June 30, 2020

FUNDS REGULATIONS IN JAPANA fund is an investment vehicle that (i) collects money (or other assets) from investors, (ii) invests thepooled money into securities, real estate, crypto, and other assets and (iii) distributes profits arisingout of the investments to the investors. In Japan, there are three legal forms to set up a fund: (i) trusts,(ii) corporations, and (iii) partnerships. Mutual funds are structured as unit trusts under the Investment
Trust and Investment Corporation Act (Law No. 198 of 1951, as amended), while J-REITs arecorporations established under the same act. Funds structured as partnerships typically target asmaller number of investors and are generally more flexible in terms of investment, target investors,
and timing of entry and exit than the other types.
In this article, we first outline the legal and regulatory environment for funds that invest primarily insecurities and which are structured as partnerships. In the second part, we then take a closer look at
crypto funds. Funds investing in real estate and commodities must comply with different laws and will
be covered in a separate article.

1.

Forms of Partnerships
Partnership-type funds under Japanese laws may be set up as (i) partnerships under the Civil
Code (Law No. 89 of 1896, as amended), (ii) silent partnerships under the Commercial Code(Law No. 48 of 1899, as amended), (iii) limited partnerships for investment under the Limited
Partnership Act for Investment (Law No. 90 of 1998, as amended), and (iv) limited liability
partnerships under the Limited Liability Partnership Act (Law No. 40 of 2005, as amended).
Depending on the percentage of foreign investors 1 and the percentage of investments inforeign assets2, foreign partnership-type funds such as limited partnerships in the Cayman
Islands may be more suitable. This topic will, however, be covered in a separate article.
The characteristic features of each legal form will be outlined in the following.

1.1.

Partnerships under the Civil CodeAccording to Article 667(1) of the Civil Code, a partnership is established when each of theparties promises to make a contribution and to engage in a joint undertaking. When using apartnership under the Civil Code as a fund, the partners are jointly responsible for the day-today operations of the fund by the act, though the partners typically delegate the managementof the fund to one or more partners.
For funds set up as partnerships under the Civil Code, there are no investment restrictions. All

1This may affect the application of pass-through taxation.
There are restrictions on investments in foreign securities for Limited Partnerships for Investments as
discussed in more detail below.
2

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partners assume unlimited liability and, in general, all profits and losses are distributed to thepartners depending on their overall contributions.

1.2.

Silent Partnership (Tokumei Kumiai Partnership)
A silent partnership is a contract between a business operator and an investor according to
Article 535 of the Commercial Code.
The operator of a silent partnership carries out the business under his/her own name and on
his/her own account. The silent partner does not play an active role and is only obliged tomake contributions. In turn, he/she is entitled to participate in the profits generated by thebusiness of the operator. The liability of a silent partner is stipulated in a silent partnershipagreement and is usually limited to the amount of his/her contribution.
Under the applicable laws there are no investment restrictions for silent partnerships.
Since a silent partnership agreement is a two-party agreement, an operator concludes
individual contracts with each investor.

1.3.

Limited Partnership for Investment (LPS)
A limited partnership for investment is a partnership under the Limited Partnership Act for
Investment3 and consists of partners with a limited liability, limited partners (LP), and at least
one general partner (GP) with an unlimited liability. For funds structured as a LPS, a GP is
responsible for operating the fund’s business, while LPs are not involved in the day-to-day
operations of the fund. A LP’s liability is limited to the amount of his/her contribution.4
LPS are subject to investment restrictions.5 A LPS must, for example, not invest more than 50
percent of its total funds in foreign securities.6

1.4.

