[Federal Register Volume 90, Number 72 (Wednesday, April 16, 2025)]
[Notices]
[Pages 16022-16036]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-06413]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-102812; File No. SR-NASDAQ-2025-030]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing of a Proposed Rule Change To List and Trade Shares of
Grayscale Avalanche Trust (AVAX) Under Nasdaq Rule 5711(d) (Commodity-
Based Trust Shares)
April 10, 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 27, 2025 The Nasdaq Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I and II 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.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to list and trade shares of Grayscale
Avalanche Trust (AVAX) (the ``Trust'') under Nasdaq Rule 5711(d)
(``Commodity-Based Trust Shares''). The shares of the Trust are
referred to herein as the ``Shares.''
The text of the proposed rule change is available on the Exchange's
website at https://listingcenter.nasdaq.com/rulebook/nasdaq/rulefilings, at the principal office of the Exchange, 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
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.
[[Page 16023]]
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 Nasdaq
Rule 5711(d), which governs the listing and trading of Commodity-Based
Trust Shares on the Exchange.\3\ The sponsors of the Trust are
Grayscale Operating, LLC and Grayscale Investments Sponsors, LLC (each,
a ``Sponsor'' and, collectively, the ``Sponsors''), each a Delaware
limited liability company.\4\ The Sponsors are indirect wholly owned
subsidiaries of Digital Currency Group, Inc. (``Digital Currency
Group''). The trustee for the Trust is CSC Delaware Trust Company
(``Trustee''). The custodian for the Trust is Coinbase Custody Trust
Company, LLC (``Custodian''). The administrator and transfer agent of
the Trust is expected to be BNY Mellon Asset Servicing, a division of
The Bank of New York Mellon (the ``Transfer Agent''). The distribution
and marketing agent for the Trust is expected to be Foreside Fund
Services, LLC (the ``Marketing Agent''). The index provider for the
Trust is CoinDesk Indices, Inc. (the ``Index Provider'').
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\3\ The Commission approved Nasdaq Rule 5711 in Securities
Exchange Act Release No. 66648 (March 23, 2012), 77 FR 19428 (March
30, 2012) (SR-NASDAQ-2012-013).
\4\ As of May 3, 2025, Grayscale Operating, LLC will cease to
act as Sponsor of the Trust and Grayscale Investment Sponsors, LLC
will be sole Sponsor of the Trust.
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The Trust is a Delaware statutory trust that operates pursuant to a
trust agreement between the Sponsor and the Trustee (``Trust
Agreement'').
Operation of the Trust
According to the prospectus the Trust intends to file (the
``Prospectus''), the Trust's assets consist solely of AVAX, the native
token of the Avalanche Network (as defined below) (``AVAX'').
Each Share represents a proportional interest, based on the total
number of Shares outstanding, in the Trust's assets as determined by
reference to the Index Price,\5\ less the Trust's expenses and other
liabilities (which include accrued but unpaid fees and expenses). The
Sponsors expect that the market price of the Shares will fluctuate over
time in response to the market prices of AVAX. In addition, because the
Shares reflect the estimated accrued but unpaid expenses of the Trust,
the number of AVAX represented by a Share will gradually decrease over
time as the Trust's AVAX are used to pay the Trust's expenses.
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\5\ The ``Index Price'' means the U.S. dollar value of AVAX
derived from the Digital Asset Trading Platforms (as defined below)
that are reflected in the CoinDesk AVAX CCIXber Reference Rate (the
``Index''), calculated at 4:00 p.m., New York time, on each business
day.
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The activities of the Trust are limited to (i) issuing ``Baskets''
(as defined below) in exchange for AVAX transferred to the Trust as
consideration in connection with creations, (ii) transferring or
selling AVAX as necessary to cover the ``Sponsor's Fee'' \6\ and/or
certain Trust expenses, (iii) transferring AVAX in exchange for Baskets
surrendered for redemption (subject to obtaining regulatory approval
from the Commission and approval of the Sponsor), (iv) causing the
Sponsor to sell AVAX on the termination of the Trust, and (v) engaging
in all administrative and security procedures necessary to accomplish
such activities in accordance with the provisions of the Trust
Agreement, the Custodian Agreement, the Index License Agreement, and
the Participant Agreements (each as defined below).
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\6\ The Sponsor's Fee means a fee, payable in AVAX, which will
daily in U.S. dollars at an annual rate of a to-be-determined
percentage of the NAV Fee Basis Amount of the Trust as of 4:00 p.m.,
New York time, on each day, provided that for a day that is not a
business day, the calculation of the Sponsor's Fee will be based on
the NAV Fee Basis Amount from the most recent business day, reduced
by the accrued and unpaid Sponsor's Fee for such most recent
business day and for each day after such most recent business day
and prior to the relevant calculation date. The ``NAV Fee Basis
Amount'' is calculated in the manner set forth under ``Valuation of
AVAX and Determination of NAV'' below.
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The Trust will not be actively managed. It will not engage in any
activities designed to obtain a profit from, or to ameliorate losses
caused by, changes in the market prices of AVAX.
The Trust is not a registered investment company under the
Investment Company Act and the Sponsors believe that the Trust is not
required to register under the Investment Company Act.
Investment Objective
According to the Prospectus, and as further described below, the
Trust's investment objective is for the value of the Shares (based on
AVAX per Share) to reflect the value of the AVAX held by the Trust,
determined by reference to the Index Price, less the Trust's expenses
and other liabilities. While an investment in the Shares is not a
direct investment in AVAX, the Shares are designed to provide investors
with a cost-effective and convenient way to gain investment exposure to
AVAX. Generally speaking, a substantial direct investment in AVAX may
require expensive and sometimes complicated arrangements in connection
with the acquisition, security and safekeeping of the AVAX and may
involve the payment of substantial fees to acquire such AVAX from
third-party facilitators through cash payments of U.S. dollars. Because
the value of the Shares is correlated with the value of AVAX held by
the Trust, it is important to understand the investment attributes of,
and the market for, AVAX.
The Trust uses the Index Price to calculate its ``NAV,'' which is
the aggregate value, expressed in U.S. dollars, of the Trust's assets
(other than U.S. dollars or other fiat currency), less the U.S. dollar
value of the Trust's expenses and other liabilities calculated in the
manner set forth under ``Valuation of AVAX and Determination of NAV.''
``NAV per Share'' is calculated by dividing NAV by the number of Shares
then outstanding.
Valuation of AVAX and Determination of NAV
The following is a description of the material terms of the Trust
Agreement as they relate to valuation of the Trust's AVAX and the NAV
calculations.
On each business day at 4:00 p.m., New York time, or as soon
thereafter as practicable (the ``Evaluation Time''), the Sponsor will
evaluate the AVAX held by the Trust and calculate and publish the NAV
of the Trust. To calculate the NAV, the Sponsor will:
1. Determine the Index Price as of such business day.
2. Multiply the Index Price by the Trust's aggregate number of AVAX
owned by the Trust as of 4:00 p.m., New York time, on the immediately
preceding day, less the aggregate number of AVAX payable as the accrued
and unpaid Sponsor's Fee as of 4:00 p.m., New York time, on the
immediately preceding day.
3. Add the U.S. dollar value of AVAX, calculated using the Index
Price, receivable under pending creation orders, if any, determined by
multiplying the number of the Baskets represented by such creation
orders by the Basket Amount and then multiplying such product by the
Index Price.\7\
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\7\ ``Baskets'' and ``Basket Amount'' have the meanings set
forth in ``Creation and Redemption of Shares'' below.
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4. Subtract the U.S. dollar amount of accrued and unpaid Additional
Trust Expenses, if any.\8\
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\8\ A ``Digital Asset Market'' is a ``Brokered Market,''
``Dealer Market,'' ``Principal-to-Principal Market'' or ``Exchange
Market,'' as each such term is defined in the Financial Accounting
Standards Board Accounting Standards Codification Master Glossary.
The ``Digital Asset Trading Platform Market'' is the global trading
platform market for the trading of AVAX, which consists of
transactions on electronic Digital Asset Trading Platforms. A
``Digital Asset Trading Platform'' is an electronic marketplace
where trading participants may trade, buy and sell AVAX based on
bid-ask trading. The largest Digital Asset Trading Platforms are
online and typically trade on a 24-hour basis, publishing
transaction price and volume data.
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[[Page 16024]]
5. Subtract the U.S. dollar value of the AVAX, calculated using the
Index Price, to be distributed under pending redemption orders, if any,
determined by multiplying the number of Baskets to be redeemed
represented by such redemption orders by the Basket Amount and then
multiplying such product by the Index Price (the amount derived from
steps 1 through 5 above, the ``NAV Fee Basis Amount'').
6. Subtract the U.S. dollar amount of the Sponsor's Fee that
accrues for such business day, as calculated based on the NAV Fee Basis
Amount for such business day.
In the event that the Sponsor determines that the primary
methodology used to determine the Index Price is not an appropriate
basis for valuation of the Trust's AVAX, the Sponsor will utilize the
cascading set of rules as described in ``Determination of the Index
Price When Index Price is Unavailable'' below.
