New Bitcoin Product Launches

September 03, 2019

Apparently the folks behind one major bitcoin ETF effort have gotten tired of waiting for approval.

On Tuesday, Sept. 3, VanEck and SolidX announced that the VanEck SolidX Bitcoin Trust would begin issuing shares to a restricted set of institutional investors. Shares will start trading on Sept. 5.

Importantly, these shares will not be open for retail investors. That public ETF filing, which was first made with the Securities and Exchange Commission (SEC) in June 2018, remains in registration (read: "VanEck, SolidX Team Up On Bitcoin ETF"). Despite several rounds of back-and-forth with the SEC, it has not yet been approved for launch.

The shares would be available for other ETFs to purchase and trade, however, but only in a limited fashion.

Rule 144A Limits Who Can Buy & Sell

The shares in this offering are identical to those described in the June 2018 filing: On behalf of the fund, the trust holds physical bitcoin keys in cold storage, holdings that are insured in case of theft or loss via Amtrust at Lloyd's.

However, these shares only available to be purchased by qualified institutional buyers (QIBs), under the limitations imposed by Rule 144A of the 1933 Securities Act.

QIBs are defined as large investors such as banks, insurance companies, pensions, funds and RIAs that invest at least $100 million in assets. They're the only ones that may purchase these privately placed, "Rule 144A" securities.

Rule 144A securities are not required to be registered with the SEC, and their transactions are subject to looser reporting standards than those governing publicly traded securities. That's because the SEC assumes QIBs don't need the same level of transparency and protection as retail investors do before placing trades.

As such, Rule 144A is typically applied to individual bonds or notes, or for global depositary receipts—opaque securities geared for institutional audiences. To our knowledge, this is the first time Rule 144 has been applied in this way.

An ETF That Isn't Exchange-Traded

In many ways, the QIB shares will resemble those of other ETFs, particularly in that they'll employ the usual ETF creation/redemption mechanism, whereby authorized participants can make or destroy shares of the fund by submitting the underlying securities or ETF shares to the issuer.

However, these Rule 144A securities won't be allowed to trade on national securities exchanges, like Cboe Global Markets or the NYSE—not even if the public shares are later approved by the SEC. Instead, the Rule 144a shares will trade over-the-counter.

"The key is that this is not 'exchange-traded,'" said Dave Nadig, managing editor of ETF.com. "This product is not an ETF as we know it. It’s broker-traded, on demand, with negotiated OTC trading. This is the same way unlisted penny stocks and foreign junk bonds change hands. It’s very much a Wild West."

However, should the SEC approve the public ETF offering, creations will be halted for the Rule 144A shares. Investors will be allowed to either redeem or sell their private shares into the public market (read: "Should You Own A Bitcoin ETF?").

After 12 months, the private shares would convert automatically to the public offering—assuming the SEC approves the conversions, of course.

Motivated By Institutional Demand

According to the press release announcing the move, the issuers' motivation behind launching the 144A shares was to define, as much as to satisfy, institutional demand.

"Institutional demand for bitcoin exposure is uncertain, because institutional quality vehicles simply have not, to this point, been readily available," said Jan van Eck, CEO of VanEck, in the press release.

However, there is good indication that this institutional demand exists. Notably, Grayscale recently reported that ownership in its products, which include the Greyscale Bitcoin Trust (GBTC), is currently 84% institutional.

Notably, registered investment companies also fall under the classification of QIBs, meaning that would-be bitcoin mutual funds and ETFs could potentially hold shares of this product in order to offer bitcoin exposure to retail investors.

That could potentially skirt an SEC that has been extremely reluctant to approve a bitcoin exchange-traded product, and that has rejected or delayed every proposal that has come across its desk thus far.

ARK has used this exact method since 2015 to gain exposure to bitcoin via GBTC. However, the IRS imposes a strict 10% limit on how much of an ETF's gross profit may come from unqualified sources, such as bitcoin, so the company has had to periodically divest its bitcoin holdings (read: "ARK Funds Disrupting ETF Industry") .

Contact Lara Crigger at [email protected]

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