July 14, 2023
DAO Token Sales under Japanese Laws
So Saito
So & Sato Law Office
Attorney-at-Law
1 What is DAO?
A DAO is a decentralized autonomous organization that drives a business or project
forward using smart contracts without a specific owner or manager.
Overseas clients sometimes ask our firm whether they can sell DAO tokens in Japan.
2 Summary of regulation on sales of DAO tokens to Japanese residents(1)

You need to consider Japanese regulations when you sell DAO tokens to Japanese

residents, even if you reside outside Japan.
(2)

Regulations on DAO tokens differ depending on whether they are investment

DAO tokens or community DAO tokens.
(3)

Investment DAO tokens are generally considered “security.”

Their sale isusually regulated by the Financial Instrument and Exchange Act (FIEA). The seller mustobtain FIEA registration or delegate the sale’s activities to a licensed FIEA company.
Some exemptions exist, but they are not easy to use.
(4)

Sales of community DAO tokens are either (i) unregulated, (ii) regulated by theCrypto Asset Exchange Business Law, or (iii) regulated by the FIEA, depending on thenature of the tokens.
Below is a chart you need to consider before selling DAO tokens to Japanese residents.
<Chart to be considered>Is there principal redemption of more than 100% ora dividend payment?

Security. Regulated by FIEA
Yes

NoIs the form of DAO a company, and does the token
represents a company membership?

Security. Regulated by FIEA
Yes

No1

Can DAO Tokens be used as a means of payment,or are more than 1 million DAO Tokens issued?

Crypto Asset.
Yes

Regulated by

Crypto Asset Exchange Act

Are DAO tokens issued less than \1,000 (=$70)
Noper Token
NFT. Not subject to financial regulation
3 Community DAOs and financial regulation
Community DAOs often issue governance tokens.
To consider the financial regulation of sales of DAO tokens in Japan, we must look at (a)whether the DAO provides some kind of dividend or more than 100% redemption of theprincipal (“Dividend, Etc.”), (b) whether the DAO has any legal entity nature that is similar
to a joint stock company or LLC and whether the tokens represent nature similar toshareholders rights, and (c) whether DAO tokens can be used as a payment method.
3.1 DAO tokens that distribute Dividend, Etc.
Tokens in most community DAO do not have any dividend feature or profit distribution
feature for token holders.

If there are such features, the regulation on investment DAO

tokens will be applied. Please see item 4 below.
3.2 DAO tokens issued by a company
If a DAO is structured in the form of a company, which happens rarely, and the DAO token
awards member rights of the company to token holders, the right might be deemed assecurities. Type 1 Financial Instruments Business Registration is required for the sale ofthose tokens.
3.3 DAO tokens issued by non-company
In general, many DAOs are formed without clarification of the legal form. Some DAOs
just use a smart contract and do not have any form of legal entity. Under Japanese law, such
DAOs may be classified as partnerships or “associations without a juridical person.” Therights of partnerships and associations without juridical persons do not fall under securities
unless there are Dividend, Etc.
The sale of DAO tokens without Dividend, Etc. and so on issued by an organization otherthan a company should be classified as a crypto asset or NFT.
If the tokens fall under the definition of crypto asset, their sale shall be made by a licensed2

crypto asset exchange business operator.
However, if the DAO token is considered an NFT, there are no restrictions on its sale.
The distinction between a crypto asset (FT) and an NFT
In 2023, the Financial Services Agency (FSA) issued guidelines stating the distinction
between a crypto asset (FT) and an NFT:(https://www.fsa.go.jp/news/r4/sonota/202212162/20221216-2.html).
The guideline states that if the asset does not have “means of payment” characteristics, it is
not a crypto asset and that having “means of payment” characteristics can be determined by
the following criteria: In general, if (a) DAO tokens cannot be used as a payment method, and(b-1) the price of the token is more than JPY 1,000 or (b-2) the issued number of tokens isless than 1M, the tokens are considered NFTs, and their sale is not regulated.
FSA’s revised guidelinesa)

The issuer must make it clear that the tokens are not intended to be used to pay forgoods or services to an unspecified person. For, example the terms and conditions
provided by the issuer or business operator handling the product clearly prohibit theuse of the product as a payment method, or the system is designed to prevent theuse of the product as a payment method.

b)

Taking into consideration the price and quantity of the relevant property value,technical characteristics and specifications, and other factors as a whole, the tokens
that can be used to reimburse an unspecified person for the price of the goods andso on must be limited. For example, the tokens must have one of the following
characteristics:⚫

The price per minimum transaction unit must be high enough not to be used as
an ordinary means of settlement (JPY 1,000 or more).

⚫

The issued number of tokens divided by the minimum trading unit (issued volume
considered after divisibility) must be limited (1 million or less).

4 Investment DAOs and Financial Regulation
4.1 Investment DAO tokens are generally considered securities and regulated by FIEA
Under the FIEA, DAO tokens that pay Dividend, Etc. generally fall under the category of“ electronically recorded transfer rights. ”

Thus, in order to sell electronically recordedtransfer rights, you must either register as a Type 1 Financial Instruments Exchange Business
Operator (Type 1 FIEBO) and conduct the sales yourself or have a Type 1 FIEBO do it for3

you. Furthermore, when soliciting 50 or more persons and issuing 100 million yen or more,
the solicitation of the tokens becomes a public offering (Article 2, Paragraph 3 of the FIEA),
which requires the submission of complex offering documents and continuous disclosure.
4.2 Exemption from FIEA might apply to some tokens, but it is not easy to use
As an exception, if sales are made only to qualified institutional investors (QIIs, professionalinvestors) or wealthy individuals (with financial assets of JPY 100 million or more) who are
49 or younger, and if technical restrictions are in place to prevent other individuals frombecoming DAO token holders through resale, then the sale falls under the exception category
called “special business for qualified institutions, etc.,” and self-offering only requires a simple
notification under Article 63 of FIEA.
We have heard that many investment DAOs in the US are issued to QIIs, and many
investment DAOs limit their sales to avoid US security regulations. The problem in Japanis that the definition of “professional investors” is much narrower than in the US. In Japan,
one criterion for becoming QII is that corporations and individuals must have at least JPY 1billion in securities. In the US, a person who has more than USD200,000 annual income canbecome a QII, and in the EU, a person who has more than EUR500,000 in financial assets (inaddition to satisfying other requirements) can be a QII. These requirements are much easier
to satisfy than the requirements in Japan.
Japan also has a narrower exception to submit offering documents.

In Japan, offering

documents are required for offerings exceeding JPY 100 million. In contrast, exemptions
apply for offerings less than USD6 million in the US (sales by Reg A Tier 1) and less thanEUR5 million in some countries in the EU.
In light of the above, the issuance of investment DAOs is not popular in Japan but is still
possible if you obey Japanese regulations.
EOD4