How Overstock used blockchain to distribute its digital dividend
Overstock, the Nasdaq-listed online retailer and technology company, made history last spring by offering a digital dividend, also known as an 'airdrop' in blockchain parlance, to its 40 mn shareholders. One digital share of the OSTKO blockchain-based security token was offered for every 10 shares owned of Overstock.
‘We wanted to give shareholders real value and advance the adoption of blockchain in capital markets,’ says Alexis Callahan, Overstock’s IR director.
A security token is a digital representation of ownership of an asset that exists on a blockchain technology platform. It can be created, transferred, bought and sold based on the computer code rules of its blockchain and must comply with securities laws in order to be issued to investors.
The OSTKO token represents a digital voting Series A-1 preferred share of Overstock, paying a 16-cent annual dividend, with the liquidation rights of common shares. Trading is available only through broker-dealer subscribers to tZero, a blockchain-based alternative trading system marketplace owned by Overstock’s Medici Ventures subsidiary. The token debuted at $10 in May 2020 and was trading at $73.50 by early February.
Blockchain technology infrastructure rails will supposedly power private and public financial markets in a faster, more efficient, secure and inclusive manner in the future. Settlement times will be down to seconds, and governance and regulation can be programed right into the code, resulting in a far more streamlined capital markets system. As fast as innovation is moving, however, this new world will still take some time to become reality.
The dividend transaction took place in the usual manner using Computershare, and a duplicate or courtesy copy of the OSTKO token also exists on the blockchain to accommodate future digitization of capital markets. ‘This is an intermediary step, in part to get regulators comfortable,’ says Michael Mougias, head of IR at tZero.
While security tokens are legal in the US, regulators have not yet put definitions or a clear regulatory framework in place. So far, more than 15 countries have these definitions in place including France, Japan, the UK, Russia and Brazil, and many others are progressing toward them, including China, Germany and the UAE.
The dividend required some pioneering work for the IR team. ‘When we announced the digital dividend, we received a lot of attention; response ranged from uncertainty about share price impact and skepticism regulators would approve it to genuine excitement,’ says Mougias. He spent a lot of his time educating people on cryptocurrencies, blockchain and Bitcoin – due to a common tendency to think of them as all the one thing.
‘The education and outreach component to communicate what we were trying to accomplish was massive,’ Callahan says. ‘It included current and prospective shareholders, regulators and institutional investors early in the process before the proxy vote. We did lots of industry-wide calls to answer questions. Later we had a high volume of retail investor calls when they noticed a new deposit in their account and wanted to understand what it was. Overall, once they understood, the response was positive.’
Increasing tZero revenue, assets and users was one of the goals of this project, and Mougias says they consider the dividend a success: volumes increased by more than 900 percent and dollar value traded was up tenfold over the course of 2020.
According to industry tracker Security Token Group, 2020 saw the aggregate market cap of security tokens on secondary markets increase 517 percent to $366 mn, and this is expected to grow to $2 bn by the end of this year. The firm’s principals predict 2021 is on pace to bring thousands of new security token offerings and more than 100 new listings on secondary markets around the world, a tenfold improvement on 2020.
Mougias sees a future when the use of security tokens becomes more prevalent for investor relations teams. Issuer IR needs may be akin to buy-side IR, with the focus on capital-raising and allowing for some creativity and customization, combined with traditional public company investor relations operating within a stricter regulatory environment.
He says many more private than public companies exist, and this is where digital securities will thrive. A security token issuance may be a substitute for Series C venture capital funding for companies that want liquidity, when a traditional IPO does not fit. This means a handful of private company investors will turn into thousands, and the need for investor relations professionals will grow.
