IPO as call option for insiders

A couple of weeks ago, Matt Levine at Bloomberg View described a curious incident of a company that was a public company for only six days before cancelling its public issue:

1. On July 30, 2014, an Israeli company, Vascular Biogenics Ltd. (VBL) announced that it had priced its initial public offering (IPO) at $12 per share and that the shares would begin trading on Nasdaq the next day. The registration statement relating to these securities was filed with and was declared effective by the US Securities and Exchange Commission (SEC) on the same day.
2. On August 8, VBL announced that it had cancelled its IPO.

What happened in between was that on July 31, the shares opened at $11.00 and sank further to close at $10.25 (a 15% discount to the IPO price) on a large volume of 1.5 million shares as compared to the total issue size of 5.4 million shares excluding the Greeshoe option (Source for price and volume data is Google Finance). This price drop was bad news for one of the large shareholders who had agreed to purchase almost 45% of the shares in the IPO. This insider was unwilling or unable to pay for the shares that he had agreed to buy. Technically, the underwriters were on the hook now, and the default could have triggered a spate of law suits. Instead, the company cancelled the IPO and the underwriting agreement. Nasdaq instituted a trading halt but the company appears to be still technically listed on Nasdaq.

Matt Levine does a fabulous job of dissecting the underwriting agreement to understand the legal issues involved. I am however more concerned about the relationship between the insider and the company. The VBL episode seems to suggest that if you are an insider in a company, a US IPO is a free call option. If the stock price goes up on listing, the insider pays the IPO price and buys the stock. If the price goes down, the insider refuses to pay and the company cancels the IPO.

Posted at 6:50 pm IST on Sat, 30 Aug 2014         permanent link

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