Investment Funds 2024

Last Updated February 08, 2024

Japan

Law and Practice

Authors



Anderson Mori & Tomotsune (AMT) is one of the largest and most international Japanese law firms, with a long history of advising overseas companies that conduct business in Japan and in cross-border transactions. The main office in Tokyo is supported by two regional offices, in Osaka and Nagoya, and nine overseas offices. AMT has considerable experience and expertise in investment funds and trusts, including investment corporations such as J-REITs, infrastructure funds, ETFs, partnerships and other forms of collective investment schemes. The firm works with increasingly diversified international and Japanese-based investment funds, comprising private equity funds, venture capital funds, hedge funds, funds of funds and commodity funds. Consisting of 15 partners and 45 associates, the team provides comprehensive advice at all stages of the procedures to which investment funds are subject, and supports clients in navigating a broad range of regulatory matters concerning asset management.

Financial assets held by Japanese households have been increasing steadily for years, now reaching over JPY2,000 trillion. Building on this, a number of various types of investment funds are being marketed, offered and distributed in the Japanese market. The most widely used form of investment fund in Japan is an investment trust (toushi shintaku), created pursuant to the Act on Investment Trusts and Investment Corporations of Japan (the Investment Trust Act), which is offered on both retail markets (through public offerings) and institutional markets (mostly through private placements).

The Investment Trust Act also provides for an investment corporation (toushi houjin), which is typically used for real estate investments and is popularly known as a Japanese Real Estate Investment Trust (J-REIT), which is something of a misnomer given that all existing J-REITs use the form of an investment corporation rather than being structured as trusts.

In addition, offshore investment funds domiciled in jurisdictions such as the Cayman Islands, Luxembourg and Ireland and qualified as foreign investment trusts/corporations under the Investment Trust Act have long been used to provide access to the global market for Japanese investors.

Lastly, collective investment schemes such as investment limited partnerships under the Limited Partnership Act for Investment of Japan (LPAI) and silent partnerships under the Commercial Code also account for a substantial portion of investment funds in certain areas, such as private equity funds, as do leasing funds such as aircraft leasing funds, because those are generally treated as pass-through entities for Japanese taxation purposes. Furthermore, offshore collective investment schemes such as Cayman limited partnerships and Luxembourg common and special limited partnerships are preferred in cross-border transactions because of their flexibility and global recognition.

While there is no specific category analogous to alternative investment funds under Japanese law, privately placed investment funds are used in practice to provide alternate investment opportunities to Japanese investors.

With respect to publicly offered investment trusts/corporations, the Investment Trusts Association, Japan (ITAJ – a self-regulatory organisation of investment trust managers and asset management companies for investment corporations) provides detailed requirements on the management and administration of portfolio assets of publicly offered investment trusts/corporations. Please see 3.3.1 Regulatory Regime for more details on the rules of the ITAJ.

On the other hand, privately placed investment trusts/corporations are often created and tailored to meet specific investment purposes, strategies and risk allowances of potential investors.

In addition, collective investment schemes are, in general, offered by way of private placement because of their nature and their high flexibility in terms of their organisation, capital structure, types of underlying assets, dividend policies and fee schedules.

Therefore, for the purpose of this article, privately placed investment funds are treated as alternative investment funds.

Investment Trusts

An investment trust is generally established by a trust agreement between an investment trust manager and a trustee. An investment trust manager must be a person registered as an investment management business under the Financial Instruments and Exchange Act of Japan (FIEA) (“Registered Investment Manager”), and a trustee must be a trust company licensed under the Trust Business Act or a financial institution authorised to engage in trust business under the Act on Engagement in Trust Business by Financial Institutions.

An investment trust must invest more than half of its assets in securities, derivatives, real estate, commodities and other assets specified by the regulation under the Investment Trusts Act (“Specified Assets”).

An investment trust manager intending to enter into a trust agreement has to notify the regulator of the terms and conditions thereof in advance, and these must contain items such as the investment objective, policy, restrictions, dividend policy, method of calculation of net asset value and procedures for the issuance and redemption of units.

Investment Corporations

In order to incorporate an investment corporation, promoters must prepare a certificate of incorporation, which must be executed by all of the promoters; the promoters must notify the regulator of their intention to that effect. At least one promoter must be a Registered Investment Manager or must have the experience and knowledge specified by the Investment Trusts Act.

A certificate of incorporation must include the investment corporation’s purpose, investment policy and types of assets, dividend policy, valuation method of assets, and fees and charges. As with an investment trust, an investment corporation must invest more than half of its assets in the Specified Assets.

Subscribers for shares must contribute capital in cash into an investment corporation at the time of incorporation in exchange for an issuance of new shares. The minimum contributed capital and the net asset value at the incorporation are JPY100 million and JPY50 million, respectively.

An investment corporation is established upon the registration of its incorporation.

In order to ensure that an investment corporation functions solely as an investment vehicle, the Investment Trusts Act prohibits it from engaging in business other than asset management and the hiring of employees. As such, an investment corporation must retain an asset management company, a custody company and an administrative agent, and must delegate the relevant functions to them. An investment corporation must be registered by the regulator with the basic terms of its certificate of incorporation, the names of executive and supervisory directors, and the name of an asset management company before commencement of its operations.

Foreign Investment Trust/Corporations

The Investment Trusts Act defines a foreign investment trust/corporation as an investment fund established or incorporated outside Japan under the laws and regulations of a foreign jurisdiction, which is similar to an investment trust/corporation. Therefore, a close review of whether an offshore investment fund is treated as a foreign investment trust/corporation under the Investment Trusts Act is required before introducing it into Japan.

A foreign investment trust/corporation must file a “notification” with the regulator before conducting an offering (whether private placement or public offering) in Japan under the Investment Trusts Act, containing basic terms such as its investment objective, restrictions, dividend policy, procedures of subscription and redemptions, and costs and expenses.

No regulatory requirement is imposed on a manager, investment manager, asset management company or trustee in respect of a foreign investment trust/corporation.

