Quick Facts: D&O insurance for SPACs and the Timeline

Topic: D&O Liability Insurance, IPO, SPAC

A special purpose acquisition company (SPAC), commonly categorized as a blank check company with no specific business plan and a purpose to merge with or be acquired by a target company, typically involves four stages in its lifecycle. Generally, we can understand their risks and D&O needs along the lifecycle through two important phases – pre-merger and post-merger.

The formation and IPO of a SPAC company can be categorized as the pre-merger stage. Generally, the time between its formation and IPO would be three to four months. SPAC’s preparation, registration, and fillings with the SEC happen during the Pre-IPO and formation stage. Information on fees and ongoing regulatory filings could be either public or confidential. When they are ready, in most cases, a SPAC company does not necessarily have a target acquisition when they go public. While the SPAC is a private company, D&O insurance should be in place. Why? Directors and Officers are already facing risks when they start to raise capital. Once IPO proceeds are done, and the SPAC company starts trading publicly, the pre-merger phase officially steps into the process of finding a target company. This process typically takes 18-24 months, and the SPAC company will be exposed to risks like allegations of fraud and securities liability related to its SEC’s filings. Although this phase may seem less risky in the past, more SPACs have reportedly been facing litigation and regulatory scrutiny since 2021. SPACs may encounter lawsuits even before they find their target companies. Directors and Officers ideally need a public company D&O policy starting from their IPO date to prevent potential loss. Some optimal choices for premium would be about 100k per million, with retentions starting from 1 million. Typically, the policy period would be 1-2 years in this case, and if the SPAC company is not near its closing date, they might extend the policy period by months. After a target company is identified, SPAC’s lifecycle goes to a live-deal phase, then, if fortunate, the SPAC’s executives will vote on the merger. With the merger outcome and closing deal, SPAC will enter its post-merger phase.

After completing the merger or acquisition, the SPAC will have the option to continue as a public company in the US or outside the US market or a private company, and follow ongoing compliance. This De-SPAC process often requires an upgrade and change in the D&O coverage for the SPAC company, which is also called run-off coverage or tail coverage. In simple words, the D&O policy here mainly covers all the risks that the management group/key executives face from merger and acquisition activity and other litigation. What’s worth mentioning is that, the tail policy will only respond to claims related to events before the closing date, and the length of a tail policy is typically set up to 6 years. The broker usually presents this option in advance, so the 6-year policy could start immediately as the deal closes. Moreover, the other side of the De-SPAC transaction involves the target company. For the target company and its SPAC management team, the D&O process should begin when LOI is signed. At this stage, the SPAC entity and the target company will both need D&O policies, except D&O coverage for the target company will be more standard, just like other traditional IPO companies.

Overall, the rapid change in the public market these years drew regulators like the SEC and FINRA’s attention to SPAC’s business combinations. Therefore, selecting the right D&O insurance for a company’s stage is crucial for directors and officers to protect their assets.


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