April 12, 2022

Japanese Regulations on Crypto Fund
So & Sato Law Offices
So Saitos.saito@innovationlaw.jp
Kazuki Imanarik.imanari@innovationlaw.jp
Sergio Wilsons.wilson@innovationlaw.jp

I.

Introduction

We posted (1) an article titled "Crypto Fund"( in Japanese) on 1 June, 2018, and (2) an article titled"Funds Regulations in Japan" on 30 June, 2020.
In 2021 and 2022, we received many inquiries regarding setting up crypto funds. Considering (i) theamendments in 2020 to the Payment Services Act(PSA), (ii) the rise of NFT, DeFi, and stablecoins, and(iii) changes to the taxation of crypto assets,

we therefore are updating(1) the article titled“Crypto Fund.”In general, the term "crypto fund" can be used in a variety of ways, such as where (i) the fund’s
financial source is crypto assets which include Bitcoin and Ether, (ii) the fund’s investment targets are
crypto assets or crypto related businesses for instance BTC, ETH, SAFT, ICO tokens, NFT, stablecoins,security tokens, DeFi, and stocks of crypto related companies, and (iii) the investor’s rights aretokenized.
Therefore, the following is an overview of the regulations that apply to each type of structure.
Since this article focuses on crypto funds, other kinds of funds (investment in fiat currency andsecurities management) are not mention in this article, except in section VIII.1. For regulations onother kinds of funds, please refer to (2) the above article titled "Funds Regulations in Japan. "II.

Regulations on Fund Raising

1.

Regulations on Fund Raising in Fiat Currency

Under the Financial Instruments and Exchange Act (FIEA), soliciting investments in money (fiatcurrency), using it to conduct business, and distributing the proceeds from the business falls under acollective investment scheme (Article 2(2)(v) of the FIEA).

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Soliciting investments in a collective investment scheme (public offering or private placement, Article2(8)(vii)(f)) falls under the Type II Financial Instruments Business (Type II FIB) (Article 28(2)(i) of theFIEA) in principle, and public offering or private placement is not allowed without registration as aType II Financial Instruments Business Operator (FIBO) (Article 29 of the FIEA). This is also the casefor crypto funds where the means of fundraising is money, and the investment targets are crypto
assets.
There are some exceptions to this fund regulation under the FIEA, such as (i) cases where the fundcompletely outsources the solicitation to another Type II FIBO and does not solicit any acquisitions
on its own, (ii) cases where the fund uses the exemption so called Specially Permitted Businesses for
Qualified Institutional Investor (QII) (Article 63 of the FIEA) (Article 63 Exemption or QII etc.
Exemption), and (iii) cases where the fund is more than 50% funded by overseas investors and thedomestic investors are limited to certain investors such as QII (Overseas Investor’sExemption)( Article 63-8 of the FIEA).
Whether or not the issuer does not conduct any solicitation for acquisition is determined by thecircumstances in each case. Solicitation for acquisition refers to the solicitation of an application toacquire newly issued securities and similar activities (Article 2, Paragraph 3 of the FIEA). Solicitationis generally understood to be an act that attracts and encourages investors to acquire a particular
security, whether in writing, verbally or through advertising.
Specially Permitted Businesses for QII is an exemption that allows a fund manager to engage in fundservices by making a simple notification to the Financial Services Agency (FSA) when all investors in
the fund are QII or when the investors include one or more QII and 49 or fewer persons who areexpected to have certain investment abilities. However, that exemption has been subject to tighter
regulations under the 2015 amendment to the FIEA. Before the amendments, the scope of 49 orfewer investors included general individual investors. It should be noted that after the amendment,individual investors whose total amount of investable financial assets (referring to securities, etc., but
not including crypto assets) is 100 million yen or more and who have been in a security account for
one year would be able to invest.

2.

Regulations on Fund Raising in Crypto Assets

Until the amendment of the FIEA in 2020, soliciting investments in funds with crypto assets was not
subject to the FIEA regulation. However, due to the amendment, crypto assets are now considered
as money equivalent in relation to fundraising (Article 2-2 of the FIEA). Fund raising with crypto assets
is now subject to the same regulations as fund raising with money.
2(Summary of Regulations on Fund Raising )Exceptions

Sales by Issuer

GeneralWhen

Article 63Overseas

Registration

Completely

Exemption

Investor’sRequirements

Outsourced to a(QII etc.

