SEC Probe Into Overstock $250 Million tZero ICO, SAFE vs SAFT

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Overstock-backed ICO, tZero has released an amended statement to the SEC regarding a previously confidential Private Placement Offering Memorandum, initially dated December 18, 2017 and supplemented on January 27, 2018. In the amended, supplemented and restated statement made on March 1, 2018, tZero outlines a number of changes to their ICO, presumably to maintain compliance with SEC requirements. As part of this addendum, the company has indicated withdrawal rights for investors, meaning that people and organizations that have agreed to invest in the project prior to this latest change may rescind their offers and receive refunds on their investments.

According to tZero (t0.com), the company may issue up to $250 million of tokens, and has raised just under half of that amount, with $114.6 million of tokens funded by approximately 1,100 purchasers. According to the addendum, “there can be no assurance that tZero will ever issue the tokens.” If the tokens are not issued, then purchasers who choose to stay in the program will not receive any refund or return of their investment. The document goes on to explain that if the tokens are issued, investors may never receive any benefit from holding them, and that the tokens may never be traded on an exchange.

This is not legal or financial advice, but from a layman’s perspective, this appears to be standard legal language. Security tokens by nature have no intrinsic value outside of their trading volume and the value that the market determines them to be worth. By contrast, utility tokens have a great deal of value in their functionality. By extension, we can expect that the functional side of the tZero project will have significant value as it comes to fruition, and if the tZero token follows the path of ICOs that have made their way to the top exchanges, we can expect a similar result. Meaning, that project developments and adoption on the utilitarian side will likely result in increased value on the trading side.

The filing disclosed that the SEC contacted Overstock in February and requested the voluntary sharing of documents related to the structure of the tZero ICO. Overstock has agreed to cooperate with the request, stating, “While 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.”

One other reason for tZero coming onto the radar of the SEC is the fact that it appears to be the first SAFE (Simple Agreement for Future Equity) offering, rather than a SAFT offering. Most ICOs are SAFT (Simple Agreement for Future Tokens). Under SAFE, an investor has a right to convert their investment into actual equity, triggered by an event such as an acquisition.

The reality of the situation is that Overstock is a high profile company, and a raise of over $100 million, on the way to $250 million, would certainly capture the attention of the SEC, whether there is any cause for concern or not. It is also possible that tZero was just one of numerous ICOs targeted by the SEC. According to a Wall Street Journal report, the SEC had sent subpoenas to numerous ICO operators. We can expect more inquiries such as this, as well as more regulations in the near future.

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