Due diligence is an important step in the process of preparing a company for an SEC-registered (public) or unregistered (private) offering of its debt or equity securities. Due diligence becomes particularly important when a company is undertaking an IPO. 2013 represented the best year for US IPOs since the market crashed in 2008 and that trend has continued in 2014. Attorneys for both the company and the underwriters or placement agents must complete due diligence to advance these offerings.

The information obtained during due diligence helps the company's advisers to:

Practical Law's Practice Note, Due Diligence: Securities Offerings considers the purpose, scope and practical application of due diligence investigations in connection with SEC-registered securities offerings and unregistered securities offerings. It reviews the applicable federal securities law liability provisions and the due diligence defense available to offering participants in a registered offering if a plaintiff proves the affirmative elements of a Section 11 claim for a material misstatement or omission. It also identifies the differences among legal, business, financial and accounting and corporate governance due diligence.

For a discussion of the entire process for registering an offering of securities of an issuer under a registration statement filed with the SEC, see Practice Note, Registration Process: Overview.

The disclosure package available to investors at the time of sale of the offered securities typically consists of:

The significance of the disclosure package is that liability for material misstatements or omissions attaches at the time of sale based on the information included in the disclosure package then available to investors, not based on the information later included in the final prospectus or final offering memorandum.

The liability of the parties participating in a securities offering is examined in detail in our Practice Note, Liability Provisions: Securities Offerings.

In the context of an IPO, early stage due diligence helps determine what must be done to get the company ready to transition to reporting company status. For example, any necessary or appropriate changes to the corporate structure or charter documents should become clear during the course of the due diligence. For information on potential changes to the structure of a pre-IPO company, see Practical Law's Practice Note, Preparing a Company for an Initial Public Offering.

Practical Law has several resources to assist an attorney with the due diligence process, including:

Accountant due diligence forms an important part of the underwriters' due diligence investigation in connection with a securities offering. An important part of building this record comes about by conducting thorough accountant due diligence and asking questions of the accountants about the issuer's financial statements and financial reporting process. Practical Law's Practice Note, Accountant Due Diligence: Asking the Right Questions and Addressing the Answers describes the accounting due diligence process with auditors in the context of a registered or unregistered securities offering, including:

In connection with this due diligence, a standard accounting due diligence question outline is typically sent to an issuer's auditors in connection with a registered or unregistered securities offering. This list of questions can be used by underwriters or initial purchasers and their counsel to structure or guide the substance of accounting due diligence calls that form part of a broader due diligence investigation in a securities offering. For a standard form, see Practical Law's Standard Document, Accounting Due Diligence: Questions List.