What Is a Back Door Listing?

A back door listing is a method by which a privately traded company can become publicly listed without going through the process of an Initial Public Offering (IPO). Most companies use an IPO as a process by which stocks for the company become publicly available and traded. Rather than going through this, however, a private corporation can acquire a publicly traded company and then use that acquisition to make its stocks publicly available. This is known as a back door listing and companies often either maintain both the new and original companies individually under a shell corporation, or merge the two companies together.

There are certain rules and regulations that govern the way in which a company can proceed with an IPO or Initial Public Offering. This procedure is used to allow a corporation that is privately held and traded to go public and become listed on a stock exchange for public trade. Certain standards must be met by a company before it can have an IPO and the entire process can require both time and money to undergo. In order to avoid the need for an IPO and the regulations involved with it, some companies use a process referred to as a “back door listing.”

The way in which a back door listing works is fairly simple, though some countries have begun increasing regulations to restrict this process. A company that is privately traded, but that wishes to go public, can purchase another company that is already publicly traded. In doing so, the original corporation can now quickly and easily become publicly traded and does not have to go through the IPO process. The company that is purchased during a back door listing is often viewed with trepidation by investors as this process can be an indication that the purchased company is weak or is going to be eliminated soon.

Once a back door listing is complete, corporations that make the purchase typically choose one of a few procedures. Some corporations maintain both the original company and the new one that has been purchased, often together under a single shell corporation that owns both of them. Other businesses may conclude a back door listing by merging the two companies together, either under the name of the original corporation or as a new entity. There are also some corporations that might purchase a potentially weak business to gain the public listing, and then dismantle or close down the new company as an unwanted asset.