SPVs, or Special Purpose Vehicles, are tailored for investors with specific qualifications. To be recognized as an accredited investor individually, the SEC mandates certain criteria:
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Your net worth, excluding your primary residence, must exceed $1,000,000.
OR
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Your annual income should surpass $200,000, or combined with your spouse, be greater than $300,000 for each of the last two years. Additionally, there should be a reasonable expectation of maintaining this income level in the current year.
These accreditation requirements are put in place to ensure that investments involving substantial capital or risks are accessible only to investors who comprehend and can financially handle the capital and risks involved.
It’s important to note that accredited investors can be entities other than individuals. Qualifications for investing entities include having assets exceeding $5,000,000 for trusts, employee benefit plans, or corporations; being a bank, insurance, or investment company; or having all equity owners of the investing entity being accredited themselves.
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Who Counts as a Qualified Purchaser
Another classification employed by the SEC for certain fund structures is that of a qualified purchaser. Individual investors must meet a higher threshold to be deemed a qualified purchaser, with investments exceeding $5,000,000.
Choosing Between a 3C1 and 3C7 Fund
When establishing your fund, you must decide whether to structure it as a 3C1 fund or a 3C7 fund. Most funds are structured as 3C1 funds, where every Limited Partner (LP) is an accredited investor.
The 3C1 exemption necessitates that all fund investors must be accredited, and the total number of investors must not exceed 100. This structure is suitable for general partners seeking to create SPVs with a smaller number of individual investors.
In contrast, the 3C7 exemption is less restrictive than 3C1 and sets no cap on the number of investors, but every investor must be a qualified purchaser (meaning they must have over $5,000,000 in investments). A separate rule can still matter at scale: a company with more than $10 million in assets and 2,000 or more holders of record has to register under Section 12(g) of the Exchange Act. The 3C7 structure is ideal for general partners looking to establish SPVs with over 100 high-net-worth individuals.
SPV Fees, Carried Interest, and Expense Reserves
In terms of how individuals utilizing SPVs generate income, it’s akin to the process followed by traditional VC funds. Most SPVs charge a management fee and carried interest, alongside setting aside an expense reserve. The specific fees and carried interest percentages can vary depending on the GP’s strategy and circumstances but typically range between 3-10% for fees and remain at 20% for carried interest. The expense reserve is a fixed amount reserved for covering legal, accounting, or other administrative costs associated with the fund, usually around $50,000, depending on the fund’s size and expected needs.
