Acquiring the shares or assets of a private company in exchange for shares of a dormant ASX-listed company is known as backdoor listing in Australia. This practice has gained wide acceptance and popularity since the failure of Australian mining companies. Most of the failing mining companies are seeking investment in high-tech and other companies in order to raise funds and improve their projects.
With slowing economy and sluggish mining sector performance, Australia is encouraging the domestic and foreign companies to enter the equity market by an acquisition of already ASX listed company. According to Australian Stock exchange data, 46 backdoor listing took place in 2015, a record. Most of the backdoor listing occurred in the mining sector and the number is expected to grow significantly in the coming months.
The resurgence of the tech companies along with the failure of mining companies has caused a strong demand to backdoor listing via failed mining companies. The boom in the tech companies has helped raise the capital and facilitate backdoor listing via failed mining companies.
To lessen the market’s reliance on the mining industry, Australian Regulators are removing many hurdles in a way of entering the equity market through backdoor listing such as relaxing the rule of 20¢ to 2¢.
The huge increase in the backdoor listing via failed mining companies is due to various benefits such as fewer complications, easy access to capital fund, easy regulatory approval, and no underwriting. It encourages the investors from the US to shift their interest and investment from gloomy US market to an easier Australian market to get listed via failed mining companies.
According to critics, the rosy picture is just a façade, as the companies entering the market with backdoor still have to go through multiple procedures and costs such as listing rules, compliance with the spread requirements, full disclosure, full listing fee, etc.
Despite the fact that Australian equity market has observed an increased number of foreign start-ups to list on ASX via mining companies, the ASX has struggled to achieve large deals. The backdoor success stories are limited and only a few start-ups have ended up with successful capital funding of more than $20 million. Moreover, backdoor listing cannot prevent a newly ASX listed company from macro environmental and economic factors.
While now, it is hard to promise a strong and long road for most of the start-ups looking for ASX listing, the success stories of ambitious start-ups are quite possible for their own struggle through backdoor listing due to an end of the boom in the mining industry. However, a quick decision would be required by the companies looking for backdoor listing before they fall out of a 3-year window of continued suspension and a subsequent removal from the ASX listing.