Insurance for initial public offerings
Going public offers many benefits, including greater access to capital, an exit strategy for early investors, attracting and retaining key personnel, and raising the company profile. However, IPO insurance protection should be sought to protect your interests.
An initial public offering materially changes a company’s risk profile and adds significant exposure to the personal assets of its directors and officers. An IPO insurance policy should be considered in conjunction with a new public directors and officer’s insurance policy.
Investors will rely upon statements made during any roadshows, presentations and prospectus documents. Potential misleading statements or errors can lead to costly allegations post the initial public offering.
What is IPO insurance?
Initial Public Offering Insurance (otherwise known as IPO insurance or POSI insurance) is specific directors and officer’s insurance policy that exclusively covers liabilities arising out of the issuance of a prospectus in connection with:
(1) An initial public offering (issuance and sale of a stock to the public for the first time) on any stock exchange (LSE, AIM, Euronext, NYSE, Nasdaq, etc); (2) A secondary offering; (3) A debt or bond offering; (4) A private placement of equity or debt securities; or (4) A stock for stock transaction (merger or acquisition) resulting in issuance of new shares.
The potential liabilities are the greatest in the first 12 months following the IPO and then reduce year on year. IPO insurance is therefore a multi-year contract, typically offered for a period of either three or more often six years.
Speak with an IPO insurance broker
If you are required to make disclosures within an offering document, speak with a specialist D&O insurance broker that has the knowledge and experience of IPO insurance to negotiate the bespoke cover required to protect your interests.
Insurance brokers and clients often confuse the offer of prospectus liability under an IPO insurance policy with the separate need for coverage in respect of the Warranties and Indemnities that are contained in a share purchase agreement specifically in connection with the merger or acquisition.
If a business has D&O insurance in place prior to an offering, this will be provided on a private company policy which will operate differently to a public company policy. To discuss your IPO insurance needs, please arrange a call with once of our specialist D&O Insurance Executives.
Preparation for buying IPO insurance
All statements contained within the prospectus and any subsequent public disclosures of material information should be carefully considered. Therefore, IPO Insurance should be considered prior to the release of any offering documentation.
The draft prospectus (with offering price omitted) should be agreed by the insurers before any release to ensure they are comfortable with taking on the exposure. Non-disclosure agreements can be signed by all parties to ensure confidentiality.
IPO insurance underwriters want clients that have: a solid rationale for the offering; with an experienced management team; good historical financial performance; and a diverse board exercising control and oversight. Reputable investment bankers, auditors and legal counsel; with a proven record of good corporate governance and corporate communication will also be very important.
It is important for the company and its directors and officers to seek advice early in the process to ensure suitable coverage is identified. Our team can work with you to ensure you identify the most appropriate IPO insurance to meet your needs.
This guide is for information purposes and based on sources which we believe are reliable, the general risk management and insurance information is not intended to be taken as advice with respect to any individual circumstance and cannot be relied upon as such.