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  /  Directors and Officers Blog   /  Is Prospectus Liability Required?
Prospectus Liability

Is Prospectus Liability Required?

With the steady flow of IPOs and RTOs still happening on the ASX, it brings up the question around the need for Prospectus Liability.  Is Prospectus Liability needed and what are the benefits over a standard Directors & Officers policy that is in place for the board of directors? The Prospectus Liability is obviously specific to the risks associated with the Prospectus and is beneficial to the stakeholders for the following reasons—the Corporations Act imposes personal liability on directors & other parties for misstatements or omissions in a prospectus; it can be a multi-year policy to protect the stakeholders up to the statute of limitations; it is a way of ring fencing the exposure of the Prospectus and therefore will not erode the existing D&O policy in place to cover the standard Directors & Officers exposure; and it can add other interested parties such as the issuing underwriter, advisers to the transaction and the selling and/or controlling shareholder.

There are other ways to cover the exposure of the Prospectus, but they typically have limitations.  Many small junior public companies opt to cover the Prospectus Liability as part of the standard Directors’ & Officers’ policy, but the issue is the board is then sharing the limit of coverage with the prospectus liability exposure and it is also subject to being renewed each year.  This option doesn’t guarantee that all parties will be covered for the 7-year period.

No matter what avenue the board of directors take in covering off the exposure, it is key to make sure all options are explored and presented so they can make an informed decision to properly cover the risk.

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