider Using Cryptocurrency in Your Business Operations?

There are more than 4,000 cryptocurrencies that exist. Before you jump on the bandwagon, assess whether cryptocurrencies are suitable to be used in your business.

7 Ways To Accept Payments For Your Online Store
E-commerce

7 Ways To Accept Payments For Your Online Store

Many payment options allow you to accept credit cards and other payment types. How do you choose which method to include on your website?

Customer Retention: How To Keep Customers Coming Back Repeatedly
E-commerce

Customer Retention: How To Keep Customers Coming Back Repeatedly

Every business likes new customers, especially when the customer uses their services again and again. Existing customers help in creating a solid foundation of your business that provides a steady revenue stream that costs less than acquiring new customers.

5 Tips for a Streamlined Payroll Process for SMEs
Payroll

5 Tips for a Streamlined Payroll Process for SMEs

For a business to run smoothly, the payroll process must be streamlined and error-free. It is easy to streamline and optimize your payroll and other back-office processes within your SMB. Did you know that this can improve your cash flow?

Phase 2 Heightened Alert Support Package for SMEs (July to August 2021)
Government Grant

Phase 2 Heightened Alert Support Package for SMEs (July to August 2021)

From 22 July 2021, Singapore has reverted to Phase 2 (Heightened Alert). Fortunately, the Singapore Government will be cushioning the impacts of the harsher COVID-19 restrictions with a $1.1 billion support package.

How To Offer Free Shipping Profitably
E-commerce

How To Offer Free Shipping Profitably

Should a customer or seller bear the shipping cost? Let’s explore how a profit margin can still be maintained while offering free shipping.

What Is a Register of Controllers and Why Singapore Companies Now Have To Submit This Document
Secretary

What Is a Register of Controllers and Why Singapore Companies Now Have To Submit This Document

In April 2020, Singapore businesses will have to submit the Register for Registrable Controllers to ACRA. Before, your company was only obliged to maintain it internally. Now you will have to file the Register with ACRA electronically and maintain it updated at all times.

SG Govt Will Extend Loans for SMEs by 6 Months as Part of Heightened Alert Support Measures
Government Grant

SG Govt Will Extend Loans for SMEs by 6 Months as Part of Heightened Alert Support Measures

Singapore's Phase 2 and 3 periods of heightened alert have undoubtedly affected many businesses, especially Small- and Medium-sized Enterprises (SMEs). As such, Finance Minister Lawrence Wong has announced additional support measures for these Singapore-registered companies on 5 Jul 2021.

Clickshare Media Ventures Scales Up E-commerce Operations With Osome as Accounting Partner
Customer Stories

Clickshare Media Ventures Scales Up E-commerce Operations With Osome as Accounting Partner

Clickshare Media Ventures (CSMV) is one of the fastest-growing e-commerce companies in Southeast Asia. In just 3 years, CSMV has built itself to be an 8-figure business with more than 10 direct-to-consumer e-commerce brands in the baby, beauty, and personal care industries.

The 10 Best E-Commerce Payment Gateway for Online Sellers
E-commerce

The 10 Best E-Commerce Payment Gateway for Online Sellers

Other than branding and marketing, these technologically savvy consumers are well acquainted with the Internet and convenient payment gateways and demand nothing less than a seamless e-commerce transaction.

SMEs Can Apply for Relief Measures and Delay Full Loan Repayments till 30 Sep
Government Grant

SMEs Can Apply for Relief Measures and Delay Full Loan Repayments till 30 Sep

As the pandemic gradually transitions to an endemic, the Monetary Authority of Singapore (MAS) has announced the 'final extension' of relief measures for small and medium-sized enterprises (SMEs) affected by the COVID-19 situation to resume full loan repayments.

8 Tips to Improve Your E-commerce Photos
E-commerce

8 Tips to Improve Your E-commerce Photos

Want to kickstart your start-up or bolster an existing online business? These 8 e-commerce photography tips could have a direct impact on small businesses owners in Singapore, take a look.

Tips to run your business smarter. Delivered to you monthly.

You'll receive a verification email you'll have to open and confirm the subscription.

We’re using cookies! What does it mean?