Securing the IPO/POSI process
Prospectus Liability Insurance1 is used on a transaction-specific basis and is designed to help protect the company, its directors (including non-executives and proposed new directors), employees and selling shareholders against a securities claim.
Typically the cover is used by companies undergoing initial and secondary offerings of:
- Rights issues
- Bond offerings
- Private placements
- Or other transactions, such as debt-to-equity exchanges.
Coverage can be broadened out further to include the controlling shareholders, the issuing underwriter, and advisors to the transaction.
Covering the gaps in insurance
Most directors presume a Directors’ and Officers’ (D&O) policy will protect them against prospectus liabilities, yet the potential change in ownership caused by an initial public offering (IPO) is likely to trigger the D&O policy’s Changes in Risk provision. This means the cover could convert into a run-off policy only, therefore only providing coverage for Wrongful Acts committed prior to the IPO.
One option is to extend the D&O coverage to include Wrongful Acts emanating from pre offer risks and the offering - however, selling and controlling shareholders may not be covered. Alternatively, there is the option to purchase a one-off, standalone Prospectus Liability Insurance solution. This provides ring-fenced limits to respond specifically to claims arising from the offering document and roadshow, which can provide a more comprehensive form of cover and could avoid impacting the D&O policy’s limit or premium.
- One off, non-renewable policy.
- Six year tenor is common in the UK, three year tenor for the USA.
- Limits vary depending on individual risk appetite of the companies, circumstances and size of the offering, and the jurisdiction of the offering.
- One-off premium payment at inception.
- This allows the offering exposure to be ring-fenced from the D&O policy.
What is covered?
The prospectus or listing particulars will contain in-depth financial statements and information about the company, and a series of forward-looking statements about future anticipated performance. This information is relied upon by investors.
As such, errors, omissions, misrepresentations or non-disclosure of material information within the prospectus leaves the company and its directors liable to actions by investors for financial losses or, breaches of the law and regulation.
The cover is designed to pay damages, settlements and defence costs of the following scenarios:
- Investor (shareholder) actions concerning alleged misstatements or failure to disclose material information, on the basis of which investment decisions were made.
- Liabilities around secondary offerings similar to the initial IPO terms.
- Regulatory investigations.
- Shareholder derivative actions.
- Roadshow (pre IPO) alleged misrepresentation.
- Breach of warranty in the placing/underwriting agreement.
- Costs for emergency public relations/communications are also recoverable.
Benefits of Prospectus Liability insurance*
Prospectus Liability also has the following benefits:
- Covers potential gaps in cover on traditional D&O policies.
- Cover is ring-fenced. This means that the limits on a D&O policy do not have to be increased significantly for several years to cover the long-tail risks of the IPO.
- Similarly, claims made will not erode aggregate limits purchased under the D&O policy.
- The one-off premium can be set against the overall transaction costs of the offering.
- Cover remains in force even in the event of a future merger within the policy tenor.
- Will help with attracting and retaining executive talent.
Why Gallagher Life Sciences Practice?
Our specialist Life Sciences Practice are located in The Walbrook Building in the City of London. The team offer all you would expect from one of the world’s largest brokers – specialist products and strong influence with the insurers underwriting risks in the Life Sciences sector. We offer a dependable, personal service that seek to exceed your expectations from day one.
- A specialist team with many years’ experience of working with companies in the Life Sciences Sector.
- A personal level of broking and risk management support from a niche broking team but with the backing of a global broking house providing the size and scale to ensure delivery of broad policy cover at competitive levels of pricing.
- Capability to service and advise broad range of companies from early stage through to established publicly traded global organisations.
We offer advice across a number of insurance products including:-
- Directors’ & Officers’ Liability
- Cyber Protection
- Intellectual Property Protection
- Warranty & Indemnity Insurance
- Cargo, Supply Chain & Stock Throughput
- Errors & Omissions and Professional Liability
- Human Clinical Trials Liability
1 Variously known in the insurance market as Initial Public Offering insurance (IPO) or Public Offering of Securities Insurance (POSI)
* These are brief product descriptions only. Please refer to the policy documentation paying particular attention to the terms and conditions, exclusions, warranties, subjectivities, excesses and any endorsements.