Does your private company D&O insurance address capital raising under the JOBS Act or under a crowdfunding platform like CrowdFunder or Kickstarter, or EquityNet or any of the others? You might be surprised to learn that many carriers have added exclusions to their policies to specifically exclude capital transactions under the JOBS Act even though these transactions are exempt from the kind of SEC scrutiny that a public company might receive.
Hartford is one carrier that has offered language that specifically INCLUDES coverage for JOBS Act and crowdfunding offerings. If you are a private company seeking a capital raise outside of the traditional private placement avenue, you should be mindful of the extensions or limitations in your D&O policy. Consult a competent broker to make sure you have the coverage you need before you list your offering. Hartford is not the only carrier offering coverage. And remember that you may need to specifically request the endorsement because they won't be offering this on every policy.
For quick highlights on the Hartford endorsement, see the following link:
The litigation that is. While I am sure there have been others, on October 13, 2015 the SEC filed an injunction against Ascenergy for misusing assets raised via multiple crowdfunding platforms (notably EquityNet, CrowdFunder, Funable and AngelList).
Here is a copy of the SEC filing.
The complaint alleges that the offering was deceptive and that the funds were not used for the purpose indicated. This raises a significant question regarding the responsibility of the platform to verify the quality of the offering. The SEC alleges that many of the representations made in the offering documents are misleading and misrepresent the risk associated with an investment into the organization. To be sure, companies without the benefit of a crowdfunding platform have misled investors and had actions brought by the SEC. The interesting part of this case is that the crowdfunding platforms have allowed a larger number of participants to be impacted and likely significantly increased the size of the fraud. Article on the case here. Link to Forbes article here from May 2015 talking to the CEO of Ascenergy about his successful capital raise. Kind of reminds me when Andy Fastow got CFO of the year by CFO Magazine in 1999.
Should a platform conduct due diligence on the offerings it is promoting? Most in the crowdfunding community believe that due diligence, both on the part of the platform and on the part of the investor are critical elements to maintain the legitimacy and the credibility of the crowdfunding industry. Without some due diligence, how can an investor have any certainty that their potential investment is not a Ponzi scheme or worse. But what is the appropriate due diligence process. I suppose that's a topic that could use some work and discussion.
It is important for legitimate platforms to have a filtering process to determine if the entrepreneur or capital raiser is a legitimate business, has a reasonably credible business plan, and is the appropriate legal entity structure to accept an investment. The failure of this process may result in the discrediting of the industry as a whole (no wonder D&O underwriters are running from this stuff).
Platforms that are engaged in best practices need to consider the balance between policies & procedures, self funding of risk, and risk transfer to an insurance product. Even the best teams may allow a questionable company to raise capital and then the platform may face liability.
I will be watching closely to see if any of the platforms associated with Ascenergy get named in subsequent litigation for their role in allowing the company to perpetuate the fraud. More to come as developments evolve.
Monica M. Minkel, RPLU, MLIS, cyRM, CPLP has been working exclusively with Directors & Officers Liability, Professional Liability, Cyber Liability and related products for nearly 20 years. She started her interest in finance by loaning money to her mom at age 11 (complete with a loan agreement and competitive interest rate). She is passionate about all things in the financial industry and the way technology is changing the way capital markets function.