Introduction: Building Trust Before Investment Negotiations

Before formally initiating investment negotiations, potential investors (especially unfamiliar parties from overseas) often need to undergo a round of due diligence. This process is not only about the safety of funds, but also involves commercial secrets, compliance risks, and the foundation for long-term cooperation. However, a core question always exists:For an overseas investor with whom no cooperative relationship has yet been established, what level of due diligence requirements should we propose to be considered fair and reasonable?

This article aims to sort out the key dimensions of this issue and further explore: when the target company is in a regulated industry, should the threshold and depth of due diligence be correspondingly raised?

I. Basic Due Diligence: The Starting Point of Fairness and Reasonableness

From the principle of fairness, due diligence requirements for unfamiliar investors should match their investment scale, industry attributes, and potential impact. Generally speaking, a reasonable scope of due diligence should at least include the following aspects:

  • Identity and Background Verification: Including place of registration, actual controllers, management resumes, and past investment records.
  • Legality of Fund Sources: Requiring proof of fund sources to ensure the capital path is clear and free from suspicion of money laundering.
  • Investment Intent and Exit Plan: Clarifying its investment purpose, shareholding period, and possible exit mechanisms to assess strategic fit.
  • Legal and Compliance Records: Checking whether there are records of litigation, arbitration, administrative penalties, or regulatory investigations.

The above requirements are not excessively harsh, but are basic due diligence elements in international business practice. If an investor refuses to provide basic documents or information, one should be wary of their true intentions or potential risks.

II. Additional Considerations for Regulated Industries

When the target company is in a regulated industry (such as finance, healthcare, energy, telecommunications, etc.), the situation becomes more complex. Regulatory authorities usually have clear requirements for shareholder qualifications, equity structure, and actual controllers. Therefore,raising due diligence standards is not only commercial prudence, but also a compliance obligation。

Specifically, in regulated industries, it is recommended to add the following review levels on top of basic due diligence:

  1. Regulatory Licensing and Filing Requirements: Verifying whether the investor needs to obtain prior approval or filing from regulatory authorities, and assessing their historical compliance performance.
  2. Cross-border Capital Flow Review: For overseas investors, special attention should be paid to specific regulations on foreign exchange management, anti-money laundering, and counter-terrorism financing.
  3. Industry-Specific Restrictions: Certain industries have hard restrictions on foreign shareholding ratios, board composition, or technology transfer, which need to be checked item by item against applicable regulations.
  4. Reputation and Related-Party Risk: Investigating whether the investor and its related parties are involved in sensitive industries, sanction lists, or negative public opinion, to prevent indirect compliance risks.

It should be emphasized that raising due diligence standards does not mean setting unreasonable obstacles. Fairness is reflected in:the information required from investors should be proportional to the level of industry risk, and they should be given a reasonable response time and opportunity for explanation。

III. Balancing Strategies in Practice

In actual operation, companies can adopt a phased due diligence strategy: initially only requiring public information and basic declarations, and then, after both parties enter the substantive negotiation stage, requiring more sensitive documents (such as bank statements, audit reports, etc.). This gradual approach can both reduce the other party's resistance and gradually verify their credibility.

In addition, it is recommended to sign aNon-Disclosure Agreement (NDA)before formal due diligence to protect the commercial information of both parties. For overseas investors, consideration should also be given to the choice of applicable law and dispute resolution mechanisms to avoid subsequent disputes due to differences in judicial jurisdiction.

Conclusion

In summary, due diligence requirements for unfamiliar overseas investors should follow the principle of "risk matching, transparent procedures, and reciprocal communication. In regulated industries, raising the level of due diligence is a necessary compliance defense line, but excessive defensiveness that misses quality cooperation opportunities should be avoided. Ultimately, the standard of fairness and reasonableness should be dynamically adjusted based on specific circumstances, rather than a one-size-fits-all approach.

For corporate decision-makers, the key is not "how much to require," but "how to require" - by establishing a foundation of mutual trust in a clear, professional, and respectful manner, paving the way for subsequent negotiations.