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Prospectus liability insurance

Everything you need to know about prospectus liability insurance (POSI) for your next capital market transaction. 

This article on prospectus liability insurance (also known as POSI or IPO insurance for short) is relevant for you if you are a lawyer (ECM/DCM) and wish to advise your clients on an issue, or if you are a team member of an equity or debt capital market instrument and have questions about risk transfer. This text also provides an overview and relevant tips for those responsible for the transaction (CEO/CFO etc.).

If you are an insurance broker have been approached by your client about hedging a capital market transaction and are not one of the few specialists in this challenging area, please contact us at an early stage. At RP4brokers, we will be happy to work with you in the best interests of your client.

Prospectus liability insurance is one of our main areas of focus, but is a niche topic on the German insurance market. There is therefore a lack of clear definitions. In this article, we focus on prospectus liability insurance, which relates to liability in the event of a public offering of securities or admission to trading on a regulated market and does not fulfill any exception to the prospectus requirement. However, changes due to the EU Listing Act are not an issue here. If you are concerned about prospectus liability for unlisted venture capital and private equity funds, we refer you to our article on E&O insurance.  

Other forms of prospectus liability, such as those arising from marketing/sales documents of private equity or venture capital companies, are handled differently in terms of insurance and will not be dealt with here (note: please ask for our guides for venture capital or private equity ). In view of the role of fund companies as shareholders in IPOs such as Triton Partners (Renk), CVC Capital Partners (Douglas) or Warburg Pincus (IONOS), this article may also be valuable for this group of people - please refer to the section on the liability and protection of selling/controlling shareholders.

Risk Partners on the Deutsche Börse podcast

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As a specialist broker for capital market liability, we had the opportunity to talk to Alexander Ranga leading capital markets lawyer in Germanyfor Deutsche Börse 's "Road to IPO" series and Joel Kaczmarek (digital kompakt). Prospectus liability insurance (POSI) plays an important role, as do other valuable aspects of risk and liability management. Listen in as Alexander and Florian share relevant tips and best practices on liability and insurance strategies from their stock exchange projects.

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What is prospectus liability insurance (POSI)?

Prospectus liability insurance (Public Offering of Securities Insurance - POSI insurance for short) covers the liability that may arise from the publication of a securities prospectus, for example in the context of an IPO, a bond issue, a capital increase or an up-listing requiring a prospectus. The prospectus is the central document that contains information about the issuer and is made available to potential shareholders or investors. However, POSI insurance is more of an "insurance of the process" for a successful capital markets transaction than just an insurance of the prospectus itself, although this is of course the focus. A misleading or missing statement can already give rise to a liability case during the roadshow or cornerstone agreement and should be covered accordingly.

In short, POSI insurance as liability insurance provides protection against financial losses that may arise if material information in the prospectus or related documents is inaccurate, misleading or incomplete. The value proposition includes:

  • Examination of the question of liability,
  • Defense against unjustified claims (e.g. assumption of defense costs),
  • Payment of compensation to shareholders in the event of justified claims

POSI insurance is usually taken out as a one-off project policy for the specific transaction and is provided with a 12-year subsequent notification period in order to take account of long statutory limitation periods in Germany and to enable the integration of timely follow-up issues and take into account possible supplements, for example. In particular, it should be borne in mind that purchasers of the security can invoke the (alleged) material error in the prospectus within the first 6 months after the issue (Section 9 WpPG) and assert this within thelimitation periods. With regard to the one-off project policy, it should also be noted that we can advise clients for whom we have developed different cover for regularly recurring capital market transactions, which are structured as an ongoing policy. However, we will discuss this instrument with you depending on your financing strategy. 

Who is covered by POSI insurance and what is the background?

