What’s Going on with OSTKO?

The Largest Digital Asset Security is About to be Cancelled

Background

Overstock.com is the indirect majority owner of TZero, a registered broker-dealer and alternative trading system (“ATS”) approved by FINRA and the SEC to provide a centralized marketplace for investors to trade digital asset securities.

Overstock.com issued Series A-1 Preferred Stock commonly known as OSTKO. Many early investors believed OSTKO to be a digital asset security version of OSTK with preferred voting rights and access to special dividends not available to shareholders of OSTK (the common shares). In essence, many shareholders believed OSTKO was designed to provide greater intrinsic value than the common shares OSTK but in the form of a blockchain based digital asset security that was designed to settle same-day (T+0).

OSTKO Trading History

OSTKO was the very first digital asset security to trade on TZero in May 2020. As of March 4, 2022, since inception of trading on TZero the daily average volume has been 3,057shares, and the largest single day trading volume was 44,809shares. To put that in perspective that average daily trading volume of OSTK over the past 12 months has been 2,559,377shares.

A key point to make here is that even though OSTKO was not suppose to be traded anywhere other than TZero, OSTKO in fact has been trading through Fidelity, TD Ameritrade and otherbroker-dealers. In Overstock.com’s proxy statement theCompany explicitly states OSTKO was not to be listed on any national securities exchange or other trading market of any kind and was to be sold only on the TZero ATS. Furthermore, in a May 2020 press release Overstock.com reminded other broker-dealers that they were violating the transfer restrictions of OSTKO and was considering taking legal action to stop sales of OSTKO.

To say that the liquidity in OSTKO on TZero has been disappointing is an understatement. It has been so bad in fact that In September 2020 the trading commissions for OSTKO were reduced from 1% to zero in efforts to incentivize liquidity. The lack of liquidity for OSTKO on TZero has resulted in OSTKO trading the majority of days over the past year at a 20-30 % discount to OSTK. After the recent announcement of the New York Stock Exchange parent company’s strategic investment in Tzero the discount has narrowed substantially. As of the March 4, 2022 OSTKO traded at only a 6.9% discount to OSTK.

The Problem

On March 4, 2022 Overstock.com released a proxy statementwherein in Proposal 3 seeks shareholder approval to convert each share of OSTKO into 0.90 of a shares of OSTK. Or to put another way, convert something of perceived greater value than $1 for 90 cents.

Even though Overstock’s Board of Directors believes this to be in the best interest of both OSTK and OSTKO shareholders, there are plenty of shareholders of both who are upset about this situation, especially given the facts that Overstock announced a $100 million share buyback in August 2021 and ended 2021 with $450 million in net cash on its balance sheet. Shareholders are asking for more explanation, especially given the fact that following the announcement of the ICE strategic investment in TZero the core issue of discount for lack of liquidity appeared to be correcting itself.

Looking Forward

With David Goone (ICE’s current Chief Strategy Officer) set to take the helm of TZero next month we should expect greater clarity as to what the cancellation of the largest digital asset security in the world means for TZero and how the entire digital asset security industry plans to solve the issues with liquidity.