SPV Dictionary

This Special Purpose Vehicle (SPV) Dictionary serves as a comprehensive resource for understanding the terminology associated with these financial instruments. SPVs, by their nature, can involve a complex interplay of legal, accounting, banking, tax, compliance, and administrative considerations. This dictionary aims to provide clear and concise definitions for the key terms encountered in the context of SPVs.

Accredited Investor

The purpose of the accredited investor principle is to identify persons and entities who can bear the economic risk of investing in unregistered securities. Companies and private funds, such as a hedge fund, venture capital fund, or SPVs can engage in exempt offerings which do not have to make prescribed disclosures to accredited investors. An accredited investor, in the context of a natural person, includes anyone whose earned income exceeded $200,000 ($300,000 with spouse) in each of the prior two years, and expects the same for the current year OR has a net worth over $1 million (with or without a spouse and excluding the value of the primary residence). In addition to income and asset standards, an individual can have accreditation status through holding certain licenses (Series 7, 65 or 82), being a directors, executive officers, or general partners (GP) of the issuer, or being a “knowledgeable employee” of the SPV. 506(c) offerings must be made only by accredited investors that have verified (proved) they are accredited, whereas crowdfunding ventures are free to accept funding from nonaccredited investors as well as accredited investors.

Acquisition

An acquisition is a corporate action in which a company buys most, if not all, of the target company’s ownership stake in order to assume control of the target company. Acquisitions are often made as part of a company’s growth strategy whereby it is more beneficial to take over an existing company’s operations and niche compared to expanding on its own. Acquisitions are often paid in cash, in the acquiring company’s stock or a combination of both.

Administrative Manager

An administrative managing member of an SPV is a person or entity who is delegated specific administrative tasks by the manager (most frequently, setting up and managing a bank account). An SPV administrator can act as an administrative manager of SPVs where the Organizer elects or is required to retain managerial authority.

Administrator

A company/individual hired by an SPV to perform specified back office support of the entity.

Allocation

The amount of funds allotted to a particular investor (or SPV) that wishes to invest into a private asset. An allocation is typically a portion of a total amount. Ex. SPV 1 received an allocation of $1 million from the company’s $10 million fund raise.

AML (Anti-Money Laundering)

A set of procedures, laws, and regulations designed to stop the practice of generating income through illegal actions. Financial institutions are required to put in place policies and procedures to identify a customer’s source of wealth and funds and perform risk-based due diligence to ensure they are not aiding in money-laundering activities.

Angel (Angel Investor)

Angel investors usually invest in small early-stage startups or entrepreneurs. Angel investors can invest individually or with a group through an SPV (a vehicle where multiple angels pool their money for a larger investment). Frequently, angel investors are among an entrepreneur’s family and friends, but are more often high net worth individuals, whether previously successful entrepreneurs or just wanting to make investments. The capital angel investors provide are usually one-time investments to support and carry the company through its difficult early stages. Angel investors provide more favorable terms compared to other lenders, since they usually make smaller investments, with less leverage or bargaining power.

Arbitration

If the SPV or fund were in a legal dispute they would use arbitration which is the process of solving an argument without using the courts or judicial system.

Arbitration Location

If the SPV or fund were to require any arbitration, this would be the location it would take place. The location must be within the United States; it is recommended that the location be in Delaware, or the same city and state that the Organizer resides.

Asset

Anything with monetary value. In private equity financing, an asset is typically a financial asset, representing investment in the assets and securities of other institutions. SPVs typically hold an ownership interest or right to ownership in various types of assets including startup companies, real estate, investment funds, crypto-tokens, or oil and gas participation programs.

Asset Class

Separate legal rights, designated by asset, within a single legal structure. These are not pooled investments across all assets, but instead the investor funds attributed to a single asset constitute that Asset Class. Examples include, startup companies, secondaries, real estate, royalties and collectibles.

Blockchain

A distributed digital ledger in which transactions made in bitcoin or another cryptocurrency are recorded chronologically and publicly.

Blue Sky

Blue Sky Laws are state laws requiring notice and many time fees to any state where an investor resides. Blue sky laws serve as an additional regulatory layer to federal securities regulations. For example, if an SPV is raised with investors from California, Utah, and Massachusetts, we notify those three states within 15 days of the close and pay a fee.

Board (Board of Directors, B of D, BoD)

A group of individuals that are elected as, or elected to act as, representatives of the stockholders to establish corporate management related policies and to make decisions on major company issues. The board makes decisions on shareholders’ behalf as a fiduciary and looks out for the financial well being of the company. Such issues that may fall under a board’s purview include the hiring and firing of senior executives, dividend policies, options policies, and executive compensation. In addition to those duties, a board of directors is responsible for helping a corporation set broad goals, support executives in their duties, while also ensuring the company has adequate resources at its disposal and that those resources are managed well.

Cap Table

Cap Table or Capitalization Table is a spreadsheet or table, typically made for a portfolio company or early stage venture that shows who owns equity in a company, including equity shares, preferred shares and options, promissory interests, warrants, SAFEs and the various prices paid by owners for each interest. The table uses these details to show ownership interests on an actual and fully diluted basis, thereby enabling the portfolio company’s overall capital structure to be ascertained at a glance. SPVs also have a cap table of those investors that subscribed to the SPV raise. SPVs have far simpler cap tables than companies.

Capital Account Statement

A receipt showing the investor’s capital contribution, the percentage ownership of the SPV, and SPVs underlying asset.

Capital Call

When an asset acquisition includes pricing above what is being sent in initial funding, the SPV is expected to send additional capital to the seller to meet the obligations of the seller’s “allocation” (purchase document). If that additional capital is beyond the current funds from investors but below the subscribed total capital of investors, obtaining the additional capital comes in the form of a “capital call”. A capital call is a type of increased capital contribution (ICC), which is itself a subset of a type of Close.

A Capital Call example:

Investor Tim subscribes for $1,000,000 into SPV X. The SPV Organizer is initially collecting only 20% of subscribed capital. Investor Tim sends in $200,000 to the SPV X bank account.
The Organizer will invest the remaining 80% of capital at agreed upon intervals in the future.
Investor Tim still has $800,000 he owes to SPV X which he will contribute when he receives a “capital call” from the Organizer.

Note: Most SPVs do not employ capital calls but rather collect 100% of all subscription amounts and use those funds to purchase their entire allocation.

Carry (Carried Interest, Profits Interest)

Carry is a performance-based fee (net proceeds received by an SPV upon a liquidity event less the initial investment) that’s paid to the Organizer and other third parties designated in the Operating Agreement. Carry is typically paid out after the investors have received a return on their investment.

Note: As part of the Tax Cuts and Job Act, holders of a profits interest will only be eligible for the preferential long-term capital gains rate with respect to gains realized on dispositions of capital assets, sold after December 31, 2017, that held for more than three years.

CEO (Chief Executive Officer)

A Chief Executive Officer (CEO) is the highest ranking executive in a company whose main responsibilities include developing and implementing high-level strategies, making major corporate decisions, managing the overall operations and resources of a company, and acting as the main point of communication between the board of directors and the corporate operations. The CEO will often have a position on the board, and in some cases is even the chair.

Read more: http://www.investopedia.com/terms/c/ceo.asp#ixzz4EJybLYk8

Certificate of Formation (Certificate of Organization, CoF, CoI)

A document filed with state authorities (usually the Secretary of State or Division of Corporations, depending on the state) to form a limited liability company (LLC) (or limited partnership (LP)). As required by the general LLC law of the state, the certificate normally includes the purpose of the LLC, its principal place of business, and the names of its initial members or managers. Most states refer to this document as the articles of organization.

CFO (Chief Finance Officer)

A chief financial officer (CFO) is the senior executive responsible for managing the financial actions of a company.

Charter (Certificate of Incorporation, Articles of Incorporation)

A charter is a legal document that provides for the creation of a corporate entity. A corporation’s charter is issued by a federal or regional government and effectively creates a legal entity out of the business, which existed only as a partnership, sole proprietorship or similar business before incorporating. Most charters usually include the corporation’s name, the location of its head office, the date of incorporation, the amount/type of stock to be issued and any restrictions on areas of business activity or further share issuances. It sets forth a corporation’s basic information, including profit/nonprofit status, purpose, name and office address of the registered agent, financial data pertaining to the company’s assets, board composition and ownership structure. The charter is filed with the secretary of state for the state in which the corporation is headquartered.

