SPV Management

How is a FlexNote Different from Traditional SPV?

In a traditional SPV, investors invest capital for a % ownership in the SPV. That capital is then invested into an underlying asset that the investors own pro-rata. SPVs are typically LLCs (or a series within an LLC) that is registered with an EIN (employer identification number). The IRS expects a tax return from any EIN unless it is a disregarded entity, which traditional SPVs are not, so these SPVs are required to file a tax return and distribute K-1s to their investors every year. This results in active investors receiving hundreds of K-1s every year prompting expensive and time consuming tax prep work. SPVs are non-operating companies and hold the asset until there is an exit and distribution to the investors.

In a new FlexNote SPV by Venture360, the investors put capital into the SPV using a convertible note. This means they loan the SPV money to make the investment into the underlying asset. This loan is secured by the underlying asset, but the investors don’t own part of the SPV until conversion. When the asset has a liquidating event (loss or gain) the investors then convert to owners and reap the full benefits of the exit as if they had owned the asset from day one. Because the investors are not owners of the SPV and the only owner of the SPV is the manager, the SPV is a disregarded entity for tax purposes. For disregarded entities no tax return is required and no K-1s need to be distributed until the conversion event, which will result in a final tax return and K-1 distribution to the investors.