Limited Liability Partnership (LLP)
A limited liability partnership is a partnership under the Limited Liability Partnership Act (LLP
Act)7. The personal liability of all partners is limited to the amount of their contributions.8 A
LLP is generally managed jointly by all partners. While it is possible to delegate day-to-day
operations to a single partner, important decisions must be made jointly by all partners of the
LLP. Entering into an agreement concerning the disposition or acquisition of material assets
or borrowing of large amounts of money are matters requiring the consent of all partners.93Article 2(2) of the Limited Partnership Act for Investment.
Article 7(1), 9(1) and (2) of the Limited Partnership Act for Investment.
5
Article 3(1) of the Limited Partnership Act for Investment.
6 Article 9 of the Enforcement Order of the Limited Partnership Act for Investment.
7
Article 2 of the LLP Act.
8
Article 15 of the LLP Act.
9
Article 12 of the LLP Act.
4

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Though there are no investment restrictions for LLPs, LLPs are not used as investment vehicles
very often. One of the main use cases for LLPs as investment funds is the establishment of amovie production committee.
TABLE 1: SUMMARY OF PARTNERSHIP-TYPE FUNDS IN JAPANPartnerships

SilentInvestment LPS

LLP

under the Civil

Partnerships
an operator andgenerallimited partners

a silent partner

partner(s) andCodePartners

general partners

limited partners
Agreement

agreement

one-to-one

agreement

agreement

between allagreement

between all

between allpartners

betweenpartners

partners

operator andsilent partner
Registration

n/a

n/a

necessarynecessary

Ownership ofpartnership

operator

Investment LPS

LLP

Day-to-day

jointly by all

operator

general partner

jointly by all

operation ofpartners

partners(delegation to(delegation to

single partners

single partners

or third partiesor third parties

possible)possible to a

Assetsthe fundcertain degree)
Investment
restrictions

n/a

n/a

investments

no investment

limited to those

restrictions

assets listed in
Article 3(1) of
the LPS Act for
Investment (e.g.
shares, certain
types of bonds,
and investments
in silent
partnerships)

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restrictions≤ 50 percent of
total funds inforeignsecurities, andno investment
in crypto assets

2.

Partnership Interests as Interests in a Collective Investment Scheme
The Financial Instruments and Exchange Act (FIEA) treats certain partnership interests,
namely interests in so-called “collective investment schemes”, as securities. The definition ofcollective investment schemes under the FIEA is as follows:(1)

the interests in the fund constitute rights based on a partnership agreement
under the Civil Code, a silent partnership agreement, an investment LPS
agreement or an LLP agreement(2)

the partnership uses the collected funds for its business, i.e. investments; and(3)

the investors are entitled to receive dividends or to participate in the profits
arising out of the business conducted by the partnership or the distribution ofassets by the partnership.

Activities involving collective investment schemes are subject to disclosure and registration
requirements as well as conduct controls. The solicitation of interests in a collective
investment scheme to investors is considered a solicitation of securities. The management ofa fund’s assets is an investment management business under the FIEA. Both must be
registered with the Financial Services Agency (FSA)10.

3.

Regulatory Requirements

3.1.

Disclosure Requirements
The public offering or secondary distribution of highly liquid securities such as shares, orbonds (type I securities) is generally subject to disclosure requirements and must be

10

Even if all of the requirements from (1) to (3) are fulfilled, there are certain cases where the interests are
not considered securities. These are cases (i) where all of the fund’s business is carried out with the consent
of all investors, and where (ii-a) all of the investors regularly engage in the invested business, or where (iib) the investors participate in the invested business using their specialized skills which are indispensable forthe continuation of the business (Article 2(2)(v)(i) of the FIEA, Article 1-3-2 of the FIEA Enforcement Order).

Page 4 of 12

registered with the FSA.11
The disclosure requirements for the offering or distribution of less liquid securities such as
interests in a partnership type fund (type II securities) are less strict under the FIEA.12

3.2.

