What the pros and cons of a back door listing?

by

When companies want to grow their business, they may undertake an Initial Public Offering (IPO). However, IPOs are very costly and some companies may not have the funds for this to be an option. A back door listing is another approach a company can take if they are looking to obtain capital. Here we explain what a back door listing is and the pros and cons.

Definition

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 capitalisation 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. 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. This makes it easier for the private company to move operations to this publicly listed company.

Pros and cons of a backdoor listing

Pros

  • IPOs are more expensive than back door listings because of the fees associated with underwriting and legal costs. Back door listings would be much cheaper as there is already a shell company in place.
  • Back door listings 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 to fulfill the ASX listing requirements.

Cons

  • Companies that list through a back door listing have generally underperformed compared to IPOs.
  • Companies with back door listing may encounter liquidity issues as these are usually micro-cap companies.
  • Stockbrokers don’t usually cover back door listings so these companies receive less coverage compared to IPOs. Fund managers don’t invest in these types of companies due to the liquidity issues.
  • Back door 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.

 An 8-week FREE TRIAL to The Dynamic Investor can be found HERE.

Would you like us to call you when we have a great idea? Check out our services.

Disclaimer: The information in this article is general advice only. Read our full disclaimer HERE.

Like this article? Share it now on Facebook and Twitter!