What You Need to Know About D&O Coverage Before Your IPO

Your company is going public. It’s an exciting time, but it’s also a risky time. Make sure you have the right directors and officers (D&O) insurance coverage.

Going Public Brings Intense Scrutiny

In the initial public offering (IPO), a private company offers shares to the public. To do so, the company must select an investment bank, set a price, pick a date, and file the final prospectus, which provides information to prospective investors. Transparency is key, and the company will have to open up its books to investors in a process called the roadshow.

The IPO process is regulated by the Securities Exchange Commission (SEC), and it is subject to intense scrutiny. SEC and shareholder lawsuits are not uncommon. According to Inc., IPO-related lawsuits have doubled since 2013, and Eventbrite, Lyft, Blue Apron, Twitter, Facebook, and other companies have faced lawsuits from shareholders soon after going public.

The SPAC Option

Special Purpose Acquisition Companies, or SPACs, have become a popular alternative route for companies that want to go public. SPACs are sometimes called blank check companies. They are shell companies created to raise capital through an IPO to purchase a not-yet-determined private company.

As we covered in a previous article on SPAC insurance, interest in SPACs has surged recently – and so have the associated insurance issues and litigation concerns. Cornerstone Research shows that there were only one or two SPAC cases a year between 2016 and 2018, but there were six SPAC cases in 2019 and seven SPAC cases in 2020 – and that increase may just be the beginning of the trend.

For private companies looking to go public, SPACs can seem like a simplified option. However, SPACs come with their own unique risks. Some of these risks have to do with the “de-SPAC” process, when the SPAC identifies the acquisition target.

According to Reuters, the SEC has recently launched an inquiry into the SPAC trend and the way underwriters are managing the risks. In a public statement from April, the SEC states that “If we do not treat the de-SPAC transaction as the “real IPO,” our attention may be focused on the wrong place, and potentially problematic forward-looking information may be disseminated without appropriate safeguards.”

Private vs. Public D&O Coverage

Both public and private companies can benefit from the protection that D&O coverage provides.

D&O insurance includes three “sides” that offer protection for the directors and officers or for the company.

• Side A provides coverage for the directors and officers, whose personal assets may be put at risk during a lawsuit.
• Side B provides coverage for the company when it indemnifies directors and officers.
• Side C provides coverage for the company when the company is sued in addition to the directors and officers.

All three sides are important for both private and public companies. However, there are differences, especially when it comes to Side C coverage. For private companies, Side C provides broad coverage. For public companies, Side C only provides coverage for securities claims.

The difference between private and public D&O coverage is important during the IPO process. When companies are going public, they must work closely with their insurer to verify that the correct coverage is in place. For example, a private company should check whether they have coverage for roadshow and post-IPO risks. SPACs must also consider their unique risks and ensure that they have the appropriate coverage for the IPO process and the de-SPAC process.

Expertise is Key

To make sure that your coverage needs are being met, it’s important to work with a partner that has experience with IPOs and SPACs, such as Heffernan Insurance Brokers.

Contact Joe Talmadge to learn more.