December 11, 2018

Risk awareness of ICOs will rise

D&O insurers should continue to evaluate coverage options and tread carefully.

Initial Coin Offerings (ICOs) already, a multi-billion dollar strategy for raising capital, are growing in importance. In an ICO, investors receive “coins” or “tokens” in exchange for capital investment. The nature of the “coins” offered varies greatly, and some (the majority) may be considered securities and subject to regulation as such. ICOs allow businesses to bypass traditional equity markets and maintain ownership without dilution of the founders’ equity stake. While they are a relatively new method of raising capital, ICOs are increasingly important and have raised over $3 billion from investors. 

In 2019, D&O insurers should continue to evaluate coverage options for companies that choose an ICO to raise capital and tread carefully. Issuers of ICOs are subject to regulatory investigations and enforcement actions from federal and state regulators in the United States, as well as regulators in other countries. ICOs present a significant risk of private class action suits by investors; potentially in multiple jurisdictions. Even where an issuer seeks to comply with all applicable regulations, the marketing of ICOs through social media, which is an ill-suited vehicle  for providing the careful nuanced communication required by a securities offering, may create additional risk. 

This is a developing area. D&O Insurers who underwrite ICOs  should carefully vet policyholders engaged in – or considering engaging in – such offerings in order to take appropriate precautions and properly price these risks.

You can read the rest of our insurance predictions here.