Can a bunch of wealthy people force Facebook to go public?

Question

Over at Dealbook, Sorkin writes in reference to Facebook:

Once more than 500 individuals or institutions own shares in Facebook, securities laws mandate that the company go public. Google staged an I.P.O. in part because it hit that same threshold.

To buy shares on Sharespost, you likely have to be "wealthy", and according to the SEC that means you must make $100k in salary every year or have some amount of net worth. It doesn't seem particularly hard to find a bunch of people who fall into that category and have them purchase some shares.

I'd imagine based on employee numbers, Facebook is already close to that limit (or maybe the 500 just refers to outside investors, including ex-employees).

Couldn't a bunch of people just buy up some shares and force Facebook's hand? Even if they have first right of refusal, if enough people showed up, wouldn't they have to let SOME of them participate?

Answer 1

In the US, a private company with less than 500 owners can dictate who can or can't become a shareholder (this is true in general, but I'm sure there are loopholes). Prior to Google's IPO I could not buy shares in Google at any price. The reason Google was "forced" to go public is the 500 shareholder rule. At a high level, with 500 shareholders the company is forced to do some extra financial accounting and they no longer can control who owns a share of the company, allowing me to purchase shares of google at that point. At that point, it typically becomes in the companies best interest to go public.

See this article about Google approaching the 500 shareholder limit in 2003.

Further, Sorkin is not quite correct that "securities laws mandate that the company go public" if by "go public" we mean list on a stock exchange, available for general purchase. Securities laws mandate what has to be reported in financial reporting and when you have to report it. Securities laws also can dictate restrictions on ownership of stock and if a company can impose their own restrictions.

A group of investors cannot force a company onto a stock exchange. If shares of Facebook are already for sale to anyone, then having >500 shareholders will force Facebook to file more paperwork with the SEC, it won't force Facebook onto the NYSE or NASDAQ. When that point is reached, it may be in Facebook's best interest to have an IPO, but they will not be required by law to do so.

Update: CNN article discusses likely Facebook IPO in 2012.

When companies have more than 500 shareholders, they're required to make significant financial disclosures -- though they can choose to remain private and keep their stock from trading publicly. However, most companies facing mandatory disclosures opt to go public.

The Securities and Exchange Commission gives businesses lots of time to prepare for that milestone. Companies have until 120 days after the end of the fiscal year in which they cross the 500-shareholder line to begin making their disclosures. If Facebook tips the scale this year, that gives it until April 2012 to start filing financial reports.

Answer 2

@Alex B's answer hits most of it, but leaves out one thing: most companies control who can own their non-public shares, and prohibit transfers, sales, or in some cases, even ongoing ownership by ex-employees.

So it's not that hard to ensure you stay under 500 investors. Remember that Sharespost isn't an exchange or clearinghouse; it's basically a bulletin board with some light contract services and third-party escrow services. I'd guess that many of the companies on their "hot" list explicitly prohibit the sale of their non-public shares.