The Potential Implications Of The JOBS Act On D&O Coverage

On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups Act, better known as the JOBS Act. The JOBS Act is intended to help smaller and new companies raise capital, and, to accomplish this goal, institutes fundamental changes to existing securities laws in the areas of fundraising and emerging growth companies (EGCs).

Changes to Laws Governing Fundraising

The JOBS Act relaxes or entirely removes restrictions on private fundraising, including limitations concerning how and to whom private companies may market their Rule 144A securities offerings. It also raises the limit for securities offerings exempted under Rule 505 of Regulation D from $5 million to $50 million, thereby allowing for larger fundraising efforts. The JOBS Act broadly permits the previously limited allowance for "crowd funding," that is, the use of online platforms to raise up to $1 million in capital from numerous small investors over a 12-month period.

Changes to Laws Governing EGCs

The JOBS Act also grants EGCs – defined in the Act as companies with annual revenues less than $1 billion in the most recent fiscal year – greater flexibility to test the waters with both the Securities and Exchange Committee (SEC) and potential investors in regards to their initial public offering (IPO) prospects before they make their finances and other internal information available to the general public. Specifically, EGCs are relieved from certain regulatory and disclosure requirements in the registration statement that they originally file with the SEC when they go public and for a five-year period thereafter. Additionally, the JOBS Act relieves EGCs from some of the more burdensome obligations imposed by Section 404 of the Sarbanes-Oxley Act and related rules and regulations.

Potential D&O Implications

Although these changes are no doubt helpful for new and small business to raise capital more quickly and easily, they potentially open the floodgates to a host of D&O concerns. It is unclear at this early stage whether a company's D&O policy will cover claims stemming from the provisions of the JOBS Act. Indeed, Marsh USA, a leading insurance brokerage company, recently issued a report addressing this concern.

With regard to the changes in laws governing fundraising, it is imperative that a company first read and understand the language of its D&O liability insurance policy regarding public offerings before taking advantage of the new fundraising mechanisms...