Newsletter No. 005 | March 12th, 2024

Report of Working Group on CapitalMarket Regulations and AssetManagement Task Force of theFinancial System Council-“Issues surrounding venture capital” and"Establishment of systems for publicofferings, private placement, andinvestment crowdfunding"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, promoting initiatives forachieving a leading asset management center.
This newsletter discusses the section of the Report on “Challenges Surrounding Venture
Capital (VC) funds” and “Establishment of Systems for Public Offerings, Private Placements,
and Investment Crowdfunding”.
1． Issues Surrounding Venture Capital (VC) funds(1) Promotion of Fair Value Measurement
The fair value measurement of VC funds achieved certain progress in 2023, in May,
with the Japanese Institute of Certified Public Accountants revising related practicalguidelines and organizing audit considerations concerning the audit of VC funds.
On the other hand, issues such as the following have been pointed out: Holders of equity interests in VC funds are required to evaluate at acquisition cost,
necessitating dual management of fair value and acquisition cost.
 For GPs (General Partners, fund management operators), securing personnel for
middle and back office operations, establishing and operating internal controls,
and system implementation are necessary, thus requiring a certain fund size.
 It is necessary to permeate the above practical guidelines into the practices ofauditing firms.
 In the future, should the introduction of fair value evaluation increase and audit
demand rise, the reallocation of resources within auditing firms or the need for
new auditors for fund audits will be necessary.

1The introduction of fair value evaluation, which includes benefits such as expanding
fund sizes through obtaining funds from overseas investors and enhancing thetransparency of securities valuation, should be promptly continued with thenecessary environmental preparations. Simultaneously, it is necessary to cooperatewith relevant parties to address these issues. Specifically, regarding the issue of dualmanagement, the Japan Venture Capital Association proposed, in July of 2023, to theCorporate Accounting Standards Advisory Council of the Financial AccountingStandards Foundation, to reconsider the accounting treatment of equity interests in
VC funds held by listed companies and others, and it is essential to closely monitor
the trends in these discussions. Furthermore, from the perspective of reducing thecost burden towards the introduction of fair value evaluation, it would be useful that
VC funds share points to note to introduce fair value evaluation with other companies
in the same industry. Moreover, it is expected that activities to permeate the above
practical guidelines into the practices of auditing firms will be advanced by theJapanese Institute of Certified Public Accountants.
(2) Principles for VC funds
To facilitate the supply of funds to startup companies, it is crucial to expand the flowof funds from domestic and foreign institutional investors to domestic startup
companies through VCs. In addition to promoting the fair value evaluation of VC funds,
it has been pointed out that it is necessary for domestic VCs to ensure governance andinformation equivalent to that of foreign VCs in their operations. This include conflictof interest management by GPs, and the information provided by GPs to LPs (LimitedPartners, investors in the fund). . Also, it has been pointed out that VC investments'
exits are biased towards startups' Initial Public Offerings (IPOs), becoming a factor
for so-called small-lot listings, and the discontinuation of VC management support
after IPOs, leading to a break in the support for sustainable growth of startups.
For VCs aiming to acquire LP investments from a broad range of institutionalinvestors, it is important to ensure proper governance and discipline whilereferencing practices abroad. To enhance the appeal of VCs as an asset classconducive to long-term operations, support the development of the VC industry, andultimately stimulate the supply of funds to startups, it is appropriate to formulate2Venture Capital Principles (tentative name) based on the situation surrounding
startups in our country and global practices, aiming to improve the level ofgovernance among VCs soliciting LP investments from a wide range of institutionalinvestors. It is considered appropriate to discuss the scope and content of theseprinciples, keeping in mind that there are VCs, such as Corporate Venture Capital(CVC), that do not plan to raise LP investments from numerous investors.
Moreover, it is hoped that efforts to create opportunities for matching between
domestic VCs and foreign institutional investors, to encourage investment indomestic VCs by foreign institutional investors, will spread.
2． Establishment of Systems for Public Offerings, Private Placements, andInvestment Crowdfunding(1) Simplification of the Matters on Disclosure of Small Amount Public Offerings
For public offerings of securities to more than 50 general investors with afundraising amount of 100 million to less than 500 million yen (small amountpublic offerings), although a securities registration statement must besubmitted, there is no need to include consolidated information, and the content
to be described is simplified.
Given the recent emphasis on the disclosure of non-financial information,
particularly among listed companies, it is considered that, currently, there arematters in the securities registration statements related to small amount public
offerings that pose a significant disclosure burden for startup companies.
Therefore, from the perspective of reducing and rationalizing the disclosureburden related to fundraising by startup companies, it is appropriate to further
simplify the disclosure content in these statements.
Specifically, considering the actual needs for small amount public offerings andaiming to balance investor protection with the information provision toinvestors and the corporate burden, the following revisions should beconsidered:3 Making the disclosure of 'Sustainability Information' optional Eliminating the requirement to disclose financial statements for the last fivefiscal years and only requiring those for the most recent two fiscal years
 For the non-financial information part, making items such as 'Overview ofCorporate Governance' equivalent to the content described in the business
reports under the Companies Act(2) Activation of Investment-type CrowdfundingA) Issuance Limits, etc., for Investment-type Crowdfunding
Crowdfunding (CF) is a mechanism that allows startup companies to raise small
amounts of funds from many people via the internet. The investment-type CF
system (regulatory framework for small electronic solicitation business) wasintroduced in 2015.
In Japan, the total amount of securities that a company can issue via investmenttype CF is capped at less than 100 million yen per year. In contrast, othercountries allow for higher amounts of fundraising, with necessary investor
protection measures such as disclosure in place, with the United States setting
the limit at 5 million dollars (approximately 750 million yen) and Europe at 5million euros (approximately 800 million yen).
Given that the demand for fundraising by startup companies in Japan isincreasing yearly, with many companies needing to raise funds of 100 million toless than 500 million yen, particularly at the current stage, it is appropriate toraise the issuance amount limit to less than 500 million yen, assuming necessary
disclosures are made by companies raising more than 100 million yen. In thiscase, companies raising funds between 100 million and less than 500 million yen
could use a simplified securities registration statement form (furthersimplification of the content of such statements, as mentioned above, would
encourage its use). Such system improvements are expected to enhance thefundraising environment for startup companies. However, to ensure proper4

