Backdoor listing is a strategy where an unlisted company enters the stock market by acquiring or merging with an existing listed company. It allows the unlisted company to secure listed company status without going through the initial listing review process, hence the term ‘backdoor listing.’ The process is faster and more simplified than a formal Initial Public Offering (IPO), but it carries uncertainties and potential for investor harm.
Backdoor listings are typically executed in two ways: the unlisted company takes over the management rights of an already listed company, or both parties merge, transforming the existing listed company into a new business entity. Often, these transactions target ‘shell companies’ with minimal business performance or those that are temporarily closed or inactive. This enables the company to enter the stock market without additional listing evaluations.
A typical IPO requires complex procedures such as supervision by the Financial Supervisory Service, examination by the Korea Exchange, and investor protection measures. In contrast, backdoor listings save time and cost by utilizing companies that maintain their listing status without undergoing such assessments. This method is attractive for startups or small and medium-sized enterprises that need urgent capital raising or to gain market credibility.
For instance, if unlisted bio company A acquires listed company B, changes its company name, and relocates its headquarters, A can operate as a listed company within the continuity of B. In this case, large-scale funding can be achieved through new stock issuance or capital increase. Additionally, it is advantageous for being relatively less exposed to media and external scrutiny compared to an IPO, allowing for a ‘quiet listing.’
Nonetheless, this method has inherent limitations. The acquired or merged existing listed companies often have poor financial structures or low management transparency. When a new business entity takes on this structure, various side effects such as accounting issues, suspicions of window dressing, and insider trading can arise. Some companies utilizing backdoor listing in the past faced delisting due to embezzlement of funds or management failures and were subject to sanctions by the Financial Supervisory Service.
To mitigate these risks, the Korea Exchange has implemented measures such as ‘designation as managed stock’, ‘trading halt’, and ‘substantive review of listing eligibility’ for backdoor-listed companies that do not meet certain criteria. Especially since 2009, the institution has strengthened the ‘Backdoor Listing Review System’ to require a review equivalent to that of new listings when substantial transfer of management control is involved beyond mere equity acquisition.
From an investor’s perspective, it is crucial to thoroughly verify information as the existing company’s business model, performance, and management could completely change. Although the stock price of companies announcing a backdoor listing tends to surge in the short term, there are many instances where stock prices plummet if business performance or management results do not support this rise.
Recently, there is a growing call to enhance institutional monitoring and market transparency as backdoor listings led by venture capital and private equity funds (PEF) increase. Particularly, the necessity of a management system to prevent fraudulent M&As and backdoor listing through shell companies is emphasized.
Backdoor listing has a lower threshold compared to IPOs, but it is by no means a risk-free method. It is vital for both investors and the market to objectively verify the company’s reality and future value. The roles of the exchange and regulatory authorities are also becoming heavier.
