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Legal Barriers to Japan’s Venture Capital Industry

Although Japan is one of the leading countries in the world in terms of GDP, the success of its venture capital industry is questionable, especially when compared to that of the US. In Japan, there are about 1,500 venture capital deals annually, valued at $1.9 million per deal, whereas in the US, there are about 3,080 deals annually, valued at $7.1 million per deal.1 The aforementioned number of deals in both countries is proportional relative to the economic size of the respective countries, but the average deal size in the US is four times larger than in Japan.2 This largely stems from Japanese laws that inhibit venture capital growth.

There are legal issues that impede the formation of venture capital funds in Japan.3 While the US’s limited partnership form is the most popular among venture capital funds due to its flow-through tax treatment and limited liability, there are no organizational forms in Japan that provide both of those features.4 Though a limited partnership form exists in Japan, the Ministry of Finance imposes a withholding tax on such entities with ten or more partners, which is discouraging for investors since they would have less money from the beginning.5 Since most venture capital funds have ten or more partners, the withholding tax  essentially renders a limited partnership unattractive to venture capitalists.6

The main difference between entrepreneurship in the two countries is that entrepreneurs in Japan tend to hold on to control in their startups while entrepreneurs in the US do not.7 This is because Japanese tax laws are more restrictive about the use of sweat equity.8 It is common practice in the US for entrepreneurs to abandon some control of their startup to venture capitalists in return for additional capital in the form of sweat equity.9 Japanese entrepreneurs and venture capitalists cannot do the same due to Japanese tax laws, which challenge the sweat equity as a taxable gift.10 Thus, entrepreneurs are discouraged from accepting investments and seldom allow venture capitalists to obtain control in their startups.11

On the other hand, venture capitalists are not eager to gain control of the board majority in Japan, due to corporate laws that make it less beneficial to do so in comparison to the US.12 Gaining board control is not very advantageous for investors because shareholders possess more control than the board under Japanese corporate law.13 Also, the cost of sending directors to a startup is higher in Japan due to laws demanding a higher level of director liability to creditors, which makes it much riskier for venture capitalists to be board members in Japan.14

Likewise, in Japan, venture capitalists resist owning a large portion of a startup’s stocks. To prevent the reemergence of family-controlled conglomerates that dominated the Japanese economy until World War II, the Japanese Anti-Monopoly Law was enacted after the war, and prohibited the formation of holding companies.15 In order to avoid being classified as a holding company, a venture capital fund must limit stock ownership of a company in which it invests.16

Laws in Japan also severely limit the potential for an exit through an IPO.17 There are strict prerequisites involving profitability guidelines and minimum net asset requirements, which are extremely difficult for startups to meet.18 As a result, Japanese startups take 20 to 29 years on average to reach IPO, whereas American startups take an average of five to seven years.19 The long time it takes for startups to reach IPO in Japan discourages many venture capitalists from making large investment deals with them.20

There are also issues regarding trust between entrepreneurs and venture capitalists.21 In the US, securities regulations and the principle of full disclosure provide confidence and trust in investors.22 Japan has securities laws that closely mirror the US’s Securities and Exchange Act, but enforcement is essentially absent.23 During the last four decades, Japan’s Ministry of Finance has not engaged in any formal market monitoring or enforcement activity.24 Thus, laws against activities such as securities fraud and insider trading have not been properly enforced.25 Because of the prevalence of such types of financial corruption, an atmosphere of distrust impedes venture capitalists’ confidence in making deals with startups.26 As a result, venture capitalists are unfortunately less willing to invest large amounts of capital in startups.27

Cultural differences likely also account for the lesser presence of venture capital in Japan.28 For example, a recent survey revealed that while 91% of Americans believe that starting a business is a respectable profession, only 8% of people in Japan agree.29 Perhaps the lack of respect and interest in Japanese entrepreneurship explains the small contribution that venture capital makes to Japan’s GDP. But it is clear that current laws in Japan are substantially hindering the growth of its venture capital industry. Unfortunately, cultural change can be a slow and difficult process. Thus, it is crucial for Japan to focus more on improving its laws in ways that will support the growth of its venture capital industry.


  1. Robert Eberhaut, Japanese Venture Capital: An Analysis of Start-up Investment Patterns vs. Silicon Valley at the Stanford Program on Regions of Innovation and Entrepreneurship Tokyo Symposium: Japanese Venture Capital (July 2009), available at sprie.gsb.stanford.edu/research/staje. 

  2. Id. 

  3. Peggy H. Fu, Developing Venture Capital Laws in China: Lessons Learned from the United States, Germany, and Japan, 23 Loy. L.A. Int’l & Comp. L. Rev. 487, 505 (2001), available at http://digitalcommons.lmu.edu/ilr/vol23/iss3/4. 

  4. Id. 

  5. Id. 

  6. Id. 

  7. See Zenichi Shishido, Sweat Equity as a Gift: Venture Capital Investments and Tax Law in Japan 8 (Mar. 9, 2009) (unpublished manuscript) (on file with the Institute for Legal Research, University of California, Berkeley, School of Law), available at www.law.berkeley.edu/files/sho_sato_tax_conf_web_paper–shishido(2).pdf. 

  8. See id. at 4-5. 

  9. Id. at 2. 

  10. Id. at 4. 

  11. Id. at 8. 

  12. Zenichi Shishido, Law and Venture Capital: The Case of Japanese Entrepreneurs 4 (Mar. 2011) (unpublished manuscript) (on file with the University of California, Berkeley), available at works.bepress.com/zenichi_shishido/5/. 

  13. Id. 

  14. Id. at 4-5. 

  15. Fu, supra note 3, at 507. 

  16. Id. 

  17. Id. at 508. 

  18. Id. 

  19. Id. 

  20. Fu, supra note 3, at 508-09 

  21. See id. at 510. 

  22. Id. at 509. 

  23. Id. at 510. 

  24. Id. 

  25. Id. 

  26. Fu, supra note 3, at 510 

  27. See id. 

  28. See id. at 511. 

  29. Id. 

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Takayuki Matsushita

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