Collective Investment Schemes

The establishment process and notification requirements for collective investment schemes are prescribed by the relevant laws governing such collective investment schemes. For example, an investment limited partnership formed pursuant to the LPAI becomes effective upon the execution of a partnership agreement by at least one general partner and one limited partner. When a partnership agreement takes effect, its business, duration and the name of its general partner must be registered within two weeks.

The general partner of an investment limited partnership under the LPAI must be a Registered Investment Manager under the FIEA, unless an exemption from registration requirements is available.

An offshore partnership established under a foreign law can also be offered for private placement in Japan, although a general partner is required to be a Registered Investment Manager if any Japanese investor acquires and holds an interest in it, unless an exemption from registration requirements is available.

Holders of units/shares in an investment trust/corporation are liable only to the extent of the amount contributed by them.

Liabilities of investors in collective investment schemes are determined by the relevant governing law. For example, a general partner of an investment limited partnership formed pursuant to the LPAI is jointly and severally liable for the obligations of the partnership, while a limited partner thereof is liable for the partnership's obligations only to the extent of its contribution of or commitment to contribute a capital to the partnership.

In contrast to publicly offered investment funds (please see 3.1.4 Disclosure Requirements), the disclosure requirements for privately placed investment funds are limited. However, in case of a Professional Investors Placement, certain information must be disclosed in accordance with the Japan Securities Dealers Association (JSDA) rules (please see 2.3.6 Rules Concerning Marketing of Alternative Funds).

An investment trust manager must provide a document detailing the trust agreement to investors seeking a subscription of units of an investment trust, except where the units are offered by way of a QII Placement (please see 2.3.6 Rules Concerning Marketing of Alternative Funds).

An investment trust manager must prepare and deliver a management report containing performance results, market conditions and its financial statements for the relevant fiscal year to known unitholders, and must also send this report to the regulator after the end of the fiscal year without delay, unless the units of the investment trust are offered by way of a QII Placement and the terms and conditions of the trust agreement provide that a management report will not be delivered.

A management report is comprised of two types of reports:

  • a summary management report, which contains material information; and
  • a full management report.

In addition, the ITAJ provides detailed rules on matters to be included in a management report, and the forms necessary for drafting one. A full management report may be delivered to known unitholders through electronic means, including by posting the report on an issuer’s website, as long as the terms and conditions of the trust agreement so allow.

An investment corporation must notify investors seeking a subscription of shares of the basic terms of a certificate of incorporation, such as its investment objective and its dividend policy, as well as its subscription requirements.

An investment corporation must prepare financial statements, an asset investment report and a statement on the distribution of funds for each fiscal period, and must send them to the shareholders once approved by a board of directors. An asset investment report must include material issues on the situation of the investment corporation and other matters relating to the current situation, on the directors and on its shares.

A foreign investment trust must deliver a document containing a constitutional document, such as the trust deed of a unit trust or a management regulation for a fonds communs de placement (FCP), to a prospective investor, and must prepare a management report and deliver it to known unitholders. A foreign investment corporation is not required to prepare an asset investment report.

With respect to a collective investment scheme, there is no general obligation of disclosure to a prospective investor, but a prospective investor is normally provided with a partnership agreement to review before executing it.

Ongoing disclosure obligations applicable to a collective investment scheme depend on the relevant governing law. For example, a general partner of an investment limited partnership formed pursuant to the LPAI must prepare a balance sheet, profit and loss statement and business report, and must maintain these at its principal office; a limited partner may inspect or request their own copies at any time during normal business hours.

In the case of private placements for qualified institutional investors only (“QII Placements”) and those intended for professional investors (“Professional Investor Placements”), permitted investors are limited to qualified institutional investors (QIIs) and Professional Investors, respectively, as defined in the FIEA. Please see 2.3.6 Rules Concerning Marketing of Alternative Funds regarding the requirements of private placement and 2.3.7 Marketing of Alternative Funds for the scopes of QIIs and Professional Investors.

With respect to privately placed investment funds, most investors are persons who have knowledge and experience of investment in investment funds, such as banks, insurance companies, trust companies, Registered Financial Instruments Business Operators (as defined in 2.3.2 Requirements for Non-local Service Providers), wealthy individuals and general business companies with sufficient cash supplies.

Please see 2.1.2 Common Process for Setting Up Investment Funds.

Please see 2.3.7 Marketing of Alternative Funds.

Most investment trusts are established as securities investment trusts for Japanese taxation purposes. In order to be qualified as a securities investment trust, a trust must invest more than half of its assets in securities (excluding certain “deemed securities” such as trust beneficiary interests in a trust and interests in a collective investment scheme such as an investment limited partnership) and in securities-related derivatives.

The rules of the ITAJ require a real estate investment corporation to prescribe in its certificate of incorporation that its purpose is to invest more than half of its assets in real estate, lease rights and other real estate-related assets, such as asset-backed securities, more than half of the underlying assets of which are real estate and lease rights.

An investment limited partnership may acquire and hold stocks in joint stock companies (kabushiki kaisha), bonds issued by or loans issued to business entities, and other properties that facilitate the business of the entities. However, under the LPAI, unless the approval of the competent authorities is obtained, it is prohibited from acquiring and holding shares or convertible bonds in foreign companies to the extent that such securities represent half or more of its assets.

The FIEA provides four categories of financial instruments businesses:

  • type I financial instruments business;
  • type II financial instruments business;
  • investment management business; and
  • investment advisory business.

It requires a person intending to be engaged in any such business to be registered under the FIEA as a Registered Financial Instruments Business Operator. Type I and II financial instruments businesses are involved in the services of brokerage, intermediary activity and the trading of liquid and illiquid securities (as the case may be), and their derivatives.

The Trust Business Act requires a trust company to be licensed thereunder in order to conduct a trust business.

Accordingly, if a non-local service provider wants to carry out any such business in Japan or to provide the services of such business to clients resident in Japan, it must be registered under the FIEA or licensed under the Trust Business Act, as the case may be, unless it is exempted under applicable Japanese law.

