The due diligence process from the underwriter's - Fried Frank
The due diligence process from the underwriter's - Fried Frank
The due diligence process from the underwriter's - Fried Frank
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or o<strong>the</strong>r written or oral statement gives rise to prospectus-level<br />
Section 12(a)(2) liability for <strong>the</strong> user because it includes a<br />
materially false or misleading statement at <strong>the</strong> time of sale (i.e.,<br />
pricing), only information conveyed to investors at or prior to <strong>the</strong><br />
time of sale may be considered. Accordingly, information conveyed<br />
after pricing (e.g., by a final prospectus) will not be taken into<br />
account in determining whe<strong>the</strong>r all material information was<br />
delivered to investors. This new rule has put additional pressure on<br />
<strong>the</strong> offering <strong>process</strong> through more emphasis on completing<br />
<strong>diligence</strong> earlier in <strong>the</strong> <strong>process</strong> and <strong>the</strong> preparation of updates prior<br />
to pricing.<br />
• An SEC rule identifies <strong>the</strong> following factors as important in<br />
determining how much <strong>due</strong> <strong>diligence</strong> is necessary for underwriters<br />
to meet <strong>the</strong> statutory standard:<br />
• <strong>the</strong> type of issuer,<br />
• <strong>the</strong> type of security,<br />
• reasonable reliance on officers, employees and o<strong>the</strong>rs whose<br />
duties should have given <strong>the</strong>m knowledge of <strong>the</strong> particular<br />
facts,<br />
• <strong>the</strong> type of underwriting arrangement, <strong>the</strong> role of <strong>the</strong><br />
particular person as an underwriter and <strong>the</strong> availability of<br />
information with respect to <strong>the</strong> registration, and<br />
• whe<strong>the</strong>r, with respect to a fact or document incorporated by<br />
reference, <strong>the</strong> particular person had any responsibility for <strong>the</strong><br />
fact or document at <strong>the</strong> time of <strong>the</strong> filing <strong>from</strong> which it was<br />
incorporated.<br />
• U.S. courts may consider <strong>the</strong>se factors in <strong>the</strong> context of 144A<br />
offerings as well.<br />
• Although <strong>the</strong> underwriting agreement contains an indemnity by <strong>the</strong><br />
company to <strong>the</strong> underwriter for any losses sustained by <strong>the</strong><br />
underwriter, <strong>the</strong> indemnity should not be deemed a substitute for<br />
effective <strong>due</strong> <strong>diligence</strong>, for <strong>the</strong> following reasons:<br />
• <strong>the</strong> indemnity may not be enforceable,<br />
• <strong>the</strong> underwriter may be required to litigate aspects of <strong>the</strong><br />
indemnity,<br />
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