Close Date

A close is triggered on the earliest date of one of these events according to the Federal Securities and Exchange Commission: (1) using investors’ money by (a) signing investment documents (entering a contract to invest in a portfolio company or wiring investor’s money to a portfolio company or other issuer); (2) countersigning the investors’ subscription documents, which officially accepts the investor into the fund.

Close

To close an SPV means the organizer is taking the funds that were received by the investors and buying an asset. When the funds are used to purchase an asset, the SPV executes a purchase agreement and is recorded on the company’s or project’s capitalization table. An SPV closing triggers various required tasks like, countersign SPV funds documents, generate capital account statements, file a Form D with the SEC, file and make payment for Blue Sky filings, determine if a second close is needed, deal with any extra funds in the bank account, and create an SPV cap table. Finally, a closed SPV is oftentimes considered a taxable event.

Closing (Multiple)

NEW investors and/or NEW capital investing in the SAME portfolio company or asset using the SAME legal entity during the SAME round of financing.

Conversion Price

Price at which a convertible note or SAFE will convert. Typically it is the lesser of the price paid per stock in the most recent equity round times at a discount rate or the valuation cap divided by the shares of fully diluted equity.

Convertible Note (Convertible Promissory Note, Convertible Debt, Convertible Loan)

Convertible notes are short-term debt instruments that convert to equity at a later date. Typically, a convertible note is a loan that Investors would like to get paid back in stock when the loan is due, rather than getting their actual money back. Seed-stage startups typically leverage them to raise funding from investors without immediately giving away ownership equity.

Example: If I invest $200k in a company, and I accrue 5% interest for 2 years, my principal and interest owed to me at the end of 2 years is $220k. BUT instead of paying me back the $220k in cash, the investors would rather get what they are owed in stock, or ownership in the company. Convertible notes often invest earlier in the life cycle when the Company does not know or wants to wait to set a price for stock. There are common terms within a convertible note such as conversion price, discount rate, valuation cap and qualified equity or financing transactions.

Counsel (Lawyer, Legal Counsel, Advocate, Attorney)

A lawyer is a person who practices law, in or out of court, requiring the application of law, legal procedure, knowledge, training and experience to solve specific individualized problems, or to advance the interests of those who hire them to perform legal services. A lawyer is also a person who has passed one or more state bar examinations providing them with a license to practice in that state (jurisdiction). Counsel is mainly helpful with SPV fund documents, purchase agreements and security related advice and filings.

CPA (Certified Public Accountant)

Certified Public Accountant (CPA) is a designation given by the American Institute of Certified Public Accountants to those who pass an exam and meet work experience requirements. They are known for their role in income tax preparation but can specialize in many other areas, such as auditing, bookkeeping, fund accounting, forensic accounting, managerial accounting and information technology. CPAs like other professionals are bound to adhere to ethical standards of the profession. CPA’s are mainly helpful with SPV tax preparation and if needed SPV fund accounting. Typically, SPVs do not need fund accounting services.

Crowdfunding

A term used to describe collecting small amounts of capital from a large number of individuals to invest in an investment portfolio company. SPVs are frequently used to pool these small amounts of capital so one large investment amount is used to invest.

Deal

A deal typically refers to a particular investment in an asset like a portfolio company’s current share offering or real estate project. The term “deal” is used to communicate an opportunity to invest in an asset. “Doing a deal” will involve various tasks and steps from due diligence, to fund raising, to an SPV. Deals oftentimes use an SPV to aggregate investors capital in order to meet allocation or minimum investment requirements.

Delaware (State of Delaware)

Most SPVs select Delaware as the jurisdiction of choice because most experienced LLC practitioners consider the Delaware Limited Liability Company Act (Delaware Act) to be the statute of choice for sophisticated ventures organized as LLCs, and in many deals involving entrepreneurs or investors from more than one state. The Delaware Act is a complex, sophisticated, and eminently flexible statute that exalts freedom of contract even to the point of permitting an operating agreement to eliminate some or all fiduciary duties. Finally, the Delaware Court of Chancery has jurisdiction over claims relating to the internal affairs of a Delaware LLC, and that court is the preeminent business court in the United States.

Debt (Liability, Financial Obligation)

An amount of money borrowed by one party from another under the condition that it is to be paid back at a later date, usually with interest. A convertible note is an example of a debt instrument. SPVs oftentimes will invest in a convertible note or other debt instruments as the asset they are purchasing.

Discount

In finance, discount refers to the condition of the price of a bond that is lower than par, or face value. The discount equals the difference between the price paid for a security and the security’s par value. In terms of a convertible note, the discount refers to the percentage that the noteholder will receive when calculating a conversion price of a convertible debt instrument after a Company has had a successful qualified financing or equity offering. See Convertible Note for more information.

Distribution

A company’s payment of stock, cash or physical products (like crypto tokens) to its shareholders. For an SPV, a distribution is typically an allocation of capital gains and income from a portfolio company to its investors. SPVs will receive distributions from an asset, like a portfolio company investment and in turn make pro rata distributions to the SPV investors. Distributions may be owed to investors as a payment of interest, principal, or dividend on a regular basis, or as part of a liquidity event.

Doing Business

“Doing business” in a state is a legal term that refers to a business regularly carrying out its normal activities in a state that is different from its original registered jurisdiction, or having substantial contacts there. It’s also defined as having a presence in a state for legal and tax purposes. SPVs are considered businesses but they are fairly quiet and passive entities. The “doing business” question arises for SPVs when considering filing a Foreign LLC registration. Each state has a different “doing business” definition. Some states like California have broad sweeping wording and other states have more clearly defined provisions. See Foreign LLC.

DPA (Debt Payable by Assets)

DPA is a debt security, specifically for crypto token-presales to both accredited and unaccredited investors.

EIN (Employer’s Identification Number, TIN, Tax Identification Number)

A unique identification number that is assigned to a business entity so that they can easily be identified by the Internal Revenue Service. The Employer Identification Number is commonly used by employers for the purpose of reporting taxes. Also known as a Federal Tax Identification Number. When it is used to identify a corporation for tax purposes, it is commonly referred to as a Tax Identification Number. Additionally, banks require an EIN before opening a bank account for an SPV and SPV Organizers will request this information from investors on subscription documents and tax forms.

Equity (Common Stock or Preferred Stock, Shares)

Equity shares are stocks because they represent ownership in a company from which a stockholder can claim a proportionate share of the company’s assets and earnings. Two of the most common equities are Common Stock and Preferred Stock. A preferred stock is a class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred shares generally have a dividend that must be paid out before dividends to common shareholders, and the shares usually do not carry voting rights.

ERA (Exempt Reporting Adviser)

An investment adviser that is not required to register as an adviser with the Securities and Exchange Commission (“SEC”) or state regulator(s) if it meets certain qualifications, pays applicable fees, and reports public information through the Investment Advisor Registration Depository (“IARD”). Large Advisers (firms with $100M or more in regulatory Assets Under Management (“AUM”) that meet the private fund adviser or venture capital exemption requirements may register with the SEC as federally covered ERAs. Mid-Sized (firms with between $25M and $100M in regulatory AUM) and Small Advisers (firms with less than $25M in regulatory AUM) are generally required to register as state-covered Registered Investment Advisers (“RIA”) or if an exemption is available, a state-covered ERA. Certain states have adopted the federal rules allowing mid-sized or small advisers to rely on modified versions of the private fund adviser or venture capital adviser exemption.

ETF

Exchange Traded Fund, a marketable security that tracks an index, a commodity, bonds, or a basket of assets.

Exempt Offering

An exempt offering or transaction is a type of securities transaction where an SPV does not need to file registrations with any regulatory bodies. An exempt offering is a securities exchange that would otherwise have to register with the Securities and Exchange Commission (SEC) but does not because of the nature of the transaction in question. A private placement or Reg D offering is a type of exempt offering in which the securities are not offered to the public, but are instead sold privately to an accredited investor. An SPV is typically considered an exempt offering. Consult legal counsel.

