Prospectus/IPO Liability Insurance

Provides financial protection to individuals and the Company for liability imposed on them from the initial public offering or its offering prospectus.

Audio podcast by Mr Stanley Wong, Financial Lines Manager, Asia, on ACE elite II Public Offering of Securities Insurance (POSI)

Insurance Solution for Initial Public Offering (IPO) Risk in Hong Kong

The Hong Kong stock exchange is considered to be one of the most popular markets for IPO and a number of big consultancy firms expect Hong Kong to have more IPO activity this year.

As the board of directors and the management of the companies going public, are you prepared for the IPO risk?

It is well-known that legal costs in Hong Kong can be quite costly. Increasing regulatory exposure and more demanding shareholders will put the personal assets of the directors and the companies’ senior executives at high risk. This may explain why it is not easy to find a good independent director who is willing to sit on the board of a listed company.

Increasing Regulatory Exposure

In year 2012, the Securities and Futures Commission (SFC) imposed more responsibility and liability on the IPO sponsors and this will come into effect in October 2013. Exposing the IPO sponsors’ own financial liability, other than exposing other penalties proposed, will breach the new rule. As such, it is expected that the IPO sponsors will expect more from the IPO companies especially on the indemnification provided.

What does this mean to the IPO companies?

Currently, company directors and any person who authorize the issue of the prospectus would be liable for prospectus misstatements. The new rule proposed will further increase the exposure of the shareholders, board of directors and/or the management of the companies going public in Hong Kong. For example, the companies will need to file the prospectus or other required documents much earlier and the SFC will publish such draft prospectus filed on the Hong Kong Stock Exchange and Clearing (HKEx) website.

Demanding Shareholders Exposure

The IPO market also suffered from a number of accounting and governance issues and it is not only limited to Hong Kong. For example*, a number of proceedings were filed against the directors and the company related to Facebook IPO last year in the US, alleging that the company made misleading statements and omitted material facts in its prospectus. It was also claimed that the directors and the company failed to disclose during the IPO's road show in which certain underwriters reduced their performance estimation for the company and only “selectively disclosed” this information to “certain preferred investors.” Similar proceedings were also filed against Groupon IPO last year.

For Hong Kong, it is not difficult to find examples of prospectus containing errors, alleged companies, management scandal or fraud during the IPO stage and unknown complaints to the HKEx against any IPO candidates. Euro-Asia Agricultural (Holdings) Co. Ltd. and Hontex International Holdings highlight the IPO exposure in Hong Kong, by way of example.

Public Offering of Securities Insurance (POSI)

In view of the IPO risk and changing regulatory exposure that directors, management and companies face, ACE Insurance Limited has recently launched a new IPO insurance solution in Hong Kong called ACE elite II Public Offering of Securities Insurance Policy (ACE elite II POSI). This new product is designed to provide directors and officers, companies and the selling or controlling shareholders with financial liability protection (including but not limited to the legal representation expenses incurred for defence or regulatory proceedings, damages awarded and settlement) against the potential claims or investigation during the road-show or in the documentation relating to the IPO or other securities or bond offering.

ACE elite II POSI also extends to cover the IPO sponsors and underwriters indirectly depending on the indemnification provided by the IPO company.

If you would like to further understand ACE elite II POSI, please contact your brokers or insurance agents.

*Source: http://securities.stanford.edu/