The nature of the capital market in the United States is such that participants, namely underwriters and issuers, need the opportunity to make timely offerings to seize advantageous market situations. In addressing the influence of technological advances and the widespread availability of information on the capital markets, the Securities and Exchange Commission (SEC) continues to reform the rules of securities offering. Adopted in response to the issuers’ demand for rapid access to the capital markets, shelf registration reformed the offering process to allow for procedural flexibility so as to limit the impact of market volatility. The increase in technology and rapid access to the capital markets, however, places underwriters in a predicament, as there is no guide establishing the requisite due diligence for preparing for such offerings.
In an era marked by massive accounting scandals and high profile cases such as WorldCom and Enron, Wall Street investment banks, operating as underwriters, are re-evaluating their approach to due diligence requirements to limit their potential liability. In 2005 alone, underwriters paid out some twelve billion dollars to settle the claims of investors who lost money due to the undisclosed and fraudulent activity of company officers and accountants. The impact of these scandals reverberated through the investment banking industry and significantly impacted the due diligence defense that affords underwriters protection from liability. As a consequence, the lack of guidance for underwriters making a timely offering became clear in the wake of the WorldCom scandal and highlighted the dilemma underwriters must confront in conducting business. . . .