The true due diligence cost to the issuer would be significantly
less if the due diligence process is clearly separate from the costs
of issuer-paid reports.
Once the due diligence process is clearly defined as being
separate from the scope of an issuer-paid report, issuers could
save time, money and effort by organizing themselves in an efficient
manner to provide the same due diligence responses and documents
it provided one EMD to another. This would avoid the duplication of
the time, money and effort that an issuer has to go through when
dealing with separate providers of issuer-paid reports.
For example, during the due diligence process, an EMD
would typically provide the issuer with a set of due diligence
questionnaire or requisition letter tailored for that particular
offering. Written answers and documents would be provided by
the issuer to the EMD. If another EMD wanted to sell securities as
part of a selling group in connection with the same offering, the
issuer could provide that EMD with the same written answers and
documents it provided the other EMD, albeit updated, if required.
Any updates would be provided to both EMDs so that they
have the same information to do their own independent due
diligence. The sharing of the information does not relieve an EMD
of their own independent due diligence and KYP obligations but
allows EMDs to work co-operatively with one another and provide
savings to issuers that are not provided when an EMD requires an
issuer to work with only their ‘preferred’ supplier of issuer-paid
reports. Moreover, such collaboration among EMDs would assist
in an overall better due diligence effort since all EMDs are looking
for similar ‘red flags’, among other things.
By clearly defining the due diligence process as separate
Remarks and disclosures
from an issuer-paid report, the issuer and the EMDs collectively
eliminate the costs of duplicate work. An issuer can now choose
to contract for an issuer-paid report or multiple reports based on
its needs, but not be required to do so in the name of satisfying
the due diligence process for each EMD. EMDs may continue
to recommend issuers to use issuer-paid reports to facilitate a
dealing representative’s understanding of the offering from a
third-party’s perspective. Other uses for issuer-paid reports in
the context of exempt offering, including their use as part of an
offering memorandum, may raise certain regulatory concerns,
which are outside the scope of this article.
Peter Fang, the author of this article, is one of the founders of BlackOre
Research Inc., a research firm that offers issuer-paid reports for both
public and private companies.
Miika Makela, the co-author of this article, is a Dealing Representative
of Sloane Capital Corp., an exempt market dealer, who also conducts
internal due diligence reviews on prospective exempt offerings for Sloane
Capital. Sloane Capital Corp. is a member of the Exempt Market Dealers
Association of Canada.
Disclaimer: Although issuer-paid research firms have the monetary
incentive to promote the use of issuer-paid research as proxies for the
due diligence process and lobby Canadian securities regulators to make
issuer-paid reports a requirement for exempt issuances, we strongly
disagree with such an approach. Instead, the exempt market industry
stands to gain from separating the due diligence process from issuer-paid research because such separation will significantly reduce the
overall transaction and compliance costs for all market participants. We
believe that exempt market participants at large (including issuer-paid
research firms) will collectively benefit from reduced due diligence costs
because such cost reduction will increase the aggregate number of
exempt offerings and encourage growth of the exempt market industry.
For more information contact:
“…the ultimate due diligence responsibility
still rests with each EMD individually…”
“The issuers also no longer need to spend money on multiple issuer-
paid reports in the name of satisfying due diligence requirements …”