Due Diligence Disclosures: We WILL Find Out

If you are going to undertake a securities sale for your company – either issuing equity securities or being the maker of a loan – you have to disclose the risks involved in the investment to protect the interest of those who may wish to purchase the securities as well as protect yourself against future accusations of investment fraud for having failed to do these disclosures fully, completely and honestly.  Having said, it never fails to surprise me when our due diligence review finds a disclosure issue that nobody thought would either be relevant or just didn’t want out there because it would reflect poorly upon the company’s prospects for a successful outcome.  Beyond the legal issues (and if you intend to issue securities and do not obtain the advice of legal counsel you are a fool), the impact of these decisions can be telling.  The consequences are always the same: we waste time by giving business management advice that is based upon what we are in fact told are the issues and the resulting recommendations are rendered, more or less, worthless.  The cost to the opportunity is huge:

  • First, the plans developed are now useless and have to be redone and that costs the issuer money and more time that they don’t have to waste; then
  • Second, the failure to disclose places everyone else in the finance chain at risk for claims of loss for which the issuer is responsible to remedy.  The monetary liabilities owing to the damage to reputations, failed operations and future business prospects can add up to millions of dollars in a flash that the issuer probably doesn’t have available to satisfy; then
  • Third, the opportunity to create a mitigation plan to offset the disclosure issue risks is lost and probably cannot be made to work unless the party involved in the disclosure failure is removed entirely from the transaction (with the attending costs to the opportunity, delays, etc., being borne – once again – by the issuer); then
  • Finally, the entire opportunity to issue securities is subject to complete forfeiture at the cost of the issuer.

The regulatory requirements we operate under today are significantly different than just a few years ago.  If you think the underwriters won’t find out about this problem or that problem you are operating on Fantasy Island and the money plane will never land.  You will automatically be assumed to be a bad actor who only has the potential to ruin careers, bankrupt companies and get people into trouble with the regulators.  Nobody will be willing to accept these consequences and that means your future as a company could be essentially zero.  On the other hand, if you do the hard thing and disclose the problems you have faced, then we have the opportunity to create a proactive risk mitigation plan that has the potential to take the issue off the table and allow everyone to realize, that while mistakes happen, business people who have integrity at their core will always have room at the table.

Be The One…


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