Getting a SPAC through an IPO and De-SPAC

Like other sophisticated finance and acquisition vehicles, SPACs face many hurdles as they go through the IPO and the subsequent business combination. However, with some smart planning and the help of the right advisors, SPACs can take advantage of several insurance options that can help them achieve their goals while minimizing risk.

When thinking about insurance for a SPAC, it is helpful to think in terms of the SPAC’s life cycle. From an insurance perspective, there are three main phases:

Getting a SPAC through an IPO and De-SPAC

Like other sophisticated finance and acquisition vehicles, SPACs face many hurdles as they go through the IPO and the subsequent business combination. However, with some smart planning and the help of the right advisors, SPACs can take advantage of several insurance options that can help them achieve their goals while minimizing risk.

When thinking about insurance for a SPAC, it is helpful to think in terms of the SPAC’s life cycle. From an insurance perspective, there are three main phases:

Phase One: IPO

The main assets of SPACs as they go through the IPO process are their management team, the management team’s investment strategy, and the SEC’s approval of the SPAC Form S-1 registration statement.

Phase Two: SPAC Business Combination

After the IPO, SPACs have the funds to purchase or merge with another company. The SPAC’s management team must find an attractive target and complete the merger or acquisition, typically within 18 to 24 months after the IPO. When the management team approaches potential acquisition targets, which are typically private companies, M&A representations and warranties insurance (RWI) comes into play. However, the management team must also consider and plan for D&O insurance coverage of the post-business combination entity.

Phase Three: SPAC Operations

At this point the combined company is up and running—and carrying with it all the attendant risks of an operating public company. As such, the company needs to be ready for public company scrutiny, which calls not only for ongoing compliance with all necessary regulations, but for a review and usually an upgrade of the company’s overall insurance coverage. This can mean upgrading everything from the company’s property insurance to the company’s cyber Liability insurance.

Special Purpose Acquisition Companies Need D&O Coverage

Operating companies that go through an IPO process are sued frequently and for a variety of reasons. Given that SPACs are not operating companies, their IPOs see far less litigation than typical IPO companies. However, lawsuits—usually alleging material misstatements and omissions in the IPO registration statement—against a SPAC’s management team and its directors are still possible. The vulnerability brought on by public company exposure creates a need for directors and officers (D&O) liability insurance coverage for the SPAC’s management team and its existing board. Moreover, a majority of a SPAC’s board must consist of independent board members to satisfy stock exchange listing rules. Professionals who serve as independent board members typically do not accept a board appointment without a good D&O insurance already in place.

D&O Costs are Increasing

The litigation environment has gotten much worse recently as a consequence of a 2018 Supreme Court decision, Cyan v. Beaver County Employees Retirement Fund. Lawsuits are now brought in multiple jurisdictions, including federal and state courts. Plaintiff law firms have been quick to capitalize on the Supreme Court’s ruling, which in turn has driven up the cost of D&O insurance dramatically for new IPO companies compared to the cost for mature public companies.

How Acumen Can Mitigate Your SPAC Risk

Our experts can lead you through the complexities of your exposures, with services in:

  • Directors & Officers coverage for your management team before and after the IPO
  • M&A Representations & Warranties Insurance for your business combination
  • Risk management and claims support at all times
  • Creative company and deal-specific solutions, including:
    • Errors & Omissions Coverage
    • Cyber Liability
    • Tax Liability
    • Contingent Liability

What Your Insurance Broker Must Know

Given the quickly changing nature of the D&O insurance market, the peculiarities of SPAC IPO companies, and the high cost of D&O insurance for IPO companies, choosing the right insurance brokerage is a must. Working with an insurance broker who merely works with a lot of public companies will not optimize your outcome. To get the best D&O insurance coverage at the best possible price, it is critical that your D&O insurance broker has extensive and current experience working with IPO companies. In addition to having the expertise to recommend the best insurance policy placement options, it will benefit you if your broker also has extensive experience managing claims for IPO companies. Acumen has all of these components and work with our clients on this coverage daily.

What are Special Purpose Acquisition Companies (SPACs)?

SPACs are special purpose, non-operating companies that consist of a seasoned management team, called the sponsor, which raises capital through an IPO, then uses that capital to acquire and operate a business. It files an S-1 registration statement with the Securities and Exchange Commission to do so and then uses that capital to acquire and operate a business. The investors in a SPAC are looking to combine the skill and expertise of an experienced management team with an operating business that has the potential to grow and become a publicly traded entity, but does not have the funds or the expertise to do so on its own. Many private companies use the SPAC structure to become publicly traded entities.

The SPACs (special purpose acquisition companies) market has undergone a transformation over the last few years. SPAC IPOs make up an ever-increasing chunk of the overall US IPO market every year. SPACs have grown from a shunned fundraising vehicle to a sophisticated financing tool that now attracts billions of dollars in investment, sophisticated market players and advisers, and results in billion-dollar acquisitions.

SPAC Risks and Exposures

SPACs present many D&O exposures that are similar to traditional IPOs, including lawsuits stemming from claims of mismanagement, fraud or intentional misrepresentation, inaccurate information and understated risks. However, there are some unique risks to SPACs, including: 

  • Violation of SEC rules for SPACs, particularly by having a target company in mind to acquire when the SPAC is formed.
  • Increased risk of insider trading during the time between when a SPAC goes public and when it selects its target to acquire.
  • Lack of due diligence in targeting a company to acquire.
  • Lack of visibility into disclosures made by the company being acquired.
  • Existing D&O exposure and/or lack of D&O insurance by the company being acquired.
  • Lack of visibility into compensation of the directors and officers of a SPAC.
  • SPACs or underlying de-SPAC entities incorporated outside the U.S.

D&O Coverage for the New Public Entity

  • Although SPACs raise money from an IPO solely to acquire another company, the new public entity still faces many of the same risks as traditional public companies. Keep in mind, the environment public companies operate in is continually influx. From new compliance requirements to regulatory enforcement trends, SPACs frequently experience complicated shifting regularly.
  • Furthermore, this distinct landscape changes the risk for public company directors and officers — increasing it significantly. These dynamics make robust D&O coverage all the more vital for liftoff. D&O insurance comes in three parts, which include:

  • Side A
    • Suppose directors are personally sued and are forced to pay defense costs and settlements, this portion of D&O insurance kicks in to protect the individual. However, Side A will only pay the individual directors if the entity can’t, such as if the company is insolvent.
  • Side B
    • When the company (or entity) indemnifies individuals named in the lawsuit, Side B coverage reimburses those costs. But it only extends to indemnifying insured individuals named in the lawsuit. 
  • Side C
    • This coverage provides a balance sheet protection for the company if it is named in a lawsuit alongside an individual director. Side C coverage will reimburse the costs and settlements incurred.

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