Overstock’s tZero Facing SEC Review ($250 Million ICO in February)
It was familiar news in the crypto community that the Securities Exchange Commission (SEC) was calling cryptocurrency ICOs, resulting in the ICO banning U.S. investors, or shutting the ICO down entirely. However, not each ICO buckled to the SEC pressure. Overstock.com is hosting the tZero ICO and has raised over $250 million thus far. Instead of closing its doors to U.S. investors and returning funds they have faced the scrutiny of the SEC and are being reviewed.
An SEC Filing
Thursday, March 1, 2018, was not the most pleasant day for those at tZero and Overstock. A filing with the SEC revealed they were “reviewing” the tZero ICO hosted by Overstock. tZero intends to be an alternative trading system that has already surpassed $250 million in funding. The company behind tZero is publicly traded Overstock.com. The document released highlighted how the SEC was reviewing the ICO sale structure and advisory board/team. More surprisingly was that Overstock confirmed they had been aware of this review since February.
The SEC filing states that currently, Overstock is not in any legal trouble or aware of any legal proceedings that may have an “adverse impact,” on their share price. However, what is blatantly clear is the U.S. is choosing the avenue of regulation and one of the largest ICOs in history at $250 million, requires some oversight. The documents do not point to the SEC shutting the tZero ICO down or interfering; it solely states they are “reviewing” it. This may frighten some investors, but the SEC should be reviewing every ICO that can take U.S. investors, not just the ones that are into the hundreds of millions of dollars.
What Does the SEC Have to Say?
The SEC has taken a stance of regulating the crypto space while trying to reduce the scams and fraud that currently take place there. “In February 2018, the Division of Enforcement of the SEC informed the Company that it is conducting an investigation in the matter re: Overstock.com, Inc. and requested that the company voluntarily provide certain documents related to the Offering and Tokens in connection with its investigation.” It seems the “review” may be more of an investigation according to the SEC. Currently, there is no cause for alarm as the SEC will be “reviewing” or “investigating” basically every ICO and is clearly starting with some of the largest occurring. Other major ICOs like Telegram similarly will be contacted and have information regarding their sale requested.
The agency has clearly decided to conduct sweeping probes of companies and firms that have attempted or currently are raising money through the ICO mechanism. For each ICO they have to determine individually if it is legally occurring in the U.S. which is a daunting task considering many laws are only coming into existence this year. “The SEC is trying to determine whether there have been any violations of the federal securities laws, the investigation does not mean that the SEC has concluded that anyone has violated the law. Also, the investigation does not mean that the SEC has a negative opinion of any person, entity, or security.” It seems they are using fairly “boilerplate” language to say that they do not wish to impact the Overstock.com share value negatively but they are reviewing the tZero ICO.
tZero and Overstock Respond
There is only one response that would have been acceptable, and tZero nailed it. The president of tZero is Joseph Cammarata and a blockchain advocate for many years. He stated that “We are actually happy that the SEC is scrutinizing the space.” This is a response that should be expected from the President of a legally operating ICO. Given Overstock.com is hosting the tZero ICO it is likely they are the “safest” of the ICO options on the market. Initial coin offers (ICOs) have long been the Wild West of the cryptocurrency space. Cryptocurrencies are volatile, ICOs take this to an entirely new level.
Overstock confirmed the ICO pre-sale was completed when they surpassed the $100 million mark. Following this amount, subsequent fundraising rounds of the ICO took place. The first part of the ICO was held by SaftLaunch and the second portion is being managed by StartEngine. The CEO’s comment did not give much detail for why this change occurred. “SaftLaunch was utilized for the presale. We’re now augmenting the subsequent sale to bring on StartEngine.” Speculation is anyone’s best guess to why they switched, but it is likely to do with regulatory hurdles.
Cammarata quickly shut down this idea. He alleged tZero’s decision to switch platforms mid-ICO stems from Saftlaunch’s complicated and time-consuming anti-money laundering (AML) and know your customer (KYC) process which resulted in slow processing as the ICO gained more interest. However, both AML and KYC processes are required under U.S. law so it should be assumed that although they switched platforms, their AML and KYC remain requirements. SaftLaunch actually confirmed there were delays on their end in the onboarding and approval process claiming, “Because of strong demand, there was an initial backlog in managing inquiries from interested investors, and there is no backlog now, and the offering remains open.” This SaftLaunch comment, in essence, says, “Yes, we caused a backlog, but it is fixed!”
How Much Has tZero Actually Raised?
The switching of ICO token platforms mid-ICO is peculiar, to say the least. This has resulted in the skeptics and FUDsters coming out in full force. A major question that has been raised is whether or not tZero actually raised the $100 million they claim during their Pre-ICO. The most recent SEC filing places the number closer to $49 million with many speculating it could be closer to $20 million. Given how much the value of cryptocurrencies have fluctuated in the last two months, even if they did raise $100 million, it may be worth $40 million or less currently. Bitcoin did lose over 60 percent of its value in 60 days. Cammarata dispelled these accusations quickly suggesting that the majority (70 percent) of their ICO investors came from family offices and hedge funds while the remaining 30 percent is made up by non-institutional investors.
The largest claim currently is that tZero is having Overstock buy into their ICO greatly inflating the total amount raised. Cammarata quickly discounted this claim stating, “One thing that I’d like to make clear is we’re over $100 million, and Overstock has not put anything in the ICO at this time. They have not bought any tokens or made any investments at this time.” It is surprising that so many individuals would be annoyed if Overstock fiscally supported their ICO. It seems they should be financially committed to its success by being an early investor instead of being pushed away from investing in their own project/token.
Conclusion: The SEC is Doing Its Job
Overstock and tZero have yet to receive any subpoenas or legal documents alleging any wrongdoing. This is a very positive stance the SEC is taking with tZero and Overstock thus far. The SEC has already demonstrated their willingness to call out “Scam ICOs” by contacting many last week. The ICOs that are standing up to the SEC pressure are likely the ones that deserve the most recognition as they are attempting to do all aspects legally. A publicly traded company, Overstock.com (OSTK), is the least likely culprit of hosting a fraudulent ICO.
However, the market reacted accordingly with OSTK’s share price down over four percent on March 1’s trading session. Even with the SEC clarifying this is a standard review OSTK still took a tumble. It is a very positive sign to see the SEC becoming active in regulating ICOs as many have taken investor’s money and disappeared. The future of the crypto world is further regulation to facilitate institutional money coming into the space while removing scams. The SEC is one of the main organizations combating fraud while supporting crypto overall! Look for them to continue to regulate positively but impacting the price in the short term of anything that comes under their direct scrutiny.
To read the King’s prior articles, to find out which ICOs he currently recommends, or to get in contact directly with the King, you can on Twitter (@JbtheCryptoKing) or Reddit (ICO updates and Daily Reports).