Prospectus Liability Insurance

ASIC’s guidance specifically addresses the use of forecasts and projections in disclosure documents, highlighting the importance of the basis on which these statements are made.

Depending on the wording, POSI may also extend to associated offering materials and statements made during investor presentations or roadshows. These extensions should be expressly checked.

Who and what can be covered?

POSI typically protects the issuing company and its directors and officers. Depending on the policy, protection may also extend to selling or controlling shareholders and certain liabilities the company assumes towards the financial underwriters of the offering.

Cover may include legal defence costs and covered settlements or damages arising from an insured claim. Some policies also provide specified investigation or inquiry costs. The insured parties, covered losses, exclusions and applicable excesses depend on the negotiated wording.

A fall in share price does not, by itself, establish liability or trigger an insurance payment.

The relevant issue is whether there is a claim alleging conduct covered by the policy. For example, a company may raise capital using a prospectus that forecasts substantial revenue growth from a major customer contract. After listing, that contract fails to proceed and the share price declines. Investors subsequently allege that the prospectus overstated the certainty of the contract and failed to disclose material concerns.

POSI may respond to the defence of the company and insured individuals, together with any covered settlement or damages, subject to the policy terms.

Why arrange a separate policy?

A key purpose of standalone POSI is to ring-fence the exposure associated with a particular offering.

Where genuinely separate limits are arranged, prospectus claims have a dedicated pool of insurance rather than drawing on the limit available for ongoing Directors & Officers Liability claims. This helps preserve the D&O programme for other management exposures. The actual separation depends on whether the policies contain shared limits or other provisions linking their response.

How long does protection last?

Claims concerning an offering may emerge years after the prospectus was issued. POSI is therefore generally arranged as a transaction-specific, multi-year policy, commonly with a single premium.

The period varies between insurers and transactions. Six- or seven-year arrangements are common examples, while longer periods up to ten years may be negotiated. The commencement date, expiry date and claim notification requirements also require careful review.

How does POSI work with D&O insurance?

POSI focuses on the specified offering and associated disclosures. D&O insurance addresses allegations of wrongful acts committed by directors and officers in their management roles. A listed company’s D&O programme may also include cover for securities claims against the company itself.

A business undertaking an IPO will generally need its POSI and D&O arrangements considered together. The transition from private company management liability to listed company D&O requires particular attention to prior acts, offering exclusions and any run-off protection.

A retroactive date aligned with the listing date may form part of the arrangement, but that date alone does not ensure continuity of cover. The policies must be reviewed together to establish how pre-listing conduct, prospectus disclosures and post-listing conduct are treated. Where allegations involve both the offering and subsequent management conduct, the policies may overlap. Shared limits, related-claims provisions, excesses and other-insurance clauses can affect the outcome. Two policies should therefore not automatically be assumed to provide two fully independent limits.

Structuring appropriate protection

The programme should reflect the size and nature of the offering, the company’s financial position, industry, investor base, jurisdictions involved and reliance on forecasts or future milestones.

Particular attention should be given to the adequacy of the limit, whether defence costs reduce that limit, the protection available to individual directors, and the interaction with existing and future insurance.

POSI supports the financial protection of the company and its insured people when an offering gives rise to a covered claim. It complements thorough due diligence, accurate disclosure and sound governance; it does not replace them.

For a full discussion on Prospectus Liability Insurance / Public Offering of Securities Insurance (POSI), contact Business Insurance Specialists for a no-obligation consultation.