Solana ETF "Overtaking on a Bend": How C-Corporation Structure Can Break the SEC Approval Deadlock?

Original Author: Weilin

Reprint: Daisy, Mars Finance

The REX-Osprey Solana Staking ETF had a trading volume of $33 million on its first day, exceeding the expectations of many market observers. Its ability to launch in a short period of time is partly attributed to its choice of a "C Corporation" registration format. This structure allowed the fund to bypass the traditional ETF approval process and list quickly.

Author: Weilin, PANews

On July 3rd, the first Solana staking ETF in the United States, the REX-Osprey Solana Staking ETF (ticker: SSK), was officially listed on the Chicago Board Options Exchange (Cboe BZX), receiving a relatively positive market response. The trading volume on its first day was $33 million, with an inflow of $12 million, surpassing the expectations of many market observers.

This ETF not only tracks the market price of Solana (SOL) but also provides investors with native staking rewards from Solana. It is jointly managed by REX Shares and its sister company Osprey, with the first-day trading volume exceeding that of the earlier launched Solana futures ETF and XRP futures ETF.

Compared to traditional crypto asset ETFs, the REX-Osprey Solana Staking ETF offers an innovative feature - variable staking reward monthly dividends, with a current dividend yield of 7.3%. Bloomberg ETF analyst James Seyffart commented, "This is a healthy trading start," noting that trading volume reached $8 million in the first 20 minutes after listing.

Provides direct price exposure to SOL along with staking rewards

Looking back at the recent performance of the SOL futures ETFs, on March 17, the Solana futures ETF was listed on the Chicago Mercantile Exchange (CME) with a trading volume of $12.1 million on its first day, which was below market expectations. On March 20, Volatility Shares launched two Solana futures ETFs, namely The Solana ETF (SOLZ) and 2x Solana ETF (SOLT). According to Yahoo Finance, as of April 1, both products have performed steadily since their launch, with an average daily trading volume of approximately 80,000 and 140,000 contracts, or $1.25 million and $2.16 million, respectively, maintaining a relatively small scale, indicating that market demand has not been effectively boosted.

In comparison, in January 2024, the total trading volume of multiple spot Bitcoin ETFs that were listed reached 4.6 billion dollars on their first trading day.

According to the official website, SSK aims to meet the needs of various investors:

Retail investors seeking cryptocurrency exposure through brokerage accounts

Hope to support the bridge between blockchain innovation and mass adoption for crypto-native investors.

Looking for financial advisors and registered investment advisors (RIA) that comply with regulations for blockchain income access.

Institutions that need ETF transparency

According to official guidance, staking rewards are paid in kind to the fund and increase its net asset value (NAV), which may result in taxable income for shareholders. Depending on the fund's earnings and distributions, this income may be treated as ordinary income, capital gains, or return of capital. Investors should consult a tax advisor for relevant guidance.

"C Corporation" structure, bypassing traditional regulatory frameworks

The REX-Osprey Solana Staking ETF was able to launch in a relatively short period of time, partly due to its choice of the "C-Corporation" registration form. This structure allows the fund to bypass the traditional ETF approval process and go public quickly. Unlike traditional crypto asset ETFs, the REX-Osprey Solana Staking ETF opts to register under the Investment Company Act of 1940, rather than the Securities Act of 1933.

The Investment Company Act of 1940 requires ETFs to be diversified, to distribute earnings on a regular basis, and to avoid investing in assets that are considered too risky for retail investors (such as futures, commodities, and Bitcoin derivatives). These constraints make funds under the Investment Company Act of 1940 very suitable for stocks and fixed-income assets, but more complicated when dealing with assets like commodities and futures, which typically fall under the category of "33 Act" funds—such as established trusts (physical trusts providing access to spot prices) and publicly traded partnerships or commodity pools (portfolio based on futures).

At the same time, the tax rules of the "40 Act" are simple, with a capital gains tax of 20% on long-term holdings of more than 12 months, and distributed income taxed at ordinary income tax rates (up to 37%). The tax treatment of the "33 Act" requires dealing with complex tax paperwork.

Unlike the existing spot Bitcoin and Ethereum ETFs, SSK falls under a different regulatory framework, registered under the Investment Company Act of 1940. This means that a qualified custodian, rather than the fund issuer, is required to hold the underlying assets. Anchorage Digital, currently the only federally authorized bank that can both custody and stake digital assets, serves this role.

