A Private Ownership Securities Insurance (POSI) policy provides PE investors and private company shareholders with specialised coverage for losses arising from securities transactions — bridging the gap left by standard D&O policies.

What is Public Offering of Securities Insurance Policy?

An increasing number of businesses are exploring the option of raising capital through an Initial Public Offering (“IPO”) to support growth, expansion and other business objectives. An IPO is a process through which a private company offers its shares to the public for the first time, transitioning into a publicly traded company. This allows the company to raise capital for expansion, acquisitions, or debt repayment. However, the investor’s enthusiasm and indicative economic growth can also have certain pitfalls, that can be listed as below:

PITFALLS OF IPO:

• Market Saturation
• Scrutiny of Regulatory Body
• Inadequate Disclosure
• Overstatement / Overvaluation
• Under Performance

These instances can lead to potential increase in stakeholder litigation and this rise in litigation is driving a stronger awareness among company directors and officers of their fiduciary responsibilities. The Public Offering of Securities Insurance Policy (“POSI”) offers protection to companies, directors, underwriters, and promoters against liabilities arising from the IPO process, including claims of negligence or regulatory non-compliance.

Additionally, any company which intends to raise equity or debt capital through the ways of security offerings such as IPO, should opt for POSI policy at the beginning of the process i.e. roadshows of the offerings.

Benefits of POSI Insurance:

• Financial Protection: POSI safeguards companiesfrom potential financial losses due to misstatements, omissions or inaccuraciesof the offering documents, lawsuits and regulatory investigations.
• Peace of Mind: It provides assurance to companies and their directors during the public offering process.
• Investor Confidence: Having a POSI policy can build investor confidence by demonstrating a commitment to transparency and compliance.
• Risk Mitigation: POSI helps companies manage the significant risks associated with public offerings

Who Needs POSI Insurance?

• Companies: POSI is crucial for companies preparing to go public or issue new securities.
• Directors and Officers: They are protected against personal liability arising from the offering.
• Underwriters: POSI can also be beneficial for underwriters involved in the offering process.
• Advisors: Legal and financial advisors involved in the offering may also consider POSI coverage.

Who Needs POSI Insurance?

POSI Policy | Director’s & Officer’s Policy

Who will be Insured | Protection is offered to companies and their stakeholders, such as directors, officers, underwriters, and promoters. | Protection is offered to directors, officers, or any person working in a managerial capacity of an organisation and their organization.

Scope | The policy offers coverage the liabilities arising from public offerings like IPO. | The policy offers wide coverage with respect to claims for the actions or decisions of directors and officers taken in their official capacity.

Exclusions | The policy does not affect coverage offered under D&O insurance policy. | The policy excludes cover for Prospectus Exclusion or Future Offering of Securities Exclusion.

Inclusions and Exclusions of POSI Policy-

Usually, the sum insured of POSI Insurance Policy is determined basis the financial risk, size of the securities offerings etc. Therefore, the sum insured can range between 1% to 5% of total value of securities being offered. The POSI Policy period further ranges from 3 to 6 years which is generally selected to align with the potential timeframe for claims raising from securities offerings.

Major Inclusions of POSI Policy:

• Cost of official investigation and pre claim enquiries
• Cost of responding to critical regulatory event
• Legal and Administrative Cost
• Cost of Crisis Management
• Court cost, judgements and settlements for covered claims

Major Exclusions of POSI Policy:

• Pre-existing Claim Events
• Dishonest and Fraudulent Acts
• Bodily Injury and Property Damage
• Major Shareholder Exclusion
• Unlawful Conduct
• Interruption of Services
• Consequential Losses

LegaLogic (www.legalogic.com) is a full-service law firm with more than 50 people team. Founded in 2013, LegaLogic has been advising across industry segments. It is a go-to firm for the Corporate Commercial Matters, M&A, Intellectual Property, Employment Law, Real Estate, Dispute Resolution, Litigation, Insurance Advisory, India Entry Strategy, and Private Client Practice. To know more about our Corporate Commercial and M&A Practice, please write to us at insurance@legalogic.com.

This newsletter is for informational purpose only and should not be treated as legal advice or opinion. No part of this newsletter should be considered an advertisement or solicitation of professional services of LegaLogic.

Key Takeaways

• POSI (Private Ownership Securities Insurance) covers representations and warranties made in private M&A transactions.
• It bridges the gap left by standard D&O policies, which typically exclude coverage for securities transactions.
• POSI provides direct coverage to investors and shareholders for losses from securities fraud or misrepresentation.
• The policy is structured to cover rescission losses, financial statement misrepresentations, and regulatory claims.
• POSI is increasingly required by PE investors as a condition precedent to closing private equity transactions.