Due Diligence for Private Placement Investing

  • “Due diligence” is a process whereby investors evaluating a potential investment conduct independent analysis and verification of the information presented to them by the issuer.


  • Due diligence analysis goes beyond simply reading the offering documents, such as a Private Placement Memorandum or other Summary Offering Material, it involves questioning further the information presented in the primary offering documents for a particular offering.


  • Due diligence is a fundamental part of the investment process.  It should be comprehensive and thorough.  All areas of the business and the individuals managing the business should considered and available for review by investors.


  • Issuers and their broker-dealer agents should ensure such information is readily available so that an informed investment decision can be efficiently made by the investor.  Issuers not willing to discuss the details of their business, even when under the protection of a “Non-Disclosure Agreement” that an investor may be willing to sign, should be treated with great caution by potential investors.


  • Areas for analysis include (in no particular order…all are important):   industry analysis, product market analysis, production processes, financial analysis (cost analysis, financial history statements, financial projections and capital structure), personal backgrounds of key managers, a review of potential liens and legal judgements, intellectual property,  past securities issuance, regulatory compliance, corporate governance, etc.


  • While the emphasis during a due diligence analysis will naturally be more heavily weighted to the specifics of the potential investment, areas that may originally seem less significant can ultimately have a significantly detrimental impact on an investment if they are not addressed properly.


  • Federal and state regulations regarding misrepresentation or fraud apply to information provided to investors in securities transactions.