Are you an officer or director of a private company? Use of equity crowdfunding will expose you to significant liabilities.
- The Act specifically calls out personal liability should any written or oral communication in the offering or sale of crowdfunding equity turn out to contain a material misrepresentation or omission—whether or not it is intentional.
- Each of the hundreds of people expected to participate in an equity crowdfunding could be a potential lawsuit. Defending lawsuits is expensive in both time and money.
- The SEC has narrowly-defined parameters for companies who can seek equity crowdfunding. Expect the SEC to closely police crowdfunding activities and vigorously pursue violators.
- Inadvertent violation of the strict crowdfunding rules could lead the SEC to reclassify all the crowdfunding equity holders as regular security holders. This could push the company over the threshold for maximum number of private company shareholders and force the company to go public. Given the expense of a public company, most startups would go out of business.
Rising Costs of D&O Insurance
Private company D&O insurance policies generally have been much cheaper than public company insurance. Shareholders sue private companies less often than public companies, and for smaller amounts. When a company goes public, D&O insurance costs rise substantially.
Still, lawsuits against private companies have been on the rise, and higher insurance premiums have followed. The JOBS Act is likely to accelerate this trend, and the resulting increase in D&O insurance premiums likely will impact all our startup companies.
Private company D&O insurance companies contain exclusions for being a public company. The language in these exclusions varies widely among insurers. Some are written so broadly that they would omit coverage for equity crowdfunded companies. If you are doing any sort of equity-based fund raising, read your D&O exclusions carefully.