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Thoughts On The Last 24 Hours Of Overstock

Is it a SAFE or a SAFT?

For months now we've been told that Tzero would be launching an ICO to sell tokens to accredited investors via a SAFT vehicle (Simple Agreement for Future Token).  The SAFT agreement is a modified version of a SAFE (Simple Agreement for Future Equity) that is commonly used in the venture capital world.

Over the weekend, the much-anticipated SAFTLaunch.com countdown timer was pushed back by 2 hours on Monday.  In addition, Patrick Byrne was on an interview on Yahoo News and told viewers they would be able to access the Offering Memorandum "when it goes live in a couple of hours".  Then when it finally hit zero, nothing happened.  After markets closed, the company issued a press release announcing that they are running their "ICO" by issuing SAFE's (instead of SAFT's), and that the ICO process would be split into two segments, the first 30 days being open to specific accredited investors (read: hedge funds and institutions), and then the second segment being the accredited public.

On Tuesday morning, the company spoke with Coindesk to update them on the fundraise process.

Here's my opinion on what transpired:

  1. The two hour delay is very strange.  My best guess is they were waiting for final sign-off from the SEC (or lawyers, or some sort of authority) to go ahead with the ICO and they wouldn't get it before the original timeline, so they had to push it back.
  2. At the time of the interview, Patrick's best information to go off of was that the deal would go live, as planned, so he promoted it during the interview.  Note: He explicitly says the documents will be available online in a couple of hours, he says that the issuance is being done based on a SAFT agreement (not SAFE), and he says that the tokens can be used on the future exchange (all three of these end up being wrong which means he was either uninformed, being deceptive, or they did a 180 after the fact.  I prefer to believe the latter is true).
  3. The ruling on allowing the ICO to go forward came back negatively, so the company had to scramble and completely change their ICO plans.
  4. Instead of announcing that the ICO would be cancelled, they pivoted the ICO from being a SAFT to a SAFE because a SAFE is a well accepted fundraising vehicle that doesn't need special approvals.

Why is this relevant?

First of all, it's important to understand this is not an ICO, it's just a preferred equity issuance (with some unique features that retain the spirit of the initial ICO plan*).  From a valuation perspective (and how it affects OSTK), whether they issued coins or preferred shares doesn't change much.  In both cases, the terms at which the coins (or shares) are being issued is very important (and we/I don't know them yet).  For example, if the preferred shares (or coins) entitle the holders to 99% of Tzero's future revenues, that's really bad for OSTK common shareholders.  The preferred will also possibly also have some sort of equity/conversion rights which is very important.

The most relevant piece here is that the ICO was not approved.  My original thesis was that Tzero's ICO would pave the way to a plethora of other US based companies issuing SEC regulated tokens, and those tokens would need somewhere to trade.  That would create a very natural business line for the Tzero exchange (which is the only SEC regulated exchange that can handle crypto token trading). My valuation on the Tzero exchange has been reduced as a result of this development.

This morning I closed my long position of shares and calls for the following reasons:

  1. My $80 price target was hit, and the fundamental picture today is slightly worse than what it was when I set the price target.
  2. There is too much information asymmetry around the Tzero SAFE.  I want/need to know the terms of the SAFE before I feel comfortable re-evaluating the value of OSTK.
  3. The ICO messiness and scrambling was unsettling.  I know they're up against major regulatory roadblocks and commend them for their efforts, just not sure I have the stomach (or risk budget at these valuation levels) for it.
  4. I find it hard to believe the OSTK ecommerce sale is going well.  It has been ~3 months now, if there was significant demand it would have shown up already.  If you find a buyer after 6 months of searching, there is a very small probability that you can extract a premium valuation from them.

I'm still planning to closely follow the company's process and will probably get back in (higher or lower) depending on how the story develops. Best of luck to the longs.

Footnote

* They explicitly do not include the concept of using the preferred shares (tokens) as payment on the system, I believe this is because from a regulatory standpoint, you can't use preferred shares as barter/tender.  This means the "token economy" still has a ways to go before getting approved.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.