Newsletter No. 006 | April 5th, 2024

Report of Working Group on CapitalMarket Regulations and AssetManagement Task Force of theFinancial System Council-“Promotion of Utilization Investment
Corporations and Framework for Incorporating
Unlisted Equities in Investment Trusts” and"Activation of Trading in Unlisted Securities"
Atsumi & Sakai
Policy Research InstituteThe Financial Services Agency of Japan recently published a “Report of the Working Groupon Capital Market Regulations and Asset Management Task Force of the Financial SystemCouncil" (the “Report”), which describes a strategy for improving the capabilities of asset
management companies who are playing important roles in managing financial assets andmaking returns for households. The strategies include promoting a virtuous cycle ofgrowth and asset-based income in the investment chain through enhancing fund-raisingfor startups and feeding those returns back to households and promoting initiatives forachieving a leading asset management center.
This newsletter discusses the sections of the Report on “Promotion of Utilization
Investment Corporations and Framework for Incorporating Unlisted Equities inInvestment Trusts” and “Activation of Trading in Unlisted Securities”.
1． Promotion of Utilization Investment Corporations and Framework for Incorporating
Unlisted Equities in Investment Trusts(1) Incorporation of Unlisted Equities in Investment Trusts
In Japan, there is no legal prohibition against including unlisted equities ininvestment trusts; however, due to the lack of clarity regarding the evaluation
methods for unlisted equities, in practice they have not been included. Currently, theInvestment Trusts Association is considering an appropriate framework to enable
the inclusion of unlisted equities in investment trusts in practice.
There is an aspect where the clarity of product characteristics and risks becomes lessapparent for investors when listed equities with high price transparency and unlisted
equities are mixed within the same publicly offered investment trust. Each asset managementcompany should consider appropriate scheme selection based on their investment policy,content, etc. Also, in addition to the existing framework and practices of publicly offeredinvestment trusts, it is desirable to design product types such as those primarily investing in
illiquid assets, with measures taken for the assurance of liquidity, such as redemption
restrictions, etc. When such investment trusts are marketed, from the perspective of investor
protection, it is necessary to appropriately assess the suitability of investors based on thenature of their funds to be invested and their risk tolerance, and also to provide sufficient
explanations to investors regarding the risks associated with investing in unlisted equities.

1(2) Listed Venture Funds
The Venture Fund Market of the Tokyo Stock Exchange was established in December 2001
with the aim of creating a new funding scheme for startup companies and providing
individual investors with opportunities to invest in unlisted companies. Currently, there areno listed equities on the market, but it is anticipated that risk-tolerant investors will be able
to invest in startup companies through Venture Funds, leveraging the expertise of investment
professionals and the functionality of diversified investments, similar to 1.(1). Therefore, it
is important to consider reviewing necessary regulations and so forth from the perspectiveof enabling flexible operation of Venture Funds to activate the utilization of the Venture FundMarket.
Regarding the disclosure of information for listed venture funds, disclosure requirements are
established not only through statutory disclosures such as financial statements but also
through the Tokyo Stock Exchange's listing rules. Given the different nature of unlistedcompanies compared to listed ones, it is important for the Tokyo Stock Exchange to consider
the content and frequency of information disclosure.
Furthermore, in listed venture funds, acquiring self-investment units may be considered as
an option for surplus funds from stock sales or for diversifying financial strategies,
particularly when reinvestment is challenging. Therefore, considering the acquisition of selfinvestment units under the applicable insider trading restrictions could enable suchacquisitions.

