Simplified requirements for accessing Japanese capital markets

Simplified requirements for accessing Japanese capital markets

Yoshihiro Tsutaya, Anderson Mori & Tomotsune

One of the biggest hurdles securities issuers face in trying to access capital markets outside their own jurisdictions is the need to comply with cumbersome disclosure requirements. Accessing the Japanese capital market is no different. However, there is a way to simplify the disclosure. 

Non-Japanese issuers wishing to sell corporate bonds to Japanese investors are required to prepare disclosure documents containing detailed information on their financials and businesses and the securities in question. Language poses another problem. All disclosure documents issued in Japan are generally required to be in Japanese. This raises practical difficulties because of the time needed for translation and the often prohibitive costs of translating disclosure documents, which typically run up to hundreds of pages, to Japanese.

The good news is that following enacted amendments to Japanese regulations, foreign issuers can now issue securities to Japanese investors on the basis of a truncated disclosure document. This makes it much easier for foreign issuers to tap the Japanese market through Japanese securities brokerage firms. This article outlines one of the ways popularly adopted by foreign issuers to sell  corporate bonds to Japanese investors, known as the system of “Secondary Offering of Foreign Issued Securities (Gaikoku-Shoken-Uridashi)”.

Background

Japanese disclosure obligations for secondary offerings The Financial Instruments and Exchange Act of Japan (Act No. 25 of 1948, as amended; the “FIEA”) generally requires issuers to file a  securities registration statement (“SRS”) with the Director of the Kanto Local Finance Bureau (the “DKLFB”) before commencing a public offering of securities. Accordingly, all securities offerings in Japan, whether primary or secondary, are generally subject to the filing of an SRS, unless certain “private placement” exemptions1 apply. Solicitation in respect of the relevant are only permitted after an SRS filing, and actual sale of securities may only commence after registration of the SRS comes into effect (typically within sixteen calendar days following the filing of an SRS).

For non-Japanese issuers, the information in their latest annual reports to shareholders and, if applicable, in the disclosure documents they have filed with the supervisory authorities or relevant  stock exchange in their home jurisdictions, will form the basis of the SRSs they submit in Japan.

SRSs generally contain two parts, as follows:

  1. Part I will contain information on the number of securities to be sold, offer price per share, delivery date, method of offering, underwriters’ compensation and other required information under the FIFA;
  2. Part II comprise the following sections: (i) Section I, which contains an outline of the legal and other regulatory systems governing the issuer in its country of incorporation, (ii) Section II, which  contains an outline of the issuer, (iii) Section III, which contains information on the issuer’s business and operations, and is usually the only section that requires selection from or editing of  information contained in the Issuer’s annual report to shareholders or other disclosure documents, (iv) Section IV, which contains information on the condition of the issuer’s major facilities, (v) Section V, which contains information on total number of shares issued, capital stock and major shareholders, and (vi) Section VI, which contains information on the financial condition of the issuer, including the audited financial statements contained in its latest annual report to shareholders and notes thereto. Every section of an SRS contains voluminous information. As a result, SRS  sometimes come up to hundreds of pages in length.

In preparing an SRS, an Issuer should keep in mind the need for the SRS be translated into Japanese, which may entail considerable time and expense, depending on the amount of information  involved, particularly Section III of Part II of the SRS, which tends to contain the most information. Japanese counsels are commonly tasked with preparing the initial draft of the SRS (except for  Section VI of Part II, which relates to financial statements) in English for the issuer’s review. Upon finalisation of the draft,  Japanese counsel will prepare a Japanese translation of the final draft of the English version. The Japanese version of Section VI will be prepared by the Japanese accountants and provided to Japanese counsel for inclusion in the SRS. The entire process entails incurrence of a substantial amount of cost for non-Japanese issuers wishing to sell their securities in Japan.

Secondary offering of securities by non-Japanese companies (Gaikoku-Shoken-Uridashi)

Requirements for Secondary Offering of Foreign Issued Securities 

Where non-Japanese companies propose to issue securities that have already been issued abroad, such that information on the securities and the issuer, including information typically found in an  RS, have previously been disclosed based under the laws and regulations of the issuer’s home jurisdiction or the rules of some foreign securities exchange, Japanese investors may sometimes be able  to easily obtain such information in Japan online.

If sufficient information, including the price at which the relevant securities are being traded in a foreign jurisdiction can be easily obtained by Japanese investors before they purchase such  securities, an SRS containing voluminous information on the secondary offering of such securities would be unnecessary.

In such situations, only a “Foreign Securities Information (Gaikoku-Shoken-Joho)” document, containing minimal information, such as information on how details on the securities and the issuer can be accessed, can be provided to Japanese investors who are solicited. This effectively exempts issuers from having to issue a full-blown SRS. Secondary offerings based on such truncated  disclosure documents is referred to as a “Secondary Offering of Foreign Issued Securities.”

This truncated disclosure system essentially transfers the disclosure obligations from the non-Japanese issuer to the Japanese Financial Instruments Business Operators (“FIBOs”) (i.e., the Japanese securities brokerage firms selling the securities to Japanese investors). More specifically, FIBOs will instead be tasked with providing Japanese investors with the necessary information on the
foreign issuer (or details of where such information may be obtained).

