COBS 23.3 Due diligence

Before facilitating a qualifying public offer, a firm must obtain information about the issuer and the proposed qualifying public offer that:

(1) is sufficient to enable the firm to:

     (a) understand:

          (i) the identity and nature of the issuer, including its business model; and 

          (ii) the key risks associated with the proposed qualifying public offer;

     (b) carry out a reasonable assessment of the financial viability of the issuer in accordance with COBS 23.4.5R;

     (c) determine if it is appropriate to facilitate the qualifying public offer in accordance with COBS 23.5; and

     (d) present such information as a reasonable client would require to make an informed and effective decision on whether or not to participate in the qualifying public offer, in accordance withCOBS 23.6; and 

(2) addresses at least the matters specified in COBS 23.3.2R and COBS 23.3.5R.

A firm must obtain at least the following information about the issuer: 

(1) general information, including (so far as relevant):

     (a) the current and previous names of the issuer, including any trading names;

     (b) details of the issuer's incorporation, including the date and place of incorporation and company registration number;

     (c) contact details, including the issuer’s registered office address and registered email address;

     (d) the details of persons (‘A’) in relation to the issuer (‘B’) with:

          (i) 10% or more of the shares or voting power in B or in a parent undertaking (‘P’) of B; or

          (ii) the ability to exercise significant influence over the management of B or P;

     (e) information about key individuals associated with the issuer (including, but not limited to, directors and senior management), including: 

          (i) their name and current position; 

          (ii) their academic background and professional experience; and

          (iii) such other information as is necessary to enable the firm to satisfy itself as to the fitness and propriety of those individuals to perform their respective roles (see COBS 23.3.3G); 

     (f) group information, including the group structure, the issuer’s position in the group and any subsidiaries of the issuer;

     (g) details of the issuer's online presence, such as the issuer’s website and social media accounts;

     (h) a description of the issuer’s business model, including the products or services offered by the issuer;

     (i) information about any sustainability characteristics of the issuer which are material to its business model;

     (j) if it is material to the issuer’s business or profitability, information regarding the extent to which the issuer is dependent on: 

          (i) patents or licences; and

          (ii) new manufacturing processes;

     (k) key risk factors relating to the issuer or relevant securities (see COBS 23.3.4G);

     (l) details of: 

         (i) any litigation to which the issuer is, or to which it is likely to become, a party; and

         (ii) any litigation to which any member of the issuer’s group is, or is likely to become, a party that may have a material impact on the issuer; and 

     (m) details about contracts (other than contracts entered into in the ordinary course of business):

           (i) to which the issuer or any member of the issuer’sgroup is a party; and

           (ii) that are material to, or may have a material impact on, the issuer; and

(2) financial information, including (so far as is relevant):

      (a) the issuer’s most recent financial reports and accounts, including a confirmation as to whether the accounts have been audited;

      (b) details of the issuer’s financing structure, including its liabilities and sources of capital (such as any previous capital raising either through debt or equity); 

      (c) details of any fees, commissions or other charges that the issuer is likely to pay to third parties which could affect the ability of the issuer to deliver rates of return on the relevant securities; and 

      (d) the most recent group financial accounts of the issuer. 

In COBS 23.3.2R(1)(e), information about the fitness and propriety of key individuals that a firm will need to obtain:

(1) will depend on the role of the relevant individual and the nature of the issuer’s business;

(2) having regard to the purpose of the rules in this chapter (COBS 23.2.2G), should be such as to satisfy the firm as to the relevant individuals’: 

     (a) honesty and integrity; 

     (b) competence and capability; and

     (c) financial soundness; and

(3) may include, where relevant and without limitation:

     (a) checking for convictions for criminal offences (where possible), particularly in relation to dishonesty, fraud or financial crime; 

     (b) establishing whether the individual has been the subject of any adverse finding or any settlement in civil proceedings in connection with misconduct, fraud or the formation or management of a body corporate;

     (c) establishing whether the individual has been a director, partner, or concerned in the management of, a business that has gone into insolvency, liquidation or administration while the individual has been connected with that organisation or within one year of that connection;

     (d) establishing whether the individual has ever been disqualified from acting as a director or disqualified from acting in any managerial capacity; and

     (e) confirming whether the individual has previously been declared bankrupt. 

In COBS 23.3.2R(1)(k), ‘key risks factors’ are those risks: 

(1) which are specific to the issuer or qualifying public offer; 

(2) which, were they to crystalise, would have a material adverse impact on the issuer and/or its business; and

(3) that have more than a remote possibility of crystalising. 

A firm must obtain at least the following information about the proposed qualifying public offer (so far as is relevant):

(1) the target amount to be raised through the qualifying public offer; 

(2) the amount raised or likely to be raised by the issuer from any other offer of relevant securities to the public which: 

     (a) was closed, or is expected to close, in the 12 months prior to the date on which the qualifying public offer is expected to open; or

     (b) is open, or expected to be opened by the issuer, before the date on which the qualifying public offer is expected to close;

(3) the target deadline for the closure of the qualifying public offer; 

(4) a description of: 

     (a) the rights attached to the relevant securities to be offered;

     (b) how those rights relate to rights attaching to other securities or classes of securities of the issuer; and

     (c) the impact of the proposed qualifying public offer on the issuer's shareholder structure;

(5) the proposed use of funds by the issuer and any third party; 

(6) a description of any tax relief available for clients;

(7) where the relevant security is a debt instrument, the duration of the term and any interest payments; and

(8) where the issuer is a closed-ended collective investment undertaking: 

     (a) information regarding the investment policy, strategy and objectives;

     (b) a summary of the portfolio (or proposed portfolio); 

     (c) its most recent net asset value; and 

     (d) details of any person responsible for managing the investments of the closed-ended collective investment undertaking (whether directly or on a delegated or outsourced basis). 

(1) If the information gathered in accordance with COBS 23.3.2R and COBS 23.3.5R is not sufficient to meet the requirements in COBS 23.3.1R, a firm must gather additional information. 

(2) In determining what further information the firm may require, it must have regard to:

     (a) the structure and complexity of: 

          (i) the issuer or its group; and

          (ii) the qualifying public offer;

     (b) the industry to which the qualifying public offer relates, including whether there is relevant industry information which is reasonably likely to influence the value of the issuer’s business; and

     (c) the business model of the issuer and whether it involves any element that may present an increased risk of loss or harm to clients.

An example of where a firm may determine it requires further information pursuant to COBS 23.3.6R(2) is where the issuer is a special purpose vehicle. 

The characteristics of a business model that might reasonably be expected to present an increased risk of loss or harm to clients are those which could reasonably be expected to have a material impact on:

(1) the ability of the issuer to deliver an expected rate of return; or

(2) the soundness of the business of the issuer, including whether the issuer lends money to other businesses.

A firm must also obtain any supporting information or materials the issuer intends to communicate to clients in relation to the qualifying public offer.

The information, materials or communications in COBS 23.3.9R include (but are not limited to):

(1) any financial promotions relating to the qualifying public offer; and

(2) the terms of, and any contractual documentation to be used in relation to, the qualifying public offer.

(1) In respect of a particular qualifying public offer, a firm may have regard to information obtained in the course of previous dealings with the issuer for the purposes of complying with the requirements of this section. 

(2) Before having regard to the information in (1), a firm should consider whether:

     (a) it should obtain the information again (for example, because the passage of time could have affected its reliability); and

     (b) it should take particular steps to assess that information in accordance with the requirements in COBS 23.4 to ensure that it remains reliable.