Trader Talk

Green light, red light: The strange (and short) IPO of Vascular Biogenics

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Biotech firm Vascular Biogenics started trading on the Nasdaq on July 31st, pricing 5.4 million shares at $12, and attracted little attention. The Nasdaq abruptly halted trading Friday morning, asking for "additional information" from the company.

That, however, isn't the strange part. Shortly after the Nasdaq intervened, the company announced that its initial public offering (IPO) had been cancelled "due to an unexpected situation in which a substantial existing U.S. shareholder did not fund payment for shares it previously agreed to purchase in the offering."

Pisani's market open
Pisani's market open

The problem is the IPO already had occurred, and trading apparently continued after the settlement date. For the earliest trades, those that occurred on the 31st, had to be settled by August 5th or so—assuming a five-day settlement period. So the stock must have traded at least two days past the settlement date.

IPO watchers I talked to are scratching their heads over this one. There have been cases where an offering was priced, traded and then cancelled--but BEFORE the first trade settled so there was no changing of ownership, or money exchanged.

In this case, trading occurred after the settlement date, so presumably money and certificates have changed hands. That means traders and regulators will have to untangle everything. Naturally, this includes reversing the trades.

Who's fault is this? Well, someone didn't get the money. Someone was supposed to make sure there was money in the bank by a certain date, certainly by the 5th.

Certainly the guy who reneged on the deal is responsible, though it's not clear what the legal responsibility is. What about the underwriter? That would be Deutsche Bank and Wells Fargo. Possibly one or both missed the mark, but there could be some kind of agreement where the underwriter could cancel the deal if the buyer did not materialize. Still, it's all very strange.

--By CNBC's Bob Pisani