Japan: third-party allotment (第三者割当増資), MSCB pricing resets and the 10% monthly cap

A third-party allotment (第三者割当増資 for shares, 第三者割当 for bonds or warrants) is a board-resolved placement to a named allottee, gated by TSE Rule 432 at 25% dilution and floored by the JSDA guideline at 0.9 times the prior close. The moving-strike convertible, the 転換価額修正条項付転換社債, is constrained on pace, not price: TSE Rule 434 with Enforcement Rule 436 caps conversion in any calendar month at 10% of listed shares outstanding.

Key takeaways

• Japan names the instrument. The MSCB (転換価額修正条項付転換社債) and the MS warrant (行使価額修正条項付新株予約権) both revise their conversion or exercise price against market prices after issue. No other market in this directory gives the mechanic a rulebook category.
• The cap is on speed: 10% a calendar month. Rule 434, with Enforcement Rule 436, requires a 転換制限 in the subscription agreement, binding on transferees, plus monthly disclosure.
• 25% dilution is the procedural trigger. Rule 432 requires an independent opinion on necessity and appropriateness, or confirmation of shareholder intention, where a third-party allotment dilutes by 25% or more.
• Pricing is capped by guideline, not by listing rule. The JSDA guideline sets the paid-in amount at not less than 0.9 times the price on the trading day before the board resolution; below that, the Companies Act 有利発行 special resolution is in play.
• Resale is clean. No Rule 144 analogue, no statutory holding period; the calendar paces the exit, not a lock-up.

転換価額修正条項付転換社債: the instrument Japan actually names

Most markets here answer the floating-conversion question by describing what their rules do not contemplate. Japan is the exception. The MSCB — 転換価額修正条項付転換社債, a convertible bond with a conversion-price revision clause — and the MSワラント, the 行使価額修正条項付新株予約権, are named categories in the TSE rulebook, carrying obligations because they exist and are used.

Both reset against a recent reference price after issue. Market practice puts the reset around 90% to 93% of that reference, but that is a practitioner convention, not a regulatory floor. The discipline sits elsewhere.

The cap is on speed, not on depth

Rule 434 of the Securities Listing Regulations, with Enforcement Rule 436, requires an MSCB issuer to write a 転換制限, a conversion restriction, into the subscription agreement: conversion or exercise in any single calendar month may not exceed 10% of the listed shares outstanding as at the payment date. It must bind subsequent holders, the holder confirms compliance in advance, and volumes are disclosed monthly and at each 10% of the issue converted.

That is a different constraint from the others in the region. Korea floors how far the strike may fall; Hong Kong benchmarks the initial price; Japan lets the strike move and rations the flow. A position worked out over weeks in the United States is worked out over quarters here.

The MS warrant is Japan's drawdown structure

Whether an investor can subscribe over time on the issuer's demand has a real Japanese answer: the MS warrant. Warrants are allotted by 第三者割当 to a securities house that commits to exercise over a period, delivering cash in instalments. Functionally that is a committed equity facility, and a mainstream small-cap financing rather than an exotic one.

It is exempt from nothing. The same restriction applies to exercise, and the Rule 432 gate is measured on potential shares, so a warrant tranche counts in full from the day it is resolved. Compare the equity facilities sub-hub.

The 25% test and what it costs

Rule 432 is triggered by either of two facts: a dilution ratio of 25% or more, or a change in the controlling shareholder. The issuer must then obtain an opinion from a person independent of management on the necessity and appropriateness of the issue, or carry out a procedure confirming shareholder intention.

The independent-opinion route is faster and is what most issuers choose. It is not a formality: the opinion must engage with why this investor, why this price and why not a rights offering, and it enters the public record.

Pricing, and the 有利発行 line

The JSDA guideline on allotment of new shares to a third party sets the paid-in amount at not less than 0.9 times the share price on the trading day immediately preceding the board resolution, with an averaging alternative where circumstances justify it. Below that, the issue risks characterisation as a 有利発行, a particularly favourable amount, which under the Companies Act requires a special resolution.

