Grayscale Future of Finance ETF
(GFOF)
Listed
on NYSE
Arca, Inc.
PROSPECTUS
January 28,
2022
The
U.S. Securities and Exchange Commission (“SEC”) has not approved or disapproved
of these securities or passed upon the accuracy or adequacy of this Prospectus.
Any representation to the contrary is a criminal offense.
Grayscale
Future of Finance ETF
TABLE
OF CONTENTS
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Performance |
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Sub-Adviser |
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Delivery
of Shareholder Documents - Householding |
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Grayscale
Future of Finance ETF Summary |
Investment Objective
The Grayscale Future of
Finance ETF (the “Fund”) seeks to track the performance, before fees and
expenses, of the Bloomberg Grayscale Future of Finance Index (the
“Index”).
Fees and Expenses of the Fund
The
following table describes the fees and expenses you may pay if you buy, hold,
and sell shares of the Fund (“Shares”). You
may pay other fees, such as brokerage commissions and other fees to financial
intermediaries, which are not reflected in the table and Example
below.
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Annual
Fund Operating Expenses (expenses
that you pay each year as a percentage of the value of your
investment) |
| Management
Fees |
0.70% |
| Distribution
and/or Service (12b-1) Fees |
0.00% |
| Other
Expenses* |
0.00% |
|
Total
Annual Fund Operating Expenses |
0.70% |
*
Estimated for the current
fiscal year.
Expense Example
This Example is
intended to help you compare the cost of investing in the Fund with the cost of
investing in other funds. The Example assumes that you invest $10,000 in the
Fund for the time periods indicated and then continue to hold or redeem all of
your Shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Fund’s operating expenses
remain the same. The Example does not take into account brokerage commissions
that you may pay on your purchases and sales of
Shares.
Although your actual costs may be higher
or lower, based on these assumptions your costs would be:
Portfolio Turnover
The Fund pays transaction
costs, such as commissions, when it buys and sells securities (or “turns over”
its portfolio). A higher portfolio turnover rate may indicate higher transaction
costs and may result in higher taxes when Shares are held in a taxable account.
These costs, which are not reflected in annual fund operating expenses or in the
Example, affect the Fund’s performance. Because the Fund is newly organized,
portfolio turnover information is not yet available.
Principal Investment Strategy
The
Fund will not invest in digital assets directly or through the use of
derivatives. The Fund also will not invest in initial coin offerings. The Fund
may, however, have indirect exposure to digital assets by virtue of its
investments in companies that use one or more digital assets as part of their
business activities or that hold digital assets as proprietary investments.
Because the Fund will not invest directly in any digital assets, it will not
track price movements of any digital assets.
The
Fund uses a “passive management” (or indexing) approach to track the
performance, before fees and expenses, of the Index.
Bloomberg
Grayscale Future of Finance Index
The
Index is designed by Bloomberg Index Services Limited (the “Index Provider”) to
consist of U.S. and non-U.S. equity securities of companies that have been
classified by the Index Provider as providing exposure to the “Future of
Finance”, as identified by the intersection of finance, technology and digital
assets (collectively, Future of Finance Companies”). In constructing the Index,
the Index Provider identifies three core categories as the universe of Future of
Finance Companies:
1)
Financial Foundations – companies involved in the enabling of buying, selling,
and transacting in digital assets, including asset managers, exchanges,
brokerages, and wealth managers;
2)
Technology Solutions – companies involved in the development of the
infrastructure to create applications utilizing blockchain technology, including
companies providing technology through data and transaction processing;
and
3)
Digital Asset Infrastructure – companies involved in the supply of
infrastructure around the digital asset ecosystem, including the mining of
digital assets, hardware providers, and energy and resource management
providers.
The
Index Provider determines eligible Future of Finance Companies based on a
multistep process which is constructed to utilize both analyst expertise and
data analytics. The process begins with the generation of a preliminary list of
companies by Bloomberg Intelligence analysts and a list of key terms associated
with Future of Finance Companies. Next, company filings are scraped for
occurrences associated with the key terms related to Future of Finance
Companies. This process also utilizes methods for synonym-matching to reduce
variability in frequency counts due to corporate communication styles. Documents
scraped include, but are not limited to, publicly available company filings such
as 10-Ks, 10-Qs, 8-Ks, S-1s, S-3s, and similar documents for foreign securities,
investor presentations, quarterly earnings reports, earnings call transcripts,
press releases, news articles or media coverage. Additional steps are taken for
the resulting list of equity securities to measure consistency in trading as a
group. Daily price changes of the individual basket members are compared to the
group’s mean. This approach affirms companies with a strong correlation to
Future of Finance Companies. Companies having a weak or indeterminate
correlation may be re-evaluated for inclusion.
In
addition, the Index Provider assigns Future of Finance Companies a Revenue
Score, Theme Score, and Regulatory Score ranging from high (1), medium (2), to
low (3) (each as further described below).
1)
Revenue Score – measures the exposure each Future of Finance Company is
anticipated to have to the Future of Finance theme over the next two years.
2)
Theme Score – measures the relative importance of a Future of Finance Company to
the involvement and development of the Future of Finance theme.
3)
Regulatory Score – measures the risk associated with a Future of Finance Company
to the current regulatory landscape as well as any potential changes in
regulation.
A
company must have a score of high (1) or medium (2) in each of the three
measures in order to qualify for inclusion in the Index, unless the Index would
be comprised of fewer than 20 companies, in which case a company can have a
score of low (3) for the Revenue Score.
Revenue
Score Description
The
Revenue Score uses the following revenue-based thresholds, which are based on
the current or expected subsequent two-year (T+2) revenue of such company as a
percentage of its overall revenue.
The
threshold for high (1) reflects revenue greater than or equal to 50%, medium (2)
reflects revenue between 20-50%, and low (3) reflects revenue less than
20%.
Theme
Score Description
The
Theme Score takes into account key metrics for each company such as company
outlooks, competitive advantages, current and prospective product pipelines, and
brand and presence in the space to account for exposure to the theme. In
addition, the Index compares the company’s revenue from one of the three Index
investment categories relative to the entire category. Note that this is
distinct from the Revenue Score described above, which is solely with respect to
the company’s overall revenue itself as opposed to relative to the investment
category in which that company falls under.
The
Theme Score is designed to reflect the breadth and size of each investment
category, as each investment category has a different number of companies and
varying market sizes.
The
threshold for high (1) reflects the top quartile of companies in a given
investment category, medium (2) reflects the second and third quartile of
companies in a given investment category, and low (3) reflects the bottom
quartile of companies in a given investment category.
Regulatory
Score Description
The
Regulatory Score seeks to measure how much revenue exposure a given company has
to a geographic region and/or single country that exercises a high level of
regulatory, political or policy scrutiny with respect to the core investment
categories. The Regulatory Score takes into account applicable laws, rules and
regulations, including, but not limited to, those related to digital mining and
exchanges as well as financial services within the relevant geographic region or
country in which the company resides.
The
threshold for high (1) reflects little to no geographic and industry risk
associated with the company’s revenue, medium (2) reflects uncertain geographic
and industry risk associated with the company’s revenue, and low (3) reflects
high geographic and industry risk associated with the company’s
revenue.
Further,
for inclusion in the Index, companies that are identified as part of the
universe described above must be a U.S. and/or non-U.S. common stock, ordinary
share, or depositary receipt and must have a 90-day average value traded of at
least $1 million. Companies included in the Index must have a market
capitalization of at least US$100 million. The foregoing liquidity and
market
capitalization
thresholds are reduced as necessary to seek a minimum of 20 Index components.
The Index includes companies in developed and emerging markets.
The
Index is reconstituted and rebalanced quarterly after the close of business on
the last trading day (“Effective Date”) of each March, June, September, and
December, based on data as of the last week of each month prior to the
applicable reconstitution and rebalance period of the Index.
At
the time of each reconstitution and rebalance of the Index, the Index components
are market capitalization-weighted, subject to a maximum weight of 8% per issuer
for the five largest components by market capitalization and 4% for each other
component. Any excess weight due to the foregoing adjustments will be
reallocated proportionally to the unaffected securities. If the number of Index
components is less than or equal to twenty, then the three largest components by
market capitalization will be subject to a maximum weight of 15% and each other
component will be subject to a maximum weight of 4.5%. If the excess weight
cannot be fully allocated, then all Index components will be equally weighted.
Component weights and index shares are finalized ten business days prior to the
applicable reconstitution and rebalance of the Index.
A
“blockchain” is a digital series of records stored across a decentralized
network that uses cryptography to create a secure and verified history of
transactions. The decentralized nature of a blockchain utilizes and relies on
multiple “nodes” to continuously update and certify the accuracy of information
in the chain, mitigating the risks associated with centralized networks, where a
single source can be tampered with to change information across a network.
Blockchain technology can be used to record transactions involving tangible,
intangible, and digital assets, and a blockchain may be constrained to certain
users or companies or open to the public.
Blockchain
networks may also be used to track the purchase, sale, or exchange of digital
assets. Digital assets are a form of digital currency that can be used to
purchase goods or services from certain vendors or can be purchased or sold like
an investment asset. Digital assets generally rely on a blockchain to maintain
the integrity of their transaction histories, and new amounts of a digital asset
are added to the available supply based on the completion of certain complex
mathematical problems — a process known as digital asset “mining”.
Future
of Finance Companies may include small- and medium-capitalized companies and may
also include foreign and emerging market issuers. As of December 31, 2021, the
Index was composed of 22 constituents. The Index was established in 2021 and is
owned and maintained by the Index Provider. The Index Provider has partnered
with the Fund’s investment adviser to co-develop the methodology used to
determine the securities included in the Index.
The
Fund’s Investment Strategy
Under
normal circumstances, at least 80% of the Fund’s net assets, plus borrowings for
investment purposes, will be invested in the component securities of the
Index.
The
Fund will generally use a “replication” strategy to achieve its investment
objective, meaning the Fund will generally invest in all of the component
securities of the Index in the same approximate proportions as in the
Index. However, the Fund may use a “representative sampling” strategy, meaning
it may invest in a sample of the securities in the Index whose risk, return, and
other characteristics closely resemble the risk, return, and other
characteristics of the Index as a whole, when the Fund’s sub-adviser believes it
is in the best interests of the Fund (e.g.,
when replicating the Index involves practical difficulties or substantial costs,
an Index constituent becomes temporarily illiquid, unavailable, or less liquid,
or as a result of legal restrictions or limitations that apply to the Fund but
not to the Index).
The
Fund is classified as a non-diversified fund under the Investment Company Act of
1940 (the “1940 Act”) and, therefore, may invest a greater percentage of its
assets in a particular issuer than if it were a diversified fund. To the extent the Index
concentrates (i.e.,
holds more than 25% of its total assets) in the securities of a particular
industry or group of related industries, the Fund will concentrate its
investments to approximately the same extent as the
Index.
As
of December 31, 2021, the Information Technology and Financials sectors
represented a significant portion of the Index.
Principal Investment Risks
The
principal risks of investing in the Fund are summarized below. The principal
risks are presented in alphabetical order to facilitate finding particular risks
and comparing them with other funds. Each risk summarized below is considered a
“principal risk” of investing in the Fund, regardless of the order in which it
appears. As with any investment, there is a risk that you could
lose all or a portion of your investment in the Fund. Some or
all of these risks may adversely affect the Fund’s net asset value per share
(“NAV”), trading price, yield, total return and/or ability to meet its
objectives. For more information about the risks of investing in the Fund, see
the section in the Fund’s Prospectus titled “Additional Information About the
Fund.”
•Concentration
in Future of Finance Companies Risk. The
Index, and consequently the Fund, is expected to concentrate its investments
(i.e.,
hold more than 25% of its total assets) in the securities of Future of Finance
Companies. As a result, the value of
the
Fund’s shares may rise and fall more than the value of shares of a fund that
invests in securities of companies in a broader range of industries. In
addition, at times, Future of Finance Companies may be out of favor and
underperform other industries or groups of industries or the market as a whole.
