By Boo Kok Chuon

「良贾深藏若虚。」
司马迁，《史记·老子韩非列传》（西汉）
“A shrewd merchant keeps his riches hidden, as though he possessed nothing.”
— English translation by the author

More than two thousand years may have passed since Sima Qian wrote those words, but the commercial philosophy behind them remains strikingly relevant today.

A merchant who has truly discovered the secret to wealth will usually guard it for as long as possible, and conceal it as carefully as possible.

A profitable method, a pricing advantage, a unique source of supply, an arbitrage opportunity or a business model capable of generating abnormal returns is valuable precisely because not everyone knows about it. The wider that knowledge spreads, the more competitors enter the market and the more quickly that advantage may disappear.

So whenever a supposed secret to wealth is broadcast widely, taught indiscriminately or sold to the public as a formula that anyone can replicate, I think it is fair to ask one uncomfortable question:

If this really is the secret to making money, why is the secret itself being sold?

That does not mean that everyone who teaches investment or raises capital should be viewed with suspicion. There are perfectly legitimate reasons for successful entrepreneurs to teach, franchise their models, bring in investors or raise external capital.

But extraordinary returns deserve extraordinary curiosity.

And sometimes, the first thing an investor needs is not an answer.

It is a list of questions.

Two Lamborghinis and a reminder about due diligence

Reading today’s Straits Times report on two self-styled wealth gurus reminded me of several valuable insights I gained during a due diligence assignment for a potential 8-figure acquisition deal in Kuala Lumpur last week.

The Straits Times reported that the two businessmen had appeared at wealth seminars, drove Lamborghinis and were associated with investment propositions promising returns of up to 15 per cent per annum. Both have since been declared bankrupt, while more than 50 investors are reportedly concerned about some S$5 million locked up in various investments. Police investigations remain ongoing. (straitstimes.com)

Importantly, none of what follows should be taken as expressing any conclusion as to what happened in those investments, much less whether any criminal offence occurred. Those are matters for the relevant authorities to investigate.

Nor am I suggesting any connection whatsoever between the matters reported by The Straits Times and my assignment in Kuala Lumpur.

For obvious reasons, my professional duties of confidentiality prevent me from discussing the transaction I was asked to examine, the parties involved, or any of my findings.

What I can share, however, is the mechanics of the exercise: a preliminary framework I have developed, through which an ordinary investor can inspect an investment opportunity before deciding whether it is even worth committing substantial money to professional due diligence.

As you know, lawyers, accountants, valuers, investigators and technical specialists are expensive. You do not necessarily need to commission an expensive due diligence report merely to discover that an investment proposition cannot survive a few basic questions.

An important caveat remains, however, this preliminary exercise is not due diligence, nor is it a substitute for professional legal, financial, tax, valuation or technical advice. Rather, its objective is much more modest:

Is there enough substance here to justify spending money investigating further?

I would begin with six questions.

1. What exactly am I buying?

This sounds obvious.

Surprisingly, it often is not.

Before parting with money, seek discovery of the full terms and conditions governing the proposed investment or acquisition.

A marketing pamphlet is not enough.

A presentation deck is not enough.

A WhatsApp conversation is certainly not enough.

Even a term sheet, letter of intent, memorandum of understanding, or whatever creative name the parties may give to a non-binding document setting out headline commercial terms, may not tell you what ultimately matters: the legal arrangement under which your money will be held, what rights you will actually acquire, and against whom those rights may be enforced.

At the end of the transaction, you must be holding some identifiable title, interest, right or claim against something or someone.

If you are acquiring shares in a company, ask how the shares will actually come into existence or be transferred to you. What class of shares are you receiving? What rights attach to that class? When will the allotment or transfer take place? When will your name be entered in the register of members? When will the share certificate be issued, if one is to be issued? Are there conditions precedent that must first be satisfied? If the shares are subject to restrictions, preferences, conversion rights or special voting arrangements, ask to see those terms as well.

If you are acquiring ownership of an asset, ask for proof that the seller actually owns it and has the right to transfer it. Where appropriate, ask for certified true copies, notarised documents, registry extracts or other independently verifiable evidence. If title is capable of registration, ask how and when that transfer will be perfected. Do not stop at photographs of the asset or invoices showing that somebody once paid for it.

If you are lending money, first understand the legal nature of the instrument. Is it a simple loan agreement, bond, debenture, convertible note, shareholder loan or some other debt instrument? Ask whether the arrangement raises any licensing or regulatory issues, including moneylending laws where relevant. Insist on seeing the actual terms of the instrument, or at the very least a specimen or redacted version showing the key provisions. You should know the borrower, principal amount, interest or return, maturity date, repayment mechanics, security, events of default, ranking, conversion rights if any, and what happens upon insolvency.