As mentioned in 2.3.2 Requirements for Non-local Service Providers, registration is necessary in order to conduct an investment management business in Japan or to provide the services of such business to clients resident in Japan under the FIEA. Therefore, if a non-local manager intends to act as an investment trust manager of an investment trust, an asset management company of an investment corporation or a general partner of an investment limited partnership, it must generally be a Registered Investment Manager under the FIEA.

On the other hand, acting as a manager or investment manager of a foreign investment trust or an asset management company of a foreign investment corporation outside of Japan does not require registration as an investment management business under the FIEA, while acting as a general partner of offshore collective investment schemes requires the registration if it involves accepting investments from residents in Japan.

Generally speaking, the establishment processes for an investment trust and an investment corporation take one to two months and three to six months, respectively.

For a foreign investment trust/corporation, it usually takes one to two months to prepare and file a notification.

The length of time for the creation of a collective investment scheme depends on its type, its complexity and the number of investors involved, among other factors.

Assuming that pre-marketing activities mean those which are conducted towards the promotion and sale of securities but do not amount to solicitation thereof, they do not constitute public offerings or private placements under Japanese law.

However, the solicitation of securities is not expressly defined in the FIEA or in any related law or guidelines. Nonetheless, under current practice, it is generally understood to mean any act carried out with a view to inducing or pressuring a targeted person to purchase a specific product or to agree to enter into a transaction. Accordingly, activities that are not within the parameters of such conduct would be regarded as pre-marketing activities under Japanese law.

In practice, however, it is difficult to draw a clear line between the solicitation of securities and pre-marketing activities, and this should be determined on a substantive basis considering all of the facts, including the wording used, the addressee of the information provided, and the reasons for the provision of the information.

In light of the above, activities such as simply answering questions posed by a potential investor (at the instigation of such potential investor) would be treated as pre-marketing. On the other hand, delivering a prospectus or sending marketing material containing past performance details of a specific investment fund is likely to be treated as solicitation of securities and must follow the requirements of the relevant private placement.

In the case of a foreign investment trust/corporation, an advance notification must be filed before conducting a private placement in Japan under the Investment Trust Act (please see 2.1.2 Common Process for Setting Up Investment Funds).

With respect to investment trusts/corporations, the FIEA principally provides for the following three methods of private placements:

  • QII Placements;
  • Professional Investor Placements; and
  • private placements of small numbers of investors (“Small Number Placements”).

It should be noted that any solicitation of securities that does not meet the requirements for private placements will generally be treated as public offerings under the FIEA.

Pursuant to a QII Placement, an issuer of an investment trust/corporation may offer its units/shares to an unlimited number of QIIs. An investor acquiring units/shares under the QII Placement is subject to a transfer restriction prohibiting any sale or transfer of units/shares to any person who is not a QII.

Professional Investor Placements have been made available relatively recently with respect to units/shares of investment trusts/corporations. Pursuant to a Professional Investor Placement, an issuer of such units/shares must disclose basic information regarding the units/shares and the issuer to the offerees, and must disclose information regarding the issuer on an annual basis to the holders of the units/shares, in accordance with the JSDA rules. In a Professional Investor Placement, the issuer may offer its units/shares to an unlimited number of Professional Investors. An investor acquiring units/shares under the Professional Investor Placement is subject to a transfer restriction prohibiting any sale or transfer of units/shares to any person other than a Professional Investor.

Pursuant to a Small Number Placement, an issuer may offer its units/shares to fewer than 50 offerees. This limitation is based on the number of offerees but not acquirers, and the number of QIIs can be excluded in calculating the number of offerees if they are subject to the requirements specified for a QII Placement (including transfer restriction). In addition, if units/shares of the same kind as the units/shares to be offered were issued during the three-month period preceding the scheduled issue date of the relevant private placement, the number of offerees of such preceding issue will be aggregated in calculating the number of offerees, which must be fewer than 50.

An investor acquiring units of an investment trust under a Small Number Placement is subject to a transfer restriction prohibiting any sale or transfer of units, unless it transfers all of its units as a whole, or unless certificates of units are unable to be divided. No transfer restriction is imposed on shares of an investment corporation issued pursuant to a Small Number Placement.

A foreign investment trust/corporation follows the same requirements as stated above (in case of a Professional Investor Placement, it must meet certain requirements provided by the JSDA rules applicable to a publicly offered foreign investment trust/corporation – please see 3.3.1 Regulatory Regime).

With respect to collective investment schemes and offshore collective investment schemes, only Small Number Placements are available, pursuant to which an issuer may offer interests therein to up to 499 investors acquiring them.

In the case of a private placement, a written notification stating that a securities registration statement (SRS) has not been made because the offering is being made by way of a private placement must be delivered to an investor; said notification must include the applicable transfer restrictions.

Under a QII Placement, units/shares can only be offered to QIIs, which include the following persons or institutions:

  • Registered Financial Instruments Business Operators with registrations of type I financial instruments businesses and investment management businesses;
  • investment corporations and foreign investment corporations;
  • banks;
  • insurance companies and foreign insurance companies;
  • credit associations and labour credit associations;
  • credit co-operative associations and agricultural co-operative associations;
  • the Government Pension Investment Fund;
  • the Japan Bank for International Cooperation;
  • the Development Bank of Japan Inc.;
  • investment limited partnerships;
  • certain employee and corporate pension funds that have submitted a notification to the regulator;
  • certain corporations that have submitted a notification to the regulator; and
  • certain individuals that have submitted a notification to the regulator.

In a Professional Investor placement, the units/shares can only be offered to Professional Investors, including the following persons or institutions:

  • QIIs;
  • the government of Japan;
  • the Bank of Japan;
  • corporations incorporated under a specific law;
  • investor protection funds;
  • the Deposit Insurance Corporation of Japan;
  • the Agricultural and Fishery Cooperative Savings Insurance Corporation;
  • the Insurance Policyholders Protection Corporation of Japan;
  • specific purpose companies;
  • companies listed on a Japanese stock exchange;
  • Japanese stock companies whose stated capital is reasonably expected to be equal to at least JPY500 million;
  • Registered Financial Instruments Business Operators or corporations that are allowed to act as general partners of collective investment schemes by submitting notifications under the FIEA;
  • foreign corporations;
  • corporations that have requested to be treated as Professional Investors and have been approved by the Registered Financial Instruments Business Operator; and
  • individuals who are operators of silent partnerships or equivalent to Professional Investors in terms of knowledge, experience and financial conditions and have requested to be treated as Professional Investors and been approved by the Registered Financial Instruments Business Operator.

