Financial Instruments and Exchange Act of Japan defines certain investors as eligible investors, who would qualify to invest in a partnership fund (which uses Article 63 exemption). The current Japanese regulation has given a high hurdle to individual investors to qualify as an eligible investor, since it generally requires an individual to have at least more than JPY 100 million in financial assets (which do not include cash and bank deposits). Certain types of entrepreneurs are also eligible, but it is only for funds adopting venture capital exemption which is actually not so frequently used (this is different from the venture capital exemption available in the US securities regulations which is used quite often).
But I feel that there are more individuals who should be allowed to invest into partnership funds and this eligibility hurdle could be mitigated.
My understanding is that this type of asset requirement is similar to (and probably derived from) the definition of “accredited investor” in the US securities regulations (Reg D). Originally, the “high net worth” requirement of accredited investors were a method to categorize the investors who can “fend for themselves” quantitatively with certain thresholds. While the amount of assets held by an individual would be a measure to evaluate his/her investment capacity, it does not necessary reflect whether such person is a sophisticated investor who has sufficient knowledge in financial products.
If that is the case, what are the alternative categories we can add? Here are some thoughts:
– Individuals who passed investment-related well recognized qualifications. Examples: CPA, Financial Planner, CFA, CMA, Security Sales Representative;
– Individuals who have worked for financial services company (that is licensed or registered in Japan – banks, securities firms, insurance companies, asset management companies, etc.) for more than [5] years.
On the other hand, we may need to add stricter requirements to protect investors who are not suitable for this type of investments even though they are high net worth individuals. Putting aside the issues that will arise in the implementation phase, here are some ideas:
– Add more scrutinized process for the elderly;
– Limit the total amount of investments into investment collective schemes to a certain percentage of the total assets owned by the individual.