Explanation of 'Special Provisions for Foreign Investors' under Japan's Financial Instruments and Exchange Law

The “Special Provisions for Overseas Investors” newly introduced under the Japanese Financial Instruments and Exchange Act was established on May 19, 2021 (Reiwa 3), and came into effect on November 22 of the same year. This system was developed through the law aimed at enhancing and stabilizing the functions of finance in response to the socio-economic changes caused by the COVID-19 pandemic and other factors. The primary goal of this system is to lower the barriers to entry for fund managers who serve overseas professional investors, in line with the global trend of repositioning business hubs, thereby attracting foreign financial institutions and capital to the Japanese market and ensuring that Japan’s market can fully function as an “international financial center.”

This system is positioned as a special measure that allows business operations through “notification” rather than the “registration” normally required for financial instruments business operators. This reflects the Japanese government’s strategic intent to strengthen the international competitiveness of Japan’s financial markets and to promote direct investment from overseas.

However, the fact that the first notification under this system was not confirmed until March 2023 suggests challenges in the effectiveness of achieving the stated goal of becoming an “international financial center” and promoting the inflow of funds from abroad through “reducing entry barriers.” This may indicate not only that the system is new but also that market participants may not fully understand its benefits or may consider the existing “Special Provisions for Qualified Institutional Investors, etc.” sufficient. In particular, the Financial Services Agency’s statement that “notification does not guarantee the notifier’s credibility” may prompt cautious judgment on the part of investors and consequently suppress the use of the system. Restrictions on international travel due to COVID-19 have also been pointed out as a contributing factor to the initial low uptake. These circumstances suggest that mere legal system development is insufficient and that thorough dissemination of information to the market, clearer differentiation from existing systems, or resolution of practical challenges are necessary to truly fulfill the function of an “international financial center.”

The Framework of Special Business Categories Under the Japanese Financial Instruments and Exchange Act

In Japan, the Financial Instruments and Exchange Act requires those who conduct financial instruments business as a profession to be “registered” with the Prime Minister’s Cabinet as a general rule. Operating without this registration can result in penalties of up to five years in prison, a fine of up to 5 million yen, or both.

However, there are “special business categories” that allow operations through a “notification” system if certain conditions are met. The main special business categories include the pre-existing “Qualified Institutional Investor, etc. Special Business” (Article 63 of the Financial Instruments and Exchange Act) and the “Foreign Investor, etc. Special Business” (Article 63-8 of the Financial Instruments and Exchange Act), which will be explained in detail in this article. These special business categories are personalityized by more relaxed regulations compared to the usual financial instruments business (Type I Financial Instruments Business, Type II Financial Instruments Business, Investment Management Business, Investment Advisory and Agency Business, etc.).

The “notification” system, compared to the regular “registration,” has strategic value in allowing for a quick start of operations and low-cost market entry due to shorter review periods and relaxed requirements regarding capital and personnel structure. The “registration” for financial instruments business involves strict pre-screening and requirements (capital, personnel composition, internal control systems, etc.), which are time-consuming and costly. In contrast, the “notification” does not involve substantial review under the Administrative Procedure Act, enabling a swift business launch. For example, in the case of the Qualified Institutional Investor, etc. Special Business, operations can commence in as little as two weeks. This speed is a significant advantage, especially for new entrants from overseas. However, this “notification” is strictly a “special case,” and there are clear limitations on the scope of business. If these limitations are exceeded, the business may be subject to penalties for operating without registration. Therefore, businesses must accurately understand the limits of the “notification” while enjoying its benefits and strictly comply with the laws. This is an important aspect that demonstrates how Japanese authorities balance regulatory relaxation with investor protection.

Definition and Business Scope of ‘Special Services for Foreign Investors’ Under Japanese Law

Financial Instruments and Exchange Activities Targeted (Self-Management & Self-Offering) Under Japanese Law

“Special Business for Overseas Investors, etc.” refers to the conduct of any of the following activities as a business based on Article 63-8, Paragraph 1 of the Japanese Financial Instruments and Exchange Act.

• Self-Management: The act of managing funds contributed or invested by “Overseas Investors, etc.” who hold interests in a partnership-type collective investment scheme. The funds subject to this management must be “primarily” (more than half of the total contributions to the fund) contributed by non-residents. Here, “non-residents” refers to natural persons and corporations other than residents as defined in Article 6, Paragraph 1, Item 6 of the Foreign Exchange and Foreign Trade Act of Japan.
• Self-Offering: The act of offering or privately placing interests in a partnership-type collective investment scheme to “Overseas Investors, etc.” conducted at a business office or office established within Japan.

