NCCo agrees to take stock for $3M DBOT loan

WILMINGTON – New Castle County is preparing this month to swap its collateral in a $3 million loan made to the Delaware Board of Trade for stock in Ideanomics, a company that acquired the startup “penny-stock” market earlier this year.

The New Castle County Council voted 11-1 on Tuesday, Nov. 12, to support the plan to ditch its stake in the software that runs DBOT’s financial trading system, which officials repeatedly called “worthless.” The controversial loan used the software as the county’s collateral, but unlike traditional non-cash collateral like land the software’s value largely depended on DBOT’s growth. Now, even Ideanomics wants to dump it in favor of a competitor.

For Shawn Sloves, CEO of Fundamental Interactions, the company that hosts DBOT’s trading system, the original deal never made much sense. He told Delaware Business Times that New Castle County never held rights to intellectual property in the deal, but only its licensing agreement – meaning that if the operation crumbled the county could only assign the license to a new user. Early discussions on DBOT included more valuable exclusivity, Sloves said, but the final loan deal contained nothing but the licensing agreement.

Sloves added that his company’s relationship with DBOT fell apart after Ideanomics became the majority owner, and Fundamental Interactions has sued Ideanomics in federal court over failure to pay more than $160,000 in fees pending its software switch

The lone dissenting council vote came from Council President Karen Hartley-Nagle, who sought to table the resolution pending further advice from a financial adviser. She read a lengthy statement prior to the vote, voicing her concerns about the lack of information provided by Ideanomics to council regarding the stock-swap plan and its risk potential to taxpayers if share values fall or the company goes bankrupt.

“We get all of the bad and none of the good,” she said of the plan that would pin the county’s investment to the company’s ability to increase shareholder value.

Hartley-Nagle emphasized that she wanted to hear Ideanomics founder and Board Chairman Bruno Wu, a Chinese billionaire tech investor, personally guarantee the $3 million loan or have Ideanomics obtain a surety bond to protect the county.

“Our constituents deserve no less,” she said. “In good faith, we put hard-earned taxpayer money with a promise of jobs, not stock in a risky company.”

Councilman John Cartier, a co-sponsor of the resolution, said that regardless of the future risk of the stock, it was better than the county’s current position.

“The collateral we currently have is probably worthless, whereas a stock offering as collateral has value, not great value, but has value in the marketplace,” he said.

Sanjay Bhatnagar, assistant county attorney, noted that the council’s approval was not required for County Executive Matt Meyer to approve the collateral swap, and Meyer intended to execute the agreement before Nov. 25.

“The bottom line is this: We’re left a the choice of keeping the existing collateral which we’ve determined to essentially be worthless or accept a pledge of stock that is traded on the NASDAQ, which we’ve determined to be much more liquid in the event of non-payment of the loan,” Bhatnagar added.

The debate over how to proceed with the county’s interest in DBOT is fraught from its 2015 origins, when then-County Executive Tom Gordon agreed to lend the startup $3 million from county park maintenance endowment funds after council voted not to do so. Finance experts questioned the appropriateness of taking software as collateral on the loan when the market had yet to even be formed and it risked being usurped by better developing technology.

But Gordon touted the bonafides of the market’s backers, which included former New York Stock Exchange head Dick Grasso and former Philadelphia Stock Exchange chief John Wallace, as a reason to invest in the hope of bringing high-paying financial tech, or fintech, jobs to Wilmington. DBOT was advertised as an alternative way for startups to raise necessary funding compared to pursuing traditional venture capital.

Despite its rocky origin, DBOT opened in the Hercules Building in downtown Wilmington in May 2017. Within a year it was trading millions of shares of over-the-counter stock each day from roughly 1,000 companies, including low-tier equities and international stocks like BMW and Bayer Aspirin that don’t want to meet reporting requirements necessary on larger exchanges.

DBOT was also notably an adopter of blockchain technology, a decentralized, unalterable recordkeeping system made famous by its connection to cryptocurrencies like Bitcoin. Last year it launched DBOT ATS, or alternate trading system, underpinned by the tech designed by a precursor to shareholder Ideanomics, a New York-based global fintech company.

Although officials had touted job growth of up to 100 positions at DBOT, the company currently has only a handful of employees.

In its first four years, however, DBOT has made annual 6% interest payments on the loan each November totaling $180,000 annually. With the loan’s five-year term set to expire in November 2020 though, officials have grown sour on the value of the software used as collateral. That assessment grew worse after Ideanomics acquired more than 98% of DBOT’s stock in April and subsequently announced that it planned to switch its software system to one built by Chicago-based Deep Systems LLC.

In order to make the software switch, Ideanomics proposed to swap the county’s collateral with an offer $3 million in its common stock with a lock-up date to the end of the loan’s term. That plan comes with risk, however, should the company go bankrupt or if its share value falls considerably.

That was the risk highlighted by Hartley-Nagle, as Ideanomics’s value closed at 71 cents a share Friday, Nov. 15 – its lowest recorded closing price and about 75% off its 2019 high of $2.80 in July. Share values fell about 33% on Thursday alone after Ideanomics reported its first unprofitable quarter of the year. The company asserted that the financials reflected its changing focus from logistics management to fintech and electronic vehicle fleet management, and noted it reported profitable first and second quarters.

Should the county’s shares lose more value than its $3 million under the plan, it would be offered true-up stock, which the county would be required to hold for six months, to make up the difference. Those shares would once again be subject to the strength of Ideanomics though. Conversely, if the stock’s value holds, the county could cash out its principal loan value next year.

While acknowledging the risks of the stock option at the council’s Nov. 12 meeting, Councilman Cartier said it was the best option left for the county.

“This loan originated outside of the purview of council and without its approval,” he said. “Now we’re just trying to make the best of a bad situation.”

By Jacob Owens

DBT Associate Editor