Special Purpose Acquisition Company (SPAC) Insurance
Special Purpose Acquisition Company Insurance.In the past couple of years, there has been a surprising rise in the number of companies seeking SPAC IPOs in North America. In 2020 alone, we saw around 248 SPACs that raised a total of $83 billion. During the first six weeks of 2021, there have already been 168 SPACs, which have raised an astonishing $52.25 billion.
However, it is important to note that to date, the bulk of all this activity has been centered around the US or companies domiciled in the Cayman Islands.
Many of these SPACs are listed on the NYSE or Nasdaq, though there is an expectation that all of this can lead to many SPACs soon listing on the European exchange and the LSE. Today, with the number of SPAC capital for potential targets, the next big magnet for this is the growing European tech sector.
Special purpose acquisition companies (SPACs) work by offering target businesses the opportunity to access a great deal of liquidity without any execution risk that often comes with having an IPO. Through this process, they can become a listed company.
The growing interest in using SPACs as perhaps an alternative to IPOs is the key is ensuring that directors and their officers of both the target company and the SPACs have a well-designed Directors & Officers (D&O) insurance which is meant to respond as and when needed.
Seeing as how many SPAC IPOs and various de-SPAC transactions are taking place, there are new lawsuits being filed regularly, with the level of litigation now likely to only increase in the next few years.
That's why it is important to partner with an insurance broker that understands both the risks and complexities of the industry. At present, few insurers are equipped to deal with it, but as special purpose acquisition companies (SPACs) become more common, there will be more insurers offering customizable Special Purpose Acquisition Company insurance packages.
Special Purpose Acquisition Company insurance protects SPACs from lawsuits. Get a fast quote and your certificate of insurance now.
Below are some answers to commonly asked SPACs insurance questions:
- What Types Of Insurance Do Special Purpose Acquisition Companies Need?
- Why Do SPACs Need Extended Reporting Coverage?
- What Risks Do SPACs Face As A New Public Entities?
What Types Of Insurance Do Special Purpose Acquisition Companies Need?
Directors and officers are often faced with a unique set of challenges unlike with a traditional business entity. Leaders risking their personal assets alongside those of the SPAC. After all, the leaders can't reach into the SPAC's trust to indemnify themselves if someone files a lawsuit.
Instead, it is up to the accused to dig into their own pockets to cover a potential settlement's costs. The founder cannot buy a D&O policy at least not like other people. The limitations don't precisely align with the outlook that most SPACs have.
Take, for instance, the fact that conventional D&O coverage usually lasts for just 12 months. So, it isn't hard to see that this policy period isn't workable for SPACs since the timetable on which they are operating. Instead, many policy periods may focus on the length of the SPAC.
It is common to purchase a D&O policy for everyone. So, without having coverage initially, it can be tricky for a SPAC to move forward after they have de-SPACed. It becomes imperative that ventures like these plan for the future, often months in advance, and know what to expect when applying for Special Purpose Acquisition Company insurance.
Why Do SPACs Need Extended Reporting Coverage?
It should come as no surprise that the majority of lawsuits involving SPACs stem from IPO registration statements. Omissions, misstatements, allegations against the management team aren't exactly new for SPACs. In fact, they are fairly common.
Though in all fairness, SPAC IPOs tend to face less litigation as compared to traditional IPOs, though there are numerous legal concerns for SPACs, and it isn't just a minor stumbling block.
It is essential for SPACs to ensure that directors and their officers are protected from all allegations that may arise post IPO. Plus, the coverage should be able to date back to the representations during the initial process of taking the entity public.
Here extended reporting coverage or ERC is very helpful for SPACs since it provides coverage for all the reported or made claims after the policy has expired.
We have borne witness to hundreds of federal securities class action lawsuits in recent years. The market capitalization losses amounted to over a trillion dollars in 2018 under the barrage of cases.
What Risks Do SPACs Face As A New Public Entities?
Even though SPACs will raise money from their IPO to acquire another business, the new entity still faces many risks associated with traditional public entities. You need to remember that the environment in which these companies are operating is in perpetual flux. The shift continues from regulatory enforcement trends to compliance issues.
The distinct landscape is what changes the risk for these public company directors and those working for them. That's why it is so important that SPACs have robust Special Purpose Acquisition Company insurance coverage. It is also why D&O insurance is available in three parts.
In the event that directors are personally sued or are forced to pay at least the defense costs in addition to a portion of the settlement, that's when the D&O insurance will kick in. The goal is to protect the director. Though Part 1 will only cover individual directors if the entity isn't capable of covering it, like if the company is at present insolvent.
When a business indemnifies people in a lawsuit, that's when Part 2 coverage will kick in to cover the costs. However, it will only cover the indemnifying individuals insured and named in the lawsuit.
The third part is more about balance sheet protection for a company if the business is named in the lawsuit along with the director. The coverage will reimburse the costs.
Special Purpose Acquisition Company Insurance - The Bottom Line
SPACs may be on an upward trajectory in terms of popularity. However, the risks are serious but can still need to be mitigated with the right Special Purpose Acquisition Company insurance policy. Fortunately, many companies understand the risk and tailor policies accordingly for directors and the entity.
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Get useful tips and information about how much commercial insurance costs, small business risks and exposures, how insurance regulations effect your businesses' and detailed descriptions of coverages and exclusions and more. Most small businesses need to buy the following four types of insurance at a minimum to cover their operations from every day risks:
Property Insurance: This policy covers a business if the property used in the business is damaged or stolen as the result of common perils like fire or theft. Commercial property insurance covers the buildings, structures and also business personal property - which includes furniture, inventory, raw materials, machinery, computers and other items.
Liability Insurance: Any company can be sued. Slip-and fall lawsuits are very common and be costly. Customers can claim you injured them or damaged their property - and lawsuits are very expensive. Commercial liability insurance pays damages and can include attorney's fees and other legal expenses. It also ca pay for the medical bills of injured third parties
Commercial Auto Insurance: For vehicles owned by the business. Commercial auto insurance pays bodily injury or property damage costs for which the business is found liable - up the the policy limits for liability and property damage.
Workers Compensation Insurance: In almost every state employers must provide workers comp when there are W2 employees. Workers compensation pays for the medical care of employees and can replace a portion of lost wages - regardless of who was at fault for the injuries.