REX-Osprey Solana Staking ETF filed its prospectus with the SEC

Double taxation increases investment costs and may lead to imitation by other altcoin ETFs.

This structure is not without controversy, and tax issues are one of its main challenges. Since staking rewards are considered ordinary income, the fund needs to pay corporate income tax internally, while investors also have to bear dividend tax and capital gains tax. This results in a relatively high overall tax burden, even though the fund's management fee is 0.75%.

Moreover, although the SEC's approval process has not encountered significant obstacles, due to the innovative nature of this structure, the SEC has shown a hesitant attitude towards C corporations bypassing traditional approval procedures, which casts a layer of uncertainty over whether this model is applicable for the launch of more funds in the future. In the context of increasingly fierce market competition, the REX-Osprey Solana staking ETF may provide a reference structure for future crypto asset ETFs, but it may also face more scrutiny from regulators in the future.

Cryptocurrency independent researcher KOL Jason Chen explained: "So the threshold is low and the approval speed is fast. As long as the SEC does not oppose it, it can be completed within 75 days from submission to approval. However, the downside is that because it has not gone through very strict approval, the subsequent disclosure requirements will be much stricter than the regular disclosures under 19b-4, as disclosures are required daily, which will increase management costs. Additionally, there will be double taxation. When the coin price rises, it will be considered corporate profit, thus the company will be subject to a 21% corporate income tax. Investors will also be charged dividend tax and capital gains tax. Therefore, 19b-4 is more suitable for mature large assets like BTC, while the 1940 Investment Company Act applies to SOL and a series of other altcoins."

Some users also commented on the topic of the prediction market, raising corresponding risks, namely that the price of the ETF may not accurately reflect the price fluctuations of SOL. The SEC filing submitted by SSK states, "Under normal market conditions, the SSK ETF will invest at least 80% of its net assets in reference assets and other assets that provide exposure to reference assets. The fund will make direct investments or through the REX-Ospre SOL subsidiary. Although the fund aims to seek returns corresponding to the reference assets, the fund's performance will not fully replicate the performance of the reference assets (i.e., due to factors such as staking rewards, trading, and other expenses, the fund's returns may not necessarily be the same as those of the reference assets, although they generally move in the same direction, whether positive or negative)."

The application process had its ups and downs, but ultimately it was successfully "cleared."

In May of this year, REX Shares and Osprey Funds submitted an application to the U.S. Securities and Exchange Commission (SEC) seeking approval to launch a C corporation ETF focused on Solana and Ethereum.

On May 30, the SEC requested REX and Osprey to delay the effective date of their registration statements, citing unresolved issues regarding whether the proposed fund structure complies with the definition of "investment company" under the Investment Company Act of 1940.

On June 29, the SEC notified REX Shares and Osprey Funds that it had "no further comments" on their submitted Solana staking ETF application. In ETF regulatory terminology, industry observers typically view this statement as an implicit approval from the SEC. This is similar to the "tacit approval" received when companies like BlackRock and Fidelity launched their spot Bitcoin ETFs.

Bloomberg analyst James Seyffart pointed out at the time that these funds' "unique" C-corporation format might bypass the typical 19b-4 rule change process, and the SEC's silence on the C-corporation workaround now seems to confirm it as a compliant solution.

Originally, staking usually meant handing over tokens to a cryptocurrency exchange or setting up one's own validator, but the SSK ETF has significantly lowered this barrier. Traditional investors can now gain passive exposure to Solana and earn staking rewards through the same brokerage accounts they use for stocks or index funds. The approval of the Solana staking ETF now provides a roadmap. However, Ethereum's staking mechanism (such as penalties and longer unlocking periods) may involve more complexity.

There are market views that indicate that, at least under the current U.S. government's regulation, the SEC has not attempted to completely block staking. It just needs the right framework: a framework that can handle returns, taxation, custody, and compliance in a way that is understandable by traditional finance. Although REX and Osprey are not as well-known as BlackRock, they currently hold a first-mover advantage in this space, which could become a multi-billion dollar ETF category.

Currently, multiple companies are competing for the opportunity to launch a Solana spot ETF, with Invesco and Galaxy joining this competition at the end of June. Analyst Balchunas stated that these funds may be approved within two to four months. There are currently at least 60 other altcoin ETF proposals awaiting SEC review and potential approval.