SEC Staff Offers Guidance on Disclosure Requirements for Crypto Asset Exchange-Traded Products

Section

Overview

Examples of Past Disclosures Include:

Cover Page

Issuers are required to include the initial offering price of the securities. Past disclosures also identify the initial authorized participant (the AP) or the initial purchaser.[3]

• Identifying the AP or initial purchaser

Prospectus Summary

Issuers should identify the most significant aspects of the offering in clear, plain language, and avoid merely restating the text of the prospectus.

• Clearly stating the Issuer’s investment objective and specifying the index or benchmark it references
• Describing the underlying crypto asset(s) and the associated network(s)
• Outlining the Issuer’s policies for holding and managing the underlying crypto assets, including any restrictions on their use or custody
• Outlining the Issuer’s policies regarding incidental rights associated with the underlying crypto assets, such as forks, airdrops, or similar events
• Disclosing that the amount of crypto assets per share will decrease over time as assets are sold to cover the Issuer’s fees and expenses

Risk Factors

Issuers should limit the content and scope of their disclosure to risks specific to their business and securities and avoid discussion of generally applicable risks.

• Highlighting risks related to the underlying crypto assets and market-wide volatility
• Addressing risks of fraud, manipulation, front-running, wash-trading, security failures, and operational problems involving crypto asset trading platforms
• Disclosing risks of malicious attacks on the associated network(s)
• Noting risks arising from concentrated ownership of the underlying crypto asset(s)
• Identifying competitive risks, including Crypto Asset ETPs with lower fees
• Disclosing risks arising from APs and other service providers providing services for competitors

Description of Business

Issuers should provide a narrative description of the material aspects of their business in clear, plain language and avoid technical or industry jargon. The Statement provides examples of past disclosures related to Issuers’ underlying crypto assets, applicable index or benchmark methodology, and net asset value (NAV) calculation.

Underlying Crypto Asset(s) and Associated Network(s)

• Providing material information about the underlying crypto asset(s) and associated network(s), discussion regarding the total supply and market capitalization, and a description of the spot and/or futures markets for the underlying crypto asset(s)

Index or Benchmark

• Identifying each constituent trading platform used to calculate the index or benchmark price, the criteria by which constituent trading platforms are selected, the composition and operation of any oversight committee, and whether the sponsor has discretion to select a different index or benchmark

NAV Calculation

• Describing the methodology used to calculate NAV, any differences between the methodology used and GAAP methodology to determine the fair value of crypto asset holdings, and any third-party valuation agreements

Third-Party Relationships

Issuers should disclose the extent to which their business is materially reliant on third parties. Because Crypto Asset ETPs generally rely on the services of a sponsor and third-party service providers, including crypto asset custodians, Issuers should disclose the fees payable to these third parties. Additionally, Issuers are required to file as exhibits any material contracts not made in the ordinary course of business, and any contracts made in the ordinary course of business on which the Issuer substantially depends.

Service Providers

• Identifying and describing the material terms of agreements with APs or counterparties contracted to assist in the purchase and sale of underlying crypto asset(s) or to provide financing for purchases of the underlying crypto asset(s)

Custody of Assets

• Identifying and describing the material terms of any custodial agreement, including discussion of the custodian’s storage policies and whether and to what extent the custodian carries insurance for any losses of the crypto asset(s)

Fees and Expenses

• Describing how the sponsor fee is calculated, any fee arrangements with third parties, and any arrangements for the sponsor fee or other fees to be paid using the Issuer’s underlying crypto asset holdings

Description of Securities

Issuers are required to provide a description of the securities being offered, including a description of any voting rights thereunder.

• Identifying any limitations or restrictions on voting rights
• Specifying whether the rights of holders may be modified other than by a vote of a majority or more of the shares outstanding
• Describing how shareholders will be notified of material amendments to or termination of the trust agreement

Plan of Distribution

Issuers should disclose the plan of distribution for securities offered and sold in the registered offering. Issuers conducting delayed or continuous offerings under Securities Act Rule 415 should include in a post-effective amendment to the registration statement any material information related to the plan of distribution not previously disclosed or any material change to the information previously disclosed.

• Describing the mechanics of the creation and redemption process among the Issuer, the APs, the custodian(s), and any other third-party service providers and whether and to what extent orders will be settled onchain or offchain
• Discussing how price volatility, trading volume, and price differentials across crypto asset trading platforms may impact the arbitrage mechanism
• Disclosing whether the sponsor may suspend creation and redemption orders and how shareholders will be notified

Directors, Executive Officers, and Significant Employees

Issuers should disclose the identity and experience of management, including executive officers, directors, and certain significant employees, as well as other persons who perform policy-making functions typically reserved for executive officers or directors. Crypto Asset ETPs typically have a sponsor whose executive officers and directors perform policy-making functions for the trust.

• Identifying whether and to what extent the sponsor’s executive officers and directors perform policy-making functions on behalf of the Issuer and, as applicable, disclosing the identity and experience of such individuals

Conflicts of Interest

Issuers should disclose certain transactions with related persons, including information about the review, approval, and ratification of such transactions. For Crypto Asset ETPs, conflicts of interest may arise from the relationships between the sponsor and its affiliates and the trust.

• Disclosing any sponsor or insider holdings of or exposures to the underlying crypto asset(s) that could create conflicts of interest
• Identifying whether the Issuer has a code of conduct or pre-clearance requirement for sponsor or insider transactions in the underlying crypto asset(s)
• Describing the sponsor’s experience with exchange-traded products and in the crypto asset markets specifically

Financial Statements

Where Issuers are organized as statutory trusts or limited partnerships and registering the offer and sale of beneficial units or limited partnership interests in multiple series, the statutory trust or limited partnership should be treated as the sole registrant. However, in addition to providing financial statements of the statutory trust or limited partnership, Issuers should also provide the separate financial statements of each individual series.

• Providing, as applicable, for the sole registrant and for each individual series: separate financial statements and audit reports; separate interim financial statements; and separate materiality assessments under Regulation S-K and Regulation S-X

Filing Fee Tables

Issuers registering an indeterminate number of exchange-traded vehicle securities under Securities Act Rules 456(d) and 456(u) should use EDGAR fee tag “2” and EDGAR security type “Exchange-Traded Vehicle Securities.” Failure to do so may prevent the Issuer from being able to file a form of prospectus under Securities Act Rule 424(i) and pay its registration fee after the end of any fiscal year during which it has publicly offered securities.

• EDGAR fee tag “2”
• EDGAR security type “Exchange-Traded Vehicle Securities”