[Federal Register Volume 90, Number 52 (Wednesday, March 19, 2025)]
[Notices]
[Pages 12824-12835]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-04505]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-102651; File No. SR-CboeBZX-2025-039]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To List and Trade Shares of the
Franklin Solana ETF Under BZX Rule 14.11(e)(4), Commodity-Based Trust
Shares
March 13, 2025.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on March 12, 2025, Cboe BZX Exchange, Inc. (``Exchange'' or ``BZX'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe BZX Exchange, Inc. (``BZX'' or the ``Exchange'') is filing
with the Securities and Exchange Commission (``Commission'' or ``SEC'')
a proposed rule change to list and trade shares of the Franklin Solana
ETF (the ``Fund''), a series of the Franklin Solana Trust (the
``Trust''),\3\ under BZX Rule 14.11(e)(4), Commodity-Based Trust
Shares.
---------------------------------------------------------------------------
\3\ The Trust was formed as a Delaware statutory trust on
February 10, 2025. The Fund is operated as a grantor trust for U.S.
federal tax purposes. The Trust and the Fund have no fixed
termination date.
---------------------------------------------------------------------------
The text of the proposed rule change is also available on the
Exchange's website (http://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), at the Exchange's Office of the Secretary, and at
the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
[[Page 12825]]
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to list and trade the Shares under BZX Rule
14.11(e)(4),\4\ which governs the listing and trading of Commodity-
Based Trust Shares on the Exchange.\5\ Franklin Holdings, LLC is the
sponsor of the Fund (the ``Sponsor''). The Shares will be registered
with the Commission by means of the Trust's registration statement on
Form S-1 (the ``Registration Statement'').\6\ According to the
Registration Statement, the Trust is neither an investment company
registered under the Investment Company Act of 1940, as amended (the
``1940 Act''),\7\ nor a commodity pool for purposes of the Commodity
Exchange Act (``CEA''), and neither the Trust, the Fund nor the Sponsor
is subject to regulation as a commodity pool operator or a commodity
trading adviser in connection with the Shares.
---------------------------------------------------------------------------
\4\ The Commission approved BZX Rule 14.11(e)(4) in Securities
Exchange Act Release No. 65225 (August 30, 2011), 76 FR 55148
(September 6, 2011) (SR-BATS-2011-018).
\5\ Any of the statements or representations regarding the index
composition, the description of the portfolio or reference assets,
limitations on portfolio holdings or reference assets, dissemination
and availability of index, reference asset, and intraday indicative
values, or the applicability of Exchange listing rules specified in
this filing to list a series of Other Securities (collectively,
``Continued Listing Representations'') shall constitute continued
listing requirements for the Shares listed on the Exchange.
\6\ On February 21, 2025, the Trust filed with the Commission
the Registration Statement on Form S-1, submitted to the Commission
by the Sponsor on behalf of the Trust (333-285121). The descriptions
of the Trust, the Fund, the Shares, and the Index (as defined below)
contained herein are based, in part, on information in the
Registration Statement. The Registration Statement is not yet
effective, and the Shares will not trade on the Exchange until such
time that the Registration Statement is effective.
\7\ 15 U.S.C. 80a-1.
---------------------------------------------------------------------------
Since 2017, the Commission has approved or disapproved exchange
filings to list and trade series of Trust Issued Receipts, including
spot-based Commodity-Based Trust Shares, on the basis of whether the
listing exchange has in place a comprehensive surveillance sharing
agreement with a regulated market of significant size related to the
underlying commodity to be held (the ``Winklevoss Test'').\8\ The
Commission has also consistently recognized, however, that this is not
the exclusive means by which an ETP listing exchange can meet this
statutory obligation.\9\ A listing exchange could, alternatively,
demonstrate that ``other means to prevent fraudulent and manipulative
acts and practices will be sufficient'' to justify dispensing with a
surveillance-sharing agreement with a regulated market of significant
size.\10\
---------------------------------------------------------------------------
\8\ See Securities Exchange Act Release Nos. 78262 (July 8,
2016), 81 FR 78262 (July 14. 2016) (the ``Winklevoss Proposal'').
The Winklevoss Proposal was the first exchange rule filing proposing
to list and trade shares of an ETP that would hold spot bitcoin (a
``Spot Bitcoin ETP''). It was subsequently disapproved by the
Commission. See Securities Exchange Act Release No. 83723 (July 26,
2018), 83 FR 37579 (August 1, 2018) (the ``Winklevoss Order'');
99306 (January 10, 2024), 89 FR 3008 (January 17, 2024) (Self-
Regulatory Organizations; NYSE Arca, Inc.; The Nasdaq Stock Market
LLC; Cboe BZX Exchange, Inc.; Order Granting Accelerated Approval of
Proposed Rule Changes, as Modified by Amendments Thereto, To List
and Trade Bitcoin-Based Commodity-Based Trust Shares and Trust
Units) (the ``Spot Bitcoin ETP Approval Order''); 100224 (May 23,
2024), 89 FR 46937 (May 30, 2024) (Self-Regulatory Organizations;
NYSE Arca, Inc.; The Nasdaq Stock Market LLC; Cboe BZX Exchange,
Inc.; Order Granting Accelerated Approval of Proposed Rule Changes,
as Modified by Amendments Thereto, To List and Trade Shares of
Ether-Based Exchange-Traded Products) (the ``Spot ETH ETP Approval
Order'').
\9\ See Winklevoss Order, 83 FR at 37580; see Spot Bitcoin ETP
Approval Order, 89 FR at 3009; see Spot ETH ETP Approval Order 89 FR
at 46938.
\10\ The Exchange notes that that the Winklevoss Test was first
applied in 2017 in the Winklevoss Order, which was the first
disapproval order related to an exchange proposal to list and trade
a Spot Bitcoin ETP. All prior approval orders issued by the
Commission approving the listing and trading of series of Trust
Issued Receipts included no specific analysis related to a
``regulated market of significant size.''In the Winklevoss Order and
the Commission's prior orders approving the listing and trading of
series of Trust Issued Receipts have noted that the spot commodities
and currency markets for which it has previously approved spot ETPs
are generally unregulated and that the Commission relied on the
underlying futures market as the regulated market of significant
size that formed the basis for approving the series of Currency and
Commodity-Based Trust Shares, including gold, silver, platinum,
palladium, copper, and other commodities and currencies. The
Commission specifically noted in the Winklevoss Order that the
approval order issued related to the first spot gold ETP ``was based
on an assumption that the currency market and the spot gold market
were largely unregulated.'' See Winklevoss Order at 37592. As such,
the regulated market of significant size test does not require that
the spot market be regulated in order for the Commission to approve
this proposal, and precedent makes clear that an underlying market
for a spot commodity or currency being a regulated market would
actually be an exception to the norm. These largely unregulated
currency and commodity markets do not provide the same protections
as the markets that are subject to the Commission's oversight, but
the Commission has consistently looked to surveillance sharing
agreements with the underlying futures market in order to determine
whether such products were consistent with the Act.
---------------------------------------------------------------------------
The Commission recently issued orders granting approval for
proposals to list bitcoin- and ether-based commodity trust shares and
bitcoin-based, ether-based, and a combination of bitcoin- and ether-
based trust issued receipts (these proposed funds are nearly identical
to the Fund, but proposed to hold bitcoin and/or ether, respectively,
instead of Solana (also referred to as ``SOL'')) (``Spot Bitcoin ETPs''
and ``Spot ETH ETPs''). In both the Spot Bitcoin ETP Approval Order and
Spot ETH ETP Approval Order, the Commission found that sufficient
``other means'' of preventing fraud and manipulation had been
demonstrated that justified dispensing with a surveillance-sharing
agreement with a regulated market of significant size. Specifically,
the Commission found that while the Chicago Mercantile Exchange
(``CME'') futures market for both bitcoin and ether were not of
``significant size'' related to the spot market, the Exchange
demonstrated that other means could be reasonably expected to assist in
surveilling for fraudulent and manipulative acts and practices in the
specific context of the proposals.
As further discussed below, both the Exchange and the Sponsor
believe that this proposal and the included analysis are sufficient to
establish that the proposal is consistent with the Act itself and,
additionally, that there are sufficient ``other means'' of preventing
fraud and manipulation that warrant dispensing of the surveillance-
sharing agreement with a regulated market of significant size, as was
done with both Spot Bitcoin ETPs and Spot ETH ETPs, and that this
proposal should be approved.
