Canada: Underwriting Due Diligence: What’s "Reasonable"?

How do underwriters avoid prospectus liability?

An underwriter in a public offering of securities can avoid liability for a misrepresentation in the prospectus if it can establish the "due diligence defence", i.e. that it had a conducted a reasonable investigation so as to provide it with reasonable grounds for a belief that there had been no misrepresentation in the prospectus.

So what constitutes a "reasonable investigation" and "reasonable grounds"?

The Investment Industry Regulatory Organization of Canada (IIROC) has recently weighed in with its proposed guidance respecting underwriting due diligence, some of which may represent a departure from what some IIROC Dealer Members may consider as current market practice. Rather than providing specific guidelines, IIROC published key principles to inform the due diligence process while underlining its view that due diligence should be customized to the particular circumstances of the issuer and the offering, using the underwriter's professional judgment.

Despite the general nature of the proposed guidance, various practical considerations come out of IIROC's proposal. Perhaps the most important practical implication of the proposed guidance is that the guidance may be used by plaintiffs in prospectus misrepresentation cases or by securities regulatory authorities as a standard against which the due diligence performed by the underwriter may be evaluated.

Here are some of the key points for underwriters arising from the proposed guidance:

Written Policies and Procedures, Supervision and Compliance

IIROC expects underwriters to have written policies and procedures relating to the underwriting process, including due diligence. Such policies and procedures should recognize the contextual nature of due diligence. As well, IIROC Dealer Member Rules require underwriters to have a comprehensive and effective supervisory and compliance framework in place to ensure compliance with policies and procedures, IIROC requirements and applicable securities laws. The supervisory function should be undertaken by a senior member of the investment banking department of the underwriter.

IIROC warns in the notice of the groposed guidance that its compliance examinations going forward will focus on the adequacy of a Dealer Member's policies and procedures and whether the process has been followed in sampled files. Dealer Members should revisit their current policies and procedures (of which IIROC has seen considerable variations) and supervisory framework for compliance, and make any necessary updates, so as to be ready if and when IIROC's Business Conduct Compliance personnel arrive to conduct a compliance examination. Underwriters would be wise to heed IIROC's warning and reconsider how they conduct due diligence in light of the proposed guidance, and how such procedures have been documented.

Due Diligence Plan and Record Keeping

IIROC suggests that underwriters should have a due diligence plan in place from the outset of an offering that reflects the context of the offering and the issuer's business so as to tailor the due diligence to the circumstances. For example, issuers in emerging markets may require more extensive due diligence than other issuers. Before committing to underwriting a particular offering, underwriters should consider the practical matter of balancing the need to conduct an appropriate level of due diligence for smaller or infrequent issuers with the fact that these tend to be the most cost sensitive issuers.

The goal of the due diligence plan should be to determine the approach in ensuring prescribed information is included in the prospectus, investigating information provided by the issuer and verifying key materials facts. The proposed guidance includes a list of contextual matters to consider in preparing a due diligence plan. Consideration should also be given as to what records are to be kept evidencing the due diligence conducted, as well as compliance with the underwriter's own policies and procedures, IIROC requirements and applicable securities laws.

Practical considerations also arise in the context of "bought deals" on a compressed time frame. Underwriters can plan ahead in these cases as the prospectus will incorporate most of the information about the issuer's business by reference to documents already publicly available ahead of the offering.

It would be reasonable to spend some time before or shortly after launching an offering planning the scope of due diligence required given the specific characteristics of the issuer and the offering and delineating the roles of the underwriters and legal counsel. It would be unreasonable to rely on standardized checklists to drive the due diligence process.

Business v. Legal Due Diligence, Red Flags

IIROC advises that underwriters should clearly understand and communicate the boundary between business due diligence and legal due diligence to ensure that matters that should be reviewed by the underwriters are not delegated to underwriters' counsel. An Underwriter should perform business due diligence sufficient to ensure that the underwriter understands the business of the issuer and the key internal and external factors affecting the issuer's business and use its professional judgment when determining which material facts will be verified independently (in compliance with restrictions against "tipping") depending on the circumstances of the offering.

The results of the legal due diligence should inform business due diligence and the underwriter should follow up on missing records and any information that appears to contradict management's oral statements or the disclosure in the draft prospectus.

