Correspondence 0001137439-24-001558 from Franklin Crypto Trust (EZPZ) (CIK 0002033807) (EZPZ)
Franklin Crypto Trust (EZPZ) (CIK 0002033807)
Date: Dec. 11, 2024 · CIK: 0002033807 · Accession: 0001137439-24-001558
AI Filing Summary & Sentiment
File numbers found in text: 333-281615
Letter
Division of Corporation Finance – Office of Crypto Assets Subject: Franklin Crypto Trust (the “Trust”) Pre-Effective Registration Statement on Form S-1 (File No. 333-281615)
Dear Ms. Bednarowski, Ms. Berkheimer, Mr. Irving and Mr. Niethamer:
On behalf of the Trust, submitted herewith via the EDGAR system are the responses to the comments of the staff (the “Staff”) of the U.S. Securities and Exchange Commission (the “Commission”) provided via written correspondence with regard to the Trust’s pre-effective Registration Statement on Form S-1 (the “Registration Statement”) with respect to the Franklin Crypto Index ETF series of the Trust (the “Fund”), which was filed with the Commission on August 16, 2024 under the Securities Act of 1933 (the “1933 Act”). The Staff’s comments are summarized below, followed by the Trust’s responses thereto. Terms not defined herein have the meaning set forth for that term in the Registration Statement.
Registration Statement on Form S-1
General
1.
Comment: To the extent that you intend to use a fact sheet, please provide us a copy for our review.
Response: The Trust acknowledges this comment and will provide a copy of the proposed fact sheet supplementally when available.
2.
Comment: You state that the Shares of the Fund will trade on the Cboe BZX Exchange. Please tell us the status of the application for listing the Fund’s Shares on the exchange.
Response: The Fund’s application pursuant to Rule 19b-4 under the Securities Exchange Act of 1934 for its shares to be traded on the Cboe BZX Exchange was submitted on September 19, 2024.
3.
Comment: Please revise your disclosure throughout the prospectus to discuss the likelihood of additional components being added to the Index. Please also disclose what the Fund will do if any crypto asset other than bitcoin and ether becomes eligible for inclusion in the Index.
Response: The disclosure has been revised as requested.
Prospectus Summary
Key Service Providers - The Sponsor, Trustee, Custodians, Administrator, Marketing Agent and
Trade Credit Lender, page 1
4.
Comment: Please disclose who will calculate the Sponsor’s Fee and the methodology that will be used. In addition, please disclose the criteria the Sponsor will consider or the reasons why the Sponsor may choose to pay expenses beyond the cap amount for legal expenses, and, if so, whether and how Shareholders will be notified. Also, please disclose whether there is a cap on the aggregate expenses that the Sponsor will assume per year, and, if so, please disclose. Similarly, we note your disclosure on page 14 that the Sponsor may waive all or a portion of the Sponsor’s Fee for stated periods of time. Please revise to disclose the criteria the Sponsor will consider or the reasons why the Sponsor may choose to waive all or a portion of its fee. Also, you state that the Sponsor’s Fee may be paid in U.S. dollars or in-kind or any combination thereof. Please disclose the factors considered in determining how the fee will be paid, including whether the Fund may pay the fee in-kind in order to effect a rebalancing. If paid in-kind, please disclose (i) how the value of the crypto assets will be calculated, (ii) who will calculate the value of the crypto assets and (iii) the mechanics of how the Fund’s crypto assets will be transferred to the Sponsor, including whether such transactions are conducted “on-chain.”
