Due Diligence Part 1

Issuing and Codifying Securities Offerings

It is not an over-exaggeration to say that securities offerings, in particular private placements, involve thousands of entries; (i.e., documents, verifications, certifications, background checks, commission payments, reports to regulators, etc.) The volume depends on the offering, the issuer and many other factors, but it is safe to say that whatever the actual number, it’s an extremely high volume of information and regulations, all of which are surveilled and judged by the ever-watchful eyes of regulatory officials at the Securities and Exchange Commission (SEC), and its related organization, the Financial Industry Regulatory Authority (FINRA), both of which oversee and opine upon the actions, obligations and outcomes of the issuer.

Perhaps the only point on which issuers, investors, brokers and regulatory officials can agree is the SEC’s and FINRA’s reason-for-being: a fundamental responsibility of fair dealing for all parties!

A Closer Look – What Is Due Diligence?

While a bit simplistic, one way to think about a private placement offering is as a highly regulated “go fund me” page.  Many people probably wish that the standards for issuing securities applied to “go fund me” pages.

The difference of course is that investors put forth substantially larger amounts of money and expect their money back along with a healthy return on their investment, as stated by the governing offering agreement – the private placement memorandum (PPM).

In the case of private offerings, either the issuer or the issuer’s Managing Broker-Dealer (MBD), must investigate and verify all background and offering information and record all steps legally required for documentation of the offering. When serving an issuer, the MBD endeavors to meet FINRA’s Reasonable Basis Obligation.  That is the obligation that TOBIN satisfies when it approves an offering authorizing sale of securities and then notifies FINRA (Rule 5123) of the offering.

As the offering progresses, TOBIN also regularly reports to FINRA the amount of securities sold, the number of investors sold to, the commission payments paid and more. We discuss this in detail here (Due Diligence — Part 2, Suitability Rule 2111).

Generally, corporate attorneys appreciate all the documentation and verification, but for issuers this process, and the numerous associated micro-tasks including answering questions raised by the SEC and FINRA, is an unwelcomed necessity fraught with regulatory minutia.  Tobin & Company is a licensed managing broker-dealer. When engaged by an issuer as its managing broker-dealer for a securities offering TOBIN assumes a great deal of an issuer’s regulatory obligation and responsibilities throughout the life of the offering.

FINRA guidance (Regulatory Notice 10-22) requires reasonable investigation of issuers and their offerings.  This is the responsibility of the MBD when engaged by the issuer.  Successful due diligence generally includes a much deeper dive but at a minimum focuses on these five areas*:

1) the issuer and its management (e.g., background checks, resumes, a scan of public records including legal records for negative news about the issuer, board members, and key staff, a review of additional public records including corporate by-laws),

2) the business prospects of the issuer (e.g., type of business, historical performance, business plans, marketing plans, etc.),

3) the assets held by or to be acquired by the issuer (Example: stock value, subsidiaries, real property, businesses acquired, mergers, joint ventures, etc.),

4) the claims being made about the offering (e.g., the facts being disclosed as well as promotional material including advertising, recruitment material for brokers, advisors and registered representatives), and,

5) the intended use of the proceeds of the offering (e.g., detailed descriptions, projections, construction schedules if applicable, anticipated drawdowns from offering proceeds, etc.)

The topics above are all important concepts, but the overarching goal of due diligence is to demonstrate that an issuer has adequate systems in place and the sustainable stability to pay investors back for the use of their money.

Much of due diligence is organization and updating of routine details that are readily available from issuers and in the public arena.

However, some common deficiencies Tobin & Company discovers, and remedies, include loosely formulated offering projections, details lacking in business and marketing plans, missing or expired licenses and registrations, vague terminology of documents, unsubstantiated claims asserted in the offering documents and very rarely, the existence of related bad actors.

Why Hats Make a Difference!

It’s common vernacular in English to refer to switching mind-sets as “putting on a different hat.” In this regard, everyone “changes hats” often in performing the tasks associated with their job. For most people it takes an amount of time to adapt, shorter or longer, depending on the complexity of the task and the time duration since the given task was last performed.

At Tobin & Company, securities-due-diligence is our “hat.” Economists would call it our comparative advantage. Our team does it every day, so we know what to look for and where to look. As such we know the range of backup needed to approve an offering. By law, we retain all records about the origination, execution and duration of the offering should questions arise through FINRA, or from investors. We also interface with FINRA authorities.

Our efficiencies can save you time, money and more importantly, stress. Call us. Let’s discuss your next private placement.

*Topics cited are not all-inclusive list.

Offering Materials

We structure, prepare and/or review financial models and analysis, private placement memoranda, subscription documents, investor questionnaires, organizational documents and other documents pertaining to the securities offering by the issuer.

Broker-Dealer Agreements

We enter into soliciting broker-dealer agreements with brokers and broker-dealers willing and able to market and sell the securities of the issuer.


We assist with the processing of all subscription documents, offering documents and other documents necessary for finalizing the sale of securities of the issuer.


We ensure that our client’s offering complies with state and federal securities laws, where applicable, and that all filings that are required by regulators are completed and filed.

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