Initial Public Offerings

Companies that pursue IPOs face scrutiny from the moment they announce their intentions. Initial filings and roadshows designed to attract investors can draw attention from regulators, the public, and plaintiffs' attorneys.

Some of the biggest risks during the IPO journey include:

• Inadequate preparation: Companies that intend to become public may need to upgrade their accounting, reporting systems, and governance practices. Companies may wish to enlist the assistance of financial, legal, and risk professionals with experience serving public companies. Beginning this work prior to the IPO can smooth the transformation.
• Failure to complete the IPO: The inability to execute an IPO may be interpreted as an underlying problem and trigger litigation.
• Misleading statements: Statements and disclosures are critical information for investors. A materially misleading statement or omission can become the basis of a lawsuit against the company, and its directors and officers.

Becoming a public company adds some new responsibilities to the roles of directors and officers, in the form of public reporting and performing their functions in the public eye. Providing training and professional resources to help management improve its governance practices and compliance with applicable laws is an important step. Indemnification provisions in the company bylaws are another way to shield directors and officers from the costs of defending claims arising from their decisions. Litigation can put their personal assets at risk. In addition, companies undergoing IPOs should put in place adequate insurance protection.

Directors and officers liability (D&O) insurance is available for private as well as public companies. This specialized protection comes in three forms, known as Side A, B, and C. Side A provides coverage specifically for directors and officers when the company is unable or unwilling to indemnify them. Side B coverage reimburses the company for indemnifying its directors and officers, while Side C coverage is for securities claims against the corporate entity.

Soon-to-be public companies should consult Marsh risk specialists well ahead of a planned IPO to identify and design an appropriate D&O insurance and risk management program.

Special-purpose acquisition companies (SPACs) have become a popular alternative to traditional IPOs. A SPAC is a shell entity that undergoes an IPO with the intention of using the capital raised to acquire a private operating company, typically within two years. Through a process known as a de-SPAC, the acquired company becomes public and the SPAC entity dissolves.

SPAC sponsors face many of the same risks in traditional IPOs. One difference is the SPAC is not an operating company and has no revenue, so its disclosures may be simpler than a traditional IPO.

A private company considering acquisition by a SPAC should work with a trusted risk advisor to prepare to become public and evaluate whether it has adequate D&O insurance in place.

Marsh’s risk specialists have extensive experience helping public and private companies identify, mitigate, and transfer risks, so the businesses can continue to focus on achieving their growth plans no matter what IPO strategy they pursue.