Exemption from the SRS requirement applies only to secondary offerings of securities which (i) have already been issued in a foreign country or are being issued in Japan without the conduct of solicitation at the time of issuance and (ii) are conducted by Japanese FIBOs. In respect of condition (ii), only Japanese FIBOs may engage in Secondary Offering of Foreign Issued Securities. This is
to ensure that Foreign Securities Information is provided to solicitated investors. In addition to conditions (i) and (ii) above, the requirements specified in the Enforcement Order of the FIFA, which differ depending on the type of securities being offered, must also be satisfied. These requirements can be summarized as follows:

  1. the trading price of the relevant securities can be easily obtained online in Japan;
  2. the securities must continuously be traded outside Japan; and
  3. information on the issuer of the securities by can be easily obtained online in Japan.

Issuers offering securities that are difficult to value, such as structured bonds and securitised products, will not be able to avail themselves of the Secondary Offering of Foreign Issued Securities system.

With regard to the above, it is generally understood that requirement (a) above would be satisfied if information such as the trading price and reference price of securities issued by a foreign company are posted on the website of Japanese FIBOs, or if Japanese FIBOs are able to immediately provide the trading price of the securities issued by a foreign company upon request. Furthermore, it is  generally understood that requirement (b) would be satisfied if the securities issued by a foreign company can be traded continuously. This would be satisfied if, for example, the securities issued by a foreign company are listed on a foreign stock exchange or if quotes on the trading price of the securities will always be obtainable from a foreign securities brokerage firm.

Disclosure document for Secondary Offering of Foreign Issued Securities

When Japanese FIBOs engaging in a Secondary Offering of Foreign Issued Securities sell securities issued by a foreign company, they must provide the relevant Foreign Securities Information to Japanese purchasers before selling the securities, or at the same of such sale. Foreign Securities Information refers to “issuer information.” In the case of government bonds, this means an “outline of the financial affairs” of the issuing country, and in the case of corporate bonds, this means an “outline of the business and accounting affairs” as well as “securities information” pertaining to the most recent fiscal year of the issuer.

If all or part of the above-described Foreign Securities Information can be found in information that (i) has been made public for the issuance of the relevant securities, (ii) has published in accordance with applicable laws and regulations, (iii) can be easily obtained online in Japan, and (iv) are in Japanese or English, Japanese FIBOs will be absolved of the need to provide such  information. Instead, they will only be required to provide the portion of the Foreign Securities Information that do not meet conditions (i) to (iv).

Foreign Securities Information can be provided or published in any of the following ways:

  1. delivery of documents containing Foreign Securities Information;
  2. transmission of Foreign Securities Information by facsimile;
  3. transmission by e-mail or the Internet, etc.; and
  4. provision or publication online or provision of information online on how Foreign Securities Information may be obtained.

Liability for Disclosed Information in Secondary Offering of Foreign Issued Securities

Issuers and their directors are liable for damages under the FIEA if the Foreign Securities Information they provide contains false information on material matters or omits material information required to be provided or disclosed. Additionally, Japanese FIBOs that have sold securities in the secondary offering of securities without providing or disclosing the requisite Foreign Securities Information are also liable to Japanese investors for damages arising from such violation.

Furthermore, Japanese FIBOs that have sold securities on the basis of Foreign Securities Information that contains false information on material matters, omits material information that should have been provided or published, or omits facts necessary for proper understanding of the secondary offering are liable for damages incurred by investors who have purchased the relevant securities
without knowing that the information is false or has been omitted.

However, Japanese FIBOs may be absolved of such liability if they can prove that they had no knowledge of the false information or that information had been omitted, and could not have been aware of the same despite the exercise of reasonable care.

Conclusion

As explained above, foreign issuers wishing to sell corporate bonds to Japanese investors would in principle be subject to the SRS requirement, which can be potentially costly in terms of time and  money. The Secondary Offering of Foreign Issued Securities system, however, would substantially relieve foreign issuers of this burden.

The Secondary Offering of Foreign Issued Securities system also has the advantage of mitigating the risks of civil liability for foreign issuers because the Foreign Securities Information required to be provided under that system involves substantially less information compared to an SRS. Accordingly, foreign issuers wishing to access Japanese capital markets should seriously consider taking advantage of the benefits offered by the Secondary Offering of Foreign Issued Securities system.

Notes

1 To qualify as a “private placement,” a securities offering must meet certain criteria, including the following: (A) (i) the number of offerees must be no more than 49, or (ii) all offerees are “qualified
institutional investors,” such as banks, insurance companies or securities companies, and (B) certain selling restrictions are imposed on the securities offering.

Author:

Yoshihiro Tsutaya

Anderson Mori & Tomotsune

Otemachi Park Building, 1-1-1

Otemachi

Chiyoda-Ku

Tokyo, 100-8136

Tel: +81 3 6775 1000

Web: www.amt-law.com