Mr Keita Nakano
Partner

Keita Nakano is a partner at Mori Hamada & Matsumoto, which is one of the leading Japanese law firms in the asset management area. He undertakes a broad range of work for non-Japanese investment fund managers.

Keita has been involved in a number of public offerings and private placements of units/shares of investment trusts/ corporations established in a variety of jurisdictions, such as the Cayman Islands, Luxembourg, and Ireland, in relation to regulatory and disclosure compliance in Japan.

Also, Keita has advised on the formation and fund-raising of domestic and overseas partnership-type funds, such as private equity and venture capital funds and real estate funds. He has substantial experience in advising general partners and similar entities on contract drafting and regulatory compliance, including filing notifications and discussing with the Japanese authorities in connection with the admission of Japanese investors.

Mr Ryosuke Onobori
Partner

Ryosuke Onobori is a senior associate at Mori Hamada & Matsumoto who primarily works in the practice areas of financial regulations, asset management, Japanese real estate investment trusts and capital markets. He specialises in banking, security and payment regulations, and he has extensive experience in advising financial institutions such as banks, asset managers and fintech companies. From 2021 to 2023, he was seconded to the Financial Services Agency of Japan as a deputy director of the Digital and Decentralised Finance Planning Office in the Policy and Markets Bureau. During his secondment, he was actively involved in planning the Japanese regulatory framework for stablecoins, including the development of AML/CFT regulations such as the travel rule, which came into effect on 1 June 2023.

Expanding Access to Overseas Alternative Funds via Japanese Investment Trusts

— Amendments to the JITA Rules and Developments in the Professional Investor Private Placement Regime —

Introduction

In recent years, Japan’s regulatory landscape for investments in overseas alternative funds has evolved significantly. In response to growing investor demand and increasing familiarity with alternative assets, a variety of practical investment structure have emerged. Japanese investors have primarily accessed overseas alternative funds through three routes:

(i) direct investment by investors into overseas funds;

(ii) investment through overseas feeder funds, such as Cayman Islands unit trusts; and

(iii) investment through Japanese domestic investment trusts established in Japan for this purpose.

Among these options, methods (i) and (ii) involve Japanese investors dealing directly with overseas fund structures. For many Japanese investors, such structures are less familiar in practice, particularly in terms of documentation, operational processes, and ongoing regulatory compliance. As a result, market participants have long explored whether investments in overseas alternative funds could instead be provided through method (iii): Japanese domestic investment trusts established in Japan. This approach is generally regarded as more familiar to Japanese investors from both regulatory and practical perspectives, reflecting the long-established use of domestic investment trusts in the Japanese market.

Historically, the Investment Trusts Association of Japan (the “JITA”), a self-regulatory organization for domestic investment trusts, imposed relatively stringent rules on the establishment of publicly offered domestic investment trusts investing in overseas alternative funds. In recent years, however, the JITA has relaxed certain aspects of these rules.

Separately, regulatory frameworks for solicitations targeting professional investors have been strengthened in relation to privately placed domestic investment trusts, and market developments toward establishing privately placed domestic investment trusts investing in overseas alternative funds have also been observed.

This article provides an overview of recent regulatory amendments and practical developments concerning investments in overseas alternative funds through Japanese domestic investment trusts.

Overview of Investment in Domestic Investment Trusts through Distributors

Domestic investment trusts in Japan are established through the execution of an investment trust agreement between an investment trust management company and a trustee.

The investment trust management company is responsible for issuing investment instructions, preparing offering documents (such as prospectuses) and other solicitation materials, calculating net asset value (NAV), reporting to investors, handling disclosure matters relating to both the investment trust and its underlying investment targets, and making various filings with domestic regulators, including the Financial Services Agency of Japan (the “FSA”).

When establishing a domestic investment trust, the investment trust management company must comply with the JITA’s rules. Under those rules, any foreign-domiciled fund selected as an investment target must satisfy certain eligibility requirements.

Units of investment trusts are distributed by securities companies, and solicitation and sales activities are subject to regulation under the Financial Instruments and Exchange Act (the “FIEA”). Solicitation methods are broadly classified as public offerings or private placements. Private placements are further divided into the following three categories:

(i) Qualified Institutional Investor Private Placements (limited to statutorily defined qualified institutional investors);

(ii) Professional Investor Private Placements (targeting professional investors whose scope is broader than qualified institutional investors); and

(iii) Small-Number Private Placements (limited to no more than 49 investors, excluding qualified institutional investors).