In such event, the value of the Shares may rise and fall more than the value of
shares of a fund that invests in securities of companies in a broader range of
industries. An investment in a Future of Finance Company may be subject to the
following risks:
•Blockchain
technology is new and many of its uses may be untested.
The mechanics of using blockchain technology to transact in digital or other
types of assets, such as securities or derivatives, is relatively new and
untested. There is no assurance that widespread adoption will occur. A lack of
expansion in the usage of blockchain technology could adversely affect Future of
Finance Companies.
•Theft,
loss or destruction.
Transacting on a blockchain depends in part specifically on the use of
cryptographic keys that are required to access a user’s account (or “wallet”).
The theft, loss, or destruction of these keys could adversely affect a user’s
ownership claims over an asset or a company’s business or operations if it was
dependent on the blockchain.
•Competing
platforms, technologies, and patents.
The development and acceptance of competing platforms or technologies may cause
consumers or investors to use an alternative to blockchains. Further, if one or
more other persons, companies or organizations has or obtains a valid patent
covering technology critical to the operation of one or more of a Future of
Finance Company’s business lines, there can be no guarantee that such an entity
would be willing to license such technology at acceptable prices or at all,
which could have a material adverse effect on the Future of Finance Company’s
business, financial condition and results of operations.
•Cyber
security incidents.
Cyber security incidents may compromise an issuer, its operations, or its
business. Cyber security incidents may also specifically target a user’s
transaction history, digital assets, or identity, thereby leading to privacy
concerns. In addition, certain features of blockchain technology, such as
decentralization, open source protocol, and reliance on peer-to-peer
connectivity, may increase the risk of fraud or cyber-attack by potentially
reducing the likelihood of a coordinated response. Additionally, blockchain
functionality relies on the Internet. A significant disruption of Internet
connectivity affecting large numbers of users or geographic areas could impede
the functionality of blockchain technologies.
•Key
personnel risk.
Future of Finance Companies rely on highly skilled financial service
professionals and software engineers. Because of competition from other firms,
Future of Finance Companies may face difficulties in recruiting and retaining
professionals of a caliber consistent with their business strategy in the
future. The inability to successfully identify and retain qualified
professionals could materially and adversely affect the growth, operations, or
financial condition of the company.
•Lack
of liquid markets, and possible manipulation of blockchain-based
assets.
Digital assets that are represented on a blockchain and trade on a digital asset
exchange may not necessarily benefit from viable trading markets. Stock
exchanges have listing requirements and vet issuers, and perhaps users. These
conditions may not necessarily be replicated on a digital asset exchange,
depending on the platform’s controls and other policies. The more lenient a
digital asset exchange is about vetting issuers of digital assets or users that
transact on the platform, the higher the potential risk for fraud or the
manipulation of digital assets. These factors may decrease liquidity or volume,
or increase volatility of digital securities or other assets trading on a
digital asset exchange.
•Lack
of regulation.
Digital commodities and their associated platforms are largely unregulated, and
the regulatory environment is rapidly evolving. Because blockchain technology
works by having every transaction build on every other transaction, participants
can self-police any corruption, which can mitigate the need to depend on the
current level of legal or government safeguards to monitor and control the flow
of business transactions. As a result, companies engaged in such blockchain
activities may be exposed to adverse regulatory action, fraudulent activity, or
even failure. There can be no guarantee that future regulation of blockchain
technology or digital assets will not have a negative impact on the value of
such technologies and of the companies in the which the Fund
invests.
•Network
amendment risk.
Significant contributors to all or any digital asset network could propose
amendments to the respective network’s protocols and software that, if accepted
and authorized by such network, could adversely affect a Future of Finance
Company. For example, with respect to the bitcoin network, a small group of
individuals contribute to the bitcoin network’s source code. Those individuals
can propose refinements or improvements to the bitcoin network’s source code
through one or more software upgrades that alter the protocols and software that
govern the bitcoin network and the properties of bitcoin, including the
irreversibility of transactions and limitations on the mining of new bitcoin. To
the extent that a significant majority of the users and miners on the bitcoin
network install such software upgrade(s), the bitcoin network would be subject
to new protocols and software that may adversely affect Future of Finance
Companies.
•Third
party product defects or vulnerabilities.
Where blockchain systems are built using third party products, those products
may contain technical defects or vulnerabilities beyond a company’s control.
Open-source technologies that are used to build a blockchain application, may
also introduce defects and vulnerabilities.
•Reliance
on digital assets.
Future of Finance Companies rely heavily on the success of the digital currency
industry, the development and acceptance of which is subject to a variety of
factors that are difficult to evaluate. Digital assets are assets designed to
act as a medium of exchange. Digital assets are an emerging asset class. There
are thousands of digital assets, the most well-known of which is bitcoin.
Digital assets generally operate without a central authority (such as a bank)
and are not backed by any government. Digital assets are not legal tender.
Federal, state and/or foreign governments may restrict the use and exchange of
digital assets, and regulation in the United States is still developing. The
market price of bitcoin has been subject to extreme fluctuations. Similar to
fiat currencies (i.e.,
a currency that is backed by a central bank or a national, supra-national or
quasi-national organization), digital assets are susceptible to theft, loss, and
destruction. Digital asset exchanges and other trading venues on which digital
assets trade are relatively new and, in most cases, largely unregulated and may
therefore be more exposed to fraud and failure than established, regulated
exchanges for securities, derivatives and other currencies. Digital asset
exchanges may stop operating or permanently shut down due to fraud, technical
glitches, hackers, or malware, which may also affect volatility. Volatility of
digital assets may have a material adverse effect on a Future of Finance
Company’s business, financial condition, and results of operation.
•Line
of business risk.
Some Future of Finance Companies are engaged in other lines of business
unrelated to blockchain and these lines of business could adversely affect their
operating results. The operating results of these companies may fluctuate as a
result of these additional risks and events in the other lines of business. In
addition, a company’s ability to engage in new activities may expose it to
business risks with which it has less experience than it has with the business
risks associated with its traditional businesses. Despite a company’s possible
success in activities linked to its use of blockchain, there can be no assurance
that the other lines of business in which these companies are engaged will not
have an adverse effect on a company’s business or financial
condition.
•Currency
Exchange Rate Risk.
The Fund may invest a relatively large percentage of its assets in investments
denominated in non-U.S. currencies or in securities that provide exposure to
such currencies. Changes in currency exchange rates and the relative value of
non-U.S. currencies will affect the value of the Fund’s investment and the value
of your Shares. Currency exchange rates can be very volatile and can change
quickly and unpredictably. As a result, the value of an investment in the Fund
may change quickly and without warning and you may lose money.
•Depositary
Receipt Risk. Depositary
Receipts involve risks similar to those associated with investments in foreign
securities, such as changes in political or economic conditions of other
countries and changes in the exchange rates of foreign currencies. Depositary
Receipts listed on U.S. exchanges are issued by banks or trust companies and
entitle the holder to all dividends and capital gains that are paid out on the
underlying foreign shares (“Underlying Shares”). When the Fund invests in
Depositary Receipts as a substitute for an investment directly in the Underlying
Shares, the Fund is exposed to the risk that the Depositary Receipts may not
provide a return that corresponds precisely with that of the Underlying Shares.
•Emerging
Markets Risk.
The Fund may invest in companies organized in emerging market nations.
Investments in securities and instruments traded in developing or emerging
markets, or that provide exposure to such securities or markets, can involve
additional risks relating to political, economic, or regulatory conditions not
associated with investments in U.S. securities and instruments or investments in
more developed international markets. Such conditions may impact the ability of
the Fund to buy, sell or otherwise transfer securities, adversely affect the
trading market and price for Shares and cause the Fund to decline in value.
•Equity
Market Risk. The
equity securities held in the Fund’s portfolio may experience sudden,
unpredictable drops in value or long periods of decline in value. This may occur
because of factors that affect securities markets generally or factors affecting
specific issuers, industries, or sectors in which the Fund invests. Common
stocks are generally exposed to greater risk than other types of securities,
such as preferred stock and debt obligations, because common stockholders
generally have inferior rights to receive payment from issuers. In addition,
local, regional or global events such as war, acts of terrorism, spread of
infectious diseases or other public health issues, recessions, or other events
could have a significant negative impact on the Fund and its investments. For
example, the global pandemic caused by COVID-19, a novel coronavirus, and the
aggressive responses taken by many governments, including closing borders,
restricting international and domestic travel, and the imposition of prolonged
quarantines or similar restrictions, has had negative impacts, and in many cases
severe impacts, on markets worldwide. The COVID-19 pandemic has caused prolonged
disruptions to the normal business operations of companies around the world and
the impact of such disruptions is hard to predict. Such events may affect
certain geographic regions, countries, sectors and industries more significantly
than others. Such events could adversely affect the prices and liquidity of the
Fund’s portfolio securities or other instruments and could result in disruptions
in the trading markets.
•ETF
Risks. The
Fund is an ETF, and, as a result of an ETF’s structure, it is exposed to the
following risks:
•Authorized
Participants, Market Makers, and Liquidity Providers Concentration
Risk. The
Fund has a limited number of financial institutions that may act as Authorized
Participants (“APs”). In addition, there may be a limited number of market
makers and/or liquidity providers in the marketplace. To the extent either of
the following events occur, Shares may trade at a material discount to NAV and
possibly face delisting: (i) APs exit the business or otherwise become
unable to process creation and/or redemption orders and no other APs step
forward to perform these services, or (ii) market makers and/or liquidity
providers exit the business or significantly reduce their business activities
and no other entities step forward to perform their functions.
•Costs
of Buying or Selling Shares.
Due to the costs of buying or selling Shares, including brokerage commissions
imposed by brokers and bid-ask spreads, frequent trading of Shares may
significantly reduce investment results and an investment in Shares may not be
advisable for investors who anticipate regularly making small investments.
•Shares
May Trade at Prices Other Than NAV. As
with all ETFs, Shares may be bought and sold in the secondary market at market
prices. Although it is expected that the market price of Shares will approximate
the Fund’s NAV, there may be times when the market price of Shares is more than
the NAV intra-day (premium) or less than the NAV intra-day (discount) due to
supply and demand of Shares or during periods of market volatility. This risk is
heightened in times of market volatility, periods of steep market declines, and
periods when there is limited trading activity for Shares in the secondary
market, in which case such premiums or discounts may be significant. Because
securities held by the Fund may trade on foreign exchanges that are closed when
the Fund’s primary listing exchange is open, there are likely to be deviations
between the current price of a security and the security’s last quoted price
from the closed foreign market. This may result in premiums and discounts that
are greater than those experienced by domestic ETFs.
•Trading. Although
Shares are listed for trading on NYSE Arca, Inc. (the “Exchange”) and may be
traded on U.S. exchanges other than the Exchange, there can be no assurance that
Shares will trade with any volume, or at all, on any stock exchange. In stressed
market conditions, the liquidity of Shares may begin to mirror the liquidity of
the Fund’s underlying portfolio holdings, which can be significantly less liquid
than Shares, and this could lead to differences between the market price of the
Shares and the underlying value of those Shares.
•Financial
Technology Risk.
Companies that are developing financial technologies that seek to disrupt or
displace established financial institutions generally face competition from much
larger and more established firms. Such companies may not be able to capitalize
on their disruptive technologies if they face political and/or legal attacks
from competitors, industry groups or local and national governments. Laws
generally vary by country, creating some challenges to achieving scale. A
financial technology company may not currently derive any revenue, and there is
no assurance that such company will derive any revenue from innovative
technologies in the future. Additionally, financial technology companies may be
adversely impacted by potential rapid product obsolescence, cybersecurity
attacks, increased regulatory oversight and disruptions in the technology they
depend on.
•Foreign
Securities Risk.
