VC and CVC Fund Formation: Key Clauses of the Investment Limited Partnership Agreement and the Specially Permitted Business Notification

Hello, I'm Noriaki Asato, Representative Attorney at LegalAgent.

The first things to decide in forming a fund are which vehicle to use, who will manage it and from whom it will accept capital contributions. This is the same whether the fund is a venture capital (VC) firm's first fund or a fund that an operating company forms as corporate venture capital (CVC). For a fund in which the investors are not involved in management, the standard approach is to use an investment limited partnership (LPS). The general partner (GP), as the manager, and the limited partners (LPs), as the investors, enter into a limited partnership agreement (LPA), and the GP invests the money provided by the LPs.

Whether you can raise contributions as planned depends on how you deal with the Financial Instruments and Exchange Act (FIEA). The GP's solicitation of LPs and its management of the money raised are, as a rule, activities that require registration as a financial instruments business operator. For the GP itself to carry out these activities without registration, it must file a notification of specially permitted business for qualified institutional investors (specially permitted business), and the persons from whom it can accept contributions are also limited. On that basis, LPA clauses such as those on management fees and carried interest, the key person clause and the removal of the GP are at the center of negotiations with LPs.

In drafting an LPA, reference is made to the Sample Investment Limited Partnership Agreement and Commentary (2025 Version) (Japanese), which the Ministry of Economy, Trade and Industry (METI) published on June 23, 2025. The 2025 version is the successor to the November 2010 version of the "Model Investment Limited Partnership Agreement." For VC funds, the premise is that the March 2018 version, the "Investment Limited Partnership Agreement (Example) and Commentary," will continue to be used. METI states that the Model LPA is a starting point for contract negotiations and that it must be modified to suit each fund's policies and characteristics.

Why Use an Investment Limited Partnership, and How It Differs from an LLP or a Civil Code Partnership

Article 3, Paragraph 1 of the Limited Partnership Act for Investment (LPS Act) (Japanese) sets out the requirements for an LPA to take effect. An LPA takes effect when each of the parties agrees to make a contribution and to jointly carry on the businesses listed in the items of that Paragraph, such as acquiring and holding shares. The GP decides on and executes the partnership's business (Article 7, Paragraph 1), and an LP's liability is limited to the value of its contribution (Article 9, Paragraph 2). METI's commentary on the LPS Act (Japanese), dated July 2, 2025, interprets this "value of its contribution" as the amount actually contributed, not the amount the LP has committed to contribute. The GP bears unlimited liability for the partnership's obligations, and if there are two or more GPs, they are jointly and severally liable (Article 9, Paragraph 1).

In a Civil Code partnership, the partnership's creditors may exercise their rights against each partner in proportion to that partner's share of losses or in equal shares (Article 675, Paragraph 2 of the Civil Code). Even an investor that does not execute the partnership's business may face claims exceeding the amount of its contribution. According to the same commentary, the LPS Act was enacted to secure by statute the limited liability of partners who do not execute the partnership's business.

All partners of a limited liability partnership (LLP) have limited liability under Article 15 of the Act on Limited Liability Partnership Agreements (LLP Act), but each partner has the right and the obligation to execute the partnership's business (Article 13, Paragraph 1). Decisions on the execution of business also require, as a rule, the consent of all partners (Article 12, Paragraph 1). Because an LLP agreement takes effect when each party has paid in the full amount of its contribution (Article 3, Paragraph 1), it also does not fit a structure in which partners pay in their committed amounts each time an investment is made. An LPS is suited as the vehicle for a fund in which the investors are not involved in management, while an LLP can be used as the vehicle when several partners jointly serve as the GP. A June 2023 amendment to the registration rules made it possible to register an LLP as the GP of an LPS.

