Security Token Sales in Japan — a little legal guidance
After the ICO craze has cooled off, we see more and more STOs emerging all around the world. For many 2019 is supposed to be the year of the STO.
Security Tokens give some more peace of mind to investors due to being more strictly regulated than Utility Tokens. In light of this, and being based in Japan, I would like to give a little overview about how such tokens might be treated in Japan.
Please note that I am not a professional lawyer and am just stating what I have learned during my conversations with financial securities lawyers and industry experts.
The Howey Test
Before jumping into legal consideration, some words about security tokens.
To understand whether a token is a security token or utility, the Howey test is applied. It defines that a transaction is a Security (Investment) if:
- it is an investment of money
- There is an expectation of profits from the investment
- The investment of money is in a common enterprise
- Any profit comes from the efforts of a promoter or third party
When applying this test to many ICOs from recent years, you would probably conclude that they fall under securities according to this test. One famous example where a token was deemed a security after having been sold as a utility was DAO. The DAO reached fame after having been hacked and suffered losses of several million US$. The SEC saw the need to protect future investors from these misfortunes, and any ICO that wanted to sell to US investors had to register with them under securities laws.
However, other jurisdictions have adopted a variety of approaches to regulating different kind of token offerings. To name some advanced jurisdictions: Singapore, Switzerland, Malta.
So what about Japan?
In public perception, Japan seems to be a very advanced country.
After all, we are one of the most automated countries worldwide and recognized as early adapters of cryptocurrencies.
Unfortunately, we do not have a regulation on Security Tokens yet.
The FSA (Financial Services Agency) will have legislation on security tokens on the way by summer of this year. From previous statements, we can already deduce that they will be treated in a similar way as a traditional financial security.
Now, this should be the point where companies just looking for quick money should give up.
However, if you seriously believe in your security token offering as well as your fit for the Japanese Market, the safest way is to treat your token offering as a public offering.
Generally, every business that wishes to interact with Japanese counterparts or clients will fall under the scope of Japanese Licensing requirements. Be aware that, even a Japanese translation of your website to promote your STO could trigger a move from the regulators. According to Japanese regulations a foreign company that is advertising a securities offering in Japanese is engaging in solicitation unless they do not take reasonable measures to prevent Japanese investors from buying. (1: Guideline FSA to Fund Operators)
Securities, in a narrow sense, refer to capital securities that grant the owner various rights in relation to investments, such as stock and bond certificates, etc.
In Japan under the FIEA (Financial Instruments and Exchange Act) securities include, among others, municipal bonds, corporate bonds, share certificates, beneficiary securities of investment trusts or foreign investment trusts prescribed in the Act on Investment Trusts and Investment Corporations (the “ITA”) and beneficial interests in a trust. (FIEA Art.2)
Depending on the business model of your STO, your security token would fall under one of the categories defined in the FSEA.
So, how would selling the token in Japan work?
Some ways to sell your security token in Japan
1. Selling without registration to Japanese citizens and hoping to get away with it. Strongly not recommended as it will just damage your business and reputation.
2. Not registering yourself, but partnering with an already existing and under the FIEA licensed Financial Instruments Business Type I, most probably a brokerage.
3. Registering your business and your public offering in Japan.
I. To prepare for filing you will have to go through a procedure on EDINET: Electronic Disclosure for Investors’ Network
II. Filing a Securities Registration Statement (SRS) with the responsible Local Finance Bureau ( You will need to appoint a Japanese attorney-in-fact to file it)
III. The SRS includes:
a) Information concerning securities offered
b) Information about issuer such as description of business, affiliated companies, offices, employees, assets, shareholdings, stated capital, financial statements
c) In case of securities relating to investment trusts: description of investment structure, underlying assets and investment policy
d) Foreign companies furthermore have to include an outline of the legal system as well as certain aspects of their home jurisdiction
e) Your financial statements that have been audited by a Certified Public Accountant
f) As you can imagine, this process might take a while and will require intensive legal counsel.
4. Going through a private placement, where you can make use of the exemption defined under article 63. (FIEA Art. 63) Might be most interesting to all companies tokenizing existing funds. This exemption is frequently exploited by foreign fund operators. The qualifications are:
I. The fund is categorized as a “Collective Investment Scheme”
II. The investors in the Investment Scheme shall be qualified investors as defined under the FIEA. (Art.2)
III. If non-qualified investors are to invest, their number may not exceed 49.
IV. A notification as well as supporting documentation has been filed with the Local Finance Bureau of Ministry of Finance.
5. The last possibility is to not sell your security token in the first run in Japan, but focus on your STO in another jurisdiction and then, after having successfully implemented your business abroad, go through localization and enter the Japanese Market from there. If you are successful, Japanese investors will naturally start being interested in your business. ;)
I hope this could shed some light on security tokens in Japan from a legal perspective.
To sum it up, for selling your STO in Japan you will need a local legal counsel, a lot of patience to deal with bureaucracy and some money in the bank.
If you want to read more about financial securities in Japan and regulations, here are some good sources.
1 To Those who Operate Fund Related Businesses in Japan (FSA Guideline):
JSDA Sales Representative Manual Vol 1. 2018:
Financial Instruments and Exchange Act:
Securities Finance in Japan:
We will keep you updated about any regulatory changes and movements by the FSA!