Expense Reserve

An Expense Reserve is a separate account from the SPVs main bank account, oftentimes set up by the Organizer in the name of the Organizer, to collect funds from investors that will be used to pay the SPVs expenses. When an Organizer uses an Expense Reserve account each investor that wishes to participate in the SPV will be required to send their investment funds into the SPVs bank account and then send additional and separate funds to the expense reserve account. Sometimes an expense reserve account is used by complex structure entities who have a known expense coming up (such as a large legal bill). The alternative to an expense reserve is to have investors send funds into the SPVs account and then the Organizer will carve off a small portion of those funds for expenses. The benefits of an expense reserve can be cleaner books showing which funds are designated for investment and which funds are expenses. However, the negative is additional and more complex tax filings. The majority of SPV Organizers do not use expense reserves.

Form C

The Form C is a document filed with the SEC used for equity crowdfunding through Regulation CF. Regulation CF transactions can use an SPV structure but many Reg CF platforms do not use SPVs.

Form D (Notice of Sale of Securities)

Form D is also known as the Notice of Sale of Securities and is a requirement under Regulation D, Section 4(6) and/or the Uniform Limited Offering Exemption of the Securities Exchange Act of 1933. It is a filing with the Securities and Exchange Commission (SEC) required for companies that are selling securities in reliance on a Regulation D exemption or Section 4(6) exemption provisions. Form D is a brief notice of a company’s executive officers and stock promoters, in lieu of the regular reports required when no exemption under Regulation D exists. It must be filed no later than 15 days after the first sale of securities.

Form ID

SPVs are required to file a Form D with the SEC through the SEC’s EDGAR online system. In order to gain access to the EDGAR system, a CIK number and other access codes must be obtained, and an SPV Organizer obtains a CIK number and other access codes by filing a Form ID with the SEC. The Form ID application process requires a Form ID application to be completed, signed, notarized and uploaded into the EDGAR system. Once the application has been accepted the CIK number and other access codes will be emailed to the filer. The Form ID process is meant to be manual in nature to reduce fraudulent activity.

Formation Date

Date of entity (SPV) creation on record with the jurisdiction where filed for Master and Regular/Traditional entities (SPVs). For Series, the creation date is either the date that a Deal is in process but no later than the date that the deal closes. For most SPV Organizers the formation date is the date they launch or start their SPV by filing with a jurisdiction (like Delaware) or when they start inviting investors to consider the opportunity when using a Series LLC structure.

Foreign LLC

A majority of SPVs begin with an entity registration in the State of Delaware or a state that provides them with advantageous tax or fee benefits rather than the home state where the SPV Organizer resides. If your SPV is “doing business” in another state rather than in the state of original registration (like Delaware) then a Foreign LLC registration in the home state or the state where the SPV Organizer resides may be necessary. Some banks require a “local” or “home” (Foreign LLC) registration before they will open a bank account for the SPV.

Fully Diluted Basis

Ownership based on the assumption that all options, warrants or other convertible securities or instruments or other rights to acquire stock have been exercised or converted.

Fund (Capital, Investment)

A fund is a generic term to describe a structured vehicle which has the main purpose of aggregating capital from a number of different investors in order to invest into private assets. An SPV is considered a fund, a venture capital fund is considered a fund, as is a private equity fund, hedge fund and others.

Fund Close (Close)

A “Close” is triggered upon one of the following events: (1) the fund docs are countersigned by the fund manager, (2) Funds are wired to the company (investors’ funds are used), or (3) the fund manager signs investment docs. The definition of a close is important because a close triggers the federal and state filing requirements. See Form D and Blue Skies

Fund Docs (Fund Documents)

Legal documents govern how this entity (SPV) behaves, and the rights and rules of those members that belong to it. SPV documents include an Operating Agreement, Private Placement Memorandum and Subscription Agreement. Operating Agreement governs the relationship between all of the investors and managers of the SPV. Subscription Agreement covers the committing of capital to the SPV by the investors. The Private Placement Memorandum (also referred to as a PPM) advises all prospective investors of the risks of investing in the SPV.

Fund of Funds (FOF)

A fund of funds is an investment strategy in which a fund invests in other types of funds rather than investing directly in stocks, bonds, or other securities.

GP (General Partner)

A GP or General Partner is a legal entity or structure which is needed to be the owner of a limited partnership (LP). A unique characteristic of a GP structure is its unlimited liability. GPs typically act as the manager of the partnership. GP is also a general term for the individual or entity that manages a fund. SPVs usually don’t have GPs as part of their structure because SPVs usually use an LLC structure rather than an LP structure. LLC structures do not need a GP or general partner, LP structures require a GP to be its manager. Venture funds usually employ the GP, LP structure.

Grantor of a Trust

The person who creates the trust. The assets in the trust are supplied by the grantor.

Hedge Fund

A hedge fund is an investment fund that contains capital contributions from accredited individuals or institutional investors and invests in a variety of assets, often with complex portfolio-construction and risk- management techniques. Hedge funds are almost always open-ended and allow contributions or withdrawals by the investors at set times.

Holdbacks

When a company is acquired, oftentimes the acquiring company requires that not all funds are immediately distributed to the owners/shareholders of the acquired company. The acquirer may holdback funds to cover unknown or known expenses and legal contingencies to be discovered or resolved in the near term. The company will typically set a timeframe for these items to be resolved and once resolved the remaining escrowed funds are released to be distributed to the acquired company’s owners/shareholders.

Investment Advisor

An investment adviser is an individual or a firm that is in the business of giving advice about securities to clients. For instance, individuals or firms that receive compensation for giving advice on investing in stocks, bonds, mutual funds, or exchange traded funds are investment advisers. Some investment advisers manage portfolios of securities.

Depending on their size, investment advisers have to register with either the SEC or the state securities agency where they have their principal place of business. For the most part, investment advisers who manage $100 million or more in client assets must register with the SEC. If they manage less than $100 million, they must register with the state securities agency in the state where they have their principal place of business. See ERA.

Investment

Term used to describe an investor’s completed subscription to an SPVs offering.

Investment Advisers Act of 1940

The Investment Advisers Act of 1940 defines the responsibilities and duties of investment advisers. It falls under U.S Federal Law, which states who is eligible to register with the Securities and Exchange Commission (SEC) to become an adviser under the supervision and control of the Act to protect investors. The Investment Advisers Act of 1940 states that all persons or firms under the profession of investment advisory service should register with the SEC to become eligible for the role and look after the client’s interest with utmost honesty and integrity. There are certain exemptions to the Act.

Exemptions related to advisers of private funds

An adviser does not have to register with the SEC if it only advises private funds in the United States whose total asset under management is below $150 million. This kind of fund that satisfies Section 3(c) (1) or Section 3(c) (7) is a pooled investment that has less than 100 investors and does not intend to make any public offering.

Exemptions related to advisers of venture capital

An adviser does not have to register with the SEC if it only advises venture capital funds. This fund should also satisfy Section 3(c)(1) or Section 3(c)(7) and follow the strategies of investment as “venture capital”. A minimum of 80% of the fund should be invested in the equity of private companies. No more than 15% of its capital should be borrowed or used as a guarantee. If the fund borrows money, it should be less than or equal to 120 days. The investors cannot redeem or withdraw the interest from their investment in the fund.

Exemptions of registration

If the adviser manages assets less than $25 million, it must register with the state’s regulator of securities, where the adviser’s office is located. It is exempted from registering with the SEC.

Even though an advisor meets an exemption they may still be required to file as an Exempt Reporting Advisor. SPV Organizers typically meet an advisor exemption but should consult with legal counsel regarding filing as an exempt reporting advisor.

Investment Amount

Total amount purchased of a private asset. Investment amount can describe the amount an SPV purchased of a company or project offering or the amount an investor subscribed to purchase of the SPV offering.

