As outlined in our Newsletter in July 2021 (hereinafter, the 2021 Newsletter), the Financial Services Agency of Japan introduced new business structures to attract foreign investment management businesses, where they may enjoy exemption from registration as financial instruments business operators. The new exemption structures came into force on 22 November 2021. In a new issue of our Newsletter, which serves to update the 2021 Newsletter, we provide an overview and describe the key requirements of these exemptions.

Background

The Financial Services Agency of Japan (JFSA) has been eager to remove regulatory bottlenecks and enhance the attractiveness of financial and capital markets in Japan, by making it easier for foreign asset management business providers and professionals to enter the market. In order to make the Japanese market an international financial hub, the JFSA introduced new exempted business structures to attract foreign investment management businesses. The new structures came into force on 22 November 2022, by amendment to the Financial Instrument and Exchange Act (FIEA), the Order for Enforcement of the Financial Instruments and Exchange Act (hereinafter, the Enforcement Order), the Cabinet Office Order on Financial Instruments Business (hereinafter, the FIB Cabinet Office Order) and the Comprehensive Guidelines for Supervision of Financial Instruments Business Operators, etc.

Registration requirements under the FIEA for self-offering of interests in and management of partnership-type funds

Under the FIEA, the self-offering of interests in collective investment schemes, including interests in partnership-type funds, falls under the category of a type II financial instruments business. Similarly, fund management of assets by investing over 50% of the cash contributed by the investors in securities or rights in derivatives transactions falls under the category of an investment management business.

In order to attempt self-offering or fund management of the interests in a collective investment scheme, it is necessary for a business to register as a financial instruments business (a type II financial instruments business and/or an investment management business) or entrust the handling of private placement and fund management authority to registered financial instruments business operators.

As an exception under the FIEA, private placement and fund management of funds for professionals may be carried out without registration as a financial instruments business by submitting prior notification as a ‘Special Business Notifier’ to the competent authority (Article 63 of the FIEA, ‘Specially Permitted Businesses for Qualified Institutional Investors’).

In order to enjoy the exemption as a Specially Permitted Business for Qualified Institutional Investors, domestic investors in the fund must include at least one Qualified Institutional Investor[1] (QII), and the other domestic investors are limited to 49 or fewer investors who fall under the category of ‘Eligible Investors’[2]. A prior notification to the JFSA or to the competent Local Finance Bureau must be made with the other requirements under the FIEA (including, but not limited to, the non-existence of disqualified investors) being met.

Businesses are also exempt from the need to register as an investment management business in the following cases:

When a partnership-type fund is managed by a foreign investment management company and accepts investments in Japan only from investment management business operators and trust banks (Article 61(3) of the FIEA); and

When a partnership-type fund is a foreign-based fund and its Japanese investors are fewer than ten QIIs or Special Business Notifiers of Specially Permitted Businesses for Qualified Institutional Investors, and the amount of investment by Japanese investors does not exceed one-third of the total amount invested in the fund (Article 16(1)(xiii) of the Cabinet Office Order on Definitions under Article 2 of the Financial Instruments and Exchange Act).

To read the full newsletter, please download the PDF file from the following link.

https://www.pwc.com/jp/en/knowledge/news/legal-news/legal-20220224-1.html