If you are acquiring a beneficial interest in property, the questions become even more specific. Who is the conveyancing lawyer? Has a title search been conducted? Who is the registered proprietor? What exactly is the nature of your beneficial interest? When will the relevant trust, conveyancing or security documents be executed? Will a caveat be lodged, and if so, when and on what basis? If somebody tells you that your interest will be “held on trust”, ask to see the trust document and understand what property is subject to the trust, who the trustee is and what rights you have as beneficiary.

And I’d end that subsection with this line:

The point is not to drown the promoter in paperwork. The point is to identify the legal bridge between your money and the thing you are told you are buying. If that bridge cannot be shown, you may not yet have an investment. You may simply have a story.

Are you participating in profits or revenues pursuant to a contract? Are you investing through a fund or other investment vehicle? Or are you simply handing money to somebody who says:

“Park the money with me. I will invest it for you.”

If it is that’s what was said to you, my immediate question would be:

On what legal basis?

Even if I am told that the investment or asset will be held on trust for me, there should be proper documentation establishing that trust relationship and identifying the relevant trust property, trustee, beneficiary and applicable rights and obligations.

Before asking how much money you are going to make, establish something considerably more fundamental:

What happens legally to my money the moment I hand it over?

And obtain the documents that answer that question.

2. Verify the people, entity and asset independently

Due diligence should not be an exercise in repeatedly asking the person making a representation whether his representation is true.

Go outside the transaction.

If you are dealing with a Singapore company, start with ACRA’s Bizfile.

ACRA’s free entity search can tell you basic information including whether an entity is live and its registered address. You can also purchase its Business Profile for information including registration particulars and position holders. ACRA itself now publishes guidance on using its business information for basic risk assessments. (https://www.bizfile.gov.sg)

If someone tells you that a particular individual owns or controls a company, don’t simply take his word for it.

Search.

If real property forms an important part of the investment proposition, use the Singapore Land Authority’s Integrated Land Information Service (INLIS). Property Ownership Information and Property Title Information are among the searches available to members of the public. (app.sla.gov.sg)

If the financial standing of the individuals or companies behind the investment matters, searches may also be available through the Ministry of Law’s insolvency services, including its corporate insolvency search. (io.mlaw.gov.sg)

Other readily accessible checks may include:

• the MinLaw Debt Repayment Scheme search;
• the MinLaw corporate insolvency search;
• ScamShield, particularly where suspicious messages, telephone numbers or links are involved; and
• the Monetary Authority of Singapore’s regulatory resources and alert lists where an investment or purported financial-services provider is involved (https://www.mas.gov.sg/investor-alert-list).

If somebody claims that a valuable licence, permit, regulatory approval, intellectual property right or other registrable right exists, identify the relevant regulator or registry and verify it at source wherever practicable.

But remember an important limitation.

A clean search is not a certificate that an investment is legitimate.

Absence from an alert list may mean nothing more than nobody has yet placed that person or entity on the list. ScamShield similarly explains that its facilities can be used to check suspicious numbers, messages and links, but these tools should form part of your verification rather than replace it.

An adverse search may tell you something important.

A clean search merely means you continue asking questions.

3. What are the conditions of my return?

Most investors understandably ask:

“How much will I make?”

I would ask a different question first:

“What’s the Catch?” or more specifically, “Under precisely what circumstances am I entitled to make it?”

Suppose someone offers you a return of 15% per annum.

What does “15%” actually mean?

Is it interest?

A guaranteed contractual payment?

A preferred distribution?

A dividend?

A share of profits?

A projected investment return?

An illustration based upon assumptions?

What conditions must be satisfied before that return becomes payable?

Who has the legal obligation to pay it?

Is payment dependent upon profits being available?

And perhaps most importantly:

What economic activity generates the money from which I am supposed to be paid?

Take out a calculator. Pull out your excel spreadsheet if you will.

If investors collectively contribute S$1 million and are promised 15 per cent per annum, S$150,000 must be found every year merely to satisfy that return.

And that is before considering operating expenses, taxes, financing costs, capital expenditure and whatever return the promoter himself expects to earn.

So reconstruct the economic machine.

What produces the cash?

Rent?

Sales?

Interest?

Fees?

Dividends from another company?

Capital appreciation?

If the underlying business cannot plausibly produce sufficient cash to support the promised return, another question inevitably follows:

Where else could the money used to pay that return come from?

This is particularly important because receiving a return is not necessarily proof that the investment has generated a return.

In the case reported by The Straits Times, one investor said that he received the promised 15% annual dividend for the first two years before payments subsequently stopped. (straitstimes.com)

That establishes something.

It establishes that he was paid.

It does not, standing alone, establish what generated the money with which he was paid.

Those are two entirely different propositions.

4. How do I get out?

People can spend an extraordinary amount of time asking how to enter an investment and remarkably little time asking how they leave it.

Ask the exit question before investing.

Can you demand repayment?

Can you redeem the investment?

Can you sell your interest to somebody else?

Can you transfer it without the promoter’s consent?

Is there a lock-up period?

Is there an early-redemption penalty?

Must certain conditions occur before you can exit?

Is there actually a secondary market for what you own?

If somebody tells you that your investment will be worth S$500,000 in five years, there are really two questions:

How was the S$500,000 valuation derived?

And:

Who will give me S$500,000 for it?

Those questions are not interchangeable. They want your money, they better demonstrate valuation workings in detail and not give excuses like “trust me”.

An asset can have an impressive valuation on paper and still be extremely illiquid.

So I would reduce the exit question to this:

When I want my money back, who is legally obliged to give it to me, under what conditions, and where will that money come from?

If the answer is unclear before you enter, it is unlikely to become more comforting when you urgently need to exit.

5. Remove all the noise. Does it gel?

Now comes my favourite part.

Strip the investment naked.

Forget the Lamborghini.

Forget the expensive watch.

Forget the prestigious office.

Forget the business-class photographs.

Forget the photographs with politicians, celebrities and prominent businessmen.

Forget the testimonials.

Forget the seminar.

Forget how eloquently the opportunity was presented.

Forget how wealthy the promoter appears to be.

Forget even whether you personally like or trust him.

None of these things necessarily proves anything adverse about the person.

They simply do not answer the investment question.

Take everything established in Steps 1 to 4 and reconstruct the transaction without adjectives:

I pay S$X → under Agreement Y → to Entity A → in exchange for Right B → relating to Asset C → which generates Revenue D → from which Return E becomes payable subject to Conditions F → and I eventually recover my capital through Exit Mechanism G.

Now look at the entire chain.

Does it gel?

Does the company that received your money actually own the asset said to generate your return?

Does the contract give you the rights you thought you were acquiring?

Does the underlying asset generate enough cash to support the promised return?

Do the representations made verbally correspond with the documents?

Does the exit mechanism actually produce liquidity?

Can the material propositions be independently verified?

This is where an investment proposition can look entirely different.

Individual claims may each sound plausible when presented separately.

It is only when you force them to coexist in one legal and economic model that contradictions become visible.

This is also why I do not think due diligence is fundamentally about deciding whether somebody is trustworthy.

A better objective is to structure your investigation so that, as far as reasonably possible, you do not need to decide whether you believe him at all.

A representation is not evidence.

A credible person is not evidence of the proposition he advances.

An impressive lifestyle is not evidence of solvency.

And a previous investment return is not necessarily evidence of profitability.

The question is whether the transaction itself survives independently of the storyteller.

6. “Pay first, then we’ll show you”

Finally, there is the question of disclosure.

There are perfectly legitimate circumstances in which commercially sensitive information cannot simply be handed to anybody who asks for it.

Sophisticated transactions commonly involve non-disclosure agreements, controlled data rooms, staged disclosure, identity verification and sometimes proof-of-funds requirements.

That is normal.

What should make an investor considerably more cautious is being required to make a substantial or non-refundable investment deposit before being permitted to understand the fundamental legal and economic terms of the investment itself.

If the proposition becomes:

“Pay first. We’ll show you the important documents afterwards.”

be prepared to walk away. There will always be another investment opportunity.

If you nevertheless decide that the opportunity is worth pursuing, then at the very least understand the refund conditions before paying anything. Is the deposit refundable? In what circumstances? Within what period? Who holds the money? Is it kept in escrow or paid directly to the promoter? What deductions, administrative charges or forfeiture clauses apply? And what happens if the documents subsequently disclosed are materially different from what was represented to you?

You should not need to acquire an investment merely to discover what you have acquired.

The cheapest due diligence report you may ever commission

None of these six steps constitutes professional due diligence.

Passing all six does not mean an investment is safe.

It does not establish that the valuation is correct, that the financial statements are reliable, that the contracts are enforceable, that the tax treatment is appropriate, that the underlying technology works, or that the investment is commercially sensible.

And it certainly does not mean that you should proceed.

Think of this framework instead as a checkpoint before due diligence.

You are not yet trying to establish that the investment is good.

You are asking whether there is a sufficiently coherent investment to investigate at all.

If it survives these questions, excellent.

That may finally be the time to engage the lawyers, accountants, valuers and other appropriate specialists, open the data room and start spending real money on professional due diligence (I’m just a phone call away, just sayin’).

If it cannot survive them, you may have just completed the most profitable due diligence exercise of all:

the report you never had to commission.

Which brings me back to Sima Qian.

「良贾深藏若虚。」

The lesson is not that wealthy people should look poor.

Nor is it that somebody who drives a Lamborghini should be regarded with suspicion. A Lamborghini may be owned outright, financed, leased, borrowed or rented. None of those possibilities tells us whether the investment opportunity standing beside it is good or bad.

The deeper lesson is to distinguish appearance from substance.

A Lamborghini is evidence that there is a Lamborghini.

Everything else requires investigation.

And perhaps, after more than two thousand years, the philosophy of the 良贾 remains remarkably good investment advice:

Remove the spectacle. Understand the rights. Follow the money. Verify the facts. Then decide whether the opportunity is even worth investigating.