Investment Company Act of 1940

The Investment Company Act of 1940 is a law that Congress passed to define and regulate mutual funds and closed-end funds, as well as hedge funds, private equity funds, SPVs, and holding companies. Enforced by the Investment Management division at the SEC, a primary purpose of the Act is to protect investors by ensuring that they’re aware of the risks associated with buying and owning securities.

Investment Company

Investment companies are business entities, both privately and publicly owned, that manage, sell and market funds to the public. An investment company can be a corporation, partnership, business trust or limited liability company (LLC) that pools money from investors on a collective basis. The money pooled is invested, and the investors share any profits and losses incurred by the company according to each investor’s interest in the company. Investment companies are categorized into three types: closed-end funds, mutual funds (or open-end funds) and unit investment trusts (UITs). Each of these three investment companies must register under the Securities Act of 1933 and the Investment Company Act of 1940 unless they meet an exemption. SPVs typically meet an exemption so they do not need to register with the SEC. See 506(b)Offering, 506(c) Offering, 3(c)(1) exemption and 3(c)(7) exemption.

Investment Portfolio

The name of the Company(ies) or asset(s) that an SPV acquired or invested into.

Investment Round (Securities Offering)

When a company, project, SPV or fund raises capital selling a distinct asset during a specific period of time. For example, a company raises capital during a six month period selling a Series A preferred stock. This Series A preferred stock raise would be considered an investment round. A subsequent investment round by the same company might be 18 months later and the distinct asset would be Series B preferred stock.

Investor (LP, limited partner)

An investor is any person or entity who commits capital with the expectation of financial returns. Investors participate in a variety of investment vehicles including, but not limited to, SPVs, funds, stocks, bonds, commodities, mutual funds, and real estate. Investors typically perform technical and/or fundamental analysis to determine favorable investment opportunities, and generally prefer to minimize risk while maximizing returns. For example, an angel investor invests in small startups or entrepreneurs.

IRA (Individual Retirement Account)

A tax advantageous investing tool individuals use to earn and earmark funds for retirement savings. There are several types of IRAs including: traditional IRAs, Roth IRAs, Simple IRAs, and SEP IRAs. SPVs can accommodate IRA investments up to 25% of a fund’s total capital contributions due to ERISA fiduciary and IRS prohibited transaction requirements. Only self-directed IRA’s can invest in SPVs.

Issuer

An issuer is a legal entity that develops, registers and sells securities to finance its operations. An SPV Organizer is an issuer. SPVs issue LLC or LP Membership Interests inviting investors to fund the SPVs purpose of purchasing a private asset. Start up companies are also issuers, along with large corporations and governments.

K-1

A tax document generated by a form 1065, issued by a partnership (LLC or LP) entity to another entity or individual which reports the income, losses, and dividends of a business that is allocated to each partner of a partnership. Each partner is required to report the information in the K-1 in their personal income tax return. SPVs are partnerships requiring them to file a 1065 form with the IRS each year the SPV has a taxable event. Each 1065 filing generates a K-1 for each SPV investor.

KISS

A KISS is a “Keep It Simple Security”. It is an agreement between a company and an investor: the investor invests money in the company and, in exchange, receives the right to purchase shares in a future equity round when it occurs. KISS securities are a hybrid between debt and equity: it aims to keep the simplicity and user-friendly-ness of equity, but with some of the investor protections found in convertible notes (debt). A KISS is broadly similar to a SAFE but includes some downside protections which are standard in convertible note instruments. A KISS accrues interest and has a maturity date after which the investor may convert the underlying investment amount, plus accrued interest, into a new series of preference shares in the company. KISSes provide basic information rights on financial statements to investors and the right to participate in future equity funding rounds.

KYC (Know Your Customer)

A set of policies and procedures SPV organizers and financial institutions use to verify the identity of an investor. It is a requirement to know and keep records on the essential facts of each investor, as well as identify each person who has authority to act on the customer’s behalf. SPV Organizers are only required to identify owners with 25% beneficial ownership at the time of account opening. RIA’s, broker-dealers, and banking institutions are required to identify all beneficial owners with at least 10% ownership and institute a KYC/AML policy.

Lead (Lead Investor)

Is an investor who will put up a substantial amount of the total investment – often around 20% – usually early in the fund raising process. Leading an investment round can result in improved economic terms.

Ledger

A listing of investors at a specific point in time invested in an SPV. The ledger should include the investor’s name, amount invested, date of investment, tax identification information and contact information. Not to be confused with a general ledger which is a ledger of various asset, liabilities, equity, income and expense accounts which are found on a financial statement of a company. Another term for Ledger is Cap Table.

Liquidation Preferences

Liquidation preference establishes that certain investors receive their investment money back first before other investors and/or company owners in the event the company is sold, has a public offering, pays dividends, or has another liquidation (payout) event.

Liquidity event

A distribution event that results from either the sale of an investment portfolio company or some of its assets or another type of event which results in cash, equity or tokens (cryptocurrency) being distributed to the SPV. Subsequent to an SPV receiving the cash, equity or tokens, oftentimes, the SPV Organizer will distribute to the SPV investors.

LLC (limited liability company)

See Master LLC, Regular LLC and Series LLC

LLC-12

California Statement of Information form required for every California and registered foreign LLC within 90 days of registration and every two years thereafter.

Limited Partner (LP)

A non-managing owner of a Limited Partnership structure, whose liability is limited to the amount of its investment. A limited partner is the technical name for investors or members of a LP or limited partnership structure. LP is also a general term (umbrella term) for investors in an investment fund or structured vehicle. SPV investors are oftentimes called an LP. See Investor

Limited Partnership (LP)

See Regular LLC/LP

Major Investor

A term used to describe investors that contribute large amounts to an investment round. The required minimum amount for an investor to be considered a major investor is specifically stated in the purchase agreement. Major Investors receive rights and benefits that non-major investors (smaller investors) do not receive. Some examples of major investor benefits are information rights and pro rata rights.

Management Fee

A fee paid to SPV Organizers for their time and effort in managing the investment relationship between the SPV and the investment portfolio. Some of the activities an Organizer may engage in are tracking the progress of the asset, reviewing investment portfolio reports and materials, administration tasks of the SPV like post close activities and distributions and wind down of the SPV when the investment portfolio has its final exit event. Management fee can be a one time payment or annual payment. Most SPV Organizers do not charge their SPVs with a management fee or they will charge the SPV with a one time fee when the deal closes. Venture capital and private equity funds are known for charging a 2 – 3% annual management fee to pay the operational expenses associated with running the fund. For example, if a fund had legal expenses, travel expenses, investor meetings, etc. these are all examples of expenses that would be paid from a management fee.

Manager

An individual or entity that is responsible for the SPV entity (LLC or LP). A common term for Manager is GP because in the LP/GP structure the GP is the manager of the LP structure. When an LLC structure is used an LLC can be managed by a “Manager” or by its members and SPVs typically are managed by a “Manager” which can be an individual or an entity. An SPVs manager may be responsible for all activities associated with the management of investment portfolios, from buying and selling, providing investment advice, transaction settlement, performance measurement and regulatory reporting. An SPV has two “management” positions or roles. 1. Manager, 2. Investment Advisor. In some cases both positions or roles are combined into one individual or entity (they perform all the tasks and duties of both roles). In other cases, some SPVs separate the Manager and Investment Advisor roles and are held by two separate and distinct individuals or entities.

Master LLC

Master LLC is the entity registered with the state of Delaware or another state that recognizes series. Part of the series LLC structure (see series LLC definition). It is required to have a Master LLC registered with Delaware before creating any Series LLCs associated with it. The Master LLC is like a parent, or “mothership” LLC. The Master LLC is the only entity of the Master Series structure that is listed on the Certificate of Formation and the certificate will designate that the LLC has the ability to designate protected series. The Master LLC is the protective “fence” around its internal protected series. The most common structure of a Series LLC is to have the Master hold no assets and conduct no business activities other than designating protected series under its “umbrella”.

Maturity Date

Maturity date is the date on which the principal amount of a note, draft, acceptance bond or another debt instrument becomes due and is repaid to the investor and interest payments stop. It is also the termination or due date on which an installment loan must be paid in full. Maturity dates can be extended. SPVs commonly invest into convertible notes which have a “maturity date”.

