Red tape up ahead in Japan

GPs on the fundraising trail with a stop in Japan should be mindful of some changes in marketing rules, advises Monument Group general counsel Molly Diggins. 

Alternative fund managers marketing in Japan under the “Article 63” exemption should be aware of recent updates and proposals from Japan’s Financial Services Agency (FSA) that may impact them directly. Namely, the FSA has:

• Issued requests to managers to update previously filed Form 20’s for purposes of identifying an investing “Qualified Institutional Investor” (QII); 

• Proposed amendments to tighten the qualifications of  non-QIIs permitted to invest under the Article 63 exemption; 


• Required the completion of annual questionnaires by Form 20 filers located outside of Japan. 

A way out 

Private fund managers who market and sell limited partnership interests to Japanese investors are required to hold both distribution and investment management registrations in Japan. However, the Article 63 Exemption for “Special Business Activities for Qualified Institutional Investors” allows foreign managers of collective investment schemes structured as limited partnerships to avoid this costly and burdensome registration through the filing of a “Form 20” with the FSA prior to undertaking any marketing – by their own staff or by a placement agent – in Japan. 

The exemption, and the filing of a Form 20, applies even where the manager may be using the services of an FSA-licensed placement agent. It also requires at least one Qualified Institutional Investor (QII) to be subscribed to the applicable fund at all times and permits up to 49 non-Qualified Institutional Investors to also subscribe to the fund without triggering FSA registration.

Reviewing ‘Form 20’ 

The FSA has recently sent inquiries for additional investor information to those fund managers whose Form 20, when filed, did not identify a QII as an investor in the fund to be marketed.  Because the Form is required to be filed prior to any marketing, most managers would not have been able to identify an investor at the time of the filing. However, the FSA is now focusing on the requirement for managers to update their forms once a QII invests. Moving forward, funds that currently do not have a QII should indicate such on the Form. Once a QII has invested, the manager should immediately file an updated Form 20. If a fund nears closing without having a Japanese-based investor in queue, the manager should consider filing a “Notice of Abolishment,” which is one of the options in the FSA’s notice.   

Redefining LPs 

In 2014, responding to losses experienced by unsophisticated Japanese investors, the FSA also proposed Article 63 Exemption amendments that narrow the definition of “Permitted non-QIIs.”  The proposed definition includes most institutional investors, including pension funds holding assets of at least JPY10 billion and stock companies with a capital amount of over JPY50 million.     

The Proposed Amendments also include changes to the Supervisory Guidelines for managers operating under the Article 63 Exemption. Specifically, the proposed amendments would require fund managers/General Partners to:

• Take affirmative steps to confirm: (a) that the status of each QII and each non-QII Investor; and (b) that the number of non-QII Investors subscribed to the LP Fund does not exceed 49; and

• Keep proper records of the steps taken in relation to the foregoing confirmations and maintain custody of such records.

The language of the proposed Article 63 amendments has not yet been finalized, nor, as of the time of this writing, has the FSA published a response to public comments. However, it is important for fund managers who wish to market in Japan to monitor likely changes.

Pencils down  

During the month of March 2015, managers outside of Japan with a Form 20 on file with the FSA received a request from the regulator to complete a questionnaire regarding their funds and management activities (the Questionnaire). Traditionally, only Japan-based Article 63 filers have been requested to complete the annual questionnaire. The FSA has not explained this apparent change in policy.

The questionnaire consists of 20 questions regarding the Article 63 filer, including information regarding the number of QIIs invested, the amount of assets managed, and the fund’s major investment targets. Article 63 filers that receive the Questionnaire must complete it by the prescribed deadline of Monday, June 1, 2015.

Closing remarks… 

Recent regulatory changes demonstrate a focus by the FSA on offshore managers seeking to raise capital in Japan. Accordingly, managers who market alternative funds to Japanese investors should continue to monitor recent developments in order to remain compliant with Japanese securities laws. 

Based in Boston, Molly Diggins is general counsel at Monument Group, a placement agent.