What is a Special Purpose Vehicle (SPV)?

In United States business law, a special purpose vehicle (SPV), also known as a bankruptcy-remote entity or a special purpose entity (SPE), is a subsidiary created by a parent company to isolate financial risk. Although it is founded by a parent organization, it has its own assets, liabilities, and legal status. Since it is considered a separate entity from the parent company, it maintains its security even if the parent company goes bankrupt. Most special purpose vehicles take the form of partnerships, limited liability partnerships, or joint ventures.

Key Takeaways

• A special purpose vehicle (SPV) or bankruptcy-remote entity or special purpose entity (SPE) is a company created by a parent company to isolate and minimize financial risk.
• Special purpose vehicles may continue to operate, even if their parent company goes bankrupt.
• Generally, special purpose vehicles are partnerships, limited liability partnerships, or joint ventures.

Enron Corp and the Use of Special Purpose Vehicles (SPVs)

Ironically, the best way to understand SPVs is by examining a situation where they were used incorrectly. A common example is the financial crash of Enron Corp, a Houston based energy company, in 2001. While the misuse of SPVs isn’t the only reason Enron fell, it served as a major contributor to its downfall.

As Enron’s stock rose, the company established hundreds of SPVs and transferred the profits to the companies in exchange for cash. Over time, Enron abused SPVs by using them as a dumping site for troubled assets and in order to hide debt for failed projects. Since the problematic assets were not featured on Enron’s balance sheet, its debts seemed much smaller than they were in reality. Once Enron’s practices came to light, its share prices tumbled and the company eventually filed for bankruptcy.

Advantages of Special Purpose Vehicles (SPVs)

When special purpose vehicles are used correctly, they can act as an incredible tool for a number of businesses. Some of its main advantages include:

• Limited Liability: SPVs are considered separate legal entities, so a shareholder’s liability is limited to the amount they have invested in the company.
• Risk Management: SPVs can be utilized to separate and handle particular risks linked with a project or deal, resulting in greater control over the risk.
• Tax Benefits: Depending on the way in which the subsidiary is structured, it may result in lower taxes for investors.
• Bankruptcy Protection: By using SPVs, parent companies are able to undertake high-risk transactions without putting the entire company at risk. If the subsidiary or parent company goes bankrupt, the other remains unaffected.

Disadvantages of Special Purpose Vehicles (SPVs)

It should be noted that SPVs come with several potential downsides, such as:

• Complexity: Setting up an SPV can be complex and time consuming, which can minimize efficiency and deter investors.
• Limited Flexibility: Due to their specific purpose, it can be challenging for them to be flexible enough to adapt to changes in the market.
• Cost: Establishing an SPV can be costly, and if the SPV is dissolved, the parent company will have to retake possession of the assets, which can be a costly process.

Bottom Line

Special purpose vehicles (SPVs) can provide a range of benefits to a company, but it's essential to consider that they may not be a suitable fit for every financial plan. Find out if you should create an SPV by reaching out to one of our reputable business attorneys today.