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Home > Nanotechnology Columns > Alan Shalleck-NanoClarity > NanoDynamics IPO Successful, then Aborted ... NanoDynamics is Victim

Alan Shalleck
President
NanoClarity LLC

Abstract:
On February 11, 2008, NanoDynamics, Inc. (NDMX) successfully IPO'd using the Reg. S (offshore issuance procedures allowed by the US Securities and Exchange Commission) on the Dubai Stock Exchange (DIFX), raising $100,000,000 + with Global Crown Capital Ltd. (GCC) of San Francisco the lead manager (underwriter) and Daman Securities International (Daman), of Dubai, a member of the DIFX, the co-manager (co-underwriter). On Friday, February 11, 2008 the DIFX released a stunning announcement that " NADX had voluntarily requested ‘delisting' on the DIFX due to differences between the conditions presented for listing and the IPO prospectus and was returning all invested funds to the original investors!" The failure points to the lead underwriter, Global Crown Capital.

February 20th, 2008

NanoDynamics IPO Successful, then Aborted ... NanoDynamics is Victim

NanoDynamics IPO Successful, then Aborted ...
NanoDynamics is Victim
By
Alan B. Shalleck
NanoClarity LLC
February 2008



On February 11, 2008, NanoDynamics, Inc. (NDMX) successfully IPO'd using the Reg. S (offshore issuance procedures allowed by the US Securities and Exchange Commission) on the Dubai Stock Exchange (DIFX), raising $100,000,000 + with Global Crown Capital Ltd. (GCC) of San Francisco the lead manager (underwriter) and Daman Securities International (Daman), of Dubai, a member of the DIFX, the co-manager (co-underwriter).

In an IPO, underwriters agree to purchase all offered stock from the issuing company (at a discount) and then resell that stock immediately at the deal price to a group of pre-committed investors. In the NDMX IPO, each of the managers legally committed to purchase $50,000,000 of NanoDynamics common stock. That amount and the specific number of shares to be purchased are in the IPO prospectus.

In general, IPO managers in advance of the IPO pricing date sign up subscribing investors. In a non best-efforts underwriting, an underwriter's total capital is committed to buy the amount of stock remaining un-resold giving the issuing company (NDMX) assurance that it will receive a specific new funding. The code of honor is clear. Once legally obligated, a deal's underwriters will use their last dollar to make sure an IPO goes to completion. If an underwriter fails to purchase unsold stock, the underwriter cannot be counted on by future issuers and his reputation and his prospects for future underwriting business are forever lost.

Last Thursday, the head of institutional sales for GCC wrote me "the NDMX deal was sold out and that demand for the issue was strong." All looked just fine. He added that it would take a few days, administratively, for the NDMX stock to be listed on the Dubai exchange. He bragged that GCC had recently been approached by other nanotechnology marketing stage companies to do for them what seemed to be happening for NDMX ... but the NDMX stock never appeared on the DIFX quote board or website ...

On Friday, February 11, 2008 the DIFX released a stunning announcement that " NanoDynamics had voluntarily requested ‘delisting' on the DIFX due to differences between the conditions presented for listing and the IPO prospectus and was returning all invested funds to the original investors!" The supposedly successful NDMX IPO, in effect, was unsuccessful. I was amazed, and many in the nanotechnology and financial industry were equally shocked. A voluntary delisting of a closed IPO made no sense. There had not been a glitch in the entire IPO process. Something was missing. NanoClarity mounted an investigation.

Neither the lead underwriter nor NDMX would officially talk to me. However, there were those who were willing to talk and who were fully aware of what caused the abort. Some were involved peripherally in the offering. The DIFX, and Daman Securities, referred me to the two domestic parties. It was quickly clear that the DIFX had been consistent and responsible, and that Daman had acted completely in accord with its written commitments. Here is what else became apparant:

Going public using a Reg. S procedure on the DIFX remains a very viable way to raise significant funds. The NanoDynamics Reg. S IPO process (originally a successful IPO) was just like any other IPO effort although conducted mostly abroad. Both domestic and international institutions were approached using a typical "road show," and firm purchase commitments were obtained. Qualified investors in the US and abroad were solicited and subscribed. Per the Reg.S rules, no US citizen investor was solicited, no domestic deal advertising was mounted, and the prospectus was not made generally available in any domestic market. Everything was a normal Reg. S. offering, and, with strong interest, the deal was allegedly sold out by February 11. Per the lead underwriters institutional sales department, there was also strong post IPO demand ... especially in the Middle East.

