Digital markets, funding and payment servicesi Payment services
Registration or notification is necessary for non-banks to engage in certain types of payment services, including: remittances (fund transfer transactions); issuances of prepaid payment instruments (e.g., electronic money and gift vouchers); credit purchase intermediation (e.g., issuance of credit cards); and acquirer or PSP operations.ii Funds transfer services
To mitigate the significant burden of obtaining a banking services licence, the PSA, established in 2010, made it possible to make small-amount fund transfers of ¥1 million or less through a single remittance instruction by obtaining registration as a fund transfer service provider without obtaining a banking services licence. As of 28 February 2019, there are 64 businesses registered as fund transfer service providers in Japan. In early 2019, the government announced its direction to introduce new licence in 2020, under which the maximum amount of fund transfer would not be limited.
On a separate note, in relation to the payment of compensation for goods and services, 'billing agency services' (whereby a business operator receives payment of such consideration on behalf of a goods or service provider (a payee) and delivers the received funds to such payee) are not considered to fall under the definition of 'funds transfers' in Japan and thus do not require registration as fund transfer service providers. Many businesses, such as convenience stores, provide these services.Issuances of prepaid payment instruments
The PSA regulates issuers of prepaid payment instruments to protect consumers and help establish safe and sound payment and settlement systems. Issuers distributing prepaid payment instruments used to pay for goods or services offered by the issuers and third-party merchants ('third-party type' prepaid payment instruments) must register with the local finance bureau having jurisdiction over the issuer.
If the prepaid payment instruments are used only to pay the issuer ('own business type' prepaid payment instruments), the issuer must file a notice with the local finance bureau when the unused balance of the prepaid payment instruments exceeds ¥10 million on a reference date (each of 31 March and 30 September).
Furthermore, all issuers of prepaid payment instruments must reserve at least 50 per cent of the total amount of the issuance once the unused balance exceeds ¥10 million as of either reference date. Except for certain cases, the issuer may not redeem or buy back the instruments.
Under the PSA, prepaid payment instruments must have all of the following three elements: record of value; issuance in exchange for consideration; and use as payment or demand. If the instrument satisfies certain exception criteria, such as having a usage period limited to six months or less, it will not constitute a prepaid payment instrument and will be exempt from application of the PSA.Acquirers and PSPs
Japan requires credit card issuers to be registered as 'comprehensive credit purchase intermediaries'. The amendment of the Installment Sales Act came into force in June 2018, by which (1) acquirers that acquire and manage the merchants who use credit cards; or (2) certain types of payment service providers (PSPs) that enter into contracts with merchants to permit the handling of credit cards, became required to be registered. PSPs are not required to be registered if the acquirers have the final decision to conclude merchant agreements and the PSPs' operations are limited to only the first stage examination of whether to conclude the agreements.iii Collective investment schemes
The FIEA lists specific forms of instruments as securities. If a product or service (including tokens) falls within any of these securities, then the FIEA regulations apply. In addition to this list, the FIEA also comprehensively defines what is called a 'collective investment scheme' (CIS) in order to regulate various types of funds (including foreign funds), regardless of their legal form. CIS arrangements must have all of the following elements:
- monetary contribution (or monetary equivalent) from investors;
- business using the contributions; and
- investors' entitlement to the distribution of profits arising from the business or of assets relating to the business.
As described below, investment equity interests in investment-type crowdfunding (crowd-lending or peer-to-peer lending) and tokens may be considered CIS equity interests.
For CIS equity interests, subject to some exceptions, registration under the FIEA is required for solicitation for acquisition of the equity interests and management of the assets invested.
Issuers of CIS equity interests are, in principle, required to be registered as type II financial instruments businesses in order to solicit the acquisition of such equity interests.
To manage the assets invested in the fund by the CIS equity interest holders, the issuer must obtain registration as an investment management business in principle.iv Crowdfunding
In Japan, crowdfunding is classified into 'donation-type', 'purchase-type', 'loan-type' and 'investment-type' crowdfunding. A licence is not required to engage in crowdfunding as a business in cases such as 'donation-type' crowdfunding (where users donate funds without receiving any consideration in exchange) or 'purchase-type' crowdfunding (where users receive products or services in exchange for their funds).Loan-type crowdfunding (crowd-lending and peer-to-peer lending)
Loan-type crowdfunding (crowd-lending or peer-to-peer lending) involves crowdfunding business operators who intermediate between users and parties seeking funds, and such operators must obtain registration as moneylending businesses. The business operators typically solicit funds for loans from the public in the form of investments in fund vehicles and lend such funds to fund users. In order to engage in loan-type crowdfunding, as a general rule, the operators must register as type II financial instruments businesses to solicit investments in the fund, and they must also register as moneylending businesses to provide loans.Investment-type crowdfunding
Investment-type crowdfunding is divided into investments in (1) more highly liquid 'Paragraph 1 securities', such as stocks and share options, and (2) 'Paragraph 2 securities', such as equity interests in funds.
Prior to the FIEA amendment in 2014, operators had to obtain registration as type I financial instruments businesses in order to trade in or perform brokerage, intermediary, and agency services to trade paragraph 1 securities, and registration as type II financial instruments businesses in order to conduct brokerage and agency services for the sale and purchase of paragraph 2 securities, irrespective of whether a crowdfunding transaction, in which only a small amount of funds is collected, was conducted.
Following the FIEA amendment in 2014, the regulations were relaxed so that operators who only engage in crowdfunding where a certain small amount of funds are collected through the internet can obtain a more relaxed registration as a 'small-amount electronic public offering business'. However, at present, there are few advantages to being registered as such a business, so many businesses registered as type I or type II financial instruments businesses engage in crowdfunding businesses in conjunction with other businesses.
If a fund intends to invest in real estate, additional rules under the Real Estate Specified Joint Enterprise Act have applied, which made it difficult for funds to invest directly in real estates. In December 2017, the revised Act came into force, which mitigated the regulations, such as allowing for funds to provide online disclosure documents. Real estate investment crowdfunding is expected to boom following this revision.