OVERVIEW

Irish investment funds may be sold in Japan by way of public offering or by private placement, with private placements being further divided into two sub-categories; a private placement to qualified institutional investors only, and a private placement to a limited number of investors. The time frame and costs vary depending on the type of offering sought.

It should be noted that any Securities Registration Statement that is required in the case of public offering in Japan to be filed by the Irish fund with the Kanto Local Finance Bureau of the Ministry of Finance Japan must contain all of the information that is required under relevant rules issued by the Central Bank of Ireland (the "Central Bank") and must not contain any information which conflicts with the Irish prospectus.

The prospectus of any Irish domiciled fund being sold in Japan may need to comply with certain requirements. It should be noted that if any supplement or addendum to the Irish prospectus specific to investors domiciled in Japan is prepared, such document will need to be submitted to the Central Bank in advance, to ensure that there are no inconsistencies with the Irish prospectus.

INVESTMENT FUND CATEGORISATION AND REGISTRATIONS

Types of Investment Funds

There are two types of foreign collective investment scheme which are recognised under Japanese law.

  • Foreign Investment Trusts
  • Foreign Investment Corporations

A foreign investment trust is a trust type collective investment scheme and would include an Irish unit trust (a "Foreign Investment Trust"). A foreign investment corporation is a corporate type collective investment scheme and would include an Irish variable capital company (a "Foreign Investment Corporation").

For the purposes of this section, both types of foreign investment schemes shall be collectively referred to as "Foreign Investment Funds".

Units, shares or bonds issued by Foreign Investment Funds are collectively referred to as "Securities". Holders of Securities of Foreign Investment Funds are referred to as the "Shareholders" and the manager of the Foreign Investment Trust and a Foreign Investment Corporation are both referred to as an "Issuer".

Umbrella type funds have not been recognised under Japanese laws. Accordingly each sub-fund within an Irish umbrella fund must be registered separately in Japan. However, if one or more sub-fund(s) in the Irish umbrella fund has been previously registered in Japan, this will significantly expedite the process of registering additional sub-funds within the same umbrella fund.

Categories of Registrations

Foreign Investment Funds are regulated in Japan by two pieces of legislation.

The Financial Instruments and Exchange Act (the "FIE Act")

The FIE Act regulates all financial instruments as defined in the FIE Act including corporate stocks and bonds as well as Securities. The Kanto Local Finance Bureau of the Ministry of Finance Japan (the "KLFB") is the regulator for the purposes of disclosure under the FIE Act.

Since the FIE Act regulates all financial instruments, any company, partnership or other entity that issues any financial instrument is also under the control of the FIE Act as are Foreign Investment Funds.

Public offerings and private placements are dealt with separately in the FIE Act.

Unlike the ITIC Act (as discussed below), the distinction between trust-type and corporate-type vehicles is of little importance under the FIE Act as the FIE Act focuses on the Securities offered rather than on the actual structure of the Foreign Investment Fund.

In the case of public offerings, the Securities of a Foreign Investment Fund must be registered with the KLFB in accordance with the FIE Act in advance of being offered in Japan unless the registration is exempted by the FIE Act.

The registration requires a disclosure document for potential investors the contents of which are substantially identical to the prospectus to be delivered to potential investors. As long as the Securities are offered in Japan, the Foreign Investment Fund must continue to register the Securities at the start of each offering year and unless all Securities are redeemed in Japan or no shareholders exist in Japan, reports of the Securities must be filed with the KLFB periodically unless otherwise exempted.

If the Securities are only offered by way of private placement, the above registrations and reports are not required.

The Act on Investment Trust and Investment Corporation (the "ITIC Act")

Unlike the FIE Act, the ITIC Act only applies to investment funds. Only entities which satisfy the requirements of the ITIC Act will be allowed to act as Foreign Investment Funds in Japan.

Unlike the FIE Act, the distinction between public offerings and private placements is of little importance under the ITIC Act as the ITIC Act deals with the Issuer of the Securities rather than the Securities they are offering. Registrations under the ITIC Act differentiate between trust-type and corporate-type funds.

The regulator of the ITIC Act is the Financial Services Agency of the Japanese Government (the "FSA").

A Foreign Investment Fund must be registered with the FSA in advance of its Securities being offered in Japan. No periodical reports or updates are required by the ITIC Act other than investment management reports which must be periodically delivered to shareholders and to the FSA unless otherwise exempted. If an amendment is made to the offering or constitutive document of a Foreign Investment Fund, the amending document must be filed with the FSA in advance of the effectiveness of such amendment.

