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Filecoin Price Drops After SEC Asks Grayscale to Withdraw Application to Make Trust Reporting

CORRECTION (May 18, 2023, 00:25 UTC): Corrects story to reflect that the SEC wants Grayscale to withdraw its Form 10 that sought to make its Filecoin Trust a reporting entity, not withdraw the product itself.

The U.S. Securities and Exchange Commission (SEC) asked Grayscale to withdraw its application to make its Filecoin (FIL) Trust product more like a public company, the asset manager revealed Wednesday.

Grayscale had voluntarily filed a Form 10 to make its Filecoin Trust product a reporting company under which it would have been required to file quarterly and annual reports. The SEC has now asked Grayscale withdraw that application.

Grayscale said in a press release that it had received a comment letter from the federal securities regulator saying FIL "meets the definition of a security."

"The SEC staff requested that Grayscale seek withdrawal of the registration statement promptly," Grayscale said. "Grayscale does not believe that FIL is a security under the federal securities laws and intends to respond promptly to the SEC staff with an explanation of the legal basis for Grayscale’s position. Grayscale cannot predict whether the SEC staff will be persuaded that Grayscale’s position is correct, and if not, whether it may become necessary for Grayscale to seek accommodations that would enable the Trust to register under the Investment Company Act of 1940 or, alternatively, seek dissolution of the Trust."

Grayscale is a subsidiary of Digital Currency Group, CoinDesk's parent company.

An SEC spokesperson declined to comment when asked if the agency could comment on FIL last month.

Grayscale said in a public filing in April that the SEC Divisions of Corporation Finance and Enforcement had reached out at the time "concerning [Grayscale's] securities law analysis of FIL.

Grayscale "acknowledges that FIL may currently be a security, based on the facts as they exist today, or may in the future be found by the SEC or a federal court to be a security under the federal securities laws, notwithstanding [Grayscale's] prior conclusion," the company said at the time.

FIL's price dropped nearly 3% (15 cents) on the news of the filing, before rebounding slightly and trading at $4.51 at press time, according to CoinGecko.

The back-and-forth reflects SEC staffers’ growing scrutiny of crypto tokens and their status under U.S. securities law. SEC Chair Gary Gensler has repeatedly said that most cryptocurrencies are securities, a stance that fundamentally differs with that of the crypto industry, including Grayscale.

Issuers of securities have to register with the SEC and provide regular disclosures. The SEC has been cracking down on cryptocurrencies, especially projects which raised funds through initial coin offerings (ICOs), since 2017, forcing many of these projects to refund investors or shut down. Filecoin raised $200 million via an ICO.

Grayscale has previously made similar disclosures to its April Filecoin Trust disclosure related to its trust products for Stellar’s XLM, Zcash’s ZEC and Horizen’s ZEN.

UPDATE (May 17, 2023, 20:45 UTC): Adds additional detail.