JOBS Act Implications for D&O Insurance Policies

posted Jun 17, 2012, 2:06 PM by David Khorram   [ updated Jun 17, 2012, 2:06 PM by Unknown user ]

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The JOBS Act is intended to promote job creation by small companies and start-ups through the relaxation of the regulatory burdens of raising capital. However, according to this alert I just received from our friends at Wilson Sonsini, it may also open the door to potential civil actions that may not be covered by the typical private company D&O insurance policy. The alert describes the potential D&O insurance implications of the JOBS Act for companies that choose to participate in crowdfunding. Here is an excerpt:

A New Exemption and a New Cause of Action

Section 302 of the JOBS Act provides a new exemption from registration under the Securities Act of 1933 for private companies using crowdfunding to sell no more than $1 million of securities within any 12-month period, as long as the amount sold to any one investor does not exceed specified per investor annual income levels and net-worth limitations. Significantly, the JOBS Act also authorizes a purchaser in a crowdfunding offering to bring a civil action against an issuer for rescission or rescissionary damages in the event that there are material misstatements or omissions in connection with the offering.

Implications for Private Company D&O Liability Insurance

Securities Exclusions and Crowdfunding Claims

Claims filed by purchasers who participate in crowdfunding may not be covered by the typical private company D&O insurance policy. In particular, these claims could be excluded by a policy’s securities exclusion,which generally bars coverage for claims based upon or arising from a public or private offering, solicitation, sale, distribution, or issuance of securities. Because crowdfunding activities that comply with the conditions set forth in Section 302 of the JOBS Act will be exempt from registration under the Securities Act, a securities exclusion that includes a carveback or exception for transactions that are exempt from registration under the Securities Act should provide insurance coverage for claims arising from crowdfunding.

Insurability of Loss from Claims Arising from Crowdfunding 

Additionally, because the remedy in the event of liability for crowdfunding is restitutionary in nature, private companies that may engage in crowdfunding should make certain that settlements or judgments from claims brought under the JOBS Act are deemed covered “loss” within the meaning of their policies. In the context of public company D&O insurance, courts have held that loss resulting from claims under Sections 11 and 12 of the Securities Act is restitutionary in nature and, as such, may not be insurable. In response to these holdings, many public company D&O carriers now offer language in their policies expressly confirming that their policies will cover loss arising from claims under Sections 11 and 12. Companies considering crowdfunding should include similar language in their private D&O policies. Such companies also should insure that the personal profit exclusions in their policies will not bar coverage for a claim brought under the JOBS Act.