The U.S. Securities and Exchange Commission (SEC) has issued a cautionary statement regarding two proposed exchange-traded funds (ETFs) linked to Ethereum and Solana.
In a letter addressed to the counsel of ETF Opportunities Trust, the SEC expressed unresolved questions about whether these ETFs.
These questions include considering if the staking components meet the legal criteria of an “investment company” under the Investment Company Act of 1940.
The designation is crucial because it determines how such funds must register and operate under U.S. securities laws.
The SEC’s concerns highlight regulatory scrutiny on the rapidly evolving crypto ETF landscape and raise questions about the future eligibility of these funds for listing on exchanges.
Background on ETF Opportunities Trust and Proposed Crypto ETFs
ETF Opportunities Trust, based in Delaware, serves as the issuer for multiple ETFs, including those managed by REX Shares and Osprey Funds.
The two proposed ETFs, known as REX-Osprey ETH and SOL ETFs, were filed for registration on January 21.
Alongside these, the filing included applications for other crypto-linked products, such as ETFs tracking the TRUMP meme coin, BONK, Dogecoin, Bitcoin, and XRP.
Although the registration statement for the Ethereum and Solana ETFs became effective on May 30, neither fund has launched or been listed on any exchange.
The SEC’s letter underscores ongoing regulatory hurdles despite the initial approval of the registration statements.
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Regulatory Issues Focus on Investment Company Act Compliance and Filing Forms
Central to the SEC’s concerns is whether the proposed ETFs are structured primarily to invest in securities, which is a key requirement for classification as an investment company under the Investment Company Act.
The law stipulates that a fund must have more than 40% of its assets invested in securities to qualify.
The SEC also noted potential issues with the ETFs’ filing under Form N-1A, a form reserved for investment companies, suggesting that the funds may not fully comply with this filing requirement.
Additionally, the ETFs might not meet conditions outlined in Rule 6c-11, which provides an exemption allowing ETFs to operate and list without seeking individual exemptive relief.
These unresolved compliance questions could delay or prevent the ETFs from launching.
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SEC’s Broader Context and Industry Implications
The SEC’s concerns come amid broader regulatory developments, including recent guidance clarifying that certain types of crypto staking.
These crypto staking types include self-staking and custodial staking, do not constitute the offer or sale of securities under federal law.
The guidance represents a shift from previous enforcement approaches but has sparked debate, including a dissent from Commissioner Caroline Crenshaw, who criticized the guidance for creating legal uncertainty.
The SEC’s letter indicates that unresolved issues around the investment company status of crypto ETFs may lead to further regulatory actions to ensure compliance with securities laws.
The ongoing regulatory scrutiny highlights the challenges faced by crypto funds seeking to integrate innovative features like staking while navigating existing legal frameworks.