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Knowledge Center Items The Impact of IPOs on Directors & Officers Insurance

The Impact of IPOs on Directors & Officers Insurance

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A rise in securities class-action cases involving initial public offerings (IPOs) is spurring insurers to increase prices for Directors and Officers coverage (D&O), as cited in a recent article in Reuters. In some cases, a D&O policy has increased by as much as 200% in the last three years. The reason? There are a lot of risks in IPOs, and if things don’t go well, you’ll see lawsuits alleging that executives misled their investors.

Also, investors who once waited months to see how a new stock would perform are now ready to seize on dropped share prices post-IPO due to missteps in disclosures.

When shareholders sue newly public corporations, it’s often for alleged violations of a 1933 Securities Act provision that holds them and their top brass liable for misstatements or omissions in certain IPO documents. These disclosure-oriented lawsuits don’t always require companies’ knowledge of wrongdoing. That means the bar is lower to file them rather than fraud allegations.

To further complicate matters, a 2018 Supreme Court ruling may contribute to greater litigation and to a tightening insurance market. Shareholders can now file some securities lawsuits in state court in addition to federal court.

According to the Reuters article, there have been 25 lawsuits related to IPOs so far this year against 19 companies. IPO-related settlements have totaled $929 million since 2017. Moreover, according to litigation research firm ISS Securities Class Action Services, the number of IPO-related lawsuits have doubled since 2013, and data shows that most of them are directed at high-priced tech company IPOs.

The rise in IPO litigation coincides with another trend, according to an article in INC. magazine: Over the past 20 years, researchers have found that startups looking to go public are increasingly bulking up their SEC filings in an attempt to ward off lawsuits. It’s important to have robust disclosures, including outlining the business risk factors for S-1 filings. "The trend in IPO language since 1997 is for the S-1 to contain more negative and uncertain words,” says Tim Loughran, finance professor at the University of Notre Dame, in the INC. article. Mr. Loughran has been conducting textual analysis on SEC filings since 2011. "Painting a pessimistic picture of what could happen in the future can only help in the event of a lawsuit," he adds.

RPS specializes in providing D&O insurance to a broad range of businesses and can help you procure coverage for your clients. Just give us a call.

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