Regulations for Businesses Primarily Engaging in Sales
The public offering or private placement of interests in a collective investment scheme13 may
only be carried out by registered Type II Financial Instrument Business Operators (Type II
FIBO).14
This also applies to the self-offering of partnership interests to Japanese investors by a GP ora partner with similar authorities if the fund is a collective investment scheme as explained
above.
To get registered as a Type II FIBO a person must fulfill certain criteria. This includes among
others meeting minimum capital requirements and hiring fit and proper personnel (e.g. acompliance officer with eligible knowledge and experience) for operating the business. Only
where an applicant meets all requirements stipulated in the FIEA and subsidiary legislation
the FSA must approve an application for registration.

3.3.

Regulations on Investment Management
With respect to funds the term investment management business is understood as the
management of money or other property invested by a person connected with investments
primarily in securities or derivatives which are based on investment decisions requiring thevaluation and analysis of such instruments. 15 In this context, "primarily" means thatgenerally more than 50% of the assets under management are invested in securities orderivatives. To conduct an investment management business a company must register as
an Investment Management Business Operator. 16 Similar to Type II FIBO persons
engaging in the investment management business must meet certain criteria, including
minimum capital requirements and hire fit and proper personnel. Only where anapplicant meets all requirements, the FSA must register an applicant as Investment
11

Article 4(1) of the FIEA.
If a fund's interests fall under the definition of "securities investment business rights" or "electronic
record transfer rights", they are subject to disclosure regulations (Article 3(iii)(i)-(ha) of the FIEA). The term
"securities investment business rights" generally covers cases where more than 50% of a fund'scontributions are invested in securities. In that case, the full disclosure requirements apply if the numberof persons acquiring fund interests exceeds 500 (Article 2(3)(iii) of the FIEA, Article 1-7-2 of the FIEA
Enforcement Order). For further details on electronic record transfer rights (i.e. tokenized interests in afund), see Section 4.3 below.
13
As discussed in Section 2 above, interests in a collective investment scheme are deemed securities
according to Article 2(2)(v) or (vi) of the FIEA.
14
Article 28(2)(i) and Article 2(8)(vii) of the FIEA.
15
Article 2(8)(xv)(ha) and Article 28(4) of the FIEA.
16
Article 29 of the FIEA.
12Page 5 of 12

Management Business Operator.17
3.4.

Entrustment of Sales and Investment Management to Third Parties
The registration requirements in Section 3.2 and 3.3 above do not apply to the fund if thefund entrusts all sales and investment management activities to another party which isregistered as a Type II FIBO and/or Investment Management Business Operator with the FSA.

3.4.1.

Public Offerings and Private Placements by Third Parties
When a partnership-type fund entrusts all “external” activities concerning its public offeringor private placement to a registered Type II FIBO, the GP of the fund does not have to register
as a Type II FIBO.18

3.4.2.

Investment Management by Third Parties
When a partnership-type fund delegates certain activities completely to a registered
Investment Management Business Operator, the GP of the fund does not have to register as
an Investment Management Business Operator. In order for the exemption to apply, the fundmust comply with the requirements set out in Article 1-8-6(1)(iv) of the FIEA Enforcement
Order and Article 16(1)(x) of the Cabinet Office Order on Definitions under Article 2 of the
FIEA.
The main requirements are as follows:

17
18

(i)

The (silent) partnership agreement must include a provision considering thedelegation of the investment management to a third party, the name of theinvestment management company registered as Investment Management
Business Operator, and summary of the discretionary investment managementagreement with and remuneration of the investment manager.

(ii)

The agreement with the investment manager must include provisions on the
duty of care and loyalty, the prohibition of self-trading, and the investment
manager’s remuneration.

(iii)

The fund must segregate its assets from its investors’ assets and the investment
manager must confirm this.

(iv)

The investment manager of the fund must give prior notice to Financial Local
Bureau (a delegate of the FSA).

FSA's Public comment Response No. 190, etc. (2007.7.31).
FSA's Public Comment Response No. 103, etc. (2007.7.31).

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3.5.

