July
19, 2022
|
Mr. John
Dana Brown
Division
of Corporation Finance
U.S.
Securities and Exchange Commission
100 F
Street, NE
Washington,
DC 20549
|
Re:
Teucrium Commodity Trust
Amended
Registration Statement on Form S-1
File
No. 333-256339
Dear
Mr. Brown:
On
behalf of the sponsor, Teucrium Trading LLC (the
“Sponsor”), and the Hashdex Bitcoin Futures Fund (the
“Fund”), a series of the Teucrium Commodity Trust (the
“Trust”), we are responding to your comments dated
June 30, 2022 in regard to the Fund’s amended
registration statement on Form S-1 filed on June 2, 2022 (the
“Registration Statement”). All capitalized terms not
defined herein shall have the meaning assigned to them in the
Registration Statement.
Please
note that the page numbers in the Staff's comments may no longer
apply due to the deletion of addition of disclosure. Accordingly,
we have included new page numbers in our responses corresponding to
the newly revised disclosure. For convenience, each of the
Staff’s comments are restated below, with the response
following.
Amended Form S-1 filed June 2, 2022
General
1.
Comment: Refer
to your response to comment 8. Please provide us with copies of the
comments issued in the NFA's initial review and your responses.
Additionally, tell us tell [sic] whether, to your knowledge, there
will be any further NFA review and if so the anticipated time
frame.
Response:
The NFA has
completed its second review and the Fund has included edits made in
response to those comments in this filing. The Fund has been
advised that the NFA may have additional follow up edits, but no
specific timeframe has been provided. The Sponsor has provided
copies of the NFA’s comments, and its responses thereto,
under separate cover.
2.
Comment: Refer
to your response to comment 10. Please disclose the substance of
your response, including that if a bitcoin futures contract has
closed at its price fluctuation limit, that limit price will be the
daily settlement price that the CME publishes, which the Fund will
use to price its shares on that day. Also explain how the Fund
would value its bitcoin futures holdings in the event the CME
halted trading in bitcoin futures contracts for other reasons, for
example if trading were halted for an entire trading day or several
trading days.
Response:
The Fund has
revised its prospectus as follows: "When a Bitcoin Futures Contract
has closed at its daily price fluctuation limit, that limit price
will be the daily settlement price that the CME publishes. The Fund
will use the published settlement price to price its Shares on that
day.”
With
respect to how the Fund would value its bitcoin futures holdings in
the event the CME halted trading in Bitcoin Futures Contracts for
other reasons, including if trading were halted for an entire
trading day or several trading days, the Fund would value its
Bitcoin Futures Contracts by using the daily settlement price that
the CME publishes on those days, which they will continue to
publish daily even though trading is halted.
3.
Comment: Refer
to your response to comment 11. Please disclose that the initial
Authorized Purchaser is an underwriter here and in the first
paragraph on page 34. We note in this regard that shares comprising
creation baskets are purchased by authorized purchasers for sale to
the public. Alternatively, provide your legal analysis why the
initial Authorized Purchaser is not an underwriter as defined in
Section 2(a)(11) of the Securities Act.
Response:
Whether the initial
Authorized Purchaser is an underwriter is a legal question that
will depend on the facts and circumstances surrounding the Fund's
initial creation transaction.1 As Louis Loss writes in his seminal
treatise on securities regulation, "[t]he term underwriter is defined not with
reference to the particular person's general business but on the
basis of his or her relationship to the particular
offering."2
If the
Fund's prospectus states that the initial Authorized Purchaser is
an underwriter, the Fund will in effect be representing that it has
made a definitive legal determination with respect to the initial
creation transaction before such
transaction has occurred, and consequently that the initial
Authorized Purchaser has liability under Section 11 and 12(a)(2) of
the Securities Act. We understand that the initial Authorized
Purchaser's sole connection to the initial creation transaction is
that it will execute an order it receives from the market maker
contributing the initial seed capital. This could create a
situation where a plaintiff's firm could try to extract damages in
what could be an "open and shut" case.
For
these reasons, the Fund believes it would be imprudent to state in
the prospectus that the initial authorized purchaser is an
underwriter and respectfully declines to add such a
statement
4.
Comment: Refer
to your response to comment 2. Please clarify on the cover page
Hashdex's role including that Hashdex has no responsibility for the
investment or management of the Fund’s portfolio or for the
overall performance or operation of the Fund. Additionally, please
file all material agreements with Hashdex as exhibits to your
registration statement, including the Support Agreement and any
other agreements evidencing Hashdex's responsibility as Digital
Asset Adviser. Ensure that all material terms of these agreements
are disclosed in the prospectus. By way of example, explain what
obligations of Teucrium will transfer under the Support Agreement,
and under what conditions.
Response:
The cover page
disclosure regarding Hashdex has been replaced with the
following:
"Hashdex Asset
Management Ltd. ("Hashdex") will serve as the Fund's Digital Asset
Adviser and will assist the Sponsor and Marketing Agents with
research and investment analysis regarding bitcoin and bitcoin
markets for use in the marketing of the Fund. Hashdex will also
provide the Fund with marketing services including, but not limited
to, the issuance of press releases, preparation of website data
content, holding promotional webinars and engaging in promotional
activities through social media outlets. Hashdex has no
responsibility for the investment or management of the Fund's
investment portfolio or for the overall performance or operation of
the Fund.