Background
SOL is a digital asset that is created and transmitted through the
operations of the peer-to-peer Solana Network, a decentralized network
of computers that operates on cryptographic protocols. No single entity
is known to own or operate the Solana Network, the infrastructure of
which is understood to be collectively maintained by a decentralized
user base. The Solana Network allows people to exchange tokens of
value, called SOL, which are recorded on a public transaction ledger
known as a blockchain. SOL can be used to pay for goods and services,
including computational power on the Solana Network, or it can be
converted to fiat currencies, such as the U.S. dollar, at rates
determined on Digital
[[Page 12826]]
Asset Trading Platforms or in individual end-user- to-end-user
transactions under a barter system. Furthermore, the Solana Network was
designed to allow users to write and implement smart contracts--that
is, general-purpose code that executes on every computer in the network
and can instruct the transmission of information and value based on a
sophisticated set of logical conditions. Using smart contracts, users
can create markets, store registries of debts or promises, represent
the ownership of property, move funds in accordance with conditional
instructions and create digital assets other than SOL on the Solana
Network. Smart contract operations are executed on the Solana
blockchain in exchange for payment of SOL. Like the Ethereum network,
the Solana Network is one of a number of projects intended to expand
blockchain use beyond just a peer-to-peer money system.
The Solana protocol introduced the Proof-of-History (``PoH'')
timestamping mechanism. PoH automatically orders on-chain transactions
by creating a historical record that proves an event has occurred at a
specific moment in time. PoH is intended to provide a transaction
processing speed and capacity advantage over other blockchain networks
like Bitcoin and Ethereum, which rely on sequential production of
blocks and can lead to delays caused by validator confirmations. PoH is
a new blockchain technology that is not widely used. PoH may not
function as intended. For example, it may require more specialized
equipment to participate in the network and fail to attract a
significant number of users, or may be subject to outages or fail to
function as intended. In addition, there may be flaws in the
cryptography underlying PoH, including flaws that affect functionality
of the Solana Network or make the network vulnerable to attack.
In addition to the PoH mechanism described above, the Solana
Network uses a proof-of-stake consensus mechanism to incentivize SOL
holders to validate transactions. Unlike proof-of-work, in which miners
expend computational resources to compete to validate transactions and
are rewarded coins in proportion to the amount of computational
resources expended, in proof-of-stake, validators risk or ``stake''
coins to compete to be randomly selected to validate transactions and
are rewarded coins in proportion to the amount of coins staked. Any
malicious activity, such as disagreeing with the eventual consensus or
otherwise violating protocol rules, results in the forfeiture or
``slashing'' of a portion of the staked coins. Proof- of-stake is
viewed as more energy efficient and scalable than proof-of-work and is
sometimes referred to as ``virtual mining''.
The Solana protocol was first conceived by Anatoly Yakovenko in a
2017 whitepaper. Development of the Solana Network is overseen by the
Solana Foundation, a Swiss non-profit organization, and Solana Labs,
Inc., a Delaware corporation, which administered the original network
launch and token distribution.
Although Solana Labs, Inc. and the Solana Foundation continue to
exert significant influence over the direction of the development of
Solana, the Solana Network, like the Ethereum network, is believed to
be decentralized and does not require governmental authorities or
financial institution intermediaries to create, transmit or determine
the value of SOL.
As noted above, this proposal is to list and trade shares of the
Fund that would hold spot Solana. Neither the Trust, Fund, nor the
Sponsor or any of their affiliates are affiliates of Solana Labs, Inc.,
the Solana Foundation, or any of their respective affiliates.
In light of these factors and consistent with applicable legal
precedent, particularly as applied in SEC v. Ripple Labs, the Sponsor
believes that it is applying the proper legal standards in making a
good faith determination that it believes that SOL is not under these
circumstances a security under federal law in light of the
uncertainties inherent in applying the Howey and Reves tests.\11\
---------------------------------------------------------------------------
\11\ See SEC v. Ripple Labs, 2023 WL 4507900 at 15, (S.D.N.Y.
July 13, 2023) (``(XRP, as a digital token, is not in and of itself
a `contract, transaction[,] or scheme' that embodies the Howey
requirements of an investment contract.)'') and 23 (``Ripple's
Programmatic Sales were blind bid/ask transactions, and Programmatic
Buyers could not have known if their payments of money went to
Ripple, or any other seller of XRP. Since 2017, Ripple's
Programmatic Sales represented less than 1% of the global XRP
trading volume. Therefore, the vast majority of individuals who
purchased XRP from digital asset exchanges did not invest their
money in Ripple at all. An Institutional Buyer knowingly purchased
XRP directly from Ripple pursuant to a contract, but the economic
reality is that a Programmatic Buyer stood in the same shoes as a
secondary market purchaser who did not know to whom or what it was
paying its money.'') The Court specifically notes that the question
of whether secondary market sales of XRP constitute offers and sales
of investment contracts because it was not before the Court and
therefore was not addressed. However, the general logic applied
above in the Court's finding that an investment contract did not
exist seems to similarly indicate that purchases and sales on the
secondary market where the purchaser ``did not know to whom or what
it was paying its money'' would also not constitute an investment
contract.
---------------------------------------------------------------------------
Section 6(b)(5) and the Applicable Standards
The Commission has approved numerous series of Trust Issued
Receipts,\12\ including Commodity-Based Trust Shares,\13\ to be listed
on U.S. national securities exchanges. In order for any proposed rule
change from an exchange to be approved, the Commission must determine
that, among other things, the proposal is consistent with the
requirements of Section 6(b)(5) of the Act, specifically including: (i)
the requirement that a national securities exchange's rules are
designed to prevent fraudulent and manipulative acts and practices;
\14\ and (ii) the requirement that an exchange proposal be designed, in
general, to protect investors and the public interest. The Exchange
believes that this proposal is consistent with the requirements of
Section 6(b)(5) of the Act and that this filing sufficiently
demonstrates that potential policy concerns under the Act are
sufficiently mitigated to the point that they are outweighed by
quantifiable investor protection issues that would be resolved by
approving this proposal.
---------------------------------------------------------------------------
\12\ See Exchange Rule 14.11(f).
\13\ Commodity-Based Trust Shares, as described in Exchange Rule
14.11(e)(4), are a type of Trust Issued Receipt.
\14\ Much like bitcoin and ether, the Exchange believes that SOL
is resistant to price manipulation and that ``other means to prevent
fraudulent and manipulative acts and practices'' exist to justify
dispensing with the requisite surveillance sharing agreement. The
geographically diverse and continuous nature of SOL trading render
it difficult and prohibitively costly to manipulate the price of
SOL. The fragmentation across platforms and the capital necessary to
maintain a significant presence on each trading platform make
manipulation of SOL prices through continuous trading activity
challenging. To the extent that there are trading platforms engaged
in or allowing wash trading or other activity intended to manipulate
the price of SOL on other markets, such pricing does not normally
impact prices on other trading platforms because participants will
generally ignore markets with quotes that they deem non-executable.
Moreover, the linkage between SOL markets and the presence of
arbitrageurs in those markets means that the manipulation of the
price of SOL on any single venue would require manipulation of the
global SOL price in order to be effective. Arbitrageurs must have
funds distributed across multiple trading platforms in order to take
advantage of temporary price dislocations, thereby making it
unlikely that there will be strong concentration of funds on any
particular trading platforms or OTC platform. Further, the speed and
relatively inexpensive nature of transactions on the Solana network
allow arbitrageurs to quickly move capital between trading platforms
where price dislocations may occur. As a result, the potential for
manipulation on a trading platform would require overcoming the
liquidity supply of such arbitrageurs who are effectively
eliminating any cross-market pricing differences.
