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Introduction
While many people in the global business community know that Japan is the world’s third largest economy, it is not as well known that Japan is also home to the world’s third largest stock exchange, the Tokyo Stock Exchange (TSE). The TSE’s popularity is due in part to its high liquidity, with an average daily trading value of JPY 3.4 trillion[1] (USD 34 billion) in fiscal year 2015[2], as well as the ability for companies to raise substantial sums when going public. Funds raised by the 95 companies issuing shares via public offerings on the TSE during fiscal year 2015 totaled around JPY 994 billion[3] (USD 9.94 billion).
Potential Benefits to Israeli Companies
Since Prime Ministers Abe and Netanyahu exchanged visits in 2014 and 2015, Japanese concerns have evidenced significantly greater openness with respect to transactions in Israel, and Israeli companies see new horizons in Japan. We believe the Tokyo Stock Exchange provides an interesting alternative to traditional stock exchanges for maturing Israeli startups exploring growth financing alternatives. The TSE is a particularly advantageous platform for issuers in the fields of robotics and bioscience given the generally perceived strength of these sectors in the Japanese marketplace.
English Language Document Submissions for Issuers
Under the Financial Instruments and Exchange Act of Japan (the “FIEA”),[4] applicants and listed companies of the TSE must submit certain disclosure documents in Japanese to the relevant Japanese regulators[5]. However, the English-language disclosure system allows foreign applicants and listed companies of the TSE to supply English language documents in place of the Japanese disclosure documents, if the documents “were actually disclosed in a foreign country pursuant to laws and regulations, including rules of a stock exchange or an equivalent institution, in the foreign country,” and are not deemed “inadequate in consideration of the public interest and investor protection in Japan.”[6]
The relevant Japanese regulator may deem English documents inadequate, and thus require the submission of Japanese language documents, if the regulator considers the English versions to have been submitted improperly in the foreign country, or if the disclosure criteria of the foreign country are inadequate in light of the standards of the disclosure system under the FIEA.[7]
Although, as stated above, English language disclosure documents may be submitted in place of the equivalent Japanese language documents, certain documents must nonetheless be translated or summarized in Japanese.[8] A non-exhaustive list of required Japanese language documentation includes: (i) the foreign company’s registration statement, (ii) an outline of the foreign company’s business and business risks, (iii) summary of items not described in the forms associated with the company’s annual and quarterly securities reports, among several others.[9]
As a result of the substantial amount of information and items Japanese regulators require to be produced in Japanese, foreign issuers generally consider the English language disclosure system as only marginally reducing Japanese language requirements, and thus to be of little benefit. Consequently, the system is very rarely used, with only one foreign issuer currently utilizing it.[10]
Structure of the Tokyo Stock Exchange
The TSE is comprised of five separate equity markets, each with their own unique characteristics, focuses, and listing requirements. The five equity markets are: (i) the First Section, (ii) the Second Section, (iii) Mothers (Market of the high-growth and emerging stocks), (iv) JASDAQ, and (v) the TOKYO PRO Market.
A) The First and Section Sections
The First Section is designated for large companies with 2,200 shareholders or more, and an expected market capitalization of JPY 25 billion (USD 250 million) upon listing.[11] The 1,972 companies listed in the First Section[12] include some of the largest companies in Japan.
The Second Section, on the other hand, is the home of 537 mid-sized companies[13] seeking to grow their way to the First Section. In order to allow for smaller companies, the minimum shareholder and market capitalization requirements of companies applying to list on the Second Section are reduced. The Second Section requires an estimated 800 shareholders and a market capitalization of JPY 2 billion (USD 20 million) by listing time.[14] The First and Second Sections are collectively known as the “Main Markets.” Although it is possible for companies with high liquidity to list directly on the First Section, historically, most companies listing on the Main Markets first list on the Second Section.
B) Mothers Market
Mothers is the choice for relatively new companies with high-growth potential. In fiscal year 2015, 57 of the 95 companies that listed on the TSE (i.e., 60%) chose to list their shares on the Mothers market.[15] One reason for its popularity is that although listing requirements with regards to size exist, such as a JPY 1 billion[16] (USD 10 million) threshold for estimated market capitalization upon listing, there are no minimum revenue or profit thresholds needed for consideration to list on the Mothers market. As such, so long as the listing company has great growth potential, current revenue figures are not of primary importance for listing approval.
