Summary of Securities-Related Regulations Under The Financial Instruments and Exchange Act

Written By:Shinji Itoh, Esq.

Hayabusa Asuka

Tokyo, Japan

The Financial Instruments and Exchange Act (kin-yu shohin torihiki ho; the “Act”) regulates activities relating to securities and other financial instruments.  The Act covers (i) disclosure requirements for issuers of securities, (ii) disclosure requirements for tender offers, (iii) regulations on financial instruments business operators, (iv) financial instruments firms associations, and (v) financial instruments exchanges. In this article, we overview regulations on the offering of the securities and the collective investment scheme under the Act.

I.  What Are the “Securities”?

The Act concerns the “securities” (yuka shoken) and other “financial instruments” (kin-yu shohin), which terms are defined under the Act.  Article 2, Paragraph 1 of the Act provides a list of traditional types of securities to constitute the “securities” for the purposes of the Act, e.g., governmental bonds, corporate bonds, CPs, equity shares, warrants and depositary receipts (“Paragraph I Securities”).  Article 2, Paragraph 2 of the Act designates certain types of financial instruments as “deemed securities”, e.g., trust beneficiary interests, membership interests in certain closed corporations, partnership interests in a Civil Code partnership, a Commercial Code partnership, a limited liability partnership under special laws, and similar interests under foreign laws (“Paragraph II Securities”).  The term “financial instruments” is defined to include the securities, currencies, and certain derivatives/indexes.

II.  Public Offering vs. Private Placement.

(A)  In principle, an offering of Paragraph I Securities to 50 or more persons constitutes a “public offering”.  Before a public offering is made, the issuer of such Paragraph I Securities must file a securities registration statement with the Prime Minister.  A securities registration statement is a disclosure document containing the detailed information on the securities being issued as well as the issuer.  A prospectus containing the contents of such securities registration statement must be delivered to prospective investors.  Exemptions from the registration requirement are available if the offering falls into a category of the following private placements. Certain transfer restrictions are imposed on the Securities for all categories of private placements.

(1)  Placement to Qualified Institutional Investors only.  An offering must be made to “Qualified Institutional Investors” (tekikaku kikan toshika) only.  The term “Qualified Institutional Investors” are defined under a ministerial ordinance promulgated under the Act, including banks, securities houses, insurance companies and certain business corporations.

(2)  Placement to Professional Investors only.  An offering must be made to “Professional Investors” (tokutei toshika) only.  The Professional Investors include Japan, Bank of Japan, Qualified Institutional Investors, certain corporations and individuals, and foreign corporations.  The issuer of the Securities must appoint a registered “financial instruments business operator” (such as a securities company) if the offering is made to Professional Investors other than Japan, Bank of Japan and Qualified Institutional Investors.

(3)  Placement to Small Number Offerees.  An offering must be made to 49 or less persons.

(B)  Unless 500 or more persons acquire Paragraph II Securities as a result of an offering, such offering does not constitute a public offering.

(C)  Continuous reporting requirements are imposed on the issuer of the securities publicly offered.

III.  Collective Investment Scheme.

A “collective investment scheme” refers to a management of moneys and other assets contributed by holders of trust beneficiary interests or partnership interests (domestic or foreign), to invest mainly in the securities and derivatives.

The collective investment scheme is often used for real estate securitizations in Japan.  To avoid certain licensing requirements, real estate is held by a trust bank in trust.  A special purpose vehicle (an “SPV”) holds such beneficial interest in trust (Paragraph II Securities).  Typically, investors purchase partnership interests in the SPV.

In principle, an operator/manager of a collective investment scheme must be registered as a discretionary investment manager (toshi-unyo gyosha) under the Act. Conditions for the registration include the minimum capital requirement and staffing requirement.  When an SPV is used as the operator/manager of a collective investment scheme, it is impossible for such SPV to satisfy the registration requirements.  Two exemptions are available: (i) an SPV to hire a registered discretionary investment manager; and (ii) an SPV to become an operator of the “specially permitted business for Qualified Institutional Investors, etc.” (tekikaku kikan toshika tou tokurei gyomu) (“QII Special Business”). QII Special Business must collect funds through partnership interests (Paragraph II Securities), which are held by (x) at least one Qualified Institutional Investor and (y) less than 49 non-Qualified Institutional Investors.  Non-resident, foreign investors are excluded from the number of such non-Qualified Institutional Investors.  A simple notice is required to be submitted to the Prime Minister.

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