Unlike the traditional “Special Business for Qualified Institutional Investors, etc.” which was limited to private placements, the “Special Business for Overseas Investors, etc.” allows for public offerings as well. This is a significant feature that enables a broader approach to a wider range of investors.

Financial Products Handled (Type II Securities, etc.)

The financial products our firm handles primarily include what are known as “Type II Securities (deemed securities).” Specifically, this encompasses trust beneficiary rights, fund interests, other Type II securities, and crowdfunding initiatives. These securities, dealt with by Type II Financial Instruments Business Operators, fall under the category of securities regulated by the Japanese Financial Instruments and Exchange Act, often personalityized by their relatively low liquidity or as shares in collective investment schemes.

Comparison and Systemic Differences with “Special Business for Qualified Institutional Investors” Under Japanese Financial Regulations

The “Special Business for Foreign Investors” shares many similarities with the existing “Special Business for Qualified Institutional Investors” (Article 63 of the Financial Instruments and Exchange Act), yet there are several important systemic differences.

• Scope of Solicitation:
  • Special Business for Foreign Investors: Both “public offerings” and “private placements” related to partnership-type collective investment scheme interests are permitted. This allows for a broader approach to a wide range of foreign investors.
  • Special Business for Qualified Institutional Investors: Principally limited to “private placements” only.
• Limitation on the Number of Investors:
  • Special Business for Foreign Investors: There is no limit on the number of investors from “foreign investors, etc.”
  • Special Business for Qualified Institutional Investors: The number of rights holders per fund is limited to a total of 499 people, and non-qualified institutional investors are limited to 49 people or fewer.
• Investment Obligations of Qualified Institutional Investors:
  • Special Business for Foreign Investors: Investment by qualified institutional investors is not mandatory. However, it is permitted to accept investments from qualified institutional investors and certain other domestic investors within a range that is less than half of the total investment amount of the fund.
  • Special Business for Qualified Institutional Investors: The presence of at least one qualified institutional investor is mandatory.
• Objectives of Investment Targets:
  • Special Business for Foreign Investors: It appears to be designed with the intention of attracting direct investments into domestic small and medium-sized enterprises and real estate with foreign capital.
  • Special Business for Qualified Institutional Investors: Suitable mainly for funds targeting institutional investors and high-net-worth individuals, such as venture capital (VC), private equity (PE), hedge funds, and funds of funds (FoF).

By clarifying the systemic differences between the two special businesses, service providers can quickly provide criteria for selecting the system that best fits their business model. Especially since the names are similar and can easily be confused, visually presenting the decisive differences between the two systems can deepen understanding.

Differences from Standard Financial Instruments Business Registration

The “Special Business Activities for Foreign Investors” differ fundamentally from the standard registration for financial instruments business.

• Registration or Notification: Standard financial instruments business (such as Type I, Type II, and investment management business) requires “registration” with the Prime Minister of Japan’s Cabinet, which imposes strict scrutiny and requirements. On the other hand, the Special Business Activities for Foreign Investors only require a “notification,” simplifying the procedures.
• Capital Requirements: Type II financial instruments business requires a minimum capital of 10 million yen (or 5 million yen if only conducting Type II small-amount electronic public offering business). There are no direct capital requirements specified for the Special Business Activities for Foreign Investors, but the “financial status” of the notifier may be subject to review.
• Human Resources: Standard registration demands a rigorous human resource and organizational structure, including staff with sufficient knowledge and experience to conduct business fairly and accurately, and the establishment of an independent compliance department. While the Special Business Activities for Foreign Investors also require an “appropriate organizational structure” to conduct business properly, it is presumed that the detailed staffing requirements are less stringent than those for registered businesses.

The shift from “registration” to “notification” is intended to significantly lower the barriers to entry for foreign participants. This is expected to expedite procedures and reduce initial costs. The “registration” for financial instruments business involves very heavy regulations and scrutiny to protect investors and ensure market integrity. This represents a significant burden in terms of time and cost, especially for foreign businesses aiming to enter the market. The fact that these special activities only require a “notification” serves as a direct incentive to reduce this burden and encourage the inflow of foreign capital, which is expected to revitalize the Japanese market and enhance its international competitiveness. Considering the increasing difficulty in registering investment management businesses in recent years, these special activities provide an important pathway for foreign businesses to access the Japanese market, particularly for those managing and operating specific funds. However, this relaxation is strictly a “special exception,” and the benefits are limited to certain investors and business scopes, meaning only a select group of businesses can enjoy its advantages. Therefore, businesses must carefully consider whether their business model falls within the scope of these special activities.