Response: The disclosure has been revised to reflect that BNYM is responsible for calculating the Sponsor’s Fee as the Fund’s Administrator. As disclosed in the Registration Statement, the Fund will pay the Sponsor a fee as compensation for the Sponsor’s services rendered to the Fund, computed daily and payable at least quarterly in arrears, at an annual rate of a specified percentage of the average daily net assets of the Fund. The ordinary fees and expenses of the Fund that are assumed by the Sponsor are described in the Registration Statement, and there is otherwise no cap on the aggregate expenses that the Sponsor will assume per year (except as otherwise described in the Registration Statement). As stated in the Registration Statement, the Sponsor retains sole discretion to assume ordinary legal fees and expenses of the Fund in excess of the specified per annum cap. The Sponsor also retains sole discretion to determine to waive all or a portion of the Sponsor’s Fee from time to time, and in such circumstances Shareholders will be notified in a prospectus supplement, in the Fund’s periodic reports, and/or on the Fund’s website. The Trust confirms that any waiver of the Sponsor’s Fee implemented in connection with the launch of the Fund will be described in the Registration Statement. In response to this comment, the disclosure has been revised to clarify that there are no specific circumstances under which the Sponsor has determined it will waive the Sponsor’s Fee or choose to pay expenses beyond the cap amount for ordinary legal expenses.
The Fund currently expects the Sponsor’s Fee to be paid in U.S. dollars through the sale of Digital Assets held by the Fund. The Fund does not currently plan to pay the Sponsor’s Fee in-kind. The disclosure has been revised accordingly.
5.
Comment: Please revise here to include a brief summary of the material terms of the Trade Financing Agreement, including the maximum amount of Trade Credit that may be outstanding at any one time, the term of each Trade Credit, and how the interest rate is determined for each such Trade Credit. Also include a summary of the Sponsor’s policy regarding whether its intention is to generally fund the Trading Balance with sufficient cash or whether it expects to utilize the Trade Financing Agreement for creations and other purchases of crypto assets. Similarly, please revise your disclosure on page 154 to disclose
the maximum amount of Trade Credits that may be outstanding at any one time and to include a description of how the interest rate is determined for each Trade Credit.
Response: The Trust has revised the disclosure as requested. The Trust confirms that the material terms of the Trade Financing Agreement, including a description of how interest rates on Trade Credits are determined, are disclosed in the Registration Statement. The Trust respectfully submits that the maximum amount of Trade Credit is commercially sensitive information for the Trade Credit Lender and that other similar products do not disclose such information.
The Underlying Index, page 4
6.
Comment: We note your disclosure on pages 5 and 114 that in order for a crypto asset to be eligible for inclusion in the Underlying Index, the crypto asset must be listed on two or more “eligible constituent exchanges” as determined by the Index Provider and must be supported by one or more “eligible third-party custodians” as determined by the Index Provider. Please revise to identify the “eligible constituent exchanges” and the “eligible third-party custodians.” Also describe how the liquidity screen is used to determine eligible crypto assets and identify the minimum liquidity, turnover and full market capitalization ratios used to determine eligible crypto assets pursuant to the Index Rules. In addition, please revise to provide examples of the factors that may cause the Index Provider to exclude a crypto asset that would otherwise be eligible based upon the Index Rules. Also supplementally tell us generally why other high market capitalization crypto assets do not meet the Index Provider’s criteria and/or the Index Rules. In your response, please provide a few examples of such crypto assets and the reason(s) they do not qualify.
Response: The disclosure has been revised as requested. There are many digital assets that exhibit high market capitalizations but do not meet all the Index Provider’s eligibility criteria. For illustration purposes, the table below shows the eligibility criteria that certain digital assets failed to meet at the last Underlying Index reconstitution date.
Digital asset
Listed for trading against the U.S. Dollar on 2 or more eligible constituent exchanges
Custodial services offered by eligible third-party custodians
Determined to be in conformance with prevailing capital markets regulations of major financial jurisdictions
Meets the relative liquidity ratio
Meets the asset turnover ratio
BNB
Fails
Fails
Fails
Fails
Fails
XRP
Meets
Meets
Fails
Meets
Meets
Solana
Meets
Meets
Fails
Meets
Meets
Litecoin
Meets
Meets
Fails
Meets
Meets
7.
Comment: Please revise to include a definition of the terms “coin-centric” and “account-centric.”
Response: The disclosure has been revised as requested.
The Offering
Net Asset Value, page 11
8.
Comment: Your disclosure on page 11 that the “Administrator values the Digital Assets held by the Fund based on the CF Reference Rates . . .” appears to be inconsistent with your disclosure elsewhere that the net asset value of the Fund is determined by the Administrator based on the Underlying Index. Please revise for clarity and consistency.
Response: The disclosure has been revised as requested.
