Japan’s IPO in dire straits

Financial Times.com picked a miserable situation of Japan’s Initial Public Offering of as of September 7, 2008. I agree that the Financial Times concluded that “the chances of improved activity look bleak as companies are put off making initial public offerings by volatile equity markets,” in this article.

Financial Times.com
Bleak outlook for Tokyo IPO climate

I have been involved in several projects for supporting IPO of clients’ companies as an independent consultant since 2005. Therefore, I know that a lot of unlisted companies decided to postpone IPO or otherwise abandon its original plan and stay private due to unfavorable condition to raise money from stock markets. There, however, are other two crucial reasons to stop looking to go public among Japanese ventures.

First off, let’s review the numbers of IPOs over the period from FY1999 to FY2007. I regard this period as once-in-a-life opportunity for technology-oriented ventures aiming to raise capital. This is because the Internet has became popular since the appearance of Windows95 in 1995 and mobile phone has widely been used when Japanese largest career NTT DoCoMo introduced i-mode in 1999 which provides e-mail and internet access. Those innovations brought many of ventures into stock markets with a more flexible regulatory system such as Mothers, Hercules or Centrex which simplifies examining procedures for IPO than main stock markets.

Fiscal Year	FY 1999	FY 2000	FY 2001	FY 2002	FY 2003	FY 2004	FY 2005	FY 2006	FY 2007
TSE 1st section and 2nd section	8	25	16	20	18	22	18	29	13
Stock Exchanges for ventures	75	157	149	100	101	150	139	155	106
Others	27	22	4	4	2	3	1	4	2
Total	110	204	169	124	121	175	158	188	121

 
(Source: Small and Medium Enterprise Agency of Japan )

Stock Exchanges for ventures: Mothers in Tokyo Stock Exchange, Inc., Hercules in Osaka Stock Exchange, Inc., Jasdaq Securities Exchange, Inc.(JASDAQ), Centrex in Nagoya Stock Exchange, Inc., Ambitious in Sapporo Securities Exchange, Inc. and Q-board in Fukuoka Stock Exchange, Inc.

Others: 1st section and 2nd section of Osaka Stock Exchange, Inc., 1st section and 2nd section of Nagoya Stock Exchange, Inc., Sapporo Securities Exchange, Inc. and Fukuoka Stock Exchange, Inc.

There was a dent in terms of the number of IPO in 2007 influenced by one fact that examining procedures conducted by underwriters and stock exchanges got strict and took longer time than before. That movement of questioning the credibility of smaller ventures resulted from an incident that government prosecutors raided the offices of an Internet venture Livedoor in January 2006 and its founder was jailed for fraud. The new examining procedures covers everything from tax evasion activities of ventures, violation of labor law against work overtime to business ties to the yakuza, Japanese Mafia With those procedures, some are postponed to going public until improvement occurs while some ventures are regarded as inappropriate organizations to be listed.

So how about IPO trend of 2008? According to a portal focusing on IPO activities Tokyo IPO, there have been 29 IPOs during the first eight months of 2008, less than one third number of listings in the same period in 2007.

 
Tokyo IPO
August IPO Market Summary and Outlook for September

The sharp drop of 2008 is being attributed to the tighter regulatory atmosphere following Japanese-version Sarbanes-Oxley Act (J-SOX) has raised the cost for even ventures that are preparing IPO for the immediate future.

J-SOX is an unofficial term which refers to requirements for all of listed companies in stock exchanges similar to Sarbanes-Oxley Act Section 302 and Section 404 in the US. The J-SOX requirements are incorporated in the Financial Instruments and Exchange Law Act which was newly promulgated on June 14th, 2006 and became effective in April 1st, 2008. The J-SOX requirements could increase the burden of huge cost to prepare documents on the ventures.

I could not see any revival of Japan’s IPO the next couple of years, aside from the effects of both strict examining procedures and J-SOX burden though. I think that there are not many ventures qualifying as a candidate for the listed companies to meet what investors wants in terms of the potentiality of growth or technology innovation in Japan.