Investments in non-U.S. securities involve certain risks that may not be present
with investments in U.S. securities. For example, investments in non-U.S.
securities may be subject to risk of loss due to foreign currency fluctuations
or to political or economic instability. There may be less information publicly
available about a non-U.S. issuer than a U.S. issuer. Non-U.S. issuers may be
subject to different accounting, auditing, financial reporting and investor
protection standards than U.S. issuers. Investments in non-U.S. securities may
be subject to withholding or other taxes and may be subject to additional
trading, settlement, custodial, and operational risks. With respect to certain
countries, there is the possibility of government intervention and expropriation
or nationalization of assets. Because legal systems differ, there is also the
possibility that it will be difficult to obtain or enforce legal judgments in
certain countries. Since foreign exchanges may be open on days when the Fund
does not price its Shares, the value of the securities in the Fund’s portfolio
may change on days when shareholders will not be able to purchase or sell the
Shares. Conversely, Shares may trade on days when foreign exchanges are closed.
Each of these factors can make investments in the Fund more volatile and
potentially less liquid than other types of investments.
•Geographic
Investment Risk.
To
the extent that the Fund invests a significant portion of its assets in the
securities of companies of a single country or region, it is more likely to be
impacted by events or conditions affecting that country or region. For example,
political and economic conditions and changes in regulatory, tax, or economic
policy in a country could significantly affect the market in that country and in
surrounding or related countries and have a negative impact on the Fund’s
performance. Currency developments or restrictions, political and social
instability, and changing economic conditions have resulted in significant
market volatility.
•Index
Methodology Risk.
The Index may not include all Future of Finance Companies around the globe
because the Index includes only those companies meeting the Index criteria,
including liquidity and market capitalization requirements. In addition,
companies that would otherwise be included in the Index might be excluded from
the Index if they omit disclosure of, or do not
use
key terms associated with, their blockchain technology or digital asset
activities in regulatory filings or otherwise keep such work hidden from public
(and the Index Provider’s) view.
•Index
Provider Risk. There
is no assurance that the Index Provider, or any agents that act on its behalf,
will compile the Index accurately, or that the Index will be determined,
maintained, constructed, reconstituted, rebalanced, composed, calculated or
disseminated accurately. The Adviser relies upon the Index Provider and its
agents to compile, determine, maintain, construct, reconstitute, rebalance,
compose, calculate (or arrange for an agent to calculate), and disseminate the
Index accurately. Any losses or costs associated with errors made by the Index
Provider or its agents generally will be borne by the Fund and its
shareholders.
•Market
Capitalization Risk
◦Large-Capitalization
Investing.
The securities of large-capitalization companies may be relatively mature
compared to smaller companies and therefore subject to slower growth during
times of economic expansion. Large-capitalization companies may also be unable
to respond quickly to new competitive challenges, such as changes in technology
and consumer tastes.
◦Mid-Capitalization
Investing. The
securities of mid-capitalization companies may be more vulnerable to adverse
issuer, market, political, or economic developments than securities of
large-capitalization companies, but they may also be subject to slower growth
than small-capitalization companies during times of economic expansion. The
securities of mid-capitalization companies generally trade in lower volumes and
are subject to greater and more unpredictable price changes than large
capitalization stocks or the stock market as a whole, but they may also be
nimbler and more responsive to new challenges than large-capitalization
companies. Some mid-capitalization companies have limited product lines,
markets, financial resources, and management personnel and tend to concentrate
on fewer geographical markets relative to large-capitalization
companies.
◦Small-Capitalization
Investing. The
securities of small-capitalization companies may be more vulnerable to adverse
issuer, market, political, or economic developments than securities of
larger-capitalization companies. The securities of small-capitalization
companies generally trade in lower volumes and are subject to greater and more
unpredictable price changes than larger capitalization stocks or the stock
market as a whole. Some small capitalization companies have limited product
lines, markets, and financial and managerial resources and tend to concentrate
on fewer geographical markets relative to larger capitalization companies. There
is typically less publicly available information concerning
smaller-capitalization companies than for larger, more established companies.
Small-capitalization companies also may be particularly sensitive to changes in
interest rates, government regulation, borrowing costs and earnings.
•New
Fund Risk. The
Fund is a recently organized investment company with no operating history. As a
result, prospective investors have no track record or history on which to base
their investment decision.
•Non-Diversification
Risk. The Fund is considered to be non-diversified,
which means that it may invest more of its assets in the securities of a single
issuer or a smaller number of issuers than if it were a diversified fund. As a
result, the Fund may be more exposed to the risks associated with and
developments affecting an individual issuer or a smaller number of issuers than
a fund that invests more widely. This may increase the Fund’s volatility and
cause the performance of a relatively smaller number of issuers to have a
greater impact on the Fund’s performance. However, the Fund intends to satisfy
the diversification requirements for qualifying as a regulated investment
company (a “RIC”) under Subchapter M of the Internal Revenue Code of 1986, as
amended (the “Code”).
•Passive
Investment Risk.
The Fund is not actively managed, and its sub-adviser would not sell shares of
an equity security due to current or projected underperformance of a security,
industry, or sector, unless that security is removed from the Index or the
selling of shares of that security is otherwise required upon a reconstitution
or rebalancing of the Index in accordance with the Index
methodology.
•Sector
Risk. To
the extent the Fund invests more heavily in particular sectors of the economy,
its performance will be especially sensitive to developments that significantly
affect those sectors. The Fund may invest a significant portion of its assets in
the following sectors and, therefore, the performance of the Fund could be
negatively impacted by events affecting each of these sectors.
◦Financial
Sector Risk. This
sector can be significantly affected by changes in interest rates, government
regulation, the rate of defaults on corporate, consumer and government debt, the
availability and cost of capital, and fallout from the housing and sub-prime
mortgage crisis. Insurance companies, in particular, may be significantly
affected by changes in interest rates, catastrophic events, price and market
competition, the imposition of premium rate caps, or other changes in government
regulation or tax law and/or rate regulation, which may have an adverse impact
on their profitability. This sector has experienced significant losses in the
recent past, and the impact of more stringent capital requirements and of recent
or future
regulation
on any individual financial company or on the sector as a whole cannot be
predicted. In recent years, cyber attacks and technology malfunctions and
failures have become increasingly frequent in this sector and have caused
significant losses.
◦Information
Technology Sector Risk. Market
or economic factors impacting information technology companies and companies
that rely heavily on technological advances could have a significant effect on
the value of the Fund’s investments. The value of stocks of information
technology companies and companies that rely heavily on technology is
particularly vulnerable to rapid changes in technology product cycles, rapid
product obsolescence, government regulation and competition, both domestically
and internationally, including competition from foreign competitors with lower
production costs. Stocks of information technology companies and companies that
rely heavily on technology, especially those of smaller, less-seasoned
companies, tend to be more volatile than the overall market. Information
technology companies are heavily dependent on patent and intellectual property
rights, the loss or impairment of which may adversely affect
profitability.
•Tax
Risk.
To qualify for the favorable tax treatment generally available to a RIC, the
Fund must satisfy, among other requirements described in the SAI, certain
diversification requirements. Given the concentration of the Index in a
relatively small number of securities, it may not always be possible for the
Fund to fully implement a replication strategy or a representative sampling
strategy while satisfying these diversification requirements. The Fund’s efforts
to replicate or represent the Index may cause it inadvertently to fail to
satisfy the diversification requirements. If the Fund were to fail to satisfy
the diversification requirements, it could be eligible for relief provisions if
the failure is due to reasonable cause and not willful neglect and if a penalty
tax is paid with respect to each failure to satisfy the applicable requirements.
Additionally, relief is provided for certain de minimis failures of the
diversification requirements where the Fund corrects the failure within a
specified period. If the Fund were to fail to qualify as a RIC for a tax year,
and the relief provisions are not available, it would be taxed in the same
manner as an ordinary corporation, and distributions to its shareholders would
not be deductible by the Fund in computing its taxable income. In such case, its
shareholders would be taxed as if they received ordinary dividends, although
corporate shareholders could be eligible for the dividends received deduction
(subject to certain limitations) and individuals may be able to benefit from the
lower tax rates available to qualified dividend income. In addition, the Fund
could be required to recognize unrealized gains, pay substantial taxes and
interest, and make substantial distributions before requalifying as a
RIC.
•Tracking
Error Risk. As with all index funds, the performance of
the Fund and the Index may differ from each other for a variety of reasons. For
example, the Fund incurs operating expenses and portfolio transaction costs not
incurred by the Index. In addition, the Fund may not be fully invested in the
securities of the Index at all times or may hold securities not included in the
Index.
Performance
Performance information for the Fund is not
included because the Fund did not have a full calendar year of performance prior
to the date of this Prospectus. In the future, performance
information for the Fund will be presented in this section. Updated performance
information will be available on the Fund’s website at www.grayscale.com/GFOF.
Portfolio
Management
|
|
|
|
|
|
| Adviser |
Grayscale
Advisors, LLC |
| Sub-Adviser |
Vident
Investment Advisory, LLC (“VIA” or the “Sub-Adviser”) |
| Portfolio
Managers |
Austin
Wen, CFA, Portfolio Manager of VIA, and Rafael Zayas, CFA, SVP, Head of
Portfolio Management and Trading of VIA, have each been a portfolio
manager of the Fund since its inception in February
2022. |
Purchase
and Sale of Shares
Shares
are listed on the Exchange, and individual Shares may only be bought and sold in
the secondary market through brokers at market prices, rather than NAV. Because
Shares trade at market prices rather than NAV, Shares may trade at a price
greater than NAV (premium) or less than NAV (discount).
The
Fund issues and redeems Shares at NAV only in large blocks known as “Creation
Units,” which only APs (typically, broker-dealers) may purchase or redeem. The
Fund generally issues and redeems Creation Units in exchange for a portfolio of
securities and/or a designated amount of U.S. cash.
Investors
may incur costs attributable to the difference between the highest price a buyer
is willing to pay to purchase Shares (bid) and the lowest price a seller is
willing to accept for Shares (ask) when buying or selling Shares in the
secondary market (the “bid-ask spread”). Recent information about the Fund,
including its NAV, market price, premiums and discounts, and bid-ask spreads is
available on the Fund’s website at www.grayscale.com/GFOF.
Tax
Information
Fund
distributions are generally taxable as ordinary income, qualified dividend
income, or capital gains (or a combination), unless your investment is in an IRA
or other tax-advantaged account. Distributions on investments made through
tax-deferred arrangements may be taxed later upon withdrawal of assets from
those accounts.
Financial
Intermediary Compensation
If
you purchase Shares through a broker-dealer or other financial intermediary
(such as a bank) (an “Intermediary”), the Adviser or its affiliates may pay
Intermediaries for certain activities related to the Fund, including
participation in activities that are designed to make Intermediaries more
knowledgeable about exchange traded products, including the Fund, or for other
activities, such as marketing, educational training or other initiatives related
to the sale or promotion of Shares. These payments may create a conflict of
interest by influencing the Intermediary and your salesperson to recommend the
Fund over another investment. Any such arrangements do not result in increased
Fund expenses. Ask your salesperson or visit the Intermediary’s website for more
information.
ADDITIONAL
INFORMATION
ABOUT
THE
FUND
Investment
Objective.
The Fund’s investment objective has been adopted as a non-fundamental investment
policy and may be changed without shareholder approval upon written notice to
shareholders.
Additional
Information About the Index.
If the number of eligible companies is less than 20, then the liquidity
requirement of a minimum 90-day average value traded of US$1 million is relaxed
and the next eligible companies will be added until there are 20 eligible
companies or the liquidity requirement has been reduced to zero. If after
relaxing the liquidity requirement, the number of eligible companies remains
below 20, then the market capitalization requirement of at least US$100 million
is relaxed and the next eligible companies will be added until there are 20
eligible companies or the market capitalization requirement has been reduced to
zero. If, after relaxing both the liquidity and market capitalization
eligibility requirements, the number of companies remains below 20, then those
companies ranked with a Revenue Score of 3 are selected until the Index reaches
20 or there are no other companies meeting the remaining criteria.
