Due diligence is the investigation performed in connection with a securities offering. Due diligence is conducted for a number of reasons, including to:
- Confirm that the information disclosed or incorporated by reference in offering documents does not contain an untrue statement of a material fact or omit to state a material fact
- Ensure that there are no impediments to the offering, such as contractual covenants prohibiting the offering or requirements for third-party consents
- Reduce risk to the parties participating in offerings
- Allow the underwriters to establish an affirmative defense to disclosure liabilities under Sections 11 (5 U.S.C.S. § 77k) and 12(a)(2) (15 U.S.C.S. § 77l) of the Securities Act of 1933, as amended (Securities Act) in offerings registered with the Securities and Exchange Commission (SEC)
- Allow the underwriters to also negate an inference of fraud under Rule 10b-5 (17 CFR 230.10b-5) under the Securities Exchange Act of 1934, as amended, in all offerings (including private placements) where, although the due diligence defense under the Securities Act technically does not apply, a defendant’s satisfaction of the due diligence standard would be relevant to the analysis of whether such person engaged in the intentional or reckless conduct required to prove a Rule 10b-5 violation
Parties including the issuer, issuer’s counsel, the issuer’s independent outside auditors, the underwriters, and underwriters’ counsel will typically participate in the diligence process.
Contained in this article are 10 practice tips for counsel participating in due diligence for a securities offering in the United States.