Intraday Indicative Value, page 13
9.
Comment: Your disclosure on page 13 that the “Fund intends to publish an intraday indicative value per share (“IIV”) using the CME CF Ether-Dollar Real Time Index and the CME CF Bitcoin Real Time Index appears to be inconsistent with the disclosure that “[o]ne or more major market data vendors will provide an IIV updated every 15 seconds, as calculated by the Exchange or a third-party financial provider” during the Regular Market Session. Please revise to clarify whether the Fund will calculate the IIV.
Response: The disclosure has been revised as requested.
Fund expenses, page 14
10.
Comment: We note your disclosure on page 15 that in order “[t]o cover the Sponsor’s Fee and expenses not assumed by the Sponsor and to adjust the Fund’s investments to correspond with a rebalancing and/or reconstitution of the Underlying Index, the Sponsor or its delegate will cause the Fund to convert Digital Assets into U.S. dollars generally at the price available through the Prime Broker’s Coinbase Prime service (less applicable trading fees) through the Trading Platform which the Sponsor is able to obtain using commercially reasonable efforts.” Please revise to clarify what you mean by the disclosure that the “Sponsor is able to obtain using commercially reasonable efforts” by describing the Sponsor’s role in connection with the actual exchange of crypto assets on the Prime Broker’s Trading Platform. Also, please disclose here that the Sponsor will rebalance the Fund’s assets on a quarterly basis.
Response: The disclosure has been revised requested.
11.
Comment: Please revise to define “Trading Platform” the first time this term is used on page 15. In this regard, we note that the first time the definition is provided is on page 181.
Response: The disclosure has been revised as requested.
12.
Comment: We note your disclosure that to correspond with a rebalancing and/or reconstitution of the Underlying Index, the Sponsor will cause the Fund to convert the Digital Assets into U.S. dollars. Please revise to disclose why the Sponsor converts the
bitcoin and ether to cash instead of exchanging one for the other as bitcoin and ether are often traded in pairs.
Response: The above-referenced disclosure has been revised in response to this comment.
Risk Factors
Risk Factors Related to Digital Assets
The trading prices of many digital assets, including bitcoin and ether, page 21
13.
Comment: Please revise to disclose quantitative information regarding the volatility of bitcoin and ether during the time periods identified on pages 21 and 22.
Response: The disclosure has been revised as requested.
Digital asset networks face significant scaling challenges, page 28
14.
Comment: Please revise to disclose quantitative information demonstrating the fluctuations of ether transaction fees in the second paragraph of this risk factor.
Response: The Trust respectfully submits that it has disclosed this information on pages 28-29 of the Registration Statement. The Trust confirms it will update this information as of a more recent date in a subsequent amendment to the Registration Statement.
Digital assets may have concentrated ownership, page 30
15.
Comment: We note your disclosure on page 30 that “[t]he largest Digital Asset wallets are believed to hold, in aggregate, a significant percentage of the Digital Assets in circulation.” Please revise to disclose the aggregate percentage of bitcoin and ether believed to be held in such wallets.
Response: The disclosure has been revised as requested.
A temporary or permanent “fork” could adversely affect the value of the Shares, page 35
16.
Comment: Please revise to include quantitative information regarding the price of the crypto assets that experienced hard forks immediately before and after the fork.
Response: The disclosure has been revised as requested. The Trust respectfully notes that the aforementioned section already includes information on the price before and after certain hard forks such as the hard fork of the Ethereum network related to the DAO hack and the Bitcoin Cash hard fork from the Bitcoin network.
Risk Factors Related to the Digital Assets Markets
Due to the relative unregulated nature and lack of transparency, page 47
17.
Comment: Please address wash-trading and front-running in separate risk factors.
Response: The disclosure has been revised as requested.
Competitive pressures may negatively affect the ability of the Fund, page 54
18.
Comment: Please expand to specifically identify the competitive forces that the Fund and Sponsor face with regard to exchange-traded products offering exposure to the crypto assets market, including whether the timing of the Fund’s entry into the market may have an impact on its performance as several applications for spot exchange-traded crypto products have been approved and are currently listed and trading.