Additional
Information About the Fund’s Principal Risks. This
section provides additional information regarding the principal risks described
in the Fund Summary. As in the Fund Summary, the principal risks below are
presented in alphabetical order to facilitate finding particular risks and
comparing them with other funds. Each risk described below is considered a
“principal risk” of investing in the Fund, regardless of the order in which it
appears. Each of the factors below could have a negative impact on the Fund’s
performance and trading prices.
•Concentration
in Future of Finance Companies Risk. The
Index, and consequently the Fund, is expected to concentrate its investments
(i.e.,
hold more than 25% of its total assets) in the securities of Future of Finance
Companies. As a result, the value of the Fund’s shares may rise and fall more
than the value of shares of a fund that invests in securities of companies in a
broader range of industries. In addition, at times, Future of Finance Companies
may be out of favor and underperform other industries or groups of industries or
the market as a whole. In such event, the value of the Shares may rise and fall
more than the value of shares of a fund that invests in securities of companies
in a broader range of industries. An investment in a Future of Finance Company
may be subject to the following risks:
◦Blockchain
technology is new and many of its uses may be untested.
The mechanics of using blockchain technology to transact in digital or other
types of assets, such as securities or derivatives, is relatively new and
untested. There is no assurance that widespread adoption will occur. A lack of
expansion in the usage of blockchain technology could adversely affect Future of
Finance Companies. A breach to one blockchain could cause investors, and the
public generally, to lose trust in blockchain technology and increase reluctance
to issue and invest in assets recorded on blockchains. Furthermore, blockchain
technology is subject to a rapidly evolving regulatory landscape in the United
States and in other countries, which might include security, privacy, or other
regulatory concerns that could require changes to blockchain
networks.
◦Theft,
loss or destruction.
Transacting on a blockchain depends in part specifically on the use of
cryptographic keys that are required to access a user’s account (or “wallet”).
The theft, loss, or destruction of these keys could adversely affect a user’s
ownership claims over an asset or a company’s business or operations if it was
dependent on the blockchain.
◦Competing
platforms, technologies, and patents.
The development and acceptance of competing platforms or technologies may cause
consumers or investors to use an alternative to blockchains. Further, if one or
more other persons, companies or organizations has or obtains a valid patent
covering technology critical to the operation of one or more of a Future of
Finance Company’s business lines, there can be no guarantee that such an entity
would be willing to license such technology at acceptable prices or at all,
which could have a material adverse effect on the Future of Finance Company’s
business, financial condition and results of operations. Moreover, if for any
reason a Future of Finance Company were to fail to comply with its obligations
under an applicable agreement, it may be unable to operate, which would also
have a material adverse effect on that Future of Finance Company’s business,
financial condition and results of operations. Due to the fundamentally
open-source nature of blockchain technology, a Future of Finance Company may not
always be able to determine that it is using or accessing protected information
or software. For example, there could be issued patents of which a Future of
Finance Company is not aware that its products infringe. Moreover, patent
applications are in some cases maintained in secrecy until patents are issued.
The publication of discoveries in scientific or patent literature frequently
occurs substantially later than the date on which the underlying discoveries
were made and patent applications were filed. Because patents can take many
years to issue, there may currently be pending applications of which a Future of
Finance Company is unaware that may later result in issued patents that its
products infringe. A Future of Finance Company could expend significant
resources defending against patent infringement and other intellectual property
right claims, which could require it to divert resources away from operations.
Any damages a Future of Finance Company is required to pay or injunctions
against its continued use of such intellectual property in resolution of such
claims may cause a material adverse effect to its business, financial condition
and results of operations.
◦Cyber
security incidents.
Cyber security incidents may compromise an issuer, its operations, or its
business. Cyber security incidents may also specifically target a user’s
transaction history, digital assets, or identity, thereby leading to privacy
concerns. In addition, certain features of blockchain technology, such as
decentralization, open source protocol, and reliance on peer-to-peer
connectivity, may increase the risk of fraud or cyber-attack by potentially
reducing the likelihood of a coordinated response. Additionally, blockchain
functionality relies on the Internet. A significant disruption of Internet
connectivity affecting large numbers of users or geographic areas could impede
the functionality of blockchain technologies.
◦Key
personnel risk.
Future of Finance Companies rely on highly skilled financial service
professionals and software engineers. Because of competition from other firms,
Future of Finance Companies may face difficulties in recruiting and retaining
professionals of a caliber consistent with their business strategy in the
future. The inability to successfully identify and retain qualified
professionals could materially and adversely affect the growth, operations, or
financial condition of the company.
◦Lack
of liquid markets, and possible manipulation of blockchain-based assets.
Digital
assets that are represented and trade on a blockchain may not necessarily
benefit from viable trading markets. Stock exchanges have listing requirements
and vet issuers, and perhaps users. These conditions may not necessarily be
replicated on a blockchain, depending on the platform’s controls and other
policies. The more lenient a blockchain is about vetting issuers of digital
assets or users that transact on the platform, the higher the potential risk for
fraud or the manipulation of digital assets. These factors may decrease
liquidity or volume, or increase volatility of digital securities or other
assets trading on a blockchain.
◦Lack
of regulation.
Digital commodities and their associated platforms are largely unregulated, and
the regulatory environment is rapidly evolving. Because blockchain technology
works by having every transaction build on every other transaction, participants
can self-police any corruption, which can mitigate the need to depend on the
current level of legal or government safeguards to monitor and control the flow
of business transactions. As a result, companies engaged in such blockchain
activities may be exposed to adverse regulatory action, fraudulent activity, or
even failure. There can be no guarantee that future regulation of blockchain
technology or digital assets will not have a negative impact on the value of
such technologies and of the companies in the which the Fund
invests.
◦Network
amendment risk.
Significant contributors to all or any digital asset network could propose
amendments to the respective network’s protocols and software that, if accepted
and authorized by such network, could adversely affect a Future of Finance
Company. For example, with respect to the bitcoin network, a small group of
individuals contribute to the bitcoin network’s source code. Those individuals
can propose refinements or improvements to the bitcoin network’s source code
through one or more software upgrades that alter the protocols and software that
govern the bitcoin network and the properties of bitcoin, including the
irreversibility of transactions and limitations on the mining of new bitcoin.
Proposals for upgrades and discussions relating thereto take place on online
forums. For example, in the past there have been ongoing debates regarding
altering the blockchain of a given digital asset by increasing the size of
blocks to accommodate a larger volume of transactions. Although some proponents
support such increases, other market participants oppose such increases to the
block size as it may deter miners from confirming transactions and concentrate
power into a smaller group of miners. To the extent that a significant majority
of the users and miners on a digital asset network install such software
upgrade(s), such digital asset network would be subject to new protocols and
software that may adversely affect Future of Finance Companies. In the event a
developer or group of developers proposes a modification to a given digital
asset network that is not accepted by a majority of such network’s miners and
users, but that is nonetheless accepted by a substantial plurality of miners and
users, two or more competing and incompatible blockchain implementations could
result. This is known as a “hard fork.” In such a case, the “hard fork” in the
blockchain could materially and adversely affect the perceived value of digital
assets as reflected on one or both incompatible blockchains, which may adversely
affect Future of Finance Companies.
◦Third
party product defects or vulnerabilities.
Where blockchain systems are built using third party products, those products
may contain technical defects or vulnerabilities beyond a company’s control.
Open-source technologies that are used to build a blockchain application, may
also introduce defects and vulnerabilities.
◦Reliance
on digital assets.
Future of Finance Companies rely heavily on the success of the digital currency
industry, the development and acceptance of which is subject to a variety of
factors that are difficult to evaluate. Digital assets are assets designed to
act as a medium of exchange. Digital assets are an emerging asset class. There
are thousands of digital assets , the most well-known of which is bitcoin.
Digital assets generally operate without a central authority (such as a bank)
and are not backed by any government. Digital assets are not legal tender.
Federal, state and/or foreign governments may restrict the use and exchange of
digital assets, and regulation in the United States is still developing. The
market price of bitcoin has been subject to extreme fluctuations. Similar to
fiat currencies (i.e.,
a currency that is backed by a central bank or a national, supra-national or
quasi-national organization), digital assets are susceptible to theft, loss, and
destruction. Digital asset exchanges and other trading venues on which digital
assets trade are relatively new and, in most cases, largely unregulated and may
therefore be more exposed to fraud and failure than established, regulated
exchanges for securities, derivatives and other
currencies.
Digital asset exchanges may stop operating or permanently shut down due to
fraud, technical glitches, hackers, or malware, which may also affect
volatility. Volatility of digital assets may have a material adverse effect on a
Future of Finance Company’s business, financial condition, and results of
operation.
◦Line
of business risk.
Some Future of Finance Companies are engaged in other lines of business
unrelated to blockchain and these lines of business could adversely affect their
operating results. The operating results of these companies may fluctuate as a
result of these additional risks and events in the other lines of business. In
addition, a company’s ability to engage in new activities may expose it to
business risks with which it has less experience than it has with the business
risks associated with its traditional businesses. Despite a company’s possible
success in activities linked to its use of blockchain, there can be no assurance
that the other lines of business in which these companies are engaged will not
have an adverse effect on a company’s business or financial
condition.
•Currency
Exchange Rate Risk.
Changes
in currency exchange rates and the relative value of non-U.S. currencies will
affect the value of the Fund’s investments and the value of your Shares. Because
the Fund’s NAV is determined on the basis of U.S. dollars, the U.S. dollar value
of your investment in the Fund may go down if the value of the local currency of
the non-U.S. markets in which the Fund invests depreciates against the U.S.
dollar. This is true even if the local currency value of securities in the
Fund’s holdings goes up. Conversely, the dollar value of your investment in the
Fund may go up if the value of the local currency appreciates against the U.S.
dollar. The value of the U.S. dollar measured against other currencies is
influenced by a variety of factors. These factors include: national debt levels
and trade deficits, changes in balances of payments and trade, domestic and
foreign interest and inflation rates, global or regional political, economic or
financial events, monetary policies of governments, actual or potential
government intervention, and global energy prices. Political instability, the
possibility of government intervention and restrictive or opaque business and
investment policies may also reduce the value of a country’s currency.
Government monetary policies and the buying or selling of currency by a
country’s government may also influence exchange rates. Currency exchange rates
can be very volatile and can change quickly and unpredictably. As a result, the
value of an investment in the Fund may change quickly and without warning, and
you may lose money.
•Depositary
Receipt Risk.
The Fund may hold the securities of non-U.S. companies in the form of American
Depositary Receipts (“ADRs”) and Global Depositary Receipts (“GDRs”). ADRs are
negotiable certificates issued by a U.S. financial institution that represent a
specified number of shares in a foreign stock and trade on a U.S. national
securities exchange, such as the New York Stock Exchange. Sponsored ADRs are
issued with the support of the issuer of the foreign stock underlying the ADRs
and carry all of the rights of common shares, including voting rights. GDRs are
similar to ADRs but may be issued in bearer form and are typically offered for
sale globally and held by a foreign branch of an international bank. The
underlying issuers of certain depositary receipts, particularly unsponsored or
unregistered depositary receipts, are under no obligation to distribute
shareholder communications to the holders of such receipts, or to pass through
to them any voting rights with respect to the deposited securities. Issuers of
unsponsored depositary receipts are not contractually obligated to disclose
material information in the U.S. and, therefore, such information may not
correlate to the market value of the unsponsored depositary receipt. The
underlying securities of the ADRs and GDRs in the Fund’s portfolio are usually
denominated or quoted in currencies other than the U.S. Dollar. As a result,
changes in foreign currency exchange rates may affect the value of the Fund’s
portfolio. In addition, because the underlying securities of ADRs and GDRs trade
on foreign exchanges at times when the U.S. markets are not open for trading,
the value of the securities underlying the ADRs and GDRs may change materially
at times when the U.S. markets are not open for trading, regardless of whether
there is an active U.S. market for Shares.