The
Marketing Agents, Digital Asset Advisor and Sponsor have entered
into an agreement (the "Support Agreement") that sets forth the
terms and conditions applicable to the launch, marketing,
promotion, development, and ongoing operation of the Fund, as well
the respective rights in profits and obligations for expenses. The
Support Agreement also provides that the Parties expect that Toroso
will use commercially reasonable efforts to organize a new Delaware
statutory trust (the “New Trust”) and a new series
thereof (the “New Fund”) and enter into an agreement
pursuant to which, among other things,
the assets of the Fund (and certain other assets as applicable)
will be transferred to the New Fund as a series of the New Trust,
as successor to the Fund and the Trustee will transfer to Toroso
sponsorship of the Fund. There is no timeline for this
transaction.”
1 See, e.g.,
Section 2(g) of Form of Authorized
Purchaser Agreement filed as an exhibit to the Trust's registration
statement on April 26, 2019 (File No. 333-223943); the Fund's
current prospectus on page 50; filed as part of Pre-Effective
Amendment No. 4 (File No. 333-256339; Exchange-Traded Funds,
Release No. IC-33646 at 12 n. 12 (Adopting Release) (stating that
"[d]epending on the facts and circumstances, authorized
participants that purchase a creation unit and sell the shares may
be deemed to be participants in a distribution, which could render
them statutory underwriters and subject them to the prospectus
delivery and liability provisions of the Securities
Act.”).
2 1 Louis Loss
et al., Fundamentals of Securities
Regulation 496
(7th ed.
2018).
In
addition, the following disclosure has been added to the section of
the prospectus captioned "The Fund's Service Providers" after the
subcaption "Digital Asset Adviser":
“The
Marketing Agents, Digital Asset Advisor and Sponsor (the "Parties")
have entered into an agreement (the "Support Agreement") that sets
forth certain terms and conditions applicable to the launch,
marketing, promotion, development, and ongoing operation of the
Fund, as well the respective rights in profits and obligations for
expenses. The Support Agreement also provides that the Parties
expect that Toroso will use commercially reasonable efforts to
organize a new Delaware statutory trust (the “New
Trust”) and a new series thereof (the “New Fund”)
and enter into an agreement pursuant
to which, among other things, the assets of the Fund (and certain
other assets as applicable) will be transferred to the New Fund as
a series of the New Trust, as successor to the Fund and the Trustee
will transfer to Toroso sponsorship of the Fund. There is no
timeline for this transaction.
The
primary responsibilities and rights of each Party with respect to
the Fund are described below:
●
The Support
Agreement provides that Hashdex will provide to the other Parties
research and analysis regarding bitcoin and bitcoin markets for use
in the operation and marketing of the Fund. Subject to mutual
agreement of the Parties, Victory Capital will provide sub-advisory
and sales support services for the Fund.
●
Teucrium, Toroso, Hashdex and Victory
Capital are responsible for paying for all listing, legal, and regulatory
costs and expenses incurred in connection with the regulatory
process related to the launch of the Fund, including drafting the
Fund’s registration statement, exchange listing fees, and
other regulatory or service provider fees, as determined in the
Support Agreement (“Start-Up Costs”). The Fund will not
be responsible for the Start-Up Costs. Each Party is
responsible for its own internal expenses.
●
Teucrium will
receive a sponsor fee, administrative fee and trading fee, which
are paid out of the proceeds from the Management Fee of the Fund
(if sufficient) and/or from Toroso and Hashdex/Victory
Capital.
●
The Support
Agreement specifies that profits and losses for the Fund will be
shared equally among Toroso, on the one hand, and Hasdex and
Victory Capital, on the other.
Following the
transfer of the assets of the Fund to the New Fund, the primary
responsibilities and rights of each Party with respect to the New
Fund are expected to be as follows:
●
Teucrium's
responsibilities as Sponsor will cease. As sponsor of the New Fund,
Toroso's responsibilities as sponsor are expected to be
substantially the same as Teucrium's existing responsibilities.
Toroso will be generally authorized to perform all acts deemed
necessary to carry out the purposes of the New Trust and the New
Fund. Toroso is expected to be responsible for management of the New Fund (and,
as noted below, it is anticipated that Victory Capital will provide
sub-advisory services for the New Fund). Toroso is expected to
oversee the purchase and sale of Shares by Authorized Purchasers,
manage the Fund’s investments, and evaluate the credit risk
of FCMs and swap counterparties and review daily positions and
margin/collateral requirements. The Sponsor is also expected to be
responsible for selecting the service providers to the New Trust
and New Fund and preparing and filing periodic reports on behalf of
the Trust with the SEC and provide any required certification for
such reports.
●
Tidal will provide
fund administration and related services for the New Fund. Hashdex
will provide to Toroso research and analysis regarding bitcoin and
bitcoin markets for use in the operation and marketing of the New
Fund. Victory Capital shall provide sub-advisory and sales support
services for the New Fund. The formalization of such roles with
respect to the New Fund will be made in the format and at a time
mutually agreed among Teucrium, Toroso, Tidal, Hashdex, and Victory
Capital, taking into account the operations of the New Fund and any
applicable regulatory requirements. The Support Agreement specifies
that profits and losses for the New Fund will be shared equally
among Toroso, on the one hand, and Hashdex and Victory Capital, on
the other. The Management Fee for the New Fund is not expected to
change.
●
Teucrium will be
entitled to receive a monthly amount equal to seven (7) percent of
the Management Fee of the New Fund; provided, however, that such
fee will never be less than 0.04% of monthly average net assets of
the Fund.”