In the case of a foreign investment trust/corporation, a notification is required to be filed with the regulator before conducting an offering (please see 2.1.2 Common Process for Setting Up Investment Funds).

If an investment trust manager intends to change the terms and conditions of a trust agreement or implement a consolidation of investment trusts, the trustees of which are the same, it has to notify the regulator of its intention and the contents of the change or consolidation in advance. If such changes to the terms and conditions are material, an investment trust manager has to give at least two weeks’ prior written notice to known unitholders and hold a vote on a written resolution on such change or consolidation, unless such consolidation has only a minor influence on the unitholders’ interests.

If an investment trust manager intends to terminate a trust agreement, it has to notify the regulator of this intention in advance. An investment trust manager has to give at least two weeks’ prior written notice to known unitholders and hold a vote on a written resolution on such termination, except in cases where it is truly unavoidable to terminate a trust agreement without sending a notice or except when otherwise the conditions prescribed in advance by the terms and conditions of the trust agreement are met.

If any change is made to items that have been registered with the regulator, an investment corporation has to notify these to the regulator within two weeks of said change.

If an investment corporation is extinguished as a result of a merger or is dissolved, it must notify the regulator to that effect within 30 days after this takes place.

If any change is intended to be made to a constitutional document of a foreign investment trust, the issuer must notify these to the regulator in advance. If such change to a constitutional document is material, an issuer has to give at least two weeks’ prior written notice to known unitholders. If an issuer intends to terminate a constitutional document, it has to notify the regulator of its intention in advance and give at least two weeks’ prior written notice to known unitholders.

If any change is intended to be made to the items included in a notification in respect of a foreign investment corporation having been filed with the regulator, an issuer must notify the regulator of its intention in advance. If a foreign investment corporation is dissolved as a result of bankruptcy or similar proceedings, or will be dissolved for another reason, it has to notify this to the regulator.

Collective investment schemes must follow the ongoing requirements as prescribed by the relevant governing law. For example, in the case of an investment limited partnership formed under the LPAI, if any change is made to items that have been registered with the regulator, the investment limited partnership must apply for registration of such change within two weeks of such change.

There is no regulation that sets a specific limitation on investors for a certain investment fund.

However, a Registered Financial Instruments Business Operator has to comply with the general principle of suitability in the marketing and selling of financial instruments to investors under the FIEA. Pursuant to this, it must determine whether it is acceptable to market and sell a particular financial instrument to targeted investors, considering their knowledge and experience of investing in financial instruments, their asset situation and their purpose of investment, and provide an explanation to the investors in a manner and to the extent necessary for them to understand it.

Prior to entering into a contract with an investor, a Registered Financial Instruments Business Operator must, in general, deliver a document to the investor containing an outline of such contract, charges and fees, and major risk factors associated with the contract.

Upon concluding a contract, a Registered Financial Instruments Business Operator must, in general, deliver a document containing an outline of such contract, charges and fees, and provide a method for allowing communications between the operator and the investor.

The Financial Services Agency of Japan (FSA) has authority over the administration of the FIEA, and responsibility for regulating the financial markets and financial institutions. The FSA delegates certain authorities to a local finance bureau of the Ministry of Finance, such as that of regulating Registered Financial Instruments Business Operators and disclosure obligations in respect of financial instruments.

There is no general limitation on access to the regulator, but it may take time to obtain its conclusions on matters that are innovative or unprecedented. In some cases, the regulator prefers to hold preliminary consultations prior to an official filing or application.

A Registered Investment Manager owes a general duty of sincerity and fairness to its clients and must work faithfully on behalf of its investors and carry out its investment management business with the due care of a prudent manager under the FIEA.

As part of this, the FIEA specifically prohibits a Registered Investment Manager from:

  • conducting a transaction with itself or its offices;
  • conducting a transaction between investment funds both of which are managed by it;
  • conducting a transaction with the aim of benefitting itself or a third party;
  • conducting a transaction that is detrimental to investors;
  • purchasing or selling securities on its own account using information about a transaction that it has conducted as an investment;
  • providing, or promising to provide, loss compensation or additional benefits to investors; or
  • taking any other act deemed to be insufficient as a form of investor protection, harming the fairness of transactions, or causing a loss of confidence in the financial instruments business.

In addition, a Registered Investment Manager of collective investment schemes must manage invested assets separately from its own assets and other invested assets in the manner prescribed by the FIEA.

While there is no restriction on borrowing in respect of an investment trust/corporation under the Investment Trusts Act, the rules of the ITAJ provide that a securities investment trust/corporation may borrow funds only to the extent that doing so is necessary for the purpose of providing funds for payment of redemption and distribution.

Collective investment schemes have no restrictions on borrowing.

Taxation of Investment Funds

Investment trusts are generally exempted from Japanese taxation.

Investment corporations are subject to income tax, but distributions payable to investors can be included in tax deductible expenses if certain conditions are met, such as distributing an amount equal to more than 90% of profit available for dividend to investors.

Collective investment schemes are pass-through entities and are non-taxable at the investment fund level.

Taxation of Investors

For Japanese tax purposes, investment trusts are classified into public and corporate bond investment trusts and stock investment trusts. The former invest in public and corporate bonds, but may not invest in any stocks, shares or equities, while the latter comprise investment trusts other than public and corporate bond investment trusts.

There is no such classification for investment corporations, which are generally treated in the same way as stock investment trusts for tax purposes.

For individual investors, investment in a stock investment trust is treated the same as a direct investment in unlisted stocks for tax purposes. Ordinary distributions are subject to withholding taxes at the rate of 20.42% and, thereafter, to an aggregate taxation whereby tax is calculated in combination with other types of income by a final return. Special distributions are exempted from taxes because they are, in substance, a refund of capital.

