An Interview With tZero CEO Saum Noursalehi

Based in Utah, the division of Overstock

OSTK
known as “tZero” has blockchain-style trading attracting the interest of the cryptocurrency community and other sectors. To find out more, I talked to CEO Saum Noursalehi:

John Navin: Saum, to begin with, what’s the meaning of the word “tZero?”

Saum Noursalehi: Current public financial markets run on a t+2 (trade date + two business days) to settle transactions. In the much more manual private markets it can take weeks or even months to settle a transaction.

The t0/tZERO name comes from the fact that on our platform private security transactions settle the same day, and in the near future, will settle in near real-time.

Navin: I read that tZero is “a FINRA member broker-dealer which operates an SEC-registered Alternative Trading System that facilitates the trading of digital securities.” Could you elaborate on that? What’s the meaning of “alternative trading system?”

 Noursalehi: An alternative trading system, or ATS, is similar to a stock exchange. The ATS is the platform that houses the assets, similar to how companies list on Nasdaq

NDAQ
or NYSE. In order to trade the assets on our ATS, broker-dealers need to subscribe, or plug-in to the ATS, allowing their customers to trade our digital securities. 

 We also own and operate a retail broker-dealer, tZERO Markets, which went live in October. tZERO Markets ‘subscribes’ to the ATS, allowing Markets users to trade the digital securities on the ATS. In addition, we work with third-party broker-dealers, such as D.A. Davidson, which are subscribed to the ATS. Seven broker-dealers in total are subscribed to the tZERO ATS.

 Navin: What’s the connection between blockchain and the trading of illiquid securities? 

Noursalehi: Private assets are more challenging to transact than public securities, due to the various trading restrictions that exist (e.g., accredited vs. non-accredited investors, lockup windows, etc).

There tends to be a lot of compliance work involved, fees are relatively high and as a result, liquidity is limited. Through blockchain technology, specifically smart contract technology, we are able to automate much, if not all, of the compliance work.

For example, securities that trade on our platform are ‘reg-aware’. Built into the software of the shares are all the rules and regulations of trading that specific asset. For example, can both accredited and non-accredited investors trade, which geographies are allowed to trade, if new investors are allowed into the cap table, or if they want to limit liquidity to just existing investors, etc.

 Navin: What features and benefits would you say make tZero different from competitors?

 Noursalehi: tZero offers companies and investors ongoing liquidity. Trading shares of private assets on our platform is similar to how you would trade shares of Apple

AAPL
and Tesla

TSLA
. We operate an order management system with associated tickers and bid/ask prices. 

 Virtually all of our competitors offer one-off liquidity through a bulletin-board approach. Essentially, they have a specific tranche of equity in a specific company available. Once that equity is sold, it is no longer available (unless they have multiple tranches of equity at the same company available).

Transactions on the platform are facilitated by a physical broker, come with large fees (5% – 10%, versus tZERO’s 1%), and can take a month-plus to close. Transacting on our competitors’ platform is similar to buying and selling real estate. 

 Navin: tZero started out as a part of Overstock. What’s the current relationship between your company and Overstock?

 Noursalehi: Overstock currently owns roughly 80% of tZERO (the balance is primarily owned by current and former employees). 

 Navin: tZero raised 134 million dollars in an initial coin offering in late 2017. The SEC in March, 2018 asked Overstock about certain issues involving that offering and the tokens. What was the resolution of the inquiry?

 Noursalehi We completed a security token offering (STO) and not an initial coin offering. There are several differences, however, the most notable is that STOs are regulated. They register with the SEC and are facilitated through certain exemptions (Reg A, Reg D, etc.). ICOs on the other hand, are unregulated. 

 The SEC engaged many companies that conducted STOs and ICOs around that time frame. We provided them with all of the requested information, and we have not heard back. Given how long ago this inquiry began, we are working with them to have this inquiry closed.

 Navin: Where are the security tokens involved?

Noursalehi: Not sure I understand what you mean? The tZERO ATS currently has three digital securities available for trading on the tZERO ATS: TZROP (tZERO’s preferred equity), OSTKO (Overstock’s Digital Voting Series A-1 Preferred Stock), and ASPD (Aspen Digital Inc.’s equity).

We are in discussions with approximately 200 prospective issuers, a number of which are in later-stage discussions. We expect to have more assets trading on the platform in the near future.

 Navin: Tynton Capital in October arranged a $300 million dollar offering to digitize and trade a tZero proposed “digital infrastructure fund.” What’s the status of that arrangement? 

 Noursalehi: We recently signed the tokenization agreement and expect that asset to trade sometime next year. Tynton Capital is in the process of raising capital for this fund.

 Navin: Could you describe the app for digital trading that tZero has developed? Is it now available? Besides cryptocurrencies, what else could be traded on the app?

Noursalehi: Our vision is to provide a one-stop-shop for trading all types of assets. Everything from private digital securities, to cryptocurrencies, to traditional NMS stocks like Apple. We launched tZERO Markets in late October this year. and currently, it is only available via our website.

We are working on a merged mobile app and web experience for trading digital assets and cryptocurrencies in the near future. Following this merge, we plan to add NMS securities to the trading experience.

 Navin: As an individual close to the crypto market, what are your thoughts on its future — for example, vis a vis other investments such as the dollar or gold?

 Noursalehi: You will see more and more institutional money (pension funds, mutual funds, etc.) enter the space, allocating an increasing portion of their assets under management to cryptocurrencies.

You’ve seen it already in some earlier movers, such as the Harvard Endowment fund, but I believe we will see a much bigger move in the next 12 to 18 months, which further legitimizes and validates the space.

I do not hold positions in these investments. No recommendations are made one way or the other.  If you’re an investor, you’d want to look much deeper into each of these situations. You can lose money trading or investing in stocks and other instruments. Always do your own independent research, due diligence and seek professional advice from a licensed investment advisor.