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Directors & Officers Liability and the JOBS Act

The Jumpstart Our Business Startups, or JOBS, Act has been touted as a “potential game changer” for startups and small businesses when it was signed into law. The sweeping deregulation included in the law could expose directors and officers to new waves of shareholder litigation.

The JOBS Act is designed to make it easier for startups and small businesses to raise capital by significantly expanding the pool of investors to whom they can turn for funding. The law loosens public disclosure requirements for so-called “emerging growth companies” (defined as companies with up to $1 billion in annual revenue.) to make it less costly for them to become a publicly traded company. The law also exempts emerging growth companies from prohibitions against advertising the sale of securities, provided that the securities are sold to an investor the startups “reasonably believe is a qualified institutional buyer” for five years. Unfortunately, those same aspects of the law could combine to create a situation where scores “unsophisticated” investors are encouraged to buy into companies they do not know enough about. And if the startup later experiences a significant loss of value and shareholders could sue the company and its directors and officers.

One of the most worrisome provisions in the JOBS Act for D&O underwriters are those that create a framework for crowd-funded investments. This uncertainty adds to the overall unpredictable market D&O underwriters have faced in recent months and could force underwriters and to re-evaluate the language of their D&O policies. With these hybrid companies entering the market (companies that are allowed to go public but behave like a private company on many of the disclosure requirements) the challenge for brokers is going to be making sure the coverage fits these companies and that underwriters aren’t overlooking exposures and are making the right pricing and exclusion decisions.”