Forced Initial Public Offering

A forced initial public offering is an instance in which a company is forced to issue shares to the public for the first time. Forced IPOs occur when a company goes public due to certain conditions being met which are set by the securities regulatory body of the country. Initial public offerings are usually conducted at the discretion of the current management and/or owners of the private company.

The Securities and Exchange Commission (SEC) sets the standards for when companies must accept a forced initial public offering. That standard is if the company has a certain amount of assets (around 10 million) and if there are more than 500 shareholders of record. If those conditions are met, the company must start disclosing specific financial information publicly and in a timely manner. Some companies might not want to go public because it means increased oversight and reporting standards, which usually means increased costs. The reason for the law is to increase transparency and reduce risks for investors.

Prior to an IPO, a private company will have a relatively small number of shareholders, comprised of primarily early investors, such as founders, early employees, families and friends and professional investors, such as venture capitalists or angel investors. However, everybody else can't by shares in the company until it is offered for sale to the public. A private investor can potentially approach owners of a private company, but they're not obligated to sell. Public companies, on the other hand, have sold at least a portion of their shares to the public to be traded on a stock exchange. This is why an IPO is also referred to as "going public."

Going public might be good for a company’s investors and employees, but it is usually bad for the company itself because it forces CEOs to focus on short-term stock fluctuations at the expense of long-term growth. It also wrests control from the founders and gives it to thousands of faceless shareholders. For hugely successful mega-businesses – like Apple, Facebook and Google – going public has its benefits. Public companies enjoy cachet, tax advantages, and access to more and better financing options. But for many young companies, going public can lead to sudden unsustainable growth that can easily spiral out of control.

Sarbanes-Oxley regulations have made going public much more difficult, and today’s investors tend to shy away from companies without a proven track record. These conditions have resulted in investor aversion to taking big early risks – precisely the time when a fledgling operation could use an injection of cash. Some companies that find success early can continue its success without IPO funds. The problem is, once it reaches over 500 private shareholders, the SEC will force such a company into a Catch 22 – a forced IPO when it no longer needs the cash. Take Google. It had already been profitable for three years before raising $1.2 billion in its 2004 public offering. And Google never spent the money it raised that year. Instead, it put the cash straight into the bank, where the funds have been sitting ever since. Today, Google’s cash pile has grown to more than $44 billion.