SPVs: Benefits & Best Practices

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Christy: Hello, everyone, and welcome to today's webinar, "SPVs: Benefits and Best Practices." My name is Christy DeMaio Ziegler, and I will be your moderator.

Joining us today are Ciela McDevitt, Carrie Tillman, and Pam Jasinski. Ciela is a corporate solutions manager for CSC Global Financial Markets and has over 17 years of experience. Ciela is responsible for customer satisfaction, technology training, and new services. Carrie is a Vice President of SPV Management for CSC Global Financial Markets. Since joining CSC in 1995, Carrie has excelled in the administration of special purpose vehicles, including bankruptcy remote companies, statutory trusts, and other unique corporate structures. Pam is also a Vice President of SPV Management for CSC Global Financial Markets. Pam joined CSC in 1998 and ensures that all CSC special purpose entity clients are properly established and operate according to the practices and procedures set forth by CSC.

And with that, let's welcome Ciela, Carrie, and Pam.

Ciela: CSC was founded in 1899 as a lawyers incorporating service and a trust company. We've been doing this work for over 120 years. We're a large, global, stable organization providing a suite of business, legal, tax, and digital brand services.

CSC works with a variety of clients. We support over 10,000 law firms in the United States alone. We provide financial market customers with UCC, real estate document recording, global financial market services, and support over 3,000 organizations today. We work with over 180,000 corporate customers, from entrepreneurs to the Fortune 500. We do support 90% of the Fortune 500 with a CSC solution. We protect more than 65 of the 100 Best Global Brands. And we have offices around the world to support this work for you.

You can see here in this slide our offices around the world, and we're growing and adding offices all the time. So you can see here that we can support your work in the key financial market centers in North America, Europe, and Asia.

So now that you know who we support and where we're doing it, I'll give you a breakdown of the primary services that we provide. So everyone knows us as a registered agent. So, of course, we provide entity management and compliance services, filing annual reports, local business licenses and permits, and have award-winning entity management technology for your org charts and minute books. We're also the world's largest corporate domain registrar and have a suite of digital brand services to protect your brand online.

We do Uniform Commercial Code searching, filing, tracking, and monitoring portfolios. We have a suite of real estate recording services and work with numerous counties around the United States. We have technology for contract management and eBilling.

We provide corporate tax software, corporate filings and documents, global financial markets, which is where we're going to dive in today, and then, of course, our registered agent and service of process management.

So there's a lot to unpack in this slide, and that's just because we have an amazing breadth of services within our global financial markets. And here's where you can really see where our special purpose vehicle services what practice areas they fall into. So at the top of this slide, you're seeing the different projects we work with — structured and project finance, mergers and acquisitions, bankruptcy, debt capital markets, and fund services, and then a few others as well.

And at the bottom of the screen, you're seeing the services that we provide in conjunction with those transactions. So our special purpose vehicle services get used most with structured and project finance, mergers and acquisitions, sometimes bankruptcy, debt capital markets, and then of course fund managers, we work with a lot of private equity, venture capital, real estate funds and as well they will also sometimes need our SPV services.

And, of course, we do so much more than that. We're also a qualified custodian and escrow agent. We provide fund administration. We'll get into the SPVs, how those work, and the list goes on. So we'll actually have this as a handout within the widgets if you'd like to download it. And every account with CSC has a dedicated person that you can go to, to discuss any of these services. So if you do want to learn more, you'll have an opportunity at the end of the session to request more information.

I'll cover the agenda, and then I will hand it over to Pam and Carrie, our SPV experts. Here's what we're going to go over today. Common uses of SPVs, types of SPVs, the lifecycle through formation and establishment all the way through dissolution, best practices for meeting specific business objectives, and how to decide on a vendor for this work. And then we'll have time at the end for your questions.

And with that, we'll get started.

Carrie: Hi, Carrie here. A special purpose vehicle is a legal entity created to fulfill a defined objective in these transactions. Common uses of SPVs could include risk sharing, securitization, asset transfer, tax planning, joint ventures, and property investments.

Pam: Hi, this is Pam. One of the uses for SPVs is to mitigate risk. I this situation, a company could transfer their assets, whether it be intellectual property, royalties, trademarks, intercompany loans, or even investment portfolios, to the SPV for management or use by the SPV. An example of this is if assets are transferred to an SPV, which can help facilitate the financing for a large project whereby the SPV adheres to a narrow set of rules and guidelines without putting the entire corporate structure of the parent company at risk.

