Attorney Publishes FAQ on NASDAQ Listings for Japanese Companies

In 2023, six Japanese companies have been listed on NASDAQ, indicating that the option for Japanese companies to aim for a NASDAQ listing is gradually becoming more common.

However, NASDAQ listings for Japanese companies are still a field with few precedents. Consequently, in Japan, there is a scarcity of expertise and knowledge regarding issues and discussion points that are well-understood in the context of listings on the Japanese market.

At Monolith Law Office, we support Japanese companies in their NASDAQ listings through collaboration with overseas firms that have a wealth of experience in this area. As a result, we possess current knowledge on various elements that have become discussion points in the NASDAQ listings of numerous companies outside of Japan. We will explain these commonly debated points in the form of FAQs below.

Capital Increases and Share Transfers Prior to IPO

Companies aiming to list on the NASDAQ often face the question of whether there are any disadvantages to conducting third-party allotment capital increases or share transfers before going public.

In this regard, it is necessary to distinguish between third-party allotment capital increases and private share transfers for consideration. While both are subject to disclosure to the SEC if they occur within three years prior to the IPO, they differ in the following ways:

First, in the case of a third-party allotment capital increase, the SEC may question the share price (corporate market capitalization) at the time of the capital increase if it differs from the share price (corporate market capitalization) at the time of the IPO. Capital increases within one year of the IPO, in particular, often have a significant impact on the market capitalization at the time of listing.

On the other hand, when it comes to private share transfers by original shareholders, such as founders, to related parties or third parties, although these are also subject to SEC disclosure, the SEC generally does not object to or question the transfer price, even if it is at a low value.

Therefore, at least after the commencement of IPO preparations, it can be said that:

• When conducting a third-party allotment capital increase, careful consideration should be given to the share price (corporate market capitalization) at that time.
• In the case of private share transfers, conditions can be determined with relative flexibility.

This would be a prudent approach.

Corporate Governance for NASDAQ-Listed Companies

After listing on NASDAQ, the question arises whether it is necessary to comply with the stringent corporate governance standards of the United States.

This is a complex issue that requires consideration of various factors, making it difficult to answer in a single statement; however, I will provide an overview.

Principally, NASDAQ imposes strict corporate governance rules as outlined in NASDAQ Listing Rule 5605. However, when a Japanese company lists on NASDAQ, it is classified as a “foreign private issuer.” Consequently, the SEC allows for an exception where foreign private issuers are not required to follow NASDAQ’s corporate governance standards based on the listing criteria but are instead expected to adhere to the corporate governance regulations of their own country.

As a result, Japanese companies listed on NASDAQ are generally required to implement corporate governance in accordance with Japanese Company Law, with some exceptions, rather than the NASDAQ’s corporate governance standards.

Requirements for Becoming a CFO (Chief Financial Officer)

Companies listed on NASDAQ are required to have a CFO (Chief Financial Officer).

While the term CFO has become well-known in the venture community, it is not a term defined under Japanese law. In other words, under the Japanese Companies Act, there is no official position called CFO; it is a role that companies can create at their discretion without any specific legal significance.

In contrast, for a NASDAQ listing, the CFO is a formally required position according to listing standards. There are certain criteria that a person must meet to become a CFO.

• The CFO can be an executive, a full-time employee, or a contractor within the company; the position does not matter.
• The CFO must be a full-time employee of the company. To be more precise, it is acceptable to be part-time during the preparation period for listing, but full-time status is required at the time of listing.
• The CFO can also be engaged in work at other companies. For example, it is permissible for someone to be a full-time employee at a NASDAQ-listed company while also serving as the CEO of their own separate company.

