The Private Equity Review: Japan

I General overview

Despite the situation with the covid-19 pandemic over the past two years, the fundraising market for private equity funds in Japan remains strong. Due to the negative interest rate policy that has been present in Japan since 2016, investors such as regional banks are showing a strong appetite for alternative investments that will provide a meaningful level of return on investment. Although there are no official statistics on the fundraising market in Japan, we have noticed increasing demand from various private equity funds in the past years through our fund formation services. With respect to domestic Japanese funds, as of December 2021, the private equity members of the Japan Private Equity Association have increased to 48 firms from 43 firms two years ago, and the venture capital members of the Japan Venture Capital Association have increased to 124 firms from 96 firms two years ago. Japanese institutional investors have shown stronger interest in global private equity funds as well. Japanese pension funds and universities have shifted, or are willing to shift, a certain portion of their asset allocation to private equity and venture capital firms. Perhaps driven by the same reason, we have seen an increasing demand for fund of funds, which invest in various private equity firms.

II Legal framework for fundraising

i Japanese fund vehicles

There are several vehicles available under Japanese law that are used for private equity funds. Each has different characteristics, as explained further below.


A partnership is a primitive pass-through vehicle recognised under the Civil Code of Japan. It is often called an NK from the abbreviation of its Japanese name. Both the fund operator and investors will be partners in the NK. As a principal rule, all partners share profits and risks (losses) of the partnership, and all partners bear unlimited liability to third parties. Because investors wish to avoid unexpected losses, investors and the fund operator typically agree in the partnership agreement that the ultimate risk is borne by the fund operator. Nevertheless, a third party that enters into a transaction with the partnership is able to make a claim against the investors for losses, which may not be welcomed by some investors.

Investment limited partnerships

An investment limited partnership (ILP) is a partnership based on a special law (the Act on Investment Limited Partnership Agreements) enacted by the government in 1998 for the purpose of fostering investment funds in Japan. The ILP is based on the Civil Code partnership (NK), with several characteristics added by the special law. The most important characteristic of an ILP is that the investors, which will be limited partners of the ILP, bear limited liability. The liability of a limited partner is limited to the extent of its capital contribution to the ILP. The fund operator will be the general partner and bears unlimited liability to third parties in respect of the liabilities of the ILP. The ILP is the most frequently used fund vehicle in Japan. However, an ILP is prohibited from investing 50 per cent or more of its assets in foreign corporations. Once an ILP is formed, registration is required in the commercial registry within two weeks.

Limited liability partnerships

A Japanese limited liability partnership (Japanese LLP) is another variation of partnership based on the Civil Code partnership (NK), where each partner will only bear limited liability in respect of the liabilities of the fund. One important requirement of the Japanese LLP is that all partners must actively participate in the partnership activities, and mere passive cash investment is not permissible. Therefore, a Japanese LLP is not suitable for private equity funds that intend to raise money from various institutional investors. Instead, if there are only to be a limited number of investors, each of which is willing to actively participate in the investment activities of the fund, as may be the case with corporate venture capital, a Japanese LLP is a worthwhile option to consider. A Japanese LLP is also required to make a commercial registration within two weeks of its establishment.

Silent partnership

Another choice of fund vehicle is the silent partnership, which is more commonly known by its abbreviation 'TK'. A TK is recognised under the Commercial Code of Japan, and it is a contractual relationship formed by an agreement between the TK operator and the TK investor. In a TK, the TK investor makes a contribution to certain business of the TK operator (TK business), and the TK operator distributes profits arising from the TK business to the TK investor. The money contributed by the TK investor belongs to the TK operator, and all activities of the TK business are conducted by the TK operator in its own name (and not in the name of the fund). The TK investor does not hold any direct interest in the assets comprising the TK business, and the liability of the TK investor is limited to the extent of its contribution. There are no registration requirements when forming a TK.

Tax treatment of a TK differs from other pass-through partnerships, especially if the investor is an individual. A TK is often used together with a Japanese limited liability company (GK), which will be the TK operator.

ii Characteristics of Japanese fund contracts

Model agreement form

Japanese fund contracts2 generally follow the structure of global fund contracts in many respects, such as the management fee and carried interest structure. However, some of the terms and conditions widely accepted in Japanese fund contracts differ from globally recognised terms. The reason for this is because most Japanese ILP fund contracts are based on the model agreement form provided by the Ministry of Economy, Trade and Industry (METI), and some of the content of the model agreement form is not totally aligned with that currently considered to be global standard, especially compared with the terms and conditions of complicated fund agreements adopted in global private equity funds.3