---------------------------------------------------------------------------
More recently, the Commission has applied the Winklevoss Test while
also recognizing that the ``regulated market
[[Page 12827]]
of significant size'' standard is not the only means for satisfying
Section 6(b)(5) of the Act. In the specifically providing that a
listing exchange could demonstrate that ``other means to prevent
fraudulent and manipulative acts and practices'' are sufficient to
justify dispensing with the requisite surveillance-sharing
agreement.\15\ While there is currently no futures market for SOL, in
the Spot Bitcoin ETF Approval Order and Spot ETH ETF Approval Order the
Commission determined that the CME bitcoin futures market and CME ether
futures market, respectively, were not of ``significant size'' related
to the spot market. Instead, the Commission found that sufficient
``other means'' of preventing fraud and manipulation had been
demonstrated that justified dispensing with a surveillance-sharing
agreement with a regulated market of significant size. The Exchange and
Sponsor believe that this proposal provides for other means of
preventing fraud and manipulation justify dispensing with a
surveillance-sharing agreement with a regulated market of significant
size.
---------------------------------------------------------------------------
\15\ See Winklevoss Order at 37580. The Commission has also
specifically noted that it ``is not applying a `cannot be
manipulated' standard; instead, the Commission is examining whether
the proposal meets the requirements of the Exchange Act and,
pursuant to its Rules of Practice, places the burden on the listing
exchange to demonstrate the validity of its contentions and to
establish that the requirements of the Exchange Act have been met.''
Id. at 37582.
---------------------------------------------------------------------------
Over the past several years, U.S. investor exposure to SOL, through
OTC SOL Funds and digital asset trading platforms, has grown into
billions of dollars with a fully diluted market cap of greater than
$150 billion. The Exchange believes that approving this proposal (and
comparable proposals) provides the Commission with the opportunity to
allow U.S. investors with access to SOL in a regulated and transparent
exchange-traded vehicle that would act to limit risk to U.S. investors
by: (i) reducing premium and discount volatility; (ii) reducing
management fees through meaningful competition; and (iii) providing an
alternative to custodying spot SOL.
The policy concerns that the Exchange Act is designed to address
are also otherwise mitigated by the fact that the size of the market
for the underlying reference asset (approximately $150 billion fully
diluted value). The geographically diverse and continuous nature of SOL
trading makes it difficult and prohibitively costly to manipulate the
price of SOL and, in many instances, the SOL market can be less
susceptible to manipulation than the equity, fixed income, and
commodity futures markets. There are a number of reasons this is the
case, including that there is not inside information about revenue,
earnings, corporate activities, or sources of supply; manipulation of
the price on any single venue would require manipulation of the global
SOL price in order to be effective; a substantial over-the-counter
market provides liquidity and shock-absorbing capacity; SOL's 24/7/365
nature provides constant arbitrage opportunities across all trading
venues; and it is unlikely that any one actor could obtain a dominant
market share.
Further, SOL is arguably less susceptible to manipulation than
other commodities that underlie ETPs; there may be inside information
relating to the supply of the physical commodity such as the discovery
of new sources of supply or significant disruptions at mining
facilities that supply the commodity that simply are inapplicable as it
relates to certain cryptoassets, including SOL. Further, the Exchange
believes that the fragmentation across SOL trading platforms and
increased adoption of SOL, as displayed through increased user
engagement and trading volumes on the Solana Network, make manipulation
of SOL prices through continuous trading activity unlikely. Moreover,
the linkage between the SOL markets and the presence of arbitrageurs in
those markets means that the manipulation of the price of SOL price on
any single venue would require manipulation of the global SOL price in
order to be effective. Arbitrageurs must have funds distributed across
multiple SOL trading platforms in order to take advantage of temporary
price dislocations, thereby making it unlikely that there will be
strong concentration of funds on any particular SOL trading platform.
As a result, the potential for manipulation on a particular SOL trading
platform would require overcoming the liquidity supply of such
arbitrageurs who are effectively eliminating any cross-market pricing
differences. For all of these reasons, SOL is not particularly
susceptible to manipulation, especially as compared to other approved
ETP reference assets.
The Exchange also believes this proposal is designed to remove
impediments to and perfect the mechanism of a free and open market and,
in general, to protect investors and the public interest because it
would allow the Fund to stake its SOL on behalf of its investors. The
Solana Network allows for staking of its native asset, SOL tokens, and
permits validators who successfully stake SOL to receive rewards in the
form of more SOL tokens. The net beneficiaries are not only validators,
or those on behalf of whom they stake SOL, but also the Solana
blockchain itself which grows and is progressively made more secure
through the validation of transactions. Staking permits validators to
contribute to the network by staking their tokens to secure the
blockchain, facilitating the creation of blocks, and helping process
transactions. Validators are compensated for fulfilling this important
role through transaction fees and consensus rewards paid by the
blockchain itself.
Staking through mechanisms such as ``point-and-click'' staking can
also permit the earning of rewards without certain additional risks to
the tokens held by the Solana Custodian on behalf of the Fund. As such,
not staking the Fund's SOL would amount to waiving the Fund's right to
free additional SOL, an act analogous to an equity ETP refusing
dividends from the companies it holds. Allowing the Fund to stake its
SOL would benefit investors and help the Fund to better track the
returns associated with holding SOL. This would improve the creation
and redemption process for both authorized participants and the Fund,
increase efficiency, and ultimately benefit the end investors in the
Fund.
Franklin Solana ETF
CSC Delaware Trust Company, a subsidiary of the Corporation Service
Company, is the trustee (``Trustee''). A third party will be the
administrator (``Administrator'') and transfer agent (``Transfer
Agent'') and will be responsible for the custody of the Fund's cash and
cash equivalents \16\ (the ``Cash Custodian''). Coinbase Custody Trust
Company, LLC (the ``Solana Custodian'') will be responsible for custody
of the Fund's SOL.
---------------------------------------------------------------------------
\16\ Cash equivalents are short-term instruments with maturities
of less than 3 months.
---------------------------------------------------------------------------
According to the Registration Statement, each Share will represent
a fractional undivided beneficial interest in the Fund's net assets.
The Fund's assets will only consist of SOL, cash, and cash equivalents.
According to the Registration Statement, the Trust will be neither
an investment company registered under the 1940 Act,\17\ nor a
commodity pool for purposes of the CEA, and neither the Trust, the Fund
nor the Sponsor is subject to regulation as a commodity pool operator
or a commodity trading adviser in connection with the Shares.
---------------------------------------------------------------------------
\17\ 15 U.S.C. 80a-1.
---------------------------------------------------------------------------
The Fund will not acquire and will disclaim any incidental right
(``IR'') or IR asset received, for example as a result of forks or
airdrops, and such assets will
[[Page 12828]]
not be taken into account for purposes of determining the Fund's net
asset value (``NAV'').
When the Fund sells or redeems its Shares, it will do so in large
blocks of 50,000 Shares (a ``Creation Basket'') based on the quantity
of SOL attributable to each Share (net of the accrued but unpaid
Sponsor's fee and any accrued but unpaid expenses or liabilities).
Creation Baskets are issued and redeemed in exchange for SOL and/or
cash. For cash creations, authorized participants will deliver, or
facilitate the delivery of, cash to the Fund's account with the Cash
Custodian in exchange for Shares. Upon receipt of an approved cash
creation order, the Sponsor, on behalf of the Fund, will submit to one
or more previously onboarded trading partners an order to buy the
amount of SOL represented by a Creation Basket.\18\ For in-kind
creations, authorized participants or their designee will deliver, or
facilitate the delivery of, SOL to the Fund's account with the Solana
Custodian in exchange for Shares.\19\ Authorized participants may then
offer Shares to the public at prices that depend on various factors,
including the supply and demand for Shares, the value of the Fund's
assets, and market conditions at the time of a transaction.
Shareholders who buy or sell Shares during the day from their broker
may do so at a premium or discount relative to the NAV per Share of the
Fund.
---------------------------------------------------------------------------
\18\ For cash redemptions, the process will occur in the reverse
order. Upon receipt of an approved cash redemption order, the
Sponsor, on behalf of the Fund, will submit an order to sell the
amount of SOL represented by a Creation Basket and the cash proceeds
will be remitted to the authorized participant when the large block
of Shares is received by the Transfer Agent.
\19\ For in-kind redemptions, the process will occur in the
reverse order. Upon receipt of an approved in-kind redemption order,
the Sponsor, on behalf of the Fund, will transfer the amount of SOL
represented by a Creation Basket to the authorized participant or
its designee when the large block of Shares is received by the
Transfer Agent.