A key recommendation we make to first-time project managers of the insurance stream in a capital market transaction is to plan a preparatory workshop with us. In contrast to other corporate insurances, POSI insurance covers a broad circle of (external) insureds with different balance sheets and interests. This means that all persons responsible for the prospectus (issuer, banks and other responsible parties named in the prospectus) as well as the persons responsible for the prospectus (e.g. selling/controlling shareholders, group parent companies and IPO-incentivized members of the administrative bodies) as well as selected experts accompanying the prospectus can be covered by POSI insurance. It is therefore not usual for conflicts of interest to arise between banks, auditors, major shareholders and the issuer and its executive bodies. For example, the question of prioritizing the payment of a claim, which is generally irrelevant in other insurance lines, is a frequent point of discussion. A qualified "IPO insurance clause" in the underwriting agreement can provide a remedy in advance, particularly in the case of attractive IPOs, and we are happy to advise our clients on this. The following groups can be named as the core stakeholders of a POSI insurance policy, which we will discuss in more detail below. It should be noted in advance that the following liability situation is formulated with POSI insurance in mind and does not make the legally relevant distinction between special statutory prospectus liability, general civil prospectus liability (e.g. roadshow materials, see e.g. Rupert-Scholz decision of the Third Civil Senate) and tort law (Section 823 BGB), insofar as these are not relevant to underwriting.

  1. Issuer
  2. Bodies of the issuer and persons involved (e.g. Management Board / Supervisory Board, Head of Legal, Head of Insurance Stream, etc.)
  3. Underwriters (bookrunners, participating underwriters)
  4. Controlling / Selling Shareholder 
  5. Auditor (hedging the comfort letter risk)

For 1.) & 2.), the issuer is generally liable to shareholders for errors in the prospectus or in the capital market transaction process. In the case of executive bodies, liability must be considered in a more differentiated manner. Liability as the person responsible for the prospectus only comes into consideration in exceptional cases (being named as such in the prospectus; the signature alone is not sufficient). Although it is more likely that the executive bodies are liable as the person who initiated the prospectus, this must also be assessed on a case-by-case basis (e.g. incentives). Rather, potential liability essentially results from Section 93 (1) sentence 1 AktG and the associated duties of care, which also include the examination of risk transfer/purchase of appropriate insurance. In the worst case, the private assets of the executive bodies can therefore be included in the liability.

3) Underwriters are jointly liable with the issuer towards the shareholders for justified claims of the shareholders. Through their due diligence, they assume a special "auditing role" as "distributors of the securities". However, the banks attempt to limit their risk through a comprehensive "underwriting agreement", a comprehensive disclosure of information by the issuer ("prospectus"), the comfort letter and comprehensive prospectus liability insurance. This liability of the banks can optionally be covered by our Risk Partners POSI Prime Protect insurance (clause: bank module).

4) In a much-noticed judgment "Wohnungsbau Leipzig-West"(judgment of September 18, 2012 - XI ZR 344/11), the position as controlling shareholder alone was sufficient for the BGH to assume a significant interest in the issue and thus to assert claims against the shareholder based on the issue. This is stated in the ruling of the BGH: 

"Persons responsible for the issuance of the prospectus (persons responsible for the prospectus) are those persons who have an economic interest in the issue of the securities and who work towards the publication of an incorrect or incomplete prospectus. This regulation is intended to close a gap in the list of liable parties; in particular, group parent companies are also to be included in the liability if a group subsidiary issues securities"

A position as a shareholder can therefore already give rise to liability on its own, as simplified shareholders should not only enjoy the advantages of an IPO (e.g. higher liquidity), but must also share in the risk or cannot "offload" the risk onto the issuer (see DT3 case law from the Federal Court of Justice - II ZR 141/09). Rather, in the event of liability, these shareholders must indemnify the issuer internally for their share - this may also include associated legal defense costs in addition to indemnification - from liability and pay for this share in the event of damage. Depending on the shareholder (company/private ownership), this will then trigger (private) liability in the internal relationship with the controlling/selling shareholders. The associated indemnification obligations in the internal relationship can optionally be covered in our POSI insurance conditions (clause: Controlling / Selling Shareholder). As DT3 case law also requires cost sharing (Cost Sharing & Indemnity Agreement), the interests of the controlling/selling shareholders should be taken into account at an early stage when designing the insurance cover. 