AVAX and the Avalanche Network
AVAX is a digital asset that is created and transmitted through the
operations of the peer-to-peer Avalanche Network, a decentralized
network of computers that operates on cryptographic protocols. No
single entity owns or operates the Avalanche Network, the
infrastructure of which is collectively maintained by a decentralized
user base. The Avalanche Network allows people to exchange tokens of
value, called AVAX, which are recorded on a public transaction ledger
known as a blockchain. AVAX can be used to pay for goods and services,
including computational power on the Avalanche Network, or it can be
converted to fiat currencies, such as the U.S. dollar, at rates
determined on Digital Asset Trading Platforms or in individual end-
user-to-end-user transactions under a barter system. Furthermore, the
Avalanche 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 AVAX on the Avalanche Network. Smart contract
operations are executed on the Avalanche blockchain in exchange for
payment of AVAX. Like the Ethereum network, the Avalanche Network is
one of a number of projects intended to expand blockchain use beyond
just a peer-to-peer money system.
The Avalanche Network primarily uses a proof-of-stake consensus
mechanism to incentivize AVAX 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. Proof-of-stake is viewed as more energy
efficient and scalable than proof-of-work and is sometimes referred to
as ``virtual mining''.
Unlike with the Bitcoin blockchain, whereby every node validates
every transaction, each Avalanche validator is only required to
validate the ``Primary Network,'' which is comprised of three
blockchains--the Exchange (X) Chain, the Platform (P) Chain, and the
Contract (C) Chain--which each have a specific use. On the Exchange (X)
Chain, AVAX and other assets exist and are traded. The Platform (P)
Chain coordinates validators and creates subnets (as defined below).
Finally, the Contract (C) Chain executes smart contracts.
Whereas all validators are required to validate the Primary Network
and the three blockchains described above, active validators of the
Primary Network may additionally elect to validate certain non-core
blockchains (i.e., blockchains that are not fundamental to or necessary
for the Avalanche Network to operate) of the Avalanche Network.
Avalanche Network users can create tokens and transact on these non-
core blockchains (each such blockchain, a ``subnet'') for specific
applications and use cases. Transactions on these subnets are intended
to be faster and less expensive than if they occurred on one single
blockchain. The Primary Network then coordinates activities among the
subnets. For example, a single dApp might utilize a subnet to
facilitate its core transactions and functionalities, while being able
to interact with other Avalanche dApps and subnets via the Primary
Network.
These efficiencies can be achieved because the Avalanche Network
uses a subset of validators to validate subnets, reducing the resources
required to validate transactions across the entire ecosystem.
Consequently, the Avalanche Network is reportedly one of the fastest
networks when measured by transaction time-to-finality at relatively
low transaction costs.
Components of the Avalanche protocol were first conceived in a 2018
document by the pseudonymous ``Team Rocket.'' Development of the
Avalanche Network is overseen by Ava Labs Inc. (``Ava Labs''), a
Delaware corporation headquartered in New York, which was founded by
Cornell University Professor Emin Gun Sirer and graduate student Maofan
Yin to formalize the Avalanche Protocol. Ava Labs administered the
original network launch and token distribution.
Although Ava Labs and the associated Avalanche Foundation Limited
(``Avalanche Foundation'') continue to exert significant influence over
the direction of the development of Avalanche, the Avalanche Network,
like the Ethereum network, is decentralized and does not require
governmental authorities or financial institution intermediaries to
create, transmit or determine the value of AVAX.
At the time of initial distribution, Ava Labs represented the
largest owner, holding approximately 72 million AVAX, or 10% of the
total supply of AVAX, most in unreleased supply yet to be distributed
and held in treasury, and Avalanche Foundation held approximately 67
million AVAX, or 9.25% of the total supply of AVAX.\9\ As of March 20,
2025, approximately 414 million AVAX, or 58% of the total supply of
AVAX was in circulation distributed across multiple wallets.
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\9\ SEQ, Why Avalanche (AVAX) has the potential to be an
incredible store of value, Medium: Avalanche Hub (Oct. 18, 2020),
https://medium.com/avalanche-hub/why-avalanche-avax-has-the-potential-to-be-an-incredible-store-of-value-8ef6e68cbb60.
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Custody of the Trust's AVAX
Digital assets and digital asset transactions are recorded and
validated on blockchains, the public transaction ledgers of a digital
asset network. Each digital asset blockchain serves as a record of
ownership for all of the units of such digital asset, even in the case
of certain privacy-preserving digital assets, where the transactions
themselves are not publicly viewable. All digital assets recorded on a
blockchain are associated with a public blockchain address, also
referred to as a digital wallet. Digital assets held at a particular
public
[[Page 16025]]
blockchain address may be accessed and transferred using a
corresponding private key.
Key Generation
Public addresses and their corresponding private keys are generated
by the Custodian in secret key generation ceremonies at secure
locations inside faraday cages, which are enclosures used to block
electromagnetic fields and thus mitigate against attacks. The Custodian
uses quantum random number generators to generate the public and
private key pairs.
Once generated, private keys are encrypted, separated into
``shards,'' and then further encrypted. After the key generation
ceremony, all materials used to generate private keys, including
computers, are destroyed. All key generation ceremonies are performed
offline. No party other than the Custodian (including the Trust itself)
has access to the private key shards of the Trust.
Key Storage
Private key shards are distributed geographically in secure vaults
around the world, including in the United States. The locations of the
secure vaults may change regularly and are kept confidential by the
Custodian for security purposes.
The ``Digital Asset Account'' is a segregated custody account
controlled and secured by the Custodian to store private keys, which
allows for the transfer of ownership or control of the Trust's AVAX on
the Trust's behalf. The Digital Asset Account uses offline storage, or
``cold,'' mechanisms to secure the Trust's private keys. The term cold
storage refers to a safeguarding method by which the private keys
corresponding to digital assets are disconnected and/or deleted
entirely from the internet. Cold storage of private keys may involve
keeping such keys on a non-networked (or ``air-gapped'') computer or
electronic device or storing the private keys on a storage device (for
example, a USB thumb drive) or printed medium (for example, papyrus,
paper, or a metallic object). A digital wallet may receive deposits of
digital assets but may not send digital assets without use of the
digital assets' corresponding private keys. In order to send digital
assets from a digital wallet in which the private keys are kept in cold
storage, either the private keys must be retrieved from cold storage
and entered into an online, or ``hot,'' digital asset software program
to sign the transaction, or the unsigned transaction must be
transferred to the cold server in which the private keys are held for
signature by the private keys and then transferred back to the online
digital asset software program. At that point, the user of the digital
wallet can transfer its digital assets.
Security Procedures
The Custodian is the custodian of the Trust's private keys (which,
as noted above, facilitate the transfer of ownership or control of the
Trust's AVAX) in accordance with the terms and provisions of the
custodian agreement by and between the Custodian, the Sponsor and the
Trust (the ``Custodian Agreement''). Transfers from the Digital Asset
Account require certain security procedures, including, but not limited
to, multiple encrypted private key shards, usernames, passwords and 2-
step verification. Multiple private key shards held by the Custodian
must be combined to reconstitute the private key to sign any
transaction in order to transfer the Trust's assets. Private key shards
are distributed geographically in secure vaults around the world,
including in the United States.
As a result, if any one secure vault is ever compromised, this
event will have no impact on the ability of the Trust to access its
assets, other than a possible delay in operations, while one or more of
the other secure vaults is used instead. These security procedures are
intended to remove single points of failure in the protection of the
Trust's assets.
Transfers of AVAX to the Digital Asset Account will be available to
the Trust once processed on the Blockchain.
Subject to obtaining regulatory approval to operate a redemption
program and authorization of the Sponsor, the process of accessing and
withdrawing AVAX from the Trust to redeem a Basket by an Authorized
Participant will follow the same general procedure as transferring AVAX
to the Trust to create a Basket by an Authorized Participant, only in
reverse.
The Sponsor will maintain ownership and control of the Trust's AVAX
in a manner consistent with good delivery requirements for spot
commodity transactions.
AVAX Value
Digital Asset Trading Platform Valuation
The value of AVAX is determined by the value that various market
participants place on AVAX through their transactions. The most common
means of determining the value of an AVAX is by surveying one or more
Digital Asset Trading Platforms where AVAX is traded publicly and
transparently.
Digital Asset Trading Platform Public Market Data
On each online Digital Asset Trading Platform, AVAX is traded with
publicly disclosed valuations for each executed trade, measured by one
or more fiat currencies such as the U.S. dollar or euro, or stablecoins
such as U.S. Dollar Coin (``USDC''). Over-the-counter dealers or market
makers do not typically disclose their trade data.
As of December 31, 2024, the Digital Asset Trading Platforms
included in the Index were Bitstamp, Bullish, Bybit, Crypto.com,
Gemini, Kraken, and OKX. As further described below, the Sponsor and
the Trust reasonably believe each of these Digital Asset Trading
Platforms are in material compliance with applicable licensing
requirements based on the Trading Platform Category and Jurisdiction,
as detailed below, and maintain practices and policies designed to
comply with anti-money laundering (``AML'') and know-your-customer
(``KYC'') regulations.