Capital gains are subject to separate self-assessed taxation at the rate of 20.315%, whereby tax is calculated separately from other types of income by a final return.

Investment in a public and corporate bond investment trust is treated the same as a direct investment in public and corporate bonds for tax purposes. Ordinary distributions are subject to a withholding tax at a rate of 20.315%. Capital gains are subject to a separate self-assessed taxation at the rate of 20.315%.

For corporate investors, ordinary distributions and capital gains arising from an investment trust are subject to a withholding tax at a rate of 15.315%.

Collective investment schemes are transparent for Japanese tax purposes. Profits or losses of collective investment schemes are attributed directly to investors and recognised as their own profits or losses by them.

Traditionally, most publicly offered investment funds in Japan are securities investment trusts, while investment corporations are predominantly used as J-REITs. Many foreign investment trusts are also publicly offered in Japan, while foreign investment corporations such as SICAVs domiciled in Luxembourg are sometimes used.

Collective investment schemes are seldom publicly offered in Japan.

The statutory establishment processes for publicly offered investment funds are the same as those for privately placed investment funds; please see 2.1.2 Common Process for Setting Up Investment Funds. However, due to the rules of the ITAJ and the JSDA, the self-regulatory organisation of securities firms, banks and other financial institutions operating in the securities business apply to investment trusts/corporations and foreign investment trusts/corporations, respectively, and they have to satisfy the detailed requirements provided for by them; please see 3.3.1 Regulatory Regime.

Please see 2.1.3 Limited Liability.

In addition to the general disclosure requirements applicable to investment funds (please see 2.1.4 Disclosure Requirements), an issuer of an investment fund who intends to conduct a public offering in Japan must file a securities registration statement in the form prescribed based on the types of securities enumerated by the FIEA prior to conducting solicitation in Japan. The SRS generally becomes effective 15 days after the filing, and thereafter an issuer can accept subscription orders placed by investors.

However, for an investment fund that is offered on a continuous basis, the SRS becomes effective on the day following the filing, on the condition that one year has elapsed since the previous SRS was filed. Accordingly, an investment fund can continue its public offering by filing a new SRS annually.

The SRS requires full disclosure of publicly offered investment funds, enabling investors to make reasonable investment decisions. For example, the SRS with respect to an investment trust must contain the following information:

  • the terms and conditions of the public offering;
  • the investment objective, fund structure, types of assets, management system, dividend policy, investment restrictions, risk factors, charges and costs, taxation, performance results, procedures of subscription and redemption, valuation of assets, term, and description of an investment trust manager, a trustee and related parties; and
  • audited financial statements of an investment trust as well as an investment trust manager.

The SRS is filed through an electronic filing system, the Electronic Disclosure for Investors’ NETwork (EDINET), and is made available for public inspection via the internet.

If there is a change to material facts that must be stated on the SRS after it has been filed (including cases where new financial statements are prepared and an important lawsuit has been resolved), or if an issuer recognises there is an item on the SRS that needs amending, an amendment to the SRS must be filed.

There is no restriction on types of investors in respect of public offered investment funds. General investors may apply for subscription, including a wide range of individual investors and institutional investors.

Please see 3.1.1 Fund Structures.

Please see 3.2.1 Types of Investors in Retail Funds.

In general, a publicly offered securities investment trust must comply with the following requirements provided by the rules of the ITAJ.

  • It may invest only in shares listed on a stock exchange and registered on an over-the-counter market established in a foreign country, and in unlisted shares or unregistered shares subject to disclosure obligations in accordance with the FIEA, the Companies Act of Japan or similar laws, or those issued in foreign countries that are deemed similar to these.
  • It may invest in an aggregate amount of units/shares of investment funds up to 5% of its net assets. This limitation does not apply to fund-of-funds type securities investment trusts, but they must invest in multiple investment funds and comply with the credit risk limitations stated below.
  • The amount of risk arising from derivative transactions calculated in a reasonable manner may not exceed its net asset value (the “derivative transaction limitation”).
  • Ratios of the exposure to a single entity to the total amount of net assets may not exceed 10% for each of the following categories, or 20% in total (the “credit risk limitation”):
    1. shares and units/shares of investment trusts/corporations;
    2. other securities and liabilities; and
    3. derivative transactions.

A publicly offered foreign investment trust/corporation must comply with the following requirements provided by the rules of the JSDA:

  • the total value of securities sold short shall not at any time exceed its net asset value;
  • no more than 15% of the net assets may be invested in illiquid assets such as privately placed equity securities or unlisted securities, unless appropriate measures have been taken to ensure price transparency;
  • any transactions that are contrary to the protection of unitholders or prejudicial to the proper management of assets, such as transactions made for the benefit of a manager or any third party, shall be prohibited;
  • a manager shall not acquire shares of any one company if doing so would result in the total number of shares of such company held by all funds managed by a manager exceeding 50% of the total number of all issued and outstanding shares of such company;
  • derivative transaction limitations; and
  • credit risk limitations.

In addition, if an issuer of an investment trust/corporation intends to list their units/shares on a stock exchange (eg, ETF or J-REIT), they must apply for a listing examination from the relevant stock exchange. To be qualified as listed units/shares, they have to meet criteria for the listing examination provided by the securities listing regulations and related rules issued by the relevant stock exchange.

Please see 2.3.2 Requirements for Non-local Service Providers.

Please see 2.3.3 Local Regulatory Requirements for Non-local Managers.

Please see 2.3.4 Regulatory Approval Process. An additional one to three months are required to prepare the SRS and a prospectus, depending on the complexity and risk character of an investment fund.

The solicitation of securities before the filing of the SRS is strictly prohibited under the FIEA. Therefore, it is important to distinguish between the solicitation of securities and pre-marketing in a public offering. However, as it is difficult to draw a clear line between them, it is important to take all the relevant factors into account (please see 2.3.5 Rules Concerning Pre-marketing of Alternative Funds).

An issuer must prepare a prospectus in connection with a public offering of an investment fund.