Comparison between the Two Acts

Act

The Financial Instrument and Exchange Act

The Act on Investment Trust and Investment Corporation

Object

Securities

Foreign Investment Funds

Regulator

KLFB

FSA

Distinction between Public Offering and Private Placement

Yes

Not important

Primarily Responsible Party

- Issuer and

- Distributor in Japan

Issuer

Initial Registration

Securities Registration Statement ("SRS")

Registration Statement concerning Foreign Investment Trust / Registration Statement concerning Foreign Investment Corporation

Continuous Reports

Annual Securities Report; and Semi-Annual Securities Report

None, except Investment Management Report

Amendment to Registration or Reports

Amendment to SRS; and Extraordinary Reports (in the case of substantial change)

Registration Statement of Amendment to Trust Deed of Foreign Investment Trust / Registration Statement of Amendment to Foreign Investment Corporation

Disclosure

Yes (by EDINET)

No

PUBLIC OFFERING AND PRIVATE PLACEMENT

Under Japanese laws, certain registrations and reports are required to be made / filed depending on the type of offering being made. Accordingly, before a Foreign Investment Fund can be offered for sale in Japan, the first decision to be made will be to decide on the type of offering to be made.

As mentioned earlier there are two categories of offering under Japanese laws; public offering and private placement (respectively, "Public Offering" and "Private Placement"). Private Placements are divided into two sub-categories; Private Placement to Qualified Institutional Investors Only (the "QII Private Placement") and Private Placement to Limited Number of Investors (the "49-Investor Private Placement").

The time frame that it takes to complete a registration and the costs involved will depend upon the type of offering.

Private Placement:

The QII Private Placement

The QII Private Placement is commonly referred to as the "Professionals Private Placement" because Qualified Institutional Investors ("QIIs") are considered to be professionals who are deemed to have expert knowledge of and an understanding of investing in securities. Most large institutional investors (such as banks, insurance companies, securities dealers, investment advisors, investment corporations and any corporation or individual who has registered with the regulator that it holds sufficient amounts of securities, as required by law) are eligible as QIIs.

It is important to have a distributor or distributors in Japan to verify the QII status of all investors. The number of QIIs that you may solicit is unlimited provided that non-QIIs are not solicited.

From the point of view of the documentation required to be prepared and filings required to be made, the QII Private Placement is the easiest and least expensive offering.

QII Private Placement is also able to avail of exemption from the ITIC requirement to periodically deliver investment management reports to shareholders and to the FSA, provided that its Trust Deed states that an investment management report will not be delivered.

The 49-Investor Private Placement

The 49-Investor Private Placement is a private placement whereby Securities are only offered to a limited number of investors.

The 49-Investor Private Placement counts every person or entity solicited for the Securities, whether a QII or non-QII, towards the limitation of the number of investors, exclusive of the QIIs subject to the QII Transfer Restriction as explained below in the Hybrid Private Placement. It does not matter whether or not they actually subscribe for the Securities. The 49 investors are counted on the basis of any investors solicited over the course of the preceding six month period and the relevant Securities offered are deemed to be any issued securities the kind of which is identical to the Securities in question. If securities of such kind have already been offered to 49 investors in the preceding six month period then another 49- Investor Private Placement cannot be made. The test of whether there are any issued securities the kind of which is identical to the Securities in question (as set out in the FIE Act) is as follows:

(a) Whether the Issuer of the Securities is identical; and

in the case of a trust-type fund, whether the fund is identical in terms of: (b-i) Trust assets;

(b-ii) The terms and conditions of redemption of the Foreign Investment Fund and the distribution of profits of the Foreign Investment Fund; and

(b-iii) A redemption period of the Foreign Investment Fund; or

in the case of a corporate-type fund, whether the fund is identical in terms of

(b) the distribution of profits in respect of Securities.

As a general point, as the assets of a sub-fund within an umbrella scheme are segregated from the assets of other sub-funds within the umbrella, units or shares of each sub-fund may be offered by way of a 49-Investor Private Placement.

It is critical to have a distributor or distributors in Japan to monitor the number of solicited investors. The 49-Investor Private Placement is also exempted from the certain obligations imposed on Public Offerings (such as the JSDA Rules, the Selection Standards, and the requirement to register with the KLFB).

