Abstract
In Japan, neither comprehensive regulation regarding crowdfunding nor legislation that defines crowdfunding generally exists. Nevertheless, with crowdfunding used more frequently, a rough consensus about the scheme appears to be emerging. Various issues arise nevertheless in respect of the way banking and financial regulation would apply to crowdfunding activities. This study thus aims to sketch out the main characteristics of the japanese legal framework in the context of crowdfunding.
This chapter has previously been published in Japanese Reports for the XXth International Congress of Comparative Law (Fukuoka, 2-28 July 2018)/Japanese Reports for the Third Thematic Congress of the International Academy of Comparative Law (Montevideo, 16-18 November 2016) (ICCLP Publications No. 14, 2019).
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Notes
- 1.
Statistics for equity-type investment-based crowdfunding are published by the Japan Securities Dealers Association, (“JSDA”) a self- regulatory organization (“SRO”). See at http://market.jsda.or.jp/shiraberu/kabucrowdfunding/index.html. According to JSDA, as of October 31, 2017 there were five cases of equity-type investment-based crowdfunding for which fundraisings have been completed, totaling approximately 132 million yen.
- 2.
Statistics for fund-type investment-based crowdfunding are published by Type 2 Financial Instruments Firms Association (“T2FIFA”), an SRO. See at http://www.t2fifa.or.jp/toukei/index.html. According to T2FIFA, as of September 30, 2017 there were 329 cases of fund-type investment-based crowdfunding for which fundraising had been completed and funds were operational, with raised money totaling approximately 2850 million yen.
- 3.
Shōhō §535.
- 4.
The main items set in the contract are, fund name, fund duration, investment target, restricted activities of the fund operator, profit distribution rules, fund operator remuneration, expenses born by the fund, fund interest transfer rules and fund interest redemption rules. Ariyoshi et al. (2016), p. 78.
- 5.
In June 2017, Real Estate Specified Joint Enterprise Act was amended. One of the objectives of this amendment was to promote fund-type crowdfunding for real estate investment. Before this amendment, the business operator was obligated to disclose information to the investor at the time of receiving money through the delivery of documents. The amendment made it possible to disclose information via the Internet in lieu of delivery of documents. See http://www.mlit.go.jp/report/press/totikensangyo05_hh_000119.html.
- 6.
However, each company is free to voluntarily limit the business it is able to conduct in its articles of incorporation.
- 7.
For example, a company in the banking business is regulated by the Banking Act regardless of how it raised the money necessary for its business.
- 8.
FIEA Article 28 paragraph 1 item (i).
- 9.
FIEA Article 28 paragraph 2 item (ii). Strictly speaking, if the interest in the fund is deemed a security, solicitation of investment into a fund would constitute a securities offering and be subject to various FIEA regulations. FIEA Article 2 paragraph 2 item (v) & paragraph 3. Soliciting contribution of assets other that money by the investor in return for interest in a fund could also be regarded a securities offering if the interest in the fund is deemed a security. However, assets other than money that could trigger such an interpretation are limited to assets such as other securities, promissory notes and bills of exchanges. OEFIEA Article 1–3, COOD Article 5. Therefore, soliciting cryptocurrency investment in return for fund interest may not constitute a securities offering.
- 10.
FIEA Article 29-4.
- 11.
FIEA Article 29-4 paragraph 1 item (i)–(iii).
- 12.
FIEA Article 29-4 paragraph 1 item (v) (a).
- 13.
FIEA Article 29-4 paragraph 1 item (iv) (b), OEFIEA Article 15-7 paragraph 1 item (v).
- 14.
FIEA Article 35.
- 15.
FIEA Article 35 & 35-2 paragraph 1.
- 16.
FIEA Article 2 paragraph 1 item (ix) & paragraph 2 item (v) & paragraph 5.
- 17.
FIEA Article 2 paragraph 8 item (ix).
- 18.
FIEA Article 29-4.
- 19.