A “Qualified Institutional Investor” (a “QII”) is a person specified under the FIEA as having specialized knowledge and experience in securities investment. Some are (a) persons treated as QIIs without any notification, while others are (b) persons who may be treated as QIIs upon filing the requisite notification with the FSA. Those treated as QIIs without notification include certain financial instruments business operators (limited to those engaging in Type I Financial Instruments Business involving securities-related business or investment management business), investment corporations, deposit-taking financial institutions (such as banks), insurance companies, and limited liability investment partnerships. By contrast, entities that may obtain QII status by filing a notification with the FSA include venture capital companies with stated capital of JPY 500 million or more, pension funds with net assets of JPY 10 billion or more, persons or entities with securities holdings of JPY 1 billion or more (in the case of individuals, limited to those for whom at least one year has elapsed since opening an account for securities transactions), executive partners or similar business operators of partnerships with securities holdings of JPY 1 billion or more, and specified purpose companies with securities holdings of JPY 1 billion or more.

“Professional Investors” refer to investors to whom certain conduct regulations under the FIEA are partially disapplied. Where solicitation is made to Professional Investors, certain conduct regulations that would otherwise apply to securities companies—such as advertising restrictions, pre-contractual information requirements, and the suitability principle—are disapplied. Professional Investors include, among others: QIIs, the State of Japan, the Bank of Japan, specified purpose companies, listed companies, stock companies with stated capital of JPY 500 million or more, corporations that have filed notifications as financial instruments business operators or as entities conducting specified special business activities for QIIs, and foreign corporations. In addition, corporate and individual retail investors who meet certain requirements may elect to obtain Professional Investor status by following procedures prescribed under the FIEA.

When selling securities to investors, securities companies must comply not only with the FIEA but also with the rules of the Japan Securities Dealers Association (the “JSDA”), the self-regulatory organization for the securities industry.

Requirements for Target Funds of Publicly Offered Investment Trusts and Recent Relaxations

Under the JITA rules, foreign funds selected as investment targets of publicly offered investment trusts have historically been subject to various conditions where such funds are not listed on a foreign market, including leverage restrictions such as a prohibition on borrowings exceeding 10% of net assets. Similarly, where a domestically domiciled publicly offered fund-of-funds invested in real estate investment trust (REIT) securities, the relevant REIT has generally been required to be listed.

These requirements created practical hurdles, and market participants noted that certain non-listed foreign funds engaged in alternative investments—even where publicly offered overseas— could not be included as investment targets of publicly offered domestic investment trusts.

Against this backdrop, the JITA amended its rules in September 2024, expanding the range of foreign funds eligible for inclusion in publicly offered investment trusts. The key changes are:

(i) Target foreign funds designated by the JITA may be included even if unlisted without being subject to leverage restrictions; and

(ii) certain real estate and infrastructure investment trust securities designated by the JITA may be included in publicly offered fund-of-funds structures even if unlisted.

To qualify for these exceptions, the foreign target fund must satisfy specified requirements. For example, the exemption from leverage restrictions requires that:

(i) the fund is intended to invest in illiquid assets such as private assets;

(ii) the fund is authorized and supervised by the relevant local regulatory authorities;

(iii) the fund is offered, or capable of being offered, to a broad investor base including retail investors;

(iv) borrowings are conducted with due consideration to soundness and remain within borrowing limits under applicable local regulations; and

(v) measures are implemented to ensure liquidity and fairness among beneficiaries.

Exemption from the listing requirement is similarly subject to oversight, pricing transparency, and liquidity and fairness safeguards, including:

(i) the fund is authorized and supervised by the relevant regulatory authorities, is publicly offered to a broad investor base (including retail investors), and is subject to appropriate disclosure, including audited financial statements (oversight and disclosure);

(ii) price transparency is ensured under applicable local regulations or, where no such regulations exist, under the investment manager’s valuation guidelines, and the investment trust management company determines that disposals based on such pricing are feasible (price transparency); and

(iii) measures are implemented to ensure liquidity and fairness among beneficiaries, such as redemption gates or redemption restrictions (liquidity and fairness).

The JITA has published guidance documents setting out (i) points to consider regarding the inclusion of foreign investment trusts engaging in alternative investments and (ii) points to consider regarding disclosure. With respect to inclusion, investment trust management companies are required to address, among other matters, measures to prevent unfairness between investors subscribing or redeeming (including measures to mitigate “first-mover advantage”) and the need to align product design with customer needs. With respect to disclosure, the JITA calls for (a) describing in the prospectus and/or the investment trust agreement (trust deed) the measures to secure liquidity and to ensure fairness among beneficiaries (e.g., redemption restrictions), and (b) including in pre-contractual disclosure materials (such as the prospectus) risk disclosures and investor cautions specific to such investment trust securities (e.g., liquidity risk and valuation/conversion-to-cash risks).

