Insurance for issuing securities to the public – (POSI)
The transition of a private company to become a public company (or a reporting company in the case of raising debt from the public) is a complicated procedure full of risks for both the company and its officers.
A public offering is made by the prospectus. To the extent that there is a misleading detail in the prospectus, the officers and the company may find themselves sued for violations of securities laws. It is important to note that the law imposes serious responsibility on the officers in connection with a misleading detail in the prospectus. That is, in the lawsuit, the injured party only needs to prove that he suffered damage as a result of misleading details in the prospectus. Unlike normal tort claims, it is not necessary to prove the elements of the act/omission that resulted in the actual damage. The law grants office holders a number of protections in which they will not be found liable, but the burden of proving the existence of the protections falls on them. Which makes litigation in court much more expensive for the officers than a normal lawsuit.
In the case of issuing securities to the public, the company’s officers have 2 possible alternatives for transferring the risk:
- Insurance for the issuance of securities to the public – (“POSI”) and in addition insurance for officers for the current activity that excludes the issuance. (“D&O ex IPO”) –
The POSI policy provides coverage for 7 years for claims filed against the company’s officers arising from the IPO , as well as coverage for the company As a result of violations of securities laws related to the offering. This means that any claim that is filed related to the initial public offering will be covered under the POSI policy. In addition, an officers’ policy must be purchased to cover the ongoing activities of the company that excludes claims related to the public offering. However, provides coverage for all other claims that may be filed due to the company’s current activities (for example, a claim related to the company’s current reports to the stock exchange).
Unlike executive insurance for a private company, executive insurance for a public (or reporting) company usually also covers the company itself due to claims arising from violations of securities laws (Side C).
- The second option is to purchase only officers’ insurance that covers the issue (D&O Inc. IPO)
This is the officers’ policy that provides coverage for the company as a public company. That means both coverage for office holders and SIDE C coverage as mentioned. In addition, the policy will provide coverage both for claims arising from the issuance and for ongoing operations.
It is important to note that there is no unequivocal answer as to which option is more worthwhile in the case of an IPO. Each option has its advantages and disadvantages. For example: the first option will probably be more expensive because it involves the purchase of 2 separate policies. Although in the long run the second option may be more expensive. In addition, a lawsuit filed related to the issuance in the first option will only “taint” the POSI, while in the second option it may affect the insurance history of the insured completely and make it difficult to find a solution.
Important points to note:
The policy covers preliminary procedures for derivative claims such as disclosure of information and the request for a derivative claim.
The policy provides coverage in accordance with the Law on Streamlining Enforcement Procedures at the Securities Authority (Legislative Amendments), 2011
The liability limits purchased are suitable for the company’s risk, taking into account the value of the public’s holdings.
The terms of the policy and its exceptions fit the company’s business environment.
In any case, you should consult with an expert in the field before making the decision and adjusting the policy wording according to the risks inherent in the issue. Our office specializes in IPO insurance, you are welcome to leave details and a risk manager will get back to you as soon as possible.