FIEA Article 28 paragraph 1 item (i).
- 20.
FIEA Article 29-2 paragraph 1 item (vi), COOFIB Article 6-2. However, the law limits the type of securities for “services of handling electronic public offerings” to unlisted shares and to limited portions of fund interests. OEFIEA Article 15-4-2. For example, if it is contemplated to use more than 50% of money, raised by a fund, in the lending business, soliciting investment in such fund interest does not constitute “services of handling electronic public offerings”. As a result, the special provisions introduced by the 2014 FIEA Amendments are not applicable to debt-based crowdfunding, as explained in Chapter III below.
- 21.
FIEA Article 29-4-2 paragraph 10, OEFIEA Article 15-10-3.
- 22.
FIEA Article 29-4-2.
- 23.
OEFIEA Article 15-7 paragraph 1 item (vi). See also Tanaka et al. (2015), p. 6.
- 24.
FIEA Article 28 paragraph 2 item (ii).
- 25.
FIEA Article 29-4-3, OEFIEA Article 15-7 paragraph 1 item (viii).
- 26.
FIEA Article 29-4-3 paragraph 4, OEFIEA Article 15-10-3. In order to qualify as type 2 small-amount electronic public offering service, the following three criteria need to be satisfied: the fund interest has to be unlisted, the amount to be raised is below 100 million yen per offering and the amount invested per investor does not exceed 500 thousand yen. The latter two criteria are the same as for type 1 small-amount electronic public offering services.
- 27.
When a platform solicits investment through means other than the Internet or e-mails, it will not be able to utilize the special registration system for type 1 small-amount electronic public offering services or type 2 small-amount electronic public offering services. This is because solicitation using means other than the Internet or e-mails do not fall under “services of handling electronic public offering” (Motoyanagi 2016, p 40).
- 28.
For example, the financial instruments business operator is obligated to disclose information to its customers by delivering documents prior to concluding contracts. FIEA Article 37-3. This information disclosure obligation of the financial instruments business operator is relaxed when the issuer of shares is obligated to disclose information. COOFIB Article 80.
- 29.
FIEA Article 2 paragraph 3 item (i).
- 30.
FIEA Article 5 paragraph 1.
- 31.
FIEA Article 24 paragraph 1 item (iii).
- 32.
FIEA Article 4 paragraph 1 item (v).
- 33.
JSDA Articles of Association Article 5 (2) (b). However, a service provider engaged only in equity-type investment-based crowdfunding platforms becomes a Specified Business Member.
- 34.
FIEA Article 29-4 paragraph 1 item (iv) (d), CGSFIBO IV-3-5. For further details on these issues, please refer to Tanaka et al. (2015), p. 14 note 7, and Ariyoshi et al. (2016), p. 82. Platforms tend to become members of JSDA as they are required to adhere to internal rules even if they do not become members of an SRO (Motoyanagi 2016, pp. 37–38).
- 35.
JSDA Rules Concerning Over-The-Counter Securities Article 3.
- 36.
FIEA Article 3 paragraph (iii).
- 37.
As the activities that platforms perform in investment-based crowdfunding are acts resulting in the acquisition of securities, they are also subject to Act on Sales of Financial Instruments (“AFSI”) ASFI Article 2 paragraph 1 item (v) (Kataoka and Morishita 2017, p. 136). For example, based on ASFI, a platform not only is obligated to explain the risk that investment in investment-based crowdfunding entails but also is prohibited to provide the customer with conclusive evaluations on uncertain matters. ASFI Article 3 & Article 4.
- 38.
The 2014 FIEA Amendments were made based on a report by the Sectional Committee on Financial System of Financial System Council. In this report it says “Given that crowdfunding is a system that enables businesses to easily procure funds from large numbers of people via the Internet, it will also be necessary to implement regulatory methods for preventing the system from being used maliciously for fraud. (…)It will be appropriate to require intermediaries (…)to establish systems for conducting due diligence of issuers and providing appropriate information via the Internet. It will also be appropriate to require the intermediaries to provide information on issuers and themselves via the Internet, with penalties imposed for failure to provide the relevant information.” Sectional Committee on Financial System of Financial System Council Report (2014), p. 4.
