The due diligence process from the underwriter's - Fried Frank

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company’s principal executive officer, principal financial officer and principal accounting officer, and the company’s auditors and other experts named in the prospectus. • However, the statute also provides underwriters with a due diligence defense. The applicable standard depends on whether the misstatement is made in reliance on an expert’s opinion. • The statute specifically provides a complete defense with respect to any part of the registration statement that does not rely on the authority of an expert if the underwriter “had, after reasonable investigation, reasonable ground to believe and did believe, . . . that the statements [in the registration statement] were true and that there was no omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading.” • Where entitled to rely upon the opinion of an expert, there will be no liability if the underwriter “had no reasonable ground to believe, and did not believe, . . . that the statements [in the registration statement] were untrue or that there was an omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading.” • Section 12(a)(2) provides that any purchaser of a security can sue any person who offered or sold the security, by means of a prospectus or oral communications which contains a material misstatement or omission, unless the defendant “did not know, and in the exercise of reasonable care could not have known” of the misstatement or omission. Section 12(a)(2) does not make any distinction based upon “expertised” statements. • The SEC has stated that the standard of care under Section 12(a)(2) is less demanding than that prescribed by Section 11 (i.e., Section 11 requires a more diligent investigation than Section 12(a)(2)). The SEC also has stated that any practices or factors that would be considered favorably under Section 11 also would be considered favorably under the reasonable care standard of Section 12(a)(2). • In December 2005, the SEC adopted a number of reforms to the securities offering process. In particular, SEC Rule 159 provides that, for purposes of determining whether a preliminary prospectus 6 94
or other written or oral statement gives rise to prospectus-level Section 12(a)(2) liability for the user because it includes a materially false or misleading statement at the time of sale (i.e., pricing), only information conveyed to investors at or prior to the time of sale may be considered. Accordingly, information conveyed after pricing (e.g., by a final prospectus) will not be taken into account in determining whether all material information was delivered to investors. This new rule has put additional pressure on the offering process through more emphasis on completing diligence earlier in the process and the preparation of updates prior to pricing. • An SEC rule identifies the following factors as important in determining how much due diligence is necessary for underwriters to meet the statutory standard: • the type of issuer, • the type of security, • reasonable reliance on officers, employees and others whose duties should have given them knowledge of the particular facts, • the type of underwriting arrangement, the role of the particular person as an underwriter and the availability of information with respect to the registration, and • whether, with respect to a fact or document incorporated by reference, the particular person had any responsibility for the fact or document at the time of the filing from which it was incorporated. • U.S. courts may consider these factors in the context of 144A offerings as well. • Although the underwriting agreement contains an indemnity by the company to the underwriter for any losses sustained by the underwriter, the indemnity should not be deemed a substitute for effective due diligence, for the following reasons: • the indemnity may not be enforceable, • the underwriter may be required to litigate aspects of the indemnity, 7 95
Page 1: 3 THE DUE DILIGENCE PROCESS FROM TH
Page 5: 1. WHY DO UNDERWRITERS CONDUCT DUE
Page 9 and 10: numbers which become available for
Page 11 and 12: • interviews with senior manageme
Page 13 and 14: • revenue recognition • goodwil
Page 15 and 16: • Correspondence with the SEC or
Page 17 and 18: • In U.K. public equity offerings
Page 19 and 20: j. Audit Committee Due Diligence
Page 21 and 22: • During the due diligence proces
Page 23 and 24: • Even though the financial state
Page 25 and 26: • “It argues in particular with

The due diligence process from the underwriter's - Fried Frank

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