In review: governing rules for IPOs in Japan

All questions

Introduction

In Japan, there are four stock exchanges, the largest of which is the Tokyo Stock Exchange (TSE). In recent years, roughly 100 issuers per year have listed their shares on the stock exchanges in Japan, most of which were listed on the TSE. The TSE has three market sections, the prime market, the standard market, and the growth market, from among which most issuers select the growth market for their initial public offerings (IPOs).

In 2022, 91 issuers were newly listed on the main stock exchanges in Japan, of which 87 were newly listed on the TSE, and 21 were newly listed on the TOKYO PRO Market.² On 31 May 2023, there were 3,880 issuers listed on the TSE, of which 1,835 were listed on the prime market, 1,441 were listed on the standard market, 529 were listed on the growth market, and 75 were listed on the TOKYO PRO Market.³ The total market capitalisation of the TSE was approximately ¥785 trillion on 31 May 2023.⁴

In many IPOs, Japanese issuers select the offerings for domestic investors in Japan only. However, in some cases, such as larger IPOs, issuers select Rule 144A offerings in the United States or Regulation S offerings outside Japan, or both, in addition to domestic offerings.

Governing rules

i Main stock exchanges

Of the four stock exchanges in Japan, many issuers choose the TSE, which is the largest stock exchange in Japan in terms of the number of issuers and trading volume. As previously mentioned, the TSE provides three main market sections for cash equity:

1. the prime market;
2. the standard market; and
3. the growth market.

Foreign companies are, in the same manner as domestic companies, required to choose one of these three market sections for their listing.⁵ The prime market is a market for companies that have appropriate levels of market capitalisation (liquidity) to be investment instruments for many institutional investors, maintain an enhanced level of corporate governance, commit to sustainable growth and improvement of mid- to long-term corporate value, and place constructive dialogue with investors at the core of their management. The standard market is a market for companies that have appropriate levels of market capitalisation (liquidity) to be investment instruments in the open market, maintain a basic level of corporate governance expected of listed companies, and commit to sustainable growth and improvement of mid- to long-term corporate value. The growth market is a market for companies that have a certain level of market value based on their disclosure of business plans for realising high growth potential and their progress towards achieving this growth in an appropriate and timely manner, while posing a relatively high investment risk based on their business track record. To be listed on the growth market, an issuer is required to have ‘high growth potential’, and whether each company has such potential is required to be evaluated and determined by a lead underwriter (a listing sponsor) based on the company’s business model and the business environment in which it operates.

After the initial listing, companies may transfer to another market section in line with their growth stage and the characteristic of each section above.

ii Overview of listing requirements

Generally, an issuer is required to meet certain listing requirements to be listed on the relevant market section, including liquidity, governance, business performance and financial status criteria.⁶ The following is an overview of the listing requirements for Japanese companies seeking to be listed on each market section of the TSE.

Prime market

In terms of liquidity criteria, an issuer must have at least 800 shareholders, at least 20,000 units⁷ of tradable shares,⁸ a tradable share market capitalisation of at least ¥10 billion and a market capitalisation of at least ¥25 billion. In terms of governance criteria, the tradable share ratio must be at least 35 per cent. This ratio requirement has been established for the purpose of ensuring constructive dialogue with institutional investors while maintaining ‘public market control’ by maintaining the tradable share ratio at a certain level. For business performance and financial status criteria, an issuer is required to demonstrate that its revenue and financial base are both stable and excellent. Specifically, an issuer is required to have the following:

1. at least ¥2.5 billion in total profit for the most recent two years; or
2. at least ¥10 billion in sales for the most recent year and at least ¥100 billion in market capitalisation.

Net assets of at least ¥5 billion on a consolidated basis are also required.

Standard market

In terms of liquidity criteria, an issuer must have at least 400 shareholders, at least 2,000 units of tradable shares, and a tradable share market capitalisation of at least ¥1 billion; however, there is no requirement for market capitalisation. Regarding governance criteria, the tradable share ratio must be at least 25 per cent. This ratio requirement has been established for the purpose of ensuring a basic level of tradable share ratio required of a public company (same level as global stock exchanges). For business performance and financial status criteria, an issuer is required to show a stable revenue base and financial status. Specifically, an issuer is required to have had at least ¥0.1 billion in profit for the most recent year. It is also required to have positive net assets on a consolidated basis.

Growth market

In terms of liquidity criteria, the growth market requires certain minimum criteria to ensure appropriate liquidity for smooth trading by public investors. Specifically, the issuer must have at least 150 shareholders, at least 1,000 units of tradable shares and a tradable share market capitalisation of at least ¥0.5 billion. However, there is no requirement for market capitalisation. In terms of governance criteria, the tradable share ratio must be at least 25 per cent. Instead of the business performance and financial status criteria required for the prime and standard markets, the growth market requires an issuer to have a business plan for realising high growth potential and that enables investors to make reasonable investment decisions based on the information that is disclosed. For this business plan requirement, all of the following requirements must be met:

1. reasonable business plans are in place;
2. a lead underwriter (a listing sponsor) has submitted the basis for its opinion on the company’s high growth potential; and
3. the issuer makes, and will make after its listing, appropriate disclosure of business plans and matters related to its high growth potential (business model, market size, source of its competitive advantages and business risk).

To maintain its listing on the growth market, the issuer is required to have a market capitalisation of at least ¥4 billion 10 years after its listing.

Other listing requirements

In addition to the above-mentioned listing requirements for each market section, inter alia, the issuer is required to have continuously conducted its business activities as a joint stock corporation for at least three years (one year for the growth market) before the initial listing application date.

The issuer is also subject to listing examination based on substantive criteria. The stock exchange examines from the perspectives of, inter alia, corporate continuity and profitability, soundness of company management, effectiveness of corporate governance and internal management system, appropriateness of the disclosure of corporate information and other matters deemed necessary by the stock exchange.⁹

For foreign companies, not all listing requirements discussed above are applicable. For example, the 35 per cent or 25 per cent tradable share ratio requirement is not applicable. In the case of a foreign company whose shares have already been listed on a foreign stock exchange and whose principal market is a market other than the stock exchange, the stock exchange can treat the foreign company as satisfying all or part of the examination criteria for the listing application when the stock exchange deems it appropriate.

iii Overview of law and regulations

In general, apart from an obligation to file a securities registration statement under the Financial Instruments and Exchange Act of Japan (the FIEA), as discussed in Section III, there is no governmental approval or licence requirement in connection with an IPO or listing of shares in Japan.

A foreign issuer may be subject to certain reporting obligations in connection with a public offering in Japan under the Foreign Exchange and Foreign Trade Act of Japan.