FINRA Rules 2010, 2020, Section 17(a) of the Securities Act & Section 10(b) of the Securities Exchange Act (10b-5) prescribe that a broker-dealer conduct due diligence concerning securities that it offers and an issuer’s representations. Failure to do so can constitute a violation of the anti-fraud provisions of the Federal Securities laws and FINRA Rules 2010 & 2020. The scope of the due diligence investigation must be based upon the facts and circumstances surrounding the offering, however, the courts have ruled that a broker-dealer may not rely blindly upon the issuer for information concerning a company, nor may it rely on the information provided by the issuer and its counsel in lieu of conducting its own reasonable investigation. As noted by the courts, when conducting due diligence a broker-dealer is required to exercise a “high degree of care” and must independently verify an issuer’s representations and claims. For broker-dealers engaged in offering securities in smaller companies and/or newer companies an even more thorough investigation is required. In order to mitigate the potential risks of civil and possibly criminal liability a broker-dealer engaged in a related-party offering, where the broker-dealer or one of its principals has an interest, it is imperative that the due diligence review be conducted by a third party.
The principals of BD Financial Services Group have extensive experience conducting due diligence investigations for diverse purposes, including for broker-dealers offering securities under Reg D 504-506.
FINRA Rule 2010 Standards of Commercial Honor and Principles of Trade
FINRA Rule 2020 Use of Manipulative, Deceptive or Other Fraudulent Devices
17(a) Securities Act of 1933
10(b) Securities Exchange Act of 1934
[Due Diligence is used by many as a generic term to describe an investigation of a business. Many times these investigations are conducted using a one size fits all process. The lack of specific procedures and exact direction to address those concerns unique to the business acquisition at hand produces a quantity of data that neither focuses on the strategic issues nor identifies key risks.
Our company understands that each business transaction is separate and unique and requires one to understand the issues that make the transaction attractive and lucrative to the acquiring party. These issues can range from limited competition, patent rights, distribution advantages or even location. However the single most important component of a successful due diligence investigation is understanding the business being sold or acquired. This allows the due diligence process to be planned and executed to isolate and obtain the most important information needed, allowing potential stakeholders to assess risk appropriately.
Our team is experienced with the mechanics of business in particular industries and knows how to identify the strategic and advantageous aspects that may be unique to that business entity. We understand that separate companies in the same industry must establish and maintain specific skills to compete successfully in their markets. Our team has adopted a standard of care that assures our due diligence will identify and address the risks that determine the success of a business transaction. We will not generate hours of review in areas that do not create value or determine success. Our process is both efficient and value-added.]