Introduction
Real estate investment platforms have made it easier than ever for investors to diversify their portfolios and gain exposure to high-quality real estate assets. One of the most popular investment structures leveraged by these platforms is the Special Purpose Vehicle (SPV). Read on to learn more!
In this blog post, we’ll take a closer look at the benefits of using an SPV structure, which include: the simplification of the fundraising process, limiting liability, and providing more flexible investment opportunities. We’ll explore how SPVs offer a streamlined approach to raising capital and how they provide investors with the potential for greater returns through diversified exposure to real estate assets. Additionally, we’ll examine the legal protections available to SPVs that ensure compliance with relevant regulations.
By the end of it, you’ll have a better understanding of how SPVs work in the context of real estate investments!
The Rundown - From our FAQs
An SPV is an “independent company” created to execute a single transaction, and functions as a distinct legal entity. In the case of Stake, every property is purchased through an individual SPV. This allows us to streamline the investment process by granting shares in the property’s SPV to its shareholders.
The Real Estate Regulatory Authority in Dubai (RERA) does not allow more than 4 investors on a property’s title deed. That is why we must set up a Special Purpose Vehicle (SPV) in the DIFC to incorporate and ensure that all the investors in the property are legally registered in it through their ownership of shares in the SPV.
When you invest in a property on Stake, you are investing in the shares of a Special Purpose Vehicle (SPV) that will own the title deed to the subject property. All investors in a property will be issued shares in the SPV in proportion to the amount they invested.
Why were financial regulations triggered?
Financial crises
Events like financial crises, market failures, and other systemic risks that significantly threatened economic stability on both an international and regional scale revealed key weaknesses and vulnerabilities in the financial system. That paved the way for establishing adequate financial regulations. Critical moments in history, some highlighted below from all over the world, majorly affected the planning, shaping, and implementation of the regulations we know today, without which a lot of the financial products we use regularly might not exist.
Inadequate risk management, excessive leverage, and poor governance were at the forefront of many financial crises that unfolded in the past, forcing governments to intervene and set up regulatory procedures because of their lack of oversight.
Legal Protections
Limited Liability
The properties held by our SPVs are ring-fenced and solely owned by their investors, ie. Stake has no economic interest in the SPVs directly. If you’re wondering what ring-fencing is, we’ve got you covered! Read on…
💡Ring-fencing is a risk management strategy that isolates certain assets from a larger portfolio. To protect those assets from potential losses or other risks, a symbolic “protective barrier” is established around the separated assets to ensure investors’ money remains well-managed and safe. Also, it gives them a better chance of recovering their investments in case of adverse events.
In addition, since SPVs are separate legal entities, shareholders are not made personally liable for the debts or obligations of the investment vehicle beyond their initial investment.
👉 The assets registered in an SPV are kept separate from those of the parent company. This means that a legal and financial barrier exists between the parent company and the specific assets being undertaken, which can help to protect both the parent company and the assets held by the SPV in cases where one or the other were to face any form of distress.
Bankruptcy
The primary purpose of an SPV is to provide a bankruptcy-remote entity, meaning that if the parent company (e.g. Stake) were to go bankrupt, it would not impact the SPVs under its jurisdiction, and the SPV can continue to operate.
On the flip side, if the SPV were to be impacted, the parent company managing that SPV would remain intact. In case of financial duress, the assets and investments of an SPV are shielded from being seized or liquidated.
Serves a limited, special purpose
Essentially, SPVs are set up to perform a very specific function, which in the case of Stake, translates to owning the title deed of a property. For every property listed on our platform, a separate SPV is created in the DIFC, which helps to limit the exposure of the assets to risk and protects them from being used for other purposes.
When a user invests on Stake, they are investing in the shares of an SPV that will own the title deed to the subject property. All investors in a property will be issued shares in the SPV in proportion to the amount invested.
❓Did you know…
Dubai offers a favorable tax environment for SPVs, with no corporate income tax or withholding tax on dividends or interest payments. This renders Dubai an attractive location for establishing SPVs for investment and/or financing purposes.
What role do the DFSA and DIFC play?
The Dubai Financial Services Authority (DFSA) is an independent regulator responsible for managing the financial services conducted in or from the Dubai International Financial Centre (DIFC) and currently supervises over 600 authorized firms. Established in 2004, the DFSA aims to maintain the stability and integrity of the financial services industry in the DIFC, while promoting transparency, accountability, and investor protection.
It has the power to license, supervise, and enforce compliance with its rules and regulations while working closely with other authorities and law enforcement agencies in the UAE and internationally. The DFSA’s regulatory framework is structured in such a way as to meet international standards and prioritizes responsible business conduct and management of risk.
In the same year, the Dubai International Financial Centre (DIFC) was established as a free zone in Dubai and is regarded as a core hub for all finance, business, and innovation activities. The zone provides a platform for financial institutions to operate in the region. It also offers a range of financial and professional services from banking, asset management, and insurance to wealth management and legal and consulting services.
Under DFSA regulations, we at Stake are required to have both: an Internal Compliance Officer (ICO) and Money Laundering Reporting Officer (MLRO) – a person responsible for implementing and overseeing our anti-money laundering (AML) compliance program. These two core positions are supported by adequate team members comprising Stake’s internal compliance team.
The team is responsible for ensuring compliance with all applicable DFSA regulations and DIFC requirements. Additionally, where required, this team will also take on the role of submitting relevant information to the DFSA that may be an indication of a breach of regulations by the company to ensure full transparency with our parent regulator.
What about SPVs? The DIFC has a seamless online process that allows Stake, as a crowd-investing platform, to create and open SPVs for every funded property and register its investors as respective shareholders as per DFSA regulations. They are then approved by the DIFC under their specialized regulations that govern such investment vehicles.
❓Did you know…
All the information regarding the SPVs set up by Stake is made public in the DIFC public register, which is accessible online.
While SPVs are not without their risks and challenges, with proper planning and execution, they can provide significant benefits in terms of risk management, asset protection, and capital raising. If you have any questions on the mechanics behind SPVs and their context within Stake as a whole, please don’t hesitate to reach out to our team by email at contact@getstake.com! We remain at your disposal for support 💚
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