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 Is Special Purpose Acquisition Company Insurance?
- 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 Is Special Purpose Acquisition Company Insurance?
SPAC insurance is a form of coverage that protects the SPAC, its investors, and its directors and officers from potential legal claims and financial losses. It is specifically designed to address the unique risks associated with the SPAC process. The coverage typically includes protection against lawsuits related to misrepresentations or omissions in the SPAC's filings, as well as claims related to breaches of fiduciary duty by the SPAC's management team.
One of the main benefits of SPAC insurance is that it provides a level of assurance to investors that their investment is protected. This can be especially important in the case of SPACs, where investors are essentially investing in a blank check company that has yet to identify a target company for acquisition. Without the protection provided by SPAC insurance, investors may be hesitant to invest in a SPAC, or may require a higher rate of return to compensate for the added risk.
Another benefit of SPAC insurance is that it can help to reduce the overall cost of the SPAC process. By providing protection against potential legal claims, SPAC insurance can help to reduce the amount of capital that needs to be set aside by the SPAC for potential legal settlements or judgments. This, in turn, can help to make the SPAC more attractive to investors, as they will be more likely to see a return on their investment.
There are a number of different types of SPAC insurance available, each designed to address different risks. For example, some policies may provide coverage for claims related to securities law violations, while others may focus on protecting against claims related to breaches of fiduciary duty. The specific type of coverage that a SPAC chooses will depend on a number of factors, including the size of the SPAC, the industry in which it operates, and the level of risk associated with its business.
It is important to note that SPAC insurance is not a substitute for proper due diligence and risk management. While SPAC insurance can provide a level of protection against potential legal claims, it is still incumbent upon the SPAC and its management team to conduct thorough due diligence on any potential acquisition targets and to properly manage the risks associated with the SPAC process.
In conclusion, Special Purpose Acquisition Company insurance is an important tool for SPACs to manage the risks associated with the process of going public. By providing protection against potential legal claims and financial losses, SPAC insurance can help to make the SPAC more attractive to investors and reduce the overall cost of the SPAC process. While SPAC insurance is not a substitute for proper due diligence and risk management, it can be an important part of a comprehensive risk management strategy for SPACs.
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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