5.
Comment: Refer
to your response to comment 14. Please also disclose here, if true,
the potential for movement in the price of the shares between the
time an investor places an order to purchase with its broker-dealer
and the time of the actual purchase, resulting from the price
volatility of Bitcoin Futures Contracts.
Response:
The Fund has
revised its prospectus disclosure as follows:
“In addition,
Bitcoin Futures Contracts may experience pronounced and swift price
changes. Accordingly, there is a potential for movement in the
price of Shares between the time an investor places an order to
purchase or sell with its broker-dealer and the time of the actual
purchase or sale, resulting from the price volatility of Bitcoin
Futures Contracts.”
The Fund’s Investment Objective, page 2
6.
Comment: Refer
to your response to comment 16. Please also state here that the
Benchmark value will be disseminated once every 15 seconds during
the core trading session.
Response:
The terms
“approximate net asset value” and “indicative
fund value” are used interchangeably throughout the
prospectus (which notes that the terms may be used interchangeably)
As a technical matter, both terms represent substantially the same
amount, which is disseminated every 15 seconds by ICE Data
Services, LLC, and the Fund believes that each of these terms
accurately represents “Benchmark value,” as that term
is used in the Fund’s 19b-4 order.
The Fund’s Investment Strategies, page 3
7.
Comment: Refer
to your response to comment 4. Disclose here where ICE Data
Indices, LLC will publish the Benchmark and describe what first to
expire and second to expire means. Additionally, provide
roll-related disclosure regarding the benchmark
including:
●
when the Benchmark
rolls from first to expire to second to expire contracts;
and
●
a Benchmark roll
schedule and illustrative example of what the Benchmark holdings
would be on a particular date.
Response: The
Fund has revised its prospectus disclosure as follows:
“ICE Data
Indices, LLC disseminates the intraday indicative value (also
referred to in this prospectus as "approximate net asset value") of
the Fund's Shares through the facilities of Consolidated Tape
Association's Consolidated Quotation High Speed Lines (also known
as the "CTA/QC High Speed Lines"). ICE Data Indices, LLC will make
the Benchmark information available through online information
services, such as Yahoo Finance, Bloomberg, and Reuters. The
Benchmark will only include BTC Contracts.
The
Fund's futures contract positions will be rolled on a monthly basis
by closing out the first to expire contracts prior to their final
settlement date and then entering into the third to expire
contracts which will become the new second to expire - maintaining
an equal weight of 50% first to expire and 50% second to expire. A
first to expire contract is the contract with the nearest
expiration date. A second to expire contract follows the first - it
is the contract that will expire second in line after the first
contract has expired. For example, when a first to expire contract
expires, the second to expire contract becomes the first to expire
contract.
Fund
rolling will take place on the market business day preceding the
last trading day of the first to expire contract. The last trading
day of the first to expire contact is currently defined as the last
business Friday of each month. By way of example, as of the date of
this prospectus the Fund’s futures contract positions will be
entered and exited according to the roll schedule below. For
example, on August 15, 2022 if the fund held 100 futures contracts,
50 contracts would be expiring in August 2022 and 50 contracts
would be expiring in September 2022.”
|
Hashdex Bitcoin Futures ETF (DEFI) – Roll Schedule July 2022
– Dec 2022
|
|||||
|
Roll Date
|
Contract Expiring (Exiting Position)
|
New Contract (Entering Position)
|
|
First to Expire Contract
(Resulting Position)
|
Second to Expire Contract
(Resulting Position)
|
|
7/28/2022
|
July
(BTCN2)
|
September
(BTCU2)
|
|
August
(BTCQ2)
|
September
(BTCU2)
|
|
8/28/2022
|
August
(BTCQ2)
|
October
(BTCV2)
|
|
September
(BTCU2)
|
October
(BTCV2)
|
|
9/29/2022
|
September
(BTCU2)
|
November
(BTCX2)
|
|
October
(BTCV2)
|
November
(BTCX2)
|
|
10/27/2022
|
October
(BTCV2)
|
December
(BTCZ2)
|
|
November
(BTCX2)
|
December
(BTCZ2)
|
|
11/23/2022
|
November
(BTCX2)
|
January
(BTCF3)
|
|
December
(BTCZ2)
|
January
(BTCF3)
|
|
12/29/2022
|
December
(BTCZ2)
|
February
(BTCG3)
|
|
January
(BTCF3)
|
February
(BTCG3)
|
8.
Comment: Refer
to your response to comment 34. Please continue to update your roll
schedule in subsequent amendments.
Response:
The Fund will
continue to update its roll schedule in subsequent
amendments.
Principal Investment Risks of an Investment in the Fund, page
5
9.
Comment: Refer
to the second bullet point on page 6. Please briefly clarify why it
represents a risk to investors that "[t]he Sponsor pays fees and
expenses that are incurred regardless of whether it is
profitable."
Response:
The Fund has
removed the noted disclosure from the prospectus.
Breakeven Analysis, page 7
10.
Comment: Refer
to footnote (3). Please clarify the statement that the Sponsor may
elect to "pay waive" a portion of these fees and briefly describe
the reasons the Sponsor would elect to waive these
fees.
Response:
The Fund has
revised the statement “pay waive” to state “pay
or waive.” The
Fund may elect to waive these fees in order to reduce the
Fund’s expenses.
What Are the Risk Factors Involved with an Investment in the Fund,
page 10
11.
