Pre-filing activities

Due diligence
Due diligence is the process of ensuring that the
information in the registration statement is accurate in
all material respects and that the registration statement
does not contain any untrue statements of material fact or
omit material facts required to be stated in the registration
statement or that are necessary to prevent statements in
the registration statement from being misleading. One
component of due diligence includes questioning key
management personnel about company activities, matters
disclosed in the prospectus, and matters not disclosed in
the prospectus.
Under the 1933 Act, securities fraud liability may be incurred
if a registration statement contains misstatements of
material facts or omissions of material facts required to be
included at the time that the registration statement becomes
effective. The company, its directors, the officers who sign
the registration statement (the principal executive, financial,
and accounting officers), the underwriters, and any experts
(such as auditors) participating in the registration may all
be potentially liable. The company itself is liable for any
material deficiencies, regardless of good faith or the exercise
of due diligence. This requires that a complete due diligence
process be performed, which greatly increases the length of
the preparation phase.
Corporate documents and related information
Your counsel and underwriters’ counsel will review articles
of incorporation, bylaws, minutes of board and committee
meetings, major contracts, employment agreements, stock
option plans, and other significant company documents
to verify that the prospectus disclosures are accurate.
Questionnaires are circulated to all directors and officers,
requesting certain information including their names,
prior experience, direct and other remuneration, options,
warrants and rights, transactions with the company,
indemnification agreements, and the number of shares
owned of record and beneficially (shares in which they,
directly or indirectly, have or share voting or investment
power). In some cases, the individual directors and officers
may be interviewed by your advisors.

Financial statements
The audited financial statements will be included in the
prospectus, with reliance on the auditor’s report given on
the authority of the auditors as experts in auditing and
accounting. In order for a company to include the audit
firm’s report in the filing and to refer to the firm as experts,
the company must request and obtain the auditor’s consent
to the inclusion of their report in the prospectus and to
being named as experts. Before these consents are given,
the auditors must perform a reasonable investigation
through the filing dates, conducting a subsequent events
investigation to determine whether the financial statements
and their opinion thereon are still appropriate.
This investigation includes inquiries into any events that
occurred or became known after the date of the auditor’s
last report, which, had they been known at the time, would
have been disclosed or reflected in the financial statements.
Your auditors will review and discuss with management
any concerns they may have with the interim financial
statements. They will also read the entire registration
statement for inconsistencies between the financial and
non-financial portions and any material matters that have
not been disclosed. The auditors are also asked by the
underwriters to “provide comfort” (as explained below)
on certain financial amounts disclosed in the registration
statement (outside of the audited financial statements).
Comfort letters
During the registration process, the underwriters and
their counsel will discuss with your auditor the financial
statements and reach an agreement on the auditor
comfort letters. In requesting these comfort letters, the
underwriters are seeking assistance in performing a
“reasonable investigation” of financial and accounting
data in the prospectus that is not covered by the auditor’s
report. Two comfort letters are generally issued, one on
the effective date of the registration statement and one
on the closing date, the latter of which is often referred
to as the “bring-down” comfort letter. The comfort
letters list specific procedures performed at the request of
the underwriters. Your auditor will be requested by the
underwriters to furnish a preliminary draft well in advance
of the first due date so that the underwriters may decide
whether the procedures described in the letter are consistent
with what they requested. The procedures, performed by
the auditor, usually include comparison of financial data,
contained throughout the prospectus, to accounting records
or financial statements. They also include consideration
of financial results available subsequent to the last audit
for purposes of determining whether there have been
any decline in sales or income or other trends that are not
adequately disclosed in the document. It is important for
the company to be involved in the procedures requested
by the underwriters early in the process as management
may be able to identify items that can be resolved with the
underwriters in advance of the issuance date. The company
may choose to discuss these situations with the underwriter
prior to the issuance date of the comfort letter to avoid
surprises or potential delays in filing. For example, sales for
the most recent month may have declined from sales for
the same month a year ago, and this decline will be noted
in the comfort letter (unless such information is publically
disclosed, such as in a press release).


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