JAPAN Law and Practice Contributed by: Reid Monroe-Sheridan, Takahito Fujii, Haruya Suzuki, Yutaro Ito and Tomohiro Oshige, southgate
6.3 Pre-IPO Liquidity As noted in 6.1 Investor Exit Rights , no active secondary-share transfer market exists in Japan. Founders (and other key common stockholders) and preferred stockholders typically benefit from and are subject to rights of first refusal and co- sale (or tag-along rights), which means that all such stockholders wishing to sell their shares must comply with the required procedures for the rights of first refusal and co-sale (or tag-along rights). Key challenges for developing a secondary trading market in Japan include the lack of established legal and regulatory frameworks and the need for standardised transaction processes, as well as restrictions prohibiting securities brokerage firms from dealing with shares of private companies except in certain limited circumstances. Company- facilitated tender offers are not particularly com - mon in Japan. As noted in 6.1 Investor Exit Rights , it is common for start-up investors to aim for an IPO and traditionally there has not been a great demand for pre-IPO liquidity in typical cases. In Japan, start-ups’ activities involving market - ing and selling shares in pre-IPO financings are subject to various restrictions under the Financial Instruments and Exchange Act (FIEA), including prohibitions on general solicitation. Due to these restrictions under the FIEA, the investors in start- up financings are typically limited to qualified institutional investors, a limited number of non- qualified investors, and existing shareholders. For start-ups with numerous small shareholders, securing required supermajority approval (two- thirds for new equity issuances) can be logisti - cally challenging. 7. Regulation 7.1 Securities Offerings
7.2 Restrictions The FEFTA regulates investments made by for - eign investors in Japanese companies engaged in business in industries that have been des- ignated as important from the perspective of national security and public welfare, such as the software and ICT industries among others. In these designated businesses, even minority foreign investments require advance notification to, and approval from, the Japanese authority. The statutory review period for notifications is 30 days from the acceptance of the notification, but depending on the circumstances, this period can end up being as short as one to two weeks or as long as several months. A foreign investor seeking to appoint a related person as a board director of a company that operates in a designated industry must file not only the advance FEFTA notification for the investment itself but also the advance FEFTA notification with respect to the proposal for the election of the director. Even in cases where the company is not operat - ing in a designated industry, foreign investors in Japanese companies (together with their related parties) whose ownership or voting rights exceed 10% must make informational filings with the Bank of Japan after the closing. Revisions to ministerial ordinances in this area are being planned with two key changes: first, investors who are legally required to co-operate with foreign intelligence activities (particularly Chinese investors under China’s National Intel - ligence Law) will be prohibited from using the prior notification exemption system; secondly, a new category of “specified core business opera - tors” is to be established as a designated indus - try classification. Foreign investors who may be affected should monitor this issue carefully.
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