IPO activity reached a fever pitch in 2021 but slowed dramatically in 2022 and 2023. Yet, a growing chorus of capital markets and private equity experts is now predicting a resurgence of IPOs, and particularly private equity-backed IPOs. Indeed, according to EY’s newly released “Global IPO Trends Q1 2024” report, approximately ten private equity-backed IPOs came to market in Q1 2024, five of which were among the top ten global IPOs. [1] Additionally, the median deal size of private equity-backed IPOs in 2024 surpassed those listed in the same period last year by 26%.[2] This is good news for private funds and their limited partners because high interest rates and market instability have curtailed favorable exit opportunities in recent months, and a rebound in the IPO market would release some of that pent-up pressure to return cash to investors. [3]
IPOs carry risks, however, and the specter of securities litigation is chief among them. This is particularly true when a company’s share price goes “underwater” shortly after public offering. In these circumstances, the plaintiffs’ securities bar tends to scour the issuer’s public statements for potential misrepresentations that could provide a basis for a securities class action.
The risk of IPO-related litigation is not limited to the issuing company either. In connection with private equity-backed public offerings, the sponsoring firm and its principals and affiliated funds are routinely named as defendants in such lawsuits—both as primary actors under Section (10)(b) of the Securities and Exchange Act of 1934 and as controlling persons under Section 15 of the Securities Act of 1933 and Section 20(a) of the Exchange Act. Sponsor-appointed directors who serve on the issuer’s board may also be named as primary actors as well as control persons.
Securities litigation presents complex coverage issues for the insurers of private equity firms and their policyholders. Accordingly, this article provides a primer on the principal federal securities statutes implicated in the IPO context and explores several recurring insurance coverage issues that regularly arise in connection with the typical “stock drop” suits that often trail disappointing public offerings.
Overview of Principal IPO Securities Laws In Relation to Private Equity Sponsors