Digital Asset Treasury Companies: Structure And Regulation – Fin Tech

Digital Asset Treasury Companies (“DATCOs”) are a new
class of public companies whose treasuries hold significant amounts
of digital assets on their balance sheets. As distinguished from a
public company that uses digital assets only incidentally, or not
at all, a DATCO’s business plan is to acquire and manage
digital assets (like BTC or ETH) as “permanent
capital.”

This model gained prominence after MicroStrategy’s 2020
pivot, when it converted $250 million of corporate cash into
Bitcoin, dramatically boosting its stock price and inspiring
others. By September 2025, public DATCOs collectively held over
$100 billion in digital assets, and more than 200 U.S. companies
had announced “digital asset treasury” strategies,
seeking to raise an estimated $102 billion to buy crypto for their
balance sheets.

This report covers two key aspects of the U.S. legal landscape
for DATCOs:

Formation Structures: How DATCOs are formed or
taken public – including traditional IPOs, SPAC mergers,
reverse mergers, PIPE financing, and emerging techniques like
“phased” acquisitions.

Securities Law Issues: Core U.S. legal
considerations in forming a DATCO, covering Securities Act of 1933
(“Securities Act”) registration requirements, exemptive
relief and lawful avoidance of classification as an investment
company under the Investment Company Act of 1940 (the
“Investment Company Act”).

We will focus exclusively on U.S. federal securities law and
regulatory developments and will not cover state law or non-U.S.
legal regimes in this report. We also will ignore issues arising
under the Commodity Exchange Act of 1936 after noting in passing
that a properly structured DATCO can lawfully avoid regulation as a
“commodity pool,” a “commodity pool operator”
or a “commodity trading advisor” under that Act.

I. Formation Structures for
DATCOs: IPOs, ETPs, SPACs, PIPEs, Reverse Mergers, and Phased
Acquisitions

DATCOs are emerging through various transaction structures that
bring a crypto-focused company into the public markets or repurpose
an existing public company into a crypto asset vehicle. Each path
has distinctive legal implications. Here is an overview of common
formation structures for DATCOs, with recent
examples of each:

