Private Initial Offerings
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In July of 2005, Fred Wilson wrote a post on his website, A VC,' on the subject of "back door IPOs." It was later referenced and augmented in another post on Tom O'Neill's website, The Buyout Blog. Their posts provide a backdrop for introducing what may be a new name for another kind of initial offering, the private initial offering (PIO).
An initial private offering (IPO) is an offering of private company stock to the investing public through the regulated, public securities markets. For reasons noted below, the IPO route to shareholder liquidity or growth capital is unavailable to most private companies.
A "back door IPO" is a transaction in which a private company merges into a publicly traded shell company in a process often called a "reverse merger." It is a reverse merger because the private company brings all the value but the shell company is the surviving entity. Shell companies typically have few, if any assets other than, perhaps, some cash. They may, however, have considerable liabilities, including poor reputations, sleazy owners (who make bad partners), no followings, and no real markets for their shares. The back door IPO tends to be used by companies that cannot or will not go through the usual process of an IPO.