administration, the role of CF service providers, who conduct intermediaryservices, becomes more critical. From this perspective, it is essential that CF
service providers disclose items related to the review of issuers and businessplans, and conduct proper reviews in accordance with those items. Additionally,
while investor protection is taken into account, further simplification beyond
the content described in '2.(1) Simplification of the Matter on Disclosure of Small
Amount Public Offerings' should also be considered.
Furthermore, the issuance amount limit is set from the perspective of investor
protection, assuming solicitations include general investors. When conducting
specific investor private placements as a small amount electronic public offeringservice, it is considered unnecessary to set an issuance amount limit of less than
500 million yen, including solicitations to general investors. However, even in
private placements, given the high risk associated with unlisted stocks, it isappropriate to set a certain limit on the range that can be handled as a small
amount electronic public offering service.
B) Investment Limits for Investors in Investment-type Crowdfunding and Methodsof Solicitation to Investors
In our country, the annual investment limit for investors (excluding specificinvestors) in investment-type CF is set at 500,000 yen per investment target.
However, the system that sets a uniform limit for all investors is considered tohave room for improvement from the perspective of investing according to therisk tolerance and investment capacity of each investor. In this regard, in othercountries, the annual investment limit for investors in equity investment-type
CF is set according to their annual income or net assets.
Regarding the method of solicitation, to prevent investors from suffering
unforeseen losses without fully understanding the risks associated with startup
companies, the current system is limited to displaying information on websites
and sending emails in conjunction with such displays. There has been criticism
that, even when investors want to know more details about an investment5

opportunity, the inability of CF operators to provide oral explanations due tothis restriction should be improved from the perspective of investor protection.
Setting a limit based on the risk tolerance and investment capacity of investors
is considered beneficial for both protecting investors and improving
convenience. Therefore, it is appropriate in our country as well, while referring
to examples from other countries, for CF operators to understand the annual
income and net assets of their clients and set the investment limits for CF
according to the investors' annual income and net assets. Considering theadministrative burden of timely understanding the annual income and net
assets of all investors, it is conceivable to allow investments without verifying
annual income or net assets if the amount is within a certain small range.
Furthermore, regarding the method of solicitation, while it is considered that
face-to-face solicitation should continue to be handled cautiously due to thetypically high risk of exerting undue pressure on investors, providing carefuloral explanations in response to investor requests can lead to more appropriate
investment decisions. Therefore, it is deemed appropriate to allow productexplanations via voice calls only upon request from investors. In such cases, CF
operators should take measures that allow for post-verification of customer
interaction appropriateness, such as recording the voice call exchanges.
Additionally, the information that can be provided during voice call
explanations should be based on content available on websites or in emails, toensure that no information disparity occurs among investors.
-----------------------------------------------------------------------------------------------------------------THIS NEWSLETTER IS PROVIDED FOR INFORMATION PURPOSES ONLY; IT DOES NOTCONSTITUTE AND SHOULD NOT BE RELIED UPON AS LEGAL ADVICE.
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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

Ryuhei OmoriAtsumi & Sakai

Atsumi & Sakai

Policy Research Institute

Policy Research InstitutePrincipal ResearcherResearcher

E: tatsuhiro.hirayama@aplaw.jp

E: ryuhei.omori@aplaw.jp

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