According to the JITA, funds expected to satisfy these requirements include U.S. non-listed REITs, non-listed business development companies (BDCs), U.S. closed-end funds (including interval funds and tender offer funds), European Long-Term Investment Funds (ELTIFs), U.K. Long-Term Asset Funds (LTAFs), and Luxembourg law-governed UCI Part II funds.

Notwithstanding the relaxation of the leverage restrictions, other constraints remain applicable. These include restrictions on acquiring more than a majority of the voting rights of a single issuer, limits relating to derivatives transactions, and credit risk management requirements. Accordingly, careful assessment remains necessary to ensure that these requirements do not impede the contemplated investment strategy. In addition, under the current rules of the JITA, domestic investment trusts are prohibited from investing in fund-of-funds structures. Accordingly, an overseas alternative fund that is itself structured as a fund of funds—a structure commonly used in the alternative investment space—may not qualify as an investment target for a domestic investment trust.

As a result, these regulatory requirements continue to constitute practical hurdles. As of the date of this article, there have been a limited number of cases—approximately three—in which publicly offered domestic investment trusts have invested in overseas alternative funds. That said, it should be noted that the emergence of this structure in practice is relatively recent, with less than a year having elapsed since such investments first became feasible. Accordingly, while market adoption remains limited at present, further development and increased utilization of this scheme may be expected going forward.

Potential Use of the Professional Investor Private Placement Regime

Alongside the expansion of eligible target funds for publicly offered investment trusts, attention has also been drawn to private placement structures as an alternative route for facilitating investments in overseas alternative funds through domestic investment trusts.

While Section “Requirements for Target Funds of Publicly Offered Investment Trusts and Recent Relaxations” above addresses publicly offered domestic investment trusts, such trusts may also be distributed through private placements. As noted above, there are three categories of private placements. Historically, QII private placements and small-number private placements have been most commonly used. However, these approaches have inherent limitations: (i) QII private placements restrict the investor base to QIIs, and (ii) small-number private placements, although they permit solicitation of investors other than QIIs, are limited to no more than 49 offerees (excluding QIIs).

By contrast, the Professional Investor private placement regime permits solicitation, without a numerical limit, to Professional Investors whose scope is broader than that of QIIs. Where a financial instruments business operator is involved and appropriate transfer restrictions are imposed, this regime provides an exemption from the full disclosure requirements, subject instead to simplified “Specified Securities Information.”

Historically, effective use of this regime was constrained because the JSDA rules generally prohibited companies from soliciting investments in unlisted shares, and Specified Securities Information practice was not well developed outside professional investor markets. In 2022, however, reforms expanded the scope of Professional Investors and permitted solicitation of securities other than professional market issues. Corresponding amendments to the JSDA rules introduced a framework for issues targeted at Professional Investors (commonly referred to as the “J-Ships” regime).

In practice, there have been cases in which domestic investment trusts investing in overseas alternative funds were established and distributed to Professional Investors under the J-Ships regime.

Utilization of the regime nevertheless remains limited, largely due to the procedural burden associated with obtaining and maintaining Professional Investor status, including transaction-specific application requirements and annual renewals. As a result, demand for transition to Professional Investor status has remained limited, and the pool of Professional Investors has not expanded significantly.

In response, the FSA proposed in its Disclosure Working Group Report, published in December 2025, expanding the scope of eligible offerees under the Professional Investor private placement regime to include “Potential Professional Investors.” This category would cover investors who possess the capability to satisfy Professional Investor requirements but have not completed the formal transition procedures. For solicitations to such Potential Professional Investors, disclosure requirements are expected to be aligned with those applicable to Professional Investors, while conduct regulations would remain at the level applicable to non-Professional Investors. The proposal has attracted attention as an attempt to balance investor protection with the facilitation of investment opportunities commensurate with investors’ capabilities.

Conclusion

While publicly offered structures remain subject to meaningful constraints, recent regulatory developments have created new opportunities to channel overseas alternative investments through Japanese domestic investment trusts that did not previously exist. At the same time, private placement regimes—particularly those targeting Professional Investors—are emerging as a viable complementary route. Together, these developments suggest that the use of Japanese domestic investment trusts as vehicles for overseas alternative investments is likely to continue to evolve in practice.