Forced Initial Public Offering

What Is a Forced Initial Public Offering?

A forced initial public offering — or “forced IPO” for short — is the process whereby a private company is required to go public due to having breached the thresholds set out by the Securities and Exchange Commission (SEC) and applicable regulations.

How Forced Initial Public Offerings Work

The most common trigger for a forced IPO is that the company in question has grown to have over 500 shareholders of record, along with assets of at least $10 million. Under these circumstances, the company must arrange an IPO and become subject to the enhanced reporting and auditing requirements associated with public companies.

Although most entrepreneurs view “going public” as a much-desired outcome, some companies consciously prefer remaining privately owned for as long as possible. After all, privately-owned companies can operate without the substantial transparency requirements demanded of public companies, which include annual audits and the publication of detailed quarterly financial statements. 

In addition to their cost, these standards can cause a company’s management and ownership to become disproportionately focused on short-term goals, such as meeting the quarterly earnings per share (EPS) targets put forward by investment analysts. For this reason, owners and managers might see remaining private as the best means of retaining focus and control.

Nevertheless, private companies that reach a certain level of growth will typically cross one of the thresholds that trigger a forced IPO, particularly with respect to the rule concerning $10 million in company assets. Oftentimes, companies that wish to avoid the forced IPO for as long as possible will seek to do so by consolidating their ownership, with larger shareholders buying out smaller ones in order to keep the total number of registered shareholders below the 500-person limit. This strategy may prove unsustainable in the long-run, however.

Important

In the past, entrepreneurs often viewed going public as the best way to raise significant amounts of cash for their business. However, with the rise of the private equity industry in recent decades, this is no longer necessarily the case. Indeed, it is possible today for private companies to raise comparable amounts of money purely from private backers — thereby potentially enjoying the benefits of an IPO without its ongoing oversight requirements.

Real World Example of a Forced Initial Public Offering

One notable example of a forced IPO was that of Alphabet (GOOGL), which held its IPO in 2004. Although the IPO was successful and raised roughly $1.2 billion, the company itself was not enthusiastic about pursuing its IPO. Instead, its decision to do so was driven largely by regulatory considerations, having grown past the 500-shareholder limit mandated by the SEC.

The same dynamic occurred more recently with respect to the IPO of Facebook (FB) in 2012. The company was forced to go public due to surpassing its shareholder limit, raising over $100 billion in the resulting IPO.