Equity Crowdfunding Insurance
Without Crowdfunding insurance, “when taking money from strangers over the internet, something as simple as failing to pay your Delaware franchise taxes can be fatal” (- Sara Hanks, CrowdCheck). These unintended mistakes and oversights need to be protected with insurance.
When 1000’s of investors are invited onto your cap table, you’ll need to purchase an insurance that includes investor claims protection.
Investor claims are magnified with crowdfunding.
There are various types of crowdfunding which are commonly referred to as equity crowdfunding, reward-based crowdfunding, pledge-based crowdfunding, debt crowdfunding, real estate crowdfunding, or donation-based crowdfunding.
If you are company raising capital or contemplating a crowdfunding capital raise or campaign, read on.
If you are a crowdfunding portal or SaaS platform, skip to: I'm a crowdfunding portal, do I need insurance?
What is Crowdfunding Insurance?
Crowdfunding insurance is for companies raising capital is more commonly known as a Directors & Officers insurance program that provides protection for companies who have raised capital via a JOBS Act exemption: Reg CF, Reg A, Reg D - 506(c). This is a new but very important coverage recently available in the market.
In addition to covering the companies raising capital, some crowdfunding insurance policies additionally have added an investor benefit. This investor benefit helps the company that is raising as the investors receive a unique benefit from a policy you need anyways. This sweetens the deal for them.
For example, you can implement crowdfunding insurance via Assurely’s TigerMark.
TRADITIONAL D&O INSURANCE IS EXCLUDING COMPANIES RAISING CAPITAL UNDER REG CF AND REG A.
Traditional D&O leaves companies that raise capital via crowdfunding uninsured from their biggest risk. Traditional insurance companies, even most of the startup specific InsurTechs, exclude investor protection. This is important as your directors and officers, including your external board members, can be held liable. Their personal assets can be exposed if they are not properly protected.
Typically companies are required to carry directors and officers insurance following a capital raise, but a traditional D&O policy(s) excludes crowdfunding and does not provide the investor protection that the TigerMark directors & officers insurance program, from Assurely, provides.
HOW TO SOLVE FOR THIS
An InsurTech platform, Assurely, is known as the industry leader working with companies raising capital. They have a product that closes the coverage gap for companies who leverage crowdfuding to raise part or all of their capital with an insurance product called the TigerMark directors & officers insurance program.
TigerMark satisfies the nuances of companies that have raised capital under Reg CF, Reg A, as well as through traditional routes such as VCs or other HNW or institutional investors.
Periodically, companies access London and Llyod’s markets but since Assurely’s TigerMark D&O program was released in 2019, rarely do companies use this route due to it being extremely expensive and a cumbersome application process
Before Assurely’s TigerMark, insurance brokers were selling D&O products to this market that excluded investor coverage because it was not available, excluded, or declined. They often did not properly disclose the coverage gap.
NOTE: brokers continue to recommend D&O products that exclude investor protection, both intentionally and unintentionally, omitting disclosing this crucial contract stipulation that investor protection is excluded.
I'm a crowdfunding portal, do I need insurance?
For crowdfunding portals including SaaS platforms that enable capital raises, you need a specialty FinTech Errors & Omissions (E&O) specific for these operations.
Traditional tech E&O does not properly cover you.
There are 2-4 insurance companies that have a product specific to crowdfunding portals.
Assurely has a special program with one leading, worldwide insurer that combines discounts and policy enhancements for Crowdfunding portals that also offer or include the TigerMark D&O insurance program in their Issuer’s offerings. This closes the coverage gaps for everyone involved and produces the most cost-efficient risk transfer that is tied to the success and activity on a platform.
In order to properly cover the portal/ platform, build investor trust, and insulate investors against issuer fraud, the proper D&O policy should also be in place for both the principals of the portal as well as the Issuer.
There is an additional feature in the TigerMark insurance program specific to covering portals from investor claims, complaints, and lawsuits related to the Issuer. Issuers that get the TigerMark insurance policy have their crowdfunding portal added as a named insured at no additional cost.
With the exclusion of TigerMark, traditional D&O policies were not created with crowdfunding in mind (and still are not). It is unknown how these claims of fraud, or misuse of assets by issuers directors and officers will be handled.
I'm a Reg CF Issuer, do I need crowdfunding insurance?
Insurance can be confusing, you may not know what you covered for or what you should be covered for.
Here is a high level comparison that shows which D&O product is relevant based on a companies’ characteristics.
