Extra-territorial application of Japanese law to ICOs: Financial Instruments and Exchange Act

Japanese law currently has no specific regulations for ICOs. But Japan's financial watchdog, the FSA (Financial Services Agency) issued an open letter of warning, stating its view that "ICOs may fall within the scope of the Payment Services Act and/or the Financial Instruments and Exchange Act depending on how they are structured." (October 27, 2017).

Thus, where an ICO scheme is deemed to be a "collective investment scheme" as defined (without using that expression) by Article 2(2)(v) of the Financial Instruments and Exchange Act, the ICO issuer would be subject to the registration and other requirements under the Act (Article 29, etc.). Leaving aside the question what types of ICO schemes are so deemed, we will focus in this post on the transnational reach of the Financial Instruments and Exchange Act (We will turn to the Payment Services Act in the next post). A question of particular significance is how far that Act is applicable to ICO issuers operating from outside Japan.

The FSA published "Comprehensive Guidelines for Supervision of Financial Instruments Business Operators, etc.", of which the latest version is dated April 2018. It contains a sub-chapter concerning the treatment of foreign securities companies (X-1: Basic Concept for Foreign Securities Companies). There is an English translation by the FSA of the February 2017 version of the Guidelines. No difference exist in substance between the two versions, so far as the sub-chapter on the treatment of foreign securities companies is concerned.

Is this sub-chapter relevant to ICOs? Under the Financial Instruments and Exchange Act, "foreign securities companies" are persons who, in accordance with foreign statutes or statutory instruments, pursue the securities services in a foreign country. (Article 58). Under the same statute, the "securities services" are defined (in Article 28(8)) to include the handling of a public offering of securities but does not include a public offering per se (See sub-paragraph (viii) of Article 28(8)). It follows that even if some ICO schemes were deemed to be securities, the issuers of such ICOs would not be subject to the aforementioned sub-chapter on the treatment of foreign securities companies. Consequently, we are devoid of guidelines directly applicable to ICO issuers with respect to the geographical outreach of the Financial Instruments and Exchange Act. The sub-chapter, however, will be relevant to the "securities services" concerning ICO tokens, such as the handling of an ICO, the secondary distribution of ICO tokens and the handling of the secondary distribution.