Special Purpose Acquisition Companies (SPAC), often called blank check companies, take private companies public. They raise capital through an initial public offering (IPO) before acquiring an existing private company, or an operating company can merge with the SPAC to become a listed company.
SPAC offers financial flexibility, capital structure, and management and attracts many investment opportunities for their clients. Since public companies trade higher multiples than private companies, SPAC also offers clients the possibility of higher valuations.
While SPAC has become increasingly popular in the market, it’s important to remember the associated risks and take necessary precautions with SPAC insurance to mitigate those risks
Why is SPAC Insurance Important?
Although SPAC seems like a risk-free move, there are plenty of risks to investors, companies, directors, and officers. Some of these risks for the SPAC and investors include:
- SPAC sponsors can lose millions of dollars if a merger doesn’t close.
- The directors and officers of SPACs could face risks to their personal assets since funds in SPAC trusts cannot be used to secure the SPAC against liability.
- SPAC can have significant potential for fraud or lower due diligence requirements that make SPAC riskier, and it can leave investors empty-handed.
- The reputation of SPAC sponsors might replace robust due diligence measures, which can result in investigations and losses.
SPAC insurance ensures that investors and the directors and officers of the SPAC are defended and/or protected in cases of liability claims, allegations of fraud, misrepresentation or damages that can cause large financial losses.
What Does SPAC Insurance Include?
Directors and Officers Insurance is one of the most important coverages for a SPAC. Directors and officers of any company have personal liability for the actions and decisions of their company.
Commercial General Liability Insurance and Professional Liability Insurance only protect against physical, property, and financial losses the company or a third-party receives as a result of company operations, products, and services. They do not provide coverage to the board of directors or any individual director for any damages or losses associated with their actions or decisions on management, leadership, statements, and more.
Directors and Officers Insurance policies will align with the SPAC’s due diligence period and protect the executives from lawsuits against misrepresentation, conflicts of interest, management structure, false statements, and risks that can occur at any point in the process of securing an acquisition.
SPAC Directors & Officer’s Insurance Pricing
Directors & Officers Insurance liability is complicated and it can be hard to determine if you have the right coverage or are getting the best value out of your insurance coverage.
As with many insurance policies, it’s difficult to put an exact price tag because there are so many factors that could influence the cost of your Directors & Officers Insurance premiums.
Determining the pricing of your Directors & Officers Insurance largely depends on the size of your company and the number of employees you have. Other factors that can also affect insurance prices include:
- Amount of annual revenue
- Number of funding rounds
- Total amount of funding
- Organizational structure
- Number of paying customers
When purchasing Directors & Officers Insurance, there are a few key things you should consider to ensure that you are getting the most value out of every insurance dollar.
There are many differences in the Directors & Officers Insurance policies available. The cost of your insurance premium will depend on which type(s) of coverage you choose for your SPAC.
There are also limits on the amount of coverage you might receive for your Directors & Officers Insurance policy. Like any other insurance policy, extra coverage would mean a more expensive insurance premium.
There are risks with any business or service provided to clients. However, SPACs can face very unique risks that you might not typically encounter with other types of businesses, not only for investors but also for the directors and officers employed.
One of the major risks is those private companies that go public through a SPAC faceless inspection, especially since the SEC doesn’t review statements until after the acquisition occurs. As a result, there could be false statements or key omissions that may otherwise have changed an investor’s perspective on the SPAC.
Another risk of SPACs is the lack of adequate controls, especially in the beginning stages. There could be ineffective processes and procedures over financial reporting, payments, cyber fraud, and more. Directors and officers of the SPAC can also make liability and claims over the decisions and actions they make on behalf of the company.
How Many Types of Insurance Are There for SPACs?
There are several types of insurance for SPACs and the insurance needs of the SPAC also vary at each phase of its existence.
For example, Directors & Officers Insurance is especially important during the initial stages of the SPAC to protect the directors and officers against liability from any of their actions or decisions. Directors & Officers Insurance also helps SPACs attract well-recognized directors since they typically want protection before joining.
Commercial General Liability Insurance is also encouraged to protect SPACs against damages and injuries to a third party.
In the later stages, SPACs might be recommended for mergers & acquisitions representations and warranties coverage. It provides protection to the buyer if the seller’s representations and warranties are flawed.
Find the Right SPAC Insurance from ALIGNED
ALIGNED works with Canada’s top insurance companies to get the reliable and affordable coverage you need for the risks, concerns, and risk tolerance of your SPAC directors, sponsors, and investors. Click Here To Get A Quote or contact one of our business insurance experts for information or with any questions you may have.