2． Activation of Trading in Unlisted Securities(1) Relaxation of Entry Requirements for Financial Instruments Business Operators’
Intermediary Functions of Unlisted Securities Transactions Targeting Professional
Investors
Regarding the cashing out of shares of unlisted companies such as startup companies, thecurrent practice predominantly involves bilateral purchases by issuing companies orsecondary funds, making it challenging to broadly approach potential investors who could
become buyers and adequately address the cashing-out needs of shareholders and theinvestment needs of investors. Moreover, given the limited alternatives to fulfill suchcashing-out needs other than through listings, there are observations that domestic startup
companies tend to go public at smaller scales compared to those in other countries. The
revitalization of secondary trading in unlisted equities is not only conducive to facilitating2

fundraising by startup companies (primary transactions) but also essential for diversifying
exit strategies for startup companies, including M&A (mergers and acquisitions), andensuring continuous funding at appropriate scales according to their growth stages.
Therefore, it is believed that institutional arrangements related to secondary trading ofunlisted equities should be further developed.
Furthermore, when selling foreign investment securities issued by foreign investment trusts
or foreign investment corporations established and managed by overseas asset managementcompanies to domestic investors, it is necessary to establish a domestic corporation andobtain registration as a Type I Financial Instruments Business Operator in Japan.
Registration as a Type I Financial Instruments Business Operator imposes high financial
requirements and other hurdles, leading to cases where sales are ultimately abandoned. To
address the diversification of investment targets for domestic investors, it is necessary toaddress these challenges.
Therefore, to encourage new entrants into the intermediary business for trading unlisted
securities, it is appropriate to relax the registration requirements for Type I Financial
Instruments Business Operators specialized in intermediating primary and secondarytransactions of unlisted securities, particularly when they do not handle securities or moneydeposits, such as by relaxing capital requirements, self-capital adequacy ratio regulations,and regulations on concurrent employment. However, for highly liquid securities wheregeneral investors may participate, adequate investor protection measures are necessary.
Therefore, it should generally be limited to intermediating unlisted securities transactions
targeting professional investors (specific investors). Additionally, when holders of unlisted
securities conduct sales as secondary transactions, as it effectively separates the riskassociated with holding unlisted securities from holders, it may be appropriate to allow sales
by general investors, such as founders of the issuing company, for example.

(2) Relaxation of Entry Requirements for PTS Operations Handling Only Unlisted
Securities
Currently, regulations for Private Trading System (PTS) operations operated by Type I
Financial Instruments Business Operators are primarily geared towards handling listed
securities, regardless of the liquidity of the securities involved. Under the approval system,
these regulations require substantial capital (over 300 million yen) and impose net asset(over 300 million yen) and system requirements (including attachment of third-party
evaluation reports). These regulations pose high hurdles for operators intending to3

electronically intermediate secondary transactions of unlisted securities on small-scaletrading platforms. Additionally, due to the absence of such operators providing trading
venues, it is suggested that these regulations contribute to the lack of activity in secondary
trading of unlisted securities.
To promote the entry into the PTS operation market by operators providing venues forsecondary trading of unlisted securities, it is appropriate to establish entry requirements for
PTS operations based on expected trading volumes. Specifically, for PTS operations
exclusively handling unlisted securities with limited liquidity and trading volumes, it is
proposed to allow entry under the registration system of Type I Financial Instruments
Business Operators without requiring approval, under the assumption of applying necessary
regulations regarding transaction management. This includes relaxing requirements related
to capital, net asset, and system, among others.

-----------------------------------------------------------------------------------------------------------------THIS NEWSLETTER IS PROVIDED FOR INFORMATION PURPOSES ONLY; IT DOES NOTCONSTITUTE AND SHOULD NOT BE RELIED UPON AS LEGAL ADVICE.
------------------------------------------------------------------------------------------------------------------Authors/Contacts
Takafumi Ochiai

Kenichi Tanizaki

Atsumi & Sakai

Atsumi & Sakai

Head of Policy Research Institute

Deputy Head of Policy Research InstituteE: takafumi.ochiai@aplaw.jp

E: kenichi.tanizaki@aplaw.jp

Tatsuhiro Hirayama

Kyosuke Nishiyama

Atsumi & Sakai

Atsumi & Sakai

Policy Research Institute

Policy Research InstitutePrincipal ResearcherResearcher

E: tatsuhiro.hirayama@aplaw.jp

E: kyosuke.nishiyama@aplaw.jp

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