Contents
- Background
- How is a Type 1 License "simplified"?
- What business activities are permitted under a "simplified" Type 1 License?
- What is the scope of "unlisted securities"?
- What is the scope of "professional investors"?
- Key takeaways
1. Background
On May 15, 2024, the Diet passed into law amendments to the Financial Instruments and Exchange Act (the "FIEA") (the "Amendments"). While the Amendments contain many important measures, one of the noteworthy measures is to deregulate the requirements for the registration of a Type 1 financial instruments business (a "Type 1 License") under the FIEA for a person who engages only in the distribution of unlisted securities to certain professional investors. The proposed subordinated regulations under the Amendments relating to the introduction of a new special intermediary business operator license dealing with unlisted securities, which is the so-called "simplified (or attenuated)" Type 1 License, have undergone the public comment process and were finalized on March 28, 2025. They are scheduled to become effective on May 1, 2025.
As this new "simplified" Type 1 License is expected to be useful for the distribution of certain foreign investment funds in Japan, in this newsletter we provide a summary of the new license framework.
2. How is a Type 1 License "simplified"?
Hitherto, a person who offers units of a foreign investment trust or shares of a foreign investment corporation for and on behalf of the issuer, as a primary trading, to investors in Japan is generally required to obtain a Type 1 License. Similarly, a person who acts as an intermediary for a secondary sale and purchase of such units or shares of such investment funds in Japan is also generally required to obtain a Type 1 License. However, the requirements for a Type 1 License are relatively cumbersome, which might have hindered foreign asset managers from entering the Japan market for the distribution of their foreign investment fund products to Japanese investors. More specifically, an applicant for a Type 1 License is required to, among others, (1) meet the minimum capital requirement of JPY 50 million, (2) have net assets of JPY 50 million or more, (3) meet the capital adequacy ratio of 120% or more, and (4) be a member of the Japan Investor Protection Fund (the "JIPF"). In addition, such an applicant is required to have a sufficient personnel structure, among others, to have more than one full-time staff who has at least three years' experience in engaging in the same business as the contemplated Type 1 financial instruments business.
Whereas, the Amendments have lowered the requirements of (1) minimum capital and (2) net assets, respectively, from JPY 50 million to JPY 10 million, and exempted the requirements of (3) capital adequacy ratio and (4) the JIPF membership. The full-time staff requirement mentioned above has been replaced with the requirement to have at least one full-time staff who has at least one year's experience in engaging in the same business as the contemplated Type 1 financial instruments business.
That said, it should be noted that the Amendments do not ease any other requirements for a "simplified" Type 1 License. Therefore, an applicant for a "simplified" Type 1 License is still required to, among others, have a sufficient personnel structure and an internal organizational structure to soundly engage in the relevant "simplified" Type 1 financial instruments business, have a local office in Japan, and be incorporated as a Japanese joint stock company (kabushiki kaisha) or a foreign company equivalent thereto1 that engages in the business similar to the relevant "simplified" Type 1 financial instruments business in its home jurisdiction and has a local representative in Japan. Just like a normal Type 1 financial instruments business operator, a "simplified" Type 1 financial instruments business operator is required to be a member of the Japan Securities Dealers Association (the "JSDA") or have in place internal rules that are equivalent to the rules of the JSDA2. This means, among others, it must employ internal control managers, internal control directors, and registered sales representatives.
A "simplified" Type 1 financial instruments business operator is exempted from the ongoing requirements applicable to a normal Type 1 financial instruments business operator, such as laying aside the financial instrument transaction liability reserves, and the calculation and maintenance of its capital adequacy ratio.
3. What business activities are permitted under a "simplified" Type 1 License?
A "simplified" Type 1 financial instruments business operator is permitted to offer "unlisted securities" for and on behalf of the issuer, as a primary trading, to "professional investors" in Japan. It is also permitted to act as an intermediary for a secondary sale and purchase of "unlisted securities" in Japan on the condition that the purchaser is a "professional investor" while the seller is a "professional investor" or a "non-professional investor" who is not solicited by the "simplified" Type 1 financial instruments business operator.
In any case, a "simplified" Type 1 financial instruments business operator is generally prohibited from receiving its clients' money or securities; provided, however, in exceptional cases it may receive its clients' money on the condition that the receipt of such money is necessary for settlement purposes, and it does not hold such money for over one week.
4. What is the scope of "unlisted securities"?
A "simplified" Type 1 financial instruments business operator may deal with "unlisted securities", meaning securities that are not listed on a Japanese stock exchange or traded on a Japanese over-the-counter market3. This means that a "simplified" Type 1 financial instruments business operator may deal with units of a foreign investment trust and shares of a foreign investment corporation that are not listed on a stock exchange in any jurisdiction, or which are listed on a stock exchange outside of Japan like foreign exchange-traded funds ("ETFs"). It should be noted, however, that a "simplified" Type 1 financial instruments business operator may not deal with any foreign collective investment scheme4 products like foreign limited partnership interests. A person who offers foreign collective investment scheme products to investors in Japan is generally required to be registered as a Type 2 financial instruments business operator.
5. What is the scope of "professional investors"?
In the context of a "simplified" Type 1 License, "professional investors" means those who fall under any of the following categories, while "non-professional investors" means those who do not fall under "professional investors":
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Footnotes
1 This means such foreign company must have (i) a board of directors consisting of at least three directors and at least one corporate auditor (kansa-yaku), (ii) a board of directors and an audit and supervisory committee consisting of at least three directors, a majority of which must be independent directors, or (iii) a board of directors and three committees (i.e., an audit committee, nominating committee, and remuneration committee) consisting of at least three directors, a majority of which must be independent directors, respectively.
2 An applicant for a "simplified" Type 1 License is, in practice, expected to join the JSDA, as is the case of normal Type 1 License holders.
3 Currently there is no such over-the-counter market in Japan.
4 It should be noted that a "collective investment scheme" under the FIEA does not include an investment trust or investment corporation but refers typically to an investment fund formed as a limited partnership.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
