History

• The term "due diligence" arose from a U.S. Securities Act that was enacted in 1933. Within the Act, the term is used to describe a viable legal defense that could be used to protect investors in the event that inadequate or partial details were provided about a purchased security. The Act was passed in an effort to force broker-dealers to execute a full investigation into the background of any company in which they sold equity.
  
  

Significance

• Due to the law, all companies hold themselves to a specific code of due diligence when it comes to business transactions. For example, venture capitalists hold employees to strict regulations when it comes to investigating a company or group that requests funds.
  
  

Considerations

• Today, the definition of due diligence has been expanded to encompass any form of investigation or research practice that requires a certain level of care. For example, a police department may hold themselves to a specific level of due diligence while investigating a crime. However, the phrase is still most commonly used in the business world, largely in relation to business transactions.
  
  

Other Uses

• Due diligence is commonly used in relation to environmental business laws. Manufacturers must submit "due diligence reports" to verify that proper environmental standards are held relating to environmental site assessments. These reports, when completed correctly, allow manufacturers to avoid liability if future environmental issues arise.
  
  

Negligence

• Due diligence is also a term used in civil lawsuits. Under such circumstances, the definition is slightly different and refers to a proper amount of effort made on behalf of an individual or group to avoid causing harm to another individual or group. For example, improper research into the harm of a product before it is sold to the public may result in improper due diligence. Such a scenario would be grounds for a legal claim of negligence.