Formation Structure	Description & Recent Example	Legal Considerations for DATCO
Traditional IPO (ETP)	DATCO (or its parent) conducts a registered initial public offering of stock (or direct listing) to become publicly traded on a registered exchange. Examples: Multiple crypto-asset-backed exchange- traded products (“ETPs”) have been authorized by the SEC and listed on SEC-registered exchanges since the logjam broke for Bitcoin ETPs in 2024. The most famous of these ETPs is probably Blackrock’s iShares Bitcoin Trust (ticker symbol IBIT), which currently has about $90 billion in assets under management and is arguably the most successful ETP of all time. Cathie Wood’s ARK Invest also launched a Bitcoin ETP, the ARK 21Shares Bitcoin ETF (ticker symbol ARKB), whose structure was cited favorably by the SEC in approving the first suite of Bitcoin ETPs. Much to her credit, Cathie Wood has bet on crypto industry development from the industry’s early days onward.	Full SEC registration (Form S-1) with rigorous disclosure and audited financials. High upfront cost and liability, but offers significant credibility. Post-IPO, subject to ongoing reporting requirements. Must avoid being deemed an investment company (unless also registered under the Investment Company Act) if proceeds are used to buy crypto. (See Section II of this note).
SPAC Merger (De-SPAC)	A Special Purpose Acquisition Company (blank-check IPO shell) combines with a private crypto company, taking it public without a conventional IPO. Often accompanied by a PIPE financing (described below). Example: Twenty One Capital, Inc. (“Twenty One”) has entered into a definitive agreement for a business combination with Cantor Equity Partners, Inc. (“CEP”), a SPAC. At the closing of the business combination, Twenty One will be majority-owned by Tether, co-founder of Twenty One and the world’s largest stablecoin issuer, and Bitfinex, with significant minority ownership by SoftBank Group Corp., one of the world’s leading investment holding companies. Twenty One and CEP have also entered into subscription agreements with investors to raise, at closing, $585 million of total additional capital consisting of (i) $385 million through convertible senior secured notes and (ii) $200 million through a common equity PIPE financing.	Rather than an IPO prospectus and a Form S-1, this process uses a combined proxy statement and Form S-4. The business combination is deemed an offer and sale of securities, so Securities Act liability attaches to disclosures. Must meet stock exchange listing standards and must file a post-closing “Super 8-K” with full financials. High redemption rates by SPAC shareholders can reduce cash. Consequently, sponsors often arrange PIPEs to assure adequate funding. In 2022, the SEC proposed rules to align de-SPAC disclosures and liabilities more closely with IPOs (requiring fairness opinions, limiting use of safe harbors, etc.).
Reverse Merger (RTO)	A private crypto company instead might take over an existing publicly traded company (often a shell or a “fallen angel”) by merging into it or otherwise acquiring control. The private company’s shareholders receive a controlling stake. The public company adopts the crypto business. Examples: Eqonex (Diginex), a Hong Kong crypto exchange, achieved Nasdaq listing through a 2020 reverse takeover of 8i Enterprises. In 2021, crypto miner Mawson went public by merging with Nasdaq-listed Wize Pharma, a non-operational biotech shell.	Usually structured as a private share exchange exempt from registration. But because most shells are SEC-reporting, the combined company must file Form 8-K with detailed information akin to an IPO. There is no SEC review before closing, so less upfront delay, but shell company rules now essentially require the same financial disclosures as an IPO. Reverse mergers provide no grace period on SEC reporting or internal controls. The crypto company must have audited financials and must satisfy all public company requirements immediately. Diligence is critical (legacy liabilities, shareholder base, etc.) and stock exchanges may require satisfaction of “seasoned company” criteria or impose a “seasoning” period before listing if the shell was traded over the counter.
PIPE Financing (Private Investment in Public Equity)	A public company (which might be a SPAC) sells a block of stock or convertible notes privately to accredited investors, thereby raising capital, often with the intention of using that capital to buy digital assets to carry out a treasury strategy. PIPEs often accompany SPAC mergers or phased acquisitions. Example: Michael Saylor’s MicroStrategy (now known as “Strategy”), after pivoting to BTC, raised about $1.7 billion through convertible senior note PIPE offerings in 2020–2021 to fund additional BTC purchases. Similarly, many SPAC deals (e.g., Circle’s attempted SPAC in 2021) included PIPE commitments from institutional investors.	PIPE shares are sold under a private offering exemption (Regulation D or Section 4(a)(2)) such that there is no immediate SEC registration, but investors get restricted stock. Issuers typically covenant to file resale registration(s) later so PIPE investors will have better liquidity. For DATCOs, a key legal point is using PIPE proceeds in compliance with disclosures made to the PIPE investors (i.e., representing clearly whether funds will be used to buy crypto). Nasdaq’s “20% rule” also may be implicated. That rule provides that if a PIPE would cover more than 20% of pre-deal shares at a discount, then shareholder approval may be required unless it’s part of a SPAC merger or qualifies as “public.” Nasdaq has scrutinized some crypto PIPE structures to assure that they don’t evade this rule. PIPE investors often negotiate for protections (e.g., anti-dilution, lockups, board seats) that also must be disclosed. And large PIPEs can raise issues under the Investment Company Actif the company becomes primarily a pool of investment assets (discussed in Section II, below).
“Phased” Acquisition (Treasury-Only Strategy)	This is a two-step approach in which a crypto company (or investor group) first takes a minority stake in an existing public company, often via PIPE or block purchase, to quickly access public markets and implement a crypto treasury strategy, with the option of increasing ownership later. The public company, with fresh capital or new strategic direction, then buys digital assets for its treasury (becoming a DATCO) even though the crypto acquirer held less than a majority of the stock initially. Example: In 2025 we have seen crypto investors take 10–15% PIPE stakes in small public companies, which then announce large Bitcoin purchases. In mid-2025, SharpLink Gaming (NASDAQ: SBET) received a PIPE investment and pivoted to an Ethereum-based treasury strategy, after which its stock surged.	This model avoids an immediate change-of-control, so no shareholder vote is triggered if the PIPE covers less than 20% of the shares. It can close faster and with less disclosure than a full merger. But the crypto investor’s rights must be carefully documented contractually (board seats, vetoes, etc.) since they lack majority control. Stock exchange rules on “change of control” still apply. If the minority stake comes with outsized governance influence, the stock exchange may require shareholder approval. The downside is uncertainty. The crypto company is exposed as a minority shareholder; any plan to later acquire a majority interest would require another transaction, subject to approvals. Legally, this structure helps avoid classification as an unregistered investment company because the operating public company remains in place with its business and revenues, now supplemented by crypto assets. Nonetheless, the public company must disclose the new strategy and risks thoroughly. Also, Regulation FD and insider trading laws apply.