Show Raw Text
CORRESP
1
filename1.htm
December 11, 2024
Filed via EDGAR
Sonia Bednarowski, Sandra Hunter Berkheimer,
David Irving and Jason Niethamer
U.S. Securities and Exchange Commission
Division of Corporation Finance – Office of Crypto Assets
100 F Street, NE
Washington, DC 20549
Subject:
Franklin Crypto Trust (the “Trust”)
Pre-Effective Registration Statement on Form S-1
(File No. 333-281615)
Dear Ms. Bednarowski, Ms. Berkheimer, Mr. Irving and Mr. Niethamer:
On behalf of the Trust, submitted herewith via the EDGAR system are the responses to the comments of the staff (the “Staff”) of the U.S. Securities and Exchange Commission (the “Commission”) provided
via written correspondence with regard to the Trust’s pre-effective Registration Statement on Form S-1 (the “Registration Statement”) with respect to the Franklin Crypto Index ETF series of the Trust (the “Fund”), which was filed with the Commission
on August 16, 2024 under the Securities Act of 1933 (the “1933 Act”). The Staff’s comments are summarized below, followed by the Trust’s responses thereto. Terms not defined herein have the meaning set forth for that term in the Registration
Statement.
Registration Statement on Form S-1
General
1.
Comment: To the extent that you intend to use a fact sheet, please provide us a copy for our review.
Response: The Trust acknowledges this comment and will provide a copy of the proposed fact sheet supplementally when available.
2.
Comment: You state that the Shares of the Fund will trade on the Cboe BZX Exchange. Please tell us the status of the application for listing the Fund’s Shares on the exchange.
Response: The Fund’s application pursuant to Rule 19b-4 under the Securities Exchange Act of 1934 for its shares to be traded on the Cboe BZX Exchange was submitted on September 19, 2024.
3.
Comment: Please revise your disclosure throughout the prospectus to discuss the likelihood of additional components being added to the Index. Please also disclose what the Fund will do if any crypto
asset other than bitcoin and ether becomes eligible for inclusion in the Index.
Response: The disclosure has been revised as requested.
Prospectus Summary
Key Service Providers - The Sponsor, Trustee, Custodians, Administrator, Marketing Agent and
Trade Credit Lender, page 1
4.
Comment: Please disclose who will calculate the Sponsor’s Fee and the methodology that will be used. In addition, please disclose the criteria the Sponsor will consider or the reasons why the Sponsor
may choose to pay expenses beyond the cap amount for legal expenses, and, if so, whether and how Shareholders will be notified. Also, please disclose whether there is a cap on the aggregate expenses that the Sponsor will assume per year, and,
if so, please disclose. Similarly, we note your disclosure on page 14 that the Sponsor may waive all or a portion of the Sponsor’s Fee for stated periods of time. Please revise to disclose the criteria the Sponsor will consider or the reasons
why the Sponsor may choose to waive all or a portion of its fee. Also, you state that the Sponsor’s Fee may be paid in U.S. dollars or in-kind or any combination thereof. Please disclose the factors considered in determining how the fee will
be paid, including whether the Fund may pay the fee in-kind in order to effect a rebalancing. If paid in-kind, please disclose (i) how the value of the crypto assets will be calculated, (ii) who will calculate the value of the crypto assets
and (iii) the mechanics of how the Fund’s crypto assets will be transferred to the Sponsor, including whether such transactions are conducted “on-chain.”
Response: The disclosure has been revised to reflect that BNYM is responsible for calculating the Sponsor’s Fee as the Fund’s Administrator. As disclosed in the Registration Statement, the Fund will pay
the Sponsor a fee as compensation for the Sponsor’s services rendered to the Fund, computed daily and payable at least quarterly in arrears, at an annual rate of a specified percentage of the average daily net assets of the Fund. The
ordinary fees and expenses of the Fund that are assumed by the Sponsor are described in the Registration Statement, and there is otherwise no cap on the aggregate expenses that the Sponsor will assume per year (except as otherwise described
in the Registration Statement). As stated in the Registration Statement, the Sponsor retains sole discretion to assume ordinary legal fees and expenses of the Fund in excess of the specified per annum cap. The Sponsor also retains sole
discretion to determine to waive all or a portion of the Sponsor’s Fee from time to time, and in such circumstances Shareholders will be notified in a prospectus supplement, in the Fund’s periodic reports, and/or on the Fund’s website. The
Trust confirms that any waiver of the Sponsor’s Fee implemented in connection with the launch of the Fund will be described in the Registration Statement. In response to this comment, the disclosure has been revised to clarify that there are
no specific circumstances under which the Sponsor has determined it will waive the Sponsor’s Fee or choose to pay expenses beyond the cap amount for ordinary legal expenses.