5) In the context of an issue, the auditor is responsible for verifying the accuracy of the key financial figures in the prospectus. This is usually done in the form of a comfort letter; we have recently seen fewer audit opinions/test reports going beyond this in our transactions. The comfort letter is particularly important for the syndicate banks as part of their "due diligence defense strategy". However, since this task of the auditor is associated with considerable liability risks and, in particular, incorrect financial information (see, for example, the third IPO of Telekom (DT3), Wirecard) can easily be attacked, the auditor will only participate in the prospectus under the condition of a comprehensive indemnity against liability vis-à-vis his client (usually the issuer). The auditor will also want to align the scope of activities closely with auditing standards (e.g. IDW PS 910) and clearly specify the addressees of the comfort letter (expressly not shareholders) in order to minimize its liability. If claims are asserted in the context of incorrect financial figures, the contractual liability or, if applicable, the recourse options of the syndicate banks must be evaluated. A claim can be enforced up to the indemnification (usually covered by the auditor's professional liability insurance), beyond which the indemnification should apply from the auditor's perspective, so that risks remain on the issuer's balance sheet. As these can be substantial, there is a regular desire for protection. In addition to the option of taking out special comfort letter insurance policies, which the auditor takes out himself up to the amount of his indemnification, there is also the option of insuring this as a self-loss component within the framework of our POSI insurance ("comfort letter clause"). With this option, it is up to the issuer to determine the desired coverage. In practice, it is common for the final amount of the POSI insurance and the desired coverage with regard to the comfort letter clause to vary, as the WP risk is not covered by all POSI insurers. We will be happy to advise you on which option is ideal for your project.

Why is D&O insurance not enough?

To put it in a nutshell: Different benefit promise for partially different insured persons / companies. 

Prospectus liability insurance is a sub-segment of D&O insurance which, as a project policy, focuses on the risks of the capital measure, while D&O insurance focuses on the general liability of the executive bodies (Management Board & Supervisory Board) and important representatives. The company itself (in this case the issuer), the syndicate banks and auditors are therefore not covered by D&O insurance - with a few exceptions for the company. The same applies to selling/controlling shareholders, who therefore continue to have "(private) liability". A good POSI policy (e.g. our Risk Partners POSI Prime Protect) also regulates the circumstances of a capital measure such as missing / false statements by the board member during a roadshow and errors in the prospectus very precisely in the insurance cover. D&O insurance can also provide insurance cover for these liability regimes, but this is much more aggregated and less specifically regulated. Depending on the structure, there is also a risk of loss of insurance cover due to unfavorable structuring of the issue of "aggravation of risk".  

Depending on the breach of duty by a board member, D&O insurance as a policy for directors' and officers' liability leaves room for maneuver as to whether, for example, a critical transposition of figures is a classic breach of duty within the meaning of directors' and officers' liability. This is due to the fact that it is geared towards directors' and officers' liability in general (hence the name "directors and officers insurance") and not specifically to the liability regime of a corporate action. Specific bases for claims, e.g. special prospectus liability with regard to the transaction, are also clearly defined in a POSI insurance policy so that the insurance cover works accordingly in the event of a claim.

Another issue that often comes into play is "capacity". Boards are often aware of the particularly high risk, but understandably do not want to increase their D&O insurance, which renews annually for the next 12 years, in terms of the sum insured in order to make sufficient provision for a loss in the context of the IPO with regard to their own liability. In addition, the POSI project policy regularly provides higher sums insured than issuers' D&O programs. 

In conclusion, it can be said that in addition to protection for the "uninsured in the corporate D&O" such as syndicate banks, issuer, selling/controlling shareholders, the insurance cover of POSI insurance focuses precisely on the liability regime of the corporate action and thus also provides significantly improved insurance cover for the "insured in the corporate D&O" such as the board member.

Please also see our page on IPOs, where we have taken a more holistic look at the topic of IPOs. In addition to information on IPO insurance, you will find further information on the best way to proceed in the insurance stream as well as differences between an IPO in Europe and the USA. 

"We are one of the few insurance brokers with proven expertise in capital market transactions (e.g. IPO/SPO/bonds). As an owner-managed insurance broker, we can promise you leading expertise and continuity even when the stock market window closes. This has become a unique selling point in the "war of talent".

Why should your specialist broker nevertheless discuss D&O insurance with you?

