JAPAN Law and Practice Contributed by: Reid Monroe-Sheridan, Takahito Fujii, Haruya Suzuki, Yutaro Ito and Tomohiro Oshige, southgate
3.2 Process The typical process for a new financing round, from the term sheet through the consummation of the investment, takes two to three months, assuming that no Foreign Exchange and Foreign Trade Act (FEFTA) filing is required (more detail on FEFTA filings is provided in 7.2 Restrictions ). There are, however, cases where transactions are completed in only one month while other cases may take more than a year to complete. If a FEFTA filing is required, the transaction will close only after receiving approval from the regulators. Preparing the FEFTA filing normally takes one to two weeks, and after the filing is submitted, it will typically take another two to four weeks to receive approval from the regula - tors. Regulators have recently started asking an increasing number of questions in the process of approving transactions, and parties are thus encouraged to submit the filing as soon as prac - tically feasible. As in many other jurisdictions, financing rounds in Japan typically require amending the start- up’s shareholders’ agreement (SHA), which in principle requires the consent of all sharehold - ers that are party to the SHA. However, in cases where the SHA provides that it can be amended by a shareholder majority (or the majority hold - ers of each class of shares), then approval from the applicable majority is sufficient in lieu of the approval of all shareholders. Separately, an issuance of new equity by a non-listed company generally requires the consent of the holders of two thirds of a company’s capital stock under Japanese law, so it is ultimately necessary for start-ups to get supermajority shareholder approval for each financing. For start-ups that have already raised capital via the issuance of preferred stock, it is common practice for new financings to require the consent of a majority (or
higher threshold) of the holders of the compa - ny’s outstanding preferred stock, typically voting together as a single class. In small-scale Japanese start-up financings, legal counsel typically advises the client directly, with limited or no direct contact between legal counsel for opposing parties. Accordingly, in these cases, legal counsel’s role in conducting due diligence and negotiating the terms of the transaction documents is significantly smaller than in the US market and other jurisdictions where legal counsel plays a more active role. However, in larger financings, it is more common for the legal counsel for the start-up and the lead investor to play a more active role and to com - municate and negotiate directly with each other. 3.3 Investment Structure Investors in the first round of outside investment often purchase common stock or “J-KISS,” SAFE-like convertible equity instrument based on the Keep It Simple Security (KISS) developed by 500 Startups in the United States and sub - sequently adapted to the Japanese market. The economic features of the J-KISS are similar to those of the current post-money SAFE, except that the standard J-KISS is more favourable to investors because it includes both a discount and a valuation cap as well as a most favoured nation provision. In comparison to the SAFE, the J-KISS is significantly more complex and time- consuming to implement. In subsequent rounds of outside investment, investors usually receive preferred stock. Some of the rights received by preferred stockhold - ers typically include: liquidation preferences, anti-dilution adjustments, reserved matters and veto rights, pre-emptive rights for new share issuances, rights of first refusal and co-sale or
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