What is Back Door Listing?
A back door listing occurs when a private company acquires a publicly traded company and thus “goes public” without an initial public offering.
How Does Back Door Listing Work?
For example, let’s assume that Company XYZ is a privately held company with 150 shareholders and $25 million in cash. It is too small to go public and be listed on the New York Stock Exchange.
Company XYZ decides to acquire Company ABC, which trades on the New York Stock Exchange, for $15 million in cash and $50 million of debt. By making the acquisition, Company XYZ effectively becomes a public company without having to endure the process and expense of a public offering (though back door listings are by no means simple or inexpensive).
In some cases, companies conduct back door listings because they do not meet the criteria for being listed on a stock exchange.
Why Does Back Door Listing Matter?
Back door listings are often called “reverse mergers” or “reverse takeovers” because the merged entity usually does business under the target’s name. In our example, this would mean that although Company XYZ is the acquirer, the merged entity would be called Company ABC.
Company XYZ might even create a shell company and then keep the operations of Company XYZ and Company ABC independent of each other. Sometimes, the shell companies involved in back door listings are foreign companies that are registered in the United States but are not always compliant with U.S. securities laws and accounting standards. Judgments against these companies can be hard to enforce.