NU Online News Service, May 31, 1:34 p.m. EDT
Adoption of the Jumpstart Our Business Startups Act gives companies easier access to capital from the general investing public, but also presents liability exposures that directors and officers insurers do not yet fully understand, says a report from Marsh.
The New York-based insurance broker and subsidiary of Marsh & McLennan Companies released a report titled "D&O Liability Insurance Implications of the JOBS Act," which notes that the JOBS Act makes three "fundamental changes to existing securities laws and regulations" governing how emerging public and private companies raise cash.
The law affects Emerging Growth Companies, defined as companies with less than $1 billion in revenue. The law gives such a company more latitude to "test the waters with both the Securities and Exchange Commission and potential investors about [its] initial public offering prospects" before the company makes its finances and other internal information available to the general public, according to Marsh.
The law also lifts some limitations on how private companies can raise money through private-security offerings.
Furthermore, it authorizes "crowd-funding," which allows a company to raise up to $1 million in capital during a 12 month period from small investors through an SEC-registered Web portal.
According to M. Machua Millett, a senior vice president at Marsh and author of the report, All of the act's provisions open up questions regarding the extent of coverage in a D&O policy.
He notes in the repot that policyholders need to revisit provisions in their D&O policies with respect to:
- Definition of loss—covering potential liability under the act.
- Disgorgement limitations or exclusions.
- Public offering or securities exclusions.
- Roadshow carve-back or coverage.
- Public debt exclusions or limitations.
In an interview with PC360, Millett says there are also aspects of the law that the SEC has yet to issue rules for, particularly concerning crowd-funding and private offerings.
The SEC has up to nine months from when President Obama signed the JOBS Act into law, in early April, to issue rules on some aspects of the law. Some other provisions go into effect almost immediately and do not need SEC oversight.
For underwriters, Millett says their primary issue is "increased concern of shareholder litigation," which could justify rate increases on D&O programs.
However, he says it is still early in the process, and precisely what the exposures will be will not be known until after the rule making is complete.
As such, the JOBS Act should have no immediate impact on the D&O space, says Millet.
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