Scope and Requirements of “Overseas Investors and Others” Under Japanese Law

Requirements for Foreign Corporations and Individuals Residing Abroad

“Overseas Investors and Others” include foreign corporations or individuals residing abroad who meet the criteria set forth by the Cabinet Office Ordinance on Financial Instruments Business Operators, etc. (Article 63-8, Paragraph 2, Item 1 of the Financial Instruments and Exchange Act of Japan). Specifically, one of the following requirements must be satisfied (Cabinet Office Ordinance Article 246-10, Paragraph 1, each item):

• Asset Requirement: At the time of acquiring interests in a partnership-type collective investment scheme, the net amount of assets owned (total assets minus total liabilities) is expected to be at least 300 million yen.
• Investment-Type Financial Assets Requirement: At the time of acquiring interests in a partnership-type collective investment scheme, the total amount of investment-type financial assets held (limited to those listed in Cabinet Office Ordinance Article 62, Paragraph 2, Items (a) to (i)) is expected to be at least 300 million yen.
• Transaction Experience Requirement: More than one year has passed since the day an account was opened with a financial instruments business operator, etc. (including those equivalent under foreign laws) for the purpose of trading securities or derivatives.
• Equivalent to Foreign Qualified Investors: Being equivalent to a “Specific Investor” under foreign laws.

Status of Qualified Institutional Investors and Their Closely Related Persons

In addition to the above foreign corporations and individuals, “Overseas Investors and Others” also include the following (Article 63-8, Paragraph 2, Items 2 and 3 of the Financial Instruments and Exchange Act of Japan):

• Qualified Institutional Investors: Qualified institutional investors as defined in Article 2 of the Financial Instruments and Exchange Act (e.g., Type I Financial Instruments Business Operators, Investment Management Companies, Banks, Insurance Companies, Investment Corporations, Credit Cooperatives, etc.) and those deemed equivalent by Cabinet Office Ordinance (such as welfare pension funds and corporate pension funds based on foreign laws).
• Closely Related Persons of Overseas Investors and Others Special Business Notifiers: Includes officers and employees of special business operators for overseas investors and others, parent companies, subsidiaries, affiliate companies, those entrusted with the authority to manage the assets being invested, investment advisory contractors, their officers and employees, and relatives within the third degree of kinship.

By providing a comprehensive list of specific criteria for determining investor eligibility, we can streamline the verification process in practice. This enables fund organizers to quickly determine from which investors they can accept contributions. In particular, the inclusion of qualified institutional investors and closely related persons demonstrates the flexibility of the system, while also highlighting the risk of inadvertently deviating from the requirements of the special business if the scope is not accurately understood, making this table indispensable.

Requirement of “Primarily Non-Residents” for Fund Contribution Structure

In the special business for overseas investors and others who manage their own investments, the money to be managed must be “primarily” (more than half of the total amount of the fund’s contributions) contributed or provided by non-residents. This requirement clearly indicates that the system is primarily aimed at introducing funds from overseas and restricts the use of the system for the purpose of forming funds for domestic investors by domestic operators. The term “special business for overseas investors and others” may be mistakenly interpreted to mean that all investors must be abroad, but in reality, the inclusion of some domestic investors (such as qualified institutional investors and closely related persons) is permitted. However, by imposing the condition of “primarily contributions from non-residents,” a clear direction is provided to prevent the system from deviating from its intended purpose of becoming an “international financial center.” This reflects the regulatory authority’s intention to prevent domestic operators from easily using this special business to form funds that are essentially aimed at domestic general investors. This requirement functions as an important safeguard to prevent misuse of the system and to ensure it does not stray from its original objectives.

Notification Procedures and Required Documents Under Japanese Law

Overview of Notifications and the Competent Finance Bureau in Japan

In Japan, notifications for the Special Business Activities of Foreign Investors are to be made to the head of the finance bureau (or branch office) that has jurisdiction over the location of the applicant’s head office. In particular, entities without a business or office in Japan (foreign businesses) are required to submit a notification form (one original copy) to the Securities Supervision Division 3, Financial Affairs Department of the Kanto Local Finance Bureau. This indicates that the Kanto Local Finance Bureau serves as the consolidated contact point for foreign business operators. When making a notification, a registration and license tax of 150,000 yen is required.

Details and Required Documents for Notification Applications in Japan

In Japan, notification applications must be completed according to the prescribed format, referencing the notes and examples provided on the Financial Services Agency’s website. The main items to be included are as follows:

• Trade name, corporate name, or personal name
• For corporations, the amount of capital or total amount of contributions
• For corporations, the names or corporate names of officers
• Names and positions of key employees (such as Compliance Officers) as defined by ordinance
• Type of business (self-management, self-solicitation, etc.)
• Name and location of the head office and other business or office locations
• Types of other businesses being conducted, if any
• Name of the financial instruments business association joined (optional), etc.

