SAKURA Law Office | Legal Update by Managing Partner Kenshiro Michishita
October 1, 2026 (corrected October 16, 2026)
SAKURA Law Office | Kenshiro Michishita, Managing Partner
SAKURA Law Office has published Legal Update No. 28 by Managing Partner Kenshiro Michishita, entitled “Security Token Offerings (STOs) in Japan — Electronically Recorded Transferable Rights, Type I and Type II Financial Instruments Business, Offering Disclosure, Custody, Tokenized Real Estate and Secondary Trading (2026).”
A security token, or ST, represents or transfers a security or a right with securities characteristics through blockchain or another electronic mechanism. The first question in an STO is nevertheless not which blockchain or token standard to use. It is what right the token represents, where that right sits within the securities categories of the Financial Instruments and Exchange Act (FIEA), who issues, solicits and holds it, and how legal transfer and settlement operate.
Tokenized shares, corporate bonds and other Paragraph 1 Securities remain Paragraph 1 Securities. Rights that would ordinarily be Paragraph 2 Securities, including trust beneficiary interests and collective investment scheme interests, may instead become Electronically Recorded Transferable Rights (ERTRs) where they are represented by property value transferable through an electronic data processing system and do not satisfy the prescribed exclusion criteria that constrain transferability. ERTRs are subject to a framework broadly equivalent to Paragraph 1 Securities. Rights satisfying the specified investor and transfer-control conditions may remain within the Paragraph 2 framework as excluded ERTRs. This classification affects Type I or Type II registration, offering disclosure, private placements, distribution channels, eligible investors and secondary trading.
The ST market is moving beyond primary issuance. The Japan Securities Dealers Association and Japan STO Association publish monthly statistics on electronically recorded securities and related rights. On March 25, 2026, Osaka Digital Exchange’s proprietary trading system, START, began secondary trading in Japan’s first ST corporate bond for retail investors. STO structuring therefore increasingly concerns capital-markets infrastructure, including issuer review, investor protection, private-key and system controls, market surveillance, settlement and secondary trading, rather than the digitization of fundraising alone.
This Update draws on the FIEA, related Cabinet Office Orders, FSA supervisory guidance and registration materials, Japan STO Association self-regulation, MLIT materials on specified joint real-estate ventures and secondary-market developments available as of October 1, 2026. It follows the life cycle from pre-issuance structuring to secondary trading for issuers, securities firms, financial institutions, asset managers, real-estate businesses, FinTech and Web3 companies, overseas businesses and General Counsel.
Executive Summary
An STO analysis begins with the underlying right. Tokenized shares and bonds remain Paragraph 1 Securities. Tokenized trust beneficiary rights and collective investment scheme interests will generally need to be assessed as ERTRs under a Paragraph 1-equivalent framework. However, prescribed investor restrictions and technical measures requiring affirmative issuer approval for each transfer may allow a right to remain a Paragraph 2 Security under the excluded-ERTR rules.
The registration category depends on both the security and the activity. Trading, intermediation, brokerage, agency and handling an offering of ERTRs or tokenized Paragraph 1 Securities generally fall within Type I Financial Instruments Business. Excluded ERTRs may remain within Type II. Issuer self-offering must be examined separately by reference to the underlying right; issuer status does not itself exempt the activity from registration.
Where ERTRs are offered under a Paragraph 1-style framework, offering and continuing disclosure require direct consideration, subject to applicable statutory exemptions. Legal disclosures, contracts, trust terms or bond terms, marketing, websites, technical specifications and actual transfer logic must be consistent. A mismatch between software behavior and the legally promised right is an additional risk introduced by tokenization.
The FSA’s supervisory guidance expects firms handling STs to address not only issuer business and financial condition but also network risk, private-key controls, segregation, loss or theft, investor understanding, advertising and customer acceptance criteria. Legal and technology due diligence should ultimately answer the same question: will the right be issued, transferred and redeemed as the legal documents provide?
A proposed secondary market adds complexity. Issuance terms, transfer limits, investor eligibility, custody, pricing, settlement, surveillance, disclosure updates and system connections should be compatible with that market from the outset. Transferability can enhance a product’s usefulness, but it also intensifies the need for investor protection and market integrity.
1. Identify the underlying right and the regulatory consequences of tokenization
“STO” is a practical market term, not a distinct statutory category of security. The analysis should identify the underlying share, bond, trust beneficiary interest, anonymous partnership or other collective investment interest, limited-liability-company membership interest, specified joint real-estate venture right or other entitlement, and locate it within Article 2 of the FIEA.
