In a letter dated May 28, 2019, the staff of the Securities and Exchange Commission (SEC) asked a registrant to withdraw a registration statement to register shares of a closed-end bitcoin-linked interval fund. Cipher Technologies Management LP, the registrant’s sponsor, filed a registration statement for the fund on May 13, 2019. The proposed fund would invest substantially all of its assets in bitcoin, engage in loans of portfolio bitcoins, write covered calls on portfolio bitcoins and utilize bitcoin futures contracts.
The SEC has publicly rejected multiple applications submitted by national securities exchanges for rule changes, which would permit the exchanges to list and trade shares of bitcoin exchange-traded products (ETPs). To our knowledge, this is the first time the staff has asked a bitcoin-related interval fund directly to withdraw a registration statement. An interval fund is a closed-end fund that agrees to repurchase its shares at net asset value directly from shareholders at various intervals, such as quarterly or semi-annually. Unlike an interval fund, ETPs issue and redeem shares only with authorized participants (APs); retail shareholders of ETPs can only buy or sell shares on a national securities exchange.
The SEC staff questioned whether the proposed fund would qualify as an “investment company” under the Investment Company Act of 1940 due to its proposed investment strategy and anticipated holdings, and encouraged the proposed fund to provide an analysis of whether and how it will meet the “investment company” definition. If it is able to meet this definition, the staff said the fund must still answer a number of questions related to legal and investor protection issues, particularly with respect to valuation, custody and potential manipulation in the bitcoin market.
Further, the staff questioned whether the registration statement meets the disclosure requirements of the securities laws and Form N-2, particularly as it relates to custody of fund assets and related risks, as well as a number of other concerns previously flagged in a letter from the agency’s Division of Investment Management.
Until these issues are resolved, the staff said it will not consider the registration statement, issue any further comments or recommend acceleration of the effective date of the registration statement in its present form.
The SEC staff has previously cited similar concerns when rejecting applications for bitcoin ETPs, demonstrating again that the SEC does not believe these issues have been properly resolved in the marketplace. Going forward, the SEC has asked Cipher Technologies and other sponsors that have filed registration statements for similar products to withdraw their applications at this time. While the SEC said it is committed to working with applicants to resolve these issues, it appears unlikely we will see any such products approved in the near future.
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