Alternative public offering definition
A method through which a privately held company becomes a publicly traded company without going through IPO
What is an alternative public offering?
An alternative public offering (APO) is when a privately held company acquires a publicly traded company, called a shell corporation, through a reverse merger. An APO also includes a private investment of public equity (PIPE). PIPE means raising funds through the process of selling shares to a private investor. The shares from a publicly traded company are disbursed to private investors.
A shell company is a company with very little or no assets and liabilities, but it is publicly traded, meaning its stock is quoted on the stock exchange. When the buyer company mergers with the shell company, the new business is listed on the markets under the buyer’s company name.
Alternative public offering meaning
An APO can be a substitution for an initial public offering (IPO). There are a variety of reasons for a private company to do an APO. First, the opportunity to go public without the need for going through the entire hassle and costs associated with IPO. By becoming a public company, the value could be easily determined. Moreover, the acquirer has the opportunity to raise additional capital by selling shares on the market in the future. As a publicly traded company, shareholders enjoy a higher level of liquidity because stocks are tradable on the market.
However, the buyer may face a risk that the shell company has undisclosed liabilities. Moreover, during an APO, the buyer is not raising capital from the market. For the company, the sole purpose is to become listed on an exchange.
Although APO is less costly than IPO, the acquirer should have available cash on hand to execute the reverse merger. The other options for the shareholders of the target company are to be paid with a combination of cash and equity, or equity alone.
APO versus IPO
IPO enables private companies to access cheaper funds. Companies can raise the capital needed for financing activities and future projects. But the procedure for a private company to be publicly traded can be rather costly and complex. It requires underwriters to sell the shares on the open market and look for potential buyers.