This article outlines key Japanese regulations to consider when managing funds for Japanese investors (e.g., hedge funds or private equity funds). The discussion assumes:
– The fund is structured as a limited partnership (not an LLC or trust) and established outside Japan.
– The fund invests in financial instruments such as stocks, bonds, currencies, and derivatives—not in commodities, commodity derivatives, or real estate.

When accepting Japanese investors’ money in your fund, two categories of Japanese regulations are relevant: fund management regulations and marketing (distribution) regulations. Notably, managing Japanese investors’ money in your fund may trigger registration requirements in Japan, even if the management activities occur outside Japan.

1. Regulation of Fund Management

General Registration Requirement

If your fund manages Japanese investors’ money, you are generally required to register as an Investment Manager in Japan. Registration involves stringent requirements and compliance obligations, making it impractical unless managing Japanese investments at a substantial scale. In addition, you are required to have a place of business in Japan to be registered as an Investment Manager in Japan.

Key Exemptions

To avoid registration, foreign fund managers typically rely on one of the following exemptions:

(i) Japanese Investors’ Minority Investment in an Offshore Fund

This is the simplest exemption and should be your first consideration. To qualify:
– Limit on Investors: No more than 9 Japanese investors, all of whom must be Qualified Institutional Investors (QIIs) or managers of Article 63 Exemption funds (discussed below). (QIIs include banks, securities brokers, investment managers, insurers, and certain industrial companies or individuals who meet specific criteria and notify Japanese authorities.)
– Asset Proportion: Japanese investors’ contributions must not exceed one-third of the fund’s total managed assets.

(ii) Article 63 Exemption

If the above exemption is not feasible (e.g., you want to include non-QII investors), the Article 63 Exemption may apply. Key requirements include:
(a) QII Participation: At least one QII must invest in the fund.
(b) Non-QII Japanese Investor Limits:
– A maximum of 49 non-QII Japanese investors.
– Examples of eligible non-QII Japanese investors are employees of the investment manager, corporations with at least JPY 50 million in net assets or stated capital, high-net-worth individuals with at least JPY 100 million in financial instruments and an account with a securities broker opened at least one year prior to investment. Additional flexibility is available for non-leveraged funds that invest at least 80% of assets in non-listed equity securities and have refund restrictions (Venture-Fund Exemption).

If using the Article 63 Exemption, you must:
– Submit a notification to the Japanese government (in English is acceptable).
– Comply with requirements such as maintaining books and records and submitting annual business reports.
Although less burdensome than full registration as an Investment Manager, this exemption still involves significant obligations.

(iii) Offshore Investors Exemption
Funds that meet the following criteria and are managed from a place of business in Japan may accept investments without requiring registration as an Investment Manager. However, as with the Article 63 Exemption, you must submit a notification and adhere to specific regulatory requirements.
– A majority of the fund’s contributions must come from offshore investors.
– All investors other than foreign corporations must qualify as certain sophisticated investors.

2. Regulation of Marketing (Solicitation)

General Requirement for Marketing

If you plan to market the fund directly in Japan or to Japanese investors, you are required to hold a securities broker license. Given this complexity, most funds appoint a Japanese securities broker with a Type-II Financial Instrument Business Operator license to act as a local distributor.

Direct Contact with Investors

Can you contact Japanese investors directly to discuss the fund? Generally:
– Marketing activities should be conducted by the licensed distributor, not by the fund manager.
– However, the fund manager may attend meetings hosted by the distributor and explain fund details directly to prospective investors.

Using Article 63 Exemption of Offshore Investors Exemption for Marketing

If you utilize the Article 63 Exemption or Offshore Investors Exemption for fund management, the same exemption can be applied to marketing activities. This allows you to market the fund in Japan or to Japanese investors without registering as a securities broker.

Disclaimer: This column intends to provide a high-level summary of the subject matter, and it does not aim to provide exhaustive information. Also, this column is for informational purposes only and does not constitute legal advice. For specific issues, we recommend consulting an expert. If you have any query, please contact us via inquiry form in this homepage.