•Emerging
Markets Risk. Investments
in securities and instruments traded in developing or emerging markets, or that
provide exposure to such securities or markets, can involve additional risks
relating to political, economic, or regulatory conditions not associated with
investments in U.S. securities and instruments. For example, developing and
emerging markets may be subject to (i) greater market volatility,
(ii) lower trading volume and liquidity, (iii) greater social,
political and economic uncertainty, (iv) governmental controls on foreign
investments and limitations on repatriation of invested capital, (v) lower
disclosure, corporate governance, auditing and financial reporting standards,
(vi) fewer protections of property rights, (vii) fewer investor rights
and limited legal or practical remedies available to investors against emerging
market companies, (viii) restrictions on the transfer of securities or
currency, and (ix) settlement and trading practices that differ from those
in U.S. markets. Each of these factors may impact the ability of the Fund to
buy, sell or otherwise transfer securities, adversely affect the trading market
and price for Shares and cause the Fund to decline in value.
Additionally,
limitations on the availability of financial and business information about
companies in emerging markets may affect the Index Provider’s ability to
accurately determine the companies meeting the Index’s criteria.
•Equity
Market Risk.
Common stocks are susceptible to general stock market fluctuations and to
volatile increases and decreases in value as market confidence in and
perceptions of their issuers change. These investor perceptions are based on
various and unpredictable factors including: expectations regarding government,
economic, monetary and fiscal policies; inflation and interest rates; economic
expansion or contraction; and global or regional political, economic, public
health, and banking crises. If you held
common
stock, or common stock equivalents, of any given issuer, you would generally be
exposed to greater risk than if you held preferred stocks and debt obligations
of the issuer because common stockholders, or holders of equivalent interests,
generally have inferior rights to receive payments from issuers in comparison
with the rights of preferred stockholders, bondholders, and other creditors of
such issuers.
Beginning
in the first quarter of 2020, financial markets in the United States and around
the world experienced extreme and, in many cases, unprecedented volatility and
severe losses due to the global pandemic caused by COVID-19, a novel
coronavirus. The pandemic has resulted in a wide range of social and economic
disruptions, including closed borders, voluntary or compelled quarantines of
large populations, stressed healthcare systems, reduced or prohibited domestic
or international travel, and supply chain disruptions affecting the United
States and many other countries. Some sectors of the economy and individual
issuers have experienced particularly large losses as a result of these
disruptions, and such disruptions may continue for an extended period of time or
reoccur in the future to a similar or greater extent. In response, the U.S.
government and the Federal Reserve have taken extraordinary actions to support
the domestic economy and financial markets, resulting in very low interest rates
and in some cases negative yields. It is unknown how long circumstances related
to the pandemic will persist, whether they will reoccur in the future, whether
efforts to support the economy and financial markets will be successful, and
what additional implications may follow from the pandemic. The impact of these
events and other epidemics or pandemics in the future could adversely affect
Fund performance.
•ETF
Risks. The
Fund is an ETF, and, as a result of an ETF’s structure, it is exposed to the
following risks:
◦APs,
Market Makers, and Liquidity Providers Concentration Risk.
The Fund has a limited number of financial institutions that may act as APs. In
addition, there may be a limited number of market makers and/or liquidity
providers in the marketplace. To the extent either of the following events
occur, Shares may trade at a material discount to NAV and possibly face
delisting: (i) APs exit the business or otherwise become unable to process
creation and/or redemption orders and no other APs step forward to perform these
services, or (ii) market makers and/or liquidity providers exit the business or
significantly reduce their business activities and no other entities step
forward to perform their functions.
◦Costs
of Buying or Selling Shares.
Investors buying or selling Shares in the secondary market will pay brokerage
commissions or other charges imposed by brokers, as determined by that broker.
Brokerage commissions are often a fixed amount and may be a significant
proportional cost for investors seeking to buy or sell relatively small amounts
of Shares. In addition, secondary market investors will also incur the cost of
the difference between the price at which an investor is willing to buy Shares
(the “bid” price) and the price at which an investor is willing to sell Shares
(the “ask” price). This difference in bid and ask prices is often referred to as
the “spread” or “bid-ask spread.” The bid-ask spread varies over time for Shares
based on trading volume and market liquidity, and the spread is generally lower
if Shares have more trading volume and market liquidity and higher if Shares
have little trading volume and market liquidity. Further, a relatively small
investor base in the Fund, asset swings in the Fund, and/or increased market
volatility may cause increased bid-ask spreads. Due to the costs of buying or
selling Shares, including bid-ask spreads, frequent trading of Shares may
significantly reduce investment results and an investment in Shares may not be
advisable for investors who anticipate regularly making small
investments.
◦Shares
May Trade at Prices Other Than NAV.
As with all ETFs, Shares may be bought and sold in the secondary market at
market prices. Although it is expected that the market price of Shares will
approximate the Fund’s NAV, there may be times when the market price of Shares
is more than the NAV intra-day (premium) or less than the NAV intra-day
(discount) due to supply and demand of Shares or during periods of market
volatility. This risk is heightened in times of market volatility, periods of
steep market declines, and periods when there is limited trading activity for
Shares in the secondary market, in which case such premiums or discounts may be
significant. Because securities held by the Fund may trade on foreign exchanges
that are closed when the Fund’s primary listing exchange is open, there are
likely to be deviations between the current price of a security and the
security’s last quoted price from the closed foreign market. This may result in
premiums and discounts that are greater than those experienced by domestic
ETFs.
◦Trading.
Although Shares are listed for trading on the Exchange and may be listed or
traded on U.S. and non-U.S. stock exchanges other than the Exchange, there can
be no assurance that an active trading market for such Shares will develop or be
maintained. Trading in Shares may be halted due to market conditions or for
reasons that, in the view of the Exchange, make trading in Shares inadvisable.
In addition, trading in Shares on the Exchange is subject to trading halts
caused by extraordinary market volatility pursuant to Exchange “circuit breaker”
rules, which temporarily halt trading on the Exchange when a decline in the
S&P 500®
Index during a single day reaches certain thresholds (e.g.,
7%, 13%, and 20%). Additional rules applicable to the Exchange may halt trading
in Shares when extraordinary volatility causes sudden, significant swings in the
market price of Shares. There can be no assurance that Shares will trade with
any volume, or at all, on any stock exchange. In stressed market conditions, the
liquidity of Shares may begin to mirror the liquidity of the Fund’s underlying
portfolio
holdings, which can be significantly less liquid than Shares, and this could
lead to differences between the market price of the Shares and the underlying
value of those Shares.
•Financial
Technology Risk.
Companies that are developing financial technologies that seek to disrupt or
displace established financial institutions generally face competition from much
larger and more established firms. Such companies may not be able to capitalize
on their disruptive technologies if they face political and/or legal attacks
from competitors, industry groups or local and national governments. Laws
generally vary by country, creating some challenges to achieving scale. A
financial technology company may not currently derive any revenue, and there is
no assurance that such company will derive any revenue from innovative
technologies in the future. Additionally, financial technology companies may be
adversely impacted by potential rapid product obsolescence, cybersecurity
attacks, increased regulatory oversight and disruptions in the technology they
depend on.
•Foreign
Securities Risk.
Investments in non-U.S. securities involve certain risks that may not be present
with investments in U.S. securities. For example, investments in non-U.S.
securities may be subject to risk of loss due to foreign currency fluctuations
or to political or economic instability. There may be less information publicly
available about a non-U.S. issuer than a U.S. issuer. Non-U.S. issuers may be
subject to different accounting, auditing, financial reporting and investor
protection standards than U.S. issuers. Investments in non-U.S. securities may
be subject to withholding or other taxes and may be subject to additional
trading, settlement, custodial, and operational risks. With respect to certain
countries, there is the possibility of government intervention and expropriation
or nationalization of assets. Because legal systems differ, there is also the
possibility that it will be difficult to obtain or enforce legal judgments in
certain countries. Since foreign exchanges may be open on days when the Fund
does not price its Shares, the value of the securities in the Fund’s portfolio
may change on days when shareholders will not be able to purchase or sell the
Shares. Conversely, Shares may trade on days when foreign exchanges are closed.
Each of these factors can make investments in the Fund more volatile and
potentially less liquid than other types of investments.
•Geographic
Investment Risk.
To
the extent that the Fund invests a significant portion of its assets in the
securities of companies of a single country or region, it is more likely to be
impacted by events or conditions affecting that country or region. For example,
political and economic conditions and changes in regulatory, tax, or economic
policy in a country could significantly affect the market in that country and in
surrounding or related countries and have a negative impact on the Fund’s
performance. Currency developments or restrictions, political and social
instability, and changing economic conditions have resulted in significant
market volatility.
•Index
Methodology Risk.
The Index may not include all Future of Finance Companies around the globe
because the Index includes only those companies meeting the Index criteria,
including liquidity and market capitalization requirements. In addition,
companies that would otherwise be included in the Index might be excluded from
the Index if they omit disclosure of, or do not use key terms associated with,
their blockchain technology or digital asset activities in regulatory filings or
otherwise keep such work hidden from public (and the Index Provider’s)
view.
•Index
Provider Risk. There
is no assurance that the Index Provider, or any agents that act on its behalf,
will compile the Index accurately, or that the Index will be determined,
maintained, constructed, reconstituted, rebalanced, composed, calculated or
disseminated accurately. The Adviser relies upon the Index Provider and its
agents to compile, determine, maintain, construct, reconstitute, rebalance,
compose, calculate (or arrange for an agent to calculate), and disseminate the
Index accurately. Any losses or costs associated with errors made by the Index
Provider or its agents generally will be borne by the Fund and its shareholders.
To correct any such error, the Index Provider or its agents may carry out an
unscheduled rebalance of the Index or other modification of Index constituents
or weightings. When the Fund in turn rebalances its portfolio, any transaction
costs and market exposure arising from such portfolio rebalancing will be borne
by the Fund and its shareholders. Unscheduled rebalances also expose the Fund to
additional tracking error risk. Errors in respect of the quality, accuracy, and
completeness of the data used to compile the Index may occur from time to time
and may not be identified and corrected by the Index Provider for a period of
time or at all, particularly where the Index is less commonly used as a
benchmark by funds or advisors. For example, during a period where the Index
contains incorrect constituents, the Fund tracking the Index would have market
exposure to such constituents and would be underexposed to the Index’s other
constituents. Such errors may negatively impact the Fund and its shareholders.
The Index Provider and its agents rely on various sources of information to
assess the criteria of issuers included in the Index, including information that
may be based on assumptions and estimates. Neither the Fund nor the Adviser can
offer assurances that the Index’s calculation methodology or sources of
information will provide an accurate assessment of included
issuers.
•Market
Capitalization Risk
◦Large-Capitalization
Investing.
The securities of large-capitalization companies may be relatively mature
compared to smaller companies and therefore subject to slower growth during
times of economic expansion. Large-capitalization
companies
may also be unable to respond quickly to new competitive challenges, such as
changes in technology and consumer tastes.
◦Mid-Capitalization
Investing. The
securities of mid-capitalization companies may be more vulnerable to adverse
issuer, market, political, or economic developments than securities of
large-capitalization companies, but they may also be subject to slower growth
than small-capitalization companies during times of economic expansion. The
securities of mid-capitalization companies generally trade in lower volumes and
are subject to greater and more unpredictable price changes than large
capitalization stocks or the stock market as a whole, but they may also be
nimbler and more responsive to new challenges than large-capitalization
companies. Some mid-capitalization companies have limited product lines,
markets, financial resources, and management personnel and tend to concentrate
on fewer geographical markets relative to large-capitalization
companies.
◦Small-Capitalization
Investing. The
securities of small-capitalization companies may be more vulnerable to adverse
issuer, market, political, or economic developments than securities of
larger-capitalization companies. The securities of small-capitalization
companies generally trade in lower volumes and are subject to greater and more
unpredictable price changes than larger capitalization stocks or the stock
market as a whole. Some small capitalization companies have limited product
lines, markets, and financial and managerial resources and tend to concentrate
on fewer geographical markets relative to larger capitalization companies. There
is typically less publicly available information concerning
smaller-capitalization companies than for larger, more established companies.
