A special purpose vehicle (SPV) in the venture context is a standalone Delaware limited partnership or LLC formed to make a single investment or a related group of investments, separate from the GP's flagship fund. Sidecars are a variant — co-investment vehicles raised alongside the main fund, typically for a specific company or financing round. GPs use SPVs for several distinct reasons. First, when a follow-on investment opportunity exceeds the fund's concentration limits — typically a cap on the percentage of committed capital that may be deployed into any single company — an SPV allows the GP to capture a larger allocation. Second, when specific LPs have expressed demand for exposure to a particular portfolio company but lack broad fund access, a single-company SPV provides targeted exposure. Third, GPs may use SPVs to monetize pro-rata rights: if the fund holds a contractual right to participate in a future round but lacks the capital to exercise it, the GP may raise an SPV from third-party investors to exercise that right — a practice that is commercially attractive but legally fraught. Gurpreet Bal advises clients that pro-rata rights belong to the fund and cannot be redirected to an SPV that benefits the GP separately without appropriate LP consent and conflict disclosures.
The economics of SPVs differ from those of a flagship fund in ways that are consequential for LPs and regulators. SPV carry — the GP's performance allocation on SPV profits — is typically calculated on a deal-by-deal basis rather than across an aggregated portfolio. This means the GP can earn carry on a successful SPV investment even if the flagship fund's overall portfolio is underperforming, and there is no cross-vehicle loss offset. SPV management fees, if charged at all, are often lower (or zero), because the GP's cost of managing a single-company vehicle is minimal. Gurpreet S. Bal advises LPs negotiating SPV terms to be attentive to the lack of a high-water mark or loss carryforward in deal-by-deal structures — in an aggregate-return fund, losses in one investment reduce the carried interest pool; in a standalone SPV, each vehicle stands alone. From the GP's perspective, SPVs can be highly economically attractive precisely because of this isolation, which is why transparency in SPV economic terms is a meaningful LP protection issue. Side letter provisions granting LPs co-investment rights should address whether co-invest capital in an SPV bears carry and on what terms.
An SPV manager is an investment adviser under the Investment Advisers Act of 1940, subject to the same registration analysis as any fund manager. A GP managing a qualifying SPV may rely on the venture capital fund adviser exemption under Section 203(l) or the private fund adviser exemption under Section 203(m) (assets under management below $150 million), depending on the SPV's characteristics and the GP's total AUM across all vehicles. Platforms such as AngelList Venture automate much of the SPV formation process — entity formation, subscription document collection, investor accreditation, and SEC Form D filing — but they do not eliminate the GP's legal obligations. Gurpreet Bal advises fund managers that the use of an SPV platform does not substitute for legal analysis of whether the SPV constitutes a "qualifying venture capital fund" for exemption purposes, whether the SPV's investor count complies with Section 3(c)(1) limits, and whether aggregate AUM across all SPVs and the flagship fund triggers full RIA registration requirements. Filing Form D for each SPV within 15 days of first sale is a separate, non-delegable obligation regardless of platform use.
Most institutional LPAs require the GP to obtain LPAC consent before forming an SPV that would invest in a current or prospective portfolio company, on the theory that the SPV may compete with the fund for deal allocation or create GP incentives to favor the SPV. This consent requirement is especially critical when the GP charges carry on the SPV separately from the flagship fund — in that scenario, the GP has a direct economic incentive to allocate attractive investments to the SPV rather than the fund, constituting a textbook conflict of interest. Gurpreet S. Bal advises GPs to establish written allocation policies that govern how investment opportunities are allocated between the fund and any co-investment vehicles, and to make those policies available to the LPAC. The SEC has brought enforcement actions against fund managers who failed to disclose SPV-related conflicts and allocation practices, treating undisclosed conflicts as violations of the Advisers Act's anti-fraud provisions. Documenting the rationale for every SPV formation, obtaining all required LPA consents before closing, and disclosing GP economics on SPV carry in writing to all participating investors are the foundational compliance steps that prevent a commercially sensible SPV strategy from becoming a regulatory problem.
Gurpreet S. Bal is a Partner at Foley and Lardner LLP in Silicon Valley, where he advises venture funds, fund managers, founders, and investors on fund formation, venture financings, M&A, and corporate governance. He has represented clients in hundreds of transactions with aggregate deal value exceeding $60 billion across AI, semiconductors, fintech, and emerging technology.