Formation Structure

Description & Recent Example

Legal Considerations for DATCO

Traditional IPO (ETP)

DATCO (or its parent) conducts a registered initial public
offering of stock (or direct listing) to become publicly traded on
a registered exchange.

Examples: Multiple crypto-asset-backed exchange- traded
products (“ETPs”) have been authorized by the SEC and
listed on SEC-registered exchanges since the logjam broke for
Bitcoin ETPs in 2024. The most famous of these ETPs is probably
Blackrock’s iShares Bitcoin Trust (ticker symbol IBIT), which
currently has about $90 billion in assets under management and is
arguably the most successful ETP of all time. Cathie Wood’s ARK
Invest also launched a Bitcoin ETP, the ARK 21Shares Bitcoin ETF
(ticker symbol ARKB), whose structure was cited favorably by the
SEC in approving the first suite of Bitcoin ETPs. Much to her
credit, Cathie Wood has bet on crypto industry development from the
industry’s early days onward.

Full SEC registration (Form S-1) with rigorous disclosure and
audited financials. High upfront cost and liability, but offers
significant credibility. Post-IPO, subject to ongoing reporting
requirements. Must avoid being deemed an investment company (unless
also registered under the Investment Company Act) if proceeds are
used to buy crypto. (See Section II of this note).

SPAC Merger (De-SPAC)

A Special Purpose Acquisition Company (blank-check IPO shell)
combines with a private crypto company, taking it public without a
conventional IPO. Often accompanied by a PIPE financing (described
below).

Example: Twenty One Capital, Inc. (“Twenty
One”) has entered into a definitive agreement for a business
combination with Cantor Equity Partners, Inc. (“CEP”), a
SPAC. At the closing of the business combination, Twenty One will
be majority-owned by Tether, co-founder of Twenty One and the
world’s largest stablecoin issuer, and Bitfinex, with
significant minority ownership by SoftBank Group Corp., one of the
world’s leading investment holding companies. Twenty One and
CEP have also entered into subscription agreements with investors
to raise, at closing, $585 million of total additional capital
consisting of (i) $385 million through convertible senior secured
notes and (ii) $200 million through a common equity PIPE
financing.

Rather than an IPO prospectus and a Form S-1, this process uses
a combined proxy statement and Form S-4. The business combination
is deemed an offer and sale of securities, so Securities Act
liability attaches to disclosures. Must meet stock exchange listing
standards and must file a post-closing “Super 8-K” with
full financials. High redemption rates by SPAC shareholders can
reduce cash. Consequently, sponsors often arrange PIPEs to assure
adequate funding. In 2022, the SEC proposed rules to align de-SPAC
disclosures and liabilities more closely with IPOs (requiring
fairness opinions, limiting use of safe harbors, etc.).

Reverse

Merger (RTO)

A private crypto company instead might take over an existing
publicly traded company (often a shell or a “fallen
angel”) by merging into it or otherwise acquiring control. The
private company’s shareholders receive a controlling stake. The
public company adopts the crypto business.

