Many privately held companies strive to go public but failed to do so. Many non-listed companies couldn’t get the benefit of listed status. It is when companies do not qualify for the public offering process. To avail the benefits of listing on the stock exchange like accessing more capital, offering liquidity facility to existing shareholders, companies do not have many options left except the backdoor listing. So, when a company who fails to meet the criteria of listing on stock exchange get listed by undertaking a backdoor listing.
In short, we can say that backdoor listing is a process of getting listed without an Initial Public Offering (IPO). It is also referred as a reverse initial public offering (IPO), reverse merger, and reverse takeover etc.
Benefits involve with Backdoor Listing
There is nothing illegal with the backdoor listing to process for the public offering. Many companies decide on the basis of intrinsic benefits and mutually required by the acquiring and target company. Companies opt for backdoor listing against conventional IPO method is because of it being the faster and cheaper mode and the companies do not require raising the initial capital to perform it. The conventional method of IPO influenced so much by the market condition. You can say if the market is positive then the conventional cost will be in your favor but if the market is negative then you can get quite the opposite results. On another side, the backdoor listing is independent of market conditions and a lot cheaper as compared to conventional method. Reverse IPO is also simpler as compared to the conventional mode when two companies operate in a same line of business. If the two companies have the same business line then the reverse merger will take a lot less time than IPO.
That’s not all.
The backdoor listing has the most significance for companies who are looking for getting listed in foreign jurisdictions. It is very common for a company unable to meet the minimum requirement of getting listed in abroad. But, by backdoor listing, an unlisted company can merge with the foreign listed company.
Is backdoor listing as swift as it seems?
Apparently, the backdoor listing is not as great as we think it is. There are hidden things behind the curtains which need to consider before taking the big step. The one major drawback of reverse initial public offering (IPO) is the dark history which can be in the form of sloppy records, unforeseen liabilities, and pending lawsuits. On top of that these shells may come with some shareholders who are planning to dump their stock in the stock market at the first chance they get. It is natural in some shareholders of the listed company to not be a part of resulting company and plan an exit strategy which may or may not include the selling of stocks. In doing so, they may be responsible for reducing the price of shares.
Note: – The best way to safeguard yourself against the stock dump after the accomplished takeover is by locking up the shares so that the shareholders who hold the stocks as investors pose no threat and the holding shares will be insignificant.
The backdoor listing process is not that simpler or faster when it comes off the different line of business and due diligence which needs to be done on shell and target company. There is a huge cost associated with the prospectus which makes this argument of “Backdoor listing cheaper than conventional IPO mode” insignificant. And if the prospectus will not be issued then the company may not get wide publicity.
We can say that the backdoor listing or reverse merger have both intrinsic benefits and intrinsic problems. Lastly, the chances of inexperienced staff of management and directors now will have the control of the company in the field of stock market.
Final Thoughts: –
No doubt that backdoor listing or reverse merger is an effective process for an unlisted company to list on the stock exchange. It is also not illegal. But, that’s not the issue here. It is a kind of commercial transaction which has advantages and disadvantages in a comparative way.
Most importantly, if that scheme comes with a price or drives the advantages on the vulnerability of others then it must be check and regulate at any cost. A proper structure of listing unlisted companies and merger of two companies under reverse IPO must place in a form to provide protection to the investors. If it is possible to achieve then it can become a reliable method to enlist on stock exchanges and get public in a more balanced way.
Hope, we will hear some new guidelines by various stock exchange regulators to make this process more transparent than ever.
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