Membership Class

Stockholders owning different shares in different companies or assets within the same SPV. Treatment of the investors within the SPV is different because each investor, or portion of investors, owns a different asset or assets from the other SPV investors. Investors are defined as Members of the SPV. Membership classes are a complex accounting puzzle resulting in specialized financial and tax preparation. Structuring cost saving benefits will likely be reversed with the extra accounting and tax preparation expense.

Membership Interest (Membership units, member)

A membership interest is an investor’s ownership stake in an LLC (not an LP). Each investor in an LLC is called a “member.” A person who holds a membership interest has a profit and voting interest in the LLC. Ownership in an LLC can be expressed by percentage ownership interest or membership units. A membership interest is frequently represented in the admission of the investor’s name to the LLC to a ledger, this means no certificated security instruments may be issued to membership interest holders aka members. See Investor and LP.

Membership Sale

Sometimes investors wish to sell their SPV membership interest to a third party for more or less (usually more) than the amount they originally contributed when they invested into the SPV. It is advised to consult legal counsel and the SPV fund documents in these matters. A membership sale requires legal documentation and cap table updates and be aware that a membership sale is considered a taxable event so a tax return and K1s will be needed.

Membership Transfer

Oftentimes an investor needs to change the entity that invested in the SPV. For example, an investor might use an LLC to make an investment and then years later set up a trust that will hold all of the investor’s assets, including the investment they made into the SPV. The investor will ask the Organizer to “transfer” their SPV membership interest from the LLC to their new Trust. Membership transfers require legal documentation and cap table updates. Be aware that a membership transfer is considered a taxable event so a tax return and K1s will be needed. The definition of a membership transfer is when an investor transfers their membership interest from one entity they control to another entity they control. A Membership Transfer is NOT a Membership Sale. Other common situations that warrant a membership transfer are divorce and death.

Merger

A merger is a deal to unite two existing companies into one new company. There are several types of mergers and also several reasons why companies complete mergers. Most mergers unite two existing companies into one newly named company. Mergers and acquisitions are commonly interchangeable terms. SPVs that own shares in a company that merges or is acquired will receive new shares in the acquiring company or the new company or they will receive cash or some of both cash and new equity. If an SPV owns shares in a company that is acquiring other companies, the SPV will not receive any new shares or cash.

MFN (Most Favored Nation)

In a contract, a most favored nation clause indicates that one party has the right to the best pricing or terms for similar types of transactions. SPV Organizers might use a MFN clause when negotiating an investment into an asset. Or an SPV Organizer might agree to an MFN clause with an investor who wishes to have the best economic terms in exchange for their investment in the SPV.

Multi-Asset

The same legal entity (SPV) investing in more than one asset. Typically an SPV invests into one asset but sometimes an Organizer will use one SPV and invest into two or more assets. A multi-asset SPV can function more as a venture fund than an SPV.

New Round

Is another round of business financing by SPV Organizers, private equity investors or venture capitalists, for a company to raise capital. See Investment Round.

Non Accredited Investor

A non-accredited investor is an investor who fails to meet the net worth or income requirements defined by the Securities and Exchange Commission (SEC). Non-accredited investors are sometimes referred to as retail investors. The concept of a non-accredited investor comes from the various SEC acts and regulations that refer to accredited investors. An SPV Organizer should never allow non accredited investors to invest in their SPV.

OA (Operating Agreement)

LLC Operating Agreement is a document that customizes the terms of a Limited Liability Company (LLC) according to the specific needs of the owners and outlines the financial and functional decision-making in a structured manner. An Operating Agreement is a crucial document that should be included when setting up an SPV. The document, once signed by the members (owners), acts as a binding set of rules for them to adhere to. An SPV Operating Agreement governs the relationship between all of the investors and managers of the SPV. An SPV Operating Agreement is accompanied by two other documents, the subscription agreement and the private placement memorandum.

OFAC (Office of Foreign Control)

Office of Foreign Assets Control is a financial intelligence and enforcement agency of the United States Treasury Department. It administers and enforces economic and trade sanctions in support of the United States national security and foreign policy objectives. The OFAC sanctions list is designed to facilitate the use of the specially designated nationals and blocked persons list and other sanction lists administered by OFAC. An SPV Organizer should input each of their investors’ names through the OFAC website to assure themselves that none of their investors are considered bad actors by the US government.

Opportunity

When an SPV Organizer has concluded that a particular deal or asset is of a certain quality they share that deal or asset with their network of investors as an “opportunity”. An opportunity is the chance for an investor to subscribe to an SPVs offering of investing into a private asset.

Organizer

An individual, entity, syndicator, angel group, fund or venture capitalist who organizes SPVs and raises funds by reaching out to their network of accredited investors to invest in private assets.

Oversubscribed

Oversubscribed is a situation in which an asset, like a startup company or real estate project, has more investment interest than allocation available. For example, a start up company is raising $1 million in new capital and the SPV Organizers and venture capitalist offer $3 million in capital. This means this startup company is oversubscribed by $2 million.

Ownership Class

Different types of stock– Series A stock holders own a different ownership class than Series B stockholders, Common stockholders own a different share class than the series A or B investors, etc.

PCA (Post Close Activity)

A post-closing activity (PCA) is any event that requires active administration of the SPV by the investment portfolio, the Organizer, or the investors in the fund. There are two categories of SPVs PCA, administration of the SPV and the SPV acting in its role as an investor in an asset. Types of administration of the SPV PCAs include membership transfers and sales, carry assignments, manager resignations, and SPV dissolution and shutdown. Types of the SPV acting in its role as an investor in an asset PCAs include investment updates, financing review and round consents, general corporate actions, mergers and acquisitions, stock splits, IPO – initial public offering, and non exit distributions.

PE (Private Equity)

Private equity is equity capital that is not quoted on a public exchange. Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies that result in a delisting of public equity. Capital for private equity is raised from retail and institutional investors, and can be used to fund new technologies, expand working capital within an owned company, make acquisitions, or to strengthen a balance sheet.

Plan Asset Rule

An entity, such as an SPV that is not itself a plan subject to ERISA, is treated as holding assets of the investing employee benefit plans if it appears that its primary purpose is to invest retirement plan assets. This is known as the “look-through rule.” The determination of whether an entity is treated as holding ERISA plan assets is made based on regulations. The Plan Asset Rules provide additional exceptions to the look-through rule, including three well-known exceptions.

The entity is a Venture Capital Operating Company (VCOC)
The entity is a Real Estate Operating Company (REOC)
Less than 25% of the value of any class of equity interests in the entity is held by benefit plan investors

Portfolio

A grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents. A portfolio may consist of non-public securities, like start up companies, real estate, art, and secondaries. Investing into private assets through a number of SPVs would result in a portfolio of private assets.

Portfolio Company (Investment Portfolio)

A start up company, company or entity in which an SPV invests into.

Private Transaction

A purchase or sale of assets that are not publicly listed. SPVs are used to aggregate capital to participate in a private transaction.

Pro Rata (Proportionate Allocation, Pro Rata Dividends Share, Pro Rata Investment Opportunity)

Pro rata is the term used to describe a proportionate allocation. It is a method of assigning an amount to a fraction according to its share of the whole. Pro rata in business financing may be used to identify the amount of shareholders dividend according to its share in the company. For SPVs, pro rata rights identify shareholder’s applicable investment rights that enable them to participate in a subsequent round of funding proportionate to their existing shares in order to maintain their level of percentage ownership in the company.

*Pro-Rata (distribution share allocation)
Term used to describe a proportionate allocation. It is a method of assigning an amount to a fraction according to its share of the whole. Pro rata calculations are used to determine distribution amounts investors.

*Pro-Rata (Right of First Refusal)
The right of a shareholder to purchase shares in a future financing to maintain their percentage of ownership in a company.

Public Transaction

A purchase or sale of assets in which there will typically be no identifiable party to stand behind the obligations of the transaction after closing. In a public company transaction, the target company is subject to ongoing disclosure requirements by the Securities and Exchange Commission. This means that there is a significant amount of information regarding the company in the public domain and available for analysis.