Examples: Eqonex (Diginex), a Hong Kong crypto exchange,
achieved Nasdaq listing through a 2020 reverse takeover of 8i
Enterprises. In 2021, crypto miner Mawson went public by merging
with Nasdaq-listed Wize Pharma, a non-operational biotech
shell.

Usually structured as a private share exchange exempt from
registration. But because most shells are SEC-reporting, the
combined company must file Form 8-K with detailed information akin
to an IPO. There is no SEC review before closing, so less upfront
delay, but shell company rules now essentially require the same
financial disclosures as an IPO. Reverse mergers provide no grace
period on SEC reporting or internal controls. The crypto company
must have audited financials and must satisfy all public company
requirements immediately. Diligence is critical (legacy
liabilities, shareholder base, etc.) and stock exchanges may
require satisfaction of “seasoned company” criteria or
impose a “seasoning” period before listing if the shell
was traded over the counter.

PIPE Financing

(Private Investment in Public Equity)

A public company (which might be a SPAC) sells a block of stock
or convertible notes privately to accredited investors, thereby
raising capital, often with the intention of using that capital to
buy digital assets to carry out a treasury strategy. PIPEs often
accompany SPAC mergers or phased acquisitions.

Example: Michael Saylor’s MicroStrategy (now known as
“Strategy”), after pivoting to BTC, raised about $1.7
billion through convertible senior note PIPE offerings in
2020–2021 to fund additional BTC purchases. Similarly, many
SPAC deals (e.g., Circle’s attempted SPAC in 2021) included
PIPE commitments from institutional investors.

PIPE shares are sold under a private offering exemption
(Regulation D or Section 4(a)(2)) such that there is no immediate
SEC registration, but investors get restricted stock. Issuers
typically covenant to file resale registration(s) later so PIPE
investors will have better liquidity. For DATCOs, a key legal point
is using PIPE proceeds in compliance with disclosures made to the
PIPE investors (i.e., representing clearly whether funds will be
used to buy crypto). Nasdaq’s “20% rule” also may be
implicated. That rule provides that if a PIPE would cover more than
20% of pre-deal shares at a discount, then shareholder approval may
be required unless it’s part of a SPAC merger or qualifies as
“public.” Nasdaq has scrutinized some crypto PIPE
structures to assure that they don’t evade this rule. PIPE
investors often negotiate for protections (e.g., anti-dilution,
lockups, board seats) that also must be disclosed. And large PIPEs
can raise issues under the Investment Company Actif the company
becomes primarily a pool of investment assets (discussed in Section
II, below).

“Phased” Acquisition

(Treasury-Only Strategy)

This is a two-step approach in which a crypto company (or
investor group) first takes a minority stake in an existing public
company, often via PIPE or block purchase, to quickly access public
markets and implement a crypto treasury strategy, with the option
of increasing ownership later. The public company, with fresh
capital or new strategic direction, then buys digital assets for
its treasury (becoming a DATCO) even though the crypto acquirer
held less than a majority of the stock initially.

Example: In 2025 we have seen crypto investors take
10–15% PIPE stakes in small public companies, which then
announce large Bitcoin purchases. In mid-2025, SharpLink Gaming
(NASDAQ: SBET) received a PIPE investment and pivoted to an
Ethereum-based treasury strategy, after which its stock surged.

This model avoids an immediate change-of-control, so no
shareholder vote is triggered if the PIPE covers less than 20% of
the shares. It can close faster and with less disclosure than a
full merger. But the crypto investor’s rights must be carefully
documented contractually (board seats, vetoes, etc.) since they
lack majority control. Stock exchange rules on “change of
control” still apply. If the minority stake comes with
outsized governance influence, the stock exchange may require
shareholder approval. The downside is uncertainty. The crypto
company is exposed as a minority shareholder; any plan to later
acquire a majority interest would require another transaction,
subject to approvals. Legally, this structure helps avoid
classification as an unregistered investment company because the
operating public company remains in place with its business and
revenues, now supplemented by crypto assets. Nonetheless, the
public company must disclose the new strategy and risks thoroughly.
Also, Regulation FD and insider trading laws apply.

