Grayscale To Consider Tender Offer If ETF Conversion Fails

Grayscale Investments may seek to launch a tender offer for GBTC shares in the event a court rejects the company’s attempt to turn the world’s largest publicly traded crypto fund into an ETF.

“We remain steadfast in our belief that the conversion of GBTC to an ETF is in the best interest of investors, and we remain 100% committed to that endeavor,” Grayscale CEO Michael Sonnenshein wrote in a letter to investors Monday.

The Grayscale Bitcoin Trust holds almost $11B in bitcoin, but shares in the trust are trading far below the value of the bitcoin they represent, with a market capitalization of just $5.6B. That is mainly due to the fact that the trust’s legal structure precludes investors from redeeming their shares for the underlying bitcoin.

Earlier this year, the U.S. Securities and Exchange Commission rejected Grayscale’s application to convert the trust into an exchange-traded fund (ETF), on the grounds that it failed to show investors would be protected from “fraudulent and manipulative acts and practices.” Conversion to an ETF would have allowed investors to redeem their shares for bitcoin. Should that happen, GBTC would, in theory, trade on par with the value of bitcoin held by the fund.

SEC Lawsuit

Grayscale promptly sued the SEC. A three-judge panel on the D.C. Court of Appeals is expected to rule on the case early next year.

Should Grayscale lose “in all applicable courts” and “conclude there is no possibility of legislative or regulatory clarity that would allow for the conversion of GBTC to an ETF within a reasonable timeframe,” the company would “explore other options to return a portion of GBTC’s capital to shareholders,” Sonnenshein wrote to investors.

The only option mentioned in Sonnenshein’s letter – a tender offer, subject to SEC and shareholder approval, for 20% of the trust’s shares, which would allow Grayscale to purchase shareholders’ stock at a specified price and time, likely at a premium.

Tender Offer

Last year, Marlton LLC, an investment management firm holding a significant position in GBTC, sent Grayscale an open letter calling for a tender offer.

“We believe a tender offer would materially narrow — if not eliminate — the discount to NAV, immediately offering stockholders confidence in the Sponsor’s ability to manage the Fund’s discount,” Marlton wrote.

If it doesn’t receive the requisite approval for a tender offer, Grayscale would not dissolve GBTC, according to Sonnenshein, “but would instead continue to operate GBTC without an ongoing redemption program until we are successful in converting it to a spot bitcoin ETF.”