Purchase Agreement (PA)

A sales and purchase agreement (PA) is a legal contract that obligates a buyer to buy and a seller to sell a product or service. An PA serves as a basis for a transaction to take place, providing a framework of how the transaction will proceed, what is included in the transaction, and, if necessary, what is excluded from the sale. The purpose of an SPV is to aggregate funds in order to execute on a PA, or said another way, SPVs are used to aggregate funds to buy something and the PA is the legal document used to execute on that purchase. Company stock, real estate project, purchasing an interest in another SPV or venture fund, or any other private asset the SPV Organizer and its SPV investors see fit to purchase. See Stock Purchase Agreement (SPA).

Purchase Amount

Amount paid for an asset. The final amount sent from the SPV to the company or sponsor in exchange for the asset. The purchase amount should be stated in the purchase agreement.

Qualified Clients

A qualified client is a person that meets certain thresholds set by the SEC, which for individuals are currently at least $1.1. million in assets under management with the applicable investment advisor or a net worth of at least $2.2 million.

Qualified Purchaser

A qualified purchaser is a type of investor (other types are accredited investor and qualified clients) who can participate in certain alternative asset vehicles, such as 3(c)(7) funds. This standard gives SPV Organizers more flexibility in terms of the number of participants that can subscribe than the type of vehicles available for accredited investors (3(c)(1) funds). This ultimately enables the fund to grow to a bigger size and invest more capital through a single vehicle. To become a qualified purchaser, an individual generally has to have at least $5 million in investments or assets and a legal entity must have at least $25 million in investments.

Qualifying Venture Capital Fund

Qualifying venture capital funds are a subset of all venture capital funds defined in the venture capital fund adviser exemption. Generally, structured vehicles that rely on Regulation D are limited to 100 investors. However, Qualifying Venture Capital Funds that meet the definition a “venture capital fund” stipulated by the Investment Advisers Act of 1940 can raise capital from up to 250 investors if they manage less than $10 million. An SPV can be considered a qualifying venture capital fund.

Reg A (Regulation A or Title IV of the JOBS Act or Reg A+)

An exemption from registration for public offerings. Regulation A provides two offering tiers: Tier 1, for offerings of up to $20 million in a 12-month period; and Tier 2, for offerings of up to $50 million in a 12-month period. For offerings of up to $20 million, companies can elect to proceed under the requirements for either Tier 1 or Tier 2. Basic requirements include company eligibility, bad actor disqualification, disclosure, limitations for non-accredited investors, audited financials, and ongoing reporting. SPVs can be used to aggregate capital for a Reg A offering.

Reg CF (Regulation Crowdfunding or Title III of the Jobs Act)

Regulation Crowdfunding (CF) provides an exemption from the registration requirements for securities-based crowdfunding allowing companies to offer and sell up to $5 million of their securities without having to register the offering with the SEC. With Regulation CF, non accredited investors now have the opportunity to participate in the early capital raising activities of start-up and early-stage businesses. Anyone can invest in a Regulation CF offering but investors are limited in how much they can invest during any 12-month period in these transactions. SPVs can be used to aggregate capital for a Reg A offering.

Registered Agent

Also known as a resident agent or statutory agent, a registered agent is a business or individual designated to receive service of process when a business entity is a party in a legal action such as a lawsuit or summons. An SPV will typically have to engage a registered agent. Depending on the structure the SPV uses, a registered agent may be on the SPV directly or indirectly if they use the Master Series structure.

Regular LLC/LP (Traditional LLC/LP)

Before the Master Series LLC/LP structure was codified there was only LLC or LP. Now, because the Master Series structure can cause confusion, we need to distinguish between the two and the typical words to describe the original LLC/LP structure is “regular” or “traditional” (or the “OG!”). A regular LLC/LP structure typically requires a filing and fee payment for setup, an annual fee, and when the time comes, a shutdown filing and fee. Additionally, a regular LLC/LP will come with a stamped, official document recognizing the official creation and status of the LLC/LP. Some banks and some jurisdictions do not recognize a Series LLC/LP because their policy requires the evidence of an officially stamped documents as evidence for the entity’s legitimacy.

Responsible Party

This term can be found in various IRS tax forms to apply for the person who will control the entity and its assets; typically the Organizer and/or the investment advisor.

SAFE (Simple Agreement for Future Equity)

An agreement between an investor and a company that provides rights to the investor for future equity, except without determining a specific price per share at the time of the initial investment. The SAFE investor receives the futures shares when a priced round of investment or liquidation event occurs. SAFEs are intended to provide a simple mechanism for startups to seek funding, while avoiding the more traditional debt features of convertible notes.

SAFE-T (Simple Agreement for Future Equity or Tokens)

A SAFE-T is an agreement between an investor and a company that provides rights to the investor for when a cryptocurrency or other product is created, the investor will be given access to the newly created cryptocurrency or equity, except without determining a specific price at the time of the initial investment. SAFE-Ts are intended to provide a simple mechanism for startups to seek funding, while avoiding the more traditional debt features of convertible notes. A SAFE-T is considered a security.

SAFT (Simple Agreement for Future Tokens)

A SAFT is an agreement between an investor and a company that provides rights to the investor for when a cryptocurrency or other product is created, the investor will be given access, except without determining a specific price at the time of the initial investment. SAFTs are intended to provide a simple mechanism for startups to seek funding, while avoiding the more traditional debt features of convertible notes. A SAFT is considered a security.

Secondary Sale

A secondary sale is the sale by an existing stockholder of shares in a private company to a third party that does not occur in connection with an acquisition of the company. Secondary sales differ from primary sales because in primary sales, the company sells stock to its investors and keeps the money. In secondary sales, the proceeds of the sale go towards the stockholder and the company doesn’t receive any capital. SPVs are commonly used to aggregate capital to purchase secondary securities from an existing stockholder. Additionally, SPV investors can sell their membership interests in a secondary transaction/sale. Secondary sales can trigger legal and regulatory considerations.

Security Filings

Referring to the Federal Form D and Blue Sky filings.

SEDAR

System for Electronic Document Analysis and Retrieval, the electronic filing system for the disclosure documents of issuers across Canada, excluding Ontario and British Columbia as they can be filed outside SEDAR. This is the Canadian equivalent of the Securities and Exchange Commission (SEC).

Series A (Series Seed, Series B, Series C – Class of Stock)

Series A, B, and C are funding rounds that generally follow “seed funding” and “angel investing,” providing outside investors the opportunity to invest cash in a growing company in exchange for equity or partial ownership. Series A, B, and C funding rounds are each separate fund-raising occurrences. Series A is the first major round of business financing by experienced SPV syndicators and venture capitalists. An “A” round by external investors generally takes place after the founders have used their seed money to provide a “proof of concept” demonstrating that their business concept is viable – and could eventually be profitable. SPVs are used to participate in all funding rounds, Seed, A, B, C and beyond.

Shareholder (Stockholder)

Any person, company or other institution that owns at least one share of a company’s stock. Shareholders are a company’s owners. They have the potential to profit if the company does well, but that comes with the potential to lose if the company does poorly. SPVs are the shareholders of companies they invest in and the SPV investors are called SPV members.

Shutdown (Closedown, Dissolution)

A cessation of operations or activity of a company or a segment of its operations. Usually happens where a company experiences no benefit for continuing operations, runs out of cash or from shutting down temporarily; it is the combination of output and price where the company earns just enough revenue to cover its total variable costs, hence there is no specific benefit to continuing production. When a portfolio company or asset shuts down the SPV typically no longer has a purpose and can also shut down / wind down.

Side Letter

An Organizer will use a side letter to provide one SPV investor different (usually improved) economic terms than another investor or the rest of the SPV investors. Sometimes an SPV Organizer will reward or entice an investor to subscribe to the SPV with a change in the SPV economics, like lower carry or management fees. Because the SPV documents state the economic terms for all SPV investors, if the Organizer wants to give different economic terms to one or a few of the investors they don’t change the SPV documents, they provide a side letter that states this investor has different terms. Like a quiet side contract. See MFN.

