A:

A back door listing, sometimes referred to as a reverse takeover, reverse merger, or reverse IPO, occurs when a privately-held company that may not qualify for the public offering process purchases a publicly-traded company.

By undertaking a back door listing, the privately-held company avoids the public offering process and gains automatic inclusion on a stock exchange. Following the acquisition, the acquirer may merge both companies' operations or, alternatively, create a shell corporation that allows the two companies to continue operations independent of each other.

Although rare, a private company sometimes will engage in a back door listing simply to avoid the time and expense of engaging in an initial public offering (IPO). For example, Archipelago Holdings acquired the New York Stock Exchange (NYSE) via a back door listing in 2006. A back door listing usually indicates significant weakness in the acquired company and serves as a warning sign for investors to be wary.

For more on this topic, read Mergers and Acquisitions: Definition.

This question was answered by Justin Bynum.

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