Adoption of the federal Jumpstart Our Business Startups (JOBS) Act gives new companies easier access to capital from the general investing public—but also presents liability exposures that D&O insurers do not yet fully understand, says a report 
from Marsh.
The New York-based insurance broker and subsidiary of Marsh & McLennan Cos. released a report titled “D&O Liability Insurance Implications of the JOBS Act,” which notes that the 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 business 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 new company to raise up to $1 million in capital from investors through an SEC-registered Web portal over a 12-month period.
According to M. Machua Millett, a senior vice president at Marsh and author of the report, all of the act’s provisions raise questions regarding the extent of these emerging companies’ coverage in their D&O policies.
He notes in the report 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
Millett tells NU there are also aspects of the law for which the SEC has yet to issue rules, 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 of its aspects. 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 that the precise nature of the exposures will not be known until the act is put into effect.
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