SPACs, or Special Purpose Acquisition Companies, continue to be the preferred vehicle for new cannabis companies to enter the marketplace. According to NASDAQ data, there are now more IPOs for SPACs than there are for conventional companies.
But because SPACs have no allied operations — they are formed to purchase a target operating company to be named later — writing D&O coverage for a SPAC is by no means as clear-cut as it is for a tangible company. Yet D&O coverage is a necessity given the frequency of class-action filings by shareholders against SPAC management.
The grounds for these suits tend to be outsize sponsor and management compensation, inadequate disclosure, and performance misrepresentations. So far in 2021, there have been nearly two dozen such SPAC-related securities lawsuits, and more are likely to come.
None of this will likely diminish the wave of SPACs in the cannabis industry; this “blank check” approach to raising funds has proven to be beneficial for its sponsors. However, there is no standardized approach to writing D&O coverage for SPACs; each insurer has its own specific language, policy forms, and options available — and typically holds all the cards when it comes to policy negotiations.
So what D&O policy provisions best serve SPAC insureds? For starters, the most useful policies will provide protection for all matters of securities claims, including defense of government investigations by the Securities and Exchange Commission or other regulatory body. In today’s litigious environment, the broadest coverage the better.
Second, the individuals who must be covered may not have the usual titles one would expect — it’s common for the sponsors and management of a SPAC to use non-standard designations as to their roles and functions. So proper coverage should be crystal clear as to the covered individuals, typically by name.
Third, the exclusions related to fraudulent conduct should be carefully drawn up. Fraud is the most common accusation in lawsuits filed, with such claims as that the IPO offering materials misled the investors, or that the value of the target company was improperly represented. But policy coverage will likely depend on whether the conduct in question was deliberate or unintentional. Generally, SPACs are best served by D&O coverage that limits fraudulent exclusions to willful violations only.