Bitstamp: A U.K.-based trading platform registered as a
money services business (``MSB'') with the Financial Crimes Enforcement
Network (``FinCEN'') and licensed as a virtual currency business under
the New York State Department of Financial Services (``NYDFS'')
BitLicense as well as a money transmitter in various U.S. states.
Bullish: A Gibraltar-based trading platform registered as
an MSB with FinCEN. Bullish is not available to U.S. based customers.
Bullish is categorized by the Index Provider as a ``Category 2''
trading platform which meets the Inclusion Criteria outlined below but
is non-U.S. licensed.
Bybit: A United Arab Emirates based trading platform.
Bybit does not hold any licenses or registrations in the U.S. and is
not available to U.S. based customers. Bybit is categorized by the
Index Provider as a ``Category 2'' trading platform which meets the
Inclusion Criteria outlined below but is non-U.S. licensed.
Crypto.com: A Singapore-based trading platform registered
as an MSB with FinCEN and licensed as a money transmitter in various
U.S. states. Crypto.com does not hold a BitLicense.
Gemini: A U.S.-based trading platform registered as an MSB
with FinCEN and licensed as money transmitter in various U.S. states.
Gemini is exempt from applying for a BitLicense under the framework
established by NYDFS because of their trust charter under NY Banking
Law.
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Kraken: A U.S.-based trading platform registered as an MSB
with FinCEN and licensed as a money transmitter in various U.S. states.
Kraken does not hold a BitLicense.
OKX: A Seychelles based trading platform. OKX does not
hold any licenses or registrations in the U.S. and is not available to
U.S. based customers. OKX is categorized by the Index Provider as a
``Category 2'' trading platform which meets the Inclusion Criteria
outlined below but is non-U.S. licensed.
Currently, there are several Digital Asset Trading Platforms
operating worldwide and online Digital Asset Trading Platforms
represent a substantial percentage of AVAX buying and selling activity
and provide the most data with respect to prevailing valuations of
AVAX. These trading platforms include established trading platforms
such as trading platforms included in the Index which provide a number
of options for buying and selling AVAX. The below table reflects the
trading volume in AVAX and market share of the AVAX-U.S. dollar and
AVAX-USDC trading pairs of each of the Digital Asset Trading Platforms
included in the Index as of December 31, 2024 (collectively,
``Constituent Trading Platforms''), using data since January 1, 2024:
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AVAX trading platforms included in Market share \1\
the index as of December 31, 2024 Volume (AVAX) (%)
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Kraken............................ 42,568,182 11.43
Crypto.com........................ 20,093,962 5.40
Bitstamp.......................... 7,807,791 2.10
Gemini............................ 2,293,338 0.62
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Total U.S. Dollar-AVAX trading 72,763,273 19.55
pair.........................
Bullish........................... 32,307,111 28.34
Bybit............................. 18,651,429 16.36
OKX............................... 6,236,624 5.47
Kraken............................ 24,905 0.02
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Total USDC-AVAX trading pair.. 57,220,069 50.19
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\1\ Market share is calculated using trading volume (in AVAX) for
certain Digital Asset Trading Platforms including, Kraken, Crypto.com,
Bitstamp, Gemini, Bullish, Bybit and OKX, as well as certain other
large U.S.-dollar and USDC denominated Digital Asset Trading Platforms
that were not included in the Index as of December 31, 2024, including
Coinbase Bitfinex, Binance, Kucoin and MEXC.
The Index and the Index Price
The Index is a U.S. dollar-denominated composite reference rate for
the price of AVAX. The Index is designed to (1) mitigate the effects of
fraud, manipulation and other anomalous trading activity from impacting
the AVAX reference rate, (2) provide a real-time, volume-weighted fair
value of AVAX and (3) appropriately handle and adjust for non-market
related events.
The Index Price is determined by the Index Provider through a
process in which trade data is cleansed and compiled in such a manner
as to algorithmically reduce the impact of anomalistic or manipulative
trading. This is accomplished by the (a) real-time introduction and
capture of new trades on a trade-by-trade basis where prior trade data
becomes immediately less relevant with new trades, (b) utilization of
an Outlier Detection Factor \10\ for excluding a price or price(s)
deemed to be an outlier relative to the most recently calculated Index
price, and (c) utilization of a time penalty factor for penalizing
inactivity for any of the Constituent Trading Platforms.
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\10\ Outlier Detection Factor means a factor used for penalizing
a price deemed to be an outlier in accordance with the Index
Provider's methodology.
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Constituent Trading Platform Selection
According to the Memorandum, the Digital Asset Trading Platforms
that are included in the Index are selected by the Index Provider
utilizing a methodology that is guided by the International
Organization of Securities Commissions (``IOSCO'') principles for
financial benchmarks. For a trading platform to become a Constituent
Trading Platform, it must satisfy each of the criteria listed below
(the ``Inclusion Criteria''):
No evidence in the past 12 months of trading restrictions
on individuals or entities that would otherwise meet the trading
platform's eligibility requirements to trade;
No evidence in the past 12 months of undisclosed
restrictions on deposits or withdrawals from user accounts;
Real-time price discovery;
Limited or no capital controls; \11\
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\11\ ``Capital controls'' in this context means governmental
sanctions that would limit the movement of capital into, or out of,
the jurisdiction in which such Digital Asset Trading Platforms
operate.
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Transparent ownership including a publicly-known ownership
entity;
Publicly available language and policies addressing legal
and regulatory compliance in the U.S., including KYC, AML and other
policies designed to comply with relevant regulations that might apply
to it; and
Offer programmatic spot trading of the trading pair \12\
and reliably publish trade prices and volumes on a real-time basis
through Rest and Websocket APIs.
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\12\ Trading platforms with programmatic trading offer traders
an application programming interface that permits trading by sending
programmed commands to the trading platform.
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All trading platforms that meet these Inclusion Criteria will be
assigned to one Exchange Category as defined by the additional criteria
below:
Category 1
[cir] Licensed and/or able to serve investors, retail or
professional, in the U.S.; and
[cir] Maintain sufficient USD or USDC liquidity relative to the
size of the listed assets.
Category 2
[cir] Licensed (including in-principal licensure) and/or able to
serve investors, retail or professional, in one or more of the
following jurisdictions:
[ssquf] United Kingdom
[ssquf] European Union \13\
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\13\ In the event an exchange is only licensed or able to serve
investors in select European Union countries and none of the other
listed jurisdictions, the Index Provider reserves the right to
evaluate its eligibility on a case-by-case basis.
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[ssquf] Hong Kong
[ssquf] Singapore; and
[cir] Maintain sufficient USD or USDC liquidity relative to the
size of the listed assets.
A Digital Asset Trading Platform is removed as a Constituent
Trading
[[Page 16027]]
Platform when it no longer satisfies the Inclusion Criteria. The Index
Provider does not currently include data from over-the-counter markets
or derivatives platforms among the Constituent Trading Platforms.
According to the Memorandum, over-the-counter data is not currently
included because of the potential for trades to include a significant
premium or discount paid for larger liquidity, which creates an uneven
comparison relative to more active markets. There is also a higher
potential for over-the-counter transactions to not be arms-length, and
thus not be representative of a true market price.
The Index Provider and the Sponsor have entered into the index
license agreement, dated as of February 1, 2022 (as amended, the
``Index License Agreement''), governing the Sponsor's use of the Index
Price.\14\ Pursuant to the terms of the Index License Agreement, the
Index Provider may adjust the calculation methodology for the Index
Price without notice to, or consent of, the Trust or its shareholders.
The Index Provider may decide to change the calculation methodology to
maintain the integrity of the Index Price calculation should it
identify or become aware of previously unknown variables or issues with
the existing methodology that it believes could materially impact its
performance and/or reliability. The Index Provider has sole discretion
over the determination of Index Price and may change the methodologies
for determining the Index Price from time to time. Shareholders will be
notified of any material changes to the calculation methodology or the
Index Price in the Trust's current reports and will be notified of all
other changes that the Sponsor considers significant in the Trust's
periodic or current reports. The Sponsor will determine the materiality
of any changes to the Index Price on a case-by-case basis, in
consultation with external counsel.
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\14\ Upon entering into the Index License Agreement, the Sponsor
and the Index Provider terminated the license agreement between the
parties dated as of February 28, 2019.
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The Index Provider may change the trading venues that are used to
calculate the Index or otherwise change the way in which the Index is
calculated at any time. For example, the Index Provider has scheduled
quarterly reviews in which it may add or remove Constituent Trading
Platforms that satisfy or fail the Inclusion Criteria. The Index
Provider does not have any obligation to consider the interests of the
Sponsor, the Trust, the shareholders, or anyone else in connection with
such changes. While the Index Provider is not required to publicize or
explain the changes or to alert the Sponsor to such changes, it has
historically notified the Trust (and other subscribers to the Index) of
any material changes to the Constituent Trading Platforms, including
any additions or removals, contemporaneous with its issuance of press
releases in connection with the same. The Sponsor will notify investors
of any such material event by filing a current report on Form 8-K.
Although the Index methodology is designed to operate without any
manual intervention, rare events would justify manual intervention.