The deal was priced at $11 and presented to the DIFX board of governors for listing on Thursday, February 15, 2008. There was not a glitch that would raise a unique red flag for any nanotech company seeking to IPO using Reg. S on the DIFX in the near future, especially after the DIFX merges with NASDAQ. IPO'ing on the Dubai exchange is a clear and simple way to raise new capital for a needy nanotech company, even in this poor domestic market environment. Because of a latent hunger to invest in germinal US technology companies, most likely an effort would be a very successful offering.

Nothing material had changed in NanoDynamics' business or financial status during the entire Reg. S process. Everything the company said in its prospectus remained true. The company's financial statements had been certified by Deloitte and Touche (certainly a blue chip accounting firm), and no materially adverse event had occurred, especially during the early weeks of February when the IPO was going to completion. NanoDynamics did everything requested of them by the underwriters and by the DIFX exchange. Today, NDMX remains a promising Nanotech - Greentech venture with good management, strong technology, a growing list of customers and contracts, and excellent positioning in both markets. It expects to have a very strong revenue year in 2008. It was clear, after investigation, that NanoDynamics had no business or financial reason for "voluntarily" requesting delisting or aborting its IPO. It stood to gain $100 million in new investment funding only by driving the IPO to completion. The deal was not voluntarily aborted ... NDMX was told by the exchange to delist and abort.

According to our investigation, the DIFX and Daman also receive a clean bill of health regarding the aborted IPO. Daman had fulfilled its obligation by offering to put $50,000,000 in NDMX's account to support listing.

By elimination, that leaves the lead underwriter, Global Crown Capital Ltd. as the primary reason of the aborted deal. Is this true? Well, evidence seems to point in that direction. GCC claims that the DIFX governors continuously placed increasingly changing and challenging administrative requirements on them before agreeing to list the NDMX stock on the DIFX. In addition, GCC claims NASDAQ executives and their attorneys were all over the deal questioning everything as if the NDMX deal was an SEC registration ... which it was not. GCC claims that the ensuing delays discouraged NDMX and, ultimately, NanoDynamics management elected not to stay the course and voluntarily requested delisting. That makes no business sense to me. Here is what seems to have occurred.

When pushed, the DIFX asked only two administrative requirements for listing. The first was that all the IPO stock had to have been physically distributed to the investors. Stock distribution proved not to be a difficulty. The second administrative requirement was that all money raised by the IPO ($100 million) had to be in the issuing company's bank account ... and the lack of funds in Nanodynamics' accounts seems to be the source of the DIFX delisting request.

More than one source has told me that GCC could not, or would not, produce its share, $50 million, of the IPO proceeds. It was short by some significant amount. Here is where GCC, as an underwriter, violated the rules of underwriting. As I also have been told, GCC reneged in using its own capital to make up the shortage difference ... and was arrogant with the Governors of the exchange about that deficiency not being a deciding condition for delisting, in the process antagonizing every DIFX official involved in the listing decision.

Given the funding deficiency, and no immediate willingness to make up the deficiency by the lead manager, the exchange then gave NanoDynamics' management a choice of two delisting options: withdraw voluntarily or be asked to delist by the exchange. NDMX did the honorable thing ... it "voluntarily" requested delisting and returned whatever funds it had received to the investors.

Most egregiously, GCC violated the underwriter's credibility rule. An underwriter has to be ready to commit its very last dollar of capital to protect the success of an IPO that is not a "best efforts" offering. An underwriter's only "outs" are "material adverse changes in the issuing company" or "materially adverse changes in the marketplace". Neither occurred. I think GCC has a great deal of explaining to do to the entire nanotechnology or green industries if it ever wants to be considered again as an underwriter of any kind of stock offering by a needy Nanotechnology company.

Caveat Emptor. Many other solid underwriters are now willing to do Reg. S. nanotech company IPO offerings on the Dubai exchange after the pioneering NDMX effort.

Nanotechnology company owners or executives, if you need to find one, call me at 201.333.0756 or email me.

Alan B. Shalleck
NanoClarity LLC
www.nanoclarity.com


© NanoClarity LLC 2008

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