The U.S. Securities and Exchange Commission (SEC) has expressed significant regulatory concerns surrounding the proposed Solana (SOL) and Ethereum (ETH) exchange-traded funds (ETFs) by REX Shares and Osprey Funds. In a formal filing dated May 30, the SEC flagged unresolved legal questions that could stall the launch of these innovative crypto-focused ETFs.

SEC’s Concerns About Solana and Ethereum ETFs

The SEC has identified key issues with seven ETFs, including the REX-Osprey ETH ETF and REX-Osprey SOL ETF. The agency specifically questioned whether these funds meet the definition of “investment companies” under the Investment Company Act of 1940. To qualify, a fund must primarily invest or trade in securities or have securities constitute at least 40% of its total assets.

The SEC indicated that the Form N-1A filing submitted by REX Shares and Osprey Funds might be improper if the funds fail to meet this criterion. Such a misclassification could result in filings that are misleading to potential investors.

Compliance Challenges

Another concern raised by the SEC involves compliance with Rule 6c-11, which governs exchange listing standards for ETFs. This rule sets specific requirements for transparency, operations, and reporting. The SEC has requested updated filings from REX Shares and Osprey Funds to address these compliance gaps before any approval can move forward.

Legal Complexities Surrounding REX-Osprey Ethereum and Solana ETFs

The proposed ETFs utilize an unconventional structure, raising additional legal questions. According to Bloomberg analyst James Seyffart, these funds employ creative strategies to bypass standard regulatory hurdles. For instance, they are structured as C corporations—a relatively rare setup for ETFs. This approach may allow them to sidestep whether Ethereum (ETH) and Solana (SOL) are classified as securities under the Investment Company Act.

Furthermore, the funds rely on Cayman Islands subsidiaries to avoid regulations surrounding cryptocurrency custodians. These regulatory maneuvers enabled the ETFs to become effective on May 30 without requiring SEC approval through the traditional 19b-4 process.

Current Status and Market Implications

Despite going into effect, the funds have yet to be listed on any exchange as of June 2. This delay underscores the uncertainty surrounding these ETFs and the broader regulatory landscape for cryptocurrency investments.

Key Takeaways for Investors

For those interested in cryptocurrency ETFs, it is crucial to monitor regulatory developments closely. Here are a few tips:

  • Understand Legal Structures: Before investing, research the fund’s legal structure and ensure it complies with applicable regulations.
  • Evaluate Risk: Cryptocurrency ETFs can carry unique risks due to regulatory uncertainties. Assess your risk tolerance before making decisions.
  • Stay Informed: Follow updates from the SEC and other regulatory bodies to stay ahead of changes that could impact your investments.

As the cryptocurrency market continues to evolve, regulatory scrutiny will remain a critical factor shaping the future of ETFs and other investment vehicles. Investors should remain vigilant and prioritize informed decision-making.

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