So the discount at issue is disciplined by guideline, the reset afterwards is permitted, and the flow is rationed by rule. That is why Japan sits where it does rather than with the markets that simply forbid the mechanic. The same structure without those brakes is death spiral financing.

MSCB and MS warrant compared

Resale is clean; the calendar is the throttle

Shares delivered on conversion or exercise are ordinary listed shares of the same class, tradable on the TSE on delivery. Japan has no Rule 144 analogue and no statutory holding period for third-party allotment shares, which puts it alongside Hong Kong and against Taiwan, where privately placed securities are frozen for three years. What paces a position is the Rule 434 monthly cap, plus the large-shareholding reporting obligations under the Financial Instruments and Exchange Act. Where the issuer is also United States listed, Rule 144 governs resale there.

Disclosure is where the deal is judged. The announcement carries the reason for choosing this allottee, its identity and background, the dilution ratio, the basis of the issue price and the use of proceeds. A thin explanation of the allottee reads as a governance failure, not a drafting one. Compare the instruments on the instruments hub, or tell us about the listing.

Related reading

• All markets
• Taiwan
• India
• Convertible notes
• Check whether you qualify

Primary sources

• Tokyo Stock Exchange disclosure FAQ — the MSCB conversion restriction under Rule 434 and Enforcement Rule 436
• Japan Exchange Group — aiming for better equity financing (third-party allotment rules)
• Japan Exchange Group — outline of delisting criteria
• Japan Securities Dealers Association — rules concerning handling of allotment of new shares to a third party
• Financial Services Agency of Japan

Financing a Japanese issuer: frequently asked questions

What happens if a Japanese third-party allotment dilutes by 25% or more?

Rule 432 of the Tokyo Stock Exchange Securities Listing Regulations applies. Where a third-party allotment would produce a dilution ratio of 25% or more, or would change the controlling shareholder, the issuer must either obtain an opinion on the necessity and appropriateness of the issue from a person independent of management, or confirm the intention of shareholders. The choice between the two is the main timetable decision in a Japanese raise.

How is the issue price of a third-party allotment set?

By reference to the market price immediately before the board resolution. Under the Japan Securities Dealers Association guidelines the amount to be paid in should be at least 0.9 times the share price on the trading day immediately preceding the board resolution, which caps the discount at about 10%. An average over a longer period may be used where there is a reason for it. Pricing outside that range risks being treated as a particularly favourable amount under the Companies Act, which requires a special resolution.

Can a Japanese issuer be delisted for issuing too many shares?

Yes, at the extreme. The Tokyo Stock Exchange delisting criteria include an extremely dilutive third-party allotment, where the dilution ratio reaches 300% or more, unless the exchange considers investor interests unlikely to be harmed. It is rare, but it exists because Japan has seen issuers rescued into oblivion by successive allotments.

Are moving strike convertible bonds available in Japan?

Yes, and unusually for this region they are a named category in the exchange rulebook rather than a structure the rules ignore. An MSCB revises its conversion price against market prices after issue, and a moving strike warrant does the same with its exercise price. Both carry the conversion restriction under Rule 434 and Enforcement Rule 436.

How fast can an MSCB actually be converted?

No faster than 10% of the listed shares outstanding in any calendar month, measured against the number in issue at the payment date of the MSCB. The restriction is contractual, written into the subscription agreement under Rule 434 and Enforcement Rule 436, and it must bind subsequent holders so a transfer does not release the cap. Volumes are disclosed monthly.

Does Japan have anything resembling a committed equity facility?

In substance yes, through a moving strike warrant allotted by third-party allotment to a securities house that commits to exercise over time. Cash reaches the issuer in instalments as the warrants are exercised, which is the shape of a drawdown facility. It sits under the same monthly conversion restriction and the same 25% dilution gate, measured on the potential shares from the day the board resolves.