Specially Permitted Businesses for Qualified Institutional Investor
Exemptions to the registration requirements outlined in Section 3.2 and 3.3 above may apply,
under the exemption as a Specially Permitted Business for Qualified Institutional Investors(QII), etc. (QII Exemption also known as Article 63 exemption). Many funds that target QIIs
and other sophisticated investors make use of this exemption.
To fall under the QII exemption a fund must solicit (i) one or more QII, and (ii) less than 49
qualified investors other than QII. None of the investors must fall under the category of nonqualified institutional investors.1920
Persons who conduct business under the QII Exemption are not obliged to register as Type II
FIBO or Investment Management Business Operator but have to submit a comparably simple
notification to the FSA. The notification must include certain information about the fund (typeof the fund), the GP (or a partner with an equivalent authority) and the investing QII(s).
Foreign GPs must appoint Japanese representatives for the notification. Persons filing thenotification are subject to additional requirements, including conduct controls almost
equivalent to registered Type II FIBO or Investment Management Business Operators.
Furthermore, a fund making use of such notification is subject to ongoing disclosure
requirements for each fiscal year.
For your information, the QII Exemption requirements were tightened in 2015, mainly due toan increase of losses caused by malicious actors. Before the 2015 amendments, a fund wasable to solicit retail investors. Now, the scope is limited to qualified investors. Qualified
investors are investors who have a certain level of knowledge and experience in investments
and include listed companies, corporations with capital of JPY 50 million or more, andindividuals having more than JPY 100 million investment-type financial products as assets andmore than one year investment experience.
The definition of qualified investors was however considered to be too narrow for investments
in venture funds 21 . For venture funds the definition of qualified investors was therefore
broadened and additionally includes (former) officers of listed companies as well as specialists(e.g. certified public accountants, lawyers).22

19

Article 63(1) of the FIEA, Article 235 of the Cabinet Office Order on Financial Instruments Business.
Persons listed under Article 17-12(1) of the FIEA Enforcement Order and Article 233-2 of the Cabinet
Office Order on Financial Instruments Business.
21
A venture fund means a fund which invests more than 80% of its assets in shares of non-listed companies
and satisfies the other requirements in Article 17-12(2) of the FIEA Enforcement Order, Article 233-4 and239-2(1) of the Cabinet Office Order on Financial Instruments Business.
22
Article 17-12(2) of the FIEA Enforcement Order, Article 233-3 of the Cabinet Office Order on Financial
Instruments Business.
20

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TABLE 2: INVESTORS OTHER THAN QII UNDER THE QII EXEMPTION
Prior to the 2015 revision
AllAnyonepartnershiptype funds

Since the 2015 revision
Ordinary
Listed companies, corporations withpartnership- capital of 50 million yen or more,
type funds
individuals having more than JPY 100
million assets and more than 1 year
investing experience after opening theirsecurities accounts.
VentureIn addition to the above, officers of listed
funds
companies, persons who have been
officers of listed companies within thepast five years, and specialists.

TABLE 3: BUSINESS REGISTRATION AND NOTIFICATION REQUIEMENTS UNDER THE FIEA FOR
THE SALES AND MANAGEMENT OF FUNDS

SALESSales byissuer itself

General registration
requirements

Registration
requirements in caseof complete
entrustment to aregistered third party

Availability of the QII
exemption

Type II FIBO
registrationn/a(for the third party,
Type II FIBO
registration)n/a if sales activities
are sub-delegated to aregistered third party(rarely the case)yes, but Article 63
FIEA notification

Sales by third
Type II FIBO
party (onregistration
behalf of theissuers)
INVESTMENT MANAGEMENTManagement
registration of GP asof funds that
Investment
invest +50%
Management Businessin securities
Operatorby GPManagement
third party mustof funds that register as Investment
invest +50%
Management Businessin securities
Operatorby third
partyManagementn/aof otherfunds (incl.
crypto funds)

n/a(for the third party,
Investment
Management Business
operator registrationn/a
if management
activities are subdelegated to aregistered third party(rarely the case)n/aType II FIBO
registration (QII
exemption does not
apply)
yes, but Article 63
FIEA notification

third party mustregister as Investment
Management Business
Operator Registration(QII exemption does
not apply)
n/aPage 8 of 12

4.

