Due diligence

Due diligence is the process of making enquiries to ensure that the prospectus contains all information
material to investors, no material misstatements and no material omissions. Due diligence is necessary
because the SFA requires the prospectus to contain both information which is known and information
which could reasonably be found out by making enquiries.
The prospectus must not only contain information known to the directors and proposed directors of the
company, the underwriters and brokers to the IPO, experts quoted in the prospectus, and others who are
named in the prospectus with their consent, but must also contain anything else which these parties could reasonably find out. Therefore, in order to ensure the prospectus satisfies the general SFA disclosure test, it is important that each of these parties is involved in the process of making enquiries – that is, conducting ‘due diligence’.
The SFA provides for both criminal and civil liability for defective prospectuses which includes
prospectuses containing a false or misleading statement or an omission to state any required information.
The liability is imposed on each director or proposed director of the company as well as issue manager,
underwriter (but not a sub-underwriter), experts whose consent is named in the prospectus and any
person who made the false or misleading statement or omitted to state any required information. For
instance, the management team may be exposed to liability under this provision. Criminal liability only
applies where the deficiency in the prospectus (eg, omission of information) is materially adverse from the point of view of an investor.
The scope of persons who are subject to civil liability to compensate persons who suffer loss or damage
because of a defective prospectus is broader. The company, its directors and the underwriters (but not
sub-underwriters) to the offer are all potentially liable for any deficiency in the prospectus, regardless of
whether they were actually involved in the deficiency. Experts who are quoted in the prospectus with their
consent are liable for the statement attributed to them. In addition, any other person knowingly involved in the deficiency is liable.
In addition to criminal and civil liability, the company is likely to suffer embarrassment and resentment if the prospectus is inaccurate or incomplete.