---------------------------------------------------------------------------
Investment Objective
According to the Registration Statement and as further described
below, the Fund's investment objective is to seek to reflect generally
the performance of the price of SOL before payment of the Fund's
expenses and liabilities. In seeking to achieve its investment
objective, the Fund will hold only SOL, cash, and cash equivalents. The
Fund will value its Shares daily as of 4:00 p.m. ET based on the value
of the SOL held by the Fund as reflected by the Index, as described
below. All of the Fund's SOL will be held by the Solana Custodian.
The Index
As described in the Registration Statement, the Fund will value its
Shares daily based on the value of SOL as reflected by the CME CF
Solana-Dollar Reference Rate--New York Variant (the ``Index''). The
Index is calculated daily and aggregates the notional value of SOL
trading activity across major spot SOL trading platforms. The
administrator of the Index is CF Benchmarks Ltd. (the ``Index
Provider'').
The Index serves as a once-a-day benchmark rate of the U.S. dollar
price of Solana (USD/SOL), calculated as of 4:00 p.m. ET. The Index
aggregates the trade flow of several SOL trading platforms, during an
observation window between 3:00 p.m. and 4:00 p.m. ET into the U.S.
dollar price of one SOL at 4:00 p.m. ET. Specifically, the Index is
calculated based on the ``Relevant Transactions'' (as defined below) of
all of its constituent SOL trading platforms, which are currently
Coinbase, Kraken, and Gemini (the ``Constituent Platforms''), as
follows:
All Relevant Transactions are added to a joint list,
recording the time of execution, trade price and size for each
transaction.
The list is partitioned by timestamp into 12 equally-sized
time intervals of 5 (five) minute length.
For each partition separately, the volume-weighted median
trade price is calculated from the trade prices and sizes of all
Relevant Transactions, i.e., across all Constituent Platforms. A
volume-weighted median differs from a standard median in that a
weighting factor, in this case trade size, is factored into the
calculation.
The Index is then determined by the equally-weighted
average of the volume medians of all partitions.
The Constituent Platforms may change from time to time. The Index
does not include any futures prices in its methodology. A ``Relevant
Transaction'' is any cryptocurrency versus U.S. dollar spot trade that
occurs during the observation window between 3:00 p.m. and 4:00 p.m. ET
on a Constituent Platform in the SOL/USD pair that is reported and
disseminated by a Constituent Platform through its publicly available
Application Programming Interface (``API'') and observed by the Index
Provider.
The Sponsor believes that the use of the Index is reflective of a
reasonable valuation of the average spot price of SOL and that
resistance to manipulation is a priority aim of its design methodology.
The methodology: (i) takes an observation period and divides it into
equal partitions of time; (ii) then calculates the volume-weighted
median of all transactions within each partition; and (iii) the value
is determined from the arithmetic mean of the volume-weighted medians,
equally weighted. By employing the foregoing steps, the Index thereby
seeks to ensure that transactions in SOL conducted at outlying prices
do not have an undue effect on the value of the Index, large trades or
clusters of trades transacted over a short period of time will not have
an undue influence on the Index value, and the effect of large trades
at prices that deviate from the prevailing price are mitigated from
having an undue influence on the Index value.
In addition, the Sponsor notes that an oversight function is
implemented by the Index Provider in seeking to ensure that the Index
is administered through codified policies for Index integrity.
Index data and the description of the Index are based on
information made publicly available by the Index Provider on its
website at https://www.cfbenchmarks.com.
Net Asset Value
NAV means the total assets of the Fund (which includes SOL and cash
and cash equivalents) less total liabilities of the Fund. The
Administrator will determine the NAV of the Fund on each day that the
Exchange is open for regular trading, as promptly as practical after
4:00 p.m. ET. The NAV of the Fund is the aggregate value of the Fund's
assets less its estimated accrued but unpaid liabilities (which include
accrued expenses). In determining the Fund's NAV, the Administrator
values the SOL held by the Fund based on the Index as of 4:00 p.m. ET.
The Administrator also determines the NAV per Share. The NAV for the
Fund will be calculated by the Administrator once a day and will be
disseminated daily to all market participants at the same time.
If the Index is not available or the Sponsor determines, in its
sole discretion, that the Index should not be used, the Fund's holdings
may be fair valued in accordance with the policy approved by the
Sponsor.\20\
---------------------------------------------------------------------------
\20\ Any alternative method will only be employed on an ad hoc
basis. Any permanent change to the calculation of the NAV would
require a proposed rule change under Rule 19b-4.
---------------------------------------------------------------------------
Availability of Information
In addition to the price transparency of the Index, the Fund will
provide information regarding the Fund's SOL holdings as well as
additional data regarding the Fund. The website for the Fund, which
will be publicly accessible
[[Page 12829]]
at no charge, will contain the following information: (a) the current
NAV per Share daily and the prior business day's NAV per Share and the
reported BZX Official Closing Price; \21\ (b) the BZX Official Closing
Price in relation to the NAV per Share as of the time the NAV is
calculated and a calculation of the premium or discount of such price
against such NAV per Share; (c) data in chart form displaying the
frequency distribution of discounts and premiums of the BZX Official
Closing Price against the NAV per Share, within appropriate ranges for
each of the four previous calendar quarters (or for the life of the
Fund, if shorter); (d) the prospectus; and (e) other applicable
quantitative information. The aforementioned information will be
published as of the close of business and be available on the Fund's
website at https://www.franklintempleton.com/investments/options/exchange-traded-funds, or any successor thereto. The NAV for the Fund
will be calculated by the Administrator once a day and will be
disseminated daily to all market participants at the same time.
Quotation and last-sale information regarding the Shares will be
disseminated through the facilities of the Consolidated Tape
Association (``CTA''). The Fund will also disseminate its holdings on a
daily basis on its website.
---------------------------------------------------------------------------
\21\ As defined in Rule 11.23(a)(3), the term ``BZX Official
Closing Price'' shall mean the price disseminated to the
consolidated tape as the market center closing trade.
---------------------------------------------------------------------------
The Intraday Indicative Value (``IIV'') will be calculated by using
the prior day's closing NAV per Share as a base and updating that value
during Regular Trading Hours \22\ to reflect changes in the value of
the Fund's SOL holdings during the trading day, which is based on the
CME CF Solana-Dollar Real Time Index. The IIV disseminated during
Regular Trading Hours should not be viewed as an actual real-time
update of the NAV, which will be calculated only once at the end of
each trading day. The IIV will be widely disseminated on a per Share
basis every 15 seconds during the Exchange's Regular Trading Hours
through the facilities of the CTA and Consolidated Quotation System
(``CQS'') high speed lines. In addition, the IIV will be available
through online information services, such as Bloomberg and Reuters.
---------------------------------------------------------------------------
\22\ Regular Trading Hours is the time between 9:30 a.m. and
4:00 p.m. Eastern Time.
---------------------------------------------------------------------------
The price of SOL will be made available by one or more major market
data vendors, updated at least every 15 seconds during Regular Trading
Hours.
As noted above, the Index is calculated daily and aggregates the
notional value of SOL trading activity across major spot SOL trading
platforms. Index data, the Index value, and the description of the
Index are based on information made publicly available by the Index
Provider on its website https://www.cfbenchmarks.com.
Quotation and last sale information for SOL is widely disseminated
through a variety of major market data vendors, including Bloomberg and
Reuters. Information relating to trading, including price and volume
information, in SOL is available from major market data vendors and
from the trading platforms on which SOL are traded. Depth of book
information is also available from SOL trading platforms. The normal
trading hours for SOL trading platforms are 24 hours per day, 365 days
per year.
Information regarding market price and trading volume of the Shares
will be continually available on a real-time basis throughout the day
on brokers' computer screens and other electronic services. Information
regarding the previous day's BZX Official Closing Price and trading
volume information for the Shares will be published daily in the
financial section of newspapers. Quotation and last-sale information
regarding the Shares will be disseminated through the facilities of the
CTA.
The Solana Custodian
The Solana Custodian carefully considers the design of the
physical, operational and cryptographic systems for secure storage of
the Fund's private keys in an effort to lower the risk of loss or
theft. The Solana Custodian utilizes a variety of security measures to
ensure that private keys necessary to transfer digital assets remain
uncompromised and that the Fund maintains exclusive ownership of its
assets. The Solana Custodian will keep the private keys associated with
the Fund's SOL in ``cold storage'' \23\ (the ``Cold Vault Balance'').