Tokenization does not eliminate the legal attributes of that underlying right. A tokenized bond remains subject to company law, the bond terms and bondholder register, and rules governing interest and redemption. A tokenized real-estate trust beneficiary interest depends on the trust agreement, beneficiary rights, underlying property, distributions and termination arrangements. Blockchain supplies an infrastructure for records and transfers; it does not replace the legal source of the entitlement.
A share, bond or investment-trust security already classified as a Paragraph 1 Security remains within that category when electronically represented. By contrast, a trust beneficiary interest or collective investment scheme interest ordinarily falling within Paragraph 2 may qualify as an ERTR under Article 2(3) if it is represented by electronically transferable property value. The framework responds to the greater circulation enabled by the technology by applying offering-disclosure and intermediary requirements broadly equivalent to those for Paragraph 1 Securities.
Article 9-2 of the Cabinet Office Order on Definitions excludes certain rights whose transferability is constrained by prescribed holder-eligibility conditions and technical measures requiring an application by the holder and the issuer’s approval for each transfer. These are commonly referred to as excluded ERTRs. The FSA’s supervisory guidance explains that a contractual transfer restriction alone, or a mechanism deeming approval automatically given when a transfer contract is concluded, is not sufficient.
The distinction is therefore part of the distribution model, not a label that can be selected after development. Whether the sponsor builds Type I capabilities, uses a Type II structure, limits the offering to a private placement or permits future secondary circulation is inseparable from the original design of the right.
2. Map each participant’s regulated activity and build securities disclosure around the same product
STOs may involve an issuer, SPC, trust bank, securities firm, asset manager, distributor, platform, custodian and systems provider. Registration should be assessed by the actual activity of each participant, not simply by entity description. For ERTRs and tokenized Paragraph 1 Securities, business activities such as purchase and sale, intermediation, brokerage, agency and handling an offering raise Type I registration issues.
Excluded ERTRs and other Paragraph 2 Securities may instead fall within the Type II framework. Issuer self-offering must also be separated from third-party distribution: issuing shares or bonds is not the same regulatory act as self-soliciting investment in a fund. The FSA’s English FinTech Support Desk FAQ expressly identifies Type II registration for an issuer’s public offering or private placement of ERTRs. It is therefore insufficient to say that issuers never require registration or that every sales function is automatically Type I. Solicitation, contract formation, order receipt, intermediation, settlement instructions, custody and investment management should each be mapped to the applicable regulated activity.
Where online distribution or intermediation is added, Financial Instruments Intermediary Business and Financial Services Intermediary Business should not be treated as interchangeable registration categories. The permitted products, entrusted or affiliated relationships and scope of conduct require separate consideration. The ST label alone cannot establish that a particular intermediary registration is sufficient; suitability, advertising, explanations and controls against criminal misuse must also fit the actual business model.
Because ERTRs receive Paragraph 1-equivalent treatment, solicitation that constitutes a public offering raises offering-disclosure requirements. Whether the transaction is a private placement, qualifies for an exemption or requires a Securities Registration Statement, prospectus or other statutory document depends on the rights, offerees, investor eligibility, issue size and transfer controls.
An STO combines conventional securities disclosure with technical documentation. The issuer’s business and finances, underlying assets, distributions, interest and redemption, conflicts, fees, priorities, transfer restrictions, custody, blockchain, smart contracts, private keys and fallback procedures should be described consistently across statutory filings, contracts, sales materials, websites, FAQs and specifications.
The FSA’s focus is the information asymmetry associated with increased transferability. Tokenization is not a reason for lighter disclosure. Where traditionally illiquid assets become transferable to a wider investor population, issuer review and reliable information become more important, not less.
3. Integrate issuer and technology diligence with legally effective transfer
The FSA’s supervisory guidance expects firms underwriting or otherwise handling ERTRs to review the issuer’s business and finances, the blockchain or other transaction network, and other relevant matters through a review function independent of sales. Merely adding a technical audit to conventional securities diligence does not complete that task.
Legal diligence should examine the issuer, SPC, trust, underlying assets, material contracts, litigation, regulatory position, conflicts and tax assumptions. Technical diligence should examine minting logic, authorized supply, transfer restrictions, administrator powers, burning and reissuance, distribution and redemption logic, keys, upgrade rights, vulnerabilities and dependencies. Those workstreams must converge on the enforceable right. If the documents authorize 100 units but the code allows unlimited minting, that is not merely a software defect; it affects securities disclosure and investor protection.