- 39.
The regulations mentioned below apply not only to platforms handling only type 1 small-amount electronic public offering services or only type 2 small-amount electronic public offering services but also to type I financial instruments business operator or type II financial instruments operator operating investment-based crowdfunding platforms. This is because these regulations apply to financial instruments business operators handling electronic public offering services. Handling of electronic public offering services means handling, as a business, public offerings or private placements by using the Internet or E-mails. See supra for further details.
- 40.
Together with the registration system and the regulation of activities for investment-based crowdfunding, the 2014 FIEA Amendments allowed the use of credit cards for up to 100 thousand yen, when investors invest via investment-based crowdfunding (Motoyanagi 2016, p. 41; Kataoka and Morishita 2017, pp. 125–126).
- 41.
FIEA Article 43-5, COOFIB Article 146-2, CGSFIBO IV-3-4-2-2.
- 42.
COOFIB Article 146-2 paragraph 3.
- 43.
FIEA Article 205 item (xiv). Criminal penalties applicable are: up to six months imprisonment or a fine of up to 500 thousand yen or both.
- 44.
There is an opinion that, seen from the investor-protection point of view, without these special civil liability provisions, the information disclosures by platforms are not perfect substitutes of security registration statement submissions (Kuronuma 2016, p. 623).
- 45.
FIEA Article 35-3, COOFIB Article 70-2, CGSFIBOIV-3-4-3-1.
- 46.
If not only the solicitation of investment but also the application for investment is made on the Internet for a platform (operated by type I financial instruments business operator or type II financial instruments business operator), the operation of such a platform becomes an “electronic-application-style service of handling electronic public offering”, which will be subject to the obligation of establishing a business administration structure mentioned above. In contrast, platforms that engage only in type 1 small-amount electronic public offering services or type 2 small-amount electronic public offering services are obligated to establish a business administration structure with the objective of appropriately examining the business plans and the use of raised money regardless of whether the application for investment is made via the Internet. COOFIB Article 70-2 paragraph 3.
- 47.
COOFIB Article 70-2 paragraph 2 item (viii).
- 48.
However, there is an opinion that asserts that not too much importance should be attached to the examination by platforms, especially for equity-type investment-based crowdfunding, as a platform does not underwrite securities nor is a securities registration statement prepared at the time of the offering.
- 49.
COOFIB Article 70-2 paragraph 3 item (iii).
- 50.
COOFIB Article 70-2 paragraph 3 item (iii)–(v).
- 51.
Also, as investment-based crowdfunding platforms are financial instruments business operators, they are subject to supervision by Financial Services Agency (“FSA”). CGSFIBO shows the direction of supervision that FSA is taking. For example, on “Appropriate examination of the Issuer’s business plan etc.” it indicates that the target of supervision is as follows: “Whether appropriate rules that have been prescribed by COOFIB Article 70-2 paragraph 2 item (iii) have been established and substantive examination is properly conducted. Also, whether a system has been established that ensures the verification of the examination results. Also, whether a structure for proper examination has been established on whether the business plan has been prepared based on rational premises and whether the target offer amount has been set at a rational level based on the business plan and the financial condition of the Issuer.” CGSFIBO IV-3-4-3-1 (1).
- 52.
Article 4, Articles of Association of Type II Financial Instruments Firms Association.
- 53.
- 54.
Please see supra for further details.
- 55.
As set out in the Rules Concerning Equity-based Crowdfunding Business, Article 4 paragraph 1.
- 56.
Rules Concerning Equity-based Crowdfunding Business, Article 9-1.
- 57.
Rules Concerning Equity-based Crowdfunding Business, Article 9-1 (3).
- 58.
MLBA Article 2 paragraph 1 & Article 3 paragraph 1.
