International Business Research (U.S.A.) Inc.


92 Nassau Street, Third Floor
Princeton, N.J. 08542

Toll Free: 1-888-DUE-DILIgence

Telephone (609) 683-1100
Fax (609) 683-8917

March 16, 1999


Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W., Stop 6-9
Washington, D.C., 20549

Re: The Regulation of Securities Offerings
File No. S7-30-98; Release No. 33-7606A

Dear Mr. Katz:

International Business Research (U.S.A.) Inc.("IBR") welcomes the opportunity to comment on Release No. 33-7606A, dated November 13, 1998 (entitled, "The Regulation of Securities Offerings"), in which the Securities and Exchange Commission ("the Commission") requests comment on a variety of proposals to significantly revise the regulations governing securities offerings in the United States under the Securities Act of 1933 and the Securities Exchange Act of 1934.


IBR is an international corporate investigations firm. Our clients include many underwriters, Fortune 500 companies, financial organizations, private foundations, and their law firms. We conduct comprehensive research on companies and their principals from a specialized "due diligence" perspective. Whenever securities are being offered publicly or privately, in-depth due diligence must be undertaken to confirm the accuracy and reliability of the information contained in the registration statement and other offering documents. Our research includes a thorough review of litigation filings, regulatory records, broadcast and print media, the Internet, and company documents. Further checks include verification of credentials and, if appropriate, discreet interviews with knowledgeable third parties in order to confirm our findings and to learn more about the backgrounds and reputations of senior management. The breadth of IBR's inquiry is designed to protect investors from fraud and assurre that they receive complete and truthful information regarding the offered securities. IBR has been performing these types of inquiries for over ten years: we undertake in excess of five hundred such projects annually. Based upon our experience and expertise, we believe that we are qualified to comment upon the Commission's proposals as they relate to due diligence.


The Commission has requested comment on the role of an independent qualified professional in satisfying an underwriter's due diligence obligation in an expedited offering. The Commission also seeks comment on whether additional due diligence practices should be included in the proposed expansion of Rule 176.

In our view, inquiry by an independent qualified professional with particular skill in conducting due diligence is an absolute necessity. Specific qualifications of the independent professional should be articulated, and guidance should be provided as to what would constitute an adequate disclosure review. Rule 176 should be amended to include review by an independent qualified professional as one of the indicia of prudent due diligence.

An underwriter's ability to engage in comprehensive due diligence prior to an offering has been weakened in recent years. Underwriters face greater time pressures because advances in technology and communications, widespread institutionalization and globalization of securities markets, and a dramatic rise in the volatility of the securities market have revolutionized the dissemination and retrieval of information about reporting. More information is available from more sources than ever before.i It is precisely because of these added pressures that, increasingly, underwriters are retaining outside experts to conduct their due diligence.


Historically, underwriters have been relied upon to discover essential facts about a company and to make sure they are adequately disclosed. Underwriters customarily meet with the management of the issuer to conduct due diligence. Such meetings are necessary for the underwriter to establish its "due diligence defense" under Section 11 of the Securities Act. However, the underwriter also has an affirmative duty to verify the accuracy of statements made by management as well as those contained in a registration statement.

Failure to conduct adequate due diligence can result in litigation. Usually, the dispute will be over three questions: (1) Were there "red flags" suggesting that information to be included in the registration materials was not entirely accurate?; (2) Did those conducting the due diligence critically evaluate the information they had?; (3) Were outside sources of information contacted in order to verify or challenge information provided by management?ii


Enactment of the proposed registration system would accelerate the process and reduce the role of the Commission in reviewing registration statements. As a result, underwriters would be under pressure to conduct a more thorough due diligence investigation in less time than is available under the present system. They would assume even greater responsibility to uncover material omissions or misstatements. The "additional timing pressures" noted by the Commission are a significant obstacle to conducting a prudent due diligence review, especially with respect to securities registered under proposed Form B.

Use of Form B would allow faster access to capital markets, greater discretion on the part of the issuer as to what is included in the offering materials, and increased reliance on Exchange Act information filed with the Commission before the underwriters become involved. This change would limit the underwriter's ability to influence the disclosure and verify its accuracy.iii

The Commission also proposes to expand Rule 176 to add six additional due diligence practices in order to provide guidance to underwriters and courts with respect to due diligence obligations in the environment of expedited offerings.


