A new way of funding startups and other entrepreneurial ventures may mean a hot new market for directors and officers liability insurance sales, a top industry leader says.
Thanks to a vote by the Securities and Exchange Commission last October, the public financing method known as crowdfunding can be used by anyone—not just rich, accredited investors.
The new rules ease restrictions surrounding online fundraising for small companies and fraud protection for investors—something that proved burdensome to startups in the past, said Ty Sagalow, a 30-year insurance veteran and head of New York-based Innovation Insurance Group.
“That means any group could use [the crowdfunding platform],” said Sagalow, who has served in high-level positions with IAG,
Zurich and Tower Group. “So, any guy in a garage; the next Apple; the next big internet company; the next entrepreneur that is trying to make the world a better place and needs money to do so can now turn to crowdfunding as an easier way of raising money for more people.”
Sagalow told Insurance Business his consulting firm is heavily focused on marketing D&O policies to crowdfunding companies and those who use them, largely due to the change in SEC regulations.
“The types of activities that companies that use crowdfunding as a way of raising money have more liability because they’re involving more people in a public forum,” he explained. “So, any companies using this as a mechanism to raise funds will seriously look at D&O, whereas if they were raising money in other ways—through investors, friends or family—they might not.”
While there has not yet been any D&O lawsuits against crowdfunding groups, Sagalow notes that the industry is still at the “very, very beginning” thanks to the SEC’s long delay in proposing the crowdfunding rule.
“But, I predict there will be [lawsuits],” he said. “I predict great premium opportunity, and of course where there’s premium, there’s claims.”
Sagalow declared crowdfunding companies “the newest group of buyers for D&O insurance” and said he will continue to be “very robust” in his efforts to woo potential clients.
Not all D&O policies may be created equal when it comes to crowdfunding, however. The growth enterprises law firm Wilson, Sonsini, Goodrich & Rosati warn that exclusions in standard D&O policies may affect crowdfunding-based claims.
“These claims could be excluded by a policy’s securities exclusion, which generally bars coverage for claims based upon or arising from a public or private offering, solicitation, sale distribution, or issuance of securities,” the firm said.
To avoid such tricky exclusions, the firm recommends producers seek out policy language that covers losses considered “restitutionary” in nature. Some policies over such language, whereas others must be specifically included in a more generic policy.
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