An LPS also has constraints of its own. The businesses it may carry on are limited to those listed in the items of Article 3, Paragraph 1, and even if the GP performs any other act, the partners cannot ratify it (Article 7, Paragraph 4). Investments in shares and similar interests of foreign corporations are limited to the extent that their aggregate acquisition price is less than 50% of the total contributions of all partners (Article 3, Paragraph 1, Item 11 of the LPS Act; Article 4 of the Enforcement Order of the LPS Act). Under an amendment that took effect on September 2, 2024, foreign corporations whose management is substantially controlled or significantly influenced by Japanese corporations or similar entities were excluded from "foreign corporations" for this purpose. The same amendment also added membership interests in limited liability companies (godo kaisha) to the eligible investments, and since April 1, 2025, an LPS can also acquire crypto-assets issued for the benefit of business operators.

Within three months after the end of each fiscal year, the GP prepares financial statements and related documents, such as a balance sheet and a profit and loss statement, and keeps them for five years (Article 8, Paragraph 1). The GP must also keep the opinion of a certified public accountant or an audit firm together with them (Paragraph 2 of the same Article). The partnership has no legal personality, and METI cites the application of pass-through taxation as a feature of an LPS.

Specially Permitted Business under Article 63 of the Financial Instruments and Exchange Act and the Range of Investors

An interest in an LPS is deemed a security as a collective investment scheme interest under Article 2, Paragraph 2, Item 5 of the Financial Instruments and Exchange Act (Japanese). Self-offering, in which the GP solicits LPs, is an act under Article 2, Paragraph 8, Item 7(f), and self-management, in which the GP invests the money raised mainly in securities, is an act under Item 15 of the same Paragraph. Carrying on these activities as a business requires, as a rule, registration for Type II financial instruments business and investment management business (Article 28, Paragraph 2, Item 1 and Paragraph 4, Item 3; Article 29).

The mechanism that does not require this registration is the specially permitted business under Article 63. According to the explanation by the Financial Services Agency (FSA) (Japanese), a notification suffices where the investors are qualified institutional investors (QIIs) only, or where they are one or more QIIs and 49 or fewer investors of certain types (Article 63, Paragraph 1; Article 17-12, Paragraph 3 of the FIEA Enforcement Order). Under Article 10, Paragraph 1, Item 18 of the Cabinet Office Ordinance on Definitions under Article 2 of the FIEA (Definitions Ordinance), QIIs include not only banks and insurance companies but also LPSs themselves. A corporation holding securities with a balance of JPY 1 billion or more can also become a QII by filing a notification with the Commissioner of the FSA (Item 23(a) of the same Paragraph).

If the GP itself is registered for Type II financial instruments business and investment management business, no specially permitted business notification is required. The GP can also operate the fund without filing a notification by leaving solicitation to a registered financial instruments business operator and entrusting all of its investment management authority to an investment management business operator under certain requirements (Article 16, Paragraph 1, Item 10 of the Definitions Ordinance).

The range of eligible investors for specially permitted business, who fill the slots for 49 or fewer investors, was narrowed by an amendment that took effect on March 1, 2016, and ordinary individuals can no longer invest. Eligible investors now include, among others, listed companies, corporations with stated capital or net assets of JPY 50 million or more, and the GP's officers and employees, parent companies and subsidiaries (Article 17-12, Paragraph 1 of the FIEA Enforcement Order). For individuals, under Article 233-2, Paragraph 3 of the Cabinet Office Ordinance on Financial Instruments Business (FIB Ordinance), eligible investors include, among others, persons who are expected to hold investment-type financial assets of JPY 100 million or more and for whom one year has passed since they opened a securities account. The main conditions that must be met to conduct a private placement as specially permitted business are as follows (Article 234-2, Paragraph 1 of the FIB Ordinance; Article 17-12, Paragraph 4 of the FIEA Enforcement Order).

• Solicitation limited to one or more QIIs and 49 or fewer eligible investors for specially permitted business
• Participation of a QII other than a small LPS (one whose managed assets, excluding borrowings, are not expected to be JPY 500 million or more)
• An investor composition in which contributions from persons closely related to the GP and certain others make up less than half of total contributions
• A transfer restriction in the LPA that limits transferees of interests to QIIs and certain others

