From the Wild West to SEC Regulation: Overstock.com’s Proposed Digital Securities and the Lessons of Bitcoin
On April 24, Overstock.com filed a Form S-3 with SEC for securities offerings up to $500,000,000. This filing is the first to propose offering digital securities, which the prospectus defines as “uncertificated securities, the ownership and transfer of which are recorded on a cryptographically-secured distributed ledger system using technology similar to (or the same as) the distributed ledger technology used for trading digital currencies.” In short, Overstock.com proposes using a Bitcoin-like technology to distribute and trade in these securities.
Bitcoin, of course, is a six-year-old cryptocurrency, or digital currency, that gained traction in 2013, peaking at a value of $1200 in November 2013. Bitcoin’s anonymity fostered its use to purchase illegal narcotics, and the service’s reputation further suffered when Mt. Gox, a Bitcoin exchange, filed for bankruptcy protection in February 2014. However, the currency has survived and is currently valued at approximately $236. Bitcoin is a highly volatile currency; in 2015, the price has ranged from a high of $297 to a low of $178.
Overstock.com showed an early interest in Bitcoin and was the first major retailer to accept payment in Bitcoin, beginning in September 2014. Overstock CEO Patrick Byrne is an outspoken proponent of Bitcoin – as well as a harsh critic of Wall Street. It is no great surprise that Overstock is the first company to offer digital securities. Byrne has been highly critical of brokers and hedge funds profiting from “naked” short-selling of shares, culminating in a lawsuit by Overstock against several Wall Street firms. By offering digital securities, it is reasonable to assume that Byrne and Overstock seek to remove the control of Wall Street and the government from securities trading.
As evidenced from the SEC filing, Overstock has realized some SEC involvement is required to issue these digital securities. It is likely that Overstock will also seek to register an Alternative Trading System under Regulation ATS, SEC Release No. 34-40760. SEC approval of the S-3 and the ATS are likely necessary prerequisites to this offering.
Leaving aside government regulation, however, it will be interesting to see whether Overstock and Byrne can effectively prohibit or limit Wall Street involvement in these securities. Bitcoin, for example, was once an unregulated, anonymous currency but has recently piqued the interests of Wall Street. Goldman Sachs recently led a $50 million funding round for Circle, a Bitcoin wallet startup. Wall Street has also expressed serious interest in Bitcoin’s “blockchain” technology, which is a transparent public ledger that provides near-immediate verification and confirmation of transactions, rather than the two- to three-day wait for the settlement of traditional credit card transactions.
As noted above, there are several regulatory hoops Overstock must jump through prior to issuing its digital securities. If these cryptosecurities gain traction with investors, we will expect to see greater involvement from both regulators and Wall Street.