n March 2015 the SEC amended regulations in Title IV of the JOBS Act. Here, Ty Sagalow, President of the Innovations Insurance Group, explains the changes and why they have cause for concern among Private Company D&O underwriters.
The JOBS Act (Jumpstart Our Business Startup Act) was initially passed in April 2012. According to Mr. Sagalow, it was designed to make it easier for companies to raise capital with minimal oversight by the Securities and Exchange Commission (SEC). While the SEC was also not happy with the loss of regulatory oversight, D&O underwriters faced increased pricing pressure and potential losses.
The SEC is responsible for implementing the JOBS Act, but it has taken over three years to issue the first regulations in relation to Title IV – the Small Company Capital Formation title.
Prior to the JOBS Act, private companies were able to raise up to $50 million through a private placement memorandum. Companies could solicit credible investors and the SEC had oversight over the entire process. According to Mr. Sagalow, “the privately held D&O market was very comfortable with private placement memorandums and they were routinely covered…with a privately held D&O policy.” Another way to raise capital was through Regulation A which had less regulatory oversight, but only companies to raise up to $5 million.
Title III Crowdfunding, another section of the JOBS Act, allows companies to raise up to $1 million through online portals with little SEC oversight and without using securities brokers. In addition, companies could to solicit unqualified investors. Regulations for Title III have not been issued for over 700 days, according to Mr. Sagalow, but the SEC is expected to issue new rules in October 2015.
In March 2015, a new regulation called A Plus was issued by the SEC, and increased the amount that could be raised to $50 million with less regulatory oversight than Regulation D. Regulation A Plus also eliminated the General Solicitation ban, so companies are now able to advertise for investors. These changes, said Mr. Sagalow, have caused the D&O carriers to review their policies in order to make changes in terms of additional amendments and exclusions.
For more on Innovations in Insurance with Ty Sagalow, visit the WRIN.tv On Demand Library.