For funds that invest mainly in unlisted shares, there is a venture fund exception that broadens the range of investors. One of its conditions is that more than 80% of the contributed amount, excluding cash and deposits, be invested in unlisted shares, stock acquisition rights and the like. The fund is also required not to borrow money or guarantee debts as a rule, and not to make refunds at investors' request except where unavoidable (Article 17-12, Paragraph 2 of the FIEA Enforcement Order; Article 233-4 of the FIB Ordinance). Using this exception, the fund can also admit as investors persons such as officers of listed companies and persons who have been engaged for a total of one year or more in work such as company formation, M&A or IPO preparation, within five years of their last such engagement (Article 233-3 of the FIB Ordinance). In return, the LPA must provide for matters such as audits of the financial statements and related documents, reporting at investors' meetings and a provision allowing the GP to be removed by a majority of the interests where there are justifiable grounds (Article 239-2, Paragraph 1 of the FIB Ordinance). A copy of the agreement must be submitted within three months from the date of the notification (Article 63, Paragraph 9; Article 239-2, Paragraph 3 of the FIB Ordinance).

Because the notification must be filed "in advance" of conducting specially permitted business (Article 63, Paragraph 2), it must be completed before you begin soliciting LPs. The notification is prepared using Appended Form No. 20 of the FIB Ordinance and submitted to the Director-General of the Local Finance Bureau or other competent official with jurisdiction over the location of the head office or principal office (Article 236 of the FIB Ordinance). In addition to a written pledge that the filer does not fall under any grounds for disqualification, the articles of incorporation and a certificate of registered matters (Article 63, Paragraph 3), the résumés of officers and important employees, among other documents, must also be attached (Article 238-2 of the FIB Ordinance). Important employees are the person who oversees guidance on legal compliance and the person who oversees the investment management division (Article 17-13 of the FIEA Enforcement Order).

A GP that has filed the notification is subject to conduct rules such as advertising regulations, the delivery of pre-contract disclosure documents, the prohibition on loss compensation, and the duty of loyalty and the duty of care of a prudent manager (Article 63, Paragraph 11). The GP must also submit a business report within three months after the end of each fiscal year (Article 63-4, Paragraph 2) and make explanatory documents available for public inspection for one year from the day on which four months have passed since the end of the fiscal year (Paragraph 3 of the same Article; Article 17-13-4 of the FIEA Enforcement Order). Conducting specially permitted business without filing the notification is punishable by imprisonment for up to five years, a fine of up to JPY 5 million, or both (Article 197-2, Item 10-5). Section IX-1-1 of the FSA's Supervisory Guidelines (Japanese) requires the GP to confirm that the customers it solicits meet the investor requirements and to keep records of the results and their basis.

Main Clauses Negotiated in the Limited Partnership Agreement

Article 3, Paragraph 3 of the LPS Act sets out the mandatory items of an LPA, but the issues in negotiations are the economic terms and governance clauses that are left to the agreement of the parties. The commentary on the 2025 Model LPA explains, clause by clause, the thinking behind the design and the available options.

Capital Commitments and Capital Calls

The 2025 Model LPA adopts a structure in which each LP pays in its contributions in stages in response to requests from the GP (capital calls), up to the amount the LP has committed to contribute (capital commitment). If an LP fails to pay in, it must pay interest and also compensate for damages (Article 16 of the LPS Act; Article 669 of the Civil Code). An LP also cannot refuse to make its own payment on the ground that another LP has defaulted (Article 667-2, Paragraph 1 of the Civil Code, applied mutatis mutandis). As a means of preventing defaults, the commentary on the Model LPA explains that many agreements provide for severe sanctions such as the suspension of voting rights, exclusion from subsequent investments, the forfeiture of distributions and expulsion.

The GP itself must also hold at least one unit of contribution (Article 6, Paragraph 1 of the LPS Act), and according to METI's commentary on the LPS Act, an agreement that the GP will not make a contribution is invalid. To align the interests of the GP and the LPs, the commentary on the Model LPA gives as an example a clause under which the GP maintains a number of units equal to a certain percentage (for example, 1%) of the LPs' total units.