Regulations on crypto asset funds
A crypto fund can be understood as (i) a fund that primarily invests in crypto assets, (ii) a fundthat collects crypto assets from its investors, or (iii) a fund that is tokenized. In the following,
we will outline the applicable regulations in more detail and discuss the impact of the latest
revision of the FIEA on tokenized investment funds.

4.1.

Funds Investing in Crypto Assets

4.1.1. FIBO Registration
Funds investing in crypto assets are subject to the same rules and regulations as otherpartnership-type investment funds. In case of self-solicitation, operators of the fund must
therefore generally register as Type II FIBO.23 Exemptions from the registration requirement
apply for the solicitation of QII, etc.24 Also, if a fund delegates its sales activities to a registered
Type II FIBO, the fund operator must not register as a FIBO itself.

4.1.2. Investment Management Registration
The operator of an investment fund that mainly invests in securities and derivatives must
generally register as Investment Management Business Operator. Since crypto assets areneither considered securities nor derivatives under the FIEA this does not apply for funds
operators that mainly invest in crypto assets. Please note, however, that security tokens
constitute securities under the FIEA. Investing in security tokens may therefore trigger
registration requirements provided that certain thresholds are passed (≥ 50 percent of thetotal investments into security tokens).
4.1.3.

Funds Investing in Crypto Assets and Crypto Exchange Registration
It is sometimes argued that a fund investing into crypto must register as a crypto asset
exchange service provider under the Payment Services Act (PSA). However, it is unlikely that
registration is necessary considering the fact that a registration is only required if the trading
is carried out as a “business”. Where the trading is carried for investment purposes, therequirements stipulated by the FSA for a “business” are not met.

4.2.

Investment Funds Raising Crypto
The definition of funds requires among others the collection of money. Before the 2020
revision of the FIEA, crypto assets were not considered money within the meaning of the FIEA.
This has changed with the new laws entering into force on May 1, 2020. Under the new laws
crypto assets are deemed money within certain provisions of the FIEA 25 , including the23

Article 28(2)(i) and Article 2(8)(vii) of the FIEA.
Article 63 of the FIEA.
25
Article 2-2 of the FIEA and Article 1-23 of the FIEA Enforcement Order.
24

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provisions on collective investment schemes. The raising of crypto assets is therefore coveredby the FIEA.

4.3.

Tokenized Interests
With the 2020 revision of the FIEA the concept of electronically recorded transfer rights (ERTR)
were introduced. Article 2(3) of the FIEA defines ERTR as follows:“Electronic Recorded Transfer Right” are rights that fulfill all requirements from (1) to (3)and do not fall under (4):(1) Rights listed in Article 2(2) of the FIEA (funds, beneficial interest in a trust, membershiprights of general partnership company, etc.)(2) which are recorded electronically, and(3) may be transferred by using an electronic data processing system.
(4) Cases specified by Cabinet Office Ordinance taking into account the liquidity
constraints and other circumstances.

Interests in a fund which are tokenized are generally considered ERTR. Given their (potentially)
increased liquidity they are subject to the same regulations as more liquid type I securities.
Third parties engaging in the sale of tokenized interests must therefore register as Type I
FIBO.26 The self-solicitation of tokenized interests by a fund is subject to the same registration
requirements as the self-solicitation of funds in general. A fund must therefore register as a
Type II FIBO and, if ≥50% of the money is invested in securities or derivatives, as an Investment
Management Business Operator, unless an exemption applies. The QII exemption and theexemption in case of entrustment of all sales and investment activities to third parties also
apply to tokenized funds.27
Since ERTR are generally subject to the same regulations as type I securities disclosure
requirements apply. An issuer of ERTR is therefore obliged to prepare a prospectus28 and toregister the offering with the FSA29. In addition to the initial disclosure, ongoing disclosure