Japan STO Association has also established self-regulatory rules and guidelines covering offerings and underwriting, trading, PTS operations and advertising. A regulated participant’s project plan should incorporate the relevant self-regulatory review, distribution and market-operation requirements alongside legislation and FSA guidance.
An important and sometimes overlooked issue is the relationship between a transfer on the blockchain and transfer of the underlying legal entitlement. The FSA’s FIEA guidelines consider whether alteration of electronic records and transfer of rights operate as a connected process when assessing ERTR status.
The substantive requirements for transfer nevertheless depend on the original right. Bonds, trust beneficiary interests and partnership interests may require separate consideration of contract formation, issuer or trustee approval, entries in registers, perfection and other conditions. Movement from wallet A to wallet B does not by itself establish that every underlying right has transferred with effect against third parties.
The documents should identify the sequence of order formation, trade execution, cash settlement, token movement, register updates, legal transfer and perfection. They should also determine who may correct, freeze or reissue tokens, and under which legal authority, in cases of outage, mistaken transfer, succession, attachment, insolvency or loss of private keys.
4. Design distribution, custody and systems controls around investor protection
An ST can involve risks different from those of a listed share, including the transfer mechanism, liquidity, network, wallet, private keys, administrator powers and availability of a secondary market. The FSA expects customer acceptance criteria to reflect understanding of the holding and transfer mechanism and associated risks, in addition to investment experience and financial resources.
Smaller units and smartphone access do not lower the investor-protection standard. As retail investors gain access to property, funds and unlisted debt previously associated with professional markets, there is an increased need to explain underlying asset values, liquidity, redemption, manager risk, leverage, conflicts and technology risk in a comprehensible way.
Advertising requires the same discipline. Claims that a token can always be sold, is safe because it uses blockchain, or maintains stable principal may go beyond what the actual technology and market provide. The FSA identifies as supervisory concerns descriptions that imply unrestricted trading despite transfer controls or mislead investors about possible losses.
For regulated firms entrusted with ST custody, the FSA identifies controls concerning private keys, multi-person transfer procedures, multi-signature arrangements, separation of key-storage locations, verification of transaction authenticity and outsourced providers. Key management is therefore part of customer-asset protection and segregation, not merely general information security.
Where an ST carries voting or other governance rights, monetary compensation may not restore an investor’s full legal position after a loss. There may also be limited justification for keeping keys continuously online for products that do not require immediate settlement. The contracts and operating procedures should determine who holds each key, how many approvals are needed, which backups operate in a disruption and how recovery is performed following provider failure or compromise.
Outsourcing custody does not extinguish the regulated firm’s responsibility. Vendor oversight should cover security, business continuity, subcontracting, audit rights, incident notification, liability and migration when the service ends.
5. Treat real-estate STs as combined securities, trust and property-fund transactions
Real-estate STs are an important Japanese use case. They commonly digitize trust beneficiary interests, SPC-based fund interests or other rights through which rental income and disposal proceeds are distributed. Securities-token regulation therefore intersects with trust law, property, financing, asset management, valuation, tax and accounting.
For tokenized rights under specified joint real-estate venture contracts, the 2023 amendments clarified the interface with the FIEA. On August 21, 2026, MLIT promulgated and brought into force amendments to the implementing rules, and issued corresponding changes to supervisory and electronic-transaction guidance, strengthening pre-contract explanations, asset-management reporting and online disclosures. Some provisions have transitional measures. An existing operator or ongoing offering must therefore examine the applicable transition and timing rather than assume that all new requirements apply identically to every contract from the announcement date.
Tokenizing real estate does not lighten regulation. Wider retail distribution, online access and secondary circulation instead require securities-level explanation and management of property value, rents, tenants, borrowing, disposal policy, conflicts and asset-management fees.
6. Design the secondary market and disclose the limits of liquidity from issuance
Secondary trading can enhance the commercial usefulness of an STO, but greater circulation also increases investor-protection demands. The market operator, participating firms, pricing and order methods, suitability, surveillance, disclosure updates, settlement, custody and systems connections should be designed together.
Osaka Digital Exchange launched START as an ST secondary market in December 2023. On March 25, 2026 it began trading in a JPY 10 billion ST corporate bond issued by SBI Holdings for retail investors. This is an important example of tokenized corporate bonds entering an operational secondary market in Japan.
