I had the 12HP version of this engine in my boat and I have worked on them a lot. The nice thing is that they are very easy engines to work on yourself.
I would suggest that your problem is related to compression.
I would start by torqueing ALL the bolts to their specification.
It may just be a loose bolt.
These engines vibrate a great deal and this tends to loosen the bolts more quickly than other engines.
Secondly I would adjust the valve clearance to specifications.
Following that I would change the head gasket.
After that you start to get more involved (rings) and the cylinder liner come to mind.
The engine is raw water cooled so it never gets very hot so it will soot more than most. If you have an after market fresh water cooling system installed this may be the problem in and of itself as the engine was designed for raw water and likes to run cold. This is an engine that you should be able to run at full throttle and comfortabley rest your hand on. It shouldn't get hot. If it is then the cooling passages may be blocked up.
In this engine design the cylinder liner then expands and you can get a loss of compression around the rings.