What
is "Due Diligence?
It
first came into common use as a result of the US Securities
Act of 1933.
The
Act included a defense that could be used by Broker-Dealers
when accused inadequate disclosure to investors of material
information with respect to the purchase of securities.
So
long as they conducted a "Due Diligence" investigation
into the company of who's equity they were selling, and
disclosed to the investor what they found... they would
not be held liable for nondisclosure of information that
failed to be uncovered in the process of that investigation.
A
Due Diligence investigation is a reasonable investigation
to find all facts that would be of material interest to
an investor or acquirer of a business. It may or may not
uncover all such facts, but it should be done in a manner
reasonably calculated to do so.
The
entire Broker-Dealer community quickly institutionalized
as a standard practice, the conducting of due diligence
investigations of any stock offerings in which they involved
themselves.
Originally
the term "Due Diligence" was limited to public
offerings of equity investments. Over time it has come to
be associated with all investigations of both public and
private mergers and acquisitions.
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