IM Staff Issues Guidance for Private Fund SPVs and Escrow Accounts
The staff of the Division of Investment Management has provided guidance to private fund sponsors about single security special purpose vehicles and escrow accounts. According to the staff, many fund sponsors have inquired about whether purchasing SPVs or escrow accounts created to hold sale proceeds require a separate financial statement audit under the Advisers Act’s custody rule. With respect to SPVs, the staff indicated that a separate audit is not required so long as the SPV’s assets are included in the scope of the fund’s audit and the SPV has no third party owners other than the fund and its adviser. However, if a third party owns a portion of the SPV, the staff requires a separate audit. The staff imposed several conditions on escrow accounts to avoid a separate audit, including: (i) the fund audit must include the assets of the escrow account; (ii) the escrow is in connection with the sale or merger of a portfolio company; and (iii) the escrow is maintained at a qualified custodian.
OUR TAKE: Firms must make sure that the SPV is not owned in part by third parties. It will take some analysis to distinguish a third party from an affiliate of the adviser.