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Glossary

Data room

A data room is a secure place that an organization uses to share confidential documents with selected third parties.

What is a data room?

A data room is a secure place for storing sensitive or privileged documents. When an organization wants to share confidential documents with selected third parties it uses a data room to control what can be seen and minimize the risk of information being exposed to unauthorized people. Data rooms are frequently used for sensitive business transactions such as mergers and acquisitions (M&As) and initial public offerings (IPOs) or during legal proceedings. While a data room was traditionally a physical location, nowadays they are increasingly virtual spaces or virtual data rooms with documents shared on secure websites.

What is the difference between a physical data room and a virtual data room?

A physical data room is just that – a room full of documents. It will be protected by physical security features (such as biometric security and cameras). Access is closely controlled and monitored to ensure documents are not damaged or altered and that information cannot be removed or made available to unauthorized persons. The data room could be in a company’s head office, its attorney’s office or another secure place such as a bank.

A virtual data room is a website or online portal that provides controlled access to information. It will have security features such as encryption and multi-factor authentication. As information is confidential there will be restrictions on viewers’ ability to edit information or to share it with others by forwarding, copying or printing.

Why are virtual data rooms becoming more popular?

  • Lower costs: A virtual data room is usually cheaper to set up and maintain than a physical data room. For a physical data room a company may need to rent a room and then install and pay for round the clock security and monitoring.
  • Greater accessibility: Because it is hosted online, a virtual data room is easily and quickly accessible to authorized people from anywhere in the world. A physical data room requires people to travel to the location and typically access documents one at a time.
  • Better preservation: In a virtual data room documents can be securely preserved for as long as required. In a physical data room, there can be wear and tear to documents and the risk of damage from natural disasters such as fire and flooding.

What are virtual data rooms used for?

  • M&A: During M&As, buyers usually need access to large volumes of confidential information during the due diligence process. A virtual data room allows buyers and their representatives to review the information without travelling to a physical location.
  • IPOs: In an IPO a virtual data room gives attorneys, investment bankers, and other parties the ability to review, sign and verify documents, while preventing access to third parties who are not part of the transaction.
  • Company audits: During company audits a virtual data room can be the online resource that enables auditors, accountants, attorneys, and regulators to review relevant documents.
  • Legal proceedings: During court proceedings, attorneys, regulators, and other authorized parties can access highly confidential documents securely and remotely using a virtual data room.
  • Real estate: Real estate businesses can use virtual data rooms to manage documents more efficiently, sharing property plans and other information with potential buyers.
  • Collaborative business projects: Internal staff and external partners and advisors who work on complex collaborative business projects can use virtual data rooms to securely share and exchange information.

What are some important features to look for in a virtual data room?

  • Certification to the ISO/IEC 27001 standard for information security management systems (ISMS)
  • Flexible role-based permissions to provide access to specific individuals/groups
  • Backup and recovery, ideally with data backed up to more than one location
  • Redaction to hide sensitive information within documents
  • The ability to bulk upload documents while retaining existing file structures
  • Watermarking to protect against unauthorized copying or sharing of documents
  • Optical Character recognition (OCR) to enable scanned documents to be searchable
  • Q&A process that makes it easy for participants in the virtual data room to ask questions and receive answers
  • Audit trails and activity monitoring to track participant actions and interactions
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