Operating a PTS generally requires Type I Financial Instruments Business registration and PTS authorization under Article 30 of the FIEA, or satisfaction of the registration-based PTS framework for specified low-liquidity securities below the applicable trading-volume threshold. A website matching securities buyers and sellers may raise market-operation issues depending on the mechanism; calling it a digital marketplace does not settle the analysis.
The existence of a PTS does not establish adequate liquidity in each security. Many STs are backed by unlisted assets, and the depth of buyers, price information, trading frequency and minimum units may prevent an investor from exiting at a desired time or price.
Issuers and distributors referring to secondary trading should accurately explain trading hours, participating securities firms, execution methods, liquidity, price fluctuation, suspensions and events comparable to delisting. Availability of a secondary venue should not be described as principal protection or a liquidity guarantee.
7. Connect cross-border distribution with the full legal and operational life cycle
A token can cross a border technically without being lawfully distributable across it. Solicitation or sale of securities in Japan requires analysis of Japanese public-offering and private-placement rules, Financial Instruments Business regulation, disclosure and foreign-issuer requirements. Lawful issuance as a security token abroad does not make distribution to Japanese investors unrestricted.
Conversely, a Japanese ST offered overseas must be assessed under the destination jurisdiction’s securities, private-placement, investor-eligibility, sanctions, AML, taxation and data-protection rules. Smart-contract whitelists and transfer restrictions can help implement those controls, but code does not automatically satisfy legal requirements.
Cross-border projects also need to reconcile global investor records with Japanese legal records, foreign custodians with Japanese regulated firms, and transfers between different chains with the restrictions attached to the underlying rights.
A common weakness is to organize the project solely around the issue date and postpone post-issuance operations. STs continue to generate legal events: interest or distributions, investor-information and eligibility updates, transfers, succession, attachment, lost keys, secondary trading, system disruption, redemption, token cancellation and fund liquidation.
The full life cycle should be mapped when the project begins. For each event, the project should identify the person with legal authority, the systems operator, the definitive record of entitlement and the recovery process if technology fails. An STO is both a securities issuance and a long-term financial operating model.
The role of STO counsel is not confined to answering whether Type I or Type II registration, or a filing, is required. The intended cash flows and rights must be legally created, accurately explained, implemented in systems, reviewed and distributed properly, held safely, and transferable in the contemplated market. Making that product legally operable is the central task.
SAKURA Law Office and Managing Partner Kenshiro Michishita provide legal support on security tokens, ERTRs, tokenized real estate, Financial Instruments Business regulation, investment management, PTS arrangements and other digital-finance matters, including cryptoassets and stablecoins. Our approach connects regulatory classification with issuance structures, contracts, disclosure, issuer diligence, systems and custody, secondary trading and cross-border coordination.
Frequently Asked Questions
Q1. What is the difference between a security token and a cryptoasset?
A security token electronically represents a security or other right with securities characteristics and is principally regulated as a security under the FIEA. Cryptoassets are a separate legal category. Shared use of blockchain does not make the applicable rules identical.
Q2. Does tokenizing a trust beneficiary interest always require Type I registration?
Type I registration is a central issue where the token is an ERTR and purchase, sale or intermediation is conducted as a business. If the prescribed requirements for excluded ERTRs are satisfied and the right remains a Paragraph 2 Security, the Type II framework may be available. The activity performed must be assessed separately from the product classification.
Q3. Does an STO avoid the Securities Registration Statement requirement?
No. ERTRs generally receive Paragraph 1-equivalent treatment. The public-offering or private-placement structure, issue size, offerees and other statutory conditions determine whether offering disclosure is required. The STO label itself creates no exemption.
Q4. Does an on-chain token transfer complete the legal transfer?
Not necessarily. Depending on the underlying right, contracts, consent, register entries, perfection and other requirements must be satisfied. The structure should make the on-chain record and substantive legal transfer consistent.
Q5. Does a real-estate ST directly tokenize ownership of land or a building?
Many structures tokenize a trust beneficiary interest or fund interest rather than direct ownership of the property. Property, trust, fund and securities regulation must then be considered together.
Q6. Must the distributing securities firm review the technology?
The FSA’s supervisory guidance expects an appropriate review framework for the issuer’s business and finances and for the blockchain or other network and relevant risks. Legal, financial and technical diligence should not be conducted in isolation.
