Revisiting Due Diligence for Private Market Investments

by Edward Robertson

In the eyes of the investor, the due diligence (DD) process carried out by Exempt Market Dealers (EMDs) for private market investment products seems very problematic.


First is the question of motivation of EMDs and their representatives. Motivation can be oriented more towards immediate profitability of the EMD rather than towards safeguarding the financial soundness of the product issuer. For example, an EMD may select an issuer on the basis of an inordinate commission or preferential terms, or charge a high fee for conducting due diligence. From the perspective of the EMD, it is difficult to maintain a viable operation without somehow looking out for its own interests.

Despite established conventions of finance and investment services, DD is not standardized or quality-checked across the industry.

In relatively recent EM product failures, it has come to light that the “lift” (difference between the cost to the issuer for the asset and the price charged to investors) was extraordinary; the commissions were too high; the operators’ track record was not honourable; financial statements were not verified; and no controls were in place to prevent investing of funds far outside the original mandate. These points would presumably form part of the screening criteria of any due diligence process.

It is difficult for the investor to discover whether the DD process of any particular EMD is better than that of another. Further, the results of DD for a product offered for sale are scarcely made available to the investor, to allow some kind of assesssment to be made.


If solutions are to be developed by industry practitioners (as opposed to the securities authorities) then it must be done by taking steps to differentiate oneself as a better service providor to investors.

Motivation: The correct motivation (i.e., to safeguard the financial integrity of the issuer for the purpose of protecting the investor’s capital) will be evident in the right policies towards commissions, due diligence fees, special arrangements for options, warrants, etc., and event costs -- all to avoid excessive burden on the issuer.

Standardization: It should be possible for innovators in the field to gather a roster of best practices and to make it clear that they have established a sort of standard, even in draft, which they will apply consistently and continue to refine.

Track record: Can the EMD be transparent enough to give a record of its performance?

Results of DD Process: Why not establish a maturity rating system (even for EMD internal use) for Exempt Market products? Such a system would be instructive not only for the EMD, but also for the issuer's management team.