SPVs go by many different names. One of the names is blocker structures. These types of SPVs are usually formed for a foreign entity to invest in U.S. assets, whether it be real estate, technology, or any other type of asset. The U.S. entity is created to hold the investment and manage the investment so that there is not double taxation both in the U.S. and in the foreign jurisdiction.

Carrie: Feeder entities or another type of SPV are commonly used with private equity fund structures as an investment vehicle. It's often a limited partnership that pools capital commitments of investors and invests or feeds such capital into in a fund, often called a master fund, which then directs and oversees all the investments held within that portfolio. And with that, we'll often provide cash management, officer-director services. If it is a limited partnership formed outside of the United States, we may be their representative with the IRS.

Pam: Side-cars is also another type of SPV, and these can have a couple different definitions. One definition is a side-car being an investment in which one investor allows a second investor to control how to invest their capital. A side-car investment usually occurs when one of the parties lacks the ability or confidence to invest for themselves. Another type of side-car SPV or investment would be if an entity is strictly or pretty much investing in let's say technology assets and they come across a real estate investment that they would like to get involved with. They would form a separate SPV, known as a side-car, to use to invest in that real estate to keep it separate from their main book of investments of technology.

Orphan entities or orphan SPVs typically are used in structured finance. The SPV is created in the securitization transaction, where the equity of the SPV is handed over or allocated to an unconnected third party, who themselves have no control over the SPV. So essentially the assets are orphaned. Typically, in these types of situations, when the entity needs to be, well, wound down, it will have stipulated in its governing documents that the assets are assigned to a charity of sorts.

Another type of SPV is a bankruptcy remote entity or a BRE, which is formed to hold and protect a defined group of assets. These assets could include real estate, receivables, or other type of esoteric assets in structured finance. Generally, these transactions involving lending will require an independent director to make the entity separate or a true sale. The independent director's role is limited to voting and material actions. So this person is independent of the board of the parent company, making a good decision for the material action, which could include financing or bankruptcy.

We offer a multitude of solutions for different types of projects involving structured and project finance, again with establishing the true sale, being able to provide a separate board of directors for companies to meet their objective of the true sale. We also offer cash management and waterfall calculations to help the businesses carry out their objectives for the assets.

Also debt capital markets, CSC has Delaware Trust Company, which is a wholly owned subsidiary, that has a full suite of solutions of trust and agency that feed directly into the debt and capital markets.

Carrie: That's right, and we all work as a team. So our CSC and Delaware Trust services work together all through your dedicated account manager. With mergers and acquisitions, we are most commonly providing an escrow agent, that M&A holdback escrow. But we do also sometimes provide special purpose vehicle services when someone needs an officer or director, a signer, or maybe a principal place of business address. And, of course, we're also working with private capital funds and their SPV needs.

Pam: We've talked about the different types of SPVs. Now we're going to dive into the types of services that CSC can provide to help you manage and administer your SPV. The services that we provide to help you with your objectives are business address services, directors, managers, and/or officers, both local and independent, bank account assistance and payment management, cash management and accounting, signing services, corporate secretarial support, and IRS partnership representative services for limited partnerships. In the next couple slides we'll get into these services in depth.

Carrie: Hi, this is Carrie again. Early in the presentation, we had talked about CSC's ability to provide officers, directors, and managers to entities for a multitude of different types of transactions, whether they're to fulfill tax planning goals or other investment opportunities.

CSC has an experienced, well-tenured team of these individuals that can serve in these roles. Generally, they are hand-selected based on their experience and the type of transaction as well as the ultimate role and scope of duty involved.

We're participating in the day-to-day operations of the SPV. That could involve [inaudible 00:13:08] documents. Our officers, directors, and managers fulfill their duties, fiduciary or non-fiduciary, in accordance with the governing documents of the entities, so outlined in their operating agreement for LLCs or the bylaws for corporations.

Our directors are also prepared to participate and attend annual or quarterly board meeting, record the minutes of those meetings, as well as to prepare à la carte consents for other courses of business throughout the year.

Our officers, directors, and managers, they're able to bind the company in different types of transactions. So we are well experienced in reviewing and handling the execution of real estate documents, wire transfers, and other transactional documents related to a particular transaction.

