What is Due Diligence?

What is Due Diligence?

Kate Craven

35 years: Capital markets

In this video, Kate covers what due diligence is and why it matters. She also explained that there is no fixed standard for due diligence and that it can and should vary depending on a number of factors.

In this video, Kate covers what due diligence is and why it matters. She also explained that there is no fixed standard for due diligence and that it can and should vary depending on a number of factors.

Now free to watch

This video is now available for free. It is also part of a premium, accredited video course. Speak to an expert today to watch more.

What is Due Diligence?

9 mins 26 secs

Overview

Kate in this video has covered what due diligence is and why it matters, as well as setting out the risks to underwriters and their potential liability. She also explained that there is no fixed standard for due diligence and that it can and should vary depending on a number of factors.

Key learning objectives:

  • What is Due diligence?

  • Understand why due diligence matters

  • Understand the risks to underwriters and their potential liability

  • Identify the factors determining the nature and extent of due diligence

Now free to watch

This video is now available for free. It is also part of a premium, accredited video course. Speak to an expert today to watch more.

Summary

What is Due diligence? 

In the context of primary capital markets, due diligence is the process of verifying the completeness and accuracy of the information contained in, or incorporated by reference in, the offering document (or prospectus) for a new issue of bonds or shares. It is carried out by the issuer, the underwriters, and may also include legal counsel and auditors. It is an essential component of a capital market transaction.

Why does due diligence matter?

  • It can help with the drafting of the disclosure in the prospectus
  • It can ensure that the general duties of disclosure are satisfied
  • It may reduce legal and reputational risk
  • It can ensure that there are no legal or other barriers to the offering
  • From a US perspective:
    • It can help establish a due diligence defence under Sections 11 and 12(a)(2) of the Securities Act of 1933
    • May also protect against the suggestion of fraud under Rule 10b-5 of the Securities Exchange Act of 1934

What are the risks to underwriters?

The risks vary depending on where the offering is taking place – with much greater liability being attached to offerings directed at investors based in the U.S. 

In the UK, the disclosure requirements for securities admitted to trading on an EEA Regulated Market are set out in the UK Prospectus Regulation, which currently closely tracks the EU Prospectus Regulation.

For offerings in the US, the Securities Act of 1933 prohibits offers and sales of securities unless a registration statement is in effect. A registration statement consists of the offering prospectus plus additional information that issuers are required to file with the SEC but do not have to deliver to investors.

What are the factors determining the nature and extent of due diligence?

  • Disclosure requirements of the relevant stock exchange
  • Other regulations, such as sales into the US pursuant to rule 144A
  • Market practice
  • Characteristics of the issuer:
    • Size
    • Trading history
    • Jurisdiction
    • Industry sector
  • Type of security being offered
  • Nature of the instrument
  • The investors being targeted

Now free to watch

This video is now available for free. It is also part of a premium, accredited video course. Speak to an expert today to watch more.

Kate Craven

Kate Craven

Kate is a senior member of ICMA and consults on various projects including the recent update of the Primary Market Handbook. Kate previously served as Director at Barclays Plc in the Legal Department. She was responsible for the team specialising in debt capital markets. Prior to joining Barclays, she served as Director at Merrill Lynch. Kate had started in the Transaction Management Group at Merrill Lynch International in 1993 before spending two years in Tokyo with Merrill Lynch Japan Securities. She later headed the team responsible for the documentation of syndicated Eurobonds and EMTN programmes. Kate became chair of the Legal & Documentation Committee of the ICMA in 2001 and was listed as one of the 8 top in-house lawyers in the 2001 edition of Chambers and Partners Index to Leading Lawyers.

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