The Hybrid Private Placement

This used to be distinguished from an ordinary 49-Investor Private Placement, however, it has been incorporated in a 49-Investor Private Placement pursuant to the FIE Act.

This type of a 49-Investor Private Placement provides that a QII may be excluded from the 49 investor limitation subject to additional requirements (the "Hybrid Private Placement"). The same rules apply to the 49 investor element of the offering as apply for an ordinary 49- Investor Private Placement, while the same rules apply to the QII element of the offering as apply for an ordinary QII Private Placement.

Although the Hybrid Private Placement gives the greatest flexibility of all Private Placements, as the same offering may be made to both QIIs and to the 49 'non-QII' investors, the requirements for the Hybrid Private Placement are a mix of the requirements of both types of Private Placement. Additionally, the number of solicited non-QII investors must be continuously monitored in addition to verifying the QII status for all QII investors.

Public Offering:

JSDA Rules and Selection Standards

In order to make a public offering in Japan, a Foreign Investment Fund must meet requirements pursuant to the Rules concerning Transaction of Foreign Securities of the Japan Securities Dealers Association (the "JSDA Rules" and the "JSDA", respectively). The JSDA Rules are not legislative provisions but are a set of internal rules which bind distributors in Japan all of who must be members of the JSDA in the selection of foreign investment funds to be distributed in Japan.

The JSDA Rules provide that a JSDA member must confirm certain requirements in advance of the public offering in Japan of Securities of the Foreign Investment Fund.

The selection standards in the JSDA Rules (the "Selection Standards") can be quite burdensome because they typically result in amendments being required to be made to a Foreign Investment Funds offering and constitutive documents. Securities to be offered by way of Private Placement are exempted from the Selection Standards. Accordingly, the making of a Private Placement exempts Foreign Investment Funds from the investment restrictions in the Selection Standards.

Note that it has been established that Irish regulated funds typically comply with all of the JSDA requirements.

The distributor in Japan must submit a Confirmation of Foreign Investment Securities in advance of the Securities to be offered in Japan by way of Public Offering (the "JSDA Submission"). The Selection Standards are detailed below in the section headed Public Offering.

Comparison Amongst the Offerings

Types of Offering

I. Public Offering

II-a. QII PP

II-b. 49-Investor PP

II-b. Hybrid PP

Investors

Anybody

QIIs only

Anybody

Number of Investors

Unlimited

Up to 49

Unlimited QIIs, but up to 49 non-QIIs

Registration with the KLFB

Yes

No

FSA Registration

Yes

JSDA Submission

Yes

No

Time Frame and Costs of Offerings

The time frame and costs vary depending on the type of offering sought. The most expensive component of the offering process is the translation of documentation into Japanese.

We have set out below estimates of the time frames and the Japanese legal cost for an initial registration:

Types of Offering

Time

Estimated legal costs

Public Offering

1.5 - 2.5 months

8.0 - 12 million JPY
(80,000 - 120,000 EUR)

QII Private Placement

0.5 - 1.5 months

2.0 - 3.0 million JPY
(20,000 - 30,000 EUR)

49-Investor Private Placement

0.5 - 1.5 months

2.0 - 3.0 million JPY
(20,000 - 30,000 EUR)

Hybrid Private Placement

0.5 - 1.5 months

2.0 - 3.0 million JPY
(20,000 - 30,000 EUR)

ADJUSTMENTS TO COMPLY WITH JAPANESE LAWS

Generally Required Adjustments

Generally, in order to be offered in Japan, the structure of a Foreign Investment Trust and a Foreign Investment Corporation must be similar to a Japanese domestic investment trust and a Japanese domestic investment corporation, respectively, as defined in the relevant Japanese laws, and the Japanese regulators have not officially given any directions beyond these definitions on how similar they must be. Although the Japanese authorities are familiar with both Irish corporate and non-corporate structures, there are a number of issues that should still be borne in mind:

  • A Foreign Investment Fund must have as its objective the management of its assets through investment, investing more than a half of its assets in Specified Assets. "Specified Assets" mean securities, interests in financial derivative instruments, real estate, lease on real estate and other assets as set out in the FIE Act.;
  • A Foreign Investment Fund must intend to distribute its Securities to multiple investors; and
  • A Foreign Investment Trust must not pay any repurchase, redemption, or distribution proceeds in specie.

