JAPAN Law and Practice Contributed by: Reid Monroe-Sheridan, Takahito Fujii, Haruya Suzuki, Yutaro Ito and Tomohiro Oshige, southgate
Similar to other jurisdictions, in Japan, a VC fund in the form of an LPS is formed by entering into a Limited Partnership Agreement for Investment (LPSA) among the GP, who is responsible for the management of the fund, and the limited part - ners (LP’s), who provide the capital. The spe - cific provisions regarding governance of an LPS, including the authority of the GP and the LPS’s, as well as the management of the LPS’s assets, are set forth in the LPSA. A model LPSA has been published by Japan’s Ministry of Economy, Trade and Industry. When a VC makes investment decisions, it is common for an investment committee com - posed of officers, employees and other mem - bers of the GP, to be convened. The decision to proceed with an investment is typically made based on the outcome of the committee’s dis - cussions. 2.2 Fund Economics In Japan, Fund Principals participate in the eco - nomics of VC funds using similar means as in many other jurisdictions: primarily carried inter - est and management fees. With respect to car - ried interest, the GP receives a fixed percentage (for example, 20%) of the returns exceeding a certain threshold, often the amount of the fund’s capital contributions. An important caveat to this is that some more traditional funds (espe - cially the corporate VC funds, or CVCs, of large companies) provide little or no carried interest incentive to the personnel involved in the fund. In recent years, however, there have been some examples of Japanese CVCs introducing strong - er incentive compensation systems. Management fees, on the other hand, are pro - vided to the GP as compensation for the GP’s management of the fund’s operations. These fees are usually a percentage (for example, 2%)
of the total fund size and are paid to cover oper - ational costs and compensation for the person - nel involved on behalf of the GP. The fixed per - centage that applies to a fund’s carried interest or management fee may be adjusted if certain performance thresholds are reached (in the case of carried interest) or based on the stage of the fund (in the case of management fees). The GP typically has various obligations under the LPSA in respect of managing the partner - ship’s assets, including proper disclosure, restrictions on the management of other funds and self-dealing, and the implementation of gov - ernance measures specified in the LPSA. These obligations are intended to ensure appropriate management of conflicts of interest and improve the transparency and fairness of the fund’s oper - ations. 2.3 Fund Regulation When VC funds are organised as LPSs, they are primarily subject to regulation under the Finan - cial Instruments and Exchange Act and the Lim - ited Partnership Act for Investment. As a general rule, these funds are required to register in con - nection with their fundraising from LPs and use of LP funds for investing activities. However, due to certain financial requirements and the con - siderable time needed for registration, it is com - mon for funds to take advantage of exemptions from the registration obligation by limiting their fundraising to investors with a certain level of assets and sophistication. In addition, under the Limited Partnership Act for Investment, invest - ments by LPSs in foreign entities are limited to less than 50% of the total capital contributions of all partners. At the time of the initial execution of the LPSA, the fund must complete a commercial registra - tion process with the local Legal Affairs Bureau
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