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Venture capitalists anxious for new foreign exchange law to be enacted

  • October 30, 2019
  • , Nikkei , p. 2
  • JMH Translation

By Kazuaki Fujita, Nikkei senior staff writer

 

The cabinet has approved a bill to amend the Foreign Exchange and Foreign Trade Act that imposes tougher controls on foreign investment in Japan. The bill is intended to strengthen regulations by enabling the government to expand the scope of preliminary screening of foreign investment in Japanese companies that are important for security reasons. But the market is worried that the new regulations could cause ordinary investors to avoid Japan or lead to setbacks in corporate governance reform. On the other hand, people involved in investment in startups are looking forward to the change.

 

The Japan Venture Capital Association issued a statement following the cabinet approval on the bill that says, “We want the amendment to be enacted and put into force as soon as possible,” revealing how anxious the organization is.

 

The amendment is drawing attention for the reduction of the share ownership ratio of foreign investors subject to submitting prior notification from 10% to 1%. But venture capitalists are looking at a different aspect of the bill – its consolidation of the parties responsible for notification by regarding an investment association as a “company.” Venture capitalists are insisting that a failure to implement the amendment could affect their fundraising.

 

New regulations applied to IT sector

 

The venture capitalists’ interest in the bill was triggered in August before the cabinet approved it. The government issued an announcement and significantly expanded the scope of industries for which it required prior notification from foreign investors.

 

The IT sector, which was not subject to screening under the foreign exchange law, was newly added to the list of industries subject to screening from the perspective of cybersecurity and defending the nation. As a result, prior notification was required even for investment in newly launched software developers unrelated to security issues.

 

“Investment associations,” such as venture capitalists, are required to go through troublesome procedures. If venture capitalists can submit prior notification as a single investment association, that will save them a lot of effort. But the law does not regard investment associations as companies.

 

Therefore, foreign investors, who actually provide the funds, have to individually submit prior notification. General partners (GPs), who operate investment associations, and foreign investors who join investment associations as Limited Partners (LPs), are equally required to fulfill the obligation. The obligation is uniformly imposed regardless of the amount of investment or ownership ratio.

 

The system has been slowing down the actual procedures of investors because they cannot provide funds until they receive the screening results. Most venture capitalists lack the personnel and funds to deal with the screening procedures. So even if the majority of venture capital is from domestic investors, delayed procedures caused by just one foreign investor will prevent the venture capitalist from reaching a final agreement on investment.

 

A senior official of a venture capitalist in Tokyo says, “A few days of delay in providing money can be fatal to some young companies that have just been launched. The startups that receive funds will be directly affected by the amendment.” The official reportedly often receives the funds one or two months behind schedule.

 

Brake on investment

 

Some venture capitalists are giving up investing through stocks and switching to funding through bonds, for which prior notification is not required, as a last-ditch measure. But that deprives investors of the right they are supposed to have as investors.

 

If this confusion continues, it could lead to a situation in which foreign investors shy away from Japanese venture capital. That could also reduce the supply of risk money for Japanese startups. Industry players are growing increasingly worried, and some say the amendment has acted as a brake on foreign investment in startups during September and October. (Abridged)

 

 

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