Public Offering

Foreign Investment Trusts must have a manager and a trustee pursuant to the JSDA Selection Standards. The Selection Standards for a public offering are summarised as follows:

  • The net assets of the Foreign Investment Trust must be not less than JPY100,000,000 or its equivalent in foreign currencies;
  • The net assets of the manager who is the issuer of the Foreign Investment Trust or of the investment manager of the Foreign Investment Corporation must be not less than JPY50,000,00 or its equivalent in foreign currencies;
  • A bank or a trust company must have been appointed as trustee or custodian to hold the assets of the Foreign Investment Fund;
  • A Japanese resident must be appointed as a legal representative of the Issuer;
  • The courts of Japan must have jurisdiction in relation to legal proceedings with respect to transactions of Securities acquired by investors in Japan;
  • There must be certain restrictions on short selling and borrowing; and
  • A change in the directors or officers of the Issuer must require an approval or consent of the Central Bank of Ireland, the investors, the trustee or any other equivalent person or entity.

The Selection Standards often require changes to an existing Trust Deed or Memorandum and Articles of Association as well as the existing Irish prospectus. As such, it is often easier to provide for a Japanese registration during establishment or to create a new fund specifically for a Public Offering in Japan.

The QII Private Placement

The transfer of securities from a QII to a non-QII is prohibited ("QII Transfer Restriction") as a transfer to non-QIIs would lead to the same result as a Public Offering but without complying with the strict requirements for a Public Offering. For that reason, the FIE Act imposes the following conditions in order to inform potential QII shareholders of the QII Transfer Restriction prior to the acquisition.

Foreign Investment Trust

The most practical way is that the QII Transfer Restriction on the Securities shall be delivered in writing or electronically to an acquirer of the Securities.

The Issuer must not have issued any securities the kind of which is identical to the Securities by way of Public Offering in Japan.

Foreign Investment Corporation

Any solicitation for acquisition must be made on the condition that the acquirer must enter into an agreement that the acquirer shall not transfer the shares to a non-QII (the "Agreement on Transfer Restriction"). The Issuer must not have issued any securities the kind of which is identical to the Securities by way of Public Offering in Japan.

The 49-Investor Private Placement

Foreign Investment Trust

The most practical way is that the transfer restriction on the Securities that a whole lot of the Securities held by a shareholder may be transferred only in whole, not in part, shall be delivered in writing or electronically to an acquirer of the Securities.

The Issuer must not have issued any securities the kind of which is identical to the Securities by way of Public Offering in Japan.

Foreign Investment Corporation

No specific requirements are needed except that the Issuer must not have issued any securities the kind of which is identical to the Securities by way of Public Offering in Japan.

The Hybrid Private Placement

As stated above, the requirements for a Hybrid Private Placement are a combination of the requirements of the QII Private Placement and the 49-Investor Private Placement.

THE REGISTRATION PROCESS

FSA Registration

Registration Statement for a Foreign Investment Trust / Registration Statement for a Foreign Investment Corporation

In advance of any offering of Securities in Japan, the Foreign Investment Fund must be registered with the FSA pursuant to the ITIC Act. The documents required are a Registration Statement for a Foreign Investment Trust or a Registration Statement for a Foreign Investment Corporation (collectively, the "FSA Registration").

The FSA Registration must be in Japanese and is made by the Foreign Investment Fund's Japanese legal counsel on behalf of the Foreign Investment Fund.

The FSA Registration is required for both cases of Public Offering and Private Placements.

The first intended date of the offering of the Securities must be stated in the FSA Registration. The offering period may be unlimited. The FSA Registration is effective until its revocation or any amendment to it. While the prospectus is not required as an accompanying document, it is the most crucial document to be translated in order to prepare the FSA Registration.

Timing: Prior to the Offering

The FSA Registration must be made prior to any public offering or private placement. Usually, the date of the FSA Registration is one day prior to the start of the initial offering of the Securities. The Authorisation Certificate from the Central Bank of Ireland, must be obtained well in advance of the date of the FSA Registration so that the copy of the Authorisation Certificate can be filed with the FSA Registration.

