Reformation of the TSE Growth Market

In order to improve the effectiveness of the market restructuring, the Tokyo Stock Exchange (TSE) has established a Council of Experts, which includes economists, investors, listed companies, academics and other market participants, to continuously follow up on the progress of measures and investor evaluations, and to discuss additional measures regarding efforts to improve the corporate value of listed companies, the handling of transitional measures, and the supply of funds to venture companies.

The next meeting of the Council will take place on April 22, 2025, and a provisional discussion document has been published, outlining the TSE's proposed initiatives to enhance the Growth Market and promote sustained high growth of listed startups. The TSE aims to cultivate companies that can attract institutional investors, contribute to the revitalization of the Japanese economy through M&A and new ventures, and ultimately become drivers of future economic growth. The proposals focus on a package of measures spanning the pre-IPO and post-listing stages, including encouraging "high-growth-oriented management," revising listing maintenance criteria, and facilitating smoother IPOs focused on long-term growth. A key proposal is the tightening of the market capitalization requirement for continued listing after five years.

Promoting IPOs Focused on Post-Listing Growth

• Shared Understanding and Communication: The TSE emphasizes the need for a shared understanding among stakeholders (underwriting securities companies, venture capital, audit firms, etc.) regarding the importance of considering post-listing growth during the IPO process.
• Emphasis on Long-Term Vision: Companies considering IPOs are urged to carefully consider "how to utilize the IPO for post-listing growth" and the "appropriateness of the timing and scale of the IPO."
• Leveraging "Business Plan and Matters Concerning Growth Potential": The TSE intends for companies to reflect their growth strategies and objectives in their "Business Plan and Matters Concerning Growth Potential" disclosure document for investors.
• Collaboration and Information Sharing: The TSE plans to collaborate with market participants like venture capital and audit firms and disseminate relevant information to companies preparing for IPOs.

Encouraging "High-Growth-Oriented Management" Post-Listing

• Analysis and Evaluation of Past Growth: Listed companies will be encouraged to analyze and evaluate their growth since listing using various indicators like market capitalization, stock price, revenue, profit, PSR, and PER, considering their specific circumstances and investor needs.
• Review and Update of Growth Goals and Strategies: Companies are expected to review the assumptions underlying their target market size and competitive advantages and formulate concrete future growth targets and strategies.
• Enhanced Disclosure and Execution: Companies will be urged to disclose their updated growth goals and strategies in the "Business Plan and Matters Concerning Growth Potential" and steadily implement these measures, providing regular updates.
• TSE Support for Proactive Companies: The TSE plans to support companies actively pursuing high growth, potentially by creating a list of such companies for investors.

Reviewing Listing Maintenance Criteria

• Raising the Market Capitalization Threshold: The key proposed change is to raise the listing maintenance standard for market capitalization to ¥10 billion after five years of listing. The current standard is ¥4 billion after ten years.
• Implementation Timeline: This revised standard is planned to be applied to companies that have been listed for five years or more from 2030 onwards, providing a sufficient lead time.
• Transition to Standard Market: Companies that do not meet the new Growth Market listing maintenance criteria after five years will be subject to a market segment change to the Standard Market.
• Rationale for the Change: The TSE believes this change is necessary to encourage listed startups to grow to a scale that attracts institutional investors (¥10 billion or more) more quickly. It also aims to promote M&A among underperforming companies and encourage serial entrepreneurship, contributing to the overall revitalization of the Japanese economy.
• Positioning of the Growth Market: The TSE reiterates that the Growth Market is intended for startups aiming for high growth and taking on ambitious challenges.

Implications

• Increased Pressure for Growth: Listed companies on the Growth Market will face increased pressure to achieve significant growth in market capitalization within their first five years.
• Focus on Investor Appeal: The measures aim to cultivate companies that are attractive to institutional investors, potentially leading to greater liquidity and more stable valuations for successful high-growth companies.
• Potential for Market Consolidation: The revised listing maintenance criteria could lead to more M&A activity among companies struggling to meet the new threshold.
• Shift in IPO Focus: The emphasis on post-listing growth may lead to a greater focus on the long-term viability and scalability of businesses during the IPO process.
• Clearer Market Segmentation: The changes are intended to reinforce the Growth Market's role as a launchpad for high-potential startups, with companies that do not achieve the targeted growth transitioning to the Standard Market.

The Tokyo Stock Exchange's proposed measures for the Growth Market represent a significant push towards fostering a dynamic ecosystem of high-growth startups that can contribute meaningfully to the Japanese economy. The focus on continuous growth from the pre-IPO stage through to post-listing maintenance, particularly the stricter market capitalization requirement, signals a clear expectation for listed companies to scale rapidly and become attractive to institutional investors. The success of these initiatives will depend on effective collaboration among all market participants and the responsiveness of listed companies to these evolving expectations.

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