What Is IPO Insurance?

Initial public offering (IPO) insurance is an insurance product that offers coverage to companies preparing to make an IPO. There can be considerable risks in this process, and insurance protection is recommended to cover the company, its officers and directors, the underwriters, and other parties involved in the process. This is a specialty product that may not be available from all insurance providers, and it can be wise to get quotes from several companies to get an idea of the type of coverage available, and the cost.

An IPO insurance policy covers several liability issues associated with the process. One is the prospectus, the document the company uses to disclose information about itself and sell the IPO to prospective investors. If there are any inaccurate statements in this document, they can be subject to litigation and the company will have to bear the cost if it does not have insurance. There may also be direct liability on the part of individuals who misstate or lie in the prospectus; if an accountant is quoted and the quote is wrong, for instance, investors could sue her to recover losses.

IPO insurance policies also handle liability incurred by officers of the company and the underwriters in charge of the IPO. In the event of a problem, the insurance can cover the cost of litigation and related matters, like investigation into the circumstances of the situation. This protection makes it possible for people to agree to serve as officers, underwriters, and officials. They might not be willing to do so if the company did not carry coverage, as they would bear the costs of any litigation.

The language in the insurance policy can vary and is usually specific, rather than generic, to the IPO at hand. Many companies allow companies to use their capital raising to cover the premium. The insurance company originates a contract and starts coverage, and the company pays the premium out of the funds it raises during the IPO. Companies are often short on cash around the time of an IPO, one reason they hold such events, and IPO insurance could be out of reach if the company didn't have an option to pay the premium later.

This type of insurance can vary in scope. Before a company buys an IPO insurance policy, it should have an attorney review the contract and accompanying documents. The lawyer can determine whether the insurance meets the need, and may provide specific advice on increasing and improving coverage. The company should not sign the IPO insurance agreement until it is completely satisfied with the terms.