26

Article 28(1), Article 2(8) and Article 2(9) of the FIEA.
In order to use the QII exemption for the self-offering of ERTR, ERTR must satisfy the following
requirements in addition to the requirements which apply to non-tokenized fund, Article 63(1)(i) of the FIEA
and Article 234-2(1)(iii) of the Cabinet Office Order on Financial Instruments Business. For ERTR which aresold to QII: Technical measures have been taken to prevent the transfer of the ERTR to persons other than
QII. For ERTR which are sold to specified investors other than QII: Technical measures have been taken toprevent the transfer of ERTR to QII or specified investors other than QII and such transfer shall be made inbulks.
28
Article 13(1) and Article 15(1) of the FIEA.
29
Article 4(1) of the FIEA.
27

Page 10 of 12requirements apply.30 Something different only applies in the case of private placements.
These are placements with QII, professional investors or a small number of investors (≤ 50
investors) only.
For more detailed information on security token offerings (STOs), please click here.
TABLE 4: BUSINESS REGISTRATION AND NOTIFICATION REQUIREMENTS UNDER THE FIEAFOR THE SALE AND MANAGEMENT OF TOKENIZED FUNDS

SALESSales byissuer itself

General registration
requirements

Registration
requirements in caseof complete
entrustment to aregistered third party

Type II FIBO
registrationn/a(for the third party,
Type II FIBO
registration)n/a if sales activities
are sub-delegated toa registered third
party (rarely the case)

Sales by third
Type I FIBO
party (onregistration *behalf of theissuers)
INVESTMENT MANAGEMENTManagementn/aof funds
investingprimarily incrypto assets
by GP orthird party
Management registration of GP asof funds that
Investment
invest +50%
Management
in security
Business Operator
tokens by GP
Managementof funds thatinvest +50%
in security
tokens bythird party

third party mustregister as Investment
Management
Business Operator(**)

Availability of the QII
exemption

yes, but Article 63 FIEA
notification
no, Type I FIBO
registration necessary *

n/a

n/a

n/a
(for the third party,
Investment
Management
Business Operator
registrationn/a
if management
activities are subdelegated to aregistered third party(rarely the case)yes, but Article 63 FIEA
notification

no, registration as
Investment
Management Business
Operator necessary* These are differences from table 3 for non-tokenized funds. In case of non-tokenized funds, atype II FIBO registration is required.

30

Article 24 of the FIEA.

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TABLE 5: DISCLOSURE REGULATION
Type of solicitation
PrivatePrivateplacement placement with
QII only*
Privateplacement to asmall number ofinvestors*
Privateplacement tospecifiedinvestors*
Public offerings

Investors
QII only

Obligation to disclose
generally not applicable≤49 investors

specifiedinvestors only

unlimited
number ofinvestors

securities registration statement **(continuing disclosure of semiannual reports, extraordinary
reports, etc.)* Technical measures must have been taken to restrict resale.
** When the total issue price is less than JPY 100 million the obligation to file a securities
registration statement does not apply (Article 4(1)(v) of the FIEA).

AUTHORS
So Saito │ Partner (s.saito@innovationlaw.jp)
Yuki Sato │ Partner (y.sato@innovationlaw.jp)
Shinpei Asano │ Associate (s.asano@innovationlaw.jp)
Joerg Schmidt │ Foreign Associate (not admitted in Japan) (j.schmidt@innovationlaw.jp)

DISCLAIMER
The content of this article is not confirmed by the relevant authorities. It merely expresses
reasonably considerations under the applicable laws and regulations.
The opinions contained in this article only reflect our current interpretation of the laws andregulations, and there is a possibility that this interpretation may change.
This article is written for our newsletter and provides general information only. It does notconstitute legal advice. For specific cases, it is necessary to consult with lawyers or otherspecialists in Japan or other countries. Please feel free to contact us.
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