Due Diligence

Due diligence is a loaded phrase that can have different meanings in different contexts. The essence of due diligence is that it is a process by which someone ensure that they engage in all of the necessary steps in order to make the best possible decision. In the context of investors seeking to invest in companies, due diligence means the process by which the investors ask all of the necessary questions and examine all of the necessary company documents and reports in order to verify that the company is what it is claiming to be, and that the proposed investment, as being represented to the investor, can be verified as being accurate and truthful. For example, in the context of a private placement investment, in which a company seeks to offer its securities to an exclusive group of private investors, investors conduct their due diligence by, amongst other things, being provided with a robust private placement memorandum, which often includes reports as to the company’s financials and background information as the company’s key employees and officers. From there, investors often interview, with the assistance of their lawyers and financial advisors, the company’s founders and key officers, and have them verify in other documentation the representations in the investment materials provided to the investors.