Organisation for Small & Medium Enterprises and Regional Innovation requirements

Another characteristic of Japanese ILP fund contracts is that many agreements contain specific terms related to the Organisation for Small & Medium Enterprises and Regional Innovation (SMRJ). The SMRJ is a government-related administrative agency that invests in private equity funds, and a large number of Japanese funds are currently being invested in by the SMRJ (as a limited partner). The SMRJ requires that the funds into which it invests must have certain terms stipulated in its investment rules, such as a requirement that a certain portion of the fund's portfolio investments are made in small and medium-sized enterprises.

iii Overview of fundraising regulatory framework

Prior to the introduction of the Financial Instruments and Exchange Act of Japan (FIEA) in 2007, partnership interests were not considered to be 'securities' under the securities laws in Japan, and there were very limited restrictions on fundraising by partnerships. However, an interest in a fund is now categorised as a security under the FIEA, and is subject to its regulation. The Japanese regulations on private equity funds differ depending on the fund structure (i.e., whether it is a partnership-type fund or a corporation-type fund).

iv Regulations on partnership-type funds

Partnership-type funds are the main vehicle used for fund formation in Japan. Partnership interests are recognised as being interests in a collective investment scheme,4 which fall within the securities enumerated in the FIEA. Therefore, a partnership involving Japanese investors, regardless of whether its general partner is located outside Japan and the limited partnership is established outside Japan, is subject to regulation under the FIEA in that the general partner may be required to register or to file a notification, as the case may be, with the Financial Services Agency (FSA), the relevant Japanese regulatory authority, both in respect of (1) its offering activities in Japan or to Japan-resident investors (the Offering Regulations) and (2) its investment management activities for a fund involving Japanese investors (the Investment Management Regulations).

The Offering Regulations and the Investment Management Regulations are generally structured under the concept that the offering activities and investment management activities are conducted by the general partner of the fund, rather than by the manager of the fund. Therefore, registration or filing required under the Offering Regulations or the Investment Management Regulations is typically required to be made by the general partner of the private equity fund.

Offering Regulations

Under the Offering Regulations, in principle, to solicit partnership interests of a private equity fund in Japan, the general partner of the fund must register with the FSA as a Type II financial instruments business operator. However, registration as a Type II financial instruments business operator is a document-intensive process and generally requires several months of preparation. Therefore, a majority of fund operators typically utilise the Article 63 exemption (see below), which is one of the exemptions set out in the FIEA. With respect to foreign private equity funds, some fund operators may instead retain a Japanese firm that is already registered as a Type II financial instruments business operator (such as a securities firms) for the purpose of marketing the fund in Japan.

Investment Management Regulations

The Investment Management Regulations have the same structure as the Offering Regulations in that they generally require registration but have certain exemptions. In principle, a general partner that manages a fund that has a Japanese investor must register with the FSA as an investment management business operator. However, registration as an investment management business operator is likely to be even more time-consuming than registration as a Type II financial instruments business operator, and, hence, foreign private equity funds normally also seek to rely on exemptions from such registration.

Article 63 exemption

One of the frequently used exemptions from the registration requirement under the Offering Regulations and the Investment Management Regulations is called the Exemption for Special Business Activities for Qualified Institutional Investors, stipulated in Article 63 of the FIEA (the Article 63 exemption). A fund operator using this exemption is known as an Article 63 exempted operator. If the general partner can rely on this exemption, it can conduct offering activities in Japan and investment management activities for Japanese investors by filing a notification called a 'Form 20' with the FSA. Documents required for the Article 63 exemption can be prepared in English.

In a high-level summary, the Article 63 exemption requires that:

  1. at least one of the fund investors is a qualified institutional investor (QII);
  2. the number of Japanese non-QII fund investors is no more than 49;
  3. each Japanese non-QII fund investor is an eligible non-QII;
  4. the Japanese investors do not include investors that are considered to be disqualifying investors, such as certain types of collective investment schemes;
  5. the general partner submits a copy of its constitutional document;
  6. officers and certain employees of the general partner submit to the FSA their CV and certification of their compliance with the qualification requirements prescribed in the FIEA;
  7. the partnership interests are subject to certain transfer restrictions; and
  8. if the general partner resides outside Japan, a representative in Japan (who will be in charge of communication with the FSA) is appointed by the general partner.

However, even if the above exemption applies, the general partner is still required to comply with certain ongoing obligations under the FIEA, including the following:

  1. submitting a business report together with its balance sheet and profit and loss statements to the FSA within three months of the end of each fiscal year;
  2. making certain excerpts from the Form 20 and the business report available to the public; and
  3. filing an amended Form 20 or submitting a copy of an amended constitutional document when any revision is made to the contents.