Pam: Hi, this is Pam again. Another one of the SPV services that we provide to our clients is IRS partnership representative services for limited partnerships. U.S. partnerships are required to designate a representative, according to the IRS, to communicate on behalf of the partnership in the event of the audit. And in that case, the partnership representative will liaise with the IRS and its partners, track IRS correspondence, obtain consent on IRS correspondence. In addition, the partnership representative must have a substantial presence in the U.S. So our foreign jurisdiction clients that have limited partnerships in the United States can utilize CSC for their partnership representative needs.

Another SPV service that we provide is a business address in order to establish a principal place of business in the United States. We can assist our client with these services by providing a business address, mail forwarding via mail, email, or uploads. So as mail comes in, we can forward the mail on a weekly basis, or we can open, scan, and email to our clients. Or we can open, scan, and upload email to their database system, whether it be Entity Management that CSC provides or a third-party system.

Telephone answering and message services, shared or private office space so you a company can opt to have a private suite that they are in themselves or a shared office space, which would be shared by other companies. Conference room facilities and record storage.

Services of this type are often used for tax-planning purposes, privacy objectives, and organization of mail or to open a bank account locally.

Carrie: Our SPV management solutions include a multitude of compliance support services. Services include entity formation and annual reports, annual consent preparation and distribution. Also we provide consents for changes, for new officer appointments throughout the year. We are also monitoring annual meeting dates and recording board meeting minutes. And the annual election of officers and directors via a board meeting or consent.

Pam: Our SPV services can also help facilitate your cash management and accounting needs. We provide our clients tailored cash management and accounting services that can include authorized signatory on bank accounts, payment services via wire transfer or check, processing capital calls, distributions, and dividends, cash projections and cash flow management if needed, bank reconciliations on a monthly basis, and general ledger accounting and unaudited financial statement preparation, which can be done either on a monthly, quarterly, semi-annual, or annual basis.

Carrie: The CSC team supports the lifecycle of an entity or an SPV. So the start of an entity is the formation. So CSC can prepare and file formation documents around the world. With our SPV services, we can also assist with opening up a bank account, which normally will happen early on with the formation of the entity.

At this stage, you may be appointing officers, directors, managers to an LLC or utilizing a service provider like CSC to provide an officer-director if that's needed with the transaction. There may be contribution of assets and lease agreements set up at this phase.

Now that the entity is formed, the maintenance of an entity may include things like CSC helping with cash management, making payments for you, that monthly bank reconciliation, taking care of your invoice payments. There may be documents that need to be signed now that officers and directors are appointed.

The maintenance of an entity is almost always going to have an annual report, and what we mean by annual report, in this context, if it's a U.S. entity, it would be the secretary of state filing that is required each year, or sometimes every other year, to keep the entity in good standing. There may be internal records that need to be managed, such as those annual consents. Some states you would file an officer-director change or manager change with the secretary of state. Normally it just goes on the annual report, and those changes happen in the internal records of the company via an annual consent that is then held in the minute books. And then there's usually an annual meeting and minutes are taken. At this point, there may be need to liaise with auditors and tax firms and accounting and financial statements.

As the business grows, CSC can assist with documentation for portfolio expansion, including new asset purchases and movement of funds. An example might be if board approval is needed for a new asset acquisition. We may also help with the paperwork to settle a trade.

In terms of transaction filings, like you see here, with amendments, qualifications, acquisitions, there may be additional secretary of state filings needed. If a business is expanding into new states, it might need a qualification, or sometimes it's called a certificate of authority with the secretary of state if it's doing business outside of the domestic state. There can be amendment filings to update the business name, address, officers-directors. Normally that happens on the annual report and in the internal records, but sometimes it's via an amendment. And then, of course, merger and acquisition filings. And CSC can assist with the preparation and filing with all these documents.

When it comes to winding an entity down, at the entity level, it's normally a dissolution. Any foreign qualified states, there's normally a certificate of withdrawal filing. There may be some merger filings, and internal recordkeeping, preparation of documents for board approval for all of those changes. So between our corporate filing services and our SPV team, we can help with all of these needs.

Pam: This slide shows the SPV timeline incorporation of an entity to closing of the transaction or formation of the SPV. We start with drafting of governance documents, whether they be the bylaws or operating agreement, depending on the type of entity. Then next CSC's KYC process takes approximately one to three days for us to process.

Next we have confirmation required from the tax structure advisors in the U.S., U.S. counsel, or U.S. auditors. The next step is the Employer Identification Number or ITIN, depending on whether it's a U.S. company or a foreign-owned entity. And that can take anywhere from 1 to 10 business days.

