New Castle County officials are asking lawyers if money gifted by a DuPont executive’s estate for parks can be used to cover start-up costs on a private stock exchange based in Wilmington.
County Economic Development and Policy Director Marcus Henry said the county is exploring whether $3 million can be taken out of the county-controlled Garstin Trust Fund and transferred to the Delaware Board of Trade Holdings to help finance the initial phase of the proposed stock exchange for small- and medium-sized foreign and domestic stocks and securities.
The funding option, which is expected to be discussed with County Council members next week, would put the money in the new exchange instead of its current financial services company, Wilmington Trust. Under the plan, interest would still be used to fund parks.
“We are just tweaking how this fund is invested,” Henry said. “We made a determination that it would be the easiest funds we could use for this type of transaction.”
County Executive Tom Gordon, who has called the stock exchange a possible key to revitalizing Wilmington through well-paying jobs, said in a statement they are also exploring their options.
“We have a great team working hard with the Delaware Board of Trade. We’re still working on our presentation to County Council on Tuesday regarding the county’s potential investment in the stock exchange,” he said. “We think it would be a sound investment that would greatly enhance Delaware’s economy and the state’s future.”
The exchange, led by the former CEO of the Philadelphia Stock Exchange, John F. Wallace, was announced in July and was originally scheduled to open in November. Officials at the time said between 25 and 50 positions with an average salary of $136,000 were expected to be filled the first year. The workforce was projected to eventually grow to 100 to 125 workers averaging $86,000 in annual salaries.
The business model would use electronic transactions and serve as a market for businesses too small to trade on the New York Stock Exchange or Nasdaq. Officials have not disclosed where in Wilmington the business will operate.
This summer, the County Council approved a $15 million bond for start-up costs and to help the exchange meet financial requirements. Henry said exchange officials later approached them about contributing seed money directly from government coffers, in addition to funds generated by outside investors buying the bonds.
He said the Board of Trade wants the county money in pocket to help attract other investors to the exchange.
Brian McGlinchey, an economic development specialist with Wilmington law firm McCarter & English, declined to comment on behalf of the board, which the firm represents. Attempts to reach heirs of Garstin also were unsuccessful.
The Garstin money was willed to New Castle County government by late DuPont executive and former director of the American Red Cross Delaware chapter Geoffrey S. Garstin and wife Ann N. Garstin, who donated to various charitable endeavors.
The couple was described in the County Council resolution accepting the money in 2001 as “civic-minded citizens especially devoted to the parks of New Castle County.” The same resolution outlines “income from this endowment to be used for the care, maintenance, and upkeep of parks under New Castle County jurisdiction.”
The fund ended the last fiscal year with a balance of $4.03 million. Through stock investments with Wilmington Trust, the initial $3.8 million gift has generated $3.7 million, which has been used on maintenance of local parks.
Henry said legislation approving the fund refers to it as the Garstin Trust, but it is legally more of an investment portfolio. He said the county is looking into whether the money can be transferred for the stock exchange, as long as any interest is directed back for use in parks.
The proposal would see the Board of Trade borrow $3 million in county money for fewer than 10 years, he said. In the interim, the county would see fixed, annual returns on the investment, he said. Henry declined to say what percentage the returns would be or when the investment would be due back to the county while the deal is in legal review.
“Basically, we are just changing the investment portfolio from primarily equities and switching it to a debt instrument that is collateralized and secured with a set return,” Henry said.
But the deal may carry larger risk than the $15 million bond for the exchange that was approved by County Council in July. That agreement did not risk any county money or credit.
“There are risks (with the proposed investment). There is also the potential for great rewards if this is successful,” Henry said.
Henry said the county expects to receive a greater rate of return from investing in the Delaware Board of Trade over what has historically been received through Wilmington Trust’s management. He said proceeds would continue to be put toward county parks honoring the intent of the Garstin’s gift.
The move does not require County Council approval. County officials said the issue is being reviewed by lawyers.
Councilman Penrose Hollins said he would only get behind the plan if the county’s money is not at risk.
“The only way I could support that is if there is a guaranteed safeguard and there is a return greater than our investment,” Hollins said.
Councilman John Cartier questioned if it would be risky to take money invested in a diversified portfolio of stocks and sinking it into a startup.
“Is the proposal they have laid out concentrating the risk to the portfolio or is it reflecting good stewardship?” Cartier said during a council committee meeting discussing the issue.
A planning document compiled by the exchange and obtained by The News Journal through a Freedom of Information Act request projected the venture will operate at a loss for the first year, then build revenue to $50 million annually by year five.
The planning document said the enterprise was drawn to Delaware because it is the legal home to numerous companies. Sixty-four percent of Fortune 500 companies are headquartered in the state, attracted by low taxes, flexible business laws, and the Court of the Chancery, which deals specifically with business issues.
Their goal is “modernizing” the over-the-counter marketplace where buyers and sellers deal directly, the document said. Listed as advisers are Dick Grasso, former chairman and CEO of the New York Stock Exchange, and Joseph J. Grano, former chairman and CEO of UBS Capital Markets. Senior managers for the company include Nick Niehoff, a former Nasdaq executive and CEO of the Cincinnati Stock Exchange, and Dennis Toner, an aide to Joe Biden for more than three decades in the U.S. Senate and later as vice president.
More than 80 similar trading systems operate in the U.S., most in New York, according to the Securities and Exchange Commission.
Henry said the county is negotiating default provisions and the Board of Trade would have collateral backing the loan. He declined to elaborate on those default provisions or what collateral the board has offered.
“There is still some risk. There is a heck of a lot less risk in this than there is in stocks,” Henry said.
Johnathan Justice, an associate professor in the University of Delaware School of Public Policy & Administration, said government giving a direct loan to a startup company is unusual but not new.
“It is not something I consider routine or common, but it is not totally unheard of,” Justice said.
He also said there is a common debate in public policy about how government weighs potential economic benefit against risk to public finances.
“The rationale is somethings appear risky to investors so government has to jump in and the broader social benefits will justify the risk,” Justice said.
Councilwoman Janet Kilpatrick said there has not been enough discussion of the proposal to know whether the venture is worth investing in. When the initial bond agreement passed, one of leaders of the exchange briefly addressed council about the plans.
“People smarter than I am think it is a very good thing from an economic development standpoint and could bring corporations to Delaware. From that standpoint, it is a great idea. From the standpoint of should the county invest, I don’t have enough details to decide whether it would be a good idea or not,” she said.
Henry said the exchange has the potential to trigger a new wave of financial businesses in the state.
“This very significant business opportunity coming to Delaware. Potentially, it could open up a new marketplace to raise capital in the state of Delaware where historically it has been difficult,” Henry said. “It has a multiplier effect potential in drawing other ancillary businesses.”
Contact Xerxes Wilson at (302) 324-2787 or email@example.com. Follow @Ber_Xerxes on Twitter.