The Fund currently expects the Sponsor’s Fee to be paid in U.S. dollars through the sale of Digital Assets held by the Fund. The Fund does not currently plan to pay the Sponsor’s Fee
in-kind. The disclosure has been revised accordingly.
5.
Comment: Please revise here to include a brief summary of the material terms of the Trade Financing Agreement, including the maximum amount of Trade Credit that may be outstanding at any one time, the
term of each Trade Credit, and how the interest rate is determined for each such Trade Credit. Also include a summary of the Sponsor’s policy regarding whether its intention is to generally fund the Trading Balance with sufficient cash or
whether it expects to utilize the Trade Financing Agreement for creations and other purchases of crypto assets. Similarly, please revise your disclosure on page 154 to disclose
the maximum amount of Trade Credits that may be outstanding at any one time and to include a description of how the interest rate is determined for each Trade Credit.
Response: The Trust has revised the disclosure as requested. The Trust confirms that the material terms of the Trade Financing Agreement, including a description of how interest rates on Trade Credits
are determined, are disclosed in the Registration Statement. The Trust respectfully submits that the maximum amount of Trade Credit is commercially sensitive information for the Trade Credit Lender and that other similar products do not
disclose such information.
The Underlying Index, page 4
6.
Comment: We note your disclosure on pages 5 and 114 that in order for a crypto asset to be eligible for inclusion in the Underlying Index, the crypto asset must be listed on two or more “eligible
constituent exchanges” as determined by the Index Provider and must be supported by one or more “eligible third-party custodians” as determined by the Index Provider. Please revise to identify the “eligible constituent exchanges” and the
“eligible third-party custodians.” Also describe how the liquidity screen is used to determine eligible crypto assets and identify the minimum liquidity, turnover and full market capitalization ratios used to determine eligible crypto assets
pursuant to the Index Rules. In addition, please revise to provide examples of the factors that may cause the Index Provider to exclude a crypto asset that would otherwise be eligible based upon the Index Rules. Also supplementally tell us
generally why other high market capitalization crypto assets do not meet the Index Provider’s criteria and/or the Index Rules. In your response, please provide a few examples of such crypto assets and the reason(s) they do not qualify.
Response: The disclosure has been revised as requested. There are many digital assets that exhibit high market capitalizations but do not meet all the Index
Provider’s eligibility criteria. For illustration purposes, the table below shows the eligibility criteria that certain digital assets failed to meet at the last Underlying Index reconstitution date.
Digital asset
Listed for trading against the U.S. Dollar on 2 or more eligible constituent exchanges
Custodial services offered by eligible third-party custodians
Determined to be in conformance with prevailing capital markets regulations of major financial jurisdictions
Meets the relative liquidity ratio
Meets the asset turnover ratio
BNB
Fails
Fails
Fails
Fails
Fails
XRP
Meets
Meets
Fails
Meets
Meets
Solana
Meets
Meets
Fails
Meets
Meets
Litecoin
Meets
Meets
Fails
Meets
Meets
7.
Comment: Please revise to include a definition of the terms “coin-centric” and “account-centric.”
Response: The disclosure has been revised as requested.
The Offering
Net Asset Value, page 11
8.
Comment: Your disclosure on page 11 that the “Administrator values the Digital Assets held by the Fund based on the CF Reference Rates . . .” appears to be inconsistent with your disclosure elsewhere
that the net asset value of the Fund is determined by the Administrator based on the Underlying Index. Please revise for clarity and consistency.
Response: The disclosure has been revised as requested.