Incorporation takes about a day. Agreements to be drafted and executed as far as service agreements with CSC for the services that will be provided can take three to five business days.

Generally, the next step is to have a board meeting or unanimous written consent to approve the actions of entering into the service provider agreement with CSC, opening a lease agreement for a business address if that's being utilized, authorized opening of bank accounts, and any other type of actions that are needed.

And then, finally, bank account opening with KYC being conducted by the bank or banks that are being utilized, and that normally takes three to six days.

So this gives you a snapshot of the time it takes to get an SPV set up and ready to start business.

Carrie: CSC's KYC compliance services. Current KYC compliance services include, as Pam mentioned earlier, a review of governing documents for adequate provisions for the roles that we're serving, articles, bylaws, and operating agreements. We're also obtaining identification for individuals that might be serving on bank accounts or that ultimately we're working with or taking direction from and beneficial owner information for banking purposes.

Complete review of the Global Sanction List, including OFAC. CSC SPV management and other [inaudible 00:23:33] have a set of internal controls and Treasury requirements for all cash transactions. We're performing source and destination of funds verifications for all of the cash transactions that we might be involved with.

All of the personnel serving on the SPV entities and officer-director roles, administrative roles are AML and BSA trained, required to be certified annually.

CSC is always planning ahead, evolving with our practices in AML and KYC compliance services. We recently implemented a new global technology platform to validate KYC applicants against the WorldCheck database. We also provide support for local and global compliance requirements and any up and coming changes that might affect the way we do business. CSC is constantly maintaining and evolving with industry standards.

Pam: Now that the entity is formed, we've talked about the full timeline for an SPV, I think it's important to mention a best practice of having a plan for managing your entity data and documents, because a lot of SPV transactions include many entities or may be managed by someone who has a whole portfolio of assets and many entities to hold those. So I would be remiss if I did not mention the CSC Entity Management technology. It has won many awards, including the "New York Law Journal" has appointed us a top entity management system for the past 10 years in a row, and that's a completely independent survey that the "New York Law Journal" hosts with their readers.

CSC Entity Management is a phenomenal tool for document storage. All your minute books, like the resolutions we've talked about today, consents, annual general meeting minutes. It's also a great way to track data, like entity names, states, due dates for annual reports, officers-directors, other key things like who can sign on behalf of an entity, EIN numbers.

So this is something we're always happy to do a demonstration for, no obligation, to show you how this technology works. Or it's just something to consider, because as a portfolio grows with entities, all these data and document points are growing as well and it's really a lot easier if there ever is an audit or there's a need to go to court, all your documents are easily organized in one place and all your entities are there so you can easily build org charts off of that information.

Another important consideration when selecting a service provider or vendor for your entity management and special purpose vehicle needs is understanding their approach to security and availability. Here at CSC, it is our top priority. I've included some details here on our approach. We also maintain SOC 2 Type 2 certification and the highest levels of data security.

At this point, we've covered the common uses of special purpose vehicles, types of SPVs, the lifecycle and timing, best practices for selecting a provider. And here we've compiled a quick list for you. Are they able to form entities, and if so, where? And also I would add to that how quickly are they able to form entities if it's time sensitive. Are they able to provide a local officer, director, or manager, and also are independent directors or managers available for bankruptcy remote entities when that's needed? And there's all types of reasons why that could be needed, including an agency rating, a lender requiring it. Are they able to assist with signing services and provide signers when needed? And again, that would be an if so, where? Are they able to assist with opening up bank accounts and doing cash management and accounting with investment level entities?

CSC can help with an entity formation and ongoing corporate secretarial support in over 140 countries around the world. Our special purpose vehicle services, like our signing services and officer and director services, are available in key financial market centers — the U.S., UK, Ireland, Netherlands, Luxembourg, Singapore, Hong Kong, Shenzhen, and Jersey.

We wanted to include this resource, our blog, which you can find at cscgfm, for global financial markets, cscgfm.com/blog. This will also be included in the Resource widget so you can connect to it through there, save it as a favorite. And you can sign up for alerts because there are a lot of great updates that you can find here.

So I know we mentioned tracking legislation changes with AML and KYC compliance. We have an insight report that you can access here all about those changes. And then, as we find out about new updates to the legislation, we post it here so you can stay informed of legislation changes. We provide insight reports here. So one from the American Bankruptcy Institute. We attended that event and wrote up an insight report on key takeaways. You can see that the webinar today was posted there. So this is a great place to stay informed of those updates and upcoming sessions, including our CLE webinars.