Exemption

Third Party

Exemption)

Type II FIBO

N/A

Available

Available

Registration(for the thirdparty, Type II
FIBOregistration)

Sales by Third

Type II FIBO

N/A

N/A

N/A

Party (on behalf

Registration

if sales activities

Type II FIBO

Type II FIBO

are sub-delegatedRegistration

Registrationof the issuers)

to a registered
third party(rarely the case)

III.

Regulations on Investment Management of Funds
1. Regulations When Investments are Primarily in Securities or Derivatives

With respect to funds the term investment management business is understood as the managementof money or other property invested by a person connected with investments primarily in securities
or derivatives which are based on investment decisions requiring the valuation and analysis of such
instruments. In this context, "primarily" means that generally more than 50% of the assets undermanagement are invested in securities or derivatives. To conduct an investment managementbusiness, a company must register as an Investment Management Business Operator (Article 28(4)of the FIEA). Similar to Type II FIBO, persons engaging in the investment management business mustmeet certain criteria, including minimum capital requirements and hiring proper personnel (e.g. acompliance officer with eligible knowledge and experience) for operating the business.

3The securities include stocks as well as general security tokens. In order to avoid this regulation, it isnecessary to set a limit on the investment objectives to the effect that no more than 50% of theinvestment should be in securities or derivatives. Similar to the above II.1, there are some exemptions.
For example, registration as an investment management business is not required if (i) the fund meetsrequirements such as full outsourcing of management to other investment management companies,(ii) the fund is conducted as Article 63 Exemptions, or (iii) the fund is set up in a foreign country andinvestment from Japan is limited.

2. Regulations When Investments are Primarily in Crypto Assets
If the investment target is mainly crypto assets, the FIEA does not apply to the management. Since
the management of crypto assets is for investment purposes and not for business purposes, the PSA
does also not apply. When investing in NFT, SAFT, DeFi, stablecoins, the FIEA and the PSA do not apply
to the management, as it does when investing in crypto assets.

(Summary of Regulations on Investment Management)

GeneralRegistration
Requirements

Exceptions
When CompletelyArticle 63

Foreign Funds that

Outsourced to aExemption (QIIMeet Certain

Third Party

etc. Exemption)

Requirements

Available

Management ofRegistration of GP

N/A

Funds that Invest

as Investment(For the third party,+50% inManagement

Investment

Business Operator

Management

Securities by GP

No registration
requiredBusiness Operator
Registration)
Management ofThird party must

N/A

N/A

N/A

Funds that Invest

register as

If management

Third party must

Third party must

+50% inInvestment

activities are sub-register as

register as an

Securities byManagement

delegated to a

Investment

Investment

Third Party

Business Operator

registered thirdManagement

Management Businessparty

Business OperatorOperator registration(rarely the case)

Registration

N/AN/AManagement ofN/A4N/A

Other Funds(incl. cryptoassets)

IV.

Regulations on the Content of Investors’ Rights
1. Regulations on the Distribution of Money and Crypto Assets

A fund is generally set up by using a silent partnership agreement, a limited partnership agreement,or an overseas partnership agreement (collectively, partnership agreement), and investors haverights under such partnership agreement. In a crypto fund, it is assumed that there are cases where(1) the fund's investment is solicited in crypto assets and then dividends or principal redemption inmoney, (2) the fund's investment is solicited in money and then dividends or principal redemption in
crypto assets, and (3) the fund's investment is solicited in crypto assets and then dividends orprincipal redemption in crypto assets.
Since the transfer of the crypto assets is not a sale or exchange thereof, we believe that the PSA does
not apply except in cases of legal evasions, such as formally soliciting investment in a fund with money
and immediately redeeming the principal with crypto assets.

2. Regulations on the Tokenized Interest
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, membership rights ofgeneral 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 othercircumstances.