Comment: Refer
to your response to comment 5. In light of the cautionary language
you added to Plan of Distribution, please add a
separately-captioned risk factor addressing the possibility that
because of current or future brokerage policies regarding
bitcoin-linked securities, investors could have difficulty selling
shares through their brokerage and potentially face restrictions
when or how they could trade their shares.
Response:
The Fund has added
the following risk factor under “The Fund’s Operating
Risks” on page 29:
“Investors may not be able to buy or sell Shares of the Fund
through their current brokerages
Because
of volatility and other risks associated with bitcoin-related
investments, brokerage firms may limit or not permit trading in
such investments. Because of current or future brokerage policies
regarding bitcoin-linked securities, investors could have
difficulty selling Shares through their brokerage and potentially
face restrictions when or how they could trade their
Shares."
12.
Comment: Refer
to your response to comment 17. Please add separate risk factors
addressing each of the following:
●
rewards for mining
bitcoin are designed to decline over time, which may lessen the
incentive for miners to process and confirm transactions on the
Bitcoin Network;
●
fraud,
manipulation, security failure or operational problems at bitcoin
exchanges that result in a decline in adoption or acceptance of
bitcoin; and
●
scalability as the
use of bitcoin expands to a greater number of users.
Response: The
Fund has added the following new risk factors to the
prospectus:
“Rewards for mining bitcoin are designed to decline over
time, which may lessen the incentive for miners to process and
confirm transactions on the Bitcoin Network.
Transactions in
bitcoin are processed by miners who are primarily compensated by
receiving newly-issued bitcoin as a reward for successfully solving
cryptological puzzles according to a payment schedule that declines
over time (in some instances, miners are also compensated through
voluntary fees paid by Bitcoin Network participants). If this
compensation is not sufficient to incentivize miners to process
transactions, the confirmation process for transactions, which acts
as security for the Bitcoin Network, may become slower and the
Bitcoin Network may become more vulnerable. These and similar
events may have a significant adverse effect on the price and
liquidity of bitcoin and the value of an investment in the
Fund.”
“The Bitcoin Network may face scalability challenges as it
expands to a greater number of users
As with
other digital asset networks, the Bitcoin Network faces significant
scaling challenges because public blockchains generally face a
tradeoff between security and scalability. A decentralized network
is less susceptible to manipulation or capture if more
participants, or “nodes,” are involved in the
processing and maintenance of such network. However, a greater
number of nodes decreases the network’s efficiency in
processing transactions and may result in increased settlement
times. Increased settlement times could discourage certain uses for
bitcoin (for example, micropayments), and could reduce demand for
and price of bitcoin, which could adversely impact the value of an
investment in the Fund.”
The
Fund has revised the risk factor captioned “Bitcoin Exchanges
Are Unregulated and May Be More Exposed to Fraud and Failure”
to include the following disclosure:
“Fraud and
failure related to such bitcoin exchanges could result in a loss of
public confidence in bitcoin and cause a decline in the value of
bitcoin, which could adversely impact the adoption of bitcoin or
acceptance of bitcoin and a decline in value of the Fund’s
Bitcoin Futures Contracts.”
13.
Comment: Refer
to your response to comment 21. Please add a separate risk factor
addressing the risks presented by the existence of bitcoin "whales"
and the concentration in bitcoin ownership.
Response:
The Fund has added
the following new risk factor to the prospectus:
“Bitcoin Ownership is Concentrated in a Small Number of
Holders Referred to as ‘Whales’
A
significant portion of bitcoin is held by a small number of holders
who have the ability to affect the price of bitcoin and who are
sometimes referred to as “whales.” Because bitcoin is
lightly regulated, bitcoin whales have the ability, alone or in
coordination, to manipulate the price of bitcoin by restricting or
expanding the supply of bitcoin. Activities of bitcoin whales that
reduce user confidence in bitcoin, the Bitcoin Network or the
fairness of bitcoin trading venues, or that affect the price of
bitcoin, could have a negative impact on the value of an investment
in the Fund.”
14.
Comment: Refer
to your response to comment 31. Please add a separate risk factor
describing the risks arising from the Sponsor’s lack of prior
experience in the crypto asset markets.
Response:
The Fund has added
the following new risk factor to the prospectus:
“Sponsoring the Fund will be the Sponsor’s first
experience in the crypto asset markets
There
are risks related to the Sponsor’s lack of experience in the
crypto asset markets, particularly with respect to marketing the
fund. To address this risk, the Sponsor has entered into the
Support Agreement discussed above, under which Hashdex and Victory
Capital will provide crypto asset related marketing services. To
the extent that Hashdex and Victory Capital are not effective in
marketing the Fund, the Sponsor may not possess the requisite
marketing knowledge to grow the Fund or maintain a viable
size.”
15.
Comment: Please
add a separate risk factor addressing risks from the support
agreement, including that some or all of Teucrium's obligations
will transfer to Toroso, Tidal, Hashdex, or Victory Capital, and
these transferees may not manage the fund in the same manner as
Teucrium and may not achieve the investment objective. Also
disclose that it is not known when this will occur because the time
schedule has not yet been agreed upon.
Response:
The Fund has added
the following new risk factor to the prospectus:
“There
are risks related to the Support Agreement and the planned transfer
of operations to new management
There
are risks related to the Support Agreement and the planned transfer
of operations to new management. Among other things, following the
transfer of operations to Toroso, Toroso may not manage the Fund as
effectively as the Sponsor. In addition, because a timeline for the
transfer has not yet been determined, it is not known when the
transfer of management will occur.”
