alerts & publications
Japan Adopts New Legislation to Facilitate Equity Crowdfunding for Start-up CompaniesJuly 3, 2014
Amendments to Japan’s Financial Instruments and Exchange Act in May 2014 may facilitate the emergence of equity crowdfunding intermediaries in Japan by making it easier for intermediaries to assist start-up companies in raising funds from investors over the internet. The new rules may encourage the emergence of new crowdfunding portals in Japan and potentially provide opportunities for non-Japanese portals to extend their offerings to Japan. The amendment will come into effect by May 30, 2015 and will be subject to amendments of related government regulations.
I. Crowdfunding in Japan
Crowdfunding in Japan has become increasingly popular in recent years. Like in the United States prior to the JOBS Act, however, legal restrictions limited crowdfunding primarily to donation-based crowdfunding (crowdfunded donations to specific projects) or purchase-based crowdfunding (crowdfunded pooling of funds to develop and/or purchase products or services). There are only a small number of Japanese equity crowdfunding platforms (in which investors seek to make a profit through a crowdfunded acquisition of equity interests or an interest in a fund). Current rules generally require an intermediary (including a crowdfunding platform) that conducts public equity offerings or private placements to register as a Type I Financial Instruments Business Operator if the intermediary offers equity directly in a company (“Type I Intermediary”), and as a Type II Financial Instruments Business Operator if it offers fund interests (“Type II Intermediaries”). Current equity crowdfunding platforms in Japan are structured as Type II Intermediaries, because it is very difficult to meet the stricter registration requirements for Type I Intermediaries which are regulated as a regular securities firm. In addition, all security firms in Japan that are Type I Financial Instruments Business Operators are, as a practical matter, required to be members of the Japan Securities Dealers Association, a self-regulatory organization whose rules prohibit handling public offerings or private placements of unlisted securities. As such, currently there is no Japanese equity crowdfunding platform that offers investment directly in company stock. Many investors, however, hesitate to invest indirectly through investment in fund interests, as protection of their rights depends on the terms of individual investment agreements as opposed to company stock whose rights are governed by and protected under the Companies Act of Japan. In addition, venture companies also hope to retain financiers that can support their businesses longer than the limited term duration of funds. As a result, the government is seeking to facilitate equity crowdfunding platforms through the new amendments, especially those offering company stock as described below.
II. Amendment Encourages New Crowdfunding Intermediary Businesses
The new rules enable crowdfunding intermediaries that solely conduct public offerings or private placements through the internet only (or other designated electronic means) within certain subscription amount limits, to register as a Type I Intermediary if equity interests are offered directly (“Type I Crowdfunding Intermediaries”) or as a Type II Intermediary if fund interests are offered (“Type II Crowdfuding Intermediaries”). Subscription amount limits will be determined by government regulations, but the total subscription amount is expected to be less than JPY 100 million (approximately USD 1 million) and subscription amount per investor is expect to be JPY 500 thousand or less (approximately USD 5,000).
The new rules exempt registered crowdfunding intermediaries from certain restrictions that apply to other financial business operators, including:
- exempt Type I Crowdfunding Intermediaries from restrictions on conducting other types of business and regulation of capital to risk ratios applicable to regular Type I Intermediaries;
- lower the required capital for Type I Crowdfunding Intermediaries (expected to be lowered to JPY 10 million (approximately USD $100,000) from the current JPY 50 million (approximately USD $500,000) applicable to regular Type I Intermediaries); and
- lower capital requirements for Type II Crowdfunding Intermediaries (expected to be lowered to JPY 5 million (approximately USD $50,000) from JPY 10 million (approximately USD $100,000) applicable to regular Type II Intermediaries.
In addition, the JSDA will be lifting prohibitions on handling public offerings or private placements of unlisted securities to the extent such transactions meet the requirements for crowdfunding as described above.
In order to prevent fraudulent acts using online fund raising structures, however, certain restrictions will apply to registered crowdfunding intermediaries, including:
- obligation to provide certain disclosures about the croudfunding intermediaries and the investee companies, and a requirement to provide internet access to most information required to be delivered prior to the execution of the contract to subscribe for stock or fund interest; and
- compliance with general duties of good faith, advertising regulations, and other regulations and restrictions generally applicable to regular Type I/Type II Intermediaries.
III. Growth of Start-ups Expected
Like the liberalization in the US of crowfunding contemplated under the JOBS Act, the Amendments, once implemented, are expected to facilitate crowdfunding to finance start-up businesses in Japan, which have been historically struggled to secure financing. Also similar to the US, the rulemaking to implement the changes is expected to take a substantial amount of time, up to May 30, 2015. Whether the amendments succeed in facilitating funding businesses may depend in part on the specific requirements of the implementing regulations and timeliness of implementation.
For more information about the Amendments, please contact the authors of this alert Hiroki Sugita in our Tokyo office or Eric Sibbitt in our San Francisco office.
This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Hiroki Sugita, an O'Melveny counsel licensed to practice law in Japan and New York, and Eric Sibbitt, an O'Melveny partner licensed to practice law in California and New York, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.
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