Although the CFO position does not exist under the Japanese Companies Act and may sometimes be appointed in a somewhat ‘formal’ sense at the time of a NASDAQ listing, the CFO is a role demanded for compliance with financial reporting and governance standards. The CFO is responsible for overseeing the company’s financial operations, ensuring that financial statements and various reports comply with Generally Accepted Accounting Principles (GAAP) and SEC regulations. This role is critically important for maintaining investor trust and responding to regulatory oversight after the company goes public. It is advisable to appoint a person who is suitable for this position as the CFO.

Listing of MS Corporations (and Other Companies Challenging to List in Japan) on NASDAQ

MS Corporations refer to Medical Service Corporations, which are entities established to allow specific medical institutions to engage in hospital management activities, even if they are not legally recognized as medical institutions. The issue at hand is whether such companies, which practically cannot list on the Japanese stock market, can list on NASDAQ.

The conclusion is that being an MS Corporation does not make it impossible to list on NASDAQ. NASDAQ is personalityized by its ability to list companies that meet formal listing criteria, regardless of their status as MS Corporations.

However, it is often the case that MS Corporations depend heavily on specific medical institutions for the majority of their revenue, which can imply a lower stability in their mid to long-term management. Yet, this is a factor that affects aspects such as “market capitalization at the time of listing” and “whether investors will actually gather,” rather than being a factor that affects the possibility of listing itself.

This discussion is not limited to MS Corporations. As mentioned above, the personalityistic of NASDAQ is that any company that meets the formal criteria can list, which applies to other types of companies that are difficult to list or practically cannot list in Japan as well.

The Ratio of Public Offering Shares When Listing Based on Profit Standards

There are three main criteria for listing on the NASDAQ Capital Market: the capital standard, the market value standard, and the profit standard. The profit standard is particularly considered ‘common’ in Japan nowadays.

The profit standard allows for NASDAQ listing if certain criteria are met, such as having a net income from continuing operations of at least $750,000. In this case, the public float market value must be at least $5 million.

The public float market value refers to the market capitalization of the shares issued at the time of listing. In other words, when listing on NASDAQ, at least $5 million worth of shares must be offered for sale. This means that if a company’s market capitalization is, for example, $20 million, then 25% of its shares must be offered, or if it’s $50 million, then 10% must be offered.

Understanding ‘Market Capitalization’ for Listing Based on Market Capitalization Criteria

Market capitalization criteria refer to standards such as (1) a public float market capitalization of 15 million US dollars, and (2) a total market capitalization of listed securities of 50 million US dollars.

Firstly, the total market capitalization of listed securities refers to the total market value of all issued shares at the time of listing. For example, if a company has issued 8.75 million shares before listing and issues an additional 3.75 million shares at the time of listing, the total number of issued shares after listing will be 8.75 million + 3.75 million = 12.5 million shares. If each share is issued at 4 US dollars, then the market capitalization at the time of listing will be 4 US dollars × 12.5 million shares = 50 million US dollars. This meets the criterion of having a ‘total market capitalization of listed securities of 50 million US dollars’.

Next, the public float market capitalization, as mentioned earlier, refers to the market value of the shares issued at the time of listing. In the above case, the market capitalization of the shares issued at the time of listing will be 4 US dollars × 3.75 million shares = 15 million US dollars. This meets the criterion of having a ‘public float market capitalization of 15 million US dollars’.

In essence,

• It is possible to raise 15 million US dollars from the market (which is a higher criterion compared to the profit standard, which is 5 million dollars as mentioned earlier).
• The newly issued shares to raise this amount are below 30% (indicating that it is feasible to raise the aforementioned amount even with a significant market capitalization).

Therefore, listing based on these criteria is possible when the above conditions are met.

Guidance on Measures by Our Firm

Monolith Law Office is a law firm with high expertise in both IT, particularly the internet, and legal matters. With experience and a proven track record in venture law, Monolith Law Office operates as a law firm that collaborates with an international network to provide comprehensive support for Japanese companies aiming to list on NASDAQ. For more information on NASDAQ listing support, please refer to the article below.

Areas of practice at Monolith Law Office: NASDAQ Listing Support[ja]