JAPAN Trends and Developments Contributed by: Sadao Maeda, Yusuke Hayashi and Masato Tanaka, TMI Associates
Contributing factors Government policy support
• proposed amendment to the Articles of Incorporation setting forth the features of the preferred shares; • an investment agreement setting forth the terms and conditions for investment; and • a shareholders’ agreement. Regulations under the Foreign Exchange and Foreign Trade Act (FEFTA) Since investments in start-ups by Foreign Inves - tors usually fall under the category of “Foreign Direct Investment, etc.” (FDI), the regulations under the FEFTA must be examined prior to the investments. The following points need to be considered: • applicability to Foreign Investors; • applicability to FDI; • whether a target start-up falls within a Desig - nated Business Sector; and • availability of exemption for prior notification. “Foreign Investors” are defined as: • non-resident individuals; • corporations or other entities established under foreign laws and regulations (Foreign Entities); • Japanese entities where non-resident indi - viduals or Foreign Entities directly or indirectly hold 50% or more of such entity’s voting rights; • general partnerships engaging in investment business and JLPSs (including partnerships under foreign laws) if: (a) the ratio of capital contribution from non- resident individuals and others is 50% or more of the total amount of the capital contribution of the partnership; or (b) non-resident individuals and others con - stitute a majority of the managing part -
Initiatives such as the Plan are creating a favour - able investment environment, with streamlined visa requirements and attractive tax incentives. Technological strength and market potential Japan’s advanced technological capabilities, especially in deep-tech, and its large domestic market are highly attractive to overseas inves - tors. Japanese yen exchange rate The recent depreciation of the Japanese yen has made investments in Japan more cost-effective for Foreign Investors. Overview of method of VC financing in Japan Given that Japanese VC financing practices share many similarities with those in Silicon Val - ley, they are relatively easy for Foreign Investors to understand. However, the start-up environ - ment in Japan has certain unique features that are attributable to Japanese laws and business practices. For financing in a priced round, outside investors such as VC firms generally invest in Japanese start-ups in exchange for preferred shares, and the general flow of investment is as follows: • signing of a non-disclosure agreement; • negotiation and execution of a term sheet; • conducting due diligence; and • negotiation and execution of the definitive agreements. The following items are generally included in the definitive agreements:
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