Impact of the newly passed fund regulationons on VCs in Japan

The governing body of financial industry in Japan, 金融庁 (Financial Services Agency), dropped a bomb on the VC industry in Japan on May 14th.

The newly announced « 適格機関投資家等特例業務の見直しに係る政令 » concerns professional investment institutes that are not in the ranks of banks or stock brokerage firms, stipulating the following requirements:

  1. Public companies
  2. Joint-stock companies with capital of more than 50 million yens (about US$500,000)
  3. Juridical persons (e.g. corporates) with assets over 300 million yens (about US$3M)
  4. Individuals holding financial assets of more than 100 million yens (about US$1M) and has a stock brokerage account for more than 1 year

An additional criterion of « recognized as having certain investment skills » is on top of all these requirements.


Now like most government deeds, the new requirements were meant to protect investors. In Japan particularly, frauds invoked by fake investment funds have been so prevalent that the theme has become a staple in Japanese dramas — as a long-time Japanese drama fan I counted at least 1 drama per year that has this particular element.

The problem is that the Financial Services Agency failed to take into account the venture industry that had only taken off recently.

The main impact would be on fund raising. Compared to the regulation in the States, where the criteria on investing in private equities is that of the investors — affluent and sophisticated investors are assumed to be able to be responsable for their own decision in investments in the illiquid vehicles such as PE or VC funds — the new regulations in Japan put the criteria instead on the funds. This means that even if the accredited investors are willing to invest in certain funds after doing their own thorough evaluation, they might still be shut outside of the door.

Now you might say that the criteria listed above doesn't seem to an issue at all since the thresholds are quite low by American or European standards. The problem is of course in the conservative Japan, the venture industry is still in an early phase where many VC firms are smaller sizes and even angel-like. The sort of indepandant VC firms, i.e. without backings from large IT companies like Rakuten or Softbank, have been the most dynamic and motivational stories in Japan for the past couple years. The regulations would have handicapped the majority of them if not all.

Having lived and worked in California and eventually made the choice to leave this promised land for so many, I don't particularly feel the Silicon Valley model is the best for any society. It is however always important to recognize that the high risks entailed by a startup investment really require a lot of openmindedness, be it from the investors, the funds or the regulators. It's really time to up the communication effort and educate the governments about the only industry that could potentially drive constant real GDP growth via endogeneous effect.

When the Founder/CEO gets defensive ...

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