Japan is set to embark on an exciting venture, enabling startups to access vital funding through the sale of digital assets, such as cryptocurrency, rather than traditional stock offerings. This groundbreaking move will open up new horizons for emerging companies involved in blockchain technology, expanding their funding options significantly.
This transformative shift is poised to broaden the scope of assets available to limited partnerships. Conventionally, venture capital firms employ limited partnerships to pool resources with other entities for investments in startups, thereby limiting their exposure to the capital invested. Presently, Japan confines limited partnerships to traditional assets such as shares, stock options, and security tokens defined by Japanese securities law. However, this impending rule change will introduce various tokens and crypto assets to this list, ushering in a new era of investment that has previously been underdeveloped in the country.
The Japanese government is committed to pushing this initiative forward and aims to submit the necessary legal revisions to parliament as early as 2024.
In stark contrast to conventional shares, blockchain-based tokens can be swiftly created without the need for intermediaries like brokerages. Consequently, fundraising through digital assets is primarily embraced by companies at the forefront of next-generation Web3 technologies, including blockchain.
In 2022, Web3 startups globally secured an impressive $15.1 billion in funding, marking a staggering 15-fold increase from the 2018 total, as reported by CB Insights. Despite a temporary dip in funding during the latter half of 2022, partly attributed to the FTX cryptocurrency exchange collapse, the trend has rebounded since the first quarter of 2023.
Several Japanese companies, such as HashPalette, a prominent blockchain developer, have successfully raised substantial amounts through token offerings. However, the previous restrictions preventing limited partnerships from investing in tokens had hindered Japanese venture capital firms and institutional investors from capitalizing on the remarkable growth of Web3 companies.
In response to these limitations, some startups had resorted to issuing tokens in Singapore or Dubai. On the venture capital front, Japan’s Skyland Ventures had turned to investments in tokens overseas via a Singapore-based subsidiary.
Furthermore, the Japanese government is contemplating revisions to the tax code for fiscal years 2024 and beyond. These revisions aim to exempt crypto assets and tokens from taxes on unrealized gains based on market value, which had deterred some potential investors from entering this dynamic field.
Venture capital firms have been advocating for these changes for a considerable time. While the revision of the limited partnership law represents a significant milestone, it is acknowledged that it alone may not trigger a substantial surge in fundraising through virtual currencies, as noted by B Dash Ventures.
Japan also harbors plans to eliminate restrictions compelling limited partnerships to invest more than half of their capital domestically. By doing so, the government hopes to provide more investment opportunities, bolster profitability, and enable these firms to allocate more capital to domestic startup ventures. This multifaceted approach is set to invigorate the Japanese investment landscape, propelling the nation into the forefront of blockchain technology and digital asset financing.