2020 introduced a surge of new public companies, and while we expect to see the trend continue in 2021, we are seeing more and more companies forego the traditional IPO route in favor of a Special Purpose Acquisition Company (“SPAC”).
Below, we discuss what a SPAC is and how your company’s D&O policy comes into play.
What is a SPAC and how do they work?
A SPAC, also known as a “Blank Check Company”, is a “shell company” whose only purpose is to raise capital via initial public offering (“IPO”) to acquire an existing private company. Investors contribute capital without any clear idea of how the funds will be ultimately invested, thus the term “blank check company.” SPACS have been around for decades, but they have recently gained popularity with a fanbase of big-name underwriters and investors alike.
A SPAC will sell shares and warrants for about $10 each and investors can later purchase more shares at a fixed price. Raised funds are kept in a trust for period of time – typically two years -until either of the following happens:
- SPAC identifies a company they wish to take public via acquisition, using the funds raised in the IPO; or
- If the SPAC neither merges or acquires a company within the typical two-year period, the SPAC is liquidated and investors get their capital back.
Why SPACS instead of IPO?
Traditionally, companies most commonly go public through an IPO, raising funds from public investors who in turn get shared ownership. While an IPO is the most common route, it is not the fastest, cheapest, or easiest way. During the process, a company must publicly share an array of business information, ranging from financial statements to company secrets. The process is lengthy and expensive and there is a big risk that capital will not be raised if the market does not accept the IPO price.
Alternatively, a SPAC is a blank slate. As a shell company, it has no history, reputation, or financials. A SPAC’s credibility lies on the reputation of the management team. Unlike an IPO, a SPAC skips out on the roadshow process and typically lists in a much shorter time.
While SPACs have their benefits, the SPAC and de-SPAC process is a bit trickier than a standard IPO and does bear some additional risks that are important to highlight in respect to the company’s directors & officers liability insurance.
What do you need to know about SPAC D&O Insurance?
From an insurance perspective, the life cycle of a SPAC is composed of three phases, each with its own unique exposures and insurance needs:
Phase One – SPAC IPO
This phase is primarily classified by the following:
- Form S-1 is filed with SEC
- SEC approval is obtained
- SPAC shares begin publicly trading on an exchange
Once stock is publicly traded, directors and officers are vulnerable to potential lawsuits from public investors. This vulnerability is best addressed with a D&O insurance policy for the SPAC’s management team and board of directors. For the best outcome, start working with your broker as soon as possible.
Phase Two – de-SPAC Business Combination
This phase is driven by the merger:
- M&A target identified
- Shareholders approve target
- Target is acquired
- SPAC and target merge into a single, operating company with publicly traded shares
As soon as the merger happens, both the target’s D&O policy and the SPAC’s D&O policy cease to exist. The new entity needs a policy of its own. Therefore, prior to the merger, there are three D&O policies at stake:
- The SPAC company’s D&O Policy (public);
- The target company’s D&O policy (private);
- The newly created public D&O company
It is pertinent that the first two policies both have coverage for wrongful acts that took place prior to the transaction but that may arise post-merger. As such, tail/run-off coverage is a must to ensure past acts are covered should a claim occur. The new company’s go-forward coverage, will pick up any wrongful acts post-merger and will be no different than any other new, publicly traded operating company D&O policy.
Phase Three – SPAC Operations
In this phase, the company is up and running and has financial, compliance and operating strategies in place.
As a publicly traded company, this phase’s D&O insurance focus is on execution risk, regulatory compliance, investor relations management. It is crucial that you and your broker stay on top of the renewal planning process by starting early, meeting with underwriters and understanding the state of the insurance market and how it may affect your renewal.
For more information or to discuss your D&O liability, please reach out to your Sequoia Risk Management Client Service Manager, connect with them in HRX.
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Disclaimer: This content is intended for informational purposes only and should not be construed as legal, medical or tax advice. It provides general information and is not intended to encompass all compliance and legal obligations that may be applicable. This information and any questions as to your specific circumstances should be reviewed with your respective legal counsel and/or tax advisor as we do not provide legal or tax advice. Please note that this information may be subject to change based on legislative changes. © 2021 Sequoia Benefits & Insurance Services, LLC. All Rights Reserved