In addition, Article 63 exempted operators are subject to supervision and enforcement by the FSA, including reporting requirements, on-site inspections and business improvement orders or business suspension orders.

The Article 63 exemption has a fund-of-funds regulation that includes a look-through rule, and investors of upper-tier funds must also be counted against the threshold of 49 non-QII investors. Moreover, certain types of fund vehicles are prohibited from investing in a fund using the Article 63 exemption.

The entire list of Article 63 exempted operators is publicly available on the FSA's website.


The QII is the key concept that needs to be considered in checking the applicability of the Article 63 exemption. Unless there is a Japanese investor that qualifies as a QII, it is difficult for the general partner of a private equity fund to be exempted from the registration requirement by utilising the Article 63 exemption. Various types of institutions that fall within the definition of a QII are prescribed in a cabinet office order under the FIEA. For example, Japanese banks and insurance companies are enumerated as QIIs. Companies and individuals that hold investment assets (securities) of no less than ¥1 billion can become QIIs through a filing with the FSA. Such filing must be renewed biennially. The list of QIIs is available on the FSA's website, so private equity funds can access the website and check whether the targeted Japanese investor is a QII or not. QIIs are considered to be professional investors under the FIEA and, therefore, some of the regulations are mitigated for financial transactions with QIIs.

Transfer restrictions

Another important concept of the Article 63 exemption is transfer restrictions. Transfer restrictions should be included in the partnership agreement or other executed documents to qualify for the Article 63 exemption from the Offering Regulations. The transfer restrictions should stipulate that QII investors may only transfer their partnership interests to other QIIs, and non-QII investors may only transfer their entire interest to a single investor that is a QII or an eligible non-QII.

De minimis Japanese QII exemption

If a non-Japanese private equity fund is marketing to Japanese investors, another exemption available is the de minimis Japanese QII exemption. If the requirements for this exemption are met, the general partner is exempted from both registration and filing of a notification with respect to the Investment Management Regulations.

The de minimis Japanese QII exemption requires that:

  1. the non-Japanese fund has fewer than 10 Japanese fund investors, whether directly or indirectly through a Japanese collective investment scheme;
  2. all Japanese direct and indirect fund investors are QIIs; and
  3. the aggregate capital contributions to the fund by such Japanese fund investors represent no greater than one-third of the aggregate capital contributions of all fund investors.

However, this exemption only applies to the Investment Management Regulations, and not to the Offering Regulations. Therefore, the general partner of a foreign private equity fund still needs to file Form 20 in respect of offering activities, unless all marketing activities in Japan for such fund are carried out by a registered placement agent (Type II financial instruments business operator) under the FIEA. A general partner may use the Article 63 exemption for the Offering Regulations and thereafter rely on the de minimis Japanese QII exemption for the Investment Management Regulations.

Foreign investors' exemption

There is a new exemption adopted in 2021, which is an exemption for 'specially permitted business for foreign investors' (the foreign investors' exemption). This exemption mainly targets foreign fund managers who are willing to set up a physical office in Japan.

There are certain criteria that must be fulfilled to qualify for this exemption, including:

  1. the majority of the capital contributions to the fund must come from investors that are non-Japanese residents;
  2. the investors must meet certain criteria stipulated in the FIEA, such as that individual investors of the fund must have investment assets (and net assets) of more than ¥3oo million; and
  3. the foreign fund manager must have a physical office in Japan.

Since the main target of this exemption is foreign funds that have global investors outside Japan, the Japanese investors eligible to invest under this exemption are generally limited to professional investors.5

If a foreign fund manager can rely on the foreign investors' exemption, it can conduct offering activities and investment management activities in Japan by filing a 'Form 21-4' notification with the FSA. The foreign fund manager relying on this exemption will be subject to regulations similar to those applied to fund operators relying on the Article 63 exemption.

Temporary exemption for foreign investment managers

Together with the foreign investors exemption, the FSA also introduced a temporary exemption for specially permitted businesses during the transition period, which is applicable to foreign investment managers registered or licensed by relevant regulators in specified countries (i.e., US, UK, Australia, Singapore, Switzerland, Germany, France and Hong Kong) for three years or more. Those managers can conduct offering activities and investment management activities of foreign funds in Japan by filing a 'Form 31' notification with the FSA, and will be subject to the same regulations applied to foreign fund managers relying on foreign investors exemption. A foreign investment manager using this exemption cannot allocate more than 50 per cent of its investment portfolio to Japanese stocks.

