The Securities and Exchange Commission’s Division of Corporate Finance has posted its opinion on exchange-traded products based on crypto assets. Crypto ETFs have emerged as a regulated path for retail investors to participate in the digital asset sector. Starting with Bitcoin ETFs, today these exchange-traded products are branching out to other digital assets.
The transition from the Biden Administration to the Trump Presidency, along with the exit of former SEC Chairman Gary Gensler to the innovation-friendly Chairman Paul Atkins, has helped to fuel a boom in crypto. With a more supportive SEC and regulatory clarity on the way, innovative digital asset firms are taking advantage of the change in policy.
The Division of Corporate Finance (CorpFin) has issued a statement to clarify certain issues. CorpFin notes that Crypto Asset ETPs are typically structured as Trusts that hold spot crypto or derivatives tied to crypto.
Issuers of crypto ETPs must register with the SEC and are thus subject to anti-fraud laws. CorpFin states that offerings that are not registered under US securities laws are the reason for this statement.
The statement was engendered by the SEC’s review of various crypto-based products. Their observations have led them to publicly share common issues they have seen during their reviews. It appears that some aspiring issuers are not adhering to existing requirements when registering an offering with the SEC.
The entire statement is available here, but the shortcomings viewed by the Division of Corporate Finance are pretty extensive.
These include:
- Issuers must provide a cover page of the prospectus related to the offering, including the offering price of the securities, the nature of any underwriting arrangements and the names of the underwriters. The information should include:
- An overview of the trust, including a clear description of the investment objective of the trust and the tracking index or benchmark it plans to reference;
- A description of the underlying crypto asset(s) and the associated network(s);
- The issuer’s policies regarding the management of the underlying crypto asset(s), including any limitations on how they are held or used;
- The issuer’s policies regarding any incidental rights associated with the underlying crypto assets(s), including forks, airdrops, or similar events; and
- The amount of underlying crypto assets per share held by the trust will decline over time as the crypto assets are sold to pay the trust’s fees and expenses.
- An extensive list of risk factors must also be included, similar to traditional registration statements
- The SEC requires issuers to provide a description of the material aspects of their business. Crypto asset ETPs generally must provide disclosure regarding the trust’s assets, including the characteristics of the underlying crypto assets, and describe the applicable index or benchmark methodology, as well as the methodology to calculate net asset value. Disclosure should be presented in clear, concise, and understandable language, without overly relying on technical terminology or jargon.
- The SEC requires disclosure of information material to an understanding of the issuer’s business,[16] which may include the extent to which the issuer’s business is materially reliant on third parties.
- The SEC requires a description of the issuer’s securities. In describing the securities offered by the trust, issuers are required to disclose the circumstances under which shareholders have voting rights.
- The SEC requires disclosure of the plan of distribution of securities offered and sold in a registered offering.
- The SEC requires disclosure of information relating to the identity and experience of those entrusted with the management of the issuer, including executive officers, directors, and certain significant employees
- The SEC requires disclosure of material information about transactions with related persons and policies and procedures related to the review, approval, or ratification of transactions with related persons.
- The SEC staff has taken the position that in addition to providing financial statements of the trust or partnership, issuers should provide separate financial statements of each individual series.
- Issuers electing to register the offering of an indeterminate number of exchange-traded vehicle securities should be aware that the EDGAR fee tag for “Type of payment” is “2” and the EDGAR “Security type” is “Exchange-Traded Vehicle Securities.” Failure to include these tags may prevent the issuer from being able to file a form of prospectus
The Division of Corporate Finance says they are available to answer any questions.