Accompanying Documents

  • Trust Deed / Memorandum and Articles of Association and any amendments thereto

    The constitutional documents, including any amendments thereto, if any, are required.
  • Incumbency Certificate ("IC")

    The representative or representatives of the Issuer in the FSA Registration who execute the POA (detailed below) must be certified to have such authority by way of an incumbency certificate ("IC"). This is usually certified by another officer or director or a company secretary of the Issuer. Certification in an IC by the person who executes the POA is not permitted. The form of an IC is usually provided by Japanese counsel and an executed original of the IC is required.
  • Power of Attorney ("POA")

    The Issuer must appoint a Japanese lawyer to represent the Issuer and the representative of the Issuer must certify the appointment by way of a power of attorney ("POA"). The persons who sign the POA will be the representatives of the Issuer in the FSA Registration. The form of a POA is usually provided by Japanese counsel and an executed original of the POA is required.
  • Authorisation Certificate

    A copy of the letter of authorisation from the Central Bank of Ireland must accompany the FSA Registration (the "Authorisation Certificate"). The Authorisation Certificate is required for the FSA Registration only, not for the SRS.
  • Legal Opinion

    A legal opinion from the Irish legal adviser stating that the Foreign Investment Fund has been duly established and existing under the laws of Ireland is required.

Securities Registration Statement (the "SRS")

The SRS is necessary in order for a Foreign Investment Fund to be offered by way of Public Offering.

The SRS is prepared in Japanese. The SRS generally expires in one year. Accordingly, if it is intended that the Securities will continue to be offered after the first anniversary of the start of the offering, an updated SRS must be filed for the next offering period. As such, you must file an SRS for every offering year. No amendment to the SRS can extend the offering period. The new SRS for the next offering period is an "original" SRS, not an amendment to the SRS for the preceding period.

Any prospectus for a Foreign Investment Fund which is making a Public Offering must be substantially identical to the SRS at all times. Whenever the prospectus is amended, an amendment to the SRS must be filed simultaneously.

Timing: 16 Days Prior to the Offering

The SRS will become effective after full 15 days have elapsed since the filing, exclusive of the filing date and the effective date. Accordingly, the filing date of the SRS must be 16 days prior to the start of the intended initial offering of the Securities.

Accompanying Documents

  • Trust Deed / Memorandum and Articles of Association and any amendments thereto.
  • Copy of the Minutes of the Board of Directors of the Issuer.
  • Incumbency Certificate ("IC")
  • Power of Attorney ("POA")
  • Legal Opinion ("LO")

Comparison of Documents Required for the Differing Filings

Types of Filing

FSA Registration

SRS with the KLFB

Trust Deed / Memo & Arts

Required

Required

Minutes of Board Meeting about Issuance

No

Required

Incumbency Certificate

Required

Required

Power of Attorney

Required

Required

Certificate of Authorisation

Required

No

Legal Opinion

Required

Required

CONTINUING OBLIGATIONS

Amendment to and Termination of the FSA Registration

If a Foreign Investment Fund is being amended or terminated, an amendment to or termination of the FSA Registration will also be required unless the Foreign Investment Fund is otherwise exempted. Attention must be paid to the timing of such registration as under the provision of the ITIC Act it must be prior to the effective date of the amendment or termination. Any such amendment or termination also requires an official Central Bank of Ireland noting letter of such amendment or termination.

Amendment to the SRS and the Extraordinary Report

When a Foreign Investment Fund has been offered by way of Public Offering and its Trust Deed or Prospectus has been amended, the amendments must be disclosed to the public. The disclosure to the public involves changes to both the prospectus and the SRS. In the case of a public offering, certain other material changes may require an immediate detailed disclosure, named an Extraordinary Report.

Annual Securities Report and Semi-Annual Securities Report

In the case of public offering, an Annual Securities Report for each accounting period and a Semi-Annual Securities Report for the first six months of the accounting period must be filed with the KLFB.

Investment Management Report

An investment management report must be prepared and delivered to known shareholders annually for Foreign Investment Trusts. This obligation is exempted for Foreign Investment Trusts which have been offered by way of QII Private Placement provided that its Trust Deed states that an investment management report will not be delivered. Once an investment management report has been prepared, a copy must be filed with the FSA of Japan.

Continuous Obligations

Types of Offering

Public Offering

Private Placement

Amendment to and Termination of the FSA Registration

Required

Required

Amendment to the SRS

Required

No

Extraordinary Report

Required

No

Annual Securities Report and Semi-Annual Securities Report

Required

No

Investment Management Report

Required

Required
(QII PP may be exempted.)

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.