August 13, 2019
So Saito
Joerg Schmidt

SECURITY TOKEN OFFERINGS – THE MOST PRESSING QUESTIONS AND ANSWERS

1.

What is a Security Token Offering (STO)?
There is no legal definition of STOs in Japan. STOs are however commonly understood as theissuance of digital tokens that constitute securities under the applicable laws in order to raise
capital.
It should be noted, that the definition of securities varies from jurisdiction to jurisdiction.
For the purposes of this article security tokens are defined as digital tokens that have profit
rights attached or which can be redeemed for more than 100 percent of the principal amountin money, virtual currencies or other assets.

2.

What is the current market situation in Japan?
There have not been any public offerings of security tokens in Japan yet. There are cases
however, in which companies sold security tokens to qualified institutional investors (QII) in aprivate placement. We expect increased activities once the amended Payment Services Act(PSA) and Financial Instruments and Exchange Act (FIEA) enter into force.
What is the current legal situation in Japan?
Under the current framework STOs fall within the scope of the PSA and FIEA at the same time.
As a result, persons involved in an STO must comply with both the PSA and FIEA.

PSA

Security Tokens

3.

FIEA

Graphic 1: Illustration of the current legal framework for STOs.
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3.1. Virtual Currency under the Payment Services Act
The Financial Services Agency (FSA) interprets the term virtual currency broadly. Tokens issued
in an ICO are generally covered.
STOs are considered a type of ICOs. Tokens issued in a STO therefore fall under the PSA as well.
3.1.1. Registration as Virtual Currency Exchange Service Provider
The issuer of tokens must either register as Virtual Currency Exchange Service Provider or sell
his tokens through one of the registered exchanges.
Registration is cumbersome and expensive. In the current environment, it is not realistic fortoken issuers to register as a Virtual Currency Exchange Service Provider.
At the moment it is also not possible to sell tokens through one of the registered exchanges.
With the Japan Virtual Currency Exchange Association (JVCEA) publishing draft guidelines onICOs, this is likely to change in the near future. Provided the guidelines are approved, token
issuers will soon be able to sell their tokens via one of the registered exchanges.
Security tokens as defined in this article are explicitly excluded from the JVCEA guidelines.
3.1.2. Notification
Under the existing framework registered exchanges must notify the FSA about the listing ofnew tokens. The notification has become a de facto approval by the FSA in practice. No tokens
have been listed on registered exchanges since late 2017.
3.2. Securities under the Financial Instruments Exchange Act
Tokens without profit participation rights attached are generally not covered by the FIEA.
Security tokens as defined under item 1 above may however be classified as securities underthe FIEA.
Security tokens which do not represent traditional securities such as shares or bonds may fallunder the definition of collective investment schemes (CIS). To be classified as CIS all of thefollowing requirements must be fulfilled:(a) collection of money or money equivalent from others(b) investment of the money in a business(c) distribution of dividends to investors
Cases where tokens are issued in exchange for bitcoin or other cryptocurrencies instead of fiat
currencies are not covered at present.
4.

When will the new regulations enter into force?
In March this year, the Cabinet submitted a bill revising the PSA and FIEA to the Diet. The Dietapproved the bill on 31 May 2019. With the amendments entering into force early next year,
Page 2 of 6the term “virtual currency” will be replaced by the term “crypto assets” and regulations forregistered exchanges will be tightened. In addition, Electronically Recorded Transfer Rights as
defined in the FIEA will be explicitly excluded from the definition of crypto assets and exclusively
be covered by the FIEA.
Oct 2019 – end 2019

FSA publishes Cabinet Order as subsidiary legislation and makes it
available for public comment.
Public comments and final orders will follow two to three months
later (end of 2019 to March 2020).

~May 2020
5.

Amended laws enter into force.

What is the legal situation for security tokens after the amended laws enter into force?
After the amendments enter into force, most security tokens will exclusively be covered by theFIEA. Only in rare occasions the PSA might apply at the same time.

