On February 3, 2016, the Japanese government announced that an act (the "New Act") to amend the Financial Instruments and Exchange Act (the "FIEA") to impose stricter regulation over the QII-targeted business exemption (i.e., the "Article 63" exemption) (the "Exemption") would become effective March 1, 2016, promulgating the amendments to the relevant cabinet orders and cabinet office ordinances. The New Act reflects the recent drive of the Financial Services Agency (the "FSA") to improve the relevant legislation and regulations. Upon the New Act's entry into force, foreign investment management firms presently benefiting from the Exemption may face a greater burden.
Regarding the New Act, we provided a detailed client alert last month1, prepared based on the draft amendments (posted by the FSA for public comments last November) to the relevant cabinet orders and cabinet office ordinances. Except for a few specific changes, the promulgated amendments are nearly identical to the November draft amendments, but the FSA has also clarified some outstanding issues by publishing a response to the public comments. Thus, we provide below a revised explanation that gives up-to-date general guidance for foreign general partner entities that have filed, or intend to file, a Form 20 Notification in reliance on the Exemption. (Please do not hesitate to contact us if you would like a blackline version showing changes made to our previous client alert.)
Under the FIEA, unless an exemption applies, the general partner ("GP") of a limited partnership ("LPS") that mainly invests in securities is, in principle, required to be registered as both: (i) a financial instruments business operator ("FIBO") conducting "type II financial instruments business" ("Type II FIBO"), in respect of marketing interests in an LPS to Japanese investors or in Japan; and (ii) a FIBO conducting "investment management business" ("IMBO"), in respect of managing investments of an LPS that accepts a Japanese investor as a limited partner.
The Exemption allows a GP to conduct marketing activities and investment management activities for the LPS without being registered as either a Type II FIBO or an IMBO. To rely on the QII-targeted business exemption, the GP must both comply with the following requirements and also file a short-form notification called a "Form 20" ("Form 20 Notification") with the relevant authority before marketing to Japanese investors. In the case of a foreign GP, the relevant authority is the Kanto Local Finance Bureau (the "KLFB").
The current requirements for the Exemption are: (i) there must be at least one Qualified Institutional Investor (tekikaku-kikan-toshika) ("QII") in the LPS; (ii) there may not be more than 49 non-QII Japanese investors; (iii) there must be no "Disqualified Persons" as set forth under the FIEA, such as a fund of funds, special purpose company or other collective investment scheme (with certain exceptions); and (iv) transfer restrictions must be in place under which
(a) a QII may not transfer its interests except to another QII and (b) a non-QII may not make a transfer other than a transfer of its entire interest to a single transferee.
Until the present, many foreign general partner entities have filed a Form 20 Notification to rely on the Exemption as a simple and cost-effective measure. Given, however, that the Exemption is sometimes exploited in order to swindle investors, the FSA had been considering tightening the relevant regulations for more than one year before bringing the bill that became the New Act to the Diet.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.