This article was written as of May 2024.

On May 15, 2024, the Diet passed into law an amendment to the Financial Instruments and Exchange Act and to the Act Concerning Investment Trusts and Investment Corporation that contains a number of important measures (the "Amendment"). The aim of the Amendment includes promoting the entry of investment managers into the market¹, but it also aims to "increase the circulation of unlisted securities" in order to facilitate the financing of start-up companies.

The Amendment will deregulate the requirements for registration of a Type 1 Financial Instruments Business (a "Type 1 License") under the Financial Instruments and Exchange Act (the "FIEA") in the special case of businesses that act as intermediaries for the issuance and distribution of certain "unlisted securities" including the shares of unlisted companies.

The deregulations apply in principle if the counterparties are limited to professional investors and no funds or securities are deposited by customers. If the requirements for this exemption are fulfilled, Type 1 License holders will generally be exempted from the application of capital adequacy requirements, from the application of any concurrent business requirements, and from the obligation to fund financial instruments transaction liability reserves. The minimum capital required for registration (currently at ¥50 million) will also be reduced.

Importantly, included under "unlisted securities" are beneficiary certificates of foreign investment trusts and investment securities of foreign investment corporations established and managed by overseas asset management companies. For example, if the Japanese subsidiaries and affiliates of overseas asset management companies succeed in obtaining an "attenuated" Type 1 License, instead of being subject to the more burdensome regular Type 1 License, they will be able to sell to Japanese professional investors (Tokutei-Toshika) the above-mentioned securities of funds established and managed by overseas parent companies and group companies (so-called "Paragraph 1 Securities").

A limited number of investors will now be able to invest in funds while not being subject to the disclosure rules on public offerings under the FIEA or on private offerings for Tokutei-Toshika as determined by the Japan Securities Dealers Association, although the solicitation of such investors will be subject to the rules either on private placements for qualified institutional investors (Tekikakukikan-Toshika) or small-number private placements. It should be noted that the above exception does not include interests (so-called "Paragraph 2 Securities") in a fund that falls under a collective investment scheme, that is, typically in the form of a limited partnership.

For further details of the new Type 1 License registration requirements, it will be necessary to refer to the Enforcement Order of the FIEA and the Cabinet Office Ordinance(s), as well as to concurrent amendments to the FSA Guidelines for Supervision. This Amendment will likely have a significant impact on sales practices in relation to foreign funds in Japan.

¹To view the entire Amendment, see "Japan Legal Update : Recent Amendments to the Financial Instruments and Exchange Act and to the Act Concerning Investment Trusts and Investment Corporations".