Term of the Partnership, Investment Period and Key Person Clause

The term of the partnership is a mandatory item of the LPA and also a matter to be registered (Article 3, Paragraph 3, Item 7; Article 17, Item 1). Because an extension means that management fees continue to be paid and distributions are delayed, the Model LPA requires the LPs' consent to an extension. Where banks or insurance companies become LPs, also look at Article 11, Paragraph 1, Item 4 of the Antimonopoly Act. That Item excludes the application of the restrictions on holding voting rights on the conditions that the LP cannot exercise the voting rights or give instructions to the GP, and that it does not hold the voting rights for more than ten years (Article 17 of the Enforcement Order of that Act) after acquiring them. According to the commentary on the Model LPA, funds with such LPs commonly set the term at ten years or less.

The Model LPA separately defines the period during which new investments are made as the investment period. According to the same commentary, for a private equity fund with a ten-year term, the investment period is commonly set at around four or five years. A key person clause suspends or terminates the investment period when specified individuals leave the management of the fund. It is included where LPs invest because they trust specific individuals, and the scope of the individuals covered and whether the clause is triggered automatically or by a vote of the LPs are decided through negotiation.

Management Fees and the Allocation of Carried Interest

The Model LPA sets the basis for calculating the management fee as the total capital commitments of all partners during the investment period, and the outstanding investment balance or net asset value after the investment period ends. It also includes a clause deducting from the management fee any fees that the GP or its related parties receive from portfolio companies, and the commentary explains this as a mechanism for curbing substantive conflicts of interest between the GP and the fund.

If the LPA does not specify the ratio for sharing profits and losses, they are shared in proportion to the value of each partner's contribution (Article 16 of the LPS Act; Article 674, Paragraph 1 of the Civil Code). The Model LPA structures the GP's success-based compensation as carried interest allocated to the GP within the order of distributions (the distribution waterfall). In this design, after the LPs have recovered their contributions and received a preferred distribution corresponding to the hurdle rate, the GP and the LPs share the proceeds in fixed proportions following a catch-up. There is an approach that first returns contributions across the fund as a whole and an approach that calculates deal by deal, and the commentary states that the former is more common in Japanese practice. Because distributions to the GP start earlier under the latter, a GP clawback clause requiring the GP to return excess carried interest upon liquidation, and securing the funds for that return, become issues.

Distributions are capped at the amount of net assets on the balance sheet (Article 10, Paragraph 1 of the LPS Act), and unrealized gains are excluded from this net asset amount (Article 22, Paragraph 1 of the Enforcement Regulation of the LPS Act). An LP that receives distributions exceeding the cap is liable to pay the partnership's obligations up to the amount it received, and it is released from that liability once five years have passed since the distribution (Article 10, Paragraph 2 of the LPS Act).

Conflicts of Interest, Investment Restrictions and Reporting

The GP owes a duty of care of a prudent manager in conducting the partnership's business (Article 16 of the LPS Act; Articles 671 and 644 of the Civil Code). When the GP conducts self-management as specially permitted business, it also owes the duty of loyalty and the duty of care of a prudent manager under the FIEA (Article 63, Paragraph 11; Article 42). The GP is, as a rule, prohibited from conducting transactions involving partnership assets with itself or its directors or executive officers, and from conducting transactions with other funds that it manages (Article 42-2, Items 1 and 2). One exception is where, for each transaction, the GP explains the details and the reasons to all LPs and obtains the consent of all of them. If the LPA so provides, the consent of LPs that are at least half in number and hold at least three-quarters of the interests suffices in place of the consent of all LPs (Article 128, Item 2 and Article 129, Paragraph 1, Item 2 of the FIB Ordinance). That provision must also state that, at the request of an LP that opposed the transaction, its interest will be purchased at a fair price. For sales and purchases of unlisted shares, the price must also be calculated by a reasonable method.

The LPA also sets out when the GP may begin investing through a successor fund and how investment opportunities are allocated. The Model LPA establishes an advisory committee responsible for matters such as approving conflict-of-interest transactions, but according to the commentary, the advisory committee is not a statutory body but an optional body designed by contract. When granting powers to the advisory committee, care must be taken that the LPs do not end up deciding on or executing the partnership's business.

