5. Financing

In order for a private company to expand its business, it will typically need to raise funds in some form, depending on the degree of expansion. Fund-raising can be divided broadly into two categories: (i) debt financing, including primarily loans and bonds (shasai); and (ii) equity financing, which basically means increasing the company’s capital through the issuance of new shares. In between those two, there are instruments such as a convertible bond with warrant (the rough equivalent of a convertible note in the U.S.). Especially for start-ups, the repayment obligations associated with debt can hinder the company’s growth, so in general start-ups will more frequently raise funds through the issuance of new equity. For the company, it is necessary to construct a capitalization model that will ensure the company’s ability to expand its business in the future, as well as to actually execute financings based on its capitalization model.

When accepting an investment from a venture capitalist, the investor may demand preferred shares or a convertible bond with warrant instead of common shares, in which case it is necessary to properly construct the terms and conditions of those instruments. In particular, in the case of a convertible bond with warrant, under the Companies Act, you must consider such issues as whether or not a bond administrator is necessary and the regulations on contributions in kind. You also have to make sure to comply with the Financial Instruments and Exchange Act. In addition, the investor will typically require the company to enter into an investment contract and a shareholders agreement, in which case you must make sure that you fully understand the meaning of the terms, and that no unforeseen circumstances will arise later.

AZX has provided support for venture capital financings for many years, and we have been involved in various kinds of financing schemes in the past. Specifically, in addition to providing advice on capitalization structures, we have assisted clients to construct the terms and conditions of preferred shares and convertible bonds with warrants, as well as the procedure to issue such instruments. We have also assisted clients in the drafting, review and negotiation of investment contracts and shareholders agreements.