- 59.
MLBA Article 3paragraph 2.
- 60.
MLBA Article 6 paragraph 1.
- 61.
MLBA Article 6 paragraph 1 item (xiv) & paragraph 3. Drop of net-asset amount below 50 million yen after registration as a Money Lender is a cause for rescission of registration, as is the fact that the lender is found not to have developed the infrastructure necessary for carrying out the Money Lending Business properly. MLBA Article24-6-5 Article 1 item(i).
- 62.
MLBA Article 13 & Article 13-2.
- 63.
- 64.
MLBA Article 13 paragraph 1.
- 65.
MLBA Article 47 item (ii). Criminal penalties are: imprisonment with work for not more than 5 years, a fine of not more than 10 million yen, or both.
- 66.
For example, in a case where a debt-based crowdfunding platform disclosed that it planned to lend to multiple borrowers, although, in fact, the planned borrowers were group companies, the platform was subjected to administrative sanction because such disclosure caused misunderstanding as to the level of risk-diversification. See http://kantou.mof.go.jp/kinyuu/pagekthp032000621.html.
- 67.
For further details, please refer supra.
- 68.
FIEA Article 2 paragraph 8 item (vii) (f)(g) & Article 28 paragraph 2 item (i) & Article 29.
- 69.
FIEA Article 2 paragraph 8 item (ix) & Article 28 paragraph 2 item (ii) & Article 29. If the platform solicits investment and one of its group companies sets up the fund, the platform needs to register as type II financial instruments business operator.
- 70.
If the money that has been raised with silent partnership contracts is managed and invested in securities and/or derivatives, the business operator needs to register as investment trust manager. FIEA Article 2 paragraph 8 item (xv)(c) & Article 28 paragraph 4 item (iii) & Article 29. Debt-based crowdfunding platforms are not required to register as investment trust managers as they use the money raised from silent partners to make loans (Kuronuma 2016, pp. 592–593).
- 71.
FIEA Article 36; Article 37-3; Article 37-4; and Article 40.
- 72.
ASCT Article 2 paragraph 2, REASCT Article 2 item (ii).
- 73.
ASCT Article 11 & Article 12.
Abbreviations
- ASCT:
-
Tokutei-shōtorihiki ni kansuru hōritsu [Act on Specified Commercial Transactions]
- ASFI:
-
Kin’yūshōhin no hanbai ni kansuru hōritsu [Act on Sales, etc. of Financial Instruments]
- CGSFIBO:
-
Kin’yūshōhin-torihiki-gyōsya-nado muke no Sōgōteki na Kantoku Shishin [Comprehensive Guidelines for Supervision of Financial Instruments Business Operators, etc.]
- COOD:
-
Kin’yūshōhin-torihikihō dai-ni-jō ni kitei-suru teigi ni kansuru naikakufurei [Cabinet Office Ordinance on Definitions under Article 2 of the Financial Instruments and Exchange Act]
- COOFIB:
-
Kin’yūshōhin-torihiki-gyō-nado ni kansuru naikakufurei [Cabinet Office Order on Financial Instruments Business, etc.]
- FIEA:
-
Kin’yūshōhin-torihikihō [Financial Instruments and Exchange Act]
- MLBA:
-
Kashikingyōhō [Money Lending Business Act]
- REASCT:
-
Tokutei-shōtorihiki ni kansuru hōritsu sekō kisoku [Regulations for Enforcement of the Act on Specified Commercial Transactions]
- OEFIEA:
-
Kin’yūshōhintorihikihō sekōrei [Order for Enforcement of the Financial Instruments and Exchange Act]
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Kato, T. (2021). The Legal Regulation of Crowdfunding in Japan. In: Kleiner, C. (eds) Legal Aspects of Crowdfunding. Ius Comparatum - Global Studies in Comparative Law, vol 55. Springer, Cham. https://doi.org/10.1007/978-3-030-79264-0_15
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