Companies looking for investment capital or investors looking at investment opportunities naturally go through a due diligence process to “bang the tires” and make sure their transactions/potential investments are what they appear to be. That said, the question becomes: Are Your Due Diligence Procedures Sufficient?
A recent FINRA Settlement with a placement agent punished that agent for sloppy due diligence procedures and not documenting the process. According to that article:
The placement agent did not document the ‘process or results of a reasonable investigation into the issuer of the preferred stock shares, meetings, tasks performed, and documents and information reviewed as described by FINRA Regulatory Notice 10-22 and required by the firm’s own written procedures.’
What does this mean?
In short, that the agent’s due diligence was not sufficient. Their procedures were not sufficient and there was nothing documented. The only thing that was included in their diligence file was a link to one EDGAR filing.
What does this mean for you?
While there aren’t changes to the requirements demanded by FINRA regulations since the 10-22 regulatory notice mentioned above, FINRA is reminding people that they still have an obligation to conduct proper and sufficient due diligence and document it. It seems people have remained skeptical about FINRA’s inclination to enforce the rules. And this settlement is a reminder. You should take notice!
It would stand to reason that most have sufficient due diligence procedures in place, the question becomes, are you still following them as written? And can you optimize your procedures for future discovery and diligence?
If not, know that you are at risk of enforcement and possible fines and other repercussions.
If you don’t have such procedures in place, you can hire third-party companies to help you conduct your due diligence.
We work with companies to help them understand all of the critical technical aspects of the company/product/offerings that they make investments in or provide funding to. (To be clear, we do not assist in the technical aspects of the financial transaction or the technical aspects of the investment. Rather, we focus on evaluating the technology and quality of the product or company being invested in.) We have a thorough process that not only examines the technology/tech aspects of such a fundable company or product, but also provides recommendations on what can be done moving forward.
Keep in mind that you are still responsible for reviewing any third-party work – and keeping any documentation or reporting from third-parties. That said, the process can be more thorough and faster when utilizing partners to help you through the process.
Have any questions? Reach out to us here; we’d be happy to review your opportunity with you.
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