Small-capitalization companies also may be particularly sensitive to changes in
interest rates, government regulation, borrowing costs and
earnings.
•New
Fund Risk. The
Fund is a recently organized investment company with no operating history. As a
result, prospective investors have no track record or history on which to base
their investment decision.
•Non-Diversification
Risk. The
Fund is considered to be non-diversified, which means that it may invest more of
its assets in the securities of a single issuer or a smaller number of issuers
than if it were a diversified fund. As a result, the Fund may be more exposed to
the risks associated with and developments affecting an individual issuer or a
smaller number of issuers than a fund that invests more widely. This may
increase the Fund’s volatility and cause the performance of a relatively smaller
number of issuers to have a greater impact on the Fund’s performance. However,
the Fund intends to satisfy the diversification requirements for qualifying as a
RIC under the Code.
•Passive
Investment Risk.
The Fund invests in the securities included in, or representative of, the Index
regardless of their investment merit. The Fund does not attempt to outperform
the Index or take defensive positions in declining markets. As a result, the
Fund’s performance may be adversely affected by a general decline in the market
segments relating to the Index. The returns from the types of securities in
which the Fund invests may underperform returns from the various general
securities markets or different asset classes. This may cause the Fund to
underperform other investment vehicles that invest in different asset classes.
Different types of securities (for example, large-, mid- and
small-capitalization stocks) tend to go through cycles of doing better – or
worse – than the general securities markets. In the past, these periods have
lasted for as long as several years.
•Sector
Risk. The
Fund’s investing approach may result in an emphasis on certain sectors or
sub-sectors of the market at any given time. To the extent the Fund invests more
heavily in one sector or sub-sector of the market, it thereby presents a more
concentrated risk and its performance will be especially sensitive to
developments that significantly affect those sectors or sub-sectors. In
addition, the value of Shares may change at different rates compared to the
value of shares of a fund with investments in a more diversified mix of sectors
and industries. An individual sector or sub-sector of the market may have
above-average performance during particular periods, but it may also move up and
down more than the broader market. The several industries that constitute a
sector may all react in the same way to economic, political or regulatory
events. The Fund’s performance could also be affected if the sectors or
sub-sectors do not perform as expected. Alternatively, the lack of exposure to
one or more sectors or sub-sectors may adversely affect performance.
◦Financial
Sector Risk.
Companies in the financial sector of an economy are often subject to extensive
governmental regulation and intervention, which may adversely affect the scope
of their activities, the prices they can charge and the amount of capital they
must maintain. Governmental regulation may change frequently and may have
significant adverse consequences for companies in the financial sector,
including effects not intended by such regulation. The impact of recent or
future regulation in various countries on any individual financial company or on
the sector as a whole cannot be predicted.
Certain
risks may impact the value of investments in the financial sector more severely
than those of investments outside this sector, including the risks associated
with companies that operate with substantial financial leverage. Companies in
the financial sector may also be adversely affected by increases in interest
rates and loan losses, decreases in the availability of money or asset
valuations, credit rating downgrades and adverse conditions in other related
markets.
Insurance
companies, in particular, may be subject to severe price competition and/or rate
regulation, which may have an adverse impact on their profitability. Insurance
companies are subject to extensive government regulation in some countries and
can be significantly affected by changes in interest rates, general economic
conditions, price and marketing competition, the imposition of premium rate
caps, or other changes in government regulation or tax law. Different segments
of the insurance industry can be significantly affected by mortality and
morbidity rates, environmental clean-up costs and catastrophic events such as
earthquakes, hurricanes and terrorist acts.
The
financial sector is also a target for cyber attacks and may experience
technology malfunctions and disruptions. In recent years, cyber attacks and
technology failures have become increasingly frequent and have caused
significant losses.
◦Information
Technology Sector Risk.
Market
or economic factors impacting information technology companies and companies
that rely heavily on technological advances could have a significant effect on
the value of the Fund’s investments. The value of stocks of information
technology companies and companies that rely heavily on technology is
particularly vulnerable to rapid changes in technology product cycles, rapid
product obsolescence, government regulation and competition, both domestically
and internationally, including competition from foreign competitors with lower
production costs. Stocks of information technology companies and companies that
rely heavily on technology, especially those of smaller, less-seasoned
companies, tend to be more volatile than the overall market. Information
technology companies are heavily dependent on patent and intellectual property
rights, the loss or impairment of which may adversely affect profitability.
Additionally, companies in the technology sector may face dramatic and often
unpredictable changes in growth rates and competition for the services of
qualified personnel.
•Tax
Risk.
To qualify for the favorable tax treatment generally available to RICs, the Fund
must satisfy, among other requirements described in the SAI, certain
diversification requirements. In particular, at the close of each quarter of the
Fund’s taxable year: (A) at least 50% of the value of its total assets must
be represented by cash and cash items, U.S. government securities, securities of
other RICs and other securities, with such other securities limited, in respect
to any one issuer, to an amount not greater than 5% of the value of the Fund’s
total assets and that does not represent more than 10% of the outstanding voting
securities of such issuer, including the equity securities of a qualified
publicly traded partnership, and (B) not more than 25% of the value of its total
assets is invested, including through corporations in which the Fund owns a 20%
or more voting stock interest, in the securities (other than U.S. government
securities or securities of other RICs) of any one issuer or the securities
(other than the securities of another RIC) of two or more issuers that the Fund
controls and which are engaged in the same or similar trades or businesses or
related trades or businesses, or the securities of one or more qualified
publicly traded partnerships. While the weighting of the Index is not
inconsistent with these rules, given the concentration of the Index in a
relatively small number of securities, it may not always be possible for the
Fund to fully implement a replication strategy or a representative sampling
strategy while satisfying these diversification requirements. The Fund’s efforts
to satisfy the diversification requirements may affect the Fund’s execution of
their investment strategy and may cause the Fund’s return to deviate from that
of the Index, and the Fund’s efforts to replicate or represent the Index may
cause it inadvertently to fail to satisfy the diversification requirements. If
the Fund were to fail to satisfy the diversification requirements, it could be
eligible for relief provisions if the failure is due to reasonable cause and not
willful neglect and if a penalty tax is paid with respect to each failure to
satisfy the applicable requirements. Additionally, relief is provided for
certain de
minimis
failures of the diversification requirements where the Fund corrects the failure
within a specified period. If the Fund were to fail to qualify as a RIC for a
tax year, and the relief provisions are not available, it would be taxed in the
same manner as an ordinary corporation, and distributions to its shareholders
would not be deductible by the Fund in computing its taxable income. In such
case, the Fund’s shareholders would be taxed as if they received ordinary
dividends, although corporate shareholders could be eligible for the dividends
received deduction (subject to certain limitations) and individuals may be able
to benefit from the lower tax rates available to qualified dividend income. In
addition, the Fund could be required to recognize unrealized gains, pay
substantial taxes and interest, and make substantial distributions before
requalifying as a RIC.
•Tracking
Error Risk.
As with all index funds, the performance of the Fund and the Index may vary
somewhat for a variety of reasons. For example, the Fund incurs operating
expenses and portfolio transaction costs not incurred by the Index. In addition,
the Fund may not be fully invested in the securities of the Index at all times
or may hold securities not included in the Index. The Fund may use a
representative sampling strategy to achieve its investment objective, if the
Fund’s Sub-Adviser believes it is in the best interest of the Fund, which
generally can be expected to produce a greater non-correlation
risk.
PORTFOLIO
HOLDINGS
INFORMATION
Information
about the Fund’s daily portfolio holdings is available at www.grayscale.com/GFOF.
A complete description of the Fund’s policies and procedures with respect to the
disclosure of the Fund’s portfolio holdings is available in the Fund’s Statement
of Additional Information (“SAI”).
MANAGEMENT
Investment
Adviser
Grayscale
Advisors, LLC, serves as the investment adviser and has overall responsibility
for the general management and administration of the Fund. The Adviser is a
registered investment adviser with offices located at 290 Harbor Drive, 4th
Floor, Stamford, Connecticut 06902, and arranges for sub-advisory, transfer
agency, custody, fund administration, and all other related services necessary
for the Fund to operate. The Fund is currently the Adviser’s only
client.
The
Adviser provides oversight of the Sub-Adviser, monitoring of the Sub-Adviser’s
buying and selling of securities for the Fund, and review of the Sub-Adviser’s
performance. For the services it provides to the Fund, the Fund pays the Adviser
a unified management fee, which is calculated daily and paid monthly, at an
annual rate of 0.70% of the Fund’s average daily net assets.
Under
the investment advisory agreement, the Adviser has agreed to pay all expenses
incurred by the Fund, except for: interest charges on any borrowings, taxes,
brokerage commissions and other expenses incurred in placing orders for the
purchase and sale of securities and other investment instruments, acquired fund
fees and expenses, accrued deferred tax liability, extraordinary expenses,
distribution fees and expenses paid by the Fund under any distribution plan
adopted pursuant to Rule 12b-1 under the 1940 Act, and the unified management
fee payable to the Adviser. The Adviser, in turn, compensates the Sub-Adviser
from the management fee it receives.
The
basis for the Board of Trustees’ approval of the Fund’s Investment Advisory
Agreement will be available in the Fund’s first Annual or Semi-Annual Report to
Shareholders.
Sub-Adviser
The
Adviser has retained Vident Investment Advisory, LLC to serve as sub-adviser for
the Fund. VIA is responsible for the day-to-day management of the Fund. VIA, a
registered investment adviser, is a wholly-owned subsidiary of Vident Financial,
LLC. Its principal office is located at 1125 Sanctuary Parkway, Suite 515,
Alpharetta, Georgia 30009. VIA was formed in 2014 and provides investment
advisory services to ETFs, including the Fund. The Sub-Adviser is responsible
for trading portfolio securities for the Fund, including selecting
broker-dealers to execute purchase and sale transactions or in connection with
any rebalancing or reconstitution of the Index, subject to the supervision of
the Adviser and the Board. For its services, VIA is paid a fee by the Adviser,
which fee is calculated daily and paid monthly, at an annual rate of the Fund’s
average daily net assets of 0.045% on the first $250 million, 0.035% on the next
$250 million, and 0.025% on the net assets in excess of $500 million, subject to
a minimum annual fee of $20,000.
The
basis for the Board of Trustees’ approval of the Fund’s Investment Sub-Advisory
Agreement will be available in the Fund’s first Annual or Semi-Annual Report to
Shareholders.
Portfolio
Managers
The
Fund is managed by VIA’s portfolio management team. The individual members of
the team responsible for the day to day management of the Fund’s portfolios are
listed below.
Austin
Wen, CFA, has been a Portfolio Manager for the Sub-Adviser since 2016 and has
eight years of investment management experience. His focus at VIA is on
portfolio management and trading, risk monitoring and investment analysis.
Previously, he was an analyst for Vident Financial beginning in 2014, working on
the development and review of investment solutions. He began his career in 2011
as a State Examiner for the Georgia Department of Banking and Finance. Mr. Wen
obtained a BA in Finance from the University of Georgia and holds the Chartered
Financial Analyst designation.
Rafael
Zayas, CFA, has over 15 years of investment management experience. Mr. Zayas
became SVP, Head of Portfolio Management and Trading ETF at VIA in June 2020.
From 2017 to 2020, he was Senior Portfolio Manager – International Equity at VIA
and his investment management experience includes managing international equity
portfolios, including in emerging and frontier markets. Prior to joining VIA, he
was a Portfolio Manager – Direct Investments for seven years at Russell
Investments, a global asset manager, where he co-managed more than $4 billion in
quantitative strategies across global markets, including the Russell Strategic
Call Overwriting Fund, a mutual fund. Mr. Zayas also helped Russell Investments
launch its sponsored ETF initiative and advised on index methodologies. Prior to
joining Russell Investments, Mr. Zayas was a Portfolio Manager – Equity Indexing
at Mellon Capital Management, where he managed assets for internationally listed
global equity ETFs. Mr. Zayas graduated with a B.S. in Electrical
Engineering
from Cornell University and obtained a Certificate in Computational Finance and
Risk Management from the University of Washington. He also attained the
Chartered Financial Analyst designation in 2010.