The Commission has requested comment regarding whether to include as one of the proposed practices an underwriter's review of a favorable report issued by a qualified independent professional after the professional has conducted a year-end disclosure review.iv

We strongly support the use of a qualified independent professional. In fact, we would recommend expanding the role of such a professional to include active participation in the entire due diligence process. If, indeed, underwriters are the "gatekeepers" of the disclosure process, then they must be provided with the resources and assistance necessary to perform their task in a thorough manner. Given the increased responsibility and time pressures facing underwriters under the proposed expedited registration system, a well-seasoned professional whose business it is to conduct due diligence can play a vital role in protecting investors by performing an extensive, thorough, and timely investigation.v

Such an investigation would be designed to detect whether false and misleading disclosures have been made by engaging the full panoply of due diligence resources. This would include reviewing litigation files, regulatory records, broadcast and print media archives, and the Internet. It also would involve conducting background checks on all directors and officers; examining company documents; verifying credentials; and, if appropriate, conducting personal interviews with knowledgeable third parties. These steps should be articulated by the Commission in the form of guidelines as to what constitutes an adequate review.

Comment is requested as to whether certain qualifications should be required of the independent professional and whether the review should be limited to only certain professions. Investigative business research firms have a particular expertise that goes beyond the scope of either an attorney's or an accountant's skills. We believe the independent professional should be one that primarily engages in investigative business research. Such firms have the experience, the expertise and the resources to meet the demands of due diligence under the Commission's proposals.

The Commission also asks whether issuers would be willing to pay for the sort of review that a qualified independent professional, such as a business research firm, would conduct. In our view, payment for these services should be made through the underwriter, not the issuer. This avoids any appearance of impropriety as between the business research firm and the issuer. The underwriter can be reimbursed through his non-accountable expense allowance, which covers reasonable and customary fees in connection with every offering. In fact, it is already fairly common for underwriters to employ business research firms. We think this practice should be formalized.

In addition to providing enhanced consumer protection, a favorable review by a qualified independent professional could be an enormously effective cost saving device should the issuer or underwriter ever be challenged in court. A cautious underwriter would be well served to expend the funds necessary to engage the services of an independent professional.

Further, we believe the comfort level of investors, both individual and institutional, would be greatly enhanced by reading the written opinion of a properly licensed corporate investigations firm alongside those of the attorney and accountant in the body of the prospectus. Attorneys and accountants are expected to opine on the accuracy and truthfulness of legal and financial matters respectively. Thus, a licensed and independent professional investigator should bear sole responsibility for verifying and opining on the credentials of the issuer's management.

Finally, we believe that the inclusion of such a qualified independent professional to conduct due diligence research is consistent with the Commission's goal to maintain the integrity of due diligence in an era of expedited securities offerings.

* * * *

IBR appreciates this opportunity to provide its views to the Commission. Our staff is available at the Commission's convenience to discuss further any of the points raised in this letter. Please address any questions or requests for additional information to the undersigned.

Respectfully submitted,

Michael D. Allison

Michael D. Allison
Chairman & CEO



i See, Committee on Federal Regulation of Securities, "Report of Task Force on Sellers' Due Diligence and Similar Defenses Under the Federal Securities Laws," 48 Bus. Law. 1185 (1993)

ii See, Auspitz & Levy, "A Litigator's View of Due Diligence Obligations", S&P's Review of Securities & Commodities Regulation, vol. 30, no.18, p.215.

Question number three (3) is of particular importance. "[U]nderwriters are expected to exercise a high degree of care in investigation and independent verification of the company's representations. Tacit reliance on management assertions is unacceptable; the underwriters must play devil's advocate." Feit v. Leasco Data Processing Equipment Corp., 332 F. Supp. 544 (E.D.N.Y. 1971).

iii See, "SEC Proposes Changes to Registration System", Rogers & Wells, LLP Memorandum, November 1998.

iv SEC Release No. 33-7606A, Section IX(D)(3)(b)

v We believe that in the future, issuers will rely upon the qualified independent professional in the same manner that the underwriter historically has been relied upon, as follows: "No greater reliance in our self-regulatory system is placed on any single participant in the issuance of securities than upon the underwriter. He is most heavily relied upon to verify published materials because of his expertise in appraising the securities issue and the issuer, and because of his incentive to do so. He is familiar with the process of investigating the business condition of a company and possesses extensive resources for doing so.... Prospective investors look to the underwriter ... to pass on the soundness of the security and the correctness of the registration statement and prospectus." Chris-Craft Industries, Inc. v. Piper Aircraft Corp., 480 F.2d 341 (2d Cir.), cert. ddenied, 414 U.S. 910 (1973), on remand, 384 F. Supp. 507 (S.D.N.Y. 1974), aff'd in part and rev'd in part, 516 F.2d 172 (2d. Cir. 1975)