The hardware, software, systems, and procedures of the Solana Custodian
may not be available or cost-effective for many investors to access
directly. Only specific individuals are authorized to participate in
the custody process, and no individual acting alone will be able to
access or use any of the private keys. In addition, no combination of
the executive officers of the Sponsor, acting alone or together, will
be able to access or use any of the private keys that hold the Fund's
SOL.
---------------------------------------------------------------------------
\23\ The term ``cold storage'' refers to a safeguarding method
by which the private keys corresponding to SOL stored on a digital
wallet are removed from any computers actively connected to the
internet. Cold storage of private keys may involve keeping such
wallet on a non-networked computer or electronic device or storing
the public key and private keys relating to the digital wallet on a
storage device (for example, a USB thumb drive) or printed medium
(for example, papyrus or paper) and deleting the digital wallet from
all computers.
---------------------------------------------------------------------------
Staking
The Sponsor may, from time to time, stake a portion of the Fund's
SOL on behalf of the Fund through one or more trusted staking
providers, which may include the Solana Custodian, an affiliate of the
Solana Custodian or an affiliate of the Sponsor (``Staking
Providers''). In consideration for any staking activity in which the
Fund may engage, the Fund would receive certain staking rewards of SOL
tokens, which may be treated as income to the Fund.
The Staking Process
The Solana Network uses a proof-of-stake consensus mechanism.
Proof-of-stake is intended to address the perceived shortcomings of the
proof-of-work consensus mechanism in terms of labor intensity and
duplicative computational effort expended by validators (known under
proof-of-work as ``miners''). In a proof-of-work consensus mechanism,
miners effectively compete to be the first in time to solve the
cryptographic puzzle that would allow them to be the only validator
permitted to validate the block and thus be the only ones to receive
the resulting block reward. Miners who are not first in time (and thus
are not permitted to be validators) will have effectively expended
significant labor and computing power for no gain. In a proof-of-stake
mechanism, by contrast, a single validator is randomly selected to
solve the cryptographic puzzle needed to validate a block, which it
proposes to a committee of other validators, who vote for whether to
include the block (or not). This proof-of-stake system reduces the
computational work performed--and energy expended--to validate each
block compared to proof-of-work.
Unlike proof-of-work, in which miners expend computational
resources to compete to validate transactions and are rewarded coins in
proportion to the amount of computational resources expended, in proof-
of-stake, validators risk or ``stake'' coins to compete to be randomly
selected to validate transactions and are rewarded coins in proportion
to the amount of coins staked. Any malicious activity, such as mining
multiple blocks, disagreeing with the eventual consensus or otherwise
violating protocol rules, results in the forfeiture or ``slashing'' of
a portion of the staked coins. Proof-of-stake is viewed as more energy
efficient and scalable than proof-of-work.
[[Page 12830]]
New SOL is created as a result of the staking of SOL by validators.
Validators are required to stake SOL in order to be selected to perform
validation activities and then once selected, as a reward, they earn
newly created SOL. Validation activities include verifying
transactions, storing data, and adding to the Solana blockchain.
To operate a node on the Solana blockchain, a validator must
acquire and lock SOL by sending a special transaction to the staking
contract. This transaction associates the staked SOL with a withdrawal
address (to unlock the SOL and receive any staking rewards) and a
validator address (to designate the validator node performing
transaction verification).
Staking by the Sponsor on Behalf of the Fund
The Sponsor may, from time to time, stake a portion of the Fund's
SOL on behalf of the Fund through one or more Staking Providers. The
Sponsor expects to maintain sufficient liquidity in the Fund to satisfy
redemptions. The SOL staked by the Sponsor on behalf of the Fund will
consist exclusively of SOL owned by the Fund. The Sponsor's staking
activities on behalf of the Fund will not constitute ``delegated
staking'' and will not form part of a ``staking as a service''
offering.\24\
---------------------------------------------------------------------------
\24\ See SEC v. Payward Ventures, Inc. and Payward Trading,
Ltd., (Complaint filed February 9, 2023) available at https://www.sec.gov/files/litigation/complaints/2023/comp-pr2023-25.pdf. (In
February 2023, the SEC charged and entered into a settlement order
with Payward Ventures, Inc. and Payward Trading Ltd., both commonly
known as Kraken, regarding Kraken's alleged failure to register the
offer and sale of their crypto asset staking-as-a-service program,
whereby investors transfer crypto assets to Kraken for staking in
exchange for advertised annual investment returns of as much as 21
percent. According to the SEC's complaint, since 2019, Kraken has
offered and sold its crypto asset ``staking services'' to the
general public, whereby Kraken pools certain crypto assets
transferred by investors and stakes them on behalf of those
investors. According to the SEC, investors would lock up--or
``stake''--their crypto tokens with Kraken with the goal of being
rewarded with new tokens when their staked crypto tokens become part
of the process for validating data for the blockchain. The complaint
alleged that Kraken touted that its staking investment program
offered an easy-to-use platform and benefits that derived from
Kraken's efforts on behalf of investors, including Kraken's
strategies to obtain regular investment returns and payouts.) See
also SEC v. Binance Holdings Limited, et al., (Complaint filed June
5, 2023) available at https://www.sec.gov/files/litigation/complaints/2023/comp-pr2023-101.pdf. (On June 5, 2023, the SEC filed
a complaint charging Binance Holdings Ltd. and certain of its
affiliates with a variety of securities law violations, including
operating a ``staking-as-a-service'' program. The SEC's complaint
alleges, among other things, that BAM Trading violated Sections 5(a)
and 5(c) of the Securities Act by offering and selling its staking
program without a registration statement, and that BAM Trading's
Staking Program was promoted ``as a superior and much easier way to
obtain staking rewards by, among other things, pooling the crypto
assets of a large number of investors.'') See also SEC v. Coinbase,
Inc. and Coinbase Global (Complaint filed June 6, 2023) available at
https://www.sec.gov/files/litigation/complaints/2023/comp-pr2023-102.pdf. (On June 6, 2023, the SEC filed a complaint against
Coinbase, Inc. and Coinbase Global in federal district court in the
Southern District of New York, alleging, inter alia that Coinbase
Inc. violated the Securities Act by failing to register with the SEC
the offer and sale of its staking program. The SEC's complaint
alleges that through the Coinbase staking program, investors' crypto
assets are transferred to and pooled by Coinbase (segregated by
asset), and subsequently ``staked'' (or committed) by Coinbase in
exchange for rewards, which Coinbase distributes pro rata to
investors after paying itself a 25-35% commission. The SEC also
alleges that investors understand that Coinbase will expend efforts
and leverage its experience and expertise to generate returns.)
---------------------------------------------------------------------------
As further discussed below, the Sponsor believes its activities in
relation to staking the SOL held by the Fund on behalf of the Fund are
materially different from the delegated staking and ``staking as a
service'' activities that the SEC has alleged to involve securities
offerings in violation of Section 5 of the Securities Act of 1933 (the
``Securities Act'').
First, the Sponsor will only stake the SOL held by the Fund. The
Sponsor will not seek to pool the SOL held by the Fund with SOL held by
other entities (although such pooling may occur at the level of a
Staking Provider). Second, the Sponsor will not advertise itself as
providing any staking services generally, or promise any specific level
of return from staking, or solicit delegated stakes from entities other
than the Fund. Third, the Sponsor has stated that it is staking the
Fund's SOL solely in order to maximize the Fund's revenue generation
opportunities, and to generate returns for the Fund's shareholders.
Fourth, the Sponsor will not bear or subsidize the risk of slashing on
behalf of the Fund.
Staking by the Sponsor will not result in the SOL held by the Fund
moving out of the custody of the Solana Custodian. In order to stake
the Fund's SOL, the Sponsor will engage in what is known as ``point-
and-click staking.'' Point-and-click staking involves an interface
through which an entity can simply initiate staking by pointing and
clicking on the SOL assets to be staked. This process does not involve
the staked SOL leaving the wallet in which it is held and accordingly
reduces the risk of loss of SOL through theft at the node while the
asset is staked (although this process will not reduce the risk of loss
of the SOL through slashing).
