The Jobs Act: New D&O Liability Concerns

On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups Act (“JOBS Act”). For an estimated 97% of all businesses in the U.S., the new legislation is the most significant change since enactment of the Securities Act of 1933 regarding how companies raise capital.

The Act, which generally applies to private companies with up to $1 billion in annual revenue, substantially reduces the regulatory burdens of raising capital. The legislative expectation is that by allowing these small and mid-sized companies easier access to capital, they will grow and hire more employees faster and thus will help fuel the country’s economic recovery.

Under the new rules, qualifying private companies can sell their securities with fewer disclosures and less regulatory oversight. If those securities sales result in investor losses, the investors will have greater opportunity as a result of the new rules to allege they did not receive all material information when they made their investment decisions. Unquestionably, the Act will lead to increased securities litigation against companies and their directors and officers. Private companies will be selling more securities more often to more investors with fewer disclosures as a result of the Act, thereby creating largely unprecedented liability exposures for directors and officers of those private companies. In addition, history confirms that in the aftermath of governmental deregulation of an industry or business practice, there is a higher likelihood that some individuals will seek to take advantage of the lack of regulatory oversight by engaging in abusive practices for the benefit of themselves and their companies.

Directors and officers of private companies that avail themselves of the new and less restrictive options for raising capital should proceed carefully in light of this heightened risk of securities claims. In addition, the D&O insurance industry will need to adapt to the Act by re-evaluating underwriting practices, policy terms and pricing models especially for private companies.

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Dan Bailey
Service Affiliation
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