One of our campaigns running right now – EnergyNest – involves investment through an SPV. Here, we hope to define what it is, how it works, why EnergyNest decided on this route and how this might affect you as an investor. Until now we at Invesdor have not worked with a structure like this, mainly because in Finland single purpose entities are not deemed legal – much like nominee structures are not, but they are quite normal in other jurisdictions. SPVs can crop up in a variety of other areas of finance – but let’s focus on its purpose in this instance.
Definition of an SPV
First things first. Single Purpose Vehicle or Special Purpose Vehicle? We’re not sure either – and we’re sure it doesn’t matter either so let’s stick to acronym form. An SPV is a legal entity with a single (or special) purpose. In this case, all investors are pooled together within this entity (it’s actually a company in its own right – EN Capital AS) to invest together into the main entity – EnergyNest AS.
How does it work in practice?
In this case, EN Capital AS has been set up by EnergyNest AS to facility their investment campaign. The company has been set up already, and so – for now – management of the entity is carried out by the EnergyNest management team. After the fundraise, shareholders will be able to vote on how this will change going forward. The SPV will appoint someone to represent them at the EnergyNest Annual General Meeting and vote according to collated opinions.
The investors own shares in the SPV and in turn, the SPV owns shares in the main entity. Proportionally each investor has the same economic benefit as if he would own shares directly. If that’s the case – then why do it this way?
Advantages for the company
They have one extra shareholder rather than possibly hundreds in their cap table. Partners, acquirers and financial institutions may prefer to see a “cleaner” cap table with a short list of shareholders, rather than a very long one. In addition, if the company has an exit, approval is only needed from one shareholder – not many. Furthermore, less administrative efforts are needed for example to invite for the general meetings.
Only one representative attends the annual general meetings. This can make for a smaller and more intimate discussion.
Management of the shareholder base may also be easier in the long-run.
Advantages as an investor:
You are not bound by shareholders’ agreement directly in main entity. In the EnergyNest shareholders’ agreement they have right of first refusal. If you wish to sell your shares this might be a barrier. As a group, the crowdfunding investors will benefit from the shareholders’ agreement of EnergyNest, as the SPV as an entity will become part of the agreement. For example, if someone wants sell EnergyNest AS shares, he needs to offer it to all shareholders (including the SPV) and thus to the crowdfunding investors as well.
It is administratively easier to influence the main entity. Opinion on the main EnergyNest topics with be collated electronically and voted on your behalf at the AGMs. If you directly owned shares, you would need to attend the meeting personally or appoint a proxy to vote on your behalf. EnergyNest main shareholders are also required to own shares in the Norwegian VPS account system – which would involve setting up an account with a bank or stockbroker. Through the SPV this hurdle is removed and the one-time and recurring costs for the crowdfunding investors for holding a VPS account are lowered.
Straight through ownership. Your economic benefit is the same as direct ownership. It is very much like a nominee structure in this sense.
Ability to organise and communicate as a group. You can elect your own management of the SPV and communicate as a group about the decisions being made in the main company. There will be one voice for all crowdfunding investors in the EnergyNest AGM as long as it is supported by a majority of the crowdfunding investors.
Potential for liquidity. It will be less onerous for investors to sell their shares as they will not be subject directly to the EnergyNest shareholders’ agreement. Indeed they might find it easier to find someone within the structure who wishes to increase their stake.
Conversion option in case of IPO or an acquisition. If EnergyNest AS goes public or is sold, all EN CAPITAL AS shareholders will convert their shares into EnergyNest just before this event, and the SPV will be dissolved. Paying attention to the statements in the shareholder agreement is crucial.
Disadvantages for the investor and the company
Cost. It requires time and legal work to set up the SPV and then the running of the entity. In EnergyNest’s case they have agreed to cover the cost for at least 3 years.
Legal Set-up. The company should take every measure necessary that the structure is legal and attractive to the investor. EnergyNest, we feel, have put together a structure that mitigated risk as far as possible for the investor. If your business is considering using an SPV, ensure the SPV is legal in your jurisdiction – for example these structures are not legal in Finland.
Investment attractiveness. It might put off potential investors to use this structure, especially if they are unfamiliar with different investing structures
In summary, we believe this was – in the end – the best option for both EnergyNest and the investor. This structure might not be appropriate for all companies though, and entrepreneurs should consider the option carefully, and always take advice from a lawyer. At the end of the day, we at Invesdor are looking to ensure that our investors can participate with the confidence that we have done our homework on every company that we present. If we aren’t happy about anything about the company offering you wouldn’t see the pitch. Happy investing!
If you're interested in seeing how EnergyNest's SPV worked in practice, head over to their pitch.
Equity Director for Norway