When the Securities and Exchange Commission adopted Regulation A+ in March, the new rules exposed companies that raise capital through crowdfunding to new risks.
Regulation A exempts small issuers of securities from registration. As part of the Jumpstart Our Business Startups (JOBS) Act, Regulation A+ expands on that exemption by allowing two tiers of securities offerings. Tier 1 allows up to $20 million in offerings in a 12-month period, but less than $6 million can be from sellers affiliated with the issuer. Tier 2 allows for up to $50 million in securities offerings, and less than $15 million can be from sellers affiliated with the issuer.
Monica Minkel is senior vice president and executive protection practice leader at Poms & Associates Insurance Brokers. She says firm leaders need to make sure they’re protected by directors and officers liability insurance, especially when they introduce multiple new investors through crowdfunding.
“What Reg A+ does is it allows private firms to raise money similarly to how a large company would raise money through an IPO,” she told ThinkAdvisor on Tuesday. “It opens up the opportunity for additional investors to contribute capital to a private firm.”
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When companies bring in new investors to raise money, “we see an exposure there from a liability perspective where a D&O insurance product or some of the other products that we have could help protect the leadership team of the company as well as the balance sheet itself.”
Minkel said raising capital is one of the top three triggers that make D&O insurance an important aspect of protecting executives at private firms.
“When you look at companies that have a need for directors and officers liability, almost every publicly traded company out there buys D&O because they recognize the exposure that they have from securities claims from the various investors that they have in the company who may find fault with the leadership or the management of the organization,” she said.
She said that when current and future investors “find fault with the valuation of the company, you can have a situation where the funding fails and the company doesn’t succeed. You can have a situation where you bring in new investors to the company who perhaps don’t have that personal relationship with the leadership team; you go from a small family-owned company to a company with 100 investors and they’re more disconnected from it. They might not be patient about helping the company through their challenges or waiting until they find success.”
D&O coverage helps a firm’s leaders fight claims from those disgruntled investors of “allegations of mismanagement, misrepresentation and other negligence in the management of the company itself,” Minkel said.