The Model LPA sets out investment restrictions, such as caps on the amount invested in a single portfolio company, investment regions and methods, and conditions for borrowing, as investment guidelines in an appendix. As for reporting, in addition to the financial statements and related documents and the auditor's opinion under Article 8 of the LPS Act, the Model LPA provides for the quarterly delivery of financial information and an annual partners' meeting. A GP engaged in specially permitted business also delivers management reports to LPs that are not professional investors (Article 63, Paragraph 11 and Article 42-7 of the FIEA; Article 134, Paragraph 7, Item 4 of the FIB Ordinance). Each LP may inspect the status of the partnership's business and assets (Article 673 of the Civil Code, applied mutatis mutandis) and may also request to inspect and copy the financial statements and related documents and the LPA (Article 8, Paragraph 3 of the LPS Act).

Removal of the GP, Dissolution and Liquidation

Article 672, Paragraph 2 of the Civil Code applies mutatis mutandis to the removal of the GP (Article 16 of the LPS Act), and according to METI's commentary, removal requires justifiable grounds and the unanimous agreement of all the other partners. Because unanimity is difficult to obtain in a fund with many LPs, the LPA sets out the grounds for removal and expulsion and the percentage of consent required. Under the venture fund exception, the LPA must provide that the GP can be removed with the consent of a majority of interests (or a higher percentage) where there are justifiable grounds (Article 239-2, Paragraph 1, Item 12 of the FIB Ordinance). The Model LPA is structured so that the GP is expelled with the consent of a certain percentage of the LPs when there are grounds such as illegal acts. While noting that there are clauses overseas under which a majority of LPs can replace the GP regardless of the grounds, the commentary also points out that such clauses may have a chilling effect on the GP's execution of business.

The partnership is dissolved upon events such as the expiration of its term, the accomplishment of its business purpose or the impossibility of accomplishing it, and grounds specified in the LPA (Article 13 of the LPS Act), and as a rule the GP becomes the liquidator (Article 14). In case unsold portfolio investments remain when the term expires, also set out in the LPA the procedure for choosing among an extension of the term, a sale to a continuation fund and an in-kind distribution. That procedure will serve as the basis for decisions when the interests of the LPs and the GP conflict at the liquidation stage.

Forming a CVC Fund and LP Investments by Operating Companies

Structure with the Parent Company as the LP and a Subsidiary as the GP

METI's commentary on the LPS Act expressly states that a stock company may enter into an LPA as the LP with its wholly owned subsidiary as the GP. The GP's parent company and similar entities qualify as eligible investors for specially permitted business (Article 17-12, Paragraph 1, Item 6 of the FIEA Enforcement Order; Article 233-2, Paragraph 1, Item 2 of the FIB Ordinance). Contributions from the GP's parent company and similar entities are also excluded in calculating the one-half requirement (Article 234-2, Paragraph 1, Item 2 of the FIB Ordinance). However, specially permitted business cannot be used without at least one QII. Decide at an early stage of formation whether the parent company will meet the requirement of a securities balance of JPY 1 billion or more and become a QII by notification, or whether to bring in a financial institution or the like. QII status obtained by notification is limited to two years from the first day of the second month following the month in which the notification was filed (Article 10, Paragraph 6 of the Definitions Ordinance). Also manage the timing of renewal so that the requirements continue to be met throughout the management period. The Supervisory Guidelines cite, as an example of a private placement or management that does not meet the requirements, a structure in which the only QII is the specially permitted business operator itself or another fund that it manages (IX-1-2).

How far the parent company may be involved in the subsidiary GP's investment decisions is another point to settle in advance. METI's commentary states that establishing a clause requiring the LP's consent to every investment decision, and the LP's exercise of that consent right, conflict with Article 7, Paragraph 1 of the LPS Act. The commentary on the Model LPA likewise calls for a structure in which, in a fund with one GP and one LP where the LP is the GP's parent company, the LP does not control the GP's investment decisions. Article 130, Paragraph 1 of the FIB Ordinance also applies to a GP that has filed a specially permitted business notification (Article 63, Paragraph 11 and Article 42-2, Item 7 of the FIEA). That Paragraph prohibits management that seeks to benefit a third party to the detriment of the LPs' interests (Item 2) and management under undue restraint from others (Item 4). Agree in advance on alignment with the parent company's business strategy in the form of investment guidelines, and have the GP's investment committee decide on individual deals.

