Prospectus Liability Insurance (POSI): Coverage, Exclusions, and Case Examples

What is POSI

This is an insurance cover for the wrongful acts of a company and its directors arising from the issue of a prospectus. The cover may also include claims by the underwriter or sponsor of the floatation arising from warranties and indemnities given by the company or the directors personally in agreement with the underwriter and sponsor.

The Need of POSI

A corporate entity when raising capital through capital markets by inviting investors and by publication of a prospectus and sale of unlisted securities renders itself to the scrutiny of Regulators, New Shareholders, Customers and competitors. The Directors and officers of that entity, the entity itself, shareholders and/or advisors, lead managers etc can face potential liabilities arising from public act of issuing shares.

The SEBI Act and the Listing Agreements under the Companies Act in India and similar laws and acts provide regulations which govern the possible liabilities of persons responsible for the prospectus to anyone who purchases those securities and suffers a loss as a result of false or misleading information provided in the prospectus. The liabilities arising out of the prospectus can be significant given the considerable amounts of money that are usually involved in capital raising transactions. Directors and Officers , Employees, Issuing Entity , underwriters and any other party associated with the issuance of the prospectus can be held liable for misrepresentations, mis-statements, wrongful disclosures, false revenue recognition and improper accounting practices, assumptions and forward looking statements .

Coverage:

Securities claims arising from offerings of a company’s securities and covers equity or debt issues, both initial and secondary
Liabilities relating to the prospectus/ listing particulars
Liabilities relating to prior negotiations, discussions and decisions in connection with the offering
This cover also includes punitive and exemplary damages upto a certain extent.

Who are Insured:

The Company and its directors, officers and employees for securities claims brought against them in connection with the offering

Exclusions: