Financial Due Diligence - Part 1
How to conduct Due Diligence on Investment
If I charge a fee for the number of times, someone has asked me how to conduct due diligence on an investment, I would have been a billionaire. It is a commonly used word in the investment palace, yet it is not as easy as it sounds. Have you heard people say,” this is not investment advice, please conduct your due diligence”. Even folks that do not understand what it means, say it after dropping one generic money advice. Lol.
As a financial consultant, I have learned and still learning not to assume everyone understand the basics of (personal) finance. I have seen smart career folks fall for ridiculous money scams. It’s unbelievable but it is true. I used to work in the banking sector, so it was a surprise when I saw financial literates fall for Ponzi schemes. This article will not only speak to how to identify Ponzi schemes, but it will also give you clarity on financial due diligence.
I like to think of financial due diligence in four ways. We will deal with these over the 4 series.
1. Registration:
Every investment company that must operate in Nigeria must first register with the Company Affairs Commission (CAC) as either a limited liability or public liability company. Click this link to check for the names of registered companies in Nigeria publicsearch.cac.gov.ng. This is the first step. The next step is to verify if they are registered with Security and Exchange Commission (SEC). Every investment company in Nigeria must register with SEC. If they are into the safekeeping of funds, they need a license from the Central Bank of Nigeria (CBN) to operate. Not every company licensed by the CBN is allowed to operate as an investment firm. They are still expected to get the SEC license. Please take note, there are levels to the CBN license. It’s in your best interest to ask, check and verify this information.
Record verification is the first step in due diligence. If the investment company is not registered, there is no guarantee that the business and business owner is legitimate. It is unwise to trade with such companies. Please also check the companies are authorized to operate in their area of jurisdiction. You can’t have Cayman Island registration and be operating in Nigeria without proper approval from Ministry of Trade and Investment and CAC.
A good investment must know their ultra-vires, that is, the limit or scope of their registration. A fully licensed bank in Nigeria cannot issue a share certificate. An investment firm cannot hold your money for safekeeping. One sure way to know a true financial and investment company is for them to tell you the scope of their registration.
One gimmick I have noticed is the continuous use of “we are awaiting approval from CBN/SEC” by unregistered firms. As at today, you are not expected to start a financial/investment firm without a written nod from the regulatory bodies. There must have been some sort of written communication between the parties. Always ask for proof! If they want your money, they should at least show proof that there is a written dialogue. Click this link to know the name of the licensed capital market operators in Nigeria and their functions The Securities and Exchange Commission, Nigeria.
If you care about your money, you will care about the news. You can’t claim ignorance. Always stay in touch. A proper financial/investment firm will conduct a seminar at least once in a quarter to update its members. It’s your time to pay attention and ask questions.
Cheers to a profitable lifestyle,
TL.