This exemption is only applicable for five years from the date of the Form 31 filing, and the law stipulating the exemption itself will be abolished after 21 November 2026.

v Solicitation of non-Japanese corporation-type fund

In the case of a non-Japanese corporation-type fund, the solicitation of shares of such fund is typically delegated to and handled by a registered placement agent (Type I financial instruments business operator, such as a securities firm in Japan), and the fund itself does not conduct any marketing or offering to Japanese investors.

An investment fund established in the form of a company or a trust will likely be interpreted as a foreign investment corporation or foreign investment trust within the meaning of the Act on Investment Trusts and Investment Corporations (AITIC). Pursuant to the AITIC, prior to offering such company's shares in Japan, the issuer must file a notification with the FSA. The filing must be made in Japanese. Under the AITIC, the notification must contain information including details on the management and investments of the fund, the calculation of the net asset value of the fund and the distribution of profits.

The AITIC does not require that investment management reports be prepared or delivered to shareholders of foreign investment corporations (as opposed to foreign investment trusts).

vi Public offering

The information above generally assumes that the offering of interests in the fund qualifies as a private placement under the FIEA. However, if more than 499 limited partners subscribe for a partnership-type fund in Japan, for example, it will be subject to public offering disclosure regulations, and registration statements and other disclosure documents will be necessary for the offering of such fund.

vii Anti-Money Laundering Law

Pursuant to the Act on Prevention of Transfer of Criminal Proceeds, an Article 63 exempted operator must obtain certain documents prior to, or at the execution of, the subscription agreement of the fund with each Japanese investor for anti-money laundering purposes. In particular, there is certain information that must be obtained for purposes of investor identification. The Act also requires identification of the representative executing the fund subscription and identification of the 'effectively controlling person' of the investor. Furthermore, if a transaction is considered a high-risk transaction as stipulated in the Act (e.g., a transaction with certain foreign politically exposed persons), additional scrutiny of the identification of the investor will be required, and transactions having a suspicion of money laundering should be reported to the government authority. In addition, the Act requires record keeping with respect to investor identification procedures and transactions with investors.

viii Act on Provision of Financial Services

In accordance with the Act on Provision of Financial Services, which was renamed from the Act on Sales of Financial Products in 2021, a fund operator conducting the business of selling financial products in Japan or to Japanese investors must explain certain important matters to investors prior to the sale of financial products. However, the fund operator does not need to provide such explanation to professional investors, and the fund operator may also obtain consent from its investors that it does not need such explanation on certain important matters.

III Regulatory developments

i Reform of Article 63 exemption

In 2016, there was a major reform of fund regulations under the FIEA. After the amendment, requirements to qualify as an Article 63 exempted operator increased significantly. The following are the major new requirements.

Limitation of investors to eligible non-QIIs

Prior to the amendment of the FIEA in 2016, there were no required criteria for Japanese investors that were not QIIs. However, under the amended FIEA, for a fund operator to qualify for the Article 63 exemption, all of the Japanese fund investors need to fulfil certain minimum economic criteria or qualify as a person that is closely related to the fund, as enumerated in the FIEA (eligible non-QII). As a result, it became difficult for private equity funds to solicit individual investors other than those that are sufficiently wealthy to meet such criteria. The status of an eligible non-QII will be determined at the time of solicitation, and this status does not need to be maintained during the entire term of the fund.

Appointment of a representative in Japan

Another new requirement specifically for non-Japanese funds is the appointment of a representative. If an Article 63 exempted operator does not reside in Japan, it must appoint a representative in Japan. This representative needs to be a resident in Japan and can either be a natural person or a corporation. The representative should function as a contact person for communication with the FSA (or the Kanto Local Finance Bureau, which is, in practice, the contact point of the regulators).

Additional investor disqualification

Under the amended FIEA, an Article 63 exemption will not be available if either of the following criteria applies to the relevant fund during its term: (1) the only QII in the fund is an ILP, and such ILP has net assets under management of less than ¥500 million; or (2) 50 per cent or more of the fund assets contributed by all investors are contributed by investors with a close relationship with the Article 63 exempted operator (as further specified in the FIEA).

Additional documents for Form 20 filing

As a result of the FIEA amendment, an Article 63 exempted operator is required to submit its articles of incorporation (or other constitutional documents, such as an operating agreement of a Limited Liability Company (LLC)) and a statement letter that indicates that the Article 63 exempted operator is not disqualified from the Article 63 exemption as prescribed in the FIEA. In addition, officers and certain employees of the Article 63 exempted operator must submit an affidavit of certain personal information (e.g., name, address and date of birth), their CV and a statement letter certifying their compliance with the qualification requirements as prescribed in the FIEA.

