For Japanese companies considering an initial public offering in the United States, one of the earliest — and most consequential — structuring decisions is whether to list through American Depository Receipts (“ADRs”) or to list Japanese common shares directly. Historically, ADRs were the default (and often the only viable) path. That is no longer the case.
This blog discusses how ADRs work, the pros and cons of ADRs versus direct listings of Japanese common shares, and why recent developments have fundamentally expanded the options available to Japanese issuers contemplating a U.S. public listing.
What Is an ADR and How Does It Work?
An ADR is a U.S.-traded security issued by a U.S. depository bank that represents an interest in a specified number of a foreign company’s underlying ordinary shares. The depository holds the ordinary shares through a custodian in the issuer’s home country — in this case, Japan — and issues ADRs that trade in the U.S. market.
From a U.S. investor’s perspective, ADRs function much like domestic shares: they trade in U.S. dollars, clear through DTC, and are governed by U.S. securities laws. From the issuer’s perspective, however, ADRs introduce an additional structural layer, involving a deposit agreement, depositary fees, voting mechanics, and coordination among the issuer, the depositary, and the foreign custodian.
ADRs have historically been attractive because they fit neatly into the U.S. market infrastructure and were well understood by U.S. exchanges, clearing systems, and investors.
Why ADRs Have Traditionally Been Used by Japanese Issuers
For many years, ADRs were effectively required for Japanese companies seeking a U.S. exchange listing, particularly if the issuer also intended to maintain or pursue a listing in Japan. Dual listing using Japanese common shares directly was not considered viable within the U.S. settlement and clearing system.
ADRs also offered certain advantages:
- Familiarity for U.S. investors and analysts
- Compatibility with DTC and U.S. brokerage systems
- A well-established regulatory and operational framework
As a result, ADRs became the standard approach for Japanese issuers listing in the U.S.
The Growing Practical Challenges with ADRs
In recent years, however, ADRs have become increasingly difficult to implement for Japanese issuers. Many U.S. depository banks and Japanese custodians are no longer willing to support ADR programs for Japanese companies, particularly for small- and mid-cap issuers.
This reluctance stems from a combination of factors, including:
- Increased regulatory and compliance burdens
- Cost-benefit considerations for depositories and custodians
- Operational complexity unique to Japan-based issuers
As a result, ADRs — while still available — are often not practically available on commercially reasonable terms, or even necessary.
Exploring an Alternative: Direct Listing of Japanese Common Shares
Several years ago, in light of these ADR challenges, we explored an alternative approach with a Japanese client: listing Japanese common shares directly on a U.S. stock exchange, without using ADRs.
At the time, this was an unconventional — and largely untested — idea. The U.S. market infrastructure, including DTC, had never processed an offering involving the direct trading of Japanese common shares on a U.S. exchange.
Working closely with Japanese counsel, we conducted an in-depth analysis of the Companies Act of Japan and the Foreign Exchange and Foreign Trade Act (FEFTA) to confirm that there were no legal impediments under Japanese law to such a structure. At the same time, we worked through the U.S. clearing, custody, and settlement issues that would need to be addressed.
The DTC Opinion and a Long Road to Market Readiness
A key step in this process was the drafting of a special legal opinion to DTC, addressing the legal viability of Japanese common shares being traded, cleared, and settled through the U.S. system. This required careful coordination among U.S. counsel, Japanese counsel, market participants, and infrastructure providers.
Progress was slow at first but we were able to achieve DTC buy-in.
A Milestone Achievement: The First NYSE Listing of Japanese Common Shares
Last year, after years of groundwork, we achieved a significant milestone: the first successful listing of Japanese common shares directly on the NYSE followed by the first listing on Nasdaq.
This development represents a fundamental shift in what is possible for Japanese issuers. For the first time, a Japanese company can list its ordinary shares directly on a major U.S. stock exchange — without ADRs — using existing U.S. market infrastructure.
Why This Matters for Japanese Issuers Today
This milestone has important practical implications:
- Japanese issuers are no longer forced into ADR structures that may be unavailable or impractical.
- Companies can now consider direct listings of Japanese common shares on Nasdaq or the NYSE.
- Importantly, this structure opens the door to true dual listings — allowing a company to list the same Japanese common shares on both a U.S. exchange and the Tokyo Stock Exchange. Although there are regulatory hurdles with such a true dual listing structure, we are actively working to overcome those hurdles as well.
For companies that value liquidity across markets, alignment of shareholder bases, and structural simplicity, this is a significant advancement.
ADRs vs. Japanese Common Shares: Key Considerations
In deciding between ADRs and Japanese common shares, issuers should consider:
- Availability and cost of depositaries and custodians
- Desired listing strategy (single-market vs. dual-market)
- Investor base and liquidity objectives
- Ongoing administrative and compliance complexity
ADRs may still be appropriate in certain circumstances, particularly for larger issuers with established depositary relationships. However, they are no longer the only path — or necessarily the best path — for many Japanese companies.
Closing Thoughts
For decades, ADRs defined how Japanese companies accessed U.S. public markets. That paradigm has now changed.
With the successful NYSE and Nasdaq listings of Japanese common shares, Japanese issuers have a new, viable option — one that offers flexibility, reduces dependency on ADR infrastructure, and sets the stage for genuine dual listings between the U.S. and Japan.
For Japanese companies considering a U.S. IPO today, the question is no longer whether ADRs are required, but rather which structure best aligns with the company’s long-term capital markets strategy.
The Author
Laura Anthony, Esq.
Founding Partner
Anthony, Linder & Cacomanolis
A Corporate and Securities Law Firm
Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony, Linder & Cacomanolis, PLLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALC legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including the American Red Cross for Palm Beach and Martin Counties, Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others.
Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.
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