The table above demonstrates that no path to becoming a DATCO is
“low-regulation.” A traditional IPO offers the most
transparency and market rigor, but requires the company to already
have a compelling track record or narrative. ETPs must navigate the
listing requirements of exchanges and SEC requirements peculiar ti
crypto assets. SPAC mergers soared in popularity for crypto firms
in 2020–2021 as they provided a faster, story-driven route to
public markets. By early 2022, various crypto-focused SPAC deals
had closed (e.g., Diginex/Eqonex, Cipher Mining via Good Works,
Bakkt via VPC, Core Scientific via PDAC), and many more were
announced (Circle, eToro, Bullish, etc.). But SPACs faced high
redemption rates and, as the SEC tightened rules (proposed in March
2022) to curb rosy projections and sponsor conflicts, several
planned crypto SPACs were delayed or canceled.

The SEC issued accounting bulletins and exchanges issued
seasoning requirements after a wave of Chinese company completed
reverse mergers a decade ago. The SEC again warned in early 2018
that it would scrutinize companies that suddenly pivot to
blockchain through business combinations or name changes. While a
reverse merger can be executed quickly, it will not avoid SEC
scrutiny. Indeed, a “Super 8-K” filing with full Form 10
information is required within four business days of closing,
assuring that the combined entity will disclose essentially the
same information as in a registered offering.

PIPEs are more of a financing tool for public companies than a
standalone path to going public, but they have been critical for
DATCOs. Many companies adopted the “MicroStrategy
playbook.” That playbook is to go public or use an existing
public vehicle; next, raise additional funds through PIPE or debt
offerings; then buy large amounts of crypto. Strategy’s use of
convertible note PIPEs allowed it to buy billions of dollars of
Bitcoin quickly, effectively leveraging public markets to create a
crypto investment fund within a corporation. Other companies, like
Marathon Digital Holdings, similarly sold shares
“at-the-market” to fund Bitcoin accumulation.

These transactions are lawful if properly exempt or registered,
assuming the disclosure is materially accurate and complete, but
they underscore how a publicly traded stock can be a continuous
capital machine for crypto purchases. In late 2024 and 2025, the
SEC reportedly sent letters to more than 200 companies that had
jumped on the crypto treasury bandwagon, reminding them of
Regulation FD obligations, after suspicious trading patterns
suggested that some PIPE investors might have traded on advance
knowledge of forthcoming Bitcoin purchases.

Finally, “phased acquisitions” or minority investment
strategies for DATCO formation gained traction in 2025 as crypto
investors sought faster deals amid SPAC fatigue. Taking a
non-controlling stake in a public company can be faster and less
expensive than a traditional reverse merger since it avoids an
immediate shareholder vote and extensive SEC review. The public
company can effectively become a crypto ETF in corporate form. It
can raise cash via PIPE and deploy it into crypto assets without
the regulatory approval that an ETF would require.

This innovative approach hinges on trust and contractual right,
because the crypto investor must be comfortable that the public
company’s board will cooperate in executing the treasury
strategy and potentially, down the line, approve a merger or other
change of control. It also raises unique fiduciary questions.
Specifically, the public company board must determine that
concentrating treasury assets in crypto assets is in the best
interest of all shareholders, not just the new PIPE investors.

In sum, U.S. securities laws do not provide any shortcut around
disclosure and investor protection simply because the asset
involved is crypto. Whether a DATCO goes public via IPO, SPAC, or
stealthy PIPE, the SEC mandates robust, truthful disclosure at each
step.

II. Key Securities Law
Issues in Forming and Operating a DATCO

Forming a DATCO implicates several areas of U.S. securities law
beyond the basic mechanics of selling stock to investors. Prominent
legal considerations include: (A) Securities Act registration vs.
exemption for crypto-centric offerings; (B) the Investment Company
Act and the need to avoid inadvertently becoming an unregistered
investment fund; and (C) broker-dealer or exchange regulatory
issues if the DATCO’s activities go beyond passive holding.

