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."

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