Series LLC (SLLC)

A Series Limited Liability Company is a master LLC whose organizing document provides for separate subunits (series), which operate as independent LLCs. It is a form of a limited liability company that provides liability protection across multiple “series” each of which is theoretically protected from liabilities arising from the other series, protect personal assets from a legal claim relating to their real estate investment or business liabilities. Additional liability protection may be gained by properly forming and maintaining a separate LLC to hold each property or business entity. By forming a separate LLC to own and hold each legally titled separate property or business entity, theoretically only the assets owned by a specific LLC would be subject to claims or lawsuits arising against that LLC. Under Delaware law, a series can enter into contracts, hold title to assets, grant liens and security interests and sue or be sued.

SPA (Stock Purchase Agreement, Deed of Conditional Sale, Deed of Subscription, Asset Purchase Agreement, Purchase Agreement)

A sales and purchase agreement (SPA) is a legal contract that obligates a buyer to buy and a seller to sell a product or service. An SPA serves as a basis for a transaction to take place, providing a framework of how the transaction will proceed, what is included in the transaction, and, if necessary, what is excluded from the sale. It allows the buyer and seller of a particular asset to negotiate, and ultimately agree upon, a proper price. It is a way of finalizing the interests of both parties before closing the deal. See Purchase Agreement.

SPV (Special Purpose Vehicle)

A legal structure, used typically to aggregate funds of one or more investors to purchase a private asset. SPVs have been used as a financial structure method in a number of contexts including derivatives trading, securitization transactions, and pooled investments. Today, Organizers from around the world are using the SPV structure to facilitate pooled investments into private assets. SPVs are the easiest, most convenient and most affordable structure available to pool funds for investment purposes. No other structure can match the easy of set up, the low costs of creation and maintenance or the speed of registration and formation. Some might even say SPVs are the structure of the people – anyone from anywhere can use an SPV to organize accredited investors capital in order to invest into private assets.

SS4

IRS form or application to apply for an EIN. This relays the contact information for the entity and the person responsible for requesting it. See EIN.

SSN (Social Security Number)

A nine-digit number assigned to citizens, some temporary residents and permanent residents of the United States (US) in order to track their income and determine benefit entitlements. US investors into an SPV need to share their SSN with the SPV Organizer for KYC/AML background check purposes.

Stock (Share, Equity, Security)

A share in the ownership of a company, evidenced by a Stock Certificate. The exercise of the ownership rights in the company is best manifested through the voting rights granted on the different types of stock. Stock represents a claim on the company’s assets and earnings.

Structured Vehicle (SPV, Venture Fund, Private Equity Fund, Structured Investment Vehicle)

A legal entity, typically an LLC or LP, used to pool investor capital to invest in a private asset. The term Structured Vehicle is a descriptive term to describe the use of an LLC or LP structure to aggregate investors funds in order to purchase a private asset. Structure Vehicle is the broad term (umbrella term) that describes an SPV, venture fund, private equity fund, hedge fund, and countless other “fund” or “vehicle”.

Sub Doc (Subscription Document, Subscription Agreement)

A subscription agreement (Sub Docs) is an application by an investor to join an SPV (LLC or LP), and it is also used to sell stock shares in a private company. All SPV investors need to be accepted by the SPV Organizer. The investor candidate fills out a form documenting the investor’s suitability for the investment in the SPV. SPVs invest in companies and other private assets by completing a subscription agreement, which is an agreement between the issuing company or group and the investor documenting how many shares are sold and the price of the shares. Sub Docs are one of the three sets of documents that an SPV uses to govern the SPV and the members (investors). The Sub Docs are filled out by the investor and contains key investor representations. The filling out of the Sub Docs by the investors is the reason for the term “subscription” to describe an investors investment into an SPV.

Subscription Amount

The subscription amount is the minimum monetary commitment that the Organizer is requesting from the investors in order to participate in the deal. Most SPVs have a minimum subscription amount that is set by the Organizer and can be adjusted from time to time by the Organizer.

Syndicate

Syndicate is another name for SPV. See SPV.

Syndicator

Syndicator is another name for Organizer. See Organizer.

Takeover (Takeon, SPV Takeover)

A takeover of the administrative, windup and post close activities of an existing SPV or fund which has already closed.

Taxable Event

Any event or transaction that results in a tax consequence for the party who executes the transaction is considered a taxable event. Common examples of taxable events for an SPV include receiving interest and dividends, selling securities for a gain, and exercising options. Unrealized gains on an investment do not qualify as a taxable event. When an SPV has a taxable event during the calendar year, they are required to file a federal 1065 tax return with the IRS and share the corresponding K1s with the SPV investors. When an SPV does not have a taxable event in a calendar year they are not required to file a 1065 tax return. Most single asset SPVs have several years where there are no taxable events.

Tax Extension

Every tax form has a required file date but the IRS allows for extensions to this file date. Filing a tax extension changes the file date giving additional time for preparation and filing of a tax form. SPVs file a partnership return of IRS form 1065. The required date is by March 15th of each calendar year unless an extension is filed. If an Extension is filed the file required date is September 15.

Title III (Regulation Crowdfunding/Reg CF)

Crowdfunding regulation instituted as part of the JOBS Act. Title III allows issuers to raise funds online from non-accredited individuals for investment purposes. Issuers of securities in a Title III offering must meet various requirements. See Reg CF.

Traditional LLC/LP (Regular LLC/LP)

Before the Master Series LLC/LP structure was codified there was only LLC or LP. Now, because the Master Series structure can cause confusion, we need to distinguish between the two and the typical words to describe the original LLC/LP structure is “regular” or “traditional” (or the “OG!”). A traditional LLC/LP structure typically requires a filing and fee payment for setup, an annual fee, and when the time comes, a shutdown filing and fee. Additionally, a traditional LLC/LP will come with a stamped, official document recognizing the official creation and status of the LLC/LP. Some banks and some jurisdictions do not recognize a Series LLC/LP because their policy requires the evidence of an officially stamped documents as evidence for the entity’s legitimacy.

Valuation

Valuation is the process of determining the current worth of an asset or a company. There are many techniques used to determine value. The market value of a security is determined by what a buyer is willing to pay a seller, assuming both parties enter the transaction willingly. SPVs are used to invest into private assets and private assets do not have a public market to place a value on the asset. This means a private asset’s true value is never really known until a financing event occurs.

Valuation Cap

A “valuation cap” entitles note holders to convert the outstanding balance on the note into shares of stock at the lower of (i) the valuation cap or (ii) the price per share in a qualified financing. Valuation cap’s are used in cases of a convertible debt and SAFE rounds that allows Investors to invest into a debt instrument or SAFE, which will later convert into equity of a company.

VC (Venture Capital or Venture Capitalist)

Venture capital is financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential. For startups without access to capital markets, venture capital is an essential source of money. Risk is typically high for investors, but the downside for the startup is that these venture capitalists usually get a say in company decisions. SPV Organizers are considered venture capitalists.

VC Fund (Venture Capital Fund)

An investment fund that manages the money of investors who seek private equity interest in startup and small-to medium-sized enterprises with strong growth potential. Investment is used specifically to fund growth in the Series A round of funding. Venture capital funds use a structured vehicle structure very similar to an SPV. In fact, an SPV and venture capital fund are nearly identical in structure and anatomy. One main difference between the two is that Venture capital funds are blind pool funds where an SPV is not. See also Venture Capital Fund (ERA).

