The Financial Services Agency of Japan recently published a “Report of the Working Group on Capital Market Regulations and Asset Management Task Force of the Financial System Council” (the “Report”), which describes a strategy for improving the capabilities of asset management companies who are playing important roles in managing financial assets and making returns for households. The strategies include promoting a virtuous cycle of growth and asset-based income in the investment chain through enhancing fund-raising for startups and feeding those returns back to households, promoting initiatives for achieving a leading asset management center.
This newsletter discusses the section of the Report on “Challenges Surrounding Venture Capital (VC) funds” and “Establishment of Systems for Public Offerings, Private Placements, and Investment Crowdfunding”.
1． Issues Surrounding Venture Capital (VC) funds
(1) Promotion of Fair Value Measurement
The fair value measurement of VC funds achieved certain progress in 2023, in May, with the Japanese Institute of Certified Public Accountants revising related practical guidelines and organizing audit considerations concerning the audit of VC funds.
On the other hand, issues such as the following have been pointed out:
- Holders of equity interests in VC funds are required to evaluate at acquisition cost, necessitating dual management of fair value and acquisition cost. For GPs (General Partners, fund management operators), securing personnel for middle and back office operations, establishing and operating internal controls, and system implementation are necessary, thus requiring a certain fund size.
- It is necessary to permeate the above practical guidelines into the practices of auditing firms.
- In the future, should the introduction of fair value evaluation increase and audit demand rise, the reallocation of resources within auditing firms or the need for new auditors for fund audits will be necessary.