A prospectus in respect of an investment fund comprises a summary prospectus and a full prospectus. A summary prospectus must contain substantially material information, such as an outline of investment objectives and features, selected information on the investment trust manager, material risk factors, selected performance results and charges and costs in the case of an investment trust.

An issuer or distributor must deliver a summary prospectus to prospective investors before or at the same time as the sale. A full prospectus must contain almost the same information as the SRS, and an issuer or distributor must, upon request, deliver this to a prospective investor immediately.

Please see 3.3.3 Local Regulatory Requirements for Non-local Managers.

Please see 3.1.4 Disclosure Requirements.

An issuer of investment funds for which the SRS has been filed is subject to an ongoing disclosure obligation to file the annual securities report and semi-annual report every year within three months (or six months for an offshore investment funds) after the fiscal year end and the interim fiscal year end, respectively (where the fiscal period is six months or less, an issuer must file an annual securities report every six months).

An annual securities report with respect to an investment trust must contain the following information:

  • investment objective, fund structure, types of assets, management system, dividend policy, investment restrictions, risk factors, charges and costs, taxation, performance results, procedures of subscription and redemption, valuation of assets, term, and description of the investment trust manager, the trustee and related parties; and
  • audited financial statements of the investment trust as well as the investment trust manager.

A semi-annual report with respect to an investment trust must contain the following information:

  • performance results for a six-month period;
  • a description of the investment trust manager; and
  • unaudited interim financial statements of the investment trust and the latest financial statements of the investment trust manager.

The annual securities report and semi-annual report are filed through EDINET and made available for public inspection via the internet.

In addition, an issuer must file an extraordinary report if a certain event occurs as prescribed by the law, including a change to a major investment fund-related corporation, a material change to basic policies, restrictions or dividend policies, a dissolution of the investment corporation or termination of the investment trust.

Furthermore, if units/shares of an investment trust/corporation are listed on a stock exchange, they are subject to timely disclosure obligations provided by the securities listing regulations and related rules issued by the relevant stock exchange. For example, an issuer of an exchange traded fund (ETF) listed on the Tokyo stock exchange must disclose details of secondary offerings, borrowing of funds, revision of terms and conditions of a trust agreement, cancellation of a trust agreement, or the merger or dissolution of an issuer immediately after the occurrence thereof.

If the SRS or a prospectus contains a false statement regarding a material fact, or omits a statement regarding a material fact that is required to be stated or is necessary to prevent the SRS or prospectus from being misleading, an issuer is liable for damages suffered by an investor, whether or not there is an absence of intent or negligence on the part of the issuer, unless it can be shown that the investor was aware of such false statement or such omission at the time of purchase. Furthermore, the directors of the issuer filing such SRS, or the distributors using such prospectus, are liable for damages suffered by an investor, except in cases where such directors or distributors can prove that they did not know or could not have known of such false statement or omission had they exercised reasonable care.

In addition, it is prohibited for any person to make a false or misleading representation in documents, in drawings, via audio media, or by means other than the prospectus used for the public offering.

Apart from this, an issuer that has filed an SRS containing a false statement or misleading omission would be subject to criminal penalties and administrative fines.

Please see 2.3.11 Approach of the Regulator.

Please see 2.4 Operational Requirements.

Please see 2.5 Fund Finance.

A publicly offered foreign investment trust may borrow up to 10% of the net asset value.

The taxation of publicly offered investment funds is basically the same as for privately placed investment funds.

Nonetheless, for individual investors, in respect of stock investment trusts, ordinary distributions are subject to a withholding tax at the rate of 20.315%; thereafter, the taxpayer may select an aggregate taxation, a separate self-assessed taxation, or a separate taxation at source. If separate taxation at source is selected, the taxpayer’s tax obligations are thereby fulfilled.

Capital gains are subject to a separate self-assessed taxation at the rate of 20.315%. In respect of public and corporate bond investment trusts, ordinary distributions are subject to a withholding tax at the rate of 20.315%; thereafter, the taxpayer may select a separate self-assessed taxation or a separate taxation at source. Capital gains are subject to a separate self-assessed taxation at the rate of 20.315%.

In respect of investment corporations, ordinary distributions are subject to a withholding tax at the rate of 20.315%; thereafter, the taxpayer may select an aggregate taxation, a separate self-assessed taxation or a separate taxation at source. Capital gains are subject to a separate self-assessed taxation at the rate of 20.315%.

Asset Management Nation

The Basic Policy on Economic and Fiscal Management and Reform 2023 formulated by the Council on Economic and Fiscal Policy and adopted by the Japanese Cabinet on 16 June 2023 includes a policy aiming to open up the financial assets of households, which amounts to JPY2,000 trillion, and create an asset management nation that will contribute to sustainable growth. To this end, the policy intends to work towards increasing the sophistication of the asset management industry and strengthening the functions of asset owners managing household financial assets as institutional investors.

As part of the initiative to expand support for the new entry and to promote competition among domestic and overseas asset management companies, the following measures will be undertaken going forward:

  • the establishment of special business zones tailored specifically for asset management businesses where administrative procedures can be completed solely in English;
  • the correction of unique Japanese business practices and barriers to entry;
  • the relaxation of entry requirements for investment management businesses; and
  • the outsourcing of middle and back office operations.
Anderson Mori & Tomotsune

Otemachi Park Building
1-1-1 Otemachi
Chiyoda-ku
Tokyo 100-8136
Japan

+81 3 6775 1000

inquiry@amt-law.com www.amt-law.com
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Trends and Developments


Authors



Mori Hamada & Matsumoto is one of the largest full-service Tokyo-headquartered international law firms. A significant proportion of its work is international in nature, representing clients in cross-border transactions, litigation and other dispute resolution proceedings. MHM has more than 700 lawyers and other professionals, and more than 600 support staff. The firm’s senior lawyers include highly respected practitioners and leaders in the Japanese and international legal community, including prominent law professors at the University of Tokyo and a former Prosecutor-General of the Public Prosecutors Office. MHM is highly recognised by clients and legal professionals in the following practice areas: asset management/investment funds, M&A, capital markets, securitisations, private equity, infrastructure/energy, insolvency/restructuring, and antitrust and competition. MHM has a strong presence in Asia, with offices in Beijing, Shanghai, Singapore, Yangon, Bangkok, Ho Chi Minh City, Hanoi, Jakarta and New York. It also has domestic offices in Takamatsu, Fukuoka, Osaka, Nagoya and Sapporo.

