Shares of spike after online retailer says its entering digital coin trading business

Key Points
  • shares climbed 23.5 percent after news its subsidiary tZero is entering a joint venture to trade digital coins launched in initial coin offerings.
  • The venture will trade the coins on an alternative trading system, which Overstock has a license for through an acquisition.
  • Analysts generally saw the news as good for the development of initial coin offerings, although the SEC and FINRA had no comment to CNBC.
An distribution center
Ken James | Bloomberg | Getty Images

Shares of retailer surged Wednesday after news its subsidiary is joining the business of trading digital coins.

Shares of the online retailer of home goods and clothing shot up 23.5 percent to their highest since January 2014 and are up 65 percent for the year.

Overstock's majority-owned subsidiary tZero, along with two financial services companies RenGen and Argon, announced Wednesday they are entering a joint venture to launch an alternative trading system for trading digital coins issued in initial coin offerings, or ICOs.

The system is "in compliance with SEC and FINRA regulations," the release said. Overstock has a license for an alternative trading system through its acquisition of Pro Securities two years ago.

The U.S. Securities and Exchange Commission and FINRA had no comment to CNBC.

"Overstock has been very methodical on getting the necessary regulators on board," said Tom Forte, analyst at DA Davidson, which has a buy rating on the stock. "Their process has been thorough. That said, this is still a very early stage financial services market."

Overstock five-year performance

Source: FactSet

Patrick Byrne, CEO of Overstock, told CNBC the trading platform should be ready in roughly the next two months. "We can start moving these ICOs in and provide good, regulated trading," he said.

"Argon gives us the deal flow," Byrne said, while RenGen will be the market maker, providing a bid and an offer for trades.

Initial coin offerings have raised the equivalent of more than $2 billion in the last two years, according to CoinDesk, with the bulk of the fundraising occurring this year. The fundraisers, or token sales, are often seen as a more efficient way to raise capital rather than going through venture capitalists or other more traditional methods.

But the lack of regulation has typically prevented U.S. investors from officially participating in the initial coin offerings. In late July, the SEC signaled that securities laws might apply to the digital coins and issued an investor bulletin that warned of the risks of investing in the coin offerings.

Analysts generally saw the Overstock subsidiary's joint venture news as positive for the development of initial coin offerings.

"I think this is exactly the kind of platform for facilitating security token trading that the SEC wants to see developed," said Ryan Schoen, senior financial services policy analyst at Washington Analysis."This move clearly increases pressure on existing exchanges that traffic in tokens that could be deemed securities to come into compliance with SEC and FINRA regulations."

Wednesday's news is just the latest in Overstock's venture into digital currencies.

In 2014, the company became the first major retailer to accept digital currency bitcoin as payment. Overstock's Medici Ventures division, which has majority ownership of tZERO, also launched in 2014 to oversee the retailer's work in blockchain technologies.

Overstock reported a pre-tax loss of $3.3 million from its Medici unit in the second quarter, $400,000 more than the same quarter last year.