SEC Raises Compliance Concerns Over Ethereum Solana ETFs

The U.S. Securities and Exchange Commission (SEC) has raised significant compliance concerns regarding proposed Ethereum and Solana exchange-traded funds (ETFs) that offer staking exposure. The SEC has flagged potential issues with the funds' registration statements, suggesting that their status as investment companies could be misleading. The concerns center around the use of a c-corporation (c-corp) structure, which is uncommon for ETFs and may conflict with Rule 6C-11, also known as the "ETF rule." This rule defines the permitted structures for ETFs. The SEC staff has indicated that they have unresolved questions about whether the proposed funds, if structured and operated as planned, meet the definition of an "investment company" under the Investment Company Act. The agency has also warned that disclosures about the funds' investment company status may be potentially misleading.

Despite the regulatory pushback, there is optimism among analysts. REX Financial's lawyers have expressed confidence that they can address the SEC's concerns and work out a solution. This situation highlights the aggressive efforts by issuers to be the first to market with innovative financial products. The SEC's caution comes even after it clarified earlier this year that crypto staking, in itself, does not constitute a securities transaction. However, the agency has delayed rulings on several staking and altcoin ETF applications, which is not unexpected given the complexity and novelty of these financial instruments.

Market participants are closely monitoring the progress of these altcoin and staking-based ETFs, viewing them as a potential gateway for fresh institutional capital to enter the crypto sector. The delays in rulings are seen as a normal part of the regulatory process, with almost all of these filings having final due dates in October. It is uncommon for ETF applications to be approved so early in the process, and the SEC's thorough review is a testament to the regulatory scrutiny these innovative financial products are undergoing.

The SEC's letter to counsel for ETF Opportunities Trust, which serves as the issuer for the proposed REX-Osprey ETH and SOL ETFs, underscores the regulatory body's concerns. The letter, sent on Friday, highlights unresolved questions about whether these ETFs, which include staking components, are structured to primarily invest in securities as required under the Investment Company Act of 1940. A fund qualifies as an investment company under U.S. law if it is primarily engaged in investing or trading securities, or if investment securities make up more than 40% of its total assets. The SEC also expressed concerns that the ETFs may have improperly filed under Form N-1A, which is reserved for funds that qualify as investment companies under federal law, and may also fall short of the conditions of Rule 6c-11, which allows ETFs to operate and list without seeking individual exemptive relief.

The SEC's letter follows staff guidance issued the previous day, which clarified that certain types of crypto staking, such as self-staking and custodial staking, do not involve the offer or sale of securities under federal law. This guidance, while not legally binding, marked a shift from earlier enforcement stances and drew a dissent from Commissioner Caroline Crenshaw, who said the move “continues to sow uncertainty around what the law is.” The SEC did not immediately respond to a request for comment.

Despite the ongoing discussions, the registration for the REX-Osprey ETH and SOL ETFs became effective on May 30 without resolving the issues. The funds have not launched and are not listed on any exchange. The SEC's concerns highlight the regulatory challenges faced by innovative financial products in the crypto sector, as issuers and regulators navigate the complexities of new financial instruments. The situation underscores the need for clear regulatory frameworks to ensure compliance and protect investors in the rapidly evolving world of digital assets.