This article has been written with the goal of educating you on the importance of the process known as due diligence. We hope to address the common questions of who, what, when and why the process of due diligence is so important.
When taking your company public, your company’s legal counsel will typically be responsible for drafting the prospectus, a form that requires detailed disclosure regarding the company and its securities. Prior to the prospectus being filed, all participants of the deal team begin a detailed verification procedure to ensure that all material facts included are accurate and that there have been no exclusions. This process is generally referred to as due diligence.
The purpose of due diligence is to guarantee that the public has accurate information regarding your company and its securities without leaving anything out. The statutory liability for a misrepresentation in the prospectus provides the parties with an incentive to conduct proper screening and due diligence. Due diligence also builds the basis of a defense to prospectus liability since Canadian securities law states that no one but your company or a selling security holder is liable for misrepresentation in any part of the prospectus unless he or she failed to conduct a rational investigation so as to provide sensible grounds for a belief that there had been no misrepresentation. Although this defense is not available to your company, it provides the parties involved in the offering with a strong incentive to conduct and maintain a record of an effective due diligence process.
The underwriters and their legal counsel play the main role in the due diligence process. Business and financial due diligence involves formal review of a company’s financial statements, working capital requirements, business plans and financial forecasts, internal controls and financial reporting procedures. Typical due diligence will include comprehensive information requests to your company and a detailed review of its legal obligations. Independent verification of key material data and the use of third-party experts are common, and underwriters will conduct formal question and answer sessions with key members of management to review any potential issues identified. The underwriters will also request a formal comfort letter from your company’s auditors specifying the procedures started to provide assurance regarding the material financial information contained in the prospectus.
The due diligence process is crucial when thinking about taking your company public, and something the team at Gopublic.ai takes very seriously. If you’d like more information on the subject or would like to get in touch with us, please do not hesitate to reach out.