Intraday Indicative Value, page 13
9.
Comment: Your disclosure on page 13 that the “Fund intends to publish an intraday indicative value per share (“IIV”) using the CME CF Ether-Dollar Real Time Index and the CME CF Bitcoin Real Time Index
appears to be inconsistent with the disclosure that “[o]ne or more major market data vendors will provide an IIV updated every 15 seconds, as calculated by the Exchange or a third-party financial provider” during the Regular Market Session.
Please revise to clarify whether the Fund will calculate the IIV.
Response: The disclosure has been revised as requested.
Fund expenses, page 14
10.
Comment: We note your disclosure on page 15 that in order “[t]o cover the Sponsor’s Fee and expenses not assumed by the Sponsor and to adjust the Fund’s investments to correspond with a rebalancing
and/or reconstitution of the Underlying Index, the Sponsor or its delegate will cause the Fund to convert Digital Assets into U.S. dollars generally at the price available through the Prime Broker’s Coinbase Prime service (less applicable
trading fees) through the Trading Platform which the Sponsor is able to obtain using commercially reasonable efforts.” Please revise to clarify what you mean by the disclosure that the “Sponsor is able to obtain using commercially reasonable
efforts” by describing the Sponsor’s role in connection with the actual exchange of crypto assets on the Prime Broker’s Trading Platform. Also, please disclose here that the Sponsor will rebalance the Fund’s assets on a quarterly basis.
Response: The disclosure has been revised requested.
11.
Comment: Please revise to define “Trading Platform” the first time this term is used on page 15. In this regard, we note that the first time the definition is provided is on page 181.
Response: The disclosure has been revised as requested.
12.
Comment: We note your disclosure that to correspond with a rebalancing and/or reconstitution of the Underlying Index, the Sponsor will cause the Fund to convert the Digital Assets into U.S. dollars.
Please revise to disclose why the Sponsor converts the
bitcoin and ether to cash instead of exchanging one for the other as bitcoin and ether are often traded in pairs.
Response: The above-referenced disclosure has been revised in response to this comment.
Risk Factors
Risk Factors Related to Digital Assets
The trading prices of many digital assets, including bitcoin and ether, page 21
13.
Comment: Please revise to disclose quantitative information regarding the volatility of bitcoin and ether during the time periods identified on pages 21 and 22.
Response: The disclosure has been revised as requested.
Digital asset networks face significant scaling challenges, page 28
14.
Comment: Please revise to disclose quantitative information demonstrating the fluctuations of ether transaction fees in the second paragraph of this risk factor.
Response: The Trust respectfully submits that it has disclosed this information on pages 28-29 of the Registration Statement. The Trust confirms it will update this information as of a more recent date
in a subsequent amendment to the Registration Statement.
Digital assets may have concentrated ownership, page 30
15.
Comment: We note your disclosure on page 30 that “[t]he largest Digital Asset wallets are believed to hold, in aggregate, a significant percentage of the Digital Assets in circulation.” Please revise to
disclose the aggregate percentage of bitcoin and ether believed to be held in such wallets.
Response: The disclosure has been revised as requested.
A temporary or permanent “fork” could adversely affect the value of the Shares, page 35
16.
Comment: Please revise to include quantitative information regarding the price of the crypto assets that experienced hard forks immediately before and after the fork.
Response: The disclosure has been revised as requested. The Trust respectfully notes that the aforementioned section already includes information on the price before and after certain hard forks such as
the hard fork of the Ethereum network related to the DAO hack and the Bitcoin Cash hard fork from the Bitcoin network.
Risk Factors Related to the Digital Assets Markets
Due to the relative unregulated nature and lack of transparency, page 47
17.
Comment: Please address wash-trading and front-running in separate risk factors.
Response: The disclosure has been revised as requested.
Competitive pressures may negatively affect the ability of the Fund, page 54
18.
Comment: Please expand to specifically identify the competitive forces that the Fund and Sponsor face with regard to exchange-traded products offering exposure to the crypto assets market, including
whether the timing of the Fund’s entry into the market may have an impact on its performance as several applications for spot exchange-traded crypto products have been approved and are currently listed and trading.