When companies want to grow their business, they may undertake an IPO. However, IPOs are very costly and some companies it may not have the funds for this to be an option. Backdoor listing is another approach a company can take if they are looking to obtain capital. Here we explain what a backdooring listing is, the pros and cons, and provide examples of successful backdooring listings.
A back door listing is a way a company can list on the exchange without going through the IPO process. A private company wanting to become public can find another company that is already listed with a very small capitalization and takes it over by buying sufficient shares to have controlling interest in that publicly listed company, with the consent of the listed company’s stockholders. Then the private company’s shareholders exchange their shares in the private company to the public company. As the private company has controlling interest, they can change the name of the listed company.
These existing public companies are usually just shell corporations with no activity which makes it easier for the private company to move operations to this publicly listed company.
Pros and cons of backdoor listing
- IPOs are more expensive than back door listings because of the fees associated with underwriting and legal costs. Backdoor listings would be much cheaper as there is already a shell company in place.
- Back door listing are faster to execute as it can take as little as 30 days. IPOs can take six to nine months
- Back door listing companies use a shell company which already has sufficient shareholder numbers which fulfills the ASX listing requirements.
- Companies that list through back door listing have generally underperformed compared to IPOs
- Companies with backdoor listing may encounter liquidity issues as these are usually micro-cap companies
- Stockbrokers don’t usually cover back door listing so these companies receive less coverage compared to IPOs. Fund managers don’t invest in these types of companies due to the liquidity issues
- Backdoor listings only require an issue price of $0.02 per share compare to an IPO where the minimum issue price is $0.20.
Lauren Hua is a private client adviser at Fairmont Equities.
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