Pre IPO Insights
Forced Initial Public Offering

8 August 2022

Forced Initial Public Offering:Definition,Benefits,Example and More

Most companies shy away from going public. They are usually reluctant to subject themselves to the increased public scrutiny of being a public company. However, there are circumstances under which an unwilling private company can trigger a forced Initial Public Offering (IPO).

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Here is everything you should know about a forced IPO.

What is a Forced Initial Public Offering?

A forced Initial Public Offering is an IPO that happens when a company reluctantly offers its shares for public trading because it meets the requirements to be a reporting company. In essence, the company opts to become a publicly traded company only because, given the existing regulations, it makes more financial sense.

Why would a private company shy away from going public?

While most entrepreneurs, stockholders, and board members dream of the day that they offer their shares to the public for the first time through an IPO, some try to avoid the process.

Here are reasons why it isn’t always a great idea.

  • It comes with increased reporting requirements. When a company is private, the owners don’t have to disclose details of their operations. They can keep details of their profits and losses private. Their long-term and short-term plans can remain confidential. Also, they don’t have to disclose the amount they pay their directors or any other executives of the company.

Public companies don’t have the luxury of privacy. From the time they declare their intention to go public, the law requires them to disclose every material fact that relates to their internal operations. It is an intrusion that some private shareholders would instead do without. As a result, they may be reluctant to list their company on the stock exchange.

  • It comes with serious liability problems. Directors and officers of private companies are less exposed to liability. If they go public, their exposure will increase. For example, if they misrepresent the company’s financial position, their shareholders can sue them. They can also get in trouble for things like self-dealing, omitting federally required information, or even acting in any way that can be considered not in the shareholders’ best interest.     

Therefore, it is understandable why a board of directors may squirm at the idea of listing their shares either on the New York Stock Exchange (NYSE) or Nasdaq, especially if they have the option of raising capital from private investors. They may not want to expose themselves to the extensive liability concerns of being a director or an officer of a public company.  

  • It is restrictive. Once a company goes public, it becomes subject to regulatory oversight. State agencies and the Securities and Exchange Commission often scrutinize anything they do. These agencies can sometimes have a significant impact on the direction that the company takes. They can even determine how the company’s stock can change hands.

Another way going public interferes with a private company’s autonomy is the power that minority shareholders gain once the company goes public. While the majority shareholders have a significant degree of management control, going public usually strips some of this autonomy. In a public company, minority shareholders have significantly more power in the management of the company than they would have had had the company remained private.

Some directors and company officers prefer full autonomy in running their companies. Since losing this autonomy is part of the price of going public, they would rather keep their company private.

  • Dilution of ownership. While an IPO can be incredibly lucrative, it often dilutes an existing owner’s shares.


To conduct an IPO, existing shareholders must put up a given number of shares on sale. If the company is already successful, this may be unpalatable for the owners, especially when you consider they don’t have control over who ends up owning the shares that they list. The thought of going public may not be as attractive for some owners.

  • Market pressure. When a company goes public, it becomes subject to pressure from wall street. As a result, the management tends to focus on goals they can achieve within a short time frame because they become obsessed with how the stock performs. In some cases, this can be detrimental to the company’s future.

Given the reasons above, it is easy to understand why private company owners prefer to keep their companies private, especially if they are startups. But why do they go public even when they don’t want to?

When do reluctant companies end up filing for an IPO?

Unfortunately, a company may be forced to go public.

It happens in cases where:

  • the company has assets that are more than $10 million, and
  • it has more than 500 shareholders

Once the company has met these thresholds, the law requires them to become a reporting company. It means that they have to file their financial reports. They also have to make public disclosures that range from their internal operations, director compensation, board resolutions, and all other disclosures that a publicly listed company would have to make.

Therefore, the owners have to make a choice. They can bear all the burdens of being a public company without the easy access to capital that often comes with going public. Another option, and what almost every company opts for, is to go public. The thinking is that they are already suffering the restrictions and intrusions that securities laws impose on public companies; they might as well become one and enjoy access to the stock market.

