Starting Due Diligence? Don’t Be Overwhelmed. Start on Point with Lexis Practice Advisor.

Posted on 12-08-2016 by Jae Lee
Tags: Lexis Practice Advisor , Practice Inisights , Due Diligence Process

Lexis Practice Advisor provides an overview of due diligence in the context of securities offerings, as well as detailed practice notes, forms and checklists on this topic.

The due diligence process is typically one of the most significant and time-consuming aspects of a securities offering. It is a critical exercise for all counsel and underwriters (and other similar offering participants, such as initial purchasers) involved in a transaction, as it helps with, among other things:

• Limiting potential liability under securities laws
  • In a registered offering, the due diligence process is crucial in establishing the due diligence defense for offering participants (other than the issuer).
  • Conducting a thorough due diligence review may also help mitigate potential liability under Section 12 of the Securities Act and Rule 10b-5 under the Securities Exchange Act of 1934, as amended.
• Ensuring the offering documents are high-quality and accurate disclosure and marketing documents
• Assisting the underwriters to value the company and price the offering
• Supporting the legal opinions and 10b-5 letters to be provided by counsel for the company and the underwriters
• Identifying actions to be taken to prepare the company for successfully completing the IPO and becoming a public company

Given the significance of the due diligence process, it will usually entail a comprehensive investigation of all material legal, business, financial, and accounting information regarding the company and will require gathering and verifying all of the material information included or incorporated by reference in the offering document.

The exact nature and scope of the due diligence will depend on the many factors, including:

• the nature of the issuer
  • type of business and operating history
  • scope of business operations
  • whether the issuer is a reporting company under the Exchange Act
• the specifics of the offering, including
  • whether the offering is registered or exempt from registration
  • type of securities offered (e.g. equity vs. debt, high-yield vs. investment grade)
  • requirements under any other jurisdiction the securities are being offered (including US state and foreign country requirements)
• requirements and risk appetite of the underwriters/initial purchasers.

The following resources provide practical guidance, including forms and checklists, useful to the due diligence process.

Overview of the Due Diligence Process

The following provide a detailed overview of the due diligence review process depending on the type of offering contemplated.

• Initial public offerings. Managing the Due Diligence Process for an IPO – Practice Note
• Follow-on offerings. Due Diligence Considerations for a Follow-on Offering – Practice Note
• Secondary offerings. Conducting Due Diligence for a Secondary Offering – Practice Note
• Rule 144A/Regulation S offerings. Conducting Due Diligence in a Rule 144A/Regulation S Offering of Debt Securities – Practice Note
• Other private offerings. Conducting Due Diligence for a Private Offering – Practice Note

Due Diligence by Investment Banks and Broker-Dealers

The following discuss the regulations and considerations for investment banks and broker-dealers participating in and conducting the due diligence process.

• Research and Investment Banking Participation in Joint Due Diligence – Practice Note
• FINRA Regulation of Broker-Dealer Due Diligence in Regulation D Offerings – Practice Note

Materiality

Materiality is a key concept with respect to securities fraud liability. Therefore, determining what documents and facts are material is a key element of the due diligence process. The following discuss the topic of materiality with respect to securities laws.

• Understanding Relevant Laws and Guidance Regarding Materiality – Practice Note
• Using Guidelines for Determining Materiality – Practice Note
• Checklist – Determining Materiality for Disclosure – Checklist

Legal Due Diligence

Legal (or documentary) due diligence involves a review of the issuer’s material documents, including organizational documents, contracts and The following are forms of due diligence request lists that can be used for the legal due diligence process.

• Initial Public Offerings. Due Diligence Request List — Initial Public Offering (IPO) – Form
• Rule 144A/Regulation S Offerings. Due Diligence Request List – Rule 144A/Regulation S Debt Offering – Form

Due Diligence Calls

In many offerings, legal due diligence is supplemented with due diligence calls, in which representatives of the issuer (or other parties) discuss with counsel and specialists (and bankers) the documents and other information made available to the offering participants, and any issues raised by such materials. The following provide an overview of this topic, as well as sample questions lists.

• Due Diligence Interviews – Practice Note
• Management Due Diligence Questions – Form

OFAC Due Diligence

The following relate to special due diligence considerations for Office of Foreign Assets Control (OFAC) issues, which may be a concern for issuers that have business relationships with specially designated nationals and in countries that are subject to economic sanctions.

• OFAC Due Diligence in Securities Offerings – Practice Note
• Checklist: Ensuring OFAC Compliance in a Securities Offering – Checklist

Accounting Due Diligence and Comfort Letters

The following documents relate to accounting due diligence issues and questions, as well as comfort letters, which are an important element of due diligence with respect to the financial information of the issuer.

• Topics for Auditor Due Diligence Call Checklist – Checklist
• Reviewing the Comfort Letter – Practice Note
• Reviewing and Negotiating Comfort Letters: Checklist – Checklist
• SAS 72 Auditor Representation Letters – Practice Note
• Form of SAS 72 Auditor Representation Letter – Form
• SAS 72 Attorney Letter – Form

Legal Opinions and Negative Assurance Letters

The following documents relate to legal opinions and 10b-5 letters. In a typical transaction, both issuer and underwriters’ counsel will be expected at closing to deliver certain customary legal opinions, as well as a negative assurance (or “10b-5”) letter, which help to establish the underwriter’s due diligence defense and/or to reduce the underwriter’s liability under Rule 10b-5.

• Preparing the Legal Opinions for an IPO – Practice Note
• Legal Opinions in Securities Offerings Checklist – Checklist
• Legal Opinion - Issuer's Counsel – Form
• Legal Opinion of Underwriter's Counsel – Form
• Legal Opinion of Issuer’s Counsel for Rule 144A/ Regulation S Debt Offering - Form
• Exhibit 5 Opinion – Form
• Understanding and Negotiating 10b-5 Letters – Practice Note
• Form 10b-5 Letter – Form

Certificates

The following are forms of certificates that may be delivered in conjunction with an offering, typically to assist with the due diligence process or for the preparation of legal opinions.

• Officer’s Certificate of the Chief Financial Officer Certificate for Securities Offerings – Form
• Officers' Certificate – Form
• Form of Back-up Certificate: Company’s Qualification to Do Business – Form
• Form of Back-up Certificate: Subsidiary’s Qualification to Do Business – Form