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Directors & Officers: The Job Act and D&O Insurance


Directors & Officers: The Job Act and D&O Insurance

Signed by President Barack Obama in April, the JOBS Act (Jumpstart Our Business Startups Act) is aimed at giving start-ups and small businesses more access to capital. The Act’s purpose is to provide an “on-ramp” for private companies (Emerging Growth Companies – EGCs) seeking capital by, in part, making the IPO process less burdensome and the transition to public ownership easier.

EGCs can now elect to submit their IPO registration statement for SEC review on a confidential, nonpublic basis (although the registration statement must be publicly filed at least 21 days before the IPO road show). The Act also relaxes limitations on private fundraising and authorizes crowd funding (individuals coming together to support and directly fund projects by other individuals and organizations). It provides for reduced disclosure and reporting burdens for EGCs for as long as five years after an IPO – as long as the company continues to meet the definitional requirements.

These changes precipitated by the JOBS Acts have placed companies into unknown territory regarding their liability and D&O insurance. While the provisions afforded by the JOBS Act are intended to ease the IPO process, they also introduce risks for investors. An insurance industry report recently released on this issue brings up certain critical points that need to be considered. For example, will the narrowed public EGC disclosure obligations increase or decrease the risk of claims, and if so will this have an impact on D&O premiums?  Also, how will broadened private funding mechanisms impact D&O policies, which vary greatly in terms of their public offering exclusion/limitation language?

In addition, the report notes that many implications of the JOBS Act remain unclear pending the issuance of Securities and Exchange Commission rules. Companies should consult legal counsel before using any of the JOBS Act now available or to become available after SEC rulemaking. And, of course, the advice of an experienced D&O insurance broker is critical to ensure proper coverage is in place before proceeding with private or public fundraising.

Axis Insurance Services, LLC offers Directors and Officers insurance to protect against the costs of legal defense and provide indemnity coverage for the business, directors and officers, and employees in suits alleging internal mismanagement.

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Blogged on: June 12, 2012 by Mike Smith
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