The
Fund’s SAI provides additional information about the Portfolio Managers’
compensation structure, other accounts managed by the Portfolio Managers, and
the Portfolio Managers’ ownership of Shares.
HOW
TO
BUY
AND
SELL
SHARES
The
Fund issues and redeems Shares at NAV only in Creation Units. Only APs may
acquire Shares directly from the Fund, and only APs may tender their Shares for
redemption directly to the Fund, at NAV. APs must be a member or participant of
a clearing agency registered with the SEC and must execute a Participant
Agreement that has been agreed to by the Distributor (defined below), and that
has been accepted by the Fund’s transfer agent, with respect to purchases and
redemptions of Creation Units. Once created, Shares trade in the secondary
market in quantities less than a Creation Unit.
Most
investors buy and sell Shares in secondary market transactions through brokers.
Shares are listed for trading on the secondary market on the Exchange and can be
bought and sold throughout the trading day like other publicly traded
securities.
When
buying or selling Shares through a broker, you will incur customary brokerage
commissions and charges, and you may pay some or all of the bid-ask spread on
your transactions. In addition, because secondary market transactions occur at
market prices, you may pay more than NAV when you buy Shares and receive less
than NAV when you sell those Shares.
Book
Entry
Shares
are held in book-entry form, which means that no stock certificates are issued.
The Depository Trust Company (“DTC”) or its nominee is the record owner of all
outstanding Shares.
Investors
owning Shares are beneficial owners as shown on the records of DTC or its
participants. DTC serves as the securities depository for all Shares. DTC’s
participants include securities brokers and dealers, banks, trust companies,
clearing corporations and other institutions that directly or indirectly
maintain a custodial relationship with DTC. As a beneficial owner of Shares, you
are not entitled to receive physical delivery of stock certificates or to have
Shares registered in your name, and you are not considered a registered owner of
Shares. Therefore, to exercise any right as an owner of Shares, you must rely
upon the procedures of DTC and its participants. These procedures are the same
as those that apply to any other securities that you hold in book entry or
“street name” through your brokerage account.
Frequent
Purchases and Redemptions of Shares
The
Fund imposes no restrictions on the frequency of purchases and redemptions of
Shares. In determining not to approve a written, established policy, the Board
evaluated the risks of market timing activities by Fund shareholders. Purchases
and redemptions by APs, who are the only parties that may purchase or redeem
Shares directly with the Fund, are an essential part of the ETF process and help
keep Share trading prices in line with NAV. As such, the Fund accommodates
frequent purchases and redemptions by APs. However, the Board has also
determined that frequent purchases and redemptions for cash may increase
tracking error and portfolio transaction costs and may lead to the realization
of capital gains. To minimize these potential consequences of frequent purchases
and redemptions, the Fund employs fair value pricing and may impose transaction
fees on purchases and redemptions of Creation Units to cover the custodial and
other costs incurred by the Fund in effecting trades. In addition, the Fund and
the Adviser reserve the right to reject any purchase order at any
time.
Determination
of NAV
The
Fund’s NAV is calculated as of the scheduled close of regular trading on the New
York Stock Exchange (“NYSE”), generally 4:00 p.m. Eastern time, each day
the NYSE is open for business. The NAV is calculated by dividing the Fund’s net
assets by its Shares outstanding.
In
calculating its NAV, the Fund generally values its assets on the basis of market
quotations, last sale prices, or estimates of value furnished by a pricing
service or brokers who make markets in such instruments. If such information is
not available for a security held by the Fund or is determined to be unreliable,
the security will be valued at fair value estimates under guidelines established
by the Board (as described below).
Fair
Value Pricing
The
Board has adopted procedures and methodologies to fair value Fund securities
whose market prices are not “readily available” or are deemed to be unreliable.
For example, such circumstances may arise when: (i) a security has been
de-listed or has had its trading halted or suspended; (ii) a security’s primary
pricing source is unable or unwilling to provide a price; (iii) a security’s
primary trading market is closed during regular market hours; or (iv) a
security’s value is materially affected by events occurring after the close of
the security’s primary trading market. Generally, when fair valuing a security,
the Fund will take into account all reasonably available
information
that may be relevant to a particular valuation including, but not limited to,
fundamental analytical data regarding the issuer, information relating to the
issuer’s business, recent trades or offers of the security, general and/or
specific market conditions and the specific facts giving rise to the need to
fair value the security. Fair value determinations are made in good faith and in
accordance with the fair value methodologies included in the Board-adopted
valuation procedures. Due to the subjective and variable nature of fair value
pricing, there can be no assurance that the Adviser or Sub-Adviser will be able
to obtain the fair value assigned to the security upon the sale of such
security.
Investments
by Registered Investment Companies
Section 12(d)(1)
of the 1940 Act restricts investments by registered investment companies in the
securities of other investment companies, including Shares. Registered
investment companies are permitted to invest in the Fund beyond the limits set
forth in section 12(d)(1) subject to certain terms and conditions set forth in
Rule 12d1-4 under the 1940 Act, including that such investment companies enter
into an agreement with the Fund.
Delivery
of Shareholder Documents – Householding
Householding
is an option available to certain investors of the Fund. Householding is a
method of delivery, based on the preference of the individual investor, in which
a single copy of certain shareholder documents can be delivered to investors who
share the same address, even if their accounts are registered under different
names. Householding for the Fund is available through certain broker-dealers. If
you are interested in enrolling in householding and receiving a single copy of
prospectuses and other shareholder documents, please contact your broker-dealer.
If you are currently enrolled in householding and wish to change your
householding status, please contact your broker-dealer.
DIVIDENDS,
DISTRIBUTIONS,
AND
TAXES
Dividends
and Distributions
The
Fund intends to pay out dividends, if any, and distribute any net realized
capital gains to its shareholders at least annually. The Fund will declare and
pay capital gain distributions, if any, in cash. Distributions in cash may be
reinvested automatically in additional whole Shares only if the broker through
whom you purchased Shares makes such option available. Your broker is
responsible for distributing the income and capital gain distributions to
you.
Taxes
The
following discussion is a summary of some important U.S. federal income tax
considerations generally applicable to investments in the Fund. Your investment
in the Fund may have other tax implications. Please consult your tax advisor
about the tax consequences of an investment in Shares, including the possible
application of foreign, state, and local tax laws.
The
Fund intends to elect and qualify each year for treatment as a RIC under the
Code. If it meets certain minimum distribution requirements, a RIC is not
subject to tax at the fund level on income and gains from investments that are
timely distributed to shareholders. However, the Fund’s failure to qualify as a
RIC or to meet minimum distribution requirements would result (if certain relief
provisions were not available) in fund-level taxation and, consequently, a
reduction in income available for distribution to shareholders.
Unless
your investment in Shares is made through a tax-exempt entity or tax-advantaged
account, such as an IRA plan, you need to be aware of the possible tax
consequences when the Fund makes distributions, when you sell your Shares listed
on the Exchange, and when you purchase or redeem Creation Units (APs only).
Taxes
on Distributions
The
Fund intends to distribute, at least annually, substantially all of its net
investment income and net capital gains. For federal income tax purposes,
distributions of investment income are generally taxable as ordinary income or
qualified dividend income. Taxes on distributions of capital gains (if any) are
determined by how long the Fund owned the investments that generated them,
rather than how long a shareholder has owned his or her Shares. Sales of assets
held by the Fund for more than one year generally result in long-term capital
gains and losses, and sales of assets held by the Fund for one year or less
generally result in short-term capital gains and losses. Distributions of the
Fund’s net capital gain (the excess of net long-term capital gains over net
short-term capital losses) that are reported by the Fund as capital gain
dividends (“Capital Gain Dividends”) will be taxable as long-term capital gains,
which for non-corporate shareholders are subject to tax at reduced rates of up
to 20% (lower rates apply to individuals in lower tax brackets). Distributions
of short-term capital gain will generally be taxable as ordinary income.
Dividends and distributions are generally taxable to you whether you receive
them in cash or reinvest them in additional Shares.
Distributions
reported by the Fund as “qualified dividend income” are generally taxed to
non-corporate shareholders at rates applicable to long-term capital gains,
provided holding period and other requirements are met. “Qualified dividend
income” generally is income derived from dividends paid by U.S. corporations or
certain foreign corporations that are either incorporated in a U.S. possession
or eligible for tax benefits under certain U.S. income tax treaties. In
addition, dividends that the Fund received in respect of stock of certain
foreign corporations may be qualified dividend income if that stock is readily
tradable on an established U.S. securities market. Corporate shareholders may be
entitled to a dividends received deduction for the portion of dividends they
receive from the Fund that are attributable to dividends received by the Fund
from U.S. corporations, subject to certain limitations.
Shortly
after the close of each calendar year, you will be informed of the amount and
character of any distributions received from the Fund.
U.S.
individuals with income exceeding specified thresholds are subject to a 3.8% tax
on all or a portion of their “net investment income,” which includes interest,
dividends, and certain capital gains (generally including capital gains
distributions and capital gains realized on the sale of Shares). This 3.8% tax
also applies to all or a portion of the undistributed net investment income of
certain shareholders that are estates and trusts.
In
general, your distributions are subject to federal income tax for the year in
which they are paid. Certain distributions paid in January, however, may be
treated as paid on December 31 of the prior year. Distributions are generally
taxable even if they are paid from income or gains earned by the Fund before
your investment (and thus were included in the Shares’ NAV when you purchased
your Shares).
You
may wish to avoid investing in the Fund shortly before a dividend or other
distribution, because such a distribution will generally be taxable even though
it may economically represent a return of a portion of your investment.
If
you are neither a resident nor a citizen of the United States or if you are a
foreign entity, distributions (other than Capital Gain Dividends) paid to you by
the Fund will generally be subject to a U.S. withholding tax at the rate of 30%,
unless a lower treaty rate applies. Gains from the sale or other disposition of
your Shares generally are not subject to U.S. taxation, unless you are a
nonresident alien individual who is physically present in the U.S. for 183 days
or more per year. The Fund may, under certain circumstances, report all or a
portion of a dividend as an “interest-related dividend” or a “short-term capital
gain dividend,” which would generally be exempt from this 30%
U.S. withholding tax, provided certain other requirements are met.
Different tax consequences may result if you are a foreign shareholder engaged
in a trade or business within the United States or if a tax treaty applies.
Under
legislation generally known as “FATCA” (the Foreign Account Tax Compliance Act),
the Fund is required to withhold 30% of certain ordinary dividends it pays to
shareholders that are foreign entities and that fail to meet prescribed
information reporting or certification requirements.
The
Fund (or a financial intermediary, such as a broker, through which a shareholder
owns Shares) generally is required to withhold and remit to the U.S. Treasury a
percentage of the taxable distributions and sale or redemption proceeds paid to
any shareholder who fails to properly furnish a correct taxpayer identification
number, who has underreported dividend or interest income, or who fails to
certify that he, she or it is not subject to such withholding.
Taxes
When Shares are Sold on the Exchange
Any
capital gain or loss realized upon a sale of Shares generally is treated as a
long-term capital gain or loss if Shares have been held for more than one year
and as a short-term capital gain or loss if Shares have been held for one year
or less. However, any capital loss on a sale of Shares held for six months or
less is treated as long-term capital loss to the extent of Capital Gain
Dividends paid with respect to such Shares. Any loss realized on a sale will be
disallowed to the extent Shares of the Fund are acquired, including through
reinvestment of dividends, within a 61-day period beginning 30 days before and
ending 30 days after the disposition of Shares. The ability to deduct capital
losses may be limited.