5.1. What is the definition of security tokens under the new laws?
The legal term for security tokens under the new FIEA is Electronically Recorded Transfer Right.
In order to classify a token as Electronically Recorded Transfer Right a token must fulfill all of
the following requirements:(i) rights listed in Article 2(2) FIEA (e.g. units in a fund, beneficial interests in a trust,
membership rights in a general partnership, limited partnership or limited liabilitycompany)(ii) rights represented by proprietary value recorded electronically(iii) transfer by electronic means(iv) no case specified by Cabinet Order in consideration of liquidity constraints and othercircumstances.
Tokens classified as Electronically Recorded Transfer Right are considered Type I Securities. The
implications of such classification are discussed in further detail in the following sections.
In case any of the requirements from (ii) to (iv) is not fulfilled, a token is considered a type IIsecurity. Tokens for which the transferability is technically restricted, may fall under theexemption in item (iv) above. However, it is unclear at this point, which cases will be coveredby the Cabinet Order.
5.2. Are tokenized shares or bonds also considered Electronically Recorded Transfer Rights?
No, tokenized shares or bonds are Type I Securities and not Electronically Recorded Transfer
Rights under the FIEA. In practice this does not make a difference however, since Electronically
Recorded Transfer Rights are treated as Type I Securities. As such both are subject to the same
disclosure requirements under the FIEA.
5.3. What is the relationship between Electronically Recorded Transfer Rights and crypto assets?
Electronically Recorded Transfer Rights are explicitly excluded from the definition of crypto
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assets under the amended Payment Services Act (PSA). Tokens which do not fall under thedefinition of Electronically Recorded Transfer Rights due to liquidity constraints may in theory
be subject to both the PSA and FIEA. It must be noted, however, that in case of liquidity
constraints, the token can also not be exchanged with other tokens or fiat currencies. As such,it is unlikely that the token is considered a crypto asset under the PSA.
5.4. Are there any disclosure requirements for Electronically Recorded Transfer Rights?
Electronically Recorded Transfer Rights are considered Type I Securities under the FIEA. As suchthey are generally subject to disclosure requirements at the time of issuance (e.g. registration
documents, prospectus) and subsequently (e.g. quarterly reports, extraordinary reports).
The exact information that must be disclosed at the time of offering will be stipulated byCabinet Order in the future. In general, the preparation of a prospectus and other disclosure
documents takes a considerable amount of time.
5.5. Are there any exemptions from the disclosure requirements?
Private placements are generally exempted from disclosure requirements.
5.6. What is a public offering and what is a private placement?
A public offering is an offering of newly issued Type I securities to at least 50 persons which is
not considered a private placement.
The following offers are considered private placements of Type I Securities under the FIEA:(i) offers to qualified institutional investors (QII) only(ii) offers to specified investors only(iii) solicitations to a small number of investors (less than 50)
Private placements to QII: Offers to QII with the resale restriction under 5.7 below areconsidered private placements under the FIEA.
Private placements to specified investors: Offers to specified investors with the resale
restriction under 5.7 below are considered private placements under the FIEA. Offers tospecified investors other than QII can only be made by financial instruments business operators(FIBO).
Private placements to a small number of investors: Solicitations to less than 50 investors (QII
can be excluded from this number) with the resale restriction under 5.7 below are considered
private placements under the FIEA.
5.7. Are there any resale restrictions for securities acquired in private placements?
Private placements to QII: In general securities acquired in a private placement may not be
resold to persons other than QII. The exact nature of the restrictions varies depending on thetype of securities. In case securities are sold in violation of the restrictions on resale, the issuer
must file a registration statement with the FSA.
Page 4 of 6Private placements to specified investors: In general securities issued in a private placement tospecified investors may not be resold to other persons than specified investors. Wheresecurities are sold in violation of these restrictions, the issuer must file a registration statementwith the FSA.
Small number of investors: Resale restrictions vary depending on the type of securities. While
there are no resale restrictions for shares, restrictions apply to the resale of share options andother securities. In these cases, the securities may only be transferred in bulk. Where the total
number of units is less than 50, the units may not be split.
5.8. Do the same resale restrictions apply to security tokens?
In general, the same restrictions apply. Security tokens are considered “other securities” under
the current FIEA Enforcement Order and Cabinet Order to which the same resale restrictions
apply in case of private placements. It is possible that additional requirements, such as theimplementation of technical measures, will be introduced in the future.
5.9. Are there any regulations for the handling of security tokens in Japan?
A person engaging in the business of buying and selling security tokens (incl. the provision ofintermediary services, public offerings and private placements) must generally register as a
FIBO under the FIEA.
5.10. Do we also have to register as a FIBO if we only sell our own security tokens?
There are no restrictions for the self-solicitation of tokens that are classified as traditional typeI securities such as stocks. Regulations apply however for the self-solicitation of units in a CIS.
Persons offering their own security tokens, which qualify as units in a CIS, must register as type
II FIBO even if such units are considered Electronically Recorded Transfer Rights.
5.11. Are there any regulations related to the trading of security tokens?
Intermediaries in the sale and purchase of security tokens must register as type I FIBO. Thisapplies irrespective of whether the tokens are classified as traditional type I securities orElectronically Recorded Transfer Rights.
Persons intending to operate a security token exchange must obtain a Financial Instrument
Market License or the approval as proprietary trading system (PTS), depending on the businessmodel. Since it is difficult to obtain the said license or to registers as PTS, we expect that mostof the secondary trading will initially occur OTC.
6.

Can tokens represent rights in an anonymous partnership and if so can these rights easily betransferred by transferring the tokens?
Under the Japanese Civil Code the transfer of contractual rights generally requires anagreement between the assignor and assignee as well as the consent of the counterparty to thecontract. This should be reflected in the contract documentation for the STO.

7.

Do the provisions of the Companies Act apply to the issuance of Electronically Recorded
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Transfer Rights?
Electronically Recorded Transfer Rights are not stock or bonds. The provisions on the issuanceof stock and bonds under the Companies Act do therefore not apply. If the rights of ananonymous partnership or other funds are tokenized, an approval by the general meeting ofshareholders is not necessary. Since the tokenization of an anonymous partnership can beconsidered an important decision a board resolution is however required.
8.

Must a company obtain approval from its shareholders prior to issuing security tokens?
No, this is not necessary. From a management perspective it is advisable to issue only tokens
that do not harm the rights of existing shareholders.

9.

Are there any peculiarities for listed companies that intend to issue security tokens?
Listed companies must disclose the issuance of security tokens in a timely manner. What kindof information must be disclosed should be coordinated with the respective exchange.

CONTACT
So Saito1
Partners.saito@innovationlaw.jp
Joerg Schmidt2
Foreign Associatej.schmidt@innovationlaw.jp

DISCLAIMER
This article contains a high-level overview and is prepared for general information of our clients andother interested persons. The content has not been confirmed by the relevant authorities, but
merely contains information and interpretations that may be reasonably considered in accordancewith the applicable laws and regulations. The opinions expressed in this article are our current views
only and may be subject to change in the future. This article is provided for your convenience onlyand does not constitute legal advice.

1

Admitted in Japan and New York.

2

Admitted in Germany (not registered in Japan).

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