The commentary on the Model LPA states that it is not realistic to include a key person clause in a fund whose managers change frequently due to personnel rotations. In a CVC fund that brings in outside LPs, decide in advance on the scope of key persons and the procedure for nominating successors, taking into account the parent company's personnel policy.

Where the CVC's purposes include business collaboration with portfolio companies, whether the parent company's business divisions may use information on portfolio companies obtained through the fund depends on the LPA and the agreements with the portfolio companies. The Model LPA imposes on LPs a duty of confidentiality and a prohibition on use for other purposes with respect to information obtained through the fund (Article 50). If the parent company plans to collaborate with portfolio companies, clarify the permitted scope of use of information in the investment agreements and the LPA. Also avoid transactions between the fund and the parent company on terms that differ from ordinary terms of trade (Article 42-2, Item 4 of the FIEA). The contractual issues with operating companies, seen from the side of a startup portfolio company, are covered in What Startups Should Check Before Signing with CVCs and Corporate Partners.

If the fund's name will include the parent company's name, check Article 5, Paragraph 4 of the LPS Act. If an LP permits its own name to be used in the partnership's name, it bears the same liability as the GP for the partnership's obligations arising after that. METI states that whether the use of part of a company name or an abbreviation falls under that Paragraph is determined case by case, according to whether the name would lead third parties to mistakenly believe that the LP has the authority to execute the partnership's business.

Order of Steps from Notification to Registration and the First Contribution

The formation procedures generally proceed in the following order.

1. Establishing the entity that will serve as the GP and confirming the attributes of prospective LPs
2. Filing the specially permitted business notification before beginning to solicit LPs
3. Executing the LPA after delivering the pre-contract disclosure document and conducting customer verification
4. Registering the effectiveness of the partnership agreement within two weeks from the date it takes effect (Article 17 of the LPS Act)
5. Opening the partnership's bank account and making the first capital call

The GP files the application for registration (Article 26, Paragraph 1) and attaches the partnership agreement (Article 27). If the LPA is in English, a Japanese translation must be attached, and the registration and license tax is JPY 30,000 per application (Appended Table 1, Item 28(i)(a) of the Registration and License Tax Act). Even before registration, the LPA takes effect among the partners. However, registered matters cannot be asserted against a third party in good faith until after registration (Article 4, Paragraph 1), and failure to register is subject to a non-penal fine of up to JPY 1 million (Article 34, Item 1). After formation, the preparation and audit of the financial statements and related documents, the submission of business reports and the public inspection of explanatory documents continue every year. When notified matters or registered matters change, a notification of change and a registration of change must also be made (Article 63, Paragraph 8 of the FIEA; Article 18 of the LPS Act).

What an Operating Company Investing as an LP Should Check

An operating company investing in an outside VC fund first confirms whether it meets the investor requirements. A corporation with stated capital or net assets of JPY 50 million or more is an eligible investor for specially permitted business, and the GP may ask it to submit materials substantiating that it meets the requirements. In the LPA, first look at whether the notice period for capital calls matches the number of days your internal approval process requires, and how severe the sanctions for default are. The basis for calculating the management fee and the deduction of fees from portfolio companies, the waterfall method and the GP clawback, the key person clause and the requirements for removing the GP, and the consent required to extend the term are also items to check.

Under the Model LPA, a transfer of an interest requires the GP's consent. Because transferees are also limited to QIIs and certain others (Article 17-12, Paragraph 4 of the FIEA Enforcement Order), there are few situations in which an LP can sell its interest partway through and recover its money. If you invest for strategic purposes, check whether the confidentiality clause and the clause prohibiting use for other purposes are compatible with your plans to use information on portfolio companies in your own business. Individual terms can be agreed in a side letter. As for amendments to the LPA, METI's commentary on the LPS Act states that a provision allowing amendment by majority vote is considered prima facie valid, as long as it does not deprive partners of their vested rights. Also check how the terms obtained in a side letter will be treated in a later amendment of the LPA.