On the Hunt for ‘Back Door’ Stock Listings

On Thursday, The Australian warned readers that ‘ASIC snarls at back door listings’.

You can read the full article here if you have a subscription. If you can’t access it, don’t worry. The gist is that the corporate watchdog isn’t happy that badly performing mining stocks are taking over risky tech stocks.

As The Australian writes:

‘More than a dozen listed shells have been transformed into tech plays recently courtesy of back door listings, and as many as 25 more are believed to be in the works.’

Here’s a handful of some recent back door listings.

Later, The Australian adds that ASIC Commissioner John Price is aware of this ‘phenomenon’. Price says it’s eerily similar in the lead up to the dotcom boom and bust…

‘There may be a perception in the market that [a backdoor listing] is a more cost-effective way; that could be the reason driving this trend.’

Before I go on, what’s a back door listing?

They’re also known as a reverse listing. This is where a public company merges with a private company. The public company is a shell company. That is, a company with few assets and almost no share price value. It’s likely that the company’s shares aren’t even trading.

From here, either the listed company looks around for a new idea, or a start-up that needs cash looks for an available shell company.

Either way, a listed firm and a private firm meet and arrange a merger.

When the companies combine, the company’s purpose changes. It often means a management overhaul and a whole bunch of other regulatory processes.

You see, once the merger has taken place, the new company needs to raise capital to beef up the bank balance. This can be the biggest risk to the current shareholders. That is, a new capital raising means further share price dilution.

Of course, by the time these things happen, current shareholders don’t have much value left in the company anyway. If the share price is one tenth of a cent, the only way is up. Right?

Some entrepreneurs feel that back door listings are the only way to get their tech ideas listed on the exchange.

One Perth based analyst, Peter Strachan, said cash has dried up:

‘Over the last few years there has been a capital strike. A lot of exploration companies are sitting around watching the paint dry and thinking about how to make some money.’

Because of this, tech entrepreneur, Zenya Tsvetnenko, took advantage of the ASX’s ‘graveyard’ of mining stocks. Failed graphite explorer Lithex Resources took over Mpire Media [ASX:LTX]. And a few months later, oil and gas explorer Macro Energy acquired Digital BTC.

Digital BTC will be the first bitcoin business to trade on the ASX.

Not everyone likes change though.

Read the rest of this article at Money Morning