With almost $6 billion raised last year and offerings being explored by a myriad of companies from fintech to blockchain to cannabis companies, the fundraising capabilities and momentum behind ICOs is undeniable. Companies engaged in cryptocurrency offerings however also face considerable challenges. Along with the widespread speculation over the “bursting of the bubble”, there are also considerable taxation and volatility concerns. The turbulent regulatory landscape and recurring cases of fraud however take front and center. It seems every other week the SEC or CFTC is in pursuit of unregistered ICOs or fraudulent coin offerings. These concerns are beginning to deter even the most aggressive investors. They are, however, also creating an additional challenge, and one that might not be immediately apparent to smaller ICO’s or crypto startups - a very difficult market for D&O insurance. An inability to place D&O can have many unintended consequences, particularly an inability to attract experienced directors, seasoned advisors or willing guarantors. So what, when launching an ICO, can your company expect when going to market for D&O insurance?

THE D&O INSURANCE LANDSCAPE

• COVER IS ELUSIVE BUT AVAILABLE: Crypto companies aware of these challenges may make the initial mistake of completely writing off the ability to purchase D&O at all. While coverage may be elusive, there are a handful of carriers willing to provide coverage – and we do mean handful, as in 5 or less. The marketplace may however expand slightly in the near future as insurers appear to be slowly and cautiously exploring this space. Due to this small pool of insurers, and the perceived risk associated with such offerings, companies should approach the process with high-premium expectations. Coverage terms at these higher premiums will also carry some aggressive exclusions which can de-value coverage. Among those exclusions: regulatory exclusions, entity exclusions, and/or potential bankruptcy exclusions.
   
• HIGH RETENTIONS: Many carriers are also likely to apply high retentions, upwards of 750k. As a startup or smaller crypto company, this begs an important question: does the company have enough assets to cover such a high retention, or would that effectively push the company into bankruptcy? The benefit of entity and balance sheet protection provided by a full D&O policy is significantly diminished if the company cannot afford to cover the retention. In situations where the assets are unavailable, it may be worthwhile to explore a Side-A only policy, which would also come with a substantial premium reduction (generally 20%-40%).
   
• YOU’RE A PUBLIC COMPANY BUT NOT OFFERING SECURITIES: One of the more nuanced challenges has to do with the way insurers are treating crypto currencies. Despite the SEC’s recent statement that nearly every ICO is a security, they have also made clear in a previous statement that, as of December, there have been no coin offerings registered with the SEC. This would imply that almost all crypto companies (despite their best efforts to comply), may be dangerously operating as exempt from registration. When it comes to placing insurance, insurers will very likely side with the SEC and underwrite the company as a public company, placing coverage on a public company form, with entity coverage restricted to securities claims only. There is however one huge caveat – the insurers are also likely to include clarifying language that states they do not consider initial coin offerings “securities”. This effectively converts a full D&O policy to a Side A/B only with no true coverage for claims asserted against the entity. Combined with the regulatory exclusion, this would result in coverage being absent for any regulatory investigations/proceedings, regulatory instigated stock drop claims, as well as any claims against the entity brought by investors in connection with the offering.

COVERAGE PLACEMENT ADVICE

• PURSUE US COVERAGE: With many crypto companies domiciled abroad, the question may arise, should coverage be pursued in the home country or within the US? Being that companies are most likely to encounter litigation within the US, and due to the fact that US policies contain the most appropriate language to respond to such claims, the overwhelming recommendation is to pursue global coverage through an insurer in the US. Companies should be aware however, that they will need to maintain US offices, and/or a formal subsidiary within the country in order to obtain coverage from a US insurer.
   
• DEMONSTRATE DUE DILLIGENCE: Demonstrating that your company is performing careful due diligence and is attentive to internal policies and procedures can only help when it comes time to placing D&O insurance. These includes highlighting board experience and demonstrating that critical procedures have been implemented such as AML (anti money laundering) and KYC (know your customer) controls. Having SAFT’s/PPM’s that are well drafted, thorough, and transparent are equally important.
   
• HOWEY TESTS & LEGAL OPINIONS: Working with counsel to have a proper Howey Test performed is a good first step, and one that should really be a prerequisite for all ICOs. While it will also demonstrate a certain level of diligence to the underwriters and may ease the placement process a bit, a Howey Test alone will likely only offer minimal comfort to insurers. Crypto companies should go one step further and attempt to obtain a formal legal opinion from their counsel, verifying any registration exemptions. Outside of actually registering the ICO, providing a legal opinion to the underwriters is often the most persuasive at alleviating insurers’ concerns. It may however be difficult to obtain said legal opinion given that lawyers are now in the crosshairs.
   
• UNDERSTAND YOUR GOALS & EXPLORE ALL OPTIONS: Crypto companies often have different goals when placing D&O insurance. For some companies that goal may be straight forward: to protect the entity, its balance sheet and its c-suite. For others it may be solvency concerns or in response to a requirement from a potential director or advisor. Some crypto companies may be in pursuit of coverage with the hopes of affording themselves some insulation against regulatory actions – coverage which is entirely unavailable at the moment. The first step when seeking D&O insurance is to engage your broker and vocalize those goals to determine if there are any available solutions. With numerous ways to structure D&O, there may be more than one solution when it comes to accomplishing those goals. Considering that D&O insurance for ICO’s is costly and limited, companies should explore all of the available options and perform a cost-benefit analysis to determine the optimal course for coverage. For example, companies with limited assets that may not be able to afford a full D&O policy (or the retentions imposed), may find more value in a Side-A only policy at its lower premium.
   
• CONSIDER REGISTRATION: Registration with the SEC, while costly, is likely the single most effective way to ease underwriting concerns and open the D&O market. It may also be the only way (at least for the moment), to actually obtain coverage for regulatory actions and investor/shareholder claims against the entity.