Due Diligence Defense

Definition:

A defense to liability in a civil action based on securities laws where the defendant can show that it met a prescribed standard of care in preparing the disclosure(s) distributed to investors. Where a non-Expert makes a false statement or omission, the defendant will have to prove that after reasonable investigation there were reasonable grounds to believe that the statements in the offering document were true and no Material facts were omitted. Where a false statement or omission is made by an Expert (e.g., derived from audited Financial Statement(s)), the defendant will have to prove that there were no reasonable grounds to believe that the Expert’s statements in the offering document contained misstatements or omissions of Material facts.

This defense is available to all participants in an offering, except the issuer, which is strictly liable for disclosure. It is the underwriters’ primary defense against securities offerings lawsuits. In an SEC-registered offering, it is an affirmative defense against Section 11 and Section 12 of the Securities Act liability. In a Private Placement, it is an affirmative defense to liability under Rule 10b-5 and Section 10(b) of the Exchange Act. In establishing its Due Diligence Defense an underwriter will rely on their own Due Diligence and counsel’s 10b-5 Letter and the Comfort Letter.