16.
Comment: Please
tell us whether the potential outcome of the Gilbertie case could pose a risk to
investors in the fund. To the extent material, address this risk in
the risk factors.
Response: The
Sponsor does not believe that the Gilbertie case could pose a risk to
investors in the Fund. The Fund is not a named party to the case,
and the Sponsor does not believe there is a potential outcome in
the case that could adversely affect the Fund or the
Sponsor.
17.
Comment: We
note that existing or future competing ETFs may have a
significantly lower management fee. Please add a risk factor
addressing the risks that to the extent you have relatively higher
fees, this could impede growth of the Fund, possibly result in a
lower NAV per share, and otherwise pose a material risk to
investors.
Response:
The Fund has added
the following new risk factor to the prospectus:
“Existing
or future bitcoin futures based ETFs may have significantly lower
management fees, which may impede the growth of the
Fund.
Existing and future
bitcoin futures based ETFs may have fees that are significantly
lower than the Fund's. To the extent that the Fund has relatively
higher fees than other such funds, this could impede growth of the
Fund, possibly result in a lower NAV per Share, and otherwise pose
a material risk to investors.”
Correlation Risk, page 12
18.
Comment: Refer
to your response to comment 20 and the disclosure under Correlation
Risk on page 12. Please address the risk of potential differences
between returns based on the price of bitcoin and an investment in
the Fund because of the additional costs related to futures
investing, and other fund expenses.
Response:
The Fund has
revised the risk factor captioned “Changes in the
Fund’s NAV may not correlate well with changes in the price
of the Benchmark. If this were to occur, you may not be able to
effectively use the Fund as a way to hedge against bitcoin related
losses or as a way to indirectly invest in bitcoin” to
clarify that differences between returns based on the price of
bitcoin and an investment in the Fund may also be attributable to
additional costs related to futures investing and other fund
expenses.
Position limits, accountability levels and dynamic price
fluctuation limits, page 13
19.
Comment: Refer
to your response to comment 28. Please explain how the Dynamic
Circuit Breaker fits within the context of the dynamic price
fluctuation limit discussion, for example, whether the Dynamic
Circuit Breaker is a type of dynamic price fluctuation limit. Also
explain what you mean by "89 events" and define "hard limit move"
and explain how it works.
Response:
The Fund has
revised the first three paragraphs of this risk factor as
follows:
“The
CFTC and U.S. designated contract markets, such as the CME, have
established position limits and accountability levels on the
maximum net long or net short BTC Contracts that the Fund may hold,
own or control. Spot position limits are set at 4,000 contracts. A
position accountability level of 5,000 contracts will be applied to
positions in single months outside the spot month and in all months
combined. The MBT Contracts have a spot month limit of 200,000
contracts and a position accountability level of 250,000 contracts.
Accountability levels are not fixed ceilings but rather thresholds
above which the exchange may exercise greater scrutiny and control
over an investor, including limiting the Fund to holding no more
Bitcoin Futures Contracts than the amount established by the
accountability level. The potential for the Fund to reach position
or accountability limits will depend on if and how quickly the
Fund’s net assets increase.
In
addition to position limits and accountability limits, the CME
places daily price fluctuation limits on Bitcoin Futures Contracts
that represent the maximum daily price range permitted for a
contract. Once a price fluctuation limit has been reached, no
trades may be made at a price beyond that limit. Under the price
fluctuation mechanism that was initially put into place when
Bitcoin Futures Contracts were launched on the CME in December
2017, price fluctuation limits were triggered 116 times. In March
2019, the CME adopted a dynamic price fluctuation mechanism. This
mechanism assigns an initial opening price fluctuation limit equal
to a percentage of the prior trading day’s settlement price
(or a different price if deemed more appropriate), which then moves
with the market throughout the day. Since dynamic price fluctuation
limits were introduced, price limits have been triggered 89 times
and there has been one "hard limit move." A hard limit move is when
the price of Bitcoin Futures Contracts exceeds a price limit that
defines the minimum/maximum price to which such Bitcoin Futures
Contracts can move for the given trade date. If the hard limit is
reached, trade matching will not occur at prices above the maximum
price or below the minimum price.
Position
limits, accountability limits and dynamic price fluctuation limits
may limit the Fund’s ability to invest the proceeds of
Creation Baskets in Bitcoin Futures Contracts. As result, when the
Fund sells Creation Baskets it may be limited in its ability to
invest in Bitcoin Futures Contracts, including the Benchmark
Component Futures Contracts. In such case, the Fund may hold larger
amounts of cash and cash equivalents, which will impair the
Fund’s ability to meet its investment objective of tracking
the Benchmark.”
The price relationship between the Benchmark Component Futures
Contracts, page 14
20.
Comment: Refer
to your response to comment 27 and your disclosure regarding
periods during which certain contract combinations were in a state
of contango 92% of the time. Please discuss and quantify the
contango risk in your summary and explain to us why periods when
certain combinations of contracts were in a state of contango 92%
of the time resulted in positive average roll yields.
Response:
The reference to a
positive average annual roll yield was in error; the reference has
been revised to a negative average annual roll yield. Additionally,
the Fund has included a discussion and quantification of contango
risk in the Summary as follows:
“The design of the Fund’s Benchmark is
such that the Benchmark Component Futures Contracts will change on
a monthly basis, with the contracts with the shortest maturity
being replaced with contracts with a longer maturity.
