Clear and accurate information is critical to successful IPOs and RTOs, especially given the increasing requirement for disclosure and more transparency in exchanges around the world. This requirement is more difficult in the emerging markets of China and Southeast Asia.
High profile disclosure in the United States of financial irregularities in Chinese-based but US-listed companies has illustrated the need for in-depth investigative due diligence prior to the listing of these entities.
IPO/RTO Due Diligence
Investigative due diligence (“IVDD”) is a critical part of any major transaction but is especially important in the pre-listing process. A huge amount of material is generated in support of the offering document but much of this important documentation is often unverified, incomplete and on occasion downright misleading. SVA’s goal is to provide a detailed understanding of the actual circumstances of the company to be listed and to highlight, at an early stage, any material or important issue.
Why Investigative Due Diligence is Necessary into IPOs/RTOs
Experience has shown that whilst detailed efforts are conducted by law firms and accountants into the information provided by listing candidates, a wider, more holistic approach is beneficial in identifying practical or off-balance sheet risk. SVA’s efforts complement professional services provided by lawyers and accountants.
IVDD conducted early in the IPO process can save time, money and potential embarrassment, in that the investigative process will swiftly throw up key issues or potential “show stoppers”. This can either facilitate a complete disengagement from the listing or help deal with these matters before they adversely impact the listing.
We will initially meet with our client to discuss any specific concerns or points of emphasis they may wish to focus on. Thereafter, an extensive open source exercise will commence during which we will access online resources, public records, corporate filings, specialist corporate journals and other relevant information. Using the data acquired from a combination of the client’s own information and our findings from our open source exercise, we will identify knowledgeable persons with specific industry knowledge of the subject company.
We will then utilise discreet industry sources and conduct appropriate inquiries with regulatory organisations, distributors, clients, competitors and other industry figures.
We will compare our analysis with the contents of the listing documentation available and will highlight potential risks or other material issues.
Our focus is to look at people and organisations in great depth and then compare this to the documented IPO material.
Our reports are reasoned, balanced and factual and always include an executive summary for senior management.
Key Reference Points
Every IPO/RTO is slightly different in nature but in our experience the following aspects should be carefully considered during the course of the IVDD exercise, especially for Chinese or Southeast Asian listings:
- The “real” corporate structure, as distinct from that which may be listed in the draft IPO prospectus
- A snap shot of the operations on the ground and the business’ actual day-to-day activities
- Comment from former employees, distributors, vendors and others
- Industry reputation
- The background of directors, managers and key advisors
- The integrity of key stakeholders
- The litigation history of all the entities concerned
- Relevant political issues – local and national
- Labour or other social issues which might have potential impact on the transaction
- Potential exposure under anti-corruptions statutes, both international and local
- Quality of accounting, governance and reporting
- Key relationships
Obvious Red Flags
High profile media disclosure has highlighted a number of risk factors in listed companies. These tend to be industry specific. SVA has an excellent working knowledge of these and can advise clients and their legal advisors as to relevant and specific risks. Typically such risks fall into three broad categories:
- Operational Risk
- Reputational Risk
- Regulatory Risk