Growing Demand for Alternative Investment Funds in Japan: From Private Placements to Public Offerings

Introduction

State of the investment funds market

For a long time in Japan, investment funds for retail investors only invested in traditional assets and their derivatives, while alternative investment funds (AIFs) were only marketed to institutional investors. However, this trend has begun to change in recent years. This article will discuss these changing trends, but will first briefly describe the basic information of investment funds in Japan.

In Japan, investment funds are one of the most popular financial instruments for both institutional and retail investors.

Types of private placement and public offering

Under the laws of Japan, units/shares of investment funds may be offered by way of public offering or private placement. In a private placement, an issuer may be exempted from certain disclosure requirements that apply to public offerings.

There are basically three different types of private placement exemption:

  • Private Placement to a Small Number of Persons;
  • Private Placement to Professional Investors; and
  • Private Placement to Qualified Institutional Investors.

In general, a Private Placement to a Small Number of Persons focuses on the number of offerees, while a Private Placement to Professional Investors Qualified Institutional Investors focuses on the offerees’ qualification.

Fund structures

According to the laws of Japan, investment funds are generally divided into three different categories:

  • investment trusts;
  • investment companies; and
  • limited partnerships.

The investment trust (sometimes referred to as a contractual type investment fund) is one of the most popular investment funds for Japanese investors. In fact, numerous investment trusts are established in Japan every year, and units of these investment trusts are actively offered/sold to Japanese investors by securities companies and banks.

It should be noted that not only investment funds established in Japan but also investment funds established outside Japan (such as an FCP in Luxembourg or a unit trust in the Cayman Islands) are offered to investors in Japan, and a significant amount of money is invested into those foreign investment funds from Japan. According to statistical data released by the Japan Securities Dealers’ Association (JSDA) on 12 June 2023, the total net asset value of publicly offered investment funds established outside Japan (for Japanese domestic investors) as of the end of March 2023 was JPY6,660.3 billion.

In Japan, an investment company (sometimes referred to as a corporate type investment fund) is mainly used in the context of REITs. In other words, an investment company established in Japan is not generally utilised for the purpose of investment into securities (such as equities or bonds). However, it is also true that some securities firms actively offer various types of SICAVs established in Luxembourg to Japanese retail investors.

A limited partnership (sometimes referred to as a partnership type investment fund) is mainly utilised for the purpose of private equity investments and infrastructure investments. This type of investment fund is not so common for Japanese retail investors, and most investors are institutional. As with other types of investment funds, not only Japanese domestic funds but also limited partnerships established outside Japan are offered in Japan. Recently, a certain number of limited partnerships established outside Japan were introduced for wealthy individuals through feeder vehicles such as a Cayman unit trust on a private placement basis.

Alternative investment funds

Overview

As mentioned at the beginning of this article, for a long time, most of the investment funds sold to retail investors only invested in traditional assets and their derivatives, while alternative investment funds were sold only to institutional investors in Japan.

There are several reasons for this, but one of the most important reasons is that alternative investment funds are considered to carry a greater degree of risk than traditional investment funds, and therefore they should only be sold to institutional investors with a high risk tolerance.

However, especially in a zero-interest rate environment, the potential for greater returns of alternative investments is very attractive not only to institutional investors but also to high net worth individuals, and in the current situation where it is difficult to make a profit by investing in traditional assets such as bonds, more and more wealthy individuals are willing to take risks and invest in potentially profitable products.

For this reason, the public offering of alternative investment funds specifically targeted at high net worth individuals has begun to be considered by distributors and asset managers in Japan; in fact, a non-listed US REIT was publicly offered in Japan through a Cayman unit trust in 2022. This trend will most likely spread not only to real estate investments but also to private equity, private credit and hedge funds investments.

Generally, investment funds solicited in Japan do not invest directly in these alternative assets but rather in alternative investment funds (ie, in the form of a fund of funds) or performance-linked notes whose performance is linked to alternative investments.

Considerations for investing in alternative investment funds

It may be true that alternative investment funds offer investors potentially large profit opportunities. However, it is also true that alternative investment funds have several considerations that are generally not found in traditional investment funds, including higher fees, significant initial investment requirements, low liquidity and low transparency.

As discussed below, publicly offered funds are subject to strict investment restrictions, but it is possible under the laws of Japan to publicly offer alternative investment funds, provided that the key characteristics of alternative investment funds are disclosed in an appropriate and sufficient manner to enable investors to make accurate investment decisions.

Investment restrictions

Publicly offered non-Japanese investment trusts (such as an FCP in Luxembourg or a unit trust in the Cayman Islands) and investment companies (such as SICAVs established in Luxembourg) are subject to certain investment restrictions under the rule of the JSDA, which include but are not limited to the following (note that there is no statutory investment restriction applicable to privately placed non-Japanese investment funds):