Even companies that are not listed on the stock exchange generally have D&O insurance (more information on D&O insurance for start-ups / scale-ups can be found here). This so-called "non-public" D&O is particularly important due to many critical management decisions in the pre-IPO phase. With the IPO, however, the individual liability risk increases considerably. D&O insurers generally protect themselves by imposing a contractual reporting obligation on the policyholder and a corresponding right of termination.

Furthermore, insurers request additional information as part of the risk dialog for the capital market transaction and would like to have the accuracy of this information confirmed by a board member in a warranty statement. If the necessary notification is not provided, the insurer may be released from its obligation to indemnify the board of directors, for example, due to a breach of obligation. In the event of a claim, the insurer will attempt to cast doubt on the warranty statement in order to be released from liability.

If the intention is to consider going public as a realistic option, it is ideally advisable to consult a specialist broker 12-24 months in advance. Product innovations such as the Risk Partners Flip-D&O (DUAL listing) or Risk Partner D&O Prime Protect can defuse the "tricky" obligations for the persons involved well in advance. Care should also be taken to ensure that issues such as IPO committees are taken into account in order to protect all parties involved in this high-risk project.

You are welcome to contact us for such an insurance due diligence without obligation. We will assess whether the D&O insurers will go along with your approach or offer it due to underwriting bans of listed companies or non-competitive conditions. We also discuss structuring options to ensure that the D&O and POSI programs are appropriately mirrored. The issue of "accumulation" plays an important role here and requires special knowledge. In view of the private liability of the board members and persons involved, the topic of D&O insurance should therefore be urgently addressed at an early stage in the run-up to the IPO.

What are the special features of an IPO in the USA with regard to POSI insurance?

POSI insurance - originally from the Anglo-American area, like D&O insurance - is also an aspect of consulting and especially negotiating with insurers for every transaction of a foreign filer on a US stock exchange. However, the insurance market has not offered POSI insurance for years due to multiple tightening of liability. Nonetheless, we investigate possible capacities for you on the international markets, especially in "softer" - for the client better - market phases.  

Incidentally, this is also a problem for some transactions (e.g. SPAC, SME bond) where insurers are more reluctant to bear the risk. Here, too, there are alternatives to stand-alone prospectus liability insurance, on which we can advise you and offer solution options on the relevant insurance markets worldwide. 

How expensive is POSI insurance and what else is important?

Below we present other important aspects of POSI insurance:

  • The sum insured usually varies between 5 and 50 percent of the issue volume, depending on the issuer, the market environment and the issue proceeds achieved or targeted (incl. greenshoe). In addition, we discuss the desired shareholder structure with you, which also has a significant influence on the level of hedging. Hedging the entire risk ("assumption of the securities against reimbursement of the purchase price, insofar as this does not exceed the first issue price of the securities, and the usual costs associated with the purchase " - see Section 9 (1) sentence 1 WpPG) is rare or not feasible, particularly in the case of larger transactions. 
  • The costs for POSI insurance are between 0.5% and over 4% of the sum insured, depending on the risk profile.
  • Substantial sums insured with capacities of up to € 300-400 million can be concluded with good risk profiles and the use of international markets. (as at 2023/2024)
  • The term of the insurance is based on the specific limitation periods for prospectus liability and is 12 years.
  • In contrast to D&O insurance, for example, there is no risk of change with the project policy and only a one-off premium calculation.
  • The buffer function of POSI insurance also indirectly protects the D&O insurance and thus offers extended protection, as listed companies that are exposed to losses in particular have challenges in maintaining sufficient capacity on their D&O program.

With our international network (Foreign Filers), our leading know-how and quality standards as well as our special POSI concept (Risk Partner POSI Prime Protect), which has been stress-tested in numerous transactions.

What would a procedure with Risk Partners be like?

Road to IPO: Streamlined process with experts

Risk Partners specializes in IPOs on a German stock exchange as well as being one of the few specialists for IPOs in the USA . Due to the different liability and insurance markets, among other things, the requirements and success factors are different, so we have split them up for you in the following section. Simply select your intended stock exchange and contact us if you have any further questions.

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