Here is part of what Wikipedia has to say about Due Diligence.
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" Due diligence " is a term used for a number of concepts, involving either an investigation of a business or person prior to signing a contract, or an act with a certain standard of care .
The term "due diligence" first came into common use as a result of the United States' Securities Act of 1933 . This Act included a defense at Section 11, referred to as the "Due Diligence" defense, which could be used by broker-dealers when accused of inadequate disclosure to investors of material information with respect to the purchase of securities .
As long as broker-dealers exercised "due diligence" in their investigation into the company whose equity they were selling, and disclosed to the investor what they found, they would not be held liable for non-disclosure of information that was not discovered in the process of that investigation.
The broker-dealer community quickly institutionalized, as a standard practice, the conducting of due diligence investigations of any stock offerings in which they involved themselves. Originally the term was limited to public offerings of equity investments, but over time it has come to be associated with investigations of private mergers and acquisitions as well. The term has slowly been adapted for use in other situations including, increasingly, the process through which a potential investor can evaluate a major planned investment for its cost, benefits and risk. [3]
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