Attorney Explains the Quantitative Listing Requirements for NASDAQ

When compared to the Japanese securities market, one of the most significant personalityistics of listing on NASDAQ is that “the listing criteria are clear.” In the case of listing on Japanese securities markets, there are certainly “listing criteria,” but in practice, it cannot be said that “if you meet the listing criteria, you can list.” In contrast, with NASDAQ, the structure is simple: if you meet the listing criteria, you can list; if you don’t, you cannot. For example, as will be discussed later, if you have a net income of over $750,000, listing is generally possible.

Here, we will explain the criteria for listing on NASDAQ.

Quantitative Listing Requirements for NASDAQ

The listing standards for NASDAQ are published in the form of the “Rulebook – The Nasdaq Stock Market”.

Reference: Rules | The Nasdaq Stock Market

The NASDAQ market is classified into three tiers, with the most stringent listing standards for the “Global Select Market,” followed by the “Global Market,” and the “Capital Market.” Many Japanese companies are listed on the Capital Market, which has the most relaxed standards.

When aiming to list on the NASDAQ Capital Market, the requirements can be broadly divided into two categories:

• “Quantitative listing requirements” as defined in Rule Series 5100, 5200, and 5500 (the necessity for these to be referenced in the Capital Market is stated in Rule 5005(a)(28))
• “Corporate governance requirements” as defined in Rule Series 5600 (all companies must comply with this as stated in Rule 5001)

This article will focus on the former, the quantitative listing requirements.

As an additional note, for markets other than the Capital Market, the Global Select Market refers to the 5300 Series, and the Global Market refers to the 5400 Series.

Capital Requirements, Market Value Requirements, and Earnings Standards

To be listed on the NASDAQ Capital Market, a company must meet at least one of the following three criteria in full:

• Capital Requirements
• Market Value Requirements
• Earnings Standards

For Japanese companies seeking to list on NASDAQ, it can be said that, at least currently, the Earnings Standards are the most commonly applied criterion. Therefore, this article will explain the Earnings Standards first, followed by the other criteria.

Profit Standards for Capital Market Listings

The profit standard, simply put, is a criterion that states, “It is sufficient if the net income after taxes for the most recent fiscal year is at least $750,000.” The details are as follows:

“Net Income from Continuing Operations” can be met in the most recent fiscal year or in two of the last three fiscal years. Essentially, there are two patterns:

• Net income after taxes for the most recent fiscal year is at least $750,000
• Net income after taxes for the two fiscal years prior is at least $750,000 each, with the most recent fiscal year being less than $750,000

Additionally, the concepts of “Shareholders’ Equity” and “Public Float Market Value” are common across the three standards, so they will be explained in the sections on capital standards and market value standards.

Regarding financial statements, the principle is to have three fiscal years’ worth, but for Emerging Growth Companies (EGCs), only two fiscal years are required. EGCs are companies with annual total revenue of less than $1.235 billion in the most recent fiscal year. EGCs receive several preferential treatments, such as being exempt from auditor’s internal control audits for up to five years after listing, and one of these benefits is that “only two fiscal years of financial statements are sufficient” instead of three.

Understanding the Concept of ‘Fiscal Year’ in Profit Criteria

The ‘fiscal year’ in question when discussing profit criteria is not the ’12 months of 365 days,’ but rather the ‘accounting fiscal year.’ Therefore, it is possible to create a ‘state of compliance with the criteria’ by changing the accounting period. To put it more extremely, the following methods are not out of the question:

1. Establish a company and use a change in the accounting period to end the first and second periods within a very short time, such as one week, and then carry out the settlement of accounts.
2. Conduct the third period over several months (for example, three months) and perform another change in the accounting period followed by the settlement of accounts once the net profit after taxes exceeds 750,000 US dollars.
3. Use the profits from the third period to list the company on the stock exchange based on the profit criteria.

Listing on NASDAQ is personalityized by the fact that ‘clear criteria exist’ and ‘as long as you meet those criteria, listing is possible.’ This point is also illustrated with several examples in the article below.

Reference: Attorney Publishes FAQ on NASDAQ Listing for Japanese Companies

Capital Market Listing Criteria: ‘Capital Standards’ and ‘Market Capitalization Standards’ in Japan

The capital standards and market capitalization standards are, simply put, criteria that allow for listing based on market capitalization and other factors, rather than sales or profits. The details are as follows:

If a company has shareholders’ equity of over $5 million and has been in business for more than two years, it can use the capital standards. If not, but it has a large market capitalization, the market capitalization standards are applied.

The concepts of ‘public float market capitalization’ and ‘market capitalization of listed securities’ refer to the amount of money raised at the time of listing. In other words, the meanings are as follows:

• Capital Standards: It is sufficient to raise $15 million at the time of listing (provided that shareholders’ equity exceeds $5 million).
• Market Capitalization Standards: It is necessary to raise $15 million at the time of listing. However, the market capitalization at the time of raising must exceed $50 million. This means that it is necessary to raise $15 million by releasing no more than 30% of the shares, i.e., $15 million ÷ $50 million = 30%.

Therefore, in the case of the previously mentioned profit standards, the public float market capitalization is $5 million, which means that listing is possible if one can raise at least $5 million (rather than $15 million) using the profit standards.

Determining Market Capitalization and Other Metrics for NASDAQ Listing

In the context of a NASDAQ listing, the market capitalization of a company becomes a crucial factor. Theoretically, the calculation proceeds as follows:

1. Market capitalization is determined: For instance, it may be set at 50 million US dollars.
2. The amount to be raised (public float market capitalization) is set according to a chosen benchmark: For example, deciding to raise a minimum of 5 million US dollars based on a profitability threshold.
3. From these figures, the percentage of shares to be issued is calculated: In this case, 5 million ÷ 50 million equals a 10% issuance.
4. The public float must meet the minimum number of shares required: 5 million ÷ 4 equals 1.25 million, which satisfies the ‘1 million’ minimum shares standard for public float.

Then, the question of “what market capitalization would likely allow for successful fundraising at the time of listing” is determined by underwriters, among others. The term “underwriter” may not be familiar in Japan, but it is a concept similar to the “lead underwriting securities company” in the case of listing on the Japanese securities market. Failing to accurately determine market capitalization can lead to a situation where “a listing is possible if investors are gathered, but cannot be achieved due to a lack of investors,” making the role of underwriters in this process extremely important.

Global Market and Global Select Market

Up to this point, we have discussed the Capital Market, but the general concepts also apply to the Global Market and Global Select Market. However, there are four distinct criteria for each. The details are as follows.

The Four Criteria for Listing on the Global Market

For listing on the global market, higher demands are placed on the profit, capital, and market capitalization criteria compared to the capital market. Additionally, a fourth criterion called “total assets and revenue standard” is set, which does not exist in the capital market. Companies must meet at least one of these four types of criteria.

Four Criteria for Listing on the Global Select Market

For the Global Select Market, the profit criteria remain the same as before, demanding higher standards. In addition to this, there are a total of four types of criteria: “Cash Flow and Market Capitalization Standards,” “Revenue and Market Capitalization Standards,” and “Total Assets and Shareholders’ Equity Standards.” Conditions also arise such as “the total for the most recent ● fiscal years must be over ●, and each fiscal year must be at least ●.” For example, the cash flow requirement under the Cash Flow and Market Capitalization Standards, which states “a total of $27.5 million for the most recent three fiscal years with each year at $0,” means that “the total for the three fiscal years must be over $27.5 million, and each year must not be negative.” As such, each criterion is slightly complex.

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: Support for NASDAQ Listing