S. Securities and Exchange Commission (SEC) has flagged concerns about the recently proposed "staking ETFs" by REX Shares and Osprey Funds. The agency has communicated that the groundbreaking funds may not meet the legal definition required for an exchange-traded fund (ETF). This development emerged just hours after the registration statement for these products officially went live.

REX Shares and Osprey Funds filed to create C-corporation ETFs intended to invest in cryptocurrencies such as Ethereum and Solana, with a plan to stake at least half of the assets to generate additional yields. However, their approach, described by Bloomberg Intelligence analyst James Seyffart as involving "a bunch of clever legal and regulatory work-arounds," has been met with caution by the SEC.

Brent J. Fields, Associate Director of the SEC, expressed the agency's reservations in a letter issued on Friday. Fields indicated that there remain unresolved questions about whether the funds, as currently structured and proposed, would meet the definition of an "investment company" under the Investment Company Act.

Furthermore, the SEC has asked the issuers to delay the implementation of their registration statement, which initially went into effect on Friday. Fields stated that if these concerns are not resolved, the agency will consider what steps are necessary to ensure compliance with federal securities laws. The SEC also requested the issuers to make public an email exchange from May 29, so that potential investors can review the communications.

REX Financial's General Counsel, Greg Collett, remains optimistic. "We think we can satisfy the SEC on the investment company question, and we don't intend to launch the funds until we do that," Collett told Bloomberg. Despite the existing regulatory landscape around Ethereum ETFs, the proposed Solana staking ETF faces the additional challenge of obtaining initial approval for spot trading—a hurdle yet to be cleared.

This ongoing scrutiny by the SEC underscores the complexity and challenges faced by financial firms looking to navigate new financial products in the rapidly evolving cryptocurrency sector.