Winners only.
Participating arcades are split into blocks based on area, and appear to be organised such that there are 3-5 per block with some exceptions (e.g. G-3, Okinawa, which has only one)
Each arcade holds a preliminary tournament, and the winners qualify for the block final.
The final is held immediately after the last preliminary, and the winning team qualifies for Tougeki.
The format is decided by the individual arcades. Usually round-robin, single-elimination, or a combination thereof depending on the number of entrants. There is no entry limit and as far as I'm aware no seeding.
Any remaining spots are filled by other means (i.e. last-chance qualifiers during the final event)