SEC Raises Legal Concerns Over Proposed Solana and Ethereum ETFs
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Exchange-traded funds (ETFs) linked to Solana (SOL) and Ethereum (ETH), introduced by REX Shares and Osprey Funds, have encountered a major regulatory problem. On May 30, the U.S. Securities and Exchange Commission (SEC) identified legal concerns in a filing that questioned whether the proposed funds meet the legal definition of an “investment company.”
To this end, the SEC has flagged seven ETFs, including the REX-Osprey ETH and SOL funds, and warned that the current structure could mislead investors as it fails to follow federal regulations. As of June 2, no exchange has listed the funds.
SEC Challenges Fund Classification and Filing Compliance
At the core of the SEC’s concern is whether the proposed ETFs qualify as investment companies under the Investment Company Act of 1940. To meet this standard, a fund must primarily hold securities or have at least 40% of its assets in securities. According to the SEC, the REX-Osprey filings may not satisfy this requirement, making their registration via Form N-1A potentially improper.
As it stands, the SEC cited issues with compliance under Rule 6c-11, which governs ETF listing standards. However, the agency has noted that the funds’ current filings do not meet these rules and requested that the issuers submit updated documentation before further action can be taken.
Unconventional Fund Structures Draw Attention
One of the many reasons for the regulatory pushback involves the funds’ unconventional design. However, Bloomberg analyst James Seyffart noted that the ETFs use complex workarounds, such as operating as C corporations, a structure rarely used by ETFs. To this end, this could be an attempt to avoid legal questions about whether ETH and SOL are securities.
However, the funds rely on Cayman Islands subsidiaries to bypass certain crypto custody regulations. These methods allowed the ETFs to take effect without the usual SEC approval process. At this point, given the SEC’s response and the lack of exchange listings, their future remains uncertain.
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