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SPV IPOs → What Happens to Your SPV Investment When the Company Goes Public?

When a company that you invested in (via an SPV) goes public, many LPs are likely wondering what this means for your investment. The IPO process can be complex for SPV’s, with several important considerations that differ significantly from direct stock ownership upon IPO. This week's post will act as a guide to walk you through the key aspects of what to expect when an SPV you invested in hits the public markets.

Distributions: Cash vs. In-Kind Shares

One of the most common questions from limited partners is whether they'll receive actual shares in the newly public company or a cash distribution. The answer depends on your SPV's governing documents and the manager's strategy, but both approaches are common.

Cash Distributions: Many SPV managers opt to sell the shares during or shortly after the IPO and distribute cash proceeds to limited partners. This approach provides immediate liquidity and simplifies the process for investors. You'll receive your proportional share of the sale proceeds, minus applicable fees and expenses.

In-Kind Share Distributions: Alternatively, some SPV managers distribute the actual public company shares directly to limited partners. In this scenario, you become a direct shareholder of the public company, receiving shares proportional to your ownership stake in the SPV. This approach allows you to maintain exposure to the company's future performance but requires you to manage the shares independently, including decisions about when to sell.

The choice between cash and in-kind distributions often depends on factors such as the SPV manager's investment strategy, the liquidity needs of the limited partners, and the specific terms negotiated in the SPV agreement. Some managers may offer limited partners a choice between the two options, while others will have predetermined the distribution method in the SPV documents.

Lockup Periods and Timing Considerations

IPO lockup periods restrict when your SPV can distribute proceeds or shares. Standard lockups are 180 days (6 months) post-IPO, during which pre-IPO investors cannot sell their holdings.

During the lockup period, your SPV cannot sell its shares, which means cash distributions are generally not possible until the lockup expires. If the SPV manager plans to distribute shares in-kind, these distributions may also be subject to lockup restrictions, meaning you would receive shares that you cannot immediately sell.

It's important to understand that lockup periods can be extended under certain circumstances, such as if the company's stock price falls below specific thresholds or if the company enters a "quiet period" before earnings announcements. Some lockups also have staggered release schedules, where only a portion of shares becomes tradeable at specific intervals.

Fees and Expenses

SPV fees don't disappear at IPO – in fact, the process often triggers additional expenses. Management fees can continue to accrue until the SPV is fully liquidated, which may not happen immediately upon the IPO. Most SPVs charge carried interest (typically 20%) on gains realized from the IPO, calculated based on the increase in value from your original investment.

Transaction costs associated with the IPO process can also impact returns. These may include legal fees for updating SPV documents, administrative costs for processing distributions, transfer agent fees for distributing shares, and brokerage commissions if shares are sold on the open market. Please note, that some of these are not applicable when there is a third-party SPV fund admin (like Sydecar or AngelList etc.) however it is still important to understand what additional costs could incur.

Additionally, if you receive in-kind share distributions, you'll become responsible for any ongoing costs associated with holding and eventually selling those shares, including brokerage fees and potential tax preparation costs for tracking cost basis and holding periods.

Key Things to Watch Out For

Several important factors can significantly impact your SPV investment during an IPO process. 

First, it's important to understand the manager's discretion regarding distribution timing and method. Some agreements give managers considerable flexibility in deciding when and how to distribute proceeds.

Market conditions at the time of IPO and during the lockup period can dramatically affect the value of your investment. A company might go public at a high valuation but see its share price decline significantly before the lockup expires, potentially reducing your ultimate returns even if the IPO was initially successful.

Manager Discretion and Hold-Back Rights

Most SPV agreements grant managers significant discretion over the timing and method of distributions, including the right to hold back shares or proceeds even after the lockup period expires. There is an argument that this discretion is typically justified by the manager's responsibility to maximize returns for all limited partners. I cannot see myself ever holding back proceeds after an IPO lockup period, but I haven’t been through enough (at this stage of my VC journey) to confidently comment here.

Managers might choose to hold back distributions for several reasons: they may believe the stock price will appreciate further and want to optimize the timing of sales; they might want to avoid selling into adverse market conditions; or they may be waiting for additional lockup periods to expire to increase liquidity. Some managers also prefer to distribute all proceeds at once rather than in multiple tranches.

However, this discretion is not unlimited. Managers have fiduciary duties to act in the best interests of limited partners, and prolonged delays in distributions without reasonable justification could potentially be challenged. The specific language in your SPV agreement will determine the extent of the manager's discretion and any time limits on their ability to delay distributions.

Voting, Information, and Control Rights

It's crucial to understand that as a limited partner in an SPV, you do not have direct shareholder rights in the portfolio company. Your rights are defined strictly by the SPV's governing documents, not by securities laws that govern direct shareholders.

The SPV manager (general partner) makes all decisions regarding voting the underlying shares and handles all communications with the operating company. This means you won't receive annual reports, proxy statements, or other shareholder communications directly from the company. Instead, you'll rely on the SPV manager to share relevant information..

This structure continues even if you receive in-kind share distributions. While you'll become a direct shareholder upon receiving the shares, you won't have had any voice in corporate governance decisions made while the shares were held by the SPV.

Tax Considerations

I am not a tax advisor and therefore will share some important info related to SPVs on the topic. Consider consulting with a tax professional.

The tax implications of an SPV IPO can be complex and vary significantly depending on the distribution method and your specific situation. SPVs are generally pass-through entities, meaning capital gains, dividends, and losses flow through to your personal tax return, typically reported via a K-1 form.

If the SPV sells shares and distributes cash, you'll likely recognize capital gains based on the difference between the sale proceeds and your original investment. The character of these gains (ordinary income vs. capital gains) and the applicable tax rates will depend on how long the SPV held the shares and other factors.

If you receive in-kind share distributions, the tax treatment can be more complex. You may inherit the SPV's cost basis and holding period for the shares, which could affect your ability to qualify for long-term capital gains treatment when you eventually sell. The distribution itself might also be a taxable event, depending on the structure and your SPV agreement.

The timing of IPO-related gains can have significant tax implications. Large gains recognized in a single tax year might push you into higher tax brackets or trigger additional taxes such as the Net Investment Income Tax. Consider consulting with a tax professional to understand the optimal timing for recognizing gains and any available strategies for managing the tax impact.

If you enjoyed this article, feel free to view our prior posts on adjacent topics 

• Why Syndicate Leads Don’t Survive 

• The Syndicate LP Churn Problem 

• What Really Drives Investment Interest in SPVs

Last Money in is Powered by Sydecar

Sydecar empowers syndicate leads to manage their investments more effectively. Organize, manage, and engage your investor network effortlessly with Sydecar’s management and communication tools. Their platform also automates banking, compliance, contracts, tax, and reporting, freeing up syndicate leads to focus on securing deals and strengthening investor relations. Elevate your syndicate operations with Sydecar.

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✍️ Written by Zachary and Alex