Structuring an investment vehicle properly is crucial to its success. Special Purpose Vehicles (SPVs) and Private Funds serve different purposes, have distinct regulatory requirements, and cater to varying investor profiles. For fund managers and investors, understanding these differences is key to choosing the right structure.
In this article, we break down the key differences between SPVs and Private Funds, to help you decide which structure aligns best with your investment objectives.
What is a Special Purpose Vehicle (SPV)?
A Special Purpose Vehicle (SPV) is a legal entity created to pool investor capital for a specific transaction—such as acquiring shares in a startup, investing in real estate, or executing a private equity deal. Unlike private funds, which operate continuously, SPVs exist for a single investment and typically dissolve after the exit.
Key Characteristics of an SPV:
- Single Investment Focus – Designed for one particular asset or deal, such as shares in a private company.
- Shorter Lifespan – Exists only until the investment is realized or exited.
- Fee Structure – SPVs often charge fees, including:
- 1. Setup Fees – Administrative costs for structuring the entity.
- 2. Annual Management Fees – Typically 1–2% of committed capital.
- 3. Carried Interest – Usually 10–20% of profits upon exit.
- Simple Structure – Commonly formed as a Limited Liability Company (LLC) or Limited Partnership (LP) to keep administration simple.
- Lower Administrative Burden – Generally, fewer regulatory obligations compared to private funds.
- Direct Investment Access – Investors in an SPV get exposure to the underlying asset rather than a diversified portfolio.
Regulatory Overview for SPVs:
SPVs typically qualify for securities exemptions under:
- Regulation D (Reg D), Rule 506(b) or 506(c) – Allows the SPV to raise capital while bypassing full SEC registration.
- Regulation S – Enables fundraising from non-U.S. investors.
- Investment Company Act Exemptions:
- 1. 3(c)(1) Exemption – Limited to 100 accredited investors or fewer.
- 2. 3(c)(7) Exemption – Allows only qualified purchasers (individuals with $5M+ in investments).
- 3. Venture Capital Exemption (VCE) – Rule 203(l)-1 – Enables SPVs investing primarily in private operating companies to avoid SEC registration as an investment adviser.
The Venture Capital Exemption (VCE) for SPVs
What is the Venture Capital Exemption?
The Venture Capital Exemption (VCE) under Rule 203(l)-1 of the Investment Advisers Act allows SPVs that invest primarily in private operating companies (e.g., startups) to avoid SEC registration as an investment adviser—a significant regulatory relief for emerging fund managers and angel investors.
Benefits of the VCE for SPVs:
- Exemption from SEC Investment Adviser Registration – SPV managers do not have to register as investment advisers, reducing compliance costs.
- Lower Regulatory Burden – Fewer reporting and disclosure requirements compared to traditional private funds.
- Flexibility for Venture Deals – Ideal for one-off investments in startups and high-growth companies.
- Faster Fundraising Process – Since the SPV does not need full SEC registration, managers can launch deals more quickly.
Limitations of the VCE for SPVs:
- Limited to Venture Capital Investments – The SPV must invest at least 80% of its assets in private operating companies (i.e., startups or private businesses).
- No Leverage Allowed – The SPV cannot use significant debt financing to make investments.
- Restrictions on Secondary Transactions – The SPV must primarily invest in primary issuances rather than secondary market transactions.
- Limited to U.S. Markets – While Regulation S can allow foreign investments, the VCE primarily applies within the U.S. market.
What is a Private Fund?
A private fund is an investment vehicle that pools capital from multiple investors to build a diversified portfolio over time. Common types include hedge funds, private equity, venture capital, and real estate funds.
Key Characteristics of a Private Fund:
- Multi-Asset Portfolio – Unlike SPVs, private funds invest across multiple assets, reducing concentration risk.
- Flexible Time Horizon – Private funds can have a defined lifespan (e.g., 7–12 years) or be evergreen (open-ended, allowing continuous investments and redemptions).
- Regulatory Oversight – Depending on the fund’s size and investor base, private funds may be subject to SEC, CFTC, or state-level regulations.
- Fee Structure – Private funds typically follow the traditional “2 and 20” hedge fund model:
- 1. Management Fee – Typically 2% of assets under management (AUM), covering operational costs.
- 2. Performance Fee (Carried Interest) – Usually 20% of profits, incentivizing fund managers.
- 3. High-Water Mark – Protects investors by charging performance fees only on profits that exceed prior highs preventing double fees on previously earned returns.
Regulatory Overview for Private Funds:
Private funds operate under exemptions from the Investment Company Act of 1940:
- Section 3(c)(1) Exemption – Limited to 100 accredited investors or fewer.
- Section 3(c)(7) Exemption – Allows an unlimited number of investors but only if they are qualified purchasers ($5M+ in investments for individuals, $25M+ for institutions).
- Regulation D (Rule 506(b) or 506(c)) – Provides a securities exemption for private placements.
- Venture Capital Exemption (VCE) – Rule 203(l)-1 – Also available for qualifying venture capital funds, with similar limitations to SPVs.
SPVs vs. Private Funds: A Quick Comparison
| Feature | SPV | Private Fund |
|---|---|---|
| Investment Focus | Single investment | Multiple investments |
| Time Horizon | Short-term (until exit) | Long-term (7–12 years) or evergreen |
| Structure | LLC or LP | LP or LLC with fund manager |
| Regulatory Burden | Lower | Higher (SEC, CFTC, state-level oversight) |
| Fund Exemptions | 3(c)(1), 3(c)(7), Reg D, Venture Capital Exemption (VCE) | 3(c)(1), 3(c)(7), Reg D, VCE |
| Investor Base | Smaller, deal-specific investors | Institutional & high-net-worth investors |
| Fee Structure | Setup fees, management fees, carried interest | 2% management fee, 20% carried interest, high-water mark |
| Risk Profile | Concentrated | Diversified |
| Ideal For | Single deals, co-investments, venture capital SPVs | Professional fund management, diversified portfolios |
Which One Should You Choose?
- Use an SPV if you're raising capital for a single investment, want a simple structure, and need a cost-effective vehicle with lower regulatory oversight.
- Use a Private Fund if you plan to manage a diversified portfolio, target institutional investors, and are prepared for long-term capital deployment and compliance obligations.
Need help structuring an SPV or private fund? Seamless Alts specializes in entity formation, compliance, and fund administration—helping you focus on investment success. Get in touch today!