Venture Capital Fund (ERA)

For ERA (and other) regulatory purposes, the SEC has defined a Venture Capital Fund as:
A private fund that meets the following qualifications:

Pursues a venture capital strategy;
Fund has no more than 20% of the fund’s total assets (including committed but not yet invested capital) in assets that are not “qualifying investments” or “short term holdings.”
- Qualifying investment is one of three things: (i) an equity security issued by a “qualifying portfolio company” that is acquired directly by the private fund from such qualifying portfolio company; (ii) any equity security that is issued by a qualifying portfolio company in exchange for an equity security in that qualifying portfolio company; (iii) any equity security issued by a parent of qualifying portfolio company in exchange for an equity security in that qualifying portfolio company.
- Qualifying portfolio company must meet three requirements: (i) at the time of the investment by the fund, the company must not be a reporting company under the SEC Act of 1943 nor be listed or traded on any foreign exchange and is not an affiliate of an Exchange Act reporting company or a publicly traded foreign company; (ii) the company not borrow or issue debt obligations in connection with the fund’s investment in the company and distribute to the fund the proceeds of of such borrowing or issuance in exchange for the private fund’s investment and; (iii) it cannot be a mutual fund, hedge fund, private equity fund, another venture capital fund, a commodity pool fund, or an issuer of asset backed securities.
May not borrow, incur indebtedness, or guarantee debts of portfolio companies in a total amount in excess of 15% of the fund’s aggregate capital contributions and uncalled committed capital.
Does not provide redemption rights except in extraordinary circumstances.
Fund may not be registered under the Investment Company Act of 1940 and has not elected to be treated as a business development company.

Venture Capital Fund Exemption

The venture capital fund adviser exemption allows advisers to venture capital funds to avoid certain regulations under the Investment Advisers Act. A venture capital fund is a private fund that pursues a venture capital strategy, holds no more than 20% of assets in non-qualifying investments, does not borrow or incur leverage and does not grant investors redemption rights. See Qualifying Venture Capital Fund

W-8

W-8 form is an Internal Revenue Service (IRS) form that allows non-US individuals and businesses to confirm they are not US taxpayers. An SPV Organizer should collect a completed W8 (W8 BEN and W8 BEN-E) from each of their non US investors. A completed W8 form allows for an SPV tax return (form 1065) to be properly prepared and in some cases, obtaining a W8 from non US investors provides the SPV investors with an exemption from specified U.S. information return reporting and backup withholding regulations.

W-9 (Request for Taxpayer Identification Number and Certification form)

A W-9 form is an Internal Revenue Service (IRS) form, also known as a Request for Taxpayer Identification Number and Certification form, which is used to confirm a person’s taxpayer identification number (TIN). This confirmation can be requested for either an individual defined as a U.S. citizen or a person defined as a resident alien. An SPV Organizer should collect a completed W9 from each of their US investors. A completed W9 form allows for an SPV tax return (form 1065) to be properly prepared.

Waterfall

A schedule typically described in the SPV documents of how investor distributions are calculated. Typically broken up into tiers at either the SPV level or investment level that must be satisfied before Carried Interest is paid to the Organizer. Tiers often consist of the following phases: Return of Capital, Preferred Return, Catch-up, and Carry. Venture funds, private equity funds, and hedge funds typically have far more complex waterfall structures than does a traditional SPV. A waterfall calculation is also typical at the investment level, meaning the asset the SPV invests into has a waterfall.

1042 (1042-S, 1042S)

Forms 1042, 1042-S and 1042-T are United States Internal Revenue Service tax forms dealing with payments to foreign persons, including non-resident aliens, foreign partnerships, foreign corporations, foreign estates, and foreign trusts.

Forms 1042 and 1042-S are filed separately from an SPVs 1065 form. The main difference between forms 1042 and 1042-S is that form 1042-S is concerned with payments made to foreign persons, while form 1042 is concerned with determining how much income will be withheld for tax withholding purposes. Also, Form 1042-S must always be filed together with Form 1042-T but Form 1042 can be filed by itself. When an SPV has non-US investors and invests into a startup company and invests into a convertible note, if the SPV Organizer obtains a completed W8 from each non-US investor and files a 1042 for each non-US investor, then the non-US investor is not required to have any of its profits withheld by the IRS for that SPV investment.

1065

An IRS tax return form that reports the profits, losses, deductions, and credits of a business partnership. SPVs are considered partnerships (LLC or LP) by the IRS so SPVs file a 1065 each year the SPV has a taxable event. The IRS form 1065 generates K1s as part of its form. Each SPV member (investor) receives a K1 from the 1065.

1099

Tax document issued by a business entity to another entity or individual which reports non W-2 wage income (non-employee compensation, interest, dividends, etc.). An SPV may need to generate and deliver 1099s to individuals or entities (companies) that provided the SPV with services and was paid for those services. Examples include a law firm, management company and administration group.

2x (or 3x, 4x, etc.)

A return/realization multiple. In private equity, a measurement showing how much has been paid out to investors. A realization multiple is found by dividing the cumulative distributions by the paid-in capital. Return/Realization Multiple = Cumulative Distributions / Paid-In Capital (e.g. 2x means an investor or SPV received back two times the amount that it invested in an asset). An SPVs financial performance might be categorized as a 2x or 3x returning SPV.

3(c)(1) Exemption

In order for an SPV to not be subject to the Investment Company Act of 1940, the SPV must comply with various exemptions. The 3(c)(1) exemption states that no more than 100 accredited investors can participate in the SPV (there is another exemption called the Qualifying Venture Capital Fund exemption that allows, in certain circumstances, up to 250 investors). Rule 506 of Regulation D (506(b) and 506(c) Offering) is often paired with the 3(c)(1) and 3(c)(7) exemption.

3(c)(7) Exemption

In order for an SPV to not be subject to the Investment Company Act of 1940, the SPV must comply with various exemptions. The 3(c)(7) exemption states that no more than 2000 qualified purchaser investors can participate in the SPV. An SPV that is using the 3(c)(7) exemption cannot have a single “accredited investor” but all of the investors must be qualified purchasers. Rule 506 of Regulation D (506(b) and 506(c) Offering) is often paired with the 3(c)(1) and 3(c)(7) exemption.

409(a) Valuation

A 409(A) valuation is a formal report that sets the current value of an investment portfolio company’s common stock and the strike price to exercise an option to purchase the stock. Typically a company hires a professional appraiser to prepare the report since stock options set at a strike price below the current value of the common stock can result in large tax penalties to the option recipient. Section 409A of the United State’s tax law requires that the strike price (the set future price per share to exercise a stock option) not be lower than the current value of a share of the investment portfolio company’s common stock on the date that the stock option is issued. When an SPV invests into a startup company, knowing what the annual 409(a) valuation is could provide an update on how the company is performing.

506(b) Offering

Rule 506 of Regulation D provides two exemptions from registration of an offering of securities with the SEC. An issuer offering securities pursuant to rule 506(b) cannot use general solicitation or advertising to market the securities. All the investors should be accredited investors. Issuers are required to file Form D with the SEC, comply with state Blue Sky laws, and bad actor disqualification provisions. Most SPVs use the 506(b) exemption because most SPV Organizers only invite investors to whom they have a pre-existing relationship. Rule 506 of Regulation D (506(b) and 506(c) Offering) is often paired with the 3(c)(1) and 3(c)(7) exemption.

506(c) Offering

Rule 506 of Regulation D provides two exemptions from registration of an offering of securities with the SEC. An issuer offering securities pursuant to rule 506(c) may broadly solicit and generally advertise an offering provided that, all purchasers in the offering are accredited investors, the issuer takes reasonable steps to verify purchasers’ accredited investor status, the issuer files Form D with the SEC, complies with state Blue Sky laws, and complies with bad actor disqualification provisions. A small percentage of SPVs use the 506(c) offering because of the extra verification burden it places on every investor that subscribes to the SPV. In some cases, 506(c) is the perfect offering, for example, an Organizer who has a large social network where they don’t know each follower. This Organizer can announce publicly (through their social channels) that they have launched an SPV, then each investor can participate after they have verified they are accredited. See 506(c) Accreditation. Rule 506 of Regulation D (see 506(b) and 506(c) Offering) is oftentimes paired with the 3(c)(1) and 3(c)(7) exemption.

506(c) Accreditation

Rule 506 of Regulation D provides two exemptions from registration with the SEC for companies offering and selling securities. The company can broadly solicit and generally advertise the offering if: (1) the investors in the offering are all accredited investors; (2) the issuer takes reasonable steps to verify that the investors are accredited investors by reviewing financial statements pursuant to several non-exclusive methods (income, net worth, third-party verification), or by reviewing the investors accreditation status pursuant to a principles based (facts and circumstances) approach. See 506(c) Offering.