Public disclosure by the Article 63 exempted operator or FSA

Public disclosure requirements have also been strengthened by the 2016 amendment. Without delay, after filing Form 20, an Article 63 exempted operator must make publicly available certain information excerpted from Form 20 on its website or by other methods that can be accessed easily by the public. The form of this disclosure is called Form 20-2 and is available on the FSA website.

The FSA will also disclose the contents of Form 20-2 to the public on its website, with respect to all Article 63 exempted operators.

Annual business report and disclosure booklet

Under the amended FIEA, Article 63 exempted operators must submit a business report (Form 21-2) for each fiscal year within three months of the end of such fiscal year. If the investors are limited to professional investors, certain information, such as composition of fund assets, may be omitted from the business report.

The Article 63 exempted operator must make publicly available a disclosure booklet (Form 21-3, which is an excerpt of the business report) at its office in Japan, on its website, or by other means, for a period of one year, commencing four months after the end of the relevant fiscal year.

Stricter compliance regulations

Prior to the amendment of the FIEA in 2016, Article 63 exempted operators were only subject to a limited number of compliance regulations, such as prohibition of making false statements and compensating losses incurred by investors. However, since 2016, Article 63 exempted operators have been subject to many compliance regulations that were historically applicable to registered financial instruments business operators only, including the following:

  1. delivering a notice to each professional investor stating that it has the option to change its status from a professional investor to a non-professional investor;
  2. delivering certain explanatory documents explaining certain important risks of the fund, which should be delivered twice (prior to the subscription and at the time of subscription) to the investors that are non-professional investors;
  3. delivering an investment management report to non-professional investors periodically;
  4. keeping certain records of financial transactions, such as limited partnership agreements, subscription agreements and investment management reports, for a maximum period of 10 years;
  5. including provisions in the partnership or subscription agreement requiring the segregation of fund assets from the proprietary assets of the Article 63 exempted operator;
  6. notifying the FSA if the Article 63 exempted operator becomes subject to a lawsuit, or if a director or employee of the Article 63 exempted operator violates the law in respect of the relevant fund business;
  7. advertising by an Article 63 exempted operator must fulfil certain requirements, including a description of fees it charges; and
  8. complying with the duties of good faith and fairness, loyalty and care of a good manager.

ii Impact of covid-19 on Form 20 filing process

Prior to the covid-19 era, the filing of Form 20 required delivery of original signed hard copies to the FSA. However, because of the covid-19 pandemic and the fact that the Japanese government strongly pushed towards simplifying administrative procedures, the FSA currently accepts Form 20 filing electronically, on the condition that originals of certain documents are delivered to the FSA within approximately one month of the filing.

iii New exemptions applicable to foreign fund managers

In order to attract the global fund managers to come to Japan, the FSA amended FIEA in 2021 and introduced two new exemptions that are applicable to foreign fund managers, both of which are intended to mitigate the requirements for the foreign fund managers to set up an operation in Japan. The summary of the two new exemptions are described in the paragraphs titled 'foreign investors' exemption' and 'temporary exemption for foreign investment managers'.

iv Clarification of carried interest taxation

On 2 April 2021, the FSA announced a guidance on how carried interest of funds will be treated and taxed in Japan. In particular, the FSA provides certain criteria which need to be fulfilled in order to qualify for pass-through taxation of the carried interest (e.g., allocation of carried interest among the partners should be economically rational).

IV Outlook

The number of private equity funds and venture capital funds in Japan has increased significantly in recent years. Reflecting this growth, as well as the variation and diversified use of fund vehicles, the regulators have continually tightened the regulations on private equity funds in general. And even though the FSA mitigated regulations against foreign fund managers very recently, we anticipate that restrictions on fund solicitation and fund management will further increase in the longer term.

Another noteworthy trend is the focus on environmental, social and governance (ESG) issues. More and more institutional investors are paying attention to the ESG policy of the funds they invest in, and ESG is becoming one of the topics often included in the investment guidelines of Japanese funds.


1 Mikito Ishida is a partner at Mori Hamada & Matsumoto.

2 Because ILPs are the most frequently used vehicle for Japan-based private equity funds, this section focuses on the terms of ILP contracts.

3 The latest version of the model agreement form published in 2018 is only available in Japanese, although the previous version of the model agreement form published in 2010 has an English translation.

4 See Article 2(2)(v) and 2(2)(vi) of the FIEA for a further definition of collective investment schemes.

5 'Professional investor' is defined in the FIEA. Examples of professional investors are: QIIs, listed companies, Japanese corporations whose capital is reasonably expected to be no less than ¥500 million and foreign legal entities.

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