Aggregator Vehicle

What is an aggregator vehicle?

An aggregator vehicle is a pooled entity, normally a Delaware limited liability company or limited partnership, formed so that many small investors can back one investment while appearing on the issuer's capitalization table as a single holder. It holds the securities and passes the economics through to its members. The company sees one name; the vehicle sees eighty.

Why an issuer wants one line instead of eighty

Four reasons, all mechanical.

• Signature and consent management. Every future financing, charter amendment and stockholder consent requires action from holders. A single vehicle signs once.
• Record holder counts. Section 12(g)(1)(A) of the Securities Exchange Act obliges an issuer to register a class of equity security within 120 days after the last day of its first fiscal year on which it has total assets exceeding 10,000,000 dollars and a class of equity security held of record by either 2,000 persons or 500 persons who are not accredited investors. An aggregator adds one record holder rather than eighty, which is the difference between a headroom problem later and no problem at all.
• Information rights. The vehicle negotiates one set of rights; its members receive what the vehicle passes through rather than each holding a claim against the company.
• Transfer control. One holder means one counterparty to consent to, or block, secondary transfers.

The statute that shapes the vehicle

An aggregator holding securities for investment is an issuer of its own securities and would be an investment company but for an exclusion. Two matter.

Section 3(c)(1) of the Investment Company Act excludes an issuer whose outstanding securities, other than short-term paper, are beneficially owned by not more than one hundred persons, or 250 persons in the case of a qualifying venture capital fund, and which is not making and does not presently propose to make a public offering of its securities. The statute defines a qualifying venture capital fund as a venture capital fund with not more than 10,000,000 dollars in aggregate capital contributions and uncalled committed capital, a figure the Commission is directed to index for inflation once every five years, rounded to the nearest 1,000,000 dollars.

Section 3(c)(7) excludes an issuer whose outstanding securities are owned exclusively by persons who, at the time of acquisition, are qualified purchasers, and which is not making and does not then propose to make a public offering. A qualified purchaser includes a natural person who owns not less than 5,000,000 dollars in investments and a person acting for its own account or the accounts of other qualified purchasers who owns and invests on a discretionary basis not less than 25,000,000 dollars in investments. There is no headcount cap under 3(c)(7), which is the trade: unlimited investors, but every one of them must clear a far higher wealth test than the accredited investor standard.

The look-through that catches people

This is the provision most aggregator leads have never read. Under section 3(c)(1)(A), beneficial ownership by a company counts as one person, except that if the company owns 10 percent or more of the outstanding voting securities of the issuer and is, or but for the 3(c)(1) or 3(c)(7) exclusion would be, an investment company, then the beneficial ownership is deemed to be that of the holders of that company's own outstanding securities.

In plain terms: a small fund, syndicate or second aggregator that takes 10 percent or more of your vehicle drags its own investor list into your hundred-person count. A vehicle with 80 direct members and one 10-percent-plus fund member can be over the limit without adding a single new name at the top level.

What the vehicle files

The vehicle is selling securities to its members, so it runs its own private placement, nearly always under Regulation D. Rule 503 requires a Form D notice of sales no later than 15 calendar days after the first sale of securities in the offering, rolling to the next business day if the deadline falls on a Saturday, Sunday or holiday. Rule 506(b) allows no more than 35 purchasers in any 90-calendar-day period, and Rule 501(e)(1)(iv) excludes accredited investors from that count, so the working limit is 35 non-accredited purchasers. Rule 506(b)(1) also requires compliance with Rule 502, whose paragraph (c) is the prohibition on general solicitation. Under Rule 506(c) general solicitation is permitted, but the issuer must take reasonable steps to verify that all purchasers are accredited investors.

The Form D makes the structure public. Item 4 requires the issuer to select an industry group and, for a Pooled Investment Fund, a fund type such as Venture Capital Fund. Item 6 requires the issuer to identify all federal exemptions and exclusions claimed, with separate checkboxes for Rule 506(b) and Rule 506(c) and for the Investment Company Act exclusion relied on, including Section 3(c)(1) and Section 3(c)(7). Item 13 states the total offering amount and total amount sold. Item 14 requires the number of non-accredited investors who have invested and the total number of investors. Anyone can therefore read which exclusion a given aggregator depends on and how many people are inside it.

A worked example, with the arithmetic

Figures are hypothetical. A company raises 6,000,000 dollars at a 30,000,000 dollar post-money valuation. One aggregator vehicle subscribes for 2,400,000 dollars of that round, which is 2,400,000 divided by 30,000,000, or 8 percent of the post-money equity. The vehicle raised that amount from 80 members at an average of 30,000 dollars each, since 80 times 30,000 equals 2,400,000 dollars.

On the company's capitalization table, the vehicle is one holder for 8 percent. Its 80 members do not appear. Against the Section 12(g) thresholds, the company's record holder count went up by one instead of eighty.

Inside the vehicle, the Section 3(c)(1) count is 80 of a permitted 100, leaving 20 seats.

Now change one fact. Suppose one of those 80 members is not an individual but a small fund that subscribed 400,000 dollars, which is 400,000 divided by 2,400,000, or 16.7 percent of the vehicle, comfortably above the 10 percent threshold. If that fund is, or but for 3(c)(1) or 3(c)(7) would be, an investment company, its own holders are looked through. If it has 35 holders, the vehicle's count becomes the 79 other members plus those 35, or 114 persons, against a limit of 100. The 3(c)(1) exclusion is gone, and the fix is structural rather than cosmetic: cap that member below 10 percent of the vehicle, or reorganize the vehicle under 3(c)(7) and require every member to be a qualified purchaser.

SPV, roll-up vehicle, RUV: the naming

The terms are used loosely and the distinctions worth keeping are these. Special purpose vehicle is the general label for a single-purpose entity, in this context a single-asset investment vehicle. Roll-up vehicle, sometimes abbreviated RUV, usually means an aggregator assembled by or for the company itself to consolidate many small commitments into one cap table line, often with the company rather than an outside lead driving it. Aggregator vehicle describes the function rather than the sponsor. None of the three names changes the analysis: the Investment Company Act exclusion, the Regulation D exemption and the Form D obligations are identical.

Common mistakes

• Counting subscribers instead of beneficial owners. The 3(c)(1) limit is a beneficial ownership test with a look-through, not a count of signature pages.
• Letting one institutional member take a large slice without checking its own character. The look-through turns on whether that member would be an investment company but for an exclusion, so the diligence question is about the member's structure, not its size alone.
• Assuming 3(c)(7) is simply the roomier option. It removes the headcount cap and replaces it with a 5,000,000 dollar investments test for individuals, which most members of a small aggregator will fail.
• Treating the company's cap table benefit as the only purpose. The vehicle has its own operating agreement, its own tax filings, its own reporting obligation to members and its own fee arrangement, and those costs fall on the members.

Adjacent terms

The special purpose vehicle is the same structure named for its single-asset purpose rather than for its aggregating function. Accredited investor and qualified purchaser are the two eligibility tests that decide whether a given vehicle can be assembled under 3(c)(1) or must move to 3(c)(7). A Form D filing is the public record of the whole arrangement, and the first document to read about any aggregator.