Some crypto funds may also consider tokenizing their rights. Interests in a fund which are tokenized
are generally considered ERTR. Given their (potentially) increased liquidity they are subject to thesame regulations as more liquid Type I Securities. Third parties engaging in the sale of tokenized5

interests must therefore register as Type I FIBO (Article 28 (1) (i), Article 2 (8) (ix) of the FIEA).
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 1 and the exemption in case ofentrustment of all sales and investment activities to third parties also apply to tokenized funds.
For more detailed information on security token offerings (STOs), please click here.

(Business Regulations and Notifications Requirements under the FIEA for the Sale andManagement of Tokenized Funds)

GeneralExceptions
When CompletelyArticle 63

Foreign Funds that

Outsourced to a

Exemption (QII

Meet Certain

Third Partyetc. Exemption)

Requirements

Type II FIBO

N/A

Available

Available

registration(for the third party,Registration
Requirements
Sales
Sales by Issuer

Type II FIBOregistration)
Type I FIBO

N/A

N/A

N/A

registration

If sales activities are

Type I FIBO

Type I FIBO

sub-delegated to aregistration

registration

Available

No registration

registered thirdparty(rarely the case)
Investment Management
Management ofRegistration of GP

N/A

Funds that Invest

as Investment(for the third party,+50% inManagement

Investment

Business Operator

Management

Securities by GP

requiredBusiness Operator
registration
Management ofThird party must

N/A

N/A

1 In order to use the QII exception in a self-solicitation or management of ERTR, it is necessary to apply certain

technical transfer restrictions to the ERTR.

6N/A

Funds that Invest

Register as

If management

Third party must

Third party must

+50% inInvestment

activities are sub-register as

register as InvestmentSecurities byManagement

delegated to a

Investment

Management BusinessThird Party

Business Operator

registered third

Management

Operator registration

party

Business Operator(rarely the case)

Registration

N/A

N/A

Management ofN/A

N/A

Other Funds(incl. cryptoassets)

V.

Disclosure Regulations

Since ERTR are generally subject to the same regulations as Type I Securities, disclosure requirements
apply if investors' rights are tokenized. An issuer of ERTR is therefore obliged to prepare a prospectus(Article 13 (1) of the FIEA) and to register the offering with the FSA (Article 4 (1)). In addition to theinitial disclosure, ongoing disclosure requirements apply (Article 24). 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.
If investors' rights are not tokenized, disclosure requirements apply to public offerings of type II
securities, which fall under the category of Rights in Securities Investment Business, etc. (Article 3 (iii)(a)) that mainly invest in securities. In the case of Type II Securities, if the number of holders is lessthan 500 in response to a solicitation for acquisition, it does not fall under public offerings (Article 2(3) (iii) and Article 1-7-2 of the FIEA Enforcement Order), and disclosure requirements do not apply.

(Disclosure Regulations)Type ofSecurities

Type of Solicitation

Investors

Obligation to Disclose

QII only

Notification of specific matters

Privateplacement withType I

Private

QII only*(Article 23-13 (4) of the FIEA,

Securities placement Private
placement to aArticle 20 (1) of the Cabinet Order on≤49 investors

small number of7

Disclosure of Regulated Securities)

investors*
Privateplacement tospecified

Specified

N/A

investors only

investors*
Public offerings

Type II

Unlimited

Securities registration statement **number of(continuing disclosure of semiannual

investors

reports, extraordinary reports, etc.)

Private placement≤499 investors

Public offerings

Unlimited

Generally not applicable

number ofRights in Securities Investment

investors

Business, etc. are regulated

Securities

N/A* 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).

VI.

Fund Scheme
1. Fund Scheme if Investing in Crypto Assets

Funds are generally structured using various types of partnership agreements. In Japan, investment
Limited Liability Partnership (LLP) agreements are often used to set up PE funds and VC funds, etc.
However, LLP is legally only allowed to engage in certain businesses (Article 3 (1) of the Act on LLP),
and it does not include the acquisition and holding of crypto assets or stablecoins. Therefore, if theinvestment target is crypto assets or stablecoins, LLP cannot be used, and silent partnershipagreements should be considered2.

2. Fund Scheme if Investors Rights are Tokenized
Suppose a fund tokenizes rights under a partnership-type agreement and transfers the token toinvestors. In that case, it seems necessary to consider whether simply tokenizing existing rights on
the agreement will work properly.
For example, the following issues should be considered:-

Whether rights under partnership agreements are validly transferred only by transferring the2 That is called "GK-TK scheme" using a limited liability company and a silent partnership.

