Due Diligence
Due diligence is the process of investigating and understanding a company’s business in as much detail as reasonably possible. How much diligence is “due” depends on the specific type of transaction and the nature of the business in question, but due diligence almost always involves taking a hard look at a company’s finances, its strategic and operational situation, and any problems or risks it faces.
In a securities offering, the primary goals of due diligence are to understand the business of the issuer and to ensure that the information in the issuer’s registration statement or other offering document is complete and accurate.
Both goals are critical because each participant in an offering is potentially liable for any material misrepresentations or omissions in the registration statement.
Underwriters and dealer-managers often start with a basic due diligence checklist, which may be tailored to the DPP. The checklist is merely a general guide; the precise scope of due diligence should be customized for a specific company. For example, in the case of an oil and gas DPP, proper due diligence would likely involve an examination of potential environmental liabilities.
The goal of business due diligence is to identify, verify, and evaluate the company’s operations, facilities, business strategy, and growth potential. Underwriters and dealer-managers take the lead role in this process. At the outset, the lead underwriter conducts interviews with the entity’s management—and asks probing questions about business operations, management structure, business plans, financial matters, and other relevant issues. The interviews are followed by site visits to one or more properties or other locations as appropriate.
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