A special purpose vehicle or SPV is a type of financial unit created to fulfill a specific but limited use. The entity is separate from the parent company for tax and legal reasons. It also may be controlled by many different companies that are working together. SPVs were a common occurrence in the first ten years of the 20th century and common feature of creative accounting. The SPV were used by many major corporations to obscure their financial positions for deceptive reasons. However, the special purpose vehicle is legal and in some situations helpful despite their association with fraudulent purposes.
Sometimes a SPV is also known as an SPE or special purpose entity. The SPV is generally created as a means of isolating the parent company from risk. It also isolates it from the financial risks such as bankruptcy and for this reason is sometimes referred to as a bankruptcy remote entity. Usually, the SPV is created to securitize debt because selling debts to an SPV is a means of raising cash quickly so they are able to continue with financial operations and lending. Another reason companies create a SPV is to legally separate from the parent company as a means to protect new inventions and other projects.
The special purpose vehicles are also used for risk sharing where companies combine risky resources in the SPV and examine them to raise funds. An SPV may also be used for financing by isolating the parent company from risks associated with financing something and creating the entity for only financing becomes the sole purpose of the project. The protection a SPV provides a company can be very useful in a variety of situations and the majority of the time the entity is not used for deceptive or fraudulent means. It can help a company pull through hard times and get back to normal operations.
Creating a special purpose vehicle may be overseen by accountants and lawyers that specialize in that specific type of activity. They can make sure that the entity is created legally and that the particulars of the deal are handled in ways that comply with laws. Because of the use of SPVs in accounting fraud, many governments examine these entities closely and have implemented tougher regulations for their activities, which includes a more clear definition of when and the entity can be used. These regulations are designed to prevent an SPV from hiding debt from the company’s stockholders.