Q7. Does an external custodian remove the securities firm’s responsibility?
No. The regulated firm must assess whether the outsourced arrangements provide appropriate customer protection and must oversee the service provider. Outsourcing is not a transfer of all regulatory responsibility.
Q8. Can STs be traded on a PTS such as START?
They can where the security, participating firms and relevant requirements permit. START began secondary trading in Japan’s first retail-investor ST corporate bond in March 2026. A PTS does not, however, guarantee liquidity in an individual security.
Q9. May a foreign security token be sold to Japanese investors?
Japanese classification, public-offering or private-placement rules, registration and disclosure must be assessed. Lawful issuance overseas does not make Japanese sales unrestricted.
Q10. What should be decided first in an STO project?
Identify what right is being issued, by whom, to which investors, who will distribute, manage and custody it, and whether secondary circulation is intended. Classification, authorization, disclosure, contracts, transfers, systems, custody and secondary-market arrangements should then be designed as one structure.
About the Legal Update Series by Kenshiro Michishita
SAKURA Law Office publishes the Legal Update series through the profile of Managing Partner Kenshiro Michishita, covering corporate law, M&A, cross-border transactions, international disputes, financial regulation, Web3 and cryptoassets, AI and technology, data protection, intellectual property, crisis management and internal investigations. No. 27 addressed the 2026 cryptoasset reforms. No. 28 turns to digital assets classified as securities, examining issuance, distribution, custody and secondary trading through the practical life cycle of an STO.
SAKURA Law Office — Official Website
Kenshiro Michishita, Managing Partner — Profile
How SAKURA Law Office Can Assist
SAKURA Law Office accepts instructions on STs and STOs, ERTRs, tokenized shares and bonds, real-estate tokens, trust beneficiary and fund interests, Type I and Type II Financial Instruments Business, investment management, PTS structures, cryptoassets, stablecoins and other digital-finance matters. For issuers, securities firms, financial institutions, asset managers, real-estate businesses, FinTech and Web3 companies and overseas participants, we integrate classification, structuring, registration, contracts, disclosure, issuer review, systems and custody, FSA and Local Finance Bureau engagement, and cross-border advice.
Contact
For advice on security tokens, STOs, ERTRs and other digital-securities or financial-regulatory matters, please contact SAKURA Law Office.
SAKURA Law Office
4F Ark Hills South Tower, 4-5 Roppongi 1-chome, Minato-ku, Tokyo 106-0032, Japan
Kenshiro Michishita, Managing Partner
Web: https://sakura-lawyers.jp/en/
Principal References
1. Financial Instruments and Exchange Act — e-Gov Laws (official Japanese text)
2. Cabinet Office Order on Definitions under Article 2 of the FIEA — e-Gov Laws
3. FSA — Guidelines concerning the Financial Instruments and Exchange Act
6. FSA — Comprehensive Supervisory Guidelines, V-2-5: excluded ERTRs
7. FSA — Comprehensive Supervisory Guidelines, IV-4-2-1: PTS authorization and registration
9. Japan STO Association — Articles, Self-Regulatory Rules and Guidelines
10. Japan STO Association — Advertising and related guidelines
11. Japan STO Association — Rules concerning ERTR trading on proprietary trading systems
13. Osaka Digital Exchange — START
15. MLIT — Specified Joint Real Estate Ventures: official guidance and materials
18. SAKURA Law Office — Official Website
19. SAKURA Law Office — Kenshiro Michishita, Managing Partner
20. FSA — FinTech Support Desk, FAQ Q7-2: issuer offerings and private placements of ERTRs
Disclaimer
This article provides general information on security tokens, STOs, ERTRs and digital-securities regulation based on Japanese law, FSA, MLIT and other official materials, self-regulatory materials and general practice publicly available as of October 1, 2026. It is not legal advice or a legal opinion on any particular issue, offering, private placement, distribution, investment-management, custody or PTS transaction. Classification as a security token, Paragraph 1 or Paragraph 2 Security, ERTR or excluded ERTR; registration; disclosure; solicitation; segregation; legal transfer; AML/CFT; and the application of specified joint real-estate venture regulation depend on the underlying right, token design, investors, distribution and circulation arrangements, parties and other circumstances. Specific transactions should be reviewed under the laws, Cabinet Office Orders, supervisory guidance, self-regulatory rules and other official materials in force at the relevant time with appropriate professional advice.