A backdoor listing occurs when a private company acquires a smaller, publicly-traded company in order to gain its public listing. This process is sometimes referred to as a reverse merger or reverse takeover. In many cases, the acquiring company retains the target company’s ticker symbol.
Why Would a Company Choose to do a Backdoor Listing?
The traditional IPO process can be very costly and time-consuming for a private company that wishes to become publicly-listed. Certain thresholds must be met in terms of revenue, auditing fees, internal compliance costs, and so on. While the costs of acquiring a private target company can still be relatively high, the overall amount and time required to do so are still typically much smaller.
While the end goal is to merge or be acquired fully, the private and public company are often not in related industries. The public company is typically used as merely a vessel for the private company to achieve a public listing status. A private company generally seeks out non-functioning or barely-operative public companies as candidates to be taken over.
Backdoor listings are also sometimes utilized by foreign companies wishing to gain easier access to the U.S. market.
How Do Backdoor Listings Work?
During a backdoor listing process, the private company acquires a majority of the public company’s shares after receiving the consent of its shareholders. Operations are then merged or acquired outright, as the private company now owns the public company’s listing on the exchanges.
In some cases, a shell company may be formed by the private company to allow for the conducting of their operations independently.
Possible Advantages of Backdoor Listings
- Lower Costs – Backdoor listings allow a private company to sidestep the strict and costly listing regulations put in place by the SEC and major exchanges.
- Faster Process – The traditional IPO process can last for several months, even if it goes smoothly. Backdoor listings can often be completed in just a few weeks.
- Less Risk – Market conditions can sometimes affect a traditional IPO’s timing and cause costly delays in going public. Market volatility rarely affects the backdoor listing process.
- Public Company Benefits – Private companies can gain numerous benefits by going public, such as increased liquidity, better visibility with consumers, and higher investor confidence.
Potential Downsides of Backdoor Listings
- Share Dilution – Backdoor listings often involve new shares being issued for the incoming private company, which can sometimes lead to share dilution and decrease company value for existing shareholders.
- Increased Liabilities – By acquiring the public company, the private company assumes its liabilities and any potential issues that may have been missed during due diligence.
- Difficulty with Compliance – The private company’s ownership may be inexperienced with the intricate regulatory and compliance requirements of being public. This may lead to underperformance and stagnation that could deter potential investors.
Insurance Needs for a Backdoor Listing
After the completion of a backdoor listing, company ownership should ensure its complete readiness for ongoing regulatory compliance. This often includes examining and possibly upgrading its insurance coverage, such as property insurance, tax liability insurance, cyber liability insurance, and other insurance areas, depending on the company’s business.
https://woodruffsawyer.com/Woodruff Sawyer is the market leader for placing Directors and Officers (D&O) insurance for IPO companies. Woodruff Sawyer is also a nationally recognized leader when it comes to Representations and Warranties Insurance (RWI), a crucial aspect of the merger & acquisition process.
For more on Special Purpose Acquisition Companies:
- SPAC Finance: Read about SPAC Finance and how SPACs spurred a reopening of the capital markets during the pandemic.
- SPAC Stocks: Learn about SPAC stocks and their possible advantages and disadvantages regarding investment.
- SPAC IPOs vs. Traditional IPOs: Discover the key differences between traditional IPOs and SPAC IPOs.
- SPAC Acquisition Process: Learn how the acquisition process works when a SPAC purchases a target company.