A. Securities Act
Registration and Exemptions

Under the Securities Act, any offer or sale of securities
(company stock, security tokens, etc.) must either be registered
with the SEC or qualify for an exemption. When creating a DATCO,
this issue arises in multiple contexts:

IPO or Direct Listing: A full registration
statement (Form S-1) is required, with all the attendant
disclosures (business description, risk factors, MD&A, audited
financials, etc.). For a crypto-focused company, this means
up-front scrutiny by the SEC of its business and any token
holdings. ETPs need support at the SEC and otherwise from the stock
exchange targeted for listing.

SPAC Mergers: SPAC deals use a Form S-4 (or
F-4) registration statement for the issuance of new shares to the
target’s owners and a proxy solicitation for the SPAC’s
shareholders. Thus, even though the target company (the crypto
business) doesn’t do an IPO, it effectively undergoes an SEC
review via the S-4 filing. Material information about the target
must be disclosed. Notably, financial projections included in
de-SPAC proxy filings are not sheltered by the Private Securities
Litigation Reform Act safe harbor if the SPAC is considered a
“blank check company” which historically enjoyed a safe
harbor for forward-looking statements. The SEC’s 2022 proposal
would explicitly remove safe harbor protection for SPAC merger
projections, treating the de-SPAC akin to an IPO. In practice,
crypto companies attempting to go public via SPAC found themselves
having to extensively register and justify their business
models.

Reverse Mergers and Phased/PIPE Deals: These
typically rely on exempt offerings. In a reverse merger, the
issuance of shares by the public shell to the private company’s
shareholders is usually accomplished under Section 4(a)(2) (a
non-public offering) or Rule 506 of Regulation D, since the
recipients are a small group of sophisticated insiders (the private
company owners). Likewise, a PIPE sale of shares to institutional
investors will rely on one of those exemptions. Therefore, at the
moment of the transaction, no Securities Act registration is filed.
But the combined or recapitalized company often files a Form S-3 or
S-1 for resale registration soon after, in order to register resale
of the restricted shares by those investors. For example, if a
DATCO raises capital via PIPE to buy Bitcoin, the PIPE investors
will insist on registration covenants so they can eventually resell
their shares in the open market.

Importantly, even when initial issuance is exempt, anti-fraud
provisions still fully apply (SEC Rule 10b-5). The company must not
make materially false or misleading statements in offering
documents or press releases about the transaction. In the rush of
2021’s crypto pivot trend, the SEC was concerned that some
companies might tout plans to purchase digital assets without
robust disclosure, purely to spike the stock. The SEC has authority
to police securities fraud even if no registration statement is
filed.

In summary, most DATCO formations eventually involve an SEC
registration, either directly (on an S-1 or an S-4) or indirectly
(Super 8-K plus resale S-3). Even novel routes like phased
acquisitions do not fully escape the SEC’s reach. They simply
postpone it. Regulators have signaled that the substance, not the
form, governs. As former SEC Chair Gensler put it in a 2023 speech:
“When investors put their money at risk, it’s the
economic realities of the investment that matter,” not what
jargon or structure is used. Current SEC Chairman Atkins also has
warned market participants that the SEC will continue to scrutinize
the economic realities of crypto assets. If a DATCO raises money by
selling stock to to invest in crypto, then the SEC expects
compliance with the spirit of the securities laws, meaning full and
fair disclosure to investors about the risks of that
investment.

B. Investment Company Act
Considerations

One trap for unwary DATCOs is the Investment Company Act, which
regulates companies engaged primarily in the business of investing,
reinvesting or trading in securities. A company that falls within
the Act’s definition of “investment company” must
either register as an investment company (subject to onerous
regulation) or else fit within an exemption. Traditional operating
companies generally avoid Investment Company Act issues because
they are primarily engaged in some business other than investing,
reinvesting or trading in securities. This can be determined by
examining the sources and amounts of their income and assets.

