Step 4: Due Diligence

As the IPO team develops the registration statement and prospectus, they have two important goals:

• To make sure the prospectus tells the company’s story well and attracts serious investors
• To protect the company and the underwriter from lawsuits by shareholders

According to the law, if there is any inaccurate information in the prospectus or if any important information is left out of the prospectus, the company can be held liable for misrepresentation of the facts. You can be sure that no one on the IPO team wants to be sued, so they are going to do everything possible to be sure the prospectus is 100% correct and all possible risk factors are revealed.

Basically they are going to turn the company inside out, go over every bit of data with a fine-toothed comb, and shine flashlights in every corner. This process often feels like a major inquisition, but the official name for it is “due diligence.” The IPO team is required by law to exert all due diligence to ensure the prospectus received by investors is complete and accurate. 

Jeff Bezos, founder of Amazon.com, once said, “Sweat the small stuff, because everything matters.” In a way, due diligence is a way of sweating everything from the small stuff to the big stuff.