Intervention of this kind would be in response to non-market-related
events, such as the halting of deposits or withdrawals of funds on a
Digital Asset Trading Platform, the unannounced closure of operations
on a Digital Asset Trading Platform, insolvency or the compromise of
user funds. In the event that such an intervention is necessary, the
Index Provider would issue a public announcement through its website,
API or other established communication channels with its clients.
Determination of the Index Price
The Index applies an algorithm to the price of AVAX on the
Constituent Trading Platforms calculated every 5 seconds over a 24-hour
period. The Index's algorithm is expected to reflect a five-pronged
methodology to calculate the Index Price from the Constituent Trading
Platforms:
Volume Weighting: Constituent Trading Platforms with
greater liquidity receive a higher weighting in the Index, increasing
the ability to execute against (i.e., replicate) the Index in the
underlying spot markets. The Index Price methodology is a volume-
weighted real-time price where each Constituent Trading Platform is
weighted based on its trailing 24-hour volume.
FX Conversion: The Index Price algorithm utilizes a
volume-weighted real-time FX conversion rate for any trading activity
for the relevant Stablecoin-USD pair. This normalizes all trading
activity to USD denomination.
Outlier Detection Factor: The Index Price algorithm
excludes trade data and price(s) deemed to be an outlier relative to
the most recently calculated Index Price.
Inactivity Adjustment: The Index Price algorithm penalizes
stale activity from any given Constituent Trading Platform. When a
Constituent Trading Platform does not have recent trading data, the
outdated prices and their contribution to the Index Price calculation
is gradually reduced until it is de-weighted to 0.1%. Similarly, once
trading activity at a Constituent Trading Platform resumes, the
corresponding weighting for that Constituent Trading Platform will no
longer be penalized.
Manipulation Resistance: In order to mitigate the effects
of wash trading and order book spoofing, and in an effort to prioritize
the most significant Constituent Trading Platforms for a given asset--
the Index utilizes a Constituent Trading Platform Selection and Review
process, which seeks to identify the highest-ranking Constituent
Trading Platforms based on both qualitative and quantitative factors.
The Qualitative Review includes legal and regulation, data provision,
security, trade monitoring, market quality, and negative events policy,
among others. The Quantitative Review includes review of trading
activity for the asset on the given Constituent Trading Platform.
The Index Provider re-evaluates the weighting algorithm on a
periodic basis, but maintains discretion to change the way in which an
Index Price is calculated based on its periodic review or in extreme
circumstances and does not make the exact methodology to calculate the
Index Price publicly available. Nonetheless, the Sponsors believe that
the Index is designed to limit exposure to trading or price distortion
of any individual Digital Asset Trading Platform that experiences
periods of unusual activity or limited liquidity by discounting, in
real-time, anomalous price movements at individual Digital Asset
Trading Platforms.
The Sponsors believe the Index Provider's selection process for
Constituent Trading Platforms as well as the methodology of the Index
Price's algorithm provides a more accurate picture of AVAX price
movements than a simple average of Digital Asset Trading Platform spot
prices, and that the weighting of AVAX prices on the Constituent
Trading Platforms limits the inclusion of data that is influenced by
temporary price dislocations that may result from technical problems,
limited liquidity or fraudulent activity elsewhere in the AVAX spot
market. By referencing multiple trading venues and weighting them based
on trade activity, the Sponsors believe that the impact of any
potential fraud, manipulation or anomalous trading activity occurring
on any single venue is reduced.
If the Index Price becomes unavailable, or if the Sponsor
determines in good faith that such Index Price does not reflect an
accurate price for AVAX, then the Sponsor will, on a
[[Page 16028]]
best efforts basis, contact the Index Provider to obtain the Index
Price directly from the Index Provider. If after such contact such
Index Price remains unavailable or the Sponsor continues to believe in
good faith that such Index Price does not reflect an accurate price for
AVAX, then the Sponsor will employ a cascading set of rules to
determine the Index Price, as described below in ``Determination of the
Index Price When Index Price is Unavailable.''
The Trust values its AVAX for operational purposes by reference to
the Index Price. The Index Price is the value of AVAX as represented by
the Index, calculated at 4:00 p.m., New York time, on each business
day.
Illustrative Example
For the purposes of illustration, outlined below are examples of
how the attributes that impact weighting and adjustments in the
aforementioned methodology may be utilized to generate the Index Price
for a digital asset. For example, Constituent Trading Platforms used to
calculate the Index Price of the digital asset may include trading
platforms such as Bitstamp, Kraken, LMAX Digital, and Crypto.com.
The Index Price algorithm, as described above, is designed to
account for manipulation at the outset by only including data from
executed trades on Constituent Trading Platforms that charge trading
fees. Then, the below-listed elements may impact the weighting of the
Constituent Trading Platforms on the Index Price as follows:
Volume Weighting: Each Constituent Trading Platform will
be weighted to appropriately reflect the trading volume share of the
Constituent Trading Platform relative to all the Constituent Trading
Platforms during this same period. For example, an average hourly
weighting of 67.06%, 14.57%, 11.88%, and 6.49% for Bitstamp, Kraken,
LMAX Digital, and Crypto.com, respectively, would represent each
Constituent Trading Platform's share of trading volume during the same
period.
Inactivity Adjustment: Assume that a Constituent Trading
Platform represented a 14% weighting on the Index Price of the digital
asset, which is based on the per-second calculations of its trading
volume and price-variance relative to the cohort of Constituent Trading
Platforms included in such Index, and then went offline for
approximately two hours. The index algorithm would automatically
recognize inactivity and start de-weighting the Constituent Trading
Platform at the 5-minute mark and continue to do so with each
additional 5-minute period of inactivity until its influence was
effectively zero, 25 minutes after becoming inactive. As soon as
trading activity resumed at the Constituent Trading Platform, the index
algorithm would re-weight it to the appropriate weighting based on
trading volume and price-variance relative to the cohort of Constituent
Trading Platforms included in the Index.
Price Outlier Detection: New traded prices from
Constituent Trading Platforms are compared to the latest calculated
Index Price. In the event the new traded price deviates by +/-5% from
the latest calculated Index Price it will be considered an outlier and
not used in the calculation of the Index Price until such time as a
majority of the Constituent Trading Platforms are similarly considered
outlier prices. In that case, the new prices will be used to calculate
the Index Price. For example, if the Index Price is $10 and a new trade
price of $11 from Constituent Trading Platform X, the price of $11 will
be considered an outlier and not used. However, if the most recent
prices on a majority of the Constituent Trading Platforms are aligned
with the price of $11, then these prices will no longer be considered
outliers and will be used to calculate the new Index Price.
Determination of the Index Price When Index Price Is Unavailable
The Sponsor uses the following cascading set of rules to calculate
the Index Price when the Index Price is unavailable.\15\ For the
avoidance of doubt, the Sponsor will employ the below rules
sequentially and in the order as presented below, should one or more
specific rule(s) fail:
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\15\ The Sponsor updated these rules on January 11, 2022.
---------------------------------------------------------------------------
1. Index Price = The price set by the Index as of 4:00 p.m., New
York time, on the valuation date.\16\ If the Index becomes unavailable,
or if the Sponsor determines in good faith that the Index does not
reflect an accurate price, then the Sponsor will, on a best efforts
basis, contact the Index Provider to obtain the Index Price directly
from the Index Provider. If after such contact the Index remains
unavailable or the Sponsor continues to believe in good faith that the
Index does not reflect an accurate price, then the Sponsor will employ
the next rule to determine the Index Price. There are no predefined
criteria to make a good faith assessment and it will be made by the
Sponsor in its sole discretion.
---------------------------------------------------------------------------
\16\ The valuation date is any day for which the value of the
AVAX in the Trust may be calculated utilizing the Index Price.
---------------------------------------------------------------------------
2. Index Price = The price set by Coin Metrics Real-Time Rate (the
``Secondary Index'') as of 4:00 p.m., New York time, on the valuation
date (the ``Secondary Index Price''). The Secondary Index Price is a
real-time reference rate price, calculated using trade data from
constituent markets selected by Coin Metrics, Inc. (the ``Secondary
Index Provider''). The Secondary Index Price is calculated by applying
weighted-median techniques to such trade data where half the weight is
derived from the trading volume on each constituent market and half is
derived from inverse price variance, where a constituent market with
high price variance as a result of outliers or market anomalies
compared to other constituent markets is assigned a smaller weight. The
Secondary Index Provider and the Sponsor have entered into the master
services agreement, dated as of August 4, 2020, and order forms
thereunder, pursuant to which the Sponsor may obtain and use the
Secondary Index and the Secondary Index Price from the Secondary Index
Provider. If the Secondary Index becomes unavailable, or if the Sponsor
determines in good faith that the Secondary Index does not reflect an
accurate price, then the Sponsor will, on a best efforts basis, contact
the Secondary Index Provider to obtain the Secondary Index Price
directly from the Secondary Index Provider. If after such contact the
Secondary Index remains unavailable or the Sponsor continues to believe
in good faith that the Secondary Index does not reflect an accurate
price, then the Sponsor will employ the next rule to determine the
Index Price. There are no predefined criteria to make a good faith
assessment and it will be made by the Sponsor in its sole discretion.