Assurely also offers heavy discounts for companies that work with their Portal and Platform partners. After you’ve reviewed the chart above, you can visit D&O for private companies page to see how you can get up to 50% off and speak with us about any further questions.
WHY IS D&O INSURANCE NECESSARY FOR EQUITY CROWDFUNDING
While raising money from 1000’s of investors can help launch the production or release of your product or service, you’ll have 1000’s of investors that can now complain, legally sue you, and without the proper protection, cause a significant issue for your company.
This is not unlike many other traditional risks your business already protects with insurance; like personal information (Cyber) or your product liability.
Traditional D&O does not provide investor protection; making you and your board responsible.
Upon a successful raise, you’ll need to have insurance (D&O Specifically) already in place.
In order to cover your raise, you need to “buy” before you raise (but have the opportunity to pay after you’re successful). Note: Assurely offers conditional purchasing with guaranteed pricing before you raise. This feature is unique to any other insurance company.
Investor coverage & Benefits
With crowdfunding insurance from Assurely (See TigerMark), investors are more likely to feel confident in their investment as investors have the ability to get their principal investment returned upon a qualifying event - that is if the company lies in your offering docs, steals the money, or materially misuse the funds
Crowdfunding Insurance provides a symbol of trust with financial backing that can help remove worries about fraud, or other ‘What if’s’ about your company and their investment. Note: This is not an investment guarantee.
When do I need to implement crowdfunding insurance?
It is standard to have insurance already in place (D&O in particular) by time your raise is complete.
Assurely offers conditional purchasing with guaranteed pricing before you raise. This way, you only pay if you are successful and you only pay based on how much you need (how much you actually raise).
In order to cover your raise, you need to “buy” before you raise. However, with TigerMark you’ll have the opportunity of no-upfront costs and you’ll only pay after you’re successful.
“Buy before you raise” is yet another feature of Assurely’s TigerMark product and why they have the slogan, Insurance for innovators.
Getting this handled before you raise not only reduces the cost of crowdfunding insurance, but significantly reduces the paperwork, and is at no risk to you.
How much does equity crowdfunding insurance cost?
When accessing crowdfunding insurance via Lloyd’s/ London, pricing is typically $40,000 per/ $1M of coverage and often times as high as $80,000 per/ $1M.
The price point of Assurely’s TigerMark typically ranges much lower - in the $6,000 - $13,000 per $1M of coverage. Assurely allows you to apply a small % of your capital raise, typically 0.6% - 1%, to the premium when you apply for coverage before you raise.
This guarantees the price, reduces/ eliminates your administrative hassle and reduces both your costs and the risks associated with your capital raise.
AVERAGE COSTS
Traditional private company D&O policies range from $6,000 - $20,000 per/ $1M but will exclude the relevant coverage for crowdfunding. These products will not work for you.
HOW TO AVOID PAYING FOR INSURANCE YOU DON’T NEED?
With traditional insurance, companies need to know how much insurance they need to purchase. Most insurance brokers, whether they admit it or not, do not have a formal risk analysis process.
Startups typically buy all their insurance at one time because insurance brokers tell them “It’s easier”. You should ask them, “Easier for who?”
InsurTech has changed how insurance is being bought and sold; start there. Most InsurTech companies in 2021 are now run by industry veterans and work with all the same insurance companies at the major insurance brokers, agents, and consultants.
Look for an InsurTech that can make your buying experience easy, fast, and ongoing.
What does ongoing mean? Your risks change more than 1x/year but most brokers only want to adjust your policies at your annual renewal.
There are InsurTech companies that will automatically update your policies as your risks change. This makes your life easier, ensures you are properly protected, and ensures you are not buying products (or too much of one product) until you ACTUALLY need them.
Specifically for crowdfunded companies, you don’t know how much insurance you need until you’ve successfully raised. (But you need insurance to cover your offering)
This used to be an issue, until the TigerMark (InsurTech product), enables an adjustment of the policy based on exactly what you raised. You only pay until you’re successful.
Moreover, there’s no up-front costs with the TigerMark Insurance Policy; this means there’s no risk of paying for insurance you don’t need.
Assurely, ironically, is a great option to apply the same methodology to the rest of your insurance needs. Only what you need, as much as you need, and only when you need it. Easy insurance customization has arrived.
What is Crowdfunding?
Crowdfunding itself is the pooling of small sums of money from individuals that are then collected and used to fund a company, a project, or the production/release of a product, service, or a cause.
Assurely, with their industry specific TigerMark directors & officers insurance program and Funding Portal/ capital raising SaaS platform FinTech E&O programs are the establish experts and lead this industry in managing risk and insurance costs.
