Why due diligence exists
The issuer and, in most regimes, the banks and other persons responsible for the prospectus can be liable if it contains misleading or incomplete information. Due diligence is how they build a defence: a documented, reasonable investigation that supports every material statement.
Areas of due diligence
| Area | Typical content |
|---|---|
| Business | Strategy, market, competition, customers, suppliers, products, KPIs, business plan |
| Financial | Historical accounts, quality of earnings, working capital, debt, forecasts, KPIs |
| Legal | Corporate records, material contracts, litigation, IP, licences, data protection, employment |
| Tax | Tax compliance, structure, transfer pricing, open audits, transaction taxes |
| Commercial | Market studies, customer interviews, competitive position (often by an external adviser) |
| Technical / ESG | Operational assets, environmental matters, sustainability claims, IT and cybersecurity |
| Management | Background checks, conflicts of interest, management interviews |
How it runs
- Data room. Documents are uploaded in a structured index. A clean, complete data room speeds everything up; see the data room checklist.
- Request lists from bank counsel and auditors, answered in writing.
- Management sessions on business, financials and legal topics.
- Expert sessions with auditors, tax advisers and sometimes customers.
- Bring-down calls before key dates (launch, pricing, closing) to confirm nothing material has changed.
The prospectus
In the EU, the content of an equity prospectus follows the Prospectus Regulation and its annexes. US registration statements follow SEC forms. While layouts differ, the substance is similar:
- Summary, in a prescribed format and length.
- Risk factors, grouped by category and ordered by materiality.
- Offer terms: price range, number of shares, timetable, allocation, lock-ups, stabilisation.
- Reasons for the offer and use of proceeds.
- Dividend policy.
- Capitalisation and indebtedness, and the working capital statement.
- Selected financial information and the operating and financial review (management's discussion of results and trends).
- Business description: markets, strategy, competitive strengths, operations, material contracts.
- Regulatory environment.
- Management, board and governance, including remuneration and conflicts.
- Shareholders and related-party transactions.
- Share capital, articles and taxation.
- Historical financial information, auditor reports, pro forma information.
Drafting principles
- Supportable. Every factual claim needs evidence in the data room or a verified source. Market data requires a source and permission to use it.
- Balanced. Strengths and risks presented fairly; no promotional tone.
- Consistent. The same numbers, definitions and KPIs throughout, matching the research reports and investor presentations.
- Specific risk factors. Generic risks that apply to any company dilute the useful ones and are discouraged by regulators.
- Plain language. The summary in particular should be readable by retail investors.
Verification
Many teams run a formal verification: each statement is linked to supporting evidence and initialled by the responsible person. The finance team runs the circle-up of every number with the auditors.
Regulator review
- The draft is filed with the competent authority (for example BaFin in Germany, the AMF in France, the FCA in the UK, the SEC in the US).
- The regulator comments in rounds. Each round needs answers, revised drafts and a response letter.
- After approval, the prospectus is published, and in the EU it can be passported to other member states for public offers there.
- Significant new factors or material mistakes after approval require a supplement and can give investors withdrawal rights.
The EU has been reforming its prospectus and listing rules in stages. Confirm which version of the rules applies on your filing date.
International offerings
Offerings sold to investors outside the home market may use exemptions, such as private placements to qualified institutional buyers in the US. These still require an offering memorandum, legal opinions and disclosure letters from counsel, and they affect the due diligence standard.
Common pitfalls
- Data room opened before documents are complete and reviewed.
- Business plan and prospectus wording drift apart from the investor presentation.
- KPIs defined differently in different sections.
- Late discovery of change-of-control clauses or unresolved litigation.
- Underestimating the time needed for each regulator comment round.