A brief summary of secondary special purpose vehicles

Background

Secondary SPVs are special purpose vehicles that invest in a secondary asset from an existing holder of a security.

Sales of an asset not directly from company itself are known as secondary sales, or sales on the secondary market. Regular SPVs purchase their asset directly from the issuing entity, typically a startup. Secondary SPVs purchase their asset indirectly, oftentimes from employees who have exercised their options or from other funds that invested directly into the portfolio company

Commonly these secondary SPVs can leverage a SPV into SPV structure e.g. SPV investing into another SPV that owns SpaceX shares.

Benefits:

• Access: Gain access to more types of deals through existing SPVs.

• Membership Interest: Leverage membership interest benefits of SPVs to streamline the acquisition of shares.

• Legal Structure: Clear legal structure with existing ownership of an asset.

Structure Considerations:

• Investment Agreement: It’s important to ensure the investment agreement into the second SPV is clear and accurately represents the securities being purchased.

• Tax Returns: It’s crucial to consider the tax return implications of having two SPVs. Usually, there will be pass-through SPV returns from SPV 2 to SPV 1. The fund administrator may need to wait to receive tax returns from SPV 2.

• Fees: There are twice as many sources of fees to consider across SPVs, management, and carry fees. The fund administrator needs to be able to calculate the fee breakdown.

• Fund Admin Support: As of April 2024, AngelList has reportedly discontinued support for the SPV into SPV structure. Common complexities that may have contributed to this include: Tax Returns: SPV into SPV typically causes delayed K-1s due to waiting for the second SPV’s tax returns and additional fees that can complicate the calculations. Fees: With two SPVs, there are typically fees from both, including administration fees, management fees, and carry fees.

Conclusion

SPV into SPV can be more complex than standard SPVs, so it is important to partner with a strong fund administrator that can support these transactions. Allocations.com has powered many SPV into SPV transactions, e.g., multiple SpaceX SPV into SPV transactions (including many deals I have personally closed myself as a fund manager). The platform was built to support these types of deals and will continue to do so 🚀.