  • short sale (applicable only to non-Japanese investment trusts) – the total market value of securities sold short for the account of such fund shall not exceed its net asset value;
  • borrowings (applicable only to non-Japanese investment trust) – borrowing for the account of such fund shall not exceed 10% of its net asset value;
  • derivative transactions – the global risk amount of outstanding derivative transactions and other similar transactions entered into for the account of a non-Japanese fund, which is to be calculated in accordance with a reasonable method, shall not exceed a certain ratio of their respective net asset value;
  • credit risk – credit exposures to any single issuer of portfolio securities or counterparty of derivative transactions shall be managed and administered in accordance with a reasonable method;
  • voting rights of a single issuer – acquiring the shares of any one company is not allowed if such acquisition would result in the total number of shares of such company carrying voting rights held by either (a) all foreign investment trusts managed by the same manager or (b) a foreign investment company exceeding 50% of the total number of all issued and outstanding shares of such company carrying voting rights;
  • transparency requirement – this is applicable only to non-Japanese investment trusts, which shall not acquire any investment that is not listed on an exchange or not readily realisable, such as privately placed shares, unlisted shares or real estate, if doing so would result in the total value of all such investments held by the non-Japanese investment trust immediately following such acquisition exceeding 15% of the latest available net asset value, providing that this restriction shall not prevent any acquisition of an investment where the method of valuation of such investment is clearly disclosed in offering documents;
  • acquisition of shares issued by itself – this is applicable only to non-Japanese investment companies, which shall not acquire shares issued by themselves; and
  • inappropriate transactions – non-Japanese investment trusts and investment companies shall not enter into inappropriate transactions that are detrimental to investors or that would be contrary to the proper management of the assets of those funds, including, without limitation, transactions that are intended to benefit the asset manager or any third parties other than investors.

As mentioned above, the investment targets of alternative investment funds (such as real estate, private equity, private credit) are illiquid and cannot be readily realisable. Therefore, under the transparency requirement, the method of valuation of such investment must be clearly disclosed in offering documents in order for alternative investment funds to be publicly offered in Japan.

Having said that, it is difficult to precisely calculate the value of the investment targets (ultimate underlying investments) of alternative investment funds, and there is always a risk that the calculated value and the actual sale price may differ significantly. Thus, it is necessary to describe this consideration as one of the risk factors in offering documents. Needless to say, it is also necessary to alert investors to the risk that investments in alternative investment funds cannot be easily redeemed.

Investor protection rules

There are no rules in Japan that specify certain classes of investors as being inappropriate to invest in certain types of funds.

However, the laws of Japan require a financial instruments business operator (such as distributors in Japan) to conduct its business in such a manner that it does not issue solicitations in connection with an act that constitutes a financial instruments transaction that is found to be inappropriate in light of customer knowledge, customer experience, the state of customer assets or the purpose for which a financial instruments transaction contract is concluded, which would result in or be likely to result in insufficient investor protection.

Therefore, even if the required procedures have been completed, it does not mean that the alternative investment fund can be sold to anyone.

Tax regime: investment trusts

Under the Corporation Tax Act, collective investment trusts are treated as tax-exempt trusts. The following investment trusts are categorised as collective investment trusts under the Corporation Tax Act:

  • securities investment trusts (regardless of publicly offered or privately placed);
  • investment trusts publicly offered in Japan; and
  • foreign investment trusts.

Collective investment trusts are not treated as pass-through entities but they are tax-exempt, so are not taxed in respect of capital gains and income paid to them. Investors in a collective investment trust are subject to the relevant withholding taxes in respect of profit distribution.

Tax regime: investment companies

Taxation is imposed on investment companies at the fund level. However, if certain conditions are fulfilled (eg, more than 90% of distributable profits must be distributed to investors), dividends paid to investors may be deducted for Japanese corporation tax purposes. Investors in investment companies are subject to the relevant withholding taxes in respect of profit distribution.

Tax regime: limited partnership

Limited partnerships are pass-through entities for Japanese tax purposes, with taxes being levied on the investors in the fund rather than on the fund itself. Non-resident investors (both individuals and corporates) are subject to relevant withholding taxes in respect of profit distribution, whereas resident investors are not subject to withholding taxes.

Summary

As described, the appetite for alternative investment funds focusing on real estate, private equity, private credit and hedge funds has been increasing in the retail market in Japan, and this trend is likely to continue for the foreseeable future.

It is certainly attractive for investors that alternative investments can provide potentially high returns, which are difficult to achieve through investments in traditional assets. However, it should be emphasised that an investment in alternative investment funds involves a higher degree of risk than investments in traditional investment funds, and therefore it is important to strive to provide investors with accurate information on this points. For the sustainable growth of the Japanese investment fund industry, there should be a market situation where Japanese investors are provided with sufficient and accurate information on the funds, to enable them to make their own investment decisions and invest in suitable funds from among various investment funds, including alternative investment funds.

Mori Hamada & Matsumoto

Marunouchi Park Building
2-6-1 Marunouchi, Chiyoda-ku
Tokyo 100-8222
Japan

+81 3 6212 8330

+81 3 6212 8230

mhm_info@mhm-global.com www.mhmjapan.com/en
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Anderson Mori & Tomotsune (AMT) is one of the largest and most international Japanese law firms, with a long history of advising overseas companies that conduct business in Japan and in cross-border transactions. The main office in Tokyo is supported by two regional offices, in Osaka and Nagoya, and nine overseas offices. AMT has considerable experience and expertise in investment funds and trusts, including investment corporations such as J-REITs, infrastructure funds, ETFs, partnerships and other forms of collective investment schemes. The firm works with increasingly diversified international and Japanese-based investment funds, comprising private equity funds, venture capital funds, hedge funds, funds of funds and commodity funds. Consisting of 15 partners and 45 associates, the team provides comprehensive advice at all stages of the procedures to which investment funds are subject, and supports clients in navigating a broad range of regulatory matters concerning asset management.

Trends and Development

Authors



Mori Hamada & Matsumoto is one of the largest full-service Tokyo-headquartered international law firms. A significant proportion of its work is international in nature, representing clients in cross-border transactions, litigation and other dispute resolution proceedings. MHM has more than 700 lawyers and other professionals, and more than 600 support staff. The firm’s senior lawyers include highly respected practitioners and leaders in the Japanese and international legal community, including prominent law professors at the University of Tokyo and a former Prosecutor-General of the Public Prosecutors Office. MHM is highly recognised by clients and legal professionals in the following practice areas: asset management/investment funds, M&A, capital markets, securitisations, private equity, infrastructure/energy, insolvency/restructuring, and antitrust and competition. MHM has a strong presence in Asia, with offices in Beijing, Shanghai, Singapore, Yangon, Bangkok, Ho Chi Minh City, Hanoi, Jakarta and New York. It also has domestic offices in Takamatsu, Fukuoka, Osaka, Nagoya and Sapporo.

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