The accompanying documents are also prepared by referring to the examples provided on the Financial Services Agency’s website. The main documents to be attached are as follows:

• A written pledge that the applicant does not fall under any of the disqualification criteria
• Business Method Statement: A very important document detailing the basic principles of business operations, methods of execution, division of responsibilities, complaint resolution systems, and types of securities handled
• Document outlining the human and organizational structure related to business execution: Includes organizational charts, department names, responsible persons, positions, number of personnel, and business content, ensuring consistency with the Business Method Statement
• For corporations, resumes and certificates of residence (or a certified copy of the corporate registry), certificates from public offices confirming no disqualification criteria, and pledges for officers and key employees
• Articles of incorporation, certified copy of the corporate registry, and the latest balance sheet and income statement
• Documents describing the status of specific related parties (parent companies, subsidiaries, and holding companies)

By comprehensively listing the essential documents required for notification, we support applicants in preparing without omissions. Especially for foreign businesses, creating documents in accordance with Japanese legal systems requires specialized knowledge, making this checklist an indispensable guideline for practitioners to proceed with procedures.

Review Process and Standard Processing Period

Since the notification for special business activities for foreign investors is a “notification” rather than a “registration,” a shorter review period is expected compared to the standard “registration.” The standard processing period for the “registration” of financial instruments business operators is set at two months, but this does not include the period for amending applications or pre-consultation. Pre-consultation is not mandatory, but by using diagrams and other materials to explain specific business schemes, sales methods, and organizational structures, the subsequent notification process can be facilitated. Notifications are principally made using the “Financial Services Agency Electronic Application and Notification System.” Forms are submitted in Excel format, and accompanying documents are provided in PDF format.

The “notification” is primarily a formal examination, which has the advantage of allowing for swift processing. However, if there are deficiencies in the submitted documents or if the notification meets the criteria for refusal (for example, if there is no business office in Japan), the notification may not be accepted or may become subject to administrative action. This means that even though it is a formal examination, the fulfillment of minimum requirements is strictly required. It does not mean that the authorities do not check the content at all; rather, formal requirements, such as whether there are any disqualifying factors or any falsehoods or significant omissions in the submitted documents, are rigorously checked. If these requirements are not met, the notification will not be accepted, and in the worst case, it may be subject to administrative penalties or sanctions. Therefore, businesses should not take the formal examination lightly as being simple but must ensure the accuracy of the submitted documents and the fulfillment of requirements. Especially for foreign business operators, creating documents in compliance with the Japanese legal system requires specialized knowledge, and the support of experts is strongly recommended.

Ongoing Obligations and Disclosure/Publication Requirements Under Japanese Law

Duty to Create and Submit Business Reports

Exemption Notification Filers for Foreign Investors, among others, are required to prepare a business report for each fiscal year and submit it within three months after the end of each fiscal year. Submissions are generally made using the Financial Services Agency’s Integrated Business Support System. When using the integrated system, it is recommended to use a computer with a Japanese version OS and to utilize the Excel format templates downloaded from the system. If submission by paper is unavoidable, it is necessary to attach a document stating the reasons for this in detail. For foreign business operators, there is an extension approval system for submission deadlines.

Public Inspection and Publication Duties

The contents of new notifications and changes must be made available for public inspection without delay after notification. In addition, explanatory documents must be prepared for each fiscal year and made available for inspection within four months after the end of each fiscal year. These explanatory documents can be substituted with a copy of the business report. These publications are carried out by placing them at the main business or office locations where the special business is conducted or by posting them on the company’s website. The Financial Services Agency clearly states that it does not guarantee the reliability of the filers and cautions investors to carefully assess the creditworthiness of the business operators they deal with and to fully understand the transaction details, even if they are registered filers.

Points to Note Regarding Administrative Sanctions and Penalties

Failure to submit various notifications or business reports, or submitting false notifications or reports, may result in administrative sanctions (such as business suspension orders or business improvement orders). Engaging in financial instruments trading business without registration may result in imprisonment for up to five years or a fine of up to 5 million yen, or both, under the Financial Instruments and Exchange Act.

