As SPACs continue to barrel through 2020 at top speed, SEC has taken notice and we've already seen a number of remarks focusing on sufficient disclosure from Chair Clayton and Commissioner Lee. One area that does not seem to be getting full level of disclosure is the pricing of directors and officers (D&O) insurance coverage for the SPAC at its IPO. As I have written previously, at the IPO, the SPAC sponsor team obtains D&O coverage to protect itself from potential claims and to attract knowledgeable, well-recognized, independent directors. A typical, mid-size SPAC needs to decide between $10 million and $20 million of D&O coverage to be placed at the time of its IPO.
Recent D&O insurance environment, however, has become positively inhospitable. The contributing factors include the fact that there is only a handful of insurers who are willing to write D&O coverage for SPACs, that these same insurers have been inundated with requests for such coverage over the last few weeks and are running out of annual capacity, and that the number of SPACs out in the market has increased exponentially, thereby attracting additional risk. All of these factors do not only mean that it now takes insurers a lot longer to provide quotes, but also that it has driven SPAC D&O pricing to levels that are 100% to 200% higher than they were just a few weeks ago. As a result, the cost of a $20 million D&O policy has jumped from mid-$400,000s to between $900,000 and $1,100,000 just in the last month. Not surprisingly, this situation is creating serious tension in the market, with SPAC sponsors buckling under the pressure of hundreds of thousands of dollars in unplanned additional expenditures.
Very little of this, however, seems to be reflected or adequately disclosed in the estimated costs listed in the SPAC S-1 registration statements. Barring a few larger SPACs that filed in the last week or so, the costs of D&O coverage in a typical S-1 are estimated at around $100,000 to $200,000. These numbers may have been actionable several years ago but are wishful thinking in today's D&O market. They are also presented on an annualized basis, which obscures the fact that they need to be doubled for a typical two-year D&O policy whose entire premium is payable at the time of the IPO, a fact that does not make it into the disclosure.
The premium numbers presented in this manner and estimated at levels that are significantly below current market pricing do not provide a true picture of the market and create unrealistic expectations for both future SPAC sponsors and their investors.
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