On February 3, 2016, the Financial Services Agency of Japan (Japan FSA) promulgated the final text of the Enforcement Orders, Cabinet Ordinances, and Supervisory Guidelines Incorporating Amendments to the ‘Special Business Activities for Qualified Institutional Investors’ (Article 63 Exemption) as set forth under Article 63 of the Financial Instruments and Exchange Act of Japan (FIEA). The new amendments (Amendments) introduce a significant overhaul with respect to the Article 63 Exemption filing process and the ongoing obligations of filers under the Article 63 Exemption (Article 63 Exemption Operators). The Japan FSA has also circulated its responses (Responses) to public comments it had received regarding the proposed amendments to the Article 63 Exemption, which provide important clarification on a number of matters, including the requirement for offshore Article 63 Exemption Operators to maintain a ‘Japan representative’.
On May 27, 2015, the National Diet of Japan passed a bill setting forth the Amendments. They are generally seen as a response by the Japan FSA to scandals involving significant losses and damages to unsophisticated individual investors in Japan who subscribed to investment funds marketed under the Article 63 Exemption. The Amendments seek to narrow and limit the circumstances under which the Article 63 Exemption can be used while increasing the Japan regulators’ oversight on Article 63 Exemption Operators.
On November 20, 2015, the Japan FSA released its drafts of the Enforcement Orders, Cabinet Ordinances, and Supervisory Guidelines in connection with the Article 63 Exemption (collectively, Supplemental Regulations). The Supplemental Regulations provide further details and information with respect to the precise manner by which the Amendments will be effected, as well as certain interpretative information.
New Filing Requirements for Article 63 Exemption Operators
Historically, the notification process for Article 63 Exemption Operators had been relatively simple, as an applicant was only required to provide general information about itself (e.g., name, address, telephone number, capital amount). However, under the Amendments, the required information for Article 63 Exemption notifications would be substantially increased such that each applicant will be required to provide additional information, including, but not limited to, the following:
- Telephone number of its office and website address
- Summary/contents of the target investments of the limited partnership
- Name and type of all Qualified Institutional Investors (QIIs) as well as the total number of QIIs anticipated to subscribe to the limited partnership
- Whether the interests of the limited partnership are being offered to non-QIIs
- If an applicant is a foreign entity, the address and telephone number of its ‘Japan representative’1
Currently, only general information is listed on the Japan FSA website regarding registered Article 63 Exemption Operators. However, subsequent to the Amendments, significantly more information regarding each Article 63 Exemption Operator will be available to the public (e.g., name of representative, target investments, address and telephone number of the office, number of QIIs).
In addition to the information described above, each applicant under the Article 63 Exemption will be required to submit various deliverables with its Article 63 Exemption notification, including, but not limited to, the following:
- Résumés of each of the directors/officers of the applicant as well as ‘important’ employees
- Affidavit of each of the directors/officers and important employees to confirm address, legal competency, no criminal/administrative sanctions that would disqualify his/her status, and no affiliation with any antisocial forces (i.e., criminal organizations)
- Oath of each of the directors/officers affirming his/her status and suitability under Japanese law
Under the Amendments, Article 63 Exemption Operators will be required to file annual business reports and create, maintain, and disclose to the public explanatory documents concerning the annual business reports. The Supplemental Regulations provide details about the items that should be described in annual business reports, such as the contents/summary of the target investments of the limited partnership, financial status, and status of investors. Article 63 Exemption Operators are required to file such annual business reports within three months of the end of the business year.
As can be noted from the various changes described above, the Article 63 Exemption registration process under the Amendments is significantly more burdensome in terms of practical documentation requirements than under the prior regime.
Limitation on the Scope of Investors for Article 63 Exemption
Although the Article 63 Exemption has always required that at least one QII be subscribed to the relevant limited partnership fund, there are no explicit requirements as to the QII itself. In response to a concern regarding the lack of substance of certain QIIs that were used by Article 63 Exemption Operators to satisfy the minimum QII requirement, under the Amendments, if the QII is a domestic investment limited liability partnership (toushi yugen sekinin kumiai, ILLP), such ILLP would be required to have at least JPY 500 million (excluding loans) in invested assets. There are no additional qualifications on other types of QIIs or any minimum subscription amount.
It should be further noted that the scope of the non-QIIs seeking to subscribe to the limited partnership fund is limited to certain types of investors (such as listed companies, legal entities with JPY 50 million or more of paid-in capital, legal entities with JPY 50 million or more of net assets, and foreign entities) or persons who are closely related to Article 63 Exemption Operators (such as officers or employees of Article 63 Exemption Operators and their family members, and subdelegates or investment advisers of Article 63 Exemption Operators or their officers or employees) at the offering.
The Japan Representative
Among other important matters covered in the Responses, the Japan FSA provided further information with respect to the requirement that offshore Article 63 Exemption Operators maintain a ‘Japan representative’. This issue has been a source of great concern to many offshore fund managers that have relied on the Article 63 Exemption to engage in both their ‘self-offering’ and ‘self–asset management’ activities with respect to Japan investors.
Concerning the Japan representative, the Japan FSA commented that offshore Article 63 Exemption Operators will be expected to have a Japan representative that is responsible for proper and efficient communications with Japan regulators. The Japan FSA noted, however, that it will not be necessary for the offshore Article 63 Exemption Operators to establish a physical presence or situate personnel in Japan. Thus, as long as the regulators can immediately and adequately communicate with an offshore Article 63 Exemption Operator through such Japan representative, any person who is a resident in Japan may serve as the Japan representative for the offshore Article 63 Exemption Operator.
The Responses also noted that an appropriate professional service provider, such as a lawyer or certified public accountant, as well as an affiliated company with a presence in Japan, a financial instruments business operator, an independent adviser, and a translator might be appointed to serve as a Japan representative of the offshore Article 63 Exemption Operator.
According to the Japan FSA, the Amendments will become effective on March 1, 2016, and any new applicants filing under the Article 63 Exemption subsequent to March 1, 2016 and any existing Article 63 Exemption Operator that starts solicitation on or subsequent to March 1, 2016 must do so under the new regime. Existing Article 63 Exemption Operators can continuously provide self–asset management services to existing clients. However, with respect to those Article 63 Exemption Operators that have filed prior to March 1, 2016, there is a grace period ending August 31, 2016 in which Article 63 Exemption Operators must supplement any existing notifications with respect to the additional information required by the Amendments.