The Japan Blockchain Alliance (JBA) has published guidance for Initial Coin Offerings (ICOs) for sales to residents of Japan. The JBA said there was a misconception regarding ICOs sold to Japanese citizens as there are no existing regulations or, alternatively no Japanese laws apply if the issuer is located outside of Japan. The JBA said these concepts are “misleading and false.’
Noting that Japan does not currently have specific regulation regarding ICOs this is different from no regulation at all as many of the token sales are securities and thus regulated under existing law. The JBA recommends careful consideration for issuers warning there is a possibility of “potential punishment including criminal penalty.” Even for ICOs that are possibly pitching “utility tokens” other laws regarding commercial transactions and consumer protections may apply.
The JBA said that coin offerings via the internet and solicitation are regulated under Japanese law and recommended issuers “shut out all Japanese residents from transacting on their site.”
The JBA provided examples of applicable regulations that were described as not exhaustive:
(1) “Virtual Currency” Stipulated in PSA (called the VC Act)
(a) If ICO tokens are deemed “Virtual Currency” (“VC“) as defined in the VC Act, only registered Virtual Currency Exchange Business Operators are authorized to handle such ICO tokens.
(b) Even a registered VC Exchange Business Operator is not authorized to handle all existing VCs. The VCs to be handled should be reported to and, as a matter of practice, approved by the FSA.
(c) The criminal penalty for conducting a VC exchange business without registration is imprisonment for 3 years or less and/or a fine of 3 million yen or less.
(2) “Prepaid Payment Instruments” Stipulated in PSA
(a) If ICO tokens are deemed “Prepaid Payment Instruments” (“PPI“) as defined in the PSA, registration with or notification to FSA is required depending on the type of PPI.
(b) The criminal penalty to issue PPI without registration or submission of appropriate notice is imprisonment and/or a fine.
(3) Fund Regulation in FIEA
(a) The fund regulations pursuant to the FIEA (the “FIEA Fund Regulations“) will apply, if the ICO constitutes a “collective investment schemes (fund),” i.e., a scheme that is (i) to collect money from others; (ii) to invest in a business; and (iii) to pay dividends to holders thereof.
(b) The seller of collective investment schemes is required to register as a Type II Financial Instruments Exchange Business Operator unless a certain exemption applies
(c) The criminal penalty to solicit investors to a collective investment scheme without registration is imprisonment for 5 years or less and/or a fine of 5 million yen or less.
(4) Specified Commercial Transaction Act
(a) If ICO tokens are not regulated under financial regulations such as the VC Act and FIEA, the Specified Commercial Transaction Act would generally apply to sales of ICO tokens via the internet.
(b) The Specified Commercial Transaction Act requires certain kinds of basic disclosure such as the name, address and telephone number of a person who is in charge of sales, price, payment method, limitation of warranty (if applicable), etc. Further, the Specified Commercial Transaction Act prohibits some acts such as an extravagant advertisement.
(c) The criminal penalty for an extravagant advertisement is a fine of 1 million yen or less. If the person who makes an extravagant advertisement did not provide basic disclosure items, the penalty for that person will be imprisonment for 1 year or less and/or a fine of 2 million yen or less.
(5) Consumer Protection Act
(a) From the general consumer protection point of view, an appropriate explanation to investors is required irrespective of whether or not such ICO tokens are regulated by the VC Act, by the FIEA or by the Specified Commercial Transaction Act.
(b) The consumer can cancel the purchase of ICO tokens if there is a lack of appropriate explanation as required by the Consumer Protection Act.
The Financial Services Agency in Japan published user and business operator warning about the risks of ICOs in October.