Sometimes the Fund will have to pay more for longer maturity
contracts to replace existing shorter maturity contracts about to
expire. This situation is known as “contango” in
the futures markets. In the event of a prolonged period of
contango, and absent the impact of rising or falling bitcoin
prices, this could have a negative impact on the Fund’s NAV
and total return, which in turn may have a negative impact on your
investment in the Fund. By way of example, during the
period from 1/1/2019 to 3/31/2022, the market for Bitcoin Component
Futures Contracts were in contango approximately 89% of the time,
which resulted in an average annual negative roll yield of
approximately 7%."
The
Fund has also replaced the referenced risk factor disclosure with
the above text, which it believes is simpler and more in plain
English.
The Fund is not a registered investment company, so you do not have
the protections of the Investment Company Act of 1940, page
16
21.
Comment: Please
list the specific Investment Company Act protections that investors
will not receive and explain them to the extent
necessary.
Response:
The Fund has
replaced the referenced risk factor with the following disclosure.
It is based in part on statements made by the Division of
Investment Management in describing the protections of the
Investment Company Act, in its seminal 1992 "Protecting Investors:
A Half Century of Investment Company Regulation" report, on page
xviii:
"The
Fund is not an investment company subject to the Investment Company
Act of 1940. Accordingly, you do not have the protections expressly
provided by that statute, including preventing Fund insiders from
managing the Fund to their benefit and to the detriment of Fund
Shareholders; preventing the Fund from issuing securities having
inequitable or discriminatory provisions; preventing Fund
management by irresponsible persons; preventing the use of unsound
or misleading methods of computing Fund earnings and asset value;
and preventing changes in the Fund's character without the consent
of Fund Shareholders.”
The Fund is newly formed and may not be successful in implementing
its investment objective or attracting sufficient assets, page
19
22.
Comment: Refer
to your response to comment 18. Please discuss how your timing in
reaching the market relative to other bitcoin futures-based ETFs
could have a detrimental effect on the scale of the fund. Address
that every time a new bitcoin futures-based ETF has launched, it
ended up having lower net assets than those ETFs that launched
before it.
Response:
The following will
be added at the end of the referenced risk factor. "In this regard,
as of the date of this prospectus there are three bitcoin
futures-based ETFs. The first fund launched has obtained
significantly more assets than the other two. To the extent that
this “first mover” advantage continues to favor the
first fund launched, this might constrain the Fund’s
growth."
The NYSE Arca may halt trading in the Shares which would adversely
impact your ability to sell Shares, page 19
23.
Comment: Refer
to your response to comment 29. Please briefly explain the "market
conditions" that could lead NYSE Arca to halt trading in the
shares. Additionally, state, if true, that NYSE Arca may halt
trading if there is insufficient trading in BTC or MBT
Contracts.
Response:
The Fund has
revised the referenced disclosure to clarify the market conditions
under which the NYSE Arca may halt trading in the Shares, as
follows:
“Trading in
Shares of the Fund may be halted by the NYSE Arca due to market
conditions or, in light of NYSE Arca rules and procedures, for
reasons that, in view of the NYSE Arca, make trading in Shares
inadvisable. Such market conditions or other reasons may include
when there is significant news directly related to the Fund that,
in NYSE Arca’s view or per existing NYSE Arca rules, requires
a trading halt, such as when the Sponsor announces news relating to
changes/disruptions in the Fund’s create/redeem process
during market trading hours. In addition, market conditions that
would result in trading halts may also include extraordinary market
volatility that trigger rules requiring trading to be halted for a
specified period based on a specified market decline. NYSE Arca
might also halt trading if there is insufficient trading in BTC or
MBT Contracts. There can be no assurance that the requirements
necessary to maintain the listing of the Shares will continue to be
met or will remain unchanged. The Fund will be terminated if its
Shares are delisted.”
The Fund may become leveraged, page 21
24.
Comment: Refer
to your response to comment 3. Please state that the NYSE Arca rule
approved by the SEC under which your shares will be listed and
traded prescribes that the Fund’s investments may not be used
to enhance leverage.
Response:
The Fund has
removed the requested disclosure to avoid potential confusion. The
Fund will add a statement to the prospectus that the NYSE Arca rule
under which the Shares will be listed and traded prevents the Fund
from utilizing leverage.
The price of bitcoin can be volatile which could cause large
fluctuations, page 22
25.
Comment: Refer
to your response to comment 30. Discuss price swings for both
bitcoin and bitcoin futures contracts for all periods; the single
day price decline that occurred on September 7, 2021; and update
and quantify recent price declines in subsequent
amendments.
