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Japan: Tightened QII exemption

Investment funds handling funds from Japanese investors need to be aware of the proposed changes to the so-called QII exemption

Yoshihiko Sakai
Investment funds handling funds from Japanese investors need to be aware of the proposed changes to the so-called QII exemption. The QII exemption allows certain types of solicitation activities and fund management activities to be conducted without registration under the Financial Instruments and Exchange Act (FIEA) by satisfying certain requirements prescribed in the FIEA (such as having at least one qualified institutional investor (QII investor) and a maximum of 49 non-QII investors in Japan). However, there have been reports of fraudulent fundraising activities that evaded the supervision of the authorities by utilising the QII exemption. As a result, the Japanese regulator moved to tighten the regulation of investment funds utilising the QII exemption. On March 24 2015, a bill for the amendment of the rules regarding the QII exemption was submitted to the Japanese Diet, and the new rules are expected to be force in the near future.

The main changes to the QII exemption are as follows: (i) the information to be included in the filing documents for using the QII exemption has been increased; (ii) certain code of conduct rules and reporting rules applied to registered investment funds will also become applicable to the investment funds utilising the QII exemption; (iii) certain qualification requirements will be introduced for non-QII investors making an investment into investment funds using the QII exemption; and (iv) the authorities will have wider supervisory powers over the investment funds using the QII exemption, such as being able to issue business suspension orders.

It is common for investment funds outside Japan to use the QII exemption when the Japanese investor is solicited for investment and makes an investment. Even if not domiciled in Japan, investment funds with Japanese investors should be well prepared to comply with the new rules with regard to the QII exemption.

Yoshihiko Sakai

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