The underwriter should also diligently follow up on any potential "red flags" and document how red flags were addressed. Potential red flags identified by IIROC include significant changes in the issuer's business, financial information or other disclosure that is inconsistent with the issuer's peers or competitors, a high degree of reliance on certain individuals or relationships, or recent controversy, including criminal, regulatory or disciplinary proceedings, involving the issuer or any of its directors or senior officers. The proposed guidance also notes that for emerging market issuers, underwriters should understand the political and cultural environment in which the issuer operates, local business practices affecting the issuer, local laws affecting the issuer, local experts (including legal advisors and auditors) and the extent to which the issuer relies on local management, particularly in the context of an initial public offering or a subsequent offering by a smaller or infrequent issuer.

It would be reasonable for underwriters to select key material facts in the prospectus for independent verification. It would not be reasonable to rely solely on the issuer or underwriters' legal counsel to drive the due diligence process. Underwriters and their legal counsel should be in communication with each other throughout the due diligence process to ensure significant findings are investigated further in the appropriate context.

Reliance on Experts and Lead Underwriter

Securities legislation provides that underwriters are not liable for a misrepresentation with respect to any part of the prospectus purporting to be made on the authority of an expert, provided certain conditions are met. However, IIROC warns against undue reliance on experts. Underwriters should consider whether an expert is qualified to give its report or opinion.

The proposed guidance reminds underwriters that syndicate members are subject to the same liability as the lead underwriter (subject to statutory caps for the amount underwritten) for any misrepresentation under securities legislation. Although IIROC acknowledges that the proposed guidance is not intended to duplicate due diligence responsibilities as between the lead underwriter and a syndicate member, such syndicate member should satisfy itself that the lead underwriter performed the kind of due diligence investigation that the syndicate member would have performed on its own behalf as lead underwriter. It is acknowledged that the lead underwriter may bear additional reputational and regulatory risk.

It would be reasonable for underwriters to investigate the qualifications of purported experts having regard to the expertise, experience, independence and reputation of the expert and for each syndicate member to receive copies of all letters, opinions or memoranda relating to the underwriters' due diligence investigation, and to invite all syndicate members to and to give each the opportunity to participate in Q&A sessions. It would not be reasonable to blindly rely on the work of experts, other third parties or the lead underwriters in the case of syndicate members.

Private Placements

IIROC notes that its proposed guidance is not meant to apply to private placements, although some of the principles may be useful in conducting due diligence for private placements. In one respect due diligence for private placements is less structured as there is no prospectus to focus the due diligence. However, private placement subscription agreements typically require an investor to represent that its investment decisions is based on the public disclosure of the issuer. In that regard, the conduct of due diligence has some similarities to short form prospectus offerings that rely on previously publicly filed disclosure, although without the need to certify the disclosure.

In such cases it would be reasonable to focus due diligence on the public record. It would not be reasonable to conduct no or very limited due diligence for a private placement given the potential common law liability and reputational risk involved in such offerings.

Going Forward

Much of IIROC's proposed guidance addresses issues of procedure rather than substance, although IIROC advises that underwriters must not put "form over substance". Underwriters are reminded that reasonable due diligence requires the exercise of professional judgment in planning and following through on the due diligence plan. Legal counsel can play an important role in assisting with the due diligence process, but underwriters need to take the time to focus appropriate resources to conduct "reasonable" due diligence in the circumstances.

IIROC's proposed guidance is open for comments until June 4, 2014. Dealer Members and interested parties are encouraged to provide their input to IIROC, including responses to specific questions posed by IIROC in its notice of the proposed guidance (e.g. red flags, application to specific public offerings and private placements, etc.). No indication is provided as to when IIROC is seeking to adopt such proposed guidance.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
8 Nov 2016, Seminar, Ottawa, Canada

The prospect of an internal investigation raises many thorny issues. This presentation will canvass some of the potential triggering events, and discuss how to structure an investigation, retain forensic assistance and manage the inevitable ethical issues that will arise.

22 Nov 2016, Seminar, Ottawa, Canada

From the boardroom to the shop floor, effective organizations recognize the value of having a diverse workplace. This presentation will explore effective strategies to promote diversity, defeat bias and encourage a broader community outlook.

7 Dec 2016, Seminar, Ottawa, Canada

Staying local but going global presents its challenges. Gowling WLG lawyers offer an international roundtable on doing business in the U.K., France, Germany, China and Russia. This three-hour session will videoconference in lawyers from around the world to discuss business and intellectual property hurdles.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.