A company that holds itself out as being primarily engaged in a
business whose assets are, and whose income is derived from,
non-security commodities (such as BTC or ETH) is not an investment
company unless it is an inadvertent investment company. An
inadvertent investment company is a company that is engaged or
proposes to engage in the business of investing, reinvesting,
owning, holding or trading in securities and owns or proposes to
acquire investment securities worth at least 40% of its total
assets (excluding government securities and cash) on an
unconsolidated basis. Two examples will illustrate the application
of this test to DATCOs:

In the first case, consider a DATCO 35% of whose treasury
holdings are treasury assets that are correctly classified as
investment contracts or other securities. That DATCO is not an
inadvertent investment company. Its management has nothing to be
concerned about relative to the Investment Company Act as long as
the amount of treasury holdings that are securities stays below
40%. Again, this assumes that it is not holding itself out as an
investment company or that it has an operating business other than
securities investment in which it is primarily engaged –
ideally, both assumptions will be correct.

In the second case, consider a DATCO 45% of whose treasury
holdings are digital assets that are correctly classified as
investment contracts or other securities. That DATCO is required to
register with the SEC as an investment company regardless of how it
holds itself out to the public, unless an exemption applies.
Possible exemptions are beyond the scope of this report. Failure to
register with the SEC as an investment company when required to do
so has onerous consequences, including SEC enforcement action and
the voiding of contracts. The classification of a given digital
asset as a security, or not, is a case-by-case determination, and
the SEC has been reluctant to make determinations with respect to
most digital assets. Thus, a DATCO must carefully monitor its asset
composition and obtain competent legal advice regarding the
classification of its digital assets.

To address these concerns, DATCOs can employ these
strategies:

Retain some operational business: Many a
high-profile DATCO has an operating segment alongside its treasury.
Strategy still runs an enterprise software business, for
example, albeit one now dwarfed by its Bitcoin holdings in terms of
the value of its assets. This enables Strategy to assert correctly
that it is an operating company, not an investment company. This is
analogous to how some companies in the past maintained a small
operating business so as to avoid being deemed an investment
trust.

Rely on Rule 3a-2 for Transient Status: In
case a company finds itself over the 40% threshold temporarily, the
Investment Company Act does provide a one-year safe harbor under
Rule 3a-2 for transient investment companies, allowing them a grace
period within which to return to compliance. A company could invoke
this rule if, for example, a spike in the market price of its
treasury holdings that are securities (including crypto assets that
are securities) suddenly drives the value of those holdings above
40% of its total assets. In such a case, it then has a year to
rebalance or change its business mix.

Pursue an Exemption or No-Action Relief: In
theory, a company could seek SEC exemptive relief to operate as a
hybrid special-purpose vehicle. This would be a complex and novel
application. To date, no public DATCO has gone this route. But the
Atkins SEC is open for business and we expect applications for
novel arrangements to be made. They would entail conditions akin to
an ETF, like secure custody, independent directors, limits on
leverage, etc.

Own Digital Assets That Are Highly Likely to Be
Correctly Classified as Non-Security Commodities: There
are thousands of digital assets. We have studied and expressed
legal conclusions about nearly 100 of them. Some are securities.
Others are not. Many are somewhere in-between. That determination
is fact-intensive, and the result can vary over time. A DATCO with
savvy management will only invest in digital assets in which it has
a high level of confidence that less than 40% of the total assets
of the company are securities (crypto assets or otherwise). Expert
legal counsel can help management make that determination.

The CLARITY Act that is pending in the Senate will, if and when
enacted, help clarify which digital assets are, and which are not,
securities. Until then, and even afterward, DATCOs will need to be
structured and operated within the bounds of existing case law,
authoritative interpretations and regulatory guidance.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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Digital Asset Treasury Companies: Structure And Regulation – Fin Tech

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