United States securities and exchange commission logo
December 12, 2023
David Mann
Chief Executive Officer
Franklin Templeton Digital Holdings Trust
One Franklin Parkway
San Mateo, CA 94403
Re: Franklin Templeton
Digital Holdings Trust
Amendment No. 1 to
Registration Statement on Form S-1
Filed November 28,
2023
File No. 333-274474
Dear David Mann:
We have reviewed your amended registration statement and have the
following
comments.
Please respond to this letter by amending your registration
statement and providing the
requested information. If you do not believe a comment applies to your
facts and circumstances
or do not believe an amendment is appropriate, please tell us why in
your response.
After reviewing any amendment to your registration statement and
the information you
provide in response to this letter, we may have additional comments.
Unless we note otherwise,
any references to prior comments are to comments in our September 29,
2023 letter.
Amendment No. 1 to Registration Statement on Form S-1
General
1. To the extent that you
intend to use a fact sheet, please provide us a copy for our review.
2. Please describe the
AML, KYC and any other procedures conducted by the Fund, the
Sponsor, the Prime
Broker and the Authorized Participants to determine, among other
things, whether the
counter-party in any transactions is not a sanctioned entity.
Cover Page
3. Please revise your
cover page to disclose the termination date of the offering, if any. In
addition, we note your
disclosure on the cover page that "[t]he price of the Seed Creation
Units was determined as
described above," but the cover page does not describe how the
price of the Seed
Creation Units was determined. Please revise accordingly.
David Mann
Franklin Templeton Digital Holdings Trust
December 12, 2023
Page 2
Key Service Providers - The Sponsor, Trustee, Custodians, Administrator and
Marketing Agent,
page 6
4. We note your disclosure on page 7 that the Fund pays Bitcoin network
fees and similar
transaction fees. Please revise to briefly describe the situations in
which the Fund pays
such fees. For example, clarify whether the Fund pays such fees only
in connection with
paying the Sponsor's Fee and other Fund expenses or whether the Fund
pays such fees in
connection with redemptions and creations.
Prospectus Summary, page 6
5. Please revise to disclose here that the Fund is a passive investment
vehicle and that it is
not a leveraged product. In addition, please disclose here whether and
to what extent the
Trust's assets may be loaned, pledged or rehypothecated.
Risk Factors Related to Digital Assets, page 8
6. Please revise here to provide quantitative information that
demonstrates the volatility of
the price of bitcoin.
Summary of Risk Factors, page 8
7. Please revise here to briefly address the risk that your timing in
reaching the market and
your fee structure relative to other bitcoin ETPs could have a
detrimental effect on the
scale and sustainability of your product.
The Fund's Objective, page 8
8. We note your disclosure that the Bitcoin Custodian will keep the
private keys associated
with the Fund's bitcoin in cold storage or a similarly secure
technology. Please revise to
clarify the percentage of the private keys held in cold storage, and,
on page 86, please
describe the "similarly secure technology." Also revise your
disclosure on page 86 to
disclose the Bitcoin Custodian's policies regarding whether the
private keys are held in
cold storage or hot storage. In addition, we note that the Prime
Broker holds the Trading
Balance across a combination of omnibus hot wallets, cold wallets or
in accounts in the
Prime Broker's name on a trading venue. Please disclose the percentage
held in each or
the policies related to where the Trading Balance is held.
9. We note your disclosure on page 8 that "[a] portion of the Fund s
bitcoin holdings and
cash holdings from time to time may be held with the Prime Broker in the
Trading
Balance in connection with creations and redemptions of Creation Units
and the sale of
FirstName LastNameDavid Mann
bitcoin to pay the Sponsor s Fee and Fund expenses not assumed by the
Sponsor." Please
Comapany NameFranklin
revise Templeton
to quantify the "portion"Digital Holdings
that will be held Trust
with the Prime Broker
or describe the
Fund s
December 12, policy as to2the amount that can be held with the Prime Broker,
if any.
2023 Page
FirstName LastName
David Mann
FirstName LastNameDavid Mann
Franklin Templeton Digital Holdings Trust
Comapany12,
December NameFranklin
2023 Templeton Digital Holdings Trust
December
Page 3 12, 2023 Page 3
FirstName LastName
The Offering
Fund expenses, page 13
10. We note your disclosure on page 14 that "[i]n the event that any of
the foregoing fees and
expenses are incurred with respect to the Fund and other Client
Accounts . . ., the Sponsor
will allocate the costs across the entities on a pro rata basis or
otherwise on a basis it
considers to be equitable, except to the extent that certain expenses
are specifically
attributable to the Fund or another Client Account." Please revise
here to provide a brief
description and revise your disclosure on page 74 to include a
detailed description of the
"other Client Accounts," the entities across which the Sponsor will
allