Although small and emerging growth companies (EGCs) will have broader access to public and private funding under the new Jumpstart Our Business Startups Act (JOBS Act), they should be aware of related directors and officers (D&O) insurance issues.
Signed into law by President Obama last month, the JOBS Act fundamentally expands how small and emerging public and private companies can raise capital in the United States. The Act, among other things:
• narrows the disclosure and reporting obligations for EGCs—defined as companies with $1 billion or less in annual revenue. EGCs also are able to file IPO registration documents with the SEC on a confidential basis up to 21 days prior to public disclosure;
• relaxes restraints on a private company’s ability to raise private funding by permitting general solicitation or advertising in the offer and sale of securities; and
• expressly permits “crowdfunding”—the raising of up to $1 million in capital in any 12-month period from numerous small investors through online platforms.
Any company seeking to take advantage of these new mechanisms, however, enters into largely uncharted territory in terms of potential D&O liability risks and insurance recovery. What kinds of regulatory or shareholder claims might be possible in these circumstances? Would such claims be deemed as covered under a company’s current D&O liability insurance policy?