Creation and Redemption of Shares
When the Fund sells or redeems its Shares, it will do so in
Creation Baskets that are based on the quantity of SOL attributable to
each Share (net of the accrued but unpaid Sponsor's fee and any accrued
but unpaid expenses or liabilities). Creation Baskets are issued and
redeemed in exchange for SOL and/or cash. According to the Registration
Statement, on any business day, an authorized participant may place an
order to create one or more Creation Baskets. Purchase orders for cash
transaction Creation Baskets must be placed by 2:00 p.m. ET, or the
close of regular trading on the Exchange, whichever is earlier.
Purchase orders for in-kind transaction Creation Baskets must be placed
by 4:00 p.m. ET, or the close of regular trading on the Exchange,
whichever is earlier. The day on which an order is properly received is
considered the purchase order date. For cash creations, the total
deposit of cash required is based on the combined NAV of the number of
Shares included in the Creation Baskets being created determined as of
4:00 p.m. ET on the purchase order date. The Administrator determines
the quantity of SOL associated with a Creation Basket for a given day
by dividing the number of SOL held by the Fund as of the opening of
business on that business day, adjusted for the amount of SOL
constituting estimated accrued but unpaid fees and expenses of the Fund
as of the opening of business on that business day, by the quotient of
the number of Shares outstanding at the opening of business divided by
the number of Shares in a Creation Basket.
The procedures by which an authorized participant can redeem one or
more Creation Baskets mirror the procedures for the creation of
Creation Baskets.
The Sponsor (including its delegates) will maintain ownership and
control of the Fund's SOL in a manner consistent with good delivery
requirements for spot commodity transactions.
Rule 14.11(e)(4)--Commodity-Based Trust Shares
The Shares will be subject to BZX Rule 14.11(e)(4), which sets
forth the initial and continued listing criteria applicable to
Commodity-Based Trust Shares. The Exchange represents that, for initial
and continued listing, the Fund must be in compliance with Rule 10A-3
under the Act. A minimum of 100,000 Shares will be outstanding at the
commencement of listing on the Exchange. The Exchange will obtain a
representation that the NAV will be calculated daily and that the NAV
and information about the assets of the Fund will be made available to
all market participants at the same time. The
[[Page 12831]]
Exchange notes that, as defined in Rule 14.11(e)(4)(C)(i), the Shares
will be: (a) issued by a trust that holds (1) a specified commodity
\25\ deposited with the trust, or (2) a specified commodity and, in
addition to such specified commodity, cash; (b) issued by such trust in
a specified aggregate minimum number in return for a deposit of a
quantity of the underlying commodity and/or cash; and (c) when
aggregated in the same specified minimum number, may be redeemed at a
holder's request by such trust which will deliver to the redeeming
holder the quantity of the underlying commodity and/or cash.
---------------------------------------------------------------------------
\25\ For purposes of Rule 14.11(e)(4), the term commodity takes
on the definition of the term as provided in the CEA.
---------------------------------------------------------------------------
Upon termination of the Fund, the Shares will be removed from
listing. The Trustee is a trust company having substantial capital and
surplus and the experience and facilities for handling corporate trust
business, as required under Rule 14.11(e)(4)(E)(iv)(a) and that no
change will be made to the trustee without prior notice to and approval
of the Exchange. The Exchange also notes that, pursuant to Rule
14.11(e)(4)(F), neither the Exchange nor any agent of the Exchange
shall have any liability for damages, claims, losses or expenses caused
by any errors, omissions or delays in calculating or disseminating any
underlying commodity value, the current value of the underlying
commodity required to be deposited to the Fund in connection with
issuance of Commodity-Based Trust Shares; resulting from any negligent
act or omission by the Exchange, or any agent of the Exchange, or any
act, condition or cause beyond the reasonable control of the Exchange,
its agent, including, but not limited to, an act of God; fire; flood;
extraordinary weather conditions; war; insurrection; riot; strike;
accident; action of government; communications or power failure;
equipment or software malfunction; or any error, omission or delay in
the reports of transactions in an underlying commodity. Finally, as
required in Rule 14.11(e)(4)(G), the Exchange notes that any registered
market maker (``Market Maker'') in the Shares must file with the
Exchange in a manner prescribed by the Exchange and keep current a list
identifying all accounts for trading in an underlying commodity,
related commodity futures or options on commodity futures, or any other
related commodity derivatives, which the registered Market Maker may
have or over which it may exercise investment discretion. No registered
Market Maker shall trade in an underlying commodity, related commodity
futures or options on commodity futures, or any other related commodity
derivatives, in an account in which a registered Market Maker, directly
or indirectly, controls trading activities, or has a direct interest in
the profits or losses thereof, which has not been reported to the
Exchange as required by this Rule. In addition to the existing
obligations under Exchange rules regarding the production of books and
records (see, e.g., Rule 4.2), the registered Market Maker in
Commodity-Based Trust Shares shall make available to the Exchange such
books, records or other information pertaining to transactions by such
entity or registered or non-registered employee affiliated with such
entity for its or their own accounts for trading the underlying
physical commodity, related commodity futures or options on commodity
futures, or any other related commodity derivatives, as may be
requested by the Exchange.
The Exchange is able to obtain information regarding trading in the
Shares and the underlying SOL or any other SOL derivative through
members acting as registered Market Makers, in connection with their
proprietary or customer trades.
As a general matter, the Exchange has regulatory jurisdiction over
its Members and their associated persons, which include any person or
entity controlling a Member. To the extent the Exchange may be found to
lack jurisdiction over a subsidiary or affiliate of a Member that does
business only in commodities or futures contracts, the Exchange could
obtain information regarding the activities of such subsidiary or
affiliate through surveillance sharing agreements with regulatory
organizations of which such subsidiary or affiliate is a member.
Trading Halts
With respect to trading halts, the Exchange may consider all
relevant factors in exercising its discretion to halt or suspend
trading in the Shares. The Exchange will halt trading in the Shares
under the conditions specified in BZX Rule 11.18. Trading may be halted
because of market conditions or for reasons that, in the view of the
Exchange, make trading in the Shares inadvisable. These may include:
(1) the extent to which trading is not occurring in the SOL underlying
the Shares; or (2) whether other unusual conditions or circumstances
detrimental to the maintenance of a fair and orderly market are
present. Trading in the Shares also will be subject to Rule
14.11(e)(4)(E)(ii), which sets forth circumstances under which trading
in the Shares may be halted.
If the IIV or the value of the Index is not being disseminated as
required, the Exchange may halt trading during the day in which the
interruption to the dissemination of the IIV or the value of the Index
occurs. If the interruption to the dissemination of the IIV or the
value of the Index persists past the trading day in which it occurred,
the Exchange will halt trading no later than the beginning of the
trading day following the interruption.
In addition, if the Exchange becomes aware that the NAV with
respect to the Shares is not disseminated to all market participants at
the same time, it will halt trading in the Shares until such time as
the NAV is available to all market participants.
Trading Rules
The Exchange deems the Shares to be equity securities, thus
rendering trading in the Shares subject to the Exchange's existing
rules governing the trading of equity securities. BZX will allow
trading in the Shares during all trading sessions on the Exchange. The
Exchange has appropriate rules to facilitate transactions in the Shares
during all trading sessions. As provided in BZX Rule 11.11(a) the
minimum price variation for quoting and entry of orders in securities
traded on the Exchange is $0.01 where the price is greater than $1.00
per share or $0.0001 where the price is less than $1.00 per share. The
Shares of the Fund will conform to the initial and continued listing
criteria set forth in BZX Rule 14.11(e)(4).
Surveillance
The Exchange represents that its surveillance procedures are
adequate to properly monitor the trading of the Shares on the Exchange
during all trading sessions and to deter and detect violations of
Exchange rules and the applicable federal securities laws. Trading of
the Shares through the Exchange will be subject to the Exchange's
surveillance procedures for derivative products, including Commodity-
Based Trust Shares. FINRA conducts certain cross-market surveillances
on behalf of the Exchange pursuant to a regulatory services agreement.
The Exchange is responsible for FINRA's performance under this
regulatory services agreement.