Response:
The Fund has added
the following disclosure and table to the risk factor captioned
“The price of bitcoin can be volatile which could cause large
fluctuations in the price of Shares”:
“The table
below includes significant single day price declines since
inception of the Bitcoin Futures Contracts in December 2017 for
both bitcoin (as measured by the BRR) and for Bitcoin Futures
Contracts (as measured by the front month Bitcoin Futures
Contract), including the single day price decline that occurred on
September 7, 2021, followed by a brief narrative disclosure
describing the significant declines:”
|
Date
|
BTC1 Daily % Change
|
BRR Daily % Change
|
Notes
|
|
3/12/2020
|
-23.49%
|
-21.89%
|
The selloff in Bitcoin futures coincided with broader financial
market duress at the onset of the COVID pandemic
|
|
6/27/2019
|
-21.82%
|
-9.31%
|
Potentially signals near term profit taking as the front month
contract gained, after gaining approximately 22% in the prior
session
|
|
6/13/2022
|
-20.09%
|
-15.45%
|
Selling picked up after failing to hold the $30,000 level, filling
the gap created on the way up during December 2020
|
|
1/16/2018
|
-19.97%
|
-13.50%
|
Bitcoin futures were relatively new and there was significant
selling interest early on that carried through December
2018
|
|
2/5/2018
|
-15.43%
|
-14.16%
|
Bitcoin futures were relatively new and there was significant
selling interest early on that carried through December
2018
|
|
9/7/2021
|
-7.75%
|
-3.35%
|
The selling may have been the result of profit taking as Bitcoin
futures closed over $50,000 for the first time in the prior
session
|
The
Fund will update the table in subsequent amendments to reflect
material changes.
Operation of the Fund, page 26
26.
Comment: Refer
to your response to comment 33. We are unable to locate the
revisions you discuss. Please clarify under what circumstances you
will hold BTC contracts versus MBT contracts.
Response:
The Fund has added
the following requested disclosure, which was inadvertently omitted
from the previous filing:
"The
Fund will purchase MBT contracts only if the Fund has proceeds
remaining from the sale of a Creation Basket that are less than the
price of a BTC contract. BTC and MBT will count toward an aggregate
position limit."
Bitcoin Futures Contracts, page 27
27.
Comment: Refer
to your response to comment 36. Please describe in detail how the
CME CF Bitcoin Reference Rate is calculated. Explain how it
"aggregates trade flow"; identify the "specified bitcoin spot
exchanges" and explain how they are selected; and describe the
"calculation window."
Response: The
Fund has replaced the referenced disclosure with the
following:
“CME began
offering trading in BTC Contracts in 2017 (and in MBT Contracts in
2021). The
CME needed a transparent and readily available way to determine the
price of bitcoin for its futures contract customers. However, there
are numerous exchanges on which one can buy and sell bitcoin, and
the prices of bitcoin can differ greatly from exchange to exchange.
CME wanted to use pricing information from what it considered to be
reputable bitcoin exchanges to calculate a once-a-day reference
rate of the U.S. dollar price of bitcoin.
The CME developed the
CME CF Bitcoin Reference Rate (the "BRR") to serve these
purposes. Each of the BTC and MBT contract’s final
daily cash settlement is based on the BRR. It serves as a
once-a-day reference rate of the U.S. dollar price of bitcoin and
is used as the rate on which bitcoin futures contracts are
cash-settled in U.S. dollars at the close of CME daily trading. The
BRR is calculated by collecting purchase and sale transactions from
specified constituent bitcoin exchanges, which currently include
Bitstamp, Coinbase, Gemini, itBit, Kraken and LMAX Digital, during
a calculation window between 3:00 p.m. and 4:00 p.m. London time.
It is published at 4:00 p.m. London time each
day.”
Other Non-Contractual Payments by the Fund, page 32
28.
Comment: Refer
to your response to comment 40. Please explain to us why the Fund
paying for brokerage commissions does not reduce net asset value
and taxable gains will not decrease net asset value. To the extent
either of these expenses could decrease net asset value please add
a risk factor as requested in our comment.
Response:
Upon further
consideration, the Fund acknowledges that the disclosure initially
requested by the Staff is correct. Accordingly, the Fund has added
the following disclosure after the second sentence in the "Other
Non-Contractual Payments by the Fund" section of the
prospectus:
"Purchases of
creation units with cash may cause the Fund to incur certain costs
including brokerage commissions and redemptions of creation units
with cash may result in the recognition of gains or losses that the
Fund might not have incurred if it had made redemptions
in-kind.”
The
Fund has also added the following risk factor to the "The Fund's
Operating Risks" section:
"Purchases and
redemptions of creation units will be transacted in cash rather
than ‘in-kind’ where creation units are purchased and
redeemed in exchange for underlying constituent securities.
Purchases of creation baskets with cash may cause the Fund to incur
certain costs including brokerage commissions and redemptions of
creation baskets with cash may result in the recognition of gains
or losses that the Fund might not have incurred if it had made
redemptions in-kind."
Calculating NAV, page 34
29.
Comment: You
state that in determining the value of Bitcoin Futures Contracts,
the Administrator uses the BTC Contract settlement price on the
exchange on which the contract is traded, except that the "fair
value" of Bitcoin Futures Contracts may be used when those
contracts close at their price fluctuation limit for the day.
Please tell us how your intended calculation of net asset value is
consistent with GAAP. In this regard:
●
tell us which
market you have identified as your principal or most advantageous
market as stipulated in ASC 820-10-35-5 and 35-5A; and
●
explain how your
GAAP net asset value will be calculated when a Bitcoin Futures
Contract closes at its price fluctuation limit. Clarify whether the
fair value determination of these contracts will be based on
closing prices that include or exclude price fluctuation
limits.
Reference the
accounting literature you rely upon to support your
position.
Response: We
have responded to each of the Staff's comments below:
Please tell us how your intended calculation of net asset value is
consistent with GAAP.
The CME
will always assign a settlement price even on days where a bitcoin
futures contract held by the Fund settles at its price fluctuation
limit. The Fund will, in turn, always use this settlement price as
the fair value. Options trading halts when futures trading halts,
so that options prices cannot be substituted for futures contract
prices.