8tokens3-If the governing law is not specified as in the case of The Dao, what will be the tax and accounting
treatment in JapanVII.

Supplement
1. Investment in Crypto-Related or Blockchain-Related Companies

Funds that are financed in cash and invest primarily in shares of crypto-related or blockchain-relatedcompanies are sometimes called crypto-related funds.
As a fund that invests primarily in securities, such as this fund is, in principle, required to be registeredas a Type II FIBO for its public offering or private placement and as an investment managementbusiness operator for its management (refer to II1. and III1.).

2. Management of Own Funds
When a company launches an "in-house fund" to invest its own funds in shares of crypto-related or
blockchain-related companies, it may also be called crypto-related funds.
However, this does not fall under "investment of money or other properties invested or contributed
from a person who holds the following rights or other rights specified by the Cabinet Order" (Article
2 (8) (xv) of the FIEA), so fund regulations under the FIEA do not apply.

3. Tax Issues of Crypto Funds
We are not experts in tax issues, but we describe here for your reference since tax issues are often asignificant issue when setting up a crypto fund.4
If a company owns actively traded crypto assets in Japan, it is taxed at market value at the end of theterm (so-called unrealized gains tax).
When a crypto fund is set up with TK-GK scheme, the silent partnership investors are not consideredto own the assets, but GK is deemed to own, and therefore, in principle, unrealized gains are taxed
in GK. However, if such unrealized gains are distributed to investors based on the silent partnershipagreement, GK will not be taxed on that portion (effectively pass-through), while the portion
equivalent to such gains will be treated as income of the investors (both individual and corporateinvestors).

3 Under Japanese law, the transfer of claims is perfected by notice or acknowledgment with a fixed date orregistration under the Special Law for Transfer of Movables and Claims
4 We would like to thank Mr. Kenji Yanagisawa, a certificated public tax accountant, for his comments on thedescription of tax issues. However, the responsibility for potential errors lies with us.

9When a crypto fund is set up with an overseas partnership, it is taxed as if investors themselves own
assets of the fund (pass-through). Therefore, corporate investors of the overseas partnership are
subject to unrealized gains tax.
Unrealized gains tax might be avoided by using a scheme in which a company is set up in a foreigncountry that does not tax unrealized gains and Japanese investors invest in the company as a silent
partnership, and then unrealized gains are not allocated to the investors. However, it is necessary toconsider Anti-Tax Haven Rules when using this scheme. If the overseas company’s shareholders are
domestic companies or domestic individuals, the overseas company may be deemed to be a paper
company or not meet the economic activity standards, and income of the overseas company might
be deemed as income of the shareholders.
Therefore, you should consider the following factors and consult with legal and tax professionals tostructure a crypto fund.
-Attributes of primary investors (Japanese company, Japanese resident, foreign company, orforeign resident)-

Whether tokens to invest in are subject to unrealized gains taxes (if the tokens are listed on acrypto exchange or DEX, whether you can sell them before the end of the fiscal year).

-

Whether shareholders or GPs of overseas entities can move to Singapore or other countries.

SchemeUnrealized Gains

Unrealized Gains

Taxation

Taxationon Corporate LP

on Individual LP(if unrealized gains

Taxed if it isTaxed if it isN/A

are distributed, GKdistributeddistributed(in principle)

Unrealized Gains
Taxation on SPV

Taxation on
Shareholders of SPV

Taxed on GK
TK-GKwill not be taxed)
Overseas
Partnership

N/A(depending on

N/A
Taxed

N/Acountry)

TK-

N/A

Overseas(depending onCompanycountry)(depending oncountry)

N/A

N/A

Anti-Tax Haven Rules(in principle)(in principle)

may apply

Disclaimer
The content of this article has not been confirmed by the relevant authorities or organizations
mentioned in the article but merely reflects a reasonable interpretation of their statements. The10interpretation of the laws and regulations reflects our current understanding and may thereforechange in the future. This article does not recommend the investment in crypto funds. This article
provides merely a summary for discussion purposes. If you need legal advice on a specific topic,
please feel free to contact us.
EOD

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