Skip to main content
Article

Prospectus Liability Insurance

The benefits for Directors and Officers

Financial, Executive and Professional Risks (FINEX)
N/A

By Angus Duncan | March 10, 2021

What is Prospectus Liability Insurance? and what are the advantages for Directors & Officers?

When a company seeks to raise capital through the offer of securities to the public, or seeks an admission to trading of securities, a prospectus or listing particulars will be issued detailing in-depth financial information about the company and its future objectives and strategies.

If capital is being raised in the U.K., the issuing directors must be satisfied they have complied with the requirements laid down by the Financial Services Markets Act (2000), The Listing Rules and the London Stock Exchange’s admission and Disclosure Standards. The capital raising may be through simultaneous offerings on one or more stock exchanges, in which case care must be taken to comply with the relevant laws and regulations of the territory in which each of the stock exchanges is domiciled. In all jurisdictions signatories to the prospectus have a personal responsibility for the accuracy of the contents.

Liabilities may be incurred if the prospectus contains errors or omissions which are relied upon by investors in making their decision to purchase the company’s securities.

Liabilities may be incurred if the prospectus contains errors or omissions which are relied upon by investors in making their decision to purchase the company’s securities.

These liabilities, which potentially represent the greatest risk exposure that the directors (and the company) may incur in the corporate life of the company, can be insured through the purchase of a Prospectus Liability policy (variously known as Initial Public Offering insurance (IPO) or Public Offering of Securities Insurance (POSI)).

Prospectus Liability insurance is transaction-specific and addresses the following risks:

  • Shareholder actions alleging misstatements in the prospectus upon which investment decisions were made.
  • Shareholder actions alleging failure to disclose material information in the prospectus.
  • Legal expenses in respect of regulatory investigations.
  • Shareholder derivative actions.
  • Crisis management expenses.
  • Long-term contractual liabilities arising from the offer or listing.
  • Claims for misrepresentation in the lead up to the offering (roadshow activity).
  • Breach of warranty in the placing agreement/underwriting agreement.
  • Secondary offerings made on similar terms to an initial public offering.

Who is covered by Prospectus Liability insurance?

The company, its directors (including non-executive directors) and officers and certain employees, for a securities claim. It is also common for selling shareholders and controlling shareholders to be covered.

Use of Prospectus Liability insurance

Cover has been available for some time in the insurance market, and has been substantially utilised by companies undertaking initial and secondary offerings of shares, rights issues, bond offerings or private placements.

Cover will also be of interest to companies involved in other forms of transactions where a prospectus may be issued, such as a ‘debt-for-equity swap’.

Cover will also be of interest to companies involved in other forms of transactions where a prospectus may be issued, such as a ‘debt-for-equity swap’.

Prospectus Liability insurance is viewed as an attractive product by company directors and especially by the non- executives, who face increasing responsibilities in respect of corporate governance along with the risk of personal liabilities which can result from failure to ensure the accuracy of corporate statements and publications. Many are now unwilling to assume such long-term liability exposures without the benefit of insurance.

The increasingly stringent attitude of regulatory regimes towards company corporate governance regimes, and the increase in shareholder actions has highlighted this exposure to both company directors and the institutions which invest in their businesses.

Advantages of Prospectus Liability insurance over Directors’ & Officers’ Liability insurance

  • A Prospectus Liability policy ensures that a ringfenced limit of cover is in place for specific prospectus exposures.
  • Policy covers the strict liability exposures relating to the prospectus.
  • The ‘one-off’ premium can be attributed as a transaction cost of the listing.
  • Cover is provided for claims arising from issue of the prospectus and the policy period usually covers the statute of liability for those claims (six years in the U.K., three years in the U.S.).
  • Many Directors’ & Officers’ Liability policies do not provide cover for prospectus liabilities as standard.
  • A Prospectus Liability policy often covers people that would not be covered under a Directors’ and Officers’ Liability policy.
  • Can help minimise ‘renewal risk’ of insurance premiums shifting upwards or market capacity not being available in future years.
  • The insured does not have to buy extended levels of Directors’ & Officers’ Liability cover in relation to prospectus risks.
  • Any claims made against the Prospectus Liability policy will not erode aggregate cover limits purchased under the company’s Directors’ & Officers’ Liability cover.
  • The Prospectus Liability policy remains in place in the event the company is taken over or merges with another.
  • The policy may help attract directors who are joining the board for the offering.

What limits are purchased?

Limits purchased will vary depending on the ‘risk appetite’ of individual companies, the circumstances and size of each individual offering and in which jurisdictions the offering takes place.

The premium is usually calculated as a percentage of the overall limit of cover.

The premium is usually calculated as a percentage of the overall limit of cover. Key factors which will affect pricing are whether the share listing is being undertaken on a main or specialist exchange and whether it is multi-jurisdictional, the number of interested parties being covered and the amount being raised.

Information required to obtain a quotation

In order to underwrite prospectus exposures insurers will require the following:

  • Copy prospectus/listing particulars
  • Percentage of securities to be offered pursuant to U.S. laws and regulations
  • Value of securities being offered
  • Copy of placing/underwriting agreement
  • Proposal form
Author

Executive Director
Coverage Specialist, FINEX

Contacts

Mitch McBain
Head of London Broking
Executive Director
FINEX, Directors & Officers


Related Capabilities

Contact Us