The Exchange or FINRA, on behalf of the Exchange, or both, will
communicate as needed regarding trading in the Shares or any other SOL
derivative with other markets and other entities that are members of
the ISG, and the Exchange, or FINRA, on behalf of the Exchange, or
both, may obtain trading information regarding trading in
[[Page 12832]]
the Shares or any other SOL derivative from such markets and other
entities.\26\ The Exchange may obtain information regarding trading in
the Shares or any other SOL derivative via ISG, from other exchanges
who are members or affiliates of the ISG, or with which the Exchange
has entered into a comprehensive surveillance sharing agreement.
---------------------------------------------------------------------------
\26\ For a list of the current members and affiliate members of
ISG, see www.isgportal.com.
---------------------------------------------------------------------------
In addition, the Exchange also has a general policy prohibiting the
distribution of material, non-public information by its employees.
The Sponsor has represented to the Exchange that it will advise the
Exchange of any failure by the Fund or the Shares to comply with the
continued listing requirements, and, pursuant to its obligations under
Section 19(g)(1) of the Exchange Act, the Exchange will surveil for
compliance with the continued listing requirements. If the Fund or the
Shares are not in compliance with the applicable listing requirements,
the Exchange will commence delisting procedures under Exchange Rule
14.12.
Information Circular
Prior to the commencement of trading, the Exchange will inform its
members in an Information Circular of the special characteristics and
risks associated with trading the Shares. Specifically, the Information
Circular will discuss the following: (i) the procedures for the
creation and redemption of Creation Baskets (and that the Shares are
not individually redeemable); (ii) BZX Rule 3.7, which imposes
suitability obligations on Exchange members with respect to
recommending transactions in the Shares to customers; (iii) how
information regarding the IIV and the Fund's NAV are disseminated; (iv)
the risks involved in trading the Shares outside of Regular Trading
Hours \27\ when an updated IIV will not be calculated or publicly
disseminated; (v) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with
the confirmation of a transaction; and (vi) trading information. The
Information Circular will also reference the fact that there is no
regulated source of last sale information regarding SOL, and that the
Commission has no jurisdiction over the trading of SOL as a commodity.
---------------------------------------------------------------------------
\27\ Regular Trading Hours is the time between 9:30 a.m. and
4:00 p.m. Eastern Time.
---------------------------------------------------------------------------
In addition, the Information Circular will advise members, prior to
the commencement of trading, of the prospectus delivery requirements
applicable to the Shares. Members purchasing the Shares for resale to
investors will deliver a prospectus to such investors. The Information
Circular will also discuss any exemptive, no-action and interpretive
relief granted by the Commission from any rules under the Act.
2. Statutory Basis
The Exchange believes that the proposal is consistent with Section
6(b) of the Act \28\ in general and Section 6(b)(5) of the Act \29\ in
particular in that it is designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in facilitating transactions in securities, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system and, in general, to protect investors and the
public interest.
---------------------------------------------------------------------------
\28\ 15 U.S.C. 78f.
\29\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Commission has approved numerous series of Trust Issued
Receipts,\30\ including Commodity-Based Trust Shares,\31\ to be listed
on U.S. national securities exchanges. In order for any proposed rule
change from an exchange to be approved, the Commission must determine
that, among other things, the proposal is consistent with the
requirements of Section 6(b)(5) of the Act, specifically including: (i)
the requirement that a national securities exchange's rules are
designed to prevent fraudulent and manipulative acts and practices;
\32\ and (ii) the requirement that an exchange proposal be designed, in
general, to protect investors and the public interest. The Exchange
believes that this proposal is consistent with the requirements of
Section 6(b)(5) of the Act and that this filing sufficiently
demonstrates that potential policy concerns under the Act are
sufficiently mitigated to the point that they are outweighed by
quantifiable investor protection issues that would be resolved by
approving this proposal.
---------------------------------------------------------------------------
\30\ See Exchange Rule 14.11(f).
\31\ Commodity-Based Trust Shares, as described in Exchange Rule
14.11(e)(4), are a type of Trust Issued Receipt.
\32\ Much like bitcoin and ether, the Exchange believes that SOL
is resistant to price manipulation and that ``other means to prevent
fraudulent and manipulative acts and practices'' exist to justify
dispensing with the requisite surveillance sharing agreement. The
geographically diverse and continuous nature of SOL trading render
it difficult and prohibitively costly to manipulate the price of
SOL. The fragmentation across platforms and the capital necessary to
maintain a significant presence on each trading platform make
manipulation of SOL prices through continuous trading activity
challenging. To the extent that there are trading platforms engaged
in or allowing wash trading or other activity intended to manipulate
the price of SOL on other markets, such pricing does not normally
impact prices on other trading platforms because participants will
generally ignore markets with quotes that they deem non-executable.
Moreover, the linkage between SOL markets and the presence of
arbitrageurs in those markets means that the manipulation of the
price of SOL on any single venue would require manipulation of the
global SOL price in order to be effective. Arbitrageurs must have
funds distributed across multiple trading platforms in order to take
advantage of temporary price dislocations, thereby making it
unlikely that there will be strong concentration of funds on any
particular trading platforms or OTC platform. Further, the speed and
relatively inexpensive nature of transactions on the Solana network
allow arbitrageurs to quickly move capital between trading platforms
where price dislocations may occur. As a result, the potential for
manipulation on a trading platform would require overcoming the
liquidity supply of such arbitrageurs who are effectively
eliminating any cross-market pricing differences.
---------------------------------------------------------------------------
More recently, the Commission has applied the Winklevoss Test while
also recognizing that the ``regulated market of significant size''
standard is not the only means for satisfying Section 6(b)(5) of the
Act. In the specifically providing that a listing exchange could
demonstrate that ``other means to prevent fraudulent and manipulative
acts and practices'' are sufficient to justify dispensing with the
requisite surveillance-sharing agreement.\33\ While there is currently
no futures market for SOL, in the Spot Bitcoin ETF Approval Order and
Spot ETH ETF Approval Order the Commission determined that the CME
bitcoin futures market and CME ether futures market, respectively, were
not of ``significant size'' related to the spot market. Instead, the
Commission found that sufficient ``other means'' of preventing fraud
and manipulation had been demonstrated that justified dispensing with a
surveillance-sharing agreement with a regulated market of significant
size. The Exchange and Sponsor believe that this proposal provides for
other means of preventing fraud and manipulation justify dispensing
with a surveillance-sharing agreement with a regulated market of
significant size.
---------------------------------------------------------------------------
\33\ See Winklevoss Order at 37580. The Commission has also
specifically noted that it ``is not applying a `cannot be
manipulated' standard; instead, the Commission is examining whether
the proposal meets the requirements of the Exchange Act and,
pursuant to its Rules of Practice, places the burden on the listing
exchange to demonstrate the validity of its contentions and to
establish that the requirements of the Exchange Act have been met.''
Id. at 37582.
---------------------------------------------------------------------------
The Exchange believes that the proposal is designed to protect
investors and the public interest. Over the past several years, U.S.
investor exposure to SOL has grown into the billions of dollars, mostly
through transactions in
[[Page 12833]]
spot SOL on digital asset trading platforms. The Exchange believes that
approving this proposal (and comparable proposals) provides the
Commission with the opportunity to allow U.S. investors with access to
SOL in a regulated and transparent exchange-traded vehicle that would
act to limit risk to U.S. investors by: (i) reducing premium and
discount volatility; (ii) reducing management fees through meaningful
competition; and (iii) providing an alternative to custodying spot SOL.
The policy concerns that the Exchange Act is designed to address
are also otherwise mitigated by the fact that the size of the market
for the underlying reference asset (approximately $150 billion fully
diluted value). The geographically diverse and continuous nature of SOL
trading makes it difficult and prohibitively costly to manipulate the
price of SOL and, in many instances, the SOL market can be less
susceptible to manipulation than the equity, fixed income, and
commodity futures markets. There are a number of reasons this is the
case, including that there is not inside information about revenue,
earnings, corporate activities, or sources of supply; manipulation of
the price on any single venue would require manipulation of the global
SOL price in order to be effective; a substantial over-the-counter
market provides liquidity and shock-absorbing capacity; SOL's 24/7/365
nature provides constant arbitrage opportunities across all trading
venues; and it is unlikely that any one actor could obtain a dominant
market share.
