Background
New Scope of Definition
Comment
On May 16 2003 the Financial Services Agency of Japan (FSA) proposed an amendment to an order issued by the Prime Minister's Office concerning the definition of 'qualified institutional investors' stipulated in Article 2 of the Securities and Exchange Law.
Under the existing regulations, only certain domestic institutions in Japan are eligible to be qualified institutional investors under the Securities and Exchange Law (25/1948), which grants qualified institutional investors exemptions from certain public disclosure requirements in connection with securities offerings. The qualified institutional investors exemption is similar to the qualified purchaser and qualified investor exemptions available under US securities regulations. In order to encourage and facilitate the private placement of securities in Japan, the amendment proposes to amend the order to expand the definition of 'qualified institutional investors' to include non-Japanese resident investors.
The amendment proposes to include the following entities in the definition of 'qualified institutional investors':
- institutions established in foreign jurisdictions which conduct the following businesses, are registered as qualified institutional investors with the FSA and have the minimum stated capital, contributed amount or funded amount:
- a securities broker/dealer business with a minimum stated capital, or contributed or funded amount, of Y100 million (about $870,000);
- an investment trust management business with a minimum stated capital, or contributed or funded amount, of Y100 million (about $870,000);
- a banking business with a minimum stated capital, or contributed or funded amount, of Y2 billion (about $17.4 million);
- an insurance business with a minimum stated capital, or contributed or funded amount, of Y1 billion (about $8.7 million); and
- a discretionary investment advisory business with a minimum stated capital, or contributed or funded amount, of Y100 million (about $870,000);
- a securities broker/dealer business with a minimum stated capital, or contributed or funded amount, of Y100 million (about $870,000);
- foreign governments, foreign governmental organizations, foreign local governments, foreign central banks and international organizations in which Japan participates, which are registered as qualified institutional investors with the FSA; and
- foreign corporations which (i) submit securities reports under the Securities and Exchange Law to the Kanto Financial Bureau, if the financial documents in the securities reports indicate that such corporations have portfolio securities certificates and investment securities certificates which have an aggregated value of Y10 billion (about $87 million), and (ii) are registered as qualified institutional investors with the FSA.
In addition, in order for these foreign entities to be qualified institutional investors, they are required to appoint proxy agents residing in Japan who are responsible for their registration for qualified institutional investor status and for settling acquisitions and transfers of securities certificates.
The amendment is now subject to public consultation, and may be modified as a result of public comments (although this is unlikely). The FSA anticipates that the amendment will become effective as of July 1 2003.
Arguably, the amendment expands the utility of the professional private placement exemptions and will play a significant role in encouraging the growth of the Japanese capital market, along with other recent amendments to securities regulations made in connection with the qualified institutional investor exemptions. These include the expansion of the 'qualified institutional investor' definition to include more domestic corporations and the expansion of the professional private placement exemptions to include private placements of equity securities (for further details please see "Scope of Private Placement Exemption Extended").
Transactions and offerings which were not available in the past, such as an offering to less than 50 non-qualified institutional investors investors and up to 250 qualified institutional investors (both Japanese and foreign), will be permissible without the onerous disclosure requirements of the past. Currently, both public and private Japanese capital markets suffer from low trading volumes, but the recent and proposed amendments should serve to increase the number of securities transactions and thus improve trading volumes.
For further information on this topic please contact Koichiro Ohashi at White & Case LLP by telephone (+81 3 3259 0200) or by fax (+81 3 3259 0150) or by email ([email protected]).