Furthermore, companies listed on Mothers may apply for reassignment to the First or Second Sections as they grow to meet the eligibility requirements of the respective Sections. In fact, the reassignment rate is quite high with 73 of the 382 companies originally listing on Mothers, or 19%, successfully transferring to the First Section.[17] As of the end of June 2016, 234 companies were listed on the Mothers Market.[18]
C) JASDAQ
JASDAQ is similar to Mothers in that it specializes in listing emerging companies. However, JASDAQ does not require a listing company to have a minimum number of years in operation prior to listing. This is contrast to Mothers which has a minimum required one (1) year of operation history prior to the initial listing application day.[19] Thus, a fresh start-up, with the requisite expected market capitalization, could theoretically list directly on JASDAQ. As of the end of June 2016, 773 companies were listed on JASDAQ.[20]
D) TOKYO PRO Market
The TOKYO PRO Market is relatively new, beginning operations in June 2009 under the old name of TOKYO AIM, and is quite small with only 13 companies listed.[21]
Like the name suggests, the TOKYO PRO Market is for professional investors. Only “professional investors,” as specified in the FIEA and the Securities Listing Regulations of the TSE, as well as certain non-resident investors, are eligible to buy and sell securities on the TOKYO PRO Market. Given the professional focus of the market and the presumption that investors in this market are sophisticated enough to make appropriate investment decisions, investor protections are reduced and companies wishing to list on the TOKYO PRO Market may do so under relaxed listing criteria, disclosure requirements, and accounting standards. Moreover, the TSE itself does not perform a listing examination on companies seeking to list on the TOKYO PRO Market.[22]
However, in order to put in place minimal protections for investors in light of such relaxed rules, all companies wishing to list on the TOKYO PRO Market must retain a “J-Adviser” for the listing process and throughout the duration of remaining on the TOKYO PRO Market. The J-Adviser’s role is to evaluate the company, and to declare to the TSE whether or not the company is suitable for the TOKYO PRO Market. The TSE maintains a set of requirements for obtaining J-Adviser qualification, which J-Advisers must acquire in order to assume the role.[23] Although only a few niche advisors currently engage in this capacity, a full list of approved J-Advisers can be found on the TSE’s website.
TSE Market Listing Trends
The chart below highlights the most popular TSE equity markets for IPOs over the past three calendar years. As clearly shown, Mothers is by far the most popular market on the TSE for IPOs in recent years.
IPOs on TSE Markets by Calendar Year [24]
Conclusion
The purpose of this article has been limited to providing the reader with a basic overview of options and requirements for companies listing on the TSE. For further information on listing and eligibility requirements concerning listing on the TSE, please visit the Japan Exchange Group’s website, which contains a useful chart for your reference, or contact your nearest Greenberg Traurig office.
As the only law firm with offices in both Tokyo and Tel Aviv, Greenberg Traurig is uniquely situated in a position to assist Israeli companies that desire to have a strong market presence in Japan.
[1] This figure includes only cash equities during the fiscal year running from April 2015 – March 2016.
[2] At a conversation rate of JPY 100 to USD 1; the same conversation rate is used throughout this article.
[3] Japan Exchange Group’s Consolidated Financial Results for the Fiscal Year ended March 31, 2016, at p. 4.
[4] Act No. 25 of 1948.
[5] Such documents include: Registration Statements, Annual Reports, and other disclosure documents.
[6] Chapter 1, Section 1, Paragraph 1 of the Outline of the English-language Disclosure System.
[7] Chapter 1, Section 1, Paragraph 3 of the Outline of the English-language Disclosure System.
[8] Article 5, Paragraph 7 of the FIEA, Article 9-7, Paragraphs 2 through 4, of the Cabinet Office Ordinance on Disclosure of Information.
[9] Creation Guidelines for Foreign Company Reports, etc. (ver. 1.5), Chapter 1 (Outline of English-language Disclosure System) (released May 14, 2012).
[10] “Listed Foreign Companies conducting English Disclosure.”
[11] Rule 210, Paragraph 1 of the Securities Listing Regulations of the TSE.
[12] Dated as of June 30, 2016. Online at the Japan Exchange Group’s website.
[13] Dated as of June 30, 2016. Online at the Japan Exchange Group’s website.
[14] Rule 205, Item 1 of the Securities Listing Regulations of the TSE.
[15] Japan Exchange Group’s “Overview of Earnings for FY2015,” at p. 8.
[16] Rule 212, Item 4 of the Securities Listing Regulations of the TSE.
[17] The 2015 New Listing Guidebook for Foreign Companies, at p. 11.
[18] Online at the Japan Exchange Group’s website.
[19] Rule 212, Item 5 of the Securities Listing Regulations of the TSE.
[20] Online at the Japan Exchange Group’s website.
[21] Dated as of June 30, 2016. Online at the Japan Exchange Group’s website.
[22] The 2015 New Listing Guidebook for Foreign Companies, at p. 13.
[23] The 2014 New Listing Guidebook – TOKYO PRO Market, at p. 28 (2015 version is currently unavailable in English).
[24] Statistics compiled online from the Japan Exchange Group’s website.
