SPVs: A Gateway to Investing in Elite AI Companies

SPVs (Special Purpose Vehicles) offer a practical solution for investors seeking to engage with leading AI companies despite significant barriers to direct investment. As the AI landscape evolves, understanding how to utilize SPVs can empower a broader range of investors to capitalize on opportunities within this lucrative industry.

Below we will consider why do you need SPVs to invest in certain AI companies at all, what types of transaction structures can be used, what are the exit strategies.

Navigating Exclusivity: SPVs as an Alternative Path to AI Investment

Direct investment in top AI companies poses several challenges:

• Selective Investment Practices: Many successful AI firms prefer established venture capital firms, limiting opportunities for others.
• High Minimum Investments: Direct investments often require substantial minimum checks, excluding smaller investors.
• Network Dependence: Accessing investment deals typically relies on personal networks, making participation difficult for new investors.

Despite these barriers, investors can access these companies by purchasing shares in Special Purpose Vehicles (SPVs), which hold interests in target companies.

Anatomy of SPV Investments: Structure, Process, and Layers

An SPV is typically established by a top-tier venture capital fund to invest in a target company. The target company must approve the SPV's inclusion on its capitalization (CAP) table. Minimum investments through an SPV can start as low as $10,000. The SPV is generally managed by a fund administrator, who verifies documents, accepts wire transfers, and forwards funds to the target company, ensuring transparency and accountability throughout the process.

SPVs can be structured as either single-layer or double-layer entities.

• Single-Layer SPV: In this structure, investors directly invest in the SPV that holds shares of the target company and is listed on its CAP table (referred to as the "First Layer SPV").
• Double-Layer SPV: This involves investing in a second SPV that subsequently invests in the First Layer SPV. By doing so, investors become shareholders of an entity that exclusively owns shares of the target company through the First Layer SPV and does not possess any other assets.

The distinction between single-layer and double-layer SPVs lies primarily in governance and control. While both structures result in ownership of the target company, a single-layer SPV allows for direct involvement, such as obtaining a board seat if a significant investment is made. Conversely, a double-layer SPV does not provide the same level of governance rights.

Disclosure Restrictions in Multi-Layer SPV Investments

There are certain restriction in multi-layer SPV investments due to the following factors:

1. Exclusive Relationships: Some top AI companies work exclusively with large VC firms with whom they have pre-existing relationships. They don't allow syndication to maintain control over their investor base.
2. Sensitive Communication: Any communication between the first layer SPV and the Target Company is considered highly sensitive. This information is protected to maintain confidentiality and trust.
3. Legal Obligations: Second layer SPV managers typically have NDAs in place with the First Layer SPV and/or the Target Company. These legal agreements restrict the sharing of any information, including the name of the First Layer SPV, without proper authorization. The execution of these NDAs with any investor into Second Layer SPV is a prerequisite for any disclosure regarding the first layer SPV to occur. Bypassing these agreements is not an option; doing so could lead to legal repercussions and damage relationships between investors and companies. This practice of NDA-only disclosure for the 1st layer SPV helps maintain the integrity of the investment process while protecting the interests of both the target company and the involved investors.

Exit Strategies: Pre-IPO and Post-IPO Option

If you wish to exit SPV before the IPO, a fund, which arrange the SPV, can facilitate a secondary transaction by selling your interest in the SPV to another investor.

Alternatively, if you prefer to wait for the IPO, the fund manager and the transfer agent will handle the direct transfer of shares to you, which you can then sell on the public market.

Conclusion

SPVs provide an effective pathway for investors looking to engage with elite AI companies while navigating common barriers associated with direct investments. By understanding the structure, fee models, and exit strategies associated with SPVs, investors can make informed decisions that align with their financial goals in this dynamic sector