Direct PEF Regulation in Japan

Today's blog post will be relevant to those planning to establish direct PEF in Asia and have chosen Japan as a jurisdiction for their business.

Legal and regulatory framework

The Financial Agency or local financial bureaus are the main government bodies that are responsible for regulating funds in Japan. In the vast majority of cases, the GP of the foundation must register itself as a legal entity that deals with:

• offering a share in the fund (business type II); or
• a discretionary investment management business.

It is worth noting, however, that most GPs rely on the exemption from the above requirements for obtaining a business license in Japan by fulfilling certain QII conditions. Even so, regulators retain the right to monitor the GPs. Fortunately, this does not happen often and not on a regular basis.

The QII conditions are as follows:

• ensure that investors receive investment management reports on a regular basis;
• keep regular business records;
• submit an annual business report to the regulator;
• some parts of the reporting should be available to the general public.

Partnership funds

Unlike a corporate-type fund or a mutual fund, partner-type funds in Japan do not need to register. However, if the shares are publicly offered in the country, it is necessary to apply for registration of the issue of securities in Japan, prepare and deliver a prospectus to investors, and conduct ongoing disclosures.

Venture capital funds are typically partner funds and often operate as follows:

• A non-profit organization is being created, which is a fund for promoting the development of venture investments in small enterprises in the scientific and technical sphere;
• The Development Fund is holding a competition for the trust management of the future closed PEF in Japan, resulting in the selection of a management company.
• The management company attracts private investment structures, and forms a venture fund from the combined funds, designed to finance small innovative enterprises in the early stages of development.  Searching for projects for a venture investment fund is also the responsibility of the management company.

The corporate governance mechanism operating in closed Japanese PEFs intended for collective investors appeared with the division of investors into two classes - inexperienced and qualified. The emergence of qualified investors led to some weakening of the position of financial intermediaries (management companies), since they became full members of the investment committees of closed PEFs intended for qualified investors, and, therefore, increased their influence and control in the fund management processes.

Requirements for the fund manager

Those who intend to start financial activities in Japan should be aware that if a GP is registered to exercise discretionary investment management, it must meet certain requirements for registration, such as:

• have regulatory approval, which is required to conduct business in Japan with financial instruments, and that no such authorization has been revoked within the previous five years;
• authorized capital of 50 million yen;
• no violations of laws and fines within the previous five years;
• enough personnel for the correct implementation of financial activities in Japan.