3. Index Price = The price set by the Trust's principal market (as
defined in the Memorandum) (the ``Tertiary Pricing Option'') as of 4:00
p.m., New York time, on the valuation date. The Tertiary Pricing Option
is a spot price derived from the principal market's public data feed
that is believed to be consistently publishing pricing information as
of 4:00 p.m., New York time, and is provided to the Sponsor via an
application programming interface. If the Tertiary Pricing Option
becomes unavailable, or if the Sponsor determines in good faith that
the Tertiary Pricing Option does not reflect an accurate price, then
the Sponsor will, on a best efforts basis, contact the Tertiary Pricing
Provider to obtain the Tertiary Pricing Option directly from the
Tertiary Pricing Provider. If after such contact the Tertiary Pricing
Option
[[Page 16029]]
remains unavailable after such contact or the Sponsor continues to
believe in good faith that the Tertiary Pricing Option does not reflect
an accurate price, then the Sponsor will employ the next rule to
determine the Index Price. There are no predefined criteria to make a
good faith assessment and it will be made by the Sponsor in its sole
discretion.
4. Index Price = The Sponsor will use its best judgment to
determine a good faith estimate of the Index Price. There are no
predefined criteria to make a good faith assessment and it will be made
by the Sponsor in its sole discretion.
In the event of a fork, the Index Provider may calculate the Index
Price based on a digital asset that the Sponsor does not believe to be
an appropriate asset of the Trust (i.e., a digital asset other than
AVAX).\17\ In this event, the Sponsor has full discretion to use a
different index provider or calculate the Index Price itself using its
best judgment. In such an event, the Exchange will submit a proposed
rule filing to contemplate the assets that would subsequently be held
by the Trust.
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\17\ According to the Prospectus, the Avalanche Network operates
using open-source protocols, meaning that any user can download the
software, modify it and then propose that the users and validators
of AVAX adopt the modification. When a modification is introduced
and a substantial majority of users and validators' consent to the
modification, the change is implemented and the network remains
uninterrupted. However, if less than a substantial majority of users
and validators' consent to the proposed modification, and the
modification is not compatible with the software prior to its
modification, the consequence would be what is known as a ``hard
fork'' of the Avalanche Network, with one group running the pre-
modified software and the other running the modified software. The
effect of such a fork would be the existence of two versions of AVAX
running in parallel, yet lacking interchangeability. Forks may also
occur as a network community's response to a significant security
breach.
---------------------------------------------------------------------------
The Sponsor may, in its sole discretion, select a different index
provider, select a different index price provided by the Index
Provider, calculate the Index Price by using the cascading set of rules
set forth above, or change the cascading set of rules set forth above
at any time.\18\
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\18\ The Sponsor will provide notice of any such changes in the
Trust's periodic or current reports and, if the Sponsor makes such a
change other than on an ad hoc or temporary basis, will file a
proposed rule change with the Commission.
---------------------------------------------------------------------------
Creation and Redemption of Shares
Authorized Participants may submit orders to create or redeem
Shares under procedures for ``Cash Orders.''
The Authorized Participants will deliver only cash to create Shares
and will receive only cash when redeeming Shares. Further, Authorized
Participants will not directly or indirectly purchase, hold, deliver,
or receive AVAX as part of the creation or redemption process or
otherwise direct the Trust or a third party with respect to purchasing,
holding, delivering, or receiving AVAX as part of the creation or
redemption process.
The Trust will create Shares by receiving AVAX from a third party
that is not the Authorized Participant, and the Trust, or an affiliate
of the Trust (and in any event not the Authorized Participant), is
responsible for selecting the third party to deliver the AVAX. Further,
the third party will not be acting as an agent of the Authorized
Participant with respect to the delivery of the AVAX to the Trust nor
acting at the direction of the Authorized Participant with respect to
the delivery of the AVAX to the Trust. The Trust will redeem Shares by
delivering AVAX to a third party that is not the Authorized
Participant, and the Trust, or an affiliate of the Trust (and in any
event not the Authorized Participant), is responsible for selecting the
third party to receive the AVAX. Further, the third party will not be
acting as an agent of the Authorized Participant with respect to the
receipt of the AVAX from the Trust nor acting at the direction of the
Authorized Participant with respect to the receipt of the AVAX from the
Trust.
Cash Orders are made through the participation of a Liquidity
Provider \19\ who obtains or receives AVAX in exchange for cash, and
are facilitated by the Transfer Agent and Grayscale Investments
Sponsors, LLC, acting in its capacity as the Liquidity Engager.
Liquidity Providers are not party to the Participant Agreements (as
defined below) and are engaged separately by the Liquidity Engager.
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\19\ A ``Liquidity Provider'' means one or more eligible
companies that facilitate the purchase and sale of AVAX in
connection with creations or redemptions pursuant to Cash Orders.
The Liquidity Providers with which Grayscale Investments Sponsors,
LLC, acting other than in its capacity as the Sponsor (in such other
capacity, the ``Liquidity Engager'') will engage in AVAX
transactions are third parties that are not affiliated with the
Sponsor or the Trust and are not acting as agents of the Trust, the
Sponsor, or any Authorized Participant, and all transactions will be
done on an arms-length basis. Except for the contractual
relationships between each Liquidity Provider and Grayscale
Investments Sponsors, LLC in its capacity as the Liquidity Engager,
there is no contractual relationship between each Liquidity Provider
and the Trust, the Sponsor, or any Authorized Participant. When
seeking to buy AVAX in connection with creations or sell AVAX in
connection with redemptions, the Liquidity Engager will seek to
obtain commercially reasonable prices and terms from the approved
Liquidity Providers. Once agreed upon, the transaction will
generally occur on an ``over-the-counter'' basis.
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According to the Registration Statement, the Trust creates Baskets
(as described below) of Shares only upon receipt of AVAX and redeems
Shares only by distributing AVAX. ``Authorized Participants'' are the
only persons that may place orders to create and redeem Baskets. Each
Authorized Participant must (i) be a registered broker-dealer and (ii)
enter into an agreement with the Sponsor and Transfer Agent that
provides the procedures for the creation and redemption of Baskets and
for the delivery of AVAX required for the creation and redemption of
Baskets via a Liquidity Provider (each, a ``Participant Agreement'').
An Authorized Participant may act for its own account or as agent for
broker-dealers, custodians and other securities market participants
that wish to create or redeem Baskets. Shareholders who are not
Authorized Participants will only be able to create or redeem their
Shares through an Authorized Participant.
The Trust issues Shares to and redeems Shares from Authorized
Participants on an ongoing basis, but only in one or more ``Baskets''
(with a Basket being a block of 10,000 Shares). The Trust will not
issue fractions of a Basket.
The creation and redemption of Baskets will be made only in
exchange for the delivery to the Trust, or the distribution by the
Trust, of the number of whole and fractional AVAX represented by each
Basket being created or redeemed, which is determined by dividing (x)
the number of AVAX owned by the Trust at 4:00 p.m., New York time, on
the trade date of a creation or redemption order, after deducting the
number of AVAX representing the U.S. dollar value of accrued but unpaid
fees and expenses of the Trust (converted using the Index Price at such
time, and carried to the eighth decimal place), by (y) the number of
Shares outstanding at such time (with the quotient so obtained
calculated to one one-hundred-millionth of one AVAX (i.e., carried to
the eighth decimal place)), and multiplying such quotient by 10,000
(the ``Basket Amount''). The U.S. dollar value of a Basket is
calculated by multiplying the Basket Amount by the Index Price as of
the trade date (the ``Basket NAV''). The Basket NAV multiplied by the
number of Baskets being created or redeemed is referred to as the
``Total Basket NAV.'' All questions as to the calculation of the Basket
Amount will be conclusively determined by the Sponsor and will be final
and binding on all persons interested in the Trust. The number of
[[Page 16030]]
AVAX represented by a Share will gradually decrease over time as the
Trust's AVAX are used to pay the Trust's expenses.
The creation of Baskets requires the delivery by the Authorized
Participant of a cash amount equivalent to the Total Basket Amount and
the redemption of Baskets requires the distribution to the Authorized
Participant of a cash amount equivalent to the Total Basket Amount.
Although the Trust creates Baskets only upon the receipt of AVAX,
and redeems Baskets only by distributing AVAX, an Authorized
Participant will submit Cash Orders, pursuant to which the Authorized
Participant will deposit cash with, or accept cash from, the Transfer
Agent in connection with the creation and redemption of Baskets.
Cash Orders will be facilitated by the Transfer Agent and Liquidity
Engager, acting other than in its capacity as Sponsor. On an order-by-
order basis, the Liquidity Engager will engage one or more Liquidity
Providers to obtain or receive AVAX in exchange for cash in connection
with such order, as described in more detail below.