Each
BTC Contract and MBT Contract settles daily to the BTC Contract
volume-weighted average price (“VWAP”) of all trades
that occur between 2:59 p.m. and 3:00 p.m. Central Time, the
settlement period. For the Staff's information, the settlement
procedures that the CME uses to calculate its settlement price can
be found here –
https://www.cmegroup.com/confluence/display/EPICSANDBOX/Bitcoin
– but the Fund does not believe that such detailed disclosure
would be deemed material by investors.
The CME
has enhanced how price limits and price fluctuation limits work to
ensure the markets continue to work in an efficient and orderly
manner during volatile market conditions. The Trust believes this
process is consistent with GAAP because this is an the most
observable and verifiable market value as of the measuring date. In
addition, GAAP does not provide specific guidance on determining
fair value provided it can be demonstrated that the price is
derived from a principal market, and that the price is reflective
of what market participants are willing to pay.
Tell us which market you have identified as your principal or most
advantageous market as stipulated in ASC 820-10-35-5 and
35-5A.
The
Benchmark is currently the average of the closing settlement prices
for the first to expire and second to expire Bitcoin Futures
Contracts listed on the CME. The Trust has identified the CME as
the principal market because that is the exchange on which the
contracts will transact. The CME is a regulated futures exchange
with the requisite oversight, controls, and regulatory scrutiny
necessary to maintain, promote, and effectuate fair and transparent
trading of its listed products, including the BTC Contracts and MBT
Contracts. The BTC Contracts and MBT Contracts are highly liquid,
financially-settled instruments with no ownership interests of any
kind in actual Bitcoin.
Explain how your GAAP net asset value will be calculated when a
Bitcoin Futures Contract closes at its price fluctuation
limit
As
discussed above, the Fund will always calculate its GAAP net asset
value using the CME settlement price, including when a bitcoin
futures contract held by the Fund closes at its price fluctuation
limit. ASC 820 defines “fair value” as the exit price
that would be received to sell an asset in an orderly market. The
CME has enhanced how price fluctuation limits work to ensure that
the bitcoin futures market continue to work in an efficient and
orderly manner during volatile market conditions. For this reason,
the Fund believes that the settlement price constitutes an
observable and verifiable market value.
Clarify whether the fair value determination of these contracts
will be based on closing prices that include or exclude price
fluctuation limits.
The
fair value determination of these contracts will always be the CME
settlement price, which includes price fluctuation
limits.
30.
Comment: Refer
to your response to comment 41. Please explain to us the statement
"[t]he MBT Contract settlement price is not used in the NAV
calculation because the MBT settlement price is the same as the BTC
settlement price." It appears that, while the MBT settlement price
is proportionally the same as the BTC settlement price, these
settlement prices are different because these contracts represent
different amounts of bitcoin. Please also revise the last sentence
of the risk factor "The Net Asset Value calculation of the Fund may
be overstated or understated" on page 17 to clarify that, as stated
on page 34, when a bitcoin futures contract has closed at its price
fluctuation limit the Fund will use the daily CME settlement price
for the determination of NAV.
Response:
The Fund has
revised its disclosure under “Calculating NAV” on page
51 to state: “In determining the value of Bitcoin Futures
Contracts, the Administrator uses the settlement price for the
Benchmark Component Futures Contracts, as reported on the
CME.”
Additionally, the
Fund has revised the last sentence of the noted risk factor to
state that when a bitcoin futures contract has closed at its price
fluctuation limit the fund will use the daily CME settlement price
for the determination of NAV.
Determination of Required Deposits, page 35
31.
Comment: Refer
to your response to comment 42. Please remove statements here and
on page 36 that creation and redemption transactions may be settled
with bitcoin futures.
Response:
The Fund has
removed the noted disclosures that transactions may be settled with
bitcoin futures.
Exhibits
32.
Comment: Refer
to your response to comment 7. Please file the FCM agreements as
exhibits or provide your analysis why these are not required to be
filed under Item 601(b)(10) to Regulation S-K.
Response:
Item 601(b)(10)(ii)
defines a material contract as “Every contract that is not
made in the ordinary course of business that is material to the
registrant.” A contract is made in the ordinary course of
business “if the contract is such as ordinarily accompanies
the kind of business conducted by the registrant and its
subsidiaries” and is not required to be filed unless the
contract falls under any one of four exceptions. Because the FCM
agreements relate to routine, administrative functions of the Fund,
and none of the exceptions under Item 601(b)(10)(ii) apply, the
Sponsor does not believe that the FCM agreements are material
contracts that would be required to be filed under Item 601(b)(10)
to Regulation S-K. In support of this position, others in the
industry, including another bitcoin futures based ETF, has not
included its FCM agreements as a material contract in the exhibits
to its registration statement. To the extent that terms of the FCM
agreements are material (i.e., the names of the FCMs and the fees
charged to the Fund), they have been disclosed in the prospectus.
Accordingly, the Fund declines to include the FCM agreements as
exhibits to the Registration Statement..
Please
contact the undersigned at (202) 312-3331 (tconner@vedderprice.com)
or John Sanders at (202) 312-3332 (jsanders@vedderprice.com) with
any questions or comments.
|
Very
truly yours,
W.
Thomas Conner
Shareholder
|
|
cc:
|
Vedder
Price P.C. is affiliated with Vedder Price LLP, which operates in
England and Wales, Vedder Price (CA), LLP, which operates in
California, and Vedder Price Pte. Ltd., which operates in
Singapore.
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