In an IPO, due diligence is best understood as the working group’s disciplined effort to (1) identify and assess potentially material issues in the company’s business, history, and financial reporting, (2) translate those issues into accurate and appropriately balanced disclosure in the prospectus and related offering communications, and (3) pressure-test factual assertions so the offering record can be supported if challenged later.
A thorough due diligence investigation is designed to identify not only “problems,” but also facts that could disappoint investors if they emerge later without having been fairly described. Because an IPO is often the first time a company describes its business, results, and risks in significant detail, investors rely heavily on the prospectus as the principal disclosure document when evaluating the company and the investment.
The Due Diligence Investigation Runs from Day 1 Through Pricing and Closing
Companies should begin preparing their documentary data room in advance of kicking off an IPO process by identifying employees with subject matter ownership and assigning responsibility for collecting the relevant materials. Documents should flow to a single point of contact who will ensure materials are loaded into an organized virtual data room.
At the organizational meeting, having a substantially complete data room enables the working group to begin immediately and complete initial document review earlier, allowing diligence to run in parallel with drafting. This helps avoid a common frustration: marketing-forward disclosure drafted early in the process later must be rewritten based on diligence findings. Ideally, the working group incorporates diligence input as the disclosure is developed.
While the most intensive diligence typically wraps up around the initial SEC submission or filing, the work needs to continue through pricing and closing (including effectiveness and any bring-down diligence). New disclosure added in subsequent filings should be vetted, and new information and documentation should be added to the data room on a rolling basis. Maintaining an open issues log, with clear owners, next steps, and deadlines, helps avoid last-minute diligence scrambles that can disrupt the timing of amendments and the overall IPO schedule.
No Surprises
While it may not be enjoyable to share all of the company’s more challenging issues, companies should strive to ensure that underwriters’ counsel is not learning about issues for the first time late in the process. Early identification and resolution also avoids a common dynamic: issues are significantly easier to manage if the company or its counsel shares relevant details early, along with appropriate context, so that matters can be evaluated and framed appropriately from the outset.
This approach also protects against “over-reactions,” where diligence counsel believes it has identified a significant issue and therefore expands review and follow-up. That dynamic can devolve into time-consuming exercises and unnecessary “all-hands” calls often avoidable where the issue was presented proactively rather than discovered.
Create a Record and Document Support
A thorough diligence record maintained by counsel helps to track progress, monitor efficacy, and create an audit trail in case of a later challenge.
Counsel should maintain a back-up book linking factual statements in the prospectus to supporting sources. Subject matter owners at the company should prioritize responsiveness to support requests and avoid treating the process as a check-the-box exercise.
The process itself should also be documented. Counsel can circulate written questions for diligence calls in advance and cover those questions on the call. A memo should capture attendance, and follow-up items should be tracked to resolution. The open issues log should be shared among the company, its counsel, and underwriters’ counsel and updated regularly.
Don’t Rely on the “Belief” Crutch
One of the most repeated phrases in an IPO prospectus is “we believe.” A statement of belief can be an appropriate way to express judgments or expectations that cannot be definitively verified, and it can help avoid overstating certainty. However, a belief qualification is not a free pass to make claims that are not supportable. Where management expresses a belief, there should be a reasonable basis for that belief and the diligence process should confirm that basis exists and that the disclosure is appropriately calibrated.
For example, a biotechnology company developing a new drug may state in the prospectus: “We believe our product candidate may offer clinically meaningful benefits to patients.” While there may not yet be clinical data demonstrating that outcome, there should be a sound scientific rationale and supporting pre-clinical evidence that provides a reasonable basis for the statement as framed.
Check with Experts
Counsel will review large volumes of material as part of the investigation, but that does not guarantee the working group will fully understand highly technical, specialized, or cutting-edge topics. In appropriate cases, diligence should include calls with relevant subject matter experts (whether technical, regulatory, cybersecurity, accounting, tax, or otherwise) to ensure the record supports the disclosure.
Diligence is More Than Lawsuit Avoidance
A properly conducted due diligence investigation can reduce the likelihood of securities claims for IPO participants. It cannot eliminate the possibility of litigation, but a thorough process can create a defensible record for those who may need it.
The credibility of the working group is also at stake. Underwriters care deeply about successful offerings. Their reputation is their biggest asset and missed diligence issues can cause real reputational harm.
More broadly, accurate IPO disclosure is a long-term asset. Companies will live with their disclosure regime as public companies, updating it regularly under ongoing investor scrutiny. Strong diligence helps public company executives spend more time executing their strategy and less time responding to avoidable surprises.
