What Is the Difference Between a SPAC and a SPV
Special Purpose Acquisition Companies (SPACs) and Special Purpose Vehicles (SPVs) are two different financial entities that serve unique purposes in investments and business.
In this article, we will explore the fundamental differences between a SPAC and a SPV, highlighting their formation, roles, investor qualifications, and more. Understanding these differences is important for both entrepreneurs and investors.
Understanding SPACs and SPVs
Before delving into the specifics, let’s get a clear picture of what SPACs and SPVs are.
Special Purpose Acquisition Company (SPAC)
A SPAC is essentially a shell company that goes public through an initial public offering (IPO) with the primary intention of acquiring a private company.
It’s often referred to as a “blank-check company” because, before the acquisition, it lacked a specific business operation and primarily exists to raise capital for future purchases.
Special Purpose Vehicle (SPV)
An SPV, sometimes known as a Special Purpose Entity (SPE), is a subsidiary company created by a larger parent company for the purpose of isolating financial risk. SPVs serve various roles, including investing in startups, high-risk projects, or managing specific assets and liabilities.
They provide flexibility and a means to separate certain business activities from the parent company’s balance sheet.
The following are the differences between a SPAC and a SPV in terms of formation and structure, investor focus, investor qualifications, regulatory oversight and investor approach.
Difference Between SPAC and SPV
| SPAC | Difference | SPV |
|---|---|---|
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A SPAC is typically established by a group of business executives and investors, often referred to as sponsors. These experienced individuals conduct an IPO to raise funds from public investors based on their reputation and track record.
The capital collected from the IPO is placed into a trust account, which is accessible only for the purpose of making an acquisition. |
Formation and Structure |
SPVs are usually subsidiaries of established companies or are created for specific investment purposes.
They can take various legal forms, such as limited partnerships, LLCs, or corporations, depending on the specific needs and objectives of their parent companies. SPVs are designed to be flexible and serve as separate entities. |
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SPACs focus on acquiring private companies through mergers or acquisitions. Their purpose is to identify suitable targets and bring them into the public domain. Investors in SPACs are essentially betting on the sponsors’ ability to find an attractive acquisition that will drive the SPAC’s stock price higher. |
Investment Focus |
SPVs can be used for a range of purposes, including investing in startups, managing assets, or taking on high-risk projects. They are commonly used to isolate risk and ringfence specific activities, making them more versatile compared to SPACs. |
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SPACs are open to a broad spectrum of investors who can participate in their IPOs. While there are no stringent investor qualifications, it is essential for investors to evaluate the reputation and track record of the SPAC sponsors. |
Investor Qualifications |
To invest in an SPV, you typically need to be an accredited investor. Accredited investors meet specific financial requirements, which may include income, net worth, or professional experience. This requirement helps ensure that investors are aware of the potential risks associated with SPV investments. |
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SPACs go through an IPO process and must adhere to certain regulatory requirements. However, they have limited financial disclosures at the time of their offering due to their nature as blank-check companies. Recent SEC proposals aim to align SPAC disclosure requirements more closely with traditional IPOs. |
Regulatory Oversight |
SPVs are primarily subject to the regulatory framework applicable to their parent companies. Their regulatory environment can vary depending on the nature of their investments and activities. |
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When investing in a SPAC, investors are essentially placing trust in the sponsors’ ability to make a profitable acquisition. The sponsors are responsible for identifying a target company that will generate returns for the SPAC’s investors. |
Investment Approach |
Investing in an SPV involves more direct control and knowledge about the investment. SPV investors often have a clear understanding of the specific project or startup they are backing. This focused approach allows for greater transparency and due diligence. |
All in All
While both SPACs and SPVs serve unique purposes in the world of finance and investments, they are distinct entities with different structures, investor qualifications, and regulatory oversight.
SPACs are primarily focused on acquiring private companies, while SPVs provide flexibility for various investment strategies, such as startups and high-risk projects. Understanding these differences is important for individuals looking to make informed investment decisions in either of these financial instruments.
Additionally, when considering SPV investments, it is important to remember that only accredited investors can participate, and recent regulatory changes have made it easier for professionals to handle these investments on behalf of others.
In this regard, engaging a professional accounting service in Malaysia allows entrepreneurs and investors to have access to professional guidance in choosing between a SPAC and SPV and ensure their decisions are aligned with their financial objectives and risk tolerance.