The
cost basis of Shares of the Fund acquired by purchase will generally be based on
the amount paid for the Shares and then may be subsequently adjusted for other
applicable transactions as required by the Code. The difference between the
selling price and the cost basis of Shares generally determines the amount of
the capital gain or loss realized on the sale or exchange of Shares. Contact the
broker through whom you purchased your Shares to obtain information with respect
to the available cost basis reporting methods and elections for your account.
Taxes
on Purchases and Redemptions of Creation Units
An
AP having the U.S. dollar as its functional currency for U.S. federal income tax
purposes who exchanges securities for Creation Units generally recognizes a gain
or a loss. The gain or loss will be equal to the difference between the value of
the Creation Units at the time of the exchange and the exchanging AP’s aggregate
basis in the securities delivered, plus the amount of any cash paid for the
Creation Units. An AP who exchanges Creation Units for securities will generally
recognize a gain or loss equal to the difference between the exchanging AP’s
basis in the Creation Units and the aggregate U.S. dollar market value of the
securities received, plus any cash received for such Creation Units. The
Internal Revenue Service may assert, however, that a loss that is realized upon
an exchange of securities for Creation Units may not be currently deducted under
the rules governing “wash sales” (for an AP who does not mark-to-market their
holdings), or on the basis that there has been no significant change in economic
position. APs exchanging securities should consult their own tax advisor with
respect to whether wash sale rules apply and when a loss might be deductible.
Any
gain or loss realized upon a creation or redemption of Creation Units will be
treated as capital or ordinary gain or loss, depending on the circumstances. Any
capital gain or loss realized upon redemption of Creation Units is generally
treated as long-term capital gain or loss if Shares have been held for more than
one year and as a short-term capital gain or loss if Shares have been held for
one year or less.
The
Fund may include a payment of cash in addition to, or in place of, the delivery
of a basket of securities upon the redemption of Creation Units. The Fund may
sell portfolio securities to obtain the cash needed to distribute redemption
proceeds. This may cause the Fund to recognize investment income and/or capital
gains or losses that it might not have recognized if it had completely satisfied
the redemption in-kind. As a result, the Fund may be less tax efficient if it
includes such a cash payment in the proceeds paid upon the redemption of
Creation Units.
Foreign
Taxes
Interest
and other income received by the Fund with respect to foreign securities may
give rise to withholding and other taxes imposed by foreign countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. If as of the close of a taxable year more than 50% of the
value of the Fund’s assets consists of certain foreign stock or securities, the
Fund will be eligible to elect to “pass through” to investors the amount of
foreign income and similar taxes (including withholding taxes) paid by the Fund
during that taxable year. This means that investors would be considered to have
received as additional income their respective Shares of such foreign taxes, but
may be entitled to either a corresponding tax deduction in calculating taxable
income, or, subject to certain limitations, a credit in calculating federal
income tax. If the Fund does not so elect, the Fund will be entitled to claim a
deduction for certain foreign taxes incurred by the Fund. The Fund (or its
administrative agent) will notify you if it makes such an election and provide
you with the information necessary to reflect foreign taxes paid on your income
tax return.
The
foregoing discussion summarizes some of the possible consequences under current
federal tax law of an investment in the Fund. It is not a substitute for
personal tax advice. You also may be subject to state and local tax on Fund
distributions and sales of Shares. Consult your personal tax advisor about the
potential tax consequences of an investment in Shares under all applicable tax
laws. For more information, please see the section entitled “Federal Income
Taxes” in the SAI.
DISTRIBUTION
The
Distributor, Foreside Fund Services, LLC, is a broker-dealer registered with the
SEC. The Distributor distributes Creation Units for the Fund on an agency basis
and does not maintain a secondary market in Shares. The Distributor has no role
in determining the policies of the Fund or the securities that are purchased or
sold by the Fund. The Distributor’s principal address is Three Canal Plaza,
Suite 100, Portland, Maine 04101.
The
Board has adopted a Distribution and Service Plan (the “Plan”) pursuant to Rule
12b-1 under the 1940 Act. In accordance with the Plan, the Fund is authorized to
pay an amount up to 0.25% of its average daily net assets each year for certain
distribution-related activities and shareholder services.
No
Rule 12b-1 fees are currently paid by the Fund, and there are no plans to impose
these fees. However, in the event Rule 12b-1 fees are charged in the future,
because the fees are paid out of the Fund’s assets, over time these fees will
increase the cost of your investment and may cost you more than certain other
types of sales charges.
PREMIUM/DISCOUNT
INFORMATION
Information
regarding how often Shares traded on the Exchange at a price above (i.e.,
at a premium) or below (i.e.,
at a discount) the NAV per Share is available, free of charge, on the Fund’s
website at www.grayscale.com/GFOF.
ADDITIONAL
NOTICES
Shares
are not sponsored, endorsed, or promoted by the Exchange. The Exchange makes no
representation or warranty, express or implied, to the owners of Shares or any
member of the public regarding the ability of the Fund to track the total return
performance of
the
Index or the ability of the Index identified herein to track the performance of
its constituent securities. The Exchange is not responsible for, nor has it
participated in, the determination of the compilation or the calculation of the
Index, nor in the determination of the timing of, prices of, or quantities of
Shares to be issued, nor in the determination or calculation of the equation by
which Shares are redeemable. The Exchange has no obligation or liability to
owners of Shares in connection with the administration, marketing, or trading of
Shares.
The
Exchange does not guarantee the accuracy and/or the completeness of the Index or
the data included therein. The Exchange makes no warranty, express or implied,
as to results to be obtained by the Fund, owners of Shares, or any other person
or entity from the use of the Index or the data included therein. The Exchange
makes no express or implied warranties, and hereby expressly disclaims all
warranties of merchantability or fitness for a particular purpose with respect
to the Index or the data included therein. Without limiting any of the
foregoing, in no event shall the Exchange have any liability for any lost
profits or indirect, punitive, special, or consequential damages even if
notified of the possibility thereof.
The
Adviser, the Sub-Adviser, and the Fund make no representation or warranty,
express or implied, to the owners of Shares or any member of the public
regarding the advisability of investing in securities generally or in the Fund
particularly. The Fund does not guarantee the accuracy, completeness, or
performance of the Index or the data included therein and shall have no
liability in connection with the Index or Index calculation.
“Bloomberg®”
and Bloomberg Grayscale Future of Finance Index are service marks of Bloomberg
Finance L.P. and its affiliates, including Bloomberg Index Services Limited
(“BISL”), the administrator of the index (collectively, “Bloomberg”), and have
been licensed for use for certain purposes by Grayscale Advisors,
LLC.
The
Fund is not sponsored, endorsed, sold or promoted by Bloomberg. Bloomberg does
not make any representation or warranty, express or implied, to the owners of or
counterparties to the Fund or any member of the public regarding the
advisability of investing in securities generally or in the Fund particularly.
The only relationship of Bloomberg to Grayscale Advisors, LLC is the licensing
of certain trademarks, trade names and service marks and of the Bloomberg
Grayscale Future of Finance Index, which is determined, composed and calculated
by BISL without regard to Grayscale Advisors, LLC or the Fund. Bloomberg has no
obligation to take the needs of Grayscale Advisors, LLC or the owners of the
Fund into consideration in determining, composing or calculating the Bloomberg
Grayscale Future of Finance Index. Bloomberg is not responsible for and has not
participated in the determination of the timing of, prices at, or quantities of
the Fund to be issued. Bloomberg shall not have any obligation or liability,
including, without limitation, to Fund customers, in connection with the
administration, marketing or trading of the Fund.
BLOOMBERG
DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE BLOOMBERG
GRAYSCALE FUTURE OF FINANCE INDEX OR ANY DATA RELATED THERETO AND SHALL HAVE NO
LIABILITY FOR ANY ERRORS, OMISSIONS OR INTERRUPTIONS THEREIN. BLOOMBERG DOES NOT
MAKE ANY WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY GRAYSCALE
ADVISORS, LLC, OWNERS OF THE FUND OR ANY OTHER PERSON OR ENTITY FROM THE USE OF
THE BLOOMBERG GRAYSCALE FUTURE OF FINANCE INDEX OR ANY DATA RELATED THERETO.
BLOOMBERG DOES NOT MAKE ANY EXPRESS OR IMPLIED WARRANTIES AND EXPRESSLY
DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE
OR USE WITH RESPECT TO THE BLOOMBERG GRAYSCALE FUTURE OF FINANCE INDEX OR ANY
DATA RELATED THERETO. WITHOUT LIMITING ANY OF THE FOREGOING, TO THE MAXIMUM
EXTENT ALLOWED BY LAW, BLOOMBERG, ITS LICENSORS, AND ITS AND THEIR RESPECTIVE
EMPLOYEES, CONTRACTORS, AGENTS, SUPPLIERS, AND VENDORS SHALL HAVE NO LIABILITY
OR RESPONSIBILITY WHATSOEVER FOR ANY INJURY OR DAMAGES—WHETHER DIRECT, INDIRECT,
CONSEQUENTIAL, INCIDENTAL, PUNITIVE OR OTHERWISE—ARISING IN CONNECTION WITH THE
FUND OR BLOOMBERG GRAYSCALE FUTURE OF FINANCE INDEX OR ANY DATA OR VALUES
RELATING THERETO—WHETHER ARISING FROM THEIR NEGLIGENCE OR OTHERWISE, EVEN IF
NOTIFIED OF THE POSSIBILITY THEREOF.
The
Fund has not commenced operations prior to the date of this Prospectus and
therefore does not have financial information.
Grayscale
Future of Finance ETF
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Adviser |
Grayscale
Advisors, LLC
290
Harbor Drive, 4th Floor
Stamford,
Connecticut 06902 |
Index
Provider |
Bloomberg
Index Services Limited
731
Lexington Avenue
New
York, NY 10022 |
|
Sub-Adviser |
Vident
Investment Advisory, LLC
1125
Sanctuary Parkway, Suite 515
Alpharetta,
Georgia 30009 |
Administrator
and Transfer Agent |
U.S.
Bancorp Fund Services, LLC
615
East Michigan Street
Milwaukee,
Wisconsin 53202 |
|
Custodian |
U.S.
Bank National Association
1555
N. Rivercenter Dr., Suite 302
Milwaukee,
Wisconsin 53212 |
Distributor |
Foreside
Fund Services, LLC
Three
Canal Plaza
Portland,
Maine 04101 |
|
Independent
Registered
Public
Accounting
Firm |
Cohen
& Company, Ltd.
342
North Water Street, Suite 830
Milwaukee,
Wisconsin 53202 |
Legal
Counsel |
Morgan,
Lewis & Bockius LLP
1111
Pennsylvania Avenue NW
Washington,
DC 20004-2541 |
Investors
may find more information about the Fund in the following
documents:
Statement
of Additional Information: The
Fund’s SAI provides additional details about the investments and techniques of
the Fund and certain other additional information. A current SAI dated January
28, 2022, as supplemented from time to time, is on file with the SEC and is
herein incorporated by reference into this Prospectus. It is legally considered
a part of this Prospectus.
Annual/Semi-Annual
Reports: Additional
information about the investments for the Fund will be available in the first
annual and semi-annual reports for the Fund. In the annual report you will find
a discussion of the market conditions and investment strategies that
significantly affected the Fund’s performance.
You
can obtain free copies of these documents, request other information or make
general inquiries about the Fund by contacting the Fund at Grayscale
Future of Finance ETF,
c/o U.S. Bank Global Fund Services, P.O. Box 701, Milwaukee, Wisconsin
53201-0701 or calling 1-800-617-0004.
Shareholder
reports and other information about the Fund are available:
•Free
of charge from the SEC’s EDGAR database on the SEC’s website at
http://www.sec.gov; or
•Free
of charge from the Fund’s Internet website at www.grayscale.com/GFOF;
or
(SEC
Investment Company Act File No. 811-22668)