A LOT HAS been made of the decision by Israeli bio-pharma company Vascular Biogenics, operating as VBL Therapeutics, to terminate the underwriting agreement for its Nasdaq IPO several days after the US$64.8m deal had already printed.
On the basis of the information available, it seems to be a simple – albeit unusual – case of an existing shareholder not keeping to their agreement to purchase a substantial line of stock in the offering, leaving the lead underwriters Deutsche Bank and Wells Fargo high and dry and in breach of material information contained in the prospectus that could have left them vulnerable to litigation.
Existing shareholders had committed to purchasing almost 54% of the stock, and you imagine outside shareholders would have relied on that both as a guide to price performance and as a show of support for the company. As is pretty typical, VBL is owned by insiders. Company executives, directors, 5% shareholders and affiliates beneficially owned around 78.5% of voting shares in the run-up to the IPO. If they had purchased all of the shares as agreed, they would still have owned 71.2%.
I can’t really see that anyone can blame the underwriters for messing up here. There’s been some comment that they should have had a better handle on what was going on and read shareholders’ intentions, but I don’t know. There’s no contractual obligation for shareholders to participate. Clearly, I have no idea what went on behind the scenes, but to have bailed at the 13th hour looks mightily odd and suggests something went chronically wrong somewhere.
To have bailed at the 13th hour looks mightily odd and suggests something went chronically wrong
DOES THE PULL-OUT breach the good faith language in the prospectus? Short of the facts, it’s hard to know. One thing’s for sure: If bookrunners have to rely on insiders or anchor accounts to get a deal over the line, they should make sure funds are cleared a week before the deal prices.
Should the bookrunners and co-managers (JMP Securities, Needham, and Oppenheimer) have taken the shares on risk with a view to knocking them out over time? I wouldn’t have thought so; this is hardly the kind of stock you can broker out piecemeal through the trading desk. And imagine what would have happened to the price as the information got out to the wider market: it would have been mayhem. No-one’s interests would have been served. The underwriters would have picked up the chunky 7% fee, but would probably have used it up in stabilisation.
The company’s blunt announcement referred to a “substantial existing US shareholder” not funding payment for shares it had previously agreed to purchase. Given that all other shareholders – including executive officers and outside shareholders – are Israeli, that would point the finger squarely at Keffi Group, the New York VC firm run by former Goldman partner Jide Zeitlin.
I doubt the fact that the shares were initially quoted at US$10.25 – way below the US$12 offering price that was never hit in the company’s short life as a public company – could have been the reason. After all, Keffi has a lot vested in the company, being its largest shareholder with 24% of the stock pre-IPO. Zeitlin, a non-executive director, was an active participant in the company’s US$62.9m Series D financing and US$10m loan facility that converted into stock in the Series E round – although unlike other key shareholders Zeitlin didn’t buy additional Series E stock in May 2014. Was that a sign?
In the grand scheme of things; what’s left is little more than a huge embarrassment for the company. Perhaps more seriously, it’s now tainted with regard to future external financings.
ON A DIFFERENT note, I do wonder what attracts shareholders into this type of company. I make no specific comment here about VBL, its products or its prospects; I just mean I can’t see investing in companies that, in this case, are in clinical trials in the biotech sector as anything other than out-and-out speculation. It hardly makes for a stable shareholder base and it consigns the stock to huge volatility swings. I wonder if such companies belong in the public market.
The company has no intention of paying a dividend – which is not the point here, I know, but still. Beyond that, the risk factors outlined very transparently in the VBL prospectus are pretty toe-curling: significant losses incurred since inception and for the foreseeable future; substantial doubt about the ability to continue as a going concern; heavy dependence on lead products using novel technologies that are in clinical trials where lack of success or delay could compromise ability to generate revenue and become profitable etc. You get the picture.
“Even if this offering is successful, we will need to raise additional funding, which may not be available on acceptable terms, or at all. Failure to obtain this necessary capital when needed may force us to delay, limit or terminate our product development efforts or other operations,” the prospectus screams.
Because investors in previous financing rounds were sold stock at a lower price than the IPO price and because of the exercise of employee share options, new investors would have been diluted immediately to the tune of US$8.19 per share against pro forma net tangible book value at December 31 2013. And even though new investors would have been contributing 36.4% of the total amount invested by shareholders since inception, they would have owned 29.3% of outstanding ordinary shares.
As a postscript, even if, as an investor, you wanted to take a deep dive, you would have been precluded from doing so, since VBL came to market using emerging growth company status under the JOBS Act. And as an Israeli company, it also classifies as a foreign private issuer. Issuers get a lot of US public company benefits by using the JOBS Act, but investors get little to nothing.
