deliveryagentWhen private companies are on track toward a planned IPO, much of the focus and attention is on readying the company for the burdens and responsibilities it will face as a public company. Among other things, this also means a focus on the potential liability exposures for the company and its directors and offices once the company goes public. Until the company actually completes its planned offering, however, it is still a private company — albeit one with a heightened set of risk exposures because of the company’s pre-IPO activities. If the planned IPO never happens, the company and its senior officials sometimes face liability claims arising from pre-IPO activities. A recent complaint filed in the Northern District of California against the former directors and officers of a pre-IPO company that ultimately went bankrupt illustrates the kind of claims pre-IPO companies and their executives can face. Pre-IPO companies’ liability exposures have important implications for the companies’ D&O insurance programs, as discussed below.
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nystateIPO activity so far this year is well off the pace compared to this time a year ago. According to Renaissance Capital, as of last Friday, there have only been 16 IPOs in 2016, compared to 45 at this point last year, representing a decline of 71%. Indeed, when cybersecurity firm Secure Works Corp. completed its IPO last Thursday, it was the first tech IPO in over four months – and its debut was less than encouraging, as the offering priced below the targeted range. In an environment like this, companies whose strategies included an IPO may find that their plan to go public is simply no longer a realistic – or even desirable – option.

Among the many consequences that may befall a company whose IPO plans are sidetracked is the possibility that it may face claims from disappointed investors who assert that the company and its senior officials should be held liable to them for their losses arising from the company’s failure to launch. As discussed below, a recently filed lawsuit underscores the susceptibility of pre-IPO companies to these kinds of claims, which in turn highlights some important D&O insurance considerations for these kinds of companies.
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sec sealThe Securities and Exchange Commission is primarily concerned with public companies and the securities markets in which the shares of public companies trade. However, in a series of recent speeches and presentations as part of what the agency had called the “Silicon Valley Initiative,” the agency made it clear that it is increasingly concerned with private and pre-IPO companies as well, particularly so-called “unicorns” – that is, the private start-up firms with valuations greater than $1 billion. SEC Chairman Mary Jo White highlighted these concerns in a March 31, 2016 speech at the Rock Center for Corporate Governance at Stanford Law School, a copy of which can be found here.

As summarized in an April 4, 2016 memo from the Fenwick & West law firm about the SEC’s Silicon Valley Initiative, “the SEC is closely watching the conduct of private companies as well as emerging platforms that trade in private company securities, and will bring enforcement cases as needed to protect investors.” The agency’s recent presentations and SEC Chair White’s speech, the memo said, underscored that “the SEC expects even private companies to embrace and demonstrate sound corporate governance.”

As discussed below, these pronouncements from the SEC raise troublesome questions about what has in the past been viewed as a clear demarcation between the potential liability exposures for private and public companies.
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roadDue to a combination of favorable circumstances, the number of companies completing initial public offerings is currently at the highest level in years. According to a recent study from Cornerstone Research (here), with the 112 IPOs in the first half of 2014, IPO activity is on pace to increase for the third consecutive