What Is a Back Door Listing?
A back door listing is an alternative strategy for going public used by a company that fails to meet the minimum criteria for listing on a stock exchange. To get onto the exchange, the company that desires to go public instead acquires an already listed company.
- A back door listing is a way that a private company can go public when it does not meet the minimum listing requirements of a stock exchange.
- Instead, the private company can acquire a company that is already listed on an exchange, and begin operations under that public company's moniker.
- Back door listings are rare since often if the private company does not meet minimum listing criteria it will also be unable to raise the capital necessary to effect the purchase of the public company.
How Back Door Listings Work
If a small private firm doesn't have the resources or doesn't meet the listing requirements to go public, they might purchase a company that is already publicly traded with shares listed on a stock exchange. To do this, the private company would need to have a lot of cash on hand or be able to raise the capital necessary (often through the use of loans) to purchase the public company.
A back door listing is atypical of most acquisitions or mergers because the acquiring company in a back door listing will subsequently start doing business under the target firm's name and stock ticker. Regulatory and filing costs have become so prohibitive in the last several years that sometimes purchasing a public company can be a cost-effective way for some private firms to go public.
Listing requirements comprise the various standards established by stock exchanges, such as the New York Stock Exchange, to control membership in the exchange. Requirements vary by exchange but there are certain metrics which are almost always included. The two most important categories of requirements deal with the size of the firm (as defined by annual income or market capitalization) and the liquidity of the shares (a certain number of shares must already have been issued).
For example, the NYSE requires firms to already have 1.1 million publicly-traded shares outstanding with a collective market value of at least $100 million.
For NASDAQ, each company must also have a minimum of 1.25 million publicly traded shares upon listing, excluding those held by officers, directors or any beneficial owners of more than 10% of the company. Companies must also have at least 450 round lot (100 shares) shareholders, 2,200 total shareholders, or 550 total shareholders with 1.1 million average trading volume over the past 12 months.
Both the NYSE and the Nasdaq require a minimum security listing price of $4.00 per share.
Example of Back Door Listing
For example, say private company XYZ wants to IPO but does not meet the minimum criteria for listing.
If, however, XYZ purchases the public company ABC, XYZ will fold itself into ABC and start doing business under ABC's name - since this public company will essentially become a shell company for what XYZ has purchased. XYZ now trades as ABC on the exchange and owns everything that is a part of ABC.