Further, SOL is arguably less susceptible to manipulation than
other commodities that underlie ETPs; there may be inside information
relating to the supply of the physical commodity such as the discovery
of new sources of supply or significant disruptions at mining
facilities that supply the commodity that simply are inapplicable as it
relates to bitcoin. Further, the Exchange believes that the
fragmentation across SOL trading platforms, the relatively slow speed
of transactions, and the capital necessary to maintain a significant
presence on each trading platform make manipulation of SOL prices
through continuous trading activity unlikely. Moreover, the linkage
between the SOL markets and the presence of arbitrageurs in those
markets means that the manipulation of the price of SOL price on any
single venue would require manipulation of the global SOL price in
order to be effective. Arbitrageurs must have funds distributed across
multiple SOL trading platforms in order to take advantage of temporary
price dislocations, thereby making it unlikely that there will be
strong concentration of funds on any particular SOL trading platform.
As a result, the potential for manipulation on a particular SOL trading
platform would require overcoming the liquidity supply of such
arbitrageurs who are effectively eliminating any cross-market pricing
differences. For all of these reasons, SOL is not particularly
susceptible to manipulation, especially as compared to other approved
ETP reference assets.
The Exchange also believes this proposal is designed to remove
impediments to and perfect the mechanism of a free and open market and,
in general, to protect investors and the public interest because it
would allow the Fund to stake its SOL on behalf of its investors. The
Solana Network allows for staking of its native asset, SOL tokens, and
permits validators who successfully stake SOL to receive rewards in the
form of more SOL tokens. The net beneficiaries are not only validators,
or those on behalf of whom they stake SOL, but also the Solana
blockchain itself which grows and is progressively made more secure
through the validation of transactions. Staking permits validators to
contribute to the network by staking their tokens to secure the
blockchain, facilitating the creation of blocks, and helping process
transactions. Validators are compensated for fulfilling this important
role through transaction fees and consensus rewards paid by the
blockchain itself.
Staking through mechanisms such as ``point-and-click'' staking can
also permit the earning of rewards without certain additional risks to
the tokens held by the Solana Custodian on behalf of the Fund. As such,
not staking the Fund's SOL would amount to waiving the Fund's right to
free additional SOL, an act analogous to an equity ETP refusing
dividends from the companies it holds. Allowing the Fund to stake its
SOL would benefit investors and help the Fund to better track the
returns associated with holding SOL. This would improve the creation
and redemption process for both authorized participants and the Fund,
increase efficiency, and ultimately benefit the end investors in the
Fund.
Commodity-Based Trust Shares
The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices in that the
Shares will be listed on the Exchange pursuant to the initial and
continued listing criteria in Exchange Rule 14.11(e)(4). The Exchange
believes that its surveillance procedures are adequate to properly
monitor the trading of the Shares on the Exchange during all trading
sessions and to deter and detect violations of Exchange rules and the
applicable federal securities laws. Trading of the Shares through the
Exchange will be subject to the Exchange's surveillance procedures for
derivative products, including Commodity-Based Trust Shares. The
Sponsor has represented to the Exchange that it will advise the
Exchange of any failure by the Fund or the Shares to comply with the
continued listing requirements, and, pursuant to its obligations under
Section 19(g)(1) of the Exchange Act, the Exchange will surveil for
compliance with the continued listing requirements. If the Fund or the
Shares are not in compliance with the applicable listing requirements,
the Exchange will commence delisting procedures under Exchange Rule
14.12. The Exchange may obtain information regarding trading in the
Shares and listed SOL derivatives via the ISG, from other exchanges who
are members or affiliates of the ISG, or with which the Exchange has
entered into a comprehensive surveillance sharing agreement.
Availability of Information
In addition to the price transparency of the Index, the Fund will
provide information regarding the Fund's SOL holdings as well as
additional data regarding the Fund.
The website for the Fund, which will be publicly accessible at no
charge, will contain the following information: (a) the current NAV per
Share daily and the prior business day's NAV per Share and the reported
BZX Official Closing Price; \34\ (b) the BZX Official Closing Price in
relation to the NAV per Share as of the time the NAV is calculated and
a calculation of the premium or discount of such price against such NAV
per Share; (c) data in chart form displaying the frequency distribution
of discounts and premiums of the BZX Official Closing Price against the
NAV per Share, within appropriate ranges for each of the four previous
calendar quarters (or for the life of the Fund, if shorter); (d) the
prospectus; and (e) other applicable quantitative information. The
aforementioned information will be published as of the close of
business and be available on the Fund's website at https://
www.franklintempleton.com/investments/options/exchange-traded-
[[Page 12834]]
funds, or any successor thereto. The NAV for the Fund will be
calculated by the Administrator once a day and will be disseminated
daily to all market participants at the same time. Quotation and last-
sale information regarding the Shares will be disseminated through the
facilities of the CTA. The Fund will also disseminate its holdings on a
daily basis on its website.
---------------------------------------------------------------------------
\34\ As defined in Rule 11.23(a)(3), the term ``BZX Official
Closing Price'' shall mean the price disseminated to the
consolidated tape as the market center closing trade.
---------------------------------------------------------------------------
The IIV will be calculated by using the prior day's closing NAV per
Share as a base and updating that value during Regular Trading Hours to
reflect changes in the value of the Fund's SOL holdings during the
trading day, which is based on the CME CF Solana-Dollar Real Time
Index. The IIV disseminated during Regular Trading Hours should not be
viewed as an actual real-time update of the NAV, which will be
calculated only once at the end of each trading day. The IIV will be
widely disseminated on a per Share basis every 15 seconds during the
Exchange's Regular Trading Hours through the facilities of the CTA and
CQS high speed lines. In addition, the IIV will be available through
on-line information services such as Bloomberg and Reuters.
The price of SOL will be made available by one or more major market
data vendors, updated at least every 15 seconds during Regular Trading
Hours.
As noted above, the Index is calculated daily and aggregates the
notional value of SOL trading activity across major spot SOL trading
platforms. Index data, the Index value, and the description of the
Index are based on information made publicly available by the Index
Provider on its website at https://www.cfbenchmarks.com.
Quotation and last sale information for SOL is widely disseminated
through a variety of major market data vendors, including Bloomberg and
Reuters. Information relating to trading, including price and volume
information, in SOL is available from major market data vendors and
from the trading platforms on which SOL are traded. Depth of book
information is also available from SOL trading platforms. The normal
trading hours for SOL trading platforms are 24 hours per day, 365 days
per year.
Information regarding market price and trading volume of the Shares
will be continually available on a real-time basis throughout the day
on brokers' computer screens and other electronic services. Information
regarding the previous day's BZX Official Closing Price and trading
volume information for the Shares will be published daily in the
financial section of newspapers. Quotation and last-sale information
regarding the Shares will be disseminated through the facilities of the
CTA.
In sum, the Exchange believes that this proposal is consistent with
the requirements of Section 6(b)(5) of the Act, that on the whole the
manipulation concerns previously articulated by the Commission are
sufficiently mitigated to the point that they are outweighed by
investor protection issues that would be resolved by approving this
proposal.
The Exchange believes that the proposal is, in particular, designed
to protect investors and the public interest. The investor protection
issues for U.S. investors has grown significantly over the last several
years, through premium/discount volatility and management fees for OTC
SOL Funds. As discussed throughout, this growth investor protection
concerns need to be re-evaluated and rebalanced with the prevention of
fraudulent and manipulative acts and practices concerns that previous
disapproval orders have relied upon.
For the above reasons, the Exchange believes that the proposed rule
change is consistent with the requirements of Section 6(b)(5) of the
Act.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purpose of the Act. The Exchange notes that the
proposed rule change, rather will facilitate the listing and trading of
an additional exchange-traded product that will enhance competition
among both market participants and listing venues, to the benefit of
investors and the marketplace.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
A. by order approve or disapprove such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-CboeBZX-2025-039 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-CboeBZX-2025-039. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection. All
submissions should refer to file number SR-CboeBZX-2025-039 and should
be submitted on or before April 9, 2025.
[[Page 12835]]
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\35\
---------------------------------------------------------------------------
\35\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-04505 Filed 3-18-25; 8:45 am]
BILLING CODE 8011-01-P