tZERO secures US$5M equity investment

Not long after completing his philosophy Ph.D. in 1995 and entering the business world, Patrick Byrne was tapped by mentor Warren Buffett in 1997 to become the President and CEO of Berkshire Hathaway company Fechheimer Brothers, Inc.

In 1999, Byrne invested money in D2-Discounts Direct, taking a 60 percent equity stake, and then took over as CEO, renaming the company to Overstock.com. Byrne has grown Overstock to 1500 employees and a market cap of over US$350M.

Overstock became the first large retailer to accept Bitcoin, in January of 2014. While some speculated that the move was merely a publicity stunt, Byrne’s keynote address at the Bitcoin2014 conference in Amsterdam revealed that Bitcoin resonated deeply with his philosophical outlook. This was also the first mention of Medici.

Project Medici intends to create a blockchain-based securities exchange, and Byrne had stated that he was interested in listing Overstock securities on a blockchain-based exchange. The project was officially announced on October 6th at the Inside Bitcoins Las Vegas conference.

The long term goal was to compete with the Depository Trust and Clearing Corporation (DTCC). Through its subsidiaries, the provides clearing, settlement and information services for equities and other securities traded on US financial markets. One of its key roles is to reduce counterparty risk by guaranteeing obligations will be fulfilled. It centralizes, automates, and standardizes the clearing and settlement processes.

The DTCC now clears more than 1.7 quadrillion dollars in transactions every year, pulling in over a billion dollars of revenue. Every two days it processes the equivalent of the US annual gross domestic product.

Byrne is attempting to tackle one of the issues with this legacy system, settlement time. In a "naked" short sale, the seller does not borrow or arrange to borrow the securities in time to make delivery to the buyer within the standard three-day settlement period. As a result, the seller fails to deliver securities to the buyer when delivery is due; this is known as a "failure to deliver" or "fail."

It has been argued that naked short selling is used as a tool by unscrupulous hedge funds to attack vulnerable small and mid-cap companies and profit from a decline in the target company’s share price or even its bankruptcy. According to a report by Gary Matsumoto, in 2006, about $6B worth of trades every day would result in a failure to deliver.

tZERO is part of the Medici Ventures business network. The platform name is derived from the three-day settlement period at the core of the traditional financial market. Equity transactions generally settle three days after trade date, or T+3. By contrast, trades executed through tZERO, settle on trade date, or T+0.

In 2016, tZERO issued a registered security using its blockchain-based platform. The shares were Overstock, and touted as the first in history able to trade on an alternative trading system (ATS) utilizing distributed ledger technology, and completed one of Byrnes major goals.

Having achieved what Byrne has termed the “Chuck Yeager Moment,” in which a formidable barrier is proven to be breakable, t0 went on to build upon and expand its suite of offerings to include solutions for streamlining back-office operations, securities lending and exchange of other asset classes such as ETFs, mutual funds and pre-IPO company shares.

In 2018 tZERO raised approximately USD$134M from over 1000 global investors in a sale of tZERO security tokens, which were to trade on the tZERO platform.

In August 2018, GSR Capital (otherwise known as GoldenSand Capital) confirmed that they had signed a letter of intent to invest as much as US$270M in tZERO, alongside buying US$30M worth of tZERO tokens and buying US$104.55M worth of Overstock.com shares. This would have made the collective investment by GSR Capital as high as US$404M.

This deal was supposed to close by February 2019, but that did not occur. In a letter to shareholders, the then President of tZERO and CEO of Overstock.com, Patrick Bryne, stated that “GSR Capital did not close the GSR Stock purchase transaction” and, “GSR signed a binding agreement to buy $30 million of tZERO security tokens by May 2019.”

In March 2019 the amount being negotiated was cut by 75%, to US$100M, and the deadline moved to mid-April. Makara Capital of Singapore, touted to be a key partner of GSR, was brought in to co-lead a US$100M investment for tZERO common stock with GSR.

Both of these deals gave tZERO a valuation of $1.5B, significantly higher than its parent company Overstock.com which at that point had a market cap of $1B. Alas, tZERO was unable to close this deal either.

Finally, in May 2019, it was announced that GSR Capital has closed a US$5M investment in tZERO. Instead of purchasing US$30M of tZERO tokens as previously agreed, the private equity fund only invested US$5M in tZERO equity.

This transaction valued tZERO at US$1B, US$500M less than the previously agreed valuation. In reference to this Patrick Byrne said, “We’re letting them out of all previous contracts.” According to Overstock, the US$5M investment was “a decent offer.” and consists of $1M in U.S. dollars, $1M worth of Chinese Renminbi, and $3M worth of “certain securities.” It has taken close to a year for this deal to close.

Now that the deal is done, the approaching date for Overstocks Digital Voting Series A-1 Preferred Stock (OSTKO) dividends may be of interest to investors. In a press release published on the 20th of April, it was announced that all Overstock shareholders as of April 27, 2020, will receive the dividend, which will be distributed on the t0 platform.

At the same time, tZEROs broker-dealer subsidiary, Speedroute, which conducts equity order routing and market structure, has reported the strongest month in the history of the company. Speedroute reported a 218% increase in revenue compared to the prior period and the system had 100% uptime.

SpeedRoute President Alex Vlastakis stated, “With the markets in flux, now is the time where the robustness of technology becomes a true competitive differentiator. Our top priority continues to be to provide broker-dealers with the ability to navigate the U.S. equity markets, both intelligently and cost-effectively. We are thankful for the confidence that our clients have placed in us and for our SpeedRoute team in ensuring that our products and services remain fully functional.”