Back Door Listing Definition:
A backdoor listing is another name
given to a corporate finance term that has the same meaning as reverse merger,
reverse take over (AKA: reverse takeover),
reverse acquisition, reverse listing, or reverse IPO.
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Backdoor Listings and Going Public Options
A back door listing, also called a reverse merger, is a procedure in which an unlisted private company fuses or "reverse merges" into an existing public company by
acquiring control of the greatest number of outstanding shares in the target shell company. Please note that these types of business combinations are not to be confused with
piggy back listings as they are an entirely different concept altogether.
While it is true that IPOs may raise more capital
than back door listings, the latter is often done without retaining the
expensive services of an underwriter. Most investors are unaware of the fact that Warren Buffet's company, Berkshire Hathaway,
went public by the successful execution of a backdoor listing.
Principal Points of a Back Door Listing
An additional bonus of this kind of listing is that market conditions will be a very minor
consideration, given the very fast-paced speed of execution of this type of
offering. Financial advisors and other participants in the transaction will be
able to inject their interest in the deal without too much regard for the sudden
turns and gyrations of the market.
Private companies that become public companies by
these types of reverse listings utilize an option that is
much less expensive than an IPO, avoiding large up-front expenses for the services of investment banks, financial advisors,
printing, and other pertinent fees.
When you merge these financial transactions into
an SEC registered reporting shell company, it is a shortcut that designates the
buying entity - the former private company - as a newly-minted public company by
virtue of the merger, since the resulting business enterprise automatically becomes a publicly traded company with a stock symbol.
A back door listing is a more moderate and quiet process that doesn't carry the
hoopla and notoriety of a standard IPO. Likewise, the amount of capital raised
with a back door listing will usually be a pittance in comparison to the
enormous amount of capital garnered through the use of an IPO.
In What Other Ways Does a Back Door Listing Differ From a Standard IPO?
A standard IPO, on the other hand, can be
hampered by market conditions, owing to its long
execution time frame of a year or more – affecting the involvement of investment banking syndicates
- since they will reject further participation in less-than-desirable market conditions.
Although this point was briefly
touched upon above, its importance requires further
consideration, since it is an over-arching advantage the back
door listing has over the average IPO filing. The time saved by
avoiding the extended filing period of the initial public
offering process, is an undeniable plus of a back door listing!
These types of mergers offer a very fast speed of completion,
sometimes taking no more than a few weeks for the successful
conclusion of the back door listing.
However, even the most casual stock market observer knows the newsworthy significance of an IPO (Initial Public Offering).
This particular process is known for not only putting a company in the public spotlight, but it could land it on the financial jackpot
The mere act of becoming a publicly traded company through an IPO raises a company's profile significantly, taking
it to the proverbial next level. Such a transaction may quickly come and go in the media, but what builds a
successful campaign to raise capital is the proper timing and preparation work
to complete the market offering.
The deliberations when considering the formation
of a public company could include various alternatives to the standard IPO, such
as a DPO (Direct Public Offering) and a back door listing. However, no matter
what process is chosen as the instrument for market entry, it needs to be accomplished
by a firm that has the experience to assist and guide the enterprise through the
process of becoming a publicly traded company.