While the Exemption Notification Business for Foreign Investors lowers barriers to entry, the subsequent ongoing reporting and publication obligations and the application of administrative sanctions are as strict as those for regular financial instruments business operators. This reflects the regulatory authority’s stance of demanding strong maintenance of transparency and compliance in exchange for ease of entry. While the system’s purpose is to “reduce barriers to entry,” the strict application of ongoing reporting obligations and administrative sanctions underscores the authorities’ intent to maintain “investor protection” and “market integrity,” which are fundamental concepts of Japanese financial regulation. In other words, while the entry gate is widened, once a business operator enters the market, they are strictly required to maintain ongoing transparency and legal compliance. In particular, the Financial Services Agency’s explicit statement that it does not guarantee the reliability of filers emphasizes the importance of post-entry monitoring and the principle of self-responsibility. This means that for foreign business operators, activities in the Japanese market are not just about “notification” but necessitate the establishment of a continuous compliance system.

Obligations and Practical Considerations for Establishing Domestic Business Offices in Japan

The Necessity of Domestic Business Offices and the Treatment of Virtual Offices

Corporations conducting Special Business Activities for Foreign Investors are mandated to have a business or office within Japan (Article 63-9, Paragraph 6, Item 2 of the Financial Instruments and Exchange Act). Corporations without a business or office in Japan will be disqualified from filing (Article 63-9, Paragraph 6, Item 2 of the Financial Instruments and Exchange Act). Furthermore, individuals residing abroad are also prohibited from conducting Special Business Activities for Foreign Investors (Article 63-9, Paragraph 6, Item 3 of the Financial Instruments and Exchange Act), suggesting the necessity of having a residence within Japan. In principle, the use of so-called virtual offices is not permitted for the main business or office and all offices conducting Special Business Activities. This measure ensures the presence of substantial business operations and management systems.

Appointment of Domestic Representatives for Foreign Corporations in Japan

When foreign corporations engage in Special Business Activities for Foreign Investors, it is necessary to appoint a representative within Japan. Foreign corporations without a domestic representative will be disqualified from filing. Additionally, disqualification also occurs if there is no assurance from the foreign financial regulatory authority located at the main business office or office conducting Special Business Activities. This requirement seeks to ensure the integrity of the supervisory system in the home country.

Impact on the Taxation of Permanent Establishments (PE) in Japan

The obligation to establish a domestic base is not merely a financial regulatory requirement but also affects the tax status of a Permanent Establishment (PE). If recognized as a PE, the income generated from its business activities becomes subject to corporate tax within Japan, making careful tax consideration essential for foreign businesses contemplating operations in Japan.

The obligation to establish a domestic business office is a prerequisite for conducting business, but this physical presence is closely related to the definition of a “Permanent Establishment (PE)” in international taxation. If recognized as a PE, the income generated from its business activities will be taxable in Japan. This means that while foreign businesses may enjoy the benefits of financial regulation, they may also incur new tax obligations and burdens. Therefore, when utilizing this system, it is crucial to examine it from both legal and tax perspectives, as knowledge in a single area of expertise may overlook potential risks. To enjoy the benefits of regulatory relaxation while avoiding unexpected tax burdens, comprehensive advice from experts at the initial stage is indispensable.

Summary

The “Special Provisions for Foreign Investors” play a crucial role in promoting the inflow of overseas funds into the Japanese market and contributing to Japan’s transformation into an international financial center. The main advantages of this system are as follows:

• It allows for rapid market entry and simplified procedures through “notification,” as well as a reduction in initial costs.
• By permitting “solicitation” activities, it enables a broader approach to a wider range of foreign investors compared to the previously limited private placement special provisions.
• Since investment from Qualified Institutional Investors is not mandatory, there is increased flexibility in the composition of the fund’s investors.

However, when utilizing this system, it is necessary to be aware of the following challenges and considerations:

• There is a need for clear differentiation from the existing “Special Provisions for Qualified Institutional Investors,” and further market awareness is required to promote the use of this system.
• There is a strict application of the “primarily non-resident” requirement for the fund’s investment composition, and careful balance is needed when accepting investments from domestic investors.
• There are obligations to establish a domestic office and regulations on virtual offices, which necessitate consideration of the permanent establishment (PE) risk for tax purposes.
• Ongoing obligations such as the submission of business reports and public inspection exist, and in the event of legal violations, there are risks of administrative sanctions and penalties, making strict risk management essential.

This system, due to its exceptional nature, involves many complex interpretations and practical judgments. Especially for overseas businesses, a deep understanding of the Japanese legal system, tax system, and business practices is indispensable.

Monolith Law Office has a wealth of experience in supporting numerous domestic and international clients with legal matters related to the Japanese Financial Instruments and Exchange Act. Our firm employs several English-speaking attorneys with foreign legal qualifications, enabling us to accurately explain the complex requirements of Japanese financial regulations within the context of international business and provide practical advice. We are fully equipped to support your company’s business in Japan, ensuring smooth operations in compliance with the law.