Why is it called a forced IPO?

In short, you call it a forced IPO because the private company has no real choice. The regulations make it unpalatable to remain private. Therefore, the rules essentially shepherd them toward a forced Initial Public Offering.

Benefits of a Forced IPO

Just because a company has a forced IPO does not mean it is not beneficial. Most forced IPOs have proven to be lucrative to shareholders. Here are the main benefits of such an IPO.

  • It gives the company easy access to capital. They can use the money they raise from the general public to finance mergers and acquisition ventures.
  • It is a liquidity event that allows a company’s shareholders to cash out. In recent years, the Google and Facebook forced IPOs are great examples of where a forced IPO made people rich. By the end of the first day of offering shares to the public, the founders, venture capitalists, individual investors, and other stockholders in the company had become wealthy.
  • Increased reporting requirements allow for better transparency. Enhanced transparency is often good for shareholders, especially when determining the company’s value.
  • Unlike private placements, an IPO is a public event that often increases the visibility of a company and its products.

Why are companies forced to IPO?

Companies are forced to IPO to increase transparency. Once the company’s assets exceed $10 million and its shareholder count exceeds 500, it is in the public’s interest for the company to disclose its financial health.

The increased scrutiny and oversight that comes with the company becoming a reporting company under the Exchange Act is thus meant to protect existing and potential investors from incidences of fraud or mismanagement.

How Forced Initial Public Offerings Work


The first step in a forced Initial Public Offering is a private company meeting the criteria set out in the Exchange Act of 1934. According to the regulations, a private company should start meeting the auditing and reporting requirements of a public company once:

  • It owns assets that are valued at over $10 million, and
  • 2000 or more shareholders own it, or over 500 non-accredited investors own it

After meeting the threshold, the company will have to register under the Exchange Act. This entails having to file annual and quarterly reports. But since most companies choose to also file for an IPO under the Securities Act, they often follow the following steps in the IPO process.

  1. They find a reputable investment bank to underwrite their shares.
  2. As the issuer, they agree with the underwriting bank to purchase shares and resell them to the public. Among the things that the company’s management and the underwriters agree on include the lock-up period and other terms relating to IPO shares issuance.
  3. After the agreement, the company will file a registration statement. This statement will consist of private filings — like financial statements — and a prospectus.
  4. With the filings done, the underwriting bank, in conjunction with the company, will market the company’s shares to institutional investors and the public. It often involves going on a roadshow.
  5. They will then wait for the SEC’s approval. Once the approval comes through, both the company and the underwriters will come up with an effective date for floating the shares in the public market. They will then agree to an offer price — the share price.
  6. The underwriter will then bring the issue of the shares to the market. After that, they will execute after-market stabilization activities aimed at reducing volatility.
  7. Eventually, the transition to market competition will kick in as far as the stock price is concerned.

Real World Example of a Forced Initial Public Offering

Real-world examples of forced IPOs include:

  • The Facebook IPO. Facebook’s IPO took place in 2012. It was a forced IPO because the company would have rather stayed private. However, by that time, its valuation had increased. Also, the number of investors surpassed the 500 shareholders limit, so they were forced to list their company in the stock market.

Even though it was a forced IPO, it proved lucrative for Facebook shareholders. They raised over $100 billion from the stock market, and after the successful IPO, most of the early investors in the company became rich.

  • The Alphabet IPO. In 2004, the Alphabet Company, still known as Google, also went through a forced Initial Public Offering. The company’s shareholders didn’t have a strong need to go public. The business was growing, and the company didn’t need to raise money.

Unfortunately, they couldn’t keep their shareholder count below the mandated 500 shareholder limit. Therefore, they unenthusiastically went public. However, the company going public ended up yielding over $1.2 billion from the stock market.   

If you are interested in learning more about the financial market, check out our other guides. You can also contact us for further inquiries.

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