Unless the Sponsor requires that a Cash Order be effected at actual
execution prices (an ``Actual Execution Cash Order''),\20\ each
Authorized Participant that submits a Cash Order to create or redeem
Baskets (a ``Variable Fee Cash Order'') \21\ will pay a fee (the
``Variable Fee'') based on the Total Basket NAV, and any price
differential of AVAX between the trade date and the settlement date
will be borne solely by the Liquidity Provider until such AVAX have
been received or liquidated by the Trust. The Variable Fee is intended
to cover all of a Liquidity Provider's expenses in connection with the
creation or redemption order, including any AVAX trading platform fees
that the Liquidity Provider incurs in connection with buying or selling
AVAX. The amount may be changed by the Sponsor in its sole discretion
at any time, and Liquidity Providers will communicate to the Sponsor in
advance the Variable Fee they would be willing to accept in connection
with a Variable Fee Cash Order, based on market conditions and other
factors existing at the time of such Variable Fee Cash Order.
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\20\ With respect to a creation or redemption pursuant to an
Actual Execution Cash Order, as between the Trust and an Authorized
Participant, the Authorized Participant is responsible for the
dollar cost of the difference between the AVAX price utilized in
calculating Total Basket NAV on the trade date and the price at
which the Trust acquires or disposes of the AVAX on the settlement
date. If the price realized in acquiring or disposing of the
corresponding Total Basket Amount is higher than the Total Basket
NAV, the Authorized Participant will bear the dollar cost of such
difference, in the case of a creation, by delivering cash in the
amount of such shortfall (the ``Additional Creation Cash'') to the
Cash Account or, in the case of a redemption, with the amount of
cash to be delivered to the Authorized Participant being reduced by
the amount of such difference (the ``Redemption Cash Shortfall'').
If the price realized in acquiring the corresponding Total Basket
Amount is lower than the Total Basket NAV, the Authorized
Participant will benefit from such difference, with the Trust
promptly returning cash in the amount of such excess (the ``Excess
Creation Cash'') to the Authorized Participant.
\21\ Unless the Sponsor determines otherwise in its sole
discretion based on market conditions and other factors existing at
the time of such Cash Order, all creations and redemptions pursuant
to Cash Orders are expected to be executed as Variable Fee Cash
Orders, and any price differential of AVAX between the trade date
and the settlement date will be borne solely by the Liquidity
Provider until such AVAX have been received by the Trust.
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Alternatively, the Sponsor may require that a Cash Order be
effected as an Actual Execution Cash Order, in its sole discretion
based on market conditions and other factors existing at the time of
such Cash Order, and under such circumstances, any price differential
of AVAX between the trade date and the settlement date will be borne
solely by the Authorized Participant until such AVAX have been received
or liquidated by the Trust.
In the case of creations, to transfer the Total Basket Amount to
the Trust's Digital Asset Account, the Liquidity Provider will transfer
AVAX to one of the public key addresses associated with the Digital
Asset Account and as provided by the Sponsor. In the case of
redemptions, the same procedure is conducted, but in reverse, using the
public key addresses associated with the wallet of the Liquidity
Provider and as provided by such party. All such transactions will be
conducted on the Avalanche Blockchain and parties acknowledge and agree
that such transfers may be irreversible if done incorrectly.
Authorized Participants do not pay a transaction fee to the Trust
in connection with the creation or redemption of Baskets, but there may
be transaction fees associated with the validation of the transfer of
AVAX by the Avalanche Network, which will be paid by the Custodian in
the case of redemptions and the Authorized Participant or the Liquidity
Provider in the case of creations. Service providers may charge
Authorized Participants administrative fees for order placement and
other services related to creation of Baskets. As discussed above,
Authorized Participants will also pay the Variable Fee in connection
with Variable Fee Cash Orders. Under certain circumstances, Authorized
Participants may also be required to deposit additional cash in the
Cash Account, or be entitled to receive excess cash from the Cash
Account, in connection with creations and redemptions pursuant to
Actual Execution Cash Orders. Authorized Participants will receive no
fees, commissions or other form of compensation or inducement of any
kind from either the Sponsor or the Trust and no such person has any
obligation or responsibility to the Sponsor or the Trust to effect any
sale or resale of Shares.
The following is a summary of the procedures for the creation and
redemption of Baskets.
Creation Procedures
On any business day, an Authorized Participant may place an order
with the Transfer Agent to create one or more Baskets.
Cash Orders for creation must be placed with the Transfer Agent no
later than 1:59:59 p.m., New York time.
The Sponsor may in its sole discretion limit the number of Shares
created pursuant to Cash Orders on any specified day without notice to
the Authorized Participants and may direct the Marketing Agent to
reject any Cash Orders in excess of such capped amount. In exercising
its discretion to limit the number of Shares created pursuant to Cash
Orders, the Sponsor expects to take into consideration a number of
factors, including the availability of Liquidity Providers to
facilitate Cash Orders and the cost of processing Cash Orders.
Creations under Cash Orders will take place as follows, where ``T''
is the trade date and each day in the sequence must be a business day.
Before a creation order is placed, the Sponsor determines if such
creation order will be a Variable Fee Cash Order or an Actual Execution
Cash Order, which determination is communicated to the Authorized
Participant.
[[Page 16031]]
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Settlement date (T+1, or T+2, as
Trade date (T) established at the time of order
placement)
----------------------------------------------------------------------------------------------------------------
The Authorized Participant places a creation order with the The Authorized Participant
Transfer Agent. delivers to the Cash Account: \1\.
(x) in the case of a Variable Fee Cash
Order, the Total Basket NAV, plus any
Variable Fee; or
(y) in the case of an Actual Execution
Cash Order, the Total Basket NAV, plus
any Additional Creation Cash, less any
Excess Creation Cash, if applicable (such
amount, as applicable, the ``Required
Creation Cash'').
The Liquidity Provider transfers
the Total Basket Amount to the Trust's
Digital Asset Account.
The Marketing Agent accepts (or rejects) the creation
order, which is communicated to the Authorized Participant by the
Transfer Agent.
The Sponsor notifies the Liquidity Provider of the creation
order.
The Sponsor determines the Total Basket NAV and any
Variable Fee and Additional Creation Cash as soon as practicable
after 4:00 p.m., New York time.
Once the Trust is in simultaneous
possession of (x) the Total Basket Amount
and (y) the Required Creation Cash, the
Trust issues the aggregate number of
Shares corresponding to the Baskets
ordered by the Authorized Participant,
which the Transfer Agent holds for the
benefit of the Authorized Participant.
Cash equal to the Required
Creation Cash is delivered to the
Liquidity Provider from the Cash Account.
The Transfer Agent delivers
Shares to the Authorized Participant by
crediting the number of Baskets created
to the Authorized Participant's DTC
account.
----------------------------------------------------------------------------------------------------------------
\1\ The ``Cash Account'' means the account maintained by the Transfer Agent for purposes of receiving cash from,
and distributing cash to, Authorized Participants in connection with creations and redemptions pursuant to
Cash Orders. For the avoidance of doubt, the Trust shall have no interest (beneficial, equitable or otherwise)
in the Cash Account or any cash held therein.
Redemption Procedures
The procedures by which an Authorized Participant can redeem one or
more Baskets mirror the procedures for the creation of Baskets. On any
business day, an Authorized Participant may place a redemption order
specifying the number of Baskets to be redeemed.
The redemption of Shares pursuant to Cash Orders will only take
place if approved by the Sponsor in writing, in its sole discretion and
on a case-by-case basis. In exercising its discretion to approve the
redemption of Shares pursuant to Cash Orders, the Sponsor expects to
take into consideration a number of factors, including the availability
of Liquidity Providers to facilitate Cash Orders and the cost of
processing Cash Orders.
Cash Orders for redemption must be placed no later than 1:59:59
p.m., New York time on each business day. The Authorized Participants
may only redeem Baskets and cannot redeem any Shares in an amount less
than a Basket.
Redemptions under Cash Orders will take place as follows, where
``T'' is the trade date and each day in the sequence must be a business
day. Before a redemption order is placed, the Sponsor determines if
such redemption order will be a Variable Fee Cash Order or an Actual
Execution Cash Order, which determination is communicated to the
Authorized Participant.
----------------------------------------------------------------------------------------------------------------
Settlement date (T+1 (or T+2 on case by
Trade date (T) case basis, as approved by Sponsor))
----------------------------------------------------------------------------------------------------------------
The Authorized Participant places a redemption order with The Authorized Participant
the Transfer Agent. delivers Baskets to be redeemed from its
The Marketing Agent accepts (or rejects) the redemption DTC account to the Transfer Agent.
order, which is communicated to the Authorized Participant by the The Liquidity Provider delivers
Transfer Agent. to the Cash Account:
The Sponsor notifies the Liquidity Provider of the (x) in the case of a Variable Fee Cash
redemption order. Order, the Total Basket NAV less any
The Sponsor determines the Total Basket NAV and, in the Variable Fee; or
case of a Variable Fee Cash Order, any Variable Fee, as soon as (y) in the case of an Actual Execution
practicable after 4:00 p.m., New York time. Cash Order, the actual proceeds to the
Trust from the liquidation of the Total
Basket Amount (such amount, as
applicable, the ``Required Redemption
Cash'').
Once the Trust is in simultaneous
possession of (x) the Total Basket Amount
and (y) the Required Redemption Cash, the
Transfer Agent cancels the Shares
comprising the number of Baskets redeemed
by the Authorized Participant.
The Custodian sends the Liquidity
Provider the Total Basket Amount, and
cash equal to the Required Redemption
Cash is delivered to the Authorized
Participant from the Cash Account.
----------------------------------------------------------------------------------------------------------------
Suspension or Rejection of Orders and Total Basket Amount
The creation or redemption of Shares may be suspended generally, or
refused with respect to particular requested creations or redemptions,
during any period when the transfer books of the Transfer Agent are
closed or if circumstances outside the control of the Sponsor or its
delegates make it for all practicable purposes not feasible to process
creation orders or redemption orders or for any other reason at any
[[Page 16032]]
time or from time to time.\22\ The Transfer Agent may reject an order
or, after accepting an order, may cancel such order if: (i) such order
is not presented in proper form as described in the Participant
Agreement, (ii) the transfer of the Total Basket Amount comes from an
account other than a AVAX wallet address that is known to the Custodian
as belonging to a Liquidity Provider or (iii) the fulfillment of the
order, in the opinion of counsel, might be unlawful, among other
reasons. None of the Sponsor or its delegates will be liable for the
suspension, rejection or acceptance of any creation order or redemption
order.
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\22\ Extenuating circumstances outside of the control of the
Sponsor and its delegates or that could cause the transfer books of
the Transfer Agent to be closed are outlined in the Participant
Agreement and include, for example, public service or utility
problems, power outages resulting in telephone, telecopy and
computer failures, acts of God such as fires, floods or extreme
weather conditions, market conditions or activities causing trading
halts, systems failures involving computer or other information
systems, including any failures or outages of the Avalanche Network,
affecting the Authorized Participant, the Sponsor, the Trust, the
Transfer Agent, the Marketing Agent and the Custodian and similar
extraordinary events.
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Availability of Information and Intraday Indicative Value
In addition to the price transparency of the Index, the Trust will
provide information regarding the Trust's AVAX holdings as well as
additional data regarding the Trust. The website for the Trust, which
will be publicly accessible at no charge, will contain the following
information: (a) the prior business day's NAV per Share; (b) the prior
business day's Nasdaq official closing price; (c) calculation of the
premium or discount of such Exchange official closing price against
such NAV per Share; (d) data in chart form displaying the frequency
distribution of discounts and premiums of the Exchange's official
closing price against the NAV, within appropriate ranges for each of
the four previous calendar quarters (or for the life of the Trust, if
shorter); (e) the prospectus; and (f) other applicable quantitative
information. The Trust will also disseminate the Trust's holdings on a
daily basis on the Trust's website. Quotation and last sale information
regarding the Shares will be disseminated through the facilities of the
relevant securities information processor.
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 the Exchange's regular market session of 9:30 a.m. to 4:00 p.m.
ET (the ``Regular Market Session'') to reflect changes in the value of
the Trust's AVAX holdings during the trading day. The IIV disseminated
during the Regular Market Session should not be viewed as an actual
real-time update of the NAV, because NAV per Share is calculated only
once at the end of each trading day based upon the relevant end-of-day
values of the Trust's investments. The IIV will be widely disseminated
on a per-Share basis every 15 seconds during the Regular Market Session
through the facilities of the relevant securities information processor
by market data vendors. In addition, the IIV will be available through
online information services, such as Bloomberg and Reuters.
Quotation and last sale information for AVAX is disseminated
through a variety of major market data vendors. Information related to
trading, including price and volume information, in AVAX is available
from major market data vendors and from the trading platforms on which
AVAX are traded. The normal trading hours for AVAX 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 Nasdaq official closing price and trading
volume information for the Shares will be published daily in the
financial section of newspapers.
Applicable Standard
The Commission has historically 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.\23\ 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.\24\ 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.
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\23\ See Securities Exchange Act Release Nos. 78262 (July 8,
2016), 81 FR 78262 (July 14. 2016) (the ``Winklevoss Proposal'').
The Winklevoss Proposal 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'').
Prior orders from the Commission have pointed out that in every
prior approval order for Commodity-Based Trust Shares, there has
been a derivatives market that represents the regulated market of
significant size, generally a Commodity Futures Trading Commission
(the ``CFTC'') regulated futures market. Further to this point, the
Commission's prior orders 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. See Securities
Exchange Act No. 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'').
\24\ 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.
---------------------------------------------------------------------------
The Commission has issued orders granting approval for proposals to
list bitcoin- and ether-based commodity trust shares and bitcoin- and
ether-based trust issued receipts (these proposed funds are nearly
identical to the Trust, but proposed to hold bitcoin and ether,
respectively, instead of AVAX) (``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 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'' with respect to the spot
market, the
[[Page 16033]]
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 analysis to be included are
sufficient to establish 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.
The Commission has approved numerous series of Trust Issued
Receipts,\25\ including Commodity-Based Trust Shares,\26\ 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; 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.
---------------------------------------------------------------------------
\25\ Pursuant to Nasdaq Rule 5720(a), the term ``Trust Issued
Receipt'' means a security (a) that is issued by a trust which holds
specified securities deposited with the trust; (b) that, when
aggregated in some specified minimum number, may be surrendered to
the trust by the beneficial owner to receive the securities; and (c)
that pays beneficial owners dividends and other distributions on the
deposited securities, if any are declared and paid to the trustee by
an issuer of the deposited securities
\26\ Pursuant to Nasdaq Rule 5711(d)(iv), the term ``Commodity-
Based Trust Shares'' means a security (1) that is issued by a trust
that holds (a) a specified commodity deposited with the trust, or
(b) a specified commodity and, in addition to such specified
commodity, cash; (2) that is 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 (3) that, 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.
---------------------------------------------------------------------------
As noted above, the Commission has recognized that the ``regulated
market of significant size'' standard is not the only means for
satisfying Section 6(b)(5) of the Act, 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.\27\ For example, in approving the Spot Bitcoin ETPs, the
Commission found that there were ``sufficient `other means' of
preventing fraud and manipulation,'' including that:
---------------------------------------------------------------------------
\27\ 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
[B]ased on the record before the Commission and the improved
quality of the correlation analysis in the record, including the
Commission's own analysis, the Commission is able to conclude that
fraud or manipulation that impacts prices in spot bitcoin markets
would likely similarly impact CME bitcoin futures prices. And
because the CME's surveillance can assist in detecting those impacts
on CME bitcoin futures prices, the Exchanges' comprehensive
surveillance-sharing agreement with the CME--a U.S. regulated market
whose bitcoin futures market is consistently highly correlated to
spot bitcoin, albeit not of ``significant size'' related to spot
bitcoin--can be reasonably expected to assist in surveilling for
fraudulent and manipulative acts and practices in the specific
context of the [Spot Bitcoin ETPs].\28\
---------------------------------------------------------------------------
\28\ See Securities Exchange Act Release No. 99306 (January 10,
2024), 89 FR 3008 (January 17, 2024) (Order Granting Accelerated
Approval of Proposed Rule Changes, as Modified by Amendments
Thereto, To List and Trade Shares of Bitcoin-Based Commodity-Based
Trust Shares and Trust Units). The SEC made substantially similar
findings in the approval order for Spot ETH ETPs. See Securities
Exchange Act Release No. 100224 (May 23, 2024), 89 FR 46937 (May 30,
2024) (Order Granting Accelerated Approval of Proposed Rule Changes,
as Modified by Amendments Thereto, To List and Trade Shares of
Ether-Based Exchange-Traded Products).
Today, Coinbase Derivatives, LLC (``Coinbase Derivatives'') offers
trading in AVAX futures. Nasdaq has a comprehensive surveillance-
sharing agreement with Coinbase Derivatives via its common membership
in the Intermarket Surveillance Group (``ISG'').\29\ This facilitates
the sharing of information that is available to Coinbase Derivatives
through its surveillance of its markets, including its surveillance of
Coinbase Derivatives' AVAX futures market. Similar to the Spot Bitcoin
and Spot ETH ETPs previously approved by the SEC, Nasdaq's ability to
obtain information regarding trading in the AVAX futures from other
markets that are members of the ISG (specifically Coinbase Derivatives)
would assist Nasdaq in detecting and deterring misconduct.
---------------------------------------------------------------------------
\29\ For a list of the current members and affiliate members of
ISG, see https://isgportal.org/public-members.
---------------------------------------------------------------------------
Initial and Continued Listing
The Shares will be subject to Nasdaq Rule 5711(d)(vi), which sets
forth the initial and continued listing criteria applicable to
Commodity-Based Trust Shares. The Exchange will obtain a representation
that the Trust's NAV per Share will be calculated daily and will be
made available to all market participants at the same time. A minimum
of 40,000 Shares will be required to be outstanding at the time of
commencement of trading on the Exchange. Upon termination of the Trust,
the Shares will be removed from listing. The Trustee will be a trust
company having substantial capital and surplus and the experience and
facilities for handling corporate trust business, as required under
Nasdaq Rule 5711(d)(vi)(D) and no change will be made to the Trustee
without prior notice to and approval of the Exchange.
As required in Nasdaq Rule 5711(d)(viii), 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 the underlying
commodity, related futures or options on futures, or any other related
derivatives, which the registered Market Maker may have or over which
it may exercise investment discretion. No registered Market Maker in
the Shares shall trade in the underlying commodity, related futures or
options on futures, or any other related 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
Nasdaq Rule 5711(d). In addition to the existing obligations under
Exchange rules regarding the production of books and records, the
registered Market Maker in the Shares shall make available to the
Exchange such books, records or other information pertaining to
transactions by such entity or any limited partner, officer or approved
person thereof, registered or non-registered employee affiliated with
such entity for its or their own accounts in the underlying commodity,
related futures or options on futures, or any other related
derivatives, as may be requested by the Exchange.
The Exchange is able to obtain information regarding trading in the
Shares and the underlying AVAX, AVAX futures contracts, or any other
AVAX derivative through members
[[Page 16034]]
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. The Exchange also has
regulatory jurisdiction over any person or entity controlling a member,
as well as a subsidiary or affiliate of a member that is in the
securities business. A subsidiary or affiliate of a member organization
that does business only in commodities would not be subject to Exchange
jurisdiction, but 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 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. The Exchange will
allow trading in the Shares from 4:00 a.m. to 8:00 p.m. ET. The
Exchange has appropriate rules to facilitate transactions in the Shares
during all trading sessions. The Shares of the Trust will conform to
the initial and continued listing criteria set forth in Nasdaq Rule
5711(d) and will comply with the requirements of Rule 10A-3 of the Act.
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 Nasdaq Rules 4120 and 4121, including
without limitation the conditions specified in Nasdaq Rule 4120(a)(9)
and (10) and the trading pauses under Nasdaq Rules 4120(a)(11) and
(12).
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 AVAX underlying the Shares; or (2) whether other
unusual conditions or circumstances detrimental to the maintenance of a
fair and orderly market are present.
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 per Share
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 per Share is available to all market participants.
Surveillance
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. The surveillance
program includes real-time patterns for price and volume movements and
post-trade surveillance patterns (e.g., spoofing, marking the close,
pinging, phishing). Trading of Shares on the Exchange will be subject
to the Exchange's surveillance program for derivative products, as well
as cross-market surveillances administered by FINRA, on behalf of the
Exchange pursuant to a regulatory services agreement, which are also
designed to detect violations of Exchange rules and applicable federal
securities laws. The Exchange is responsible for FINRA's performance
under this regulatory services agreement.
The Exchange will require the Trust to represent to the Exchange
that it will advise the Exchange of any failure by the Trust 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 Trust is not in compliance with the applicable listing
requirements, the Exchange will commence delisting procedures under the
Nasdaq 5800 Series. In addition, the Exchange also has a general policy
prohibiting the distribution of material, non-public information by its
employees.
The Exchange or FINRA, on behalf of the Exchange, or both, will
communicate as needed regarding trading in the Shares 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 the Shares and listed AVAX
futures from such markets and other entities. The Exchange also may
obtain information regarding trading in the Shares, listed AVAX futures
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.
Information Circular
Prior to the commencement of trading, the Exchange will inform its
members in an information circular (``Information Circular'') of the
special characteristics and risks associated with trading the Shares.
Specifically, the Information Circular will discuss the following: (1)
the procedures for creations and redemptions of Shares in Baskets (and
that Shares are not individually redeemable); (2) Section 10 of Nasdaq
General Rule 9, which imposes suitability obligations on Nasdaq members
with respect to recommending transactions in the Shares to customers;
(3) how information regarding the IIV and NAV is disseminated; (4) the
risks involved in trading the Shares during the pre-market and post-
market sessions when an updated IIV will not be calculated or publicly
disseminated; (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with
the confirmation of a transaction; and (6) trading information. The
Information Circular will also discuss any exemptive, no action and
interpretive relief granted by the Commission from any rules under the
Act.
The Information Circular will also reference the fact that there is
no regulated source of last sale information regarding AVAX, that the
Commission has no jurisdiction over the trading of AVAX as a commodity.
Additionally, the Information Circular will reference that the
Trust is subject to various fees and expenses described in the
Registration Statement. The Information Circular will also disclose the
trading hours of the Shares. The Information Circular will disclose
that information about the Shares will be publicly available on the
Trust's website.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\30\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\31\ in particular, in that it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market
[[Page 16035]]
system, and, in general to protect investors and the public interest.
---------------------------------------------------------------------------
\30\ 15 U.S.C. 78f(b).
\31\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Commission has approved numerous series of Trust Issued
Receipts, including Commodity-Based Trust Shares, 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; 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.
As noted above, the Commission has recognized that the ``regulated
market of significant size'' standard is not the only means for
satisfying Section 6(b)(5) of the act, 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
with the underlying spot market. The Exchange and Sponsor believe that
such conditions are present. As discussed above, in approving the Spot
Bitcoin ETPs, the Commission found that there were ``sufficient `other
means' of preventing fraud and manipulation,'' including that:
[B]ased on the record before the Commission and the improved
quality of the correlation analysis in the record, including the
Commission's own analysis, the Commission is able to conclude that
fraud or manipulation that impacts prices in spot bitcoin markets
would likely similarly impact CME bitcoin futures prices. And
because the CME's surveillance can assist in detecting those impacts
on CME bitcoin futures prices, the Exchanges' comprehensive
surveillance-sharing agreement with the CME--a U.S. regulated market
whose bitcoin futures market is consistently highly correlated to
spot bitcoin, albeit not of ``significant size'' related to spot
bitcoin--can be reasonably expected to assist in surveilling for
fraudulent and manipulative acts and practices in the specific
context of the [Spot Bitcoin ETPs].\32\
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\32\ See Securities Exchange Act Release No. 99306 (January 10,
2024), 89 FR 3008 (January 17, 2024) (Order Granting Accelerated
Approval of Proposed Rule Changes, as Modified by Amendments
Thereto, To List and Trade Shares of Bitcoin-Based Commodity-Based
Trust Shares and Trust Units). The SEC made substantially similar
findings in the approval order for spot ether ETPs. See Securities
Exchange Act Release No. 100224 (May 23, 2024), 89 FR 46937 (May 30,
2024) (Order Granting Accelerated Approval of Proposed Rule Changes,
as Modified by Amendments Thereto, To List and Trade Shares of
Ether-Based Exchange-Traded Products).
As discussed above, Coinbase Derivatives offers trading in AVAX
futures. Nasdaq has a comprehensive surveillance-sharing agreement with
Coinbase Derivatives via its common membership in ISG, which
facilitates the sharing of information that is available to Coinbase
Derivatives through its surveillance of its markets, including its
surveillance of Coinbase Derivatives' AVAX futures market. Similar to
the Spot Bitcoin and Spot ETH ETPs previously approved by the SEC,
Nasdaq's ability to obtain information regarding trading in the AVAX
futures from other markets that are members of the ISG (specifically
Coinbase Derivatives) would assist Nasdaq in detecting and deterring
misconduct.
The Exchange further believes that the proposed rule change is
designed to prevent fraudulent and manipulative acts and practices and
to protect investors and the public interest in that the Shares will be
listed and traded on the Exchange pursuant to the initial and continued
listing criteria set forth in Nasdaq Rule 5711(d). The Exchange has in
place surveillance procedures that are adequate to properly monitor
trading in the Shares in all trading sessions and to deter and detect
violations of Exchange rules and applicable federal securities laws. As
discussed above, the surveillance program includes real-time patterns
for price and volume movements and post-trade surveillance patterns
(e.g., spoofing, marking the close, pinging, phishing). Trading of
Shares on the Exchange will be subject to the Exchange's surveillance
program for derivative products, as well as cross-market surveillances
administered by FINRA, on behalf of the Exchange pursuant to a
regulatory services agreement, which are also designed to detect
violations of Exchange rules and applicable federal securities laws.
The Exchange is responsible for FINRA's performance under this
regulatory services agreement.
The Exchange will require the Trust to represent to the Exchange
that it will advise the Exchange of any failure by the Trust 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 Trust is not in compliance with the applicable listing
requirements, the Exchange will commence delisting procedures under the
Nasdaq 5800 Series. In addition, the Exchange also has a general policy
prohibiting the distribution of material, non-public information by its
employees.
The Exchange will communicate as needed regarding trading in the
Shares with other markets and other entities that are members of the
ISG, and the Exchange may obtain trading information regarding trading
in the Shares and listed AVAX futures from such markets and other
entities.
Trading in Shares of the Trust will be halted if the circuit
breaker parameters have been reached or because of market conditions or
for reasons that, in the view of the Exchange, make trading in the
Shares inadvisable. These may include unusual conditions or
circumstances detrimental to the maintenance of a fair and orderly
market.
The proposed rule change is designed to perfect the mechanism of a
free and open market and, in general, to protect investors and the
public interest in that it will facilitate the listing and trading of
Shares that will enhance competition among market participants, to the
benefit of investors and the marketplace.
For all 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 not necessary or appropriate in
furtherance of the purposes 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
No written comments were either solicited or received.
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
[[Page 16036]]
the Exchange consents, the Commission shall: (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-NASDAQ-2025-030 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-NASDAQ-2025-030. 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-NASDAQ-2025-030 and should
be submitted on or before May 7, 2025.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\33\
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\33\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-06413 Filed 4-15-25; 8:45 am]
BILLING CODE 8011-01-P