Chinese private equity firm GSR Capital has confirmed to Forbes that it signed a letter of intent to invest as much as $270 million in blockchain startup tZero, a subsidiary of e-commerce giant Overstock.com.
While the investment itself would be the largest ever single investment in a blockchain startup if it closes as scheduled later this year, what sets the deal apart is its role in an even bigger investment with a very unusual structure.
Beyond the $270 million investment for an 18% stake in the tZero platform for trading public and private securities issued on a blockchain, GSR Capital confirms it will spend up to $104.55 million for about 3.1 million shares of Overstock.com stock, or about a 10% in the U.S.-based company.
But in a twist than can only happen in crypto, GSR Capital also confirmed an additional investment of $30 million, as part of tZero’s initial coin offering, or ICO, bringing the total amount raised in that sale to $134 million.
Collectively, the total investment could reach as high as $404 million and would give tZero a valuation of $1.5 billion, if the deal closes on December 15, as planned.
“Think of it as a wedding cake,” said tZero executive chairman and CEO of Overstock.com, Patrick Byrne, describing the investment. To seal the unusual deal, independent letters of intent were signed between GSR and tZero and GSR and Overstock, according to Byrne, with three other participating investors in Asia and the Middle East expected to be announced soon.
While tZero is headquartered in Salt Lake City, Utah and licensed by the U.S. Securities and Exchange Commission, Byrne said the investment from the Beijing based firm with offices in Hong Kong and the U.S. was in part a result of difficulty raising capital closer to home.
“U.S. capital is, to be honest, they’re gun shy on this whole blockchain issue,” said Byrne, who founded tZero in 2015 to stop the practice of short selling stock that wasn’t actually borrowed. “And I’m sorry to say the US is not the leading country in the world.”
In part, Byrne says tZero plans to spend the money to help roll-out multiple tokenized securities exchanges around the world in parallel with its SEC-licensed U.S. operation. “Ultimately, the nature of these tokens, they can be cross-listed across exchanges in every jurisdiction,” said Byrne. “And that’s really the vision on a global scale.”
GSR Capital’s chairman and founder, Sonny Wu, confirmed the plans in a statement:
“We have a long-term view on how we want to scale this platform on a global basis.”
This is GSR Capital’s first public investment in blockchain, following on previous deals that largely focus on electric vehicles and clean energy. Ironically, the firm’s $1.5 billion valuation of tZero, makes the blockchain company that hasn’t even launched its flagship product, more valuable than its Overstock.com parnet, which is now value at $1.07 billion.
That’s a long way to come in just three years, when Byrne first launched tZero at a glitzy event in Nasdaq’s own New York City headquarters. At the event, Byrne said he wanted to undo what he called the “original sin” of Wall Street, or the separation of the trade of a stock and its settlement. By tokenizing securities using similar technology as bitcoin’s blockchain, tZero is designed to enable real-time, more transparent securities lending.
Towards that goal, in August 2015 tZero purchased the SpeedRoute broker-dealer services provider and Pro Securities and alternative trading system (ATS) for $30 million, and shortly thereafter successfully lobbied the U.S. Securities and Exchange Commission to extend its license to include blockchain-based securities, making it the first platform to do so. In total, Byrne estimates the company has spent as much as $30 million in legal fees to get the platform to its current state, and yet the only company to ever issue any shares on the platform is Overstock itself.
In part responsible for that slow progress is undoubtedly the ICO craze that kicked off in 2015, and has since generated nearly $20 billion in capital through largely unlicensed token issuances. But further competition arrived in June 2018, when cryptocurrency exchange Coinbase bought tZero’s former broker-dealer partner, Keystone Capital Corporation and announced plans for its own SEC-regulated crypto-securities. Then, later that same month Nasdaq announced its own margin and collateral proof-of-concept developed with ABN AMRO Clearing, EuroCCP and Euroclear.
To confront this changing landscape, tZero’s newly appointed CEO, Saum Noursalehi says the company plans to invest heavily in formally expanding its scope to include real estate offerings, the private issuance of blockchain-based security tokens and their trading on a secondary market. Along those line, tZero earlier this year bought a 24% stake in custodian and clearing firm StockCross Financial Services. Noursalehi says tZero is now on the market to buy a retail broker-dealer.
“Where security tokens are reaching is further upstream in the capital cycle into the private equity and venture territory,” said Noursalehi, who took over as CEO from Byrne in May. “We really foresee it disrupting private equity and venture before it disrupts the public market.”
In addition to the increased competition and the unusual investment structure, two specters hover in the periphery of GSR Capital’s potentially historic investment.
First, the GSR Capital deal is being made in lieu of an earlier deal announced between the two companies for $160 million worth of tokens at $10 each. While the total GSR investment announced today is larger, the total tokens sold in the public sale actually fell short of the $250 million tZero had originally set out to raise.
Adding to the sense of uncertainty, a $1 billion deal in which GSR Capital was expected to purchase Nissan Motor’s battery unit fell through earlier this year, after multiple delays. While the Japan-based auto giant claimed the private equity fund didn’t have the money for the deal, GSR Capital has yet to formally explain the change of plans. One possible reason for the lower-than-expected token sale is an ongoing SEC review of the offering, with which an Overstock spokesperson said the firm is cooperating.
But Byrne is a seasoned underdog, who has been called the “scourge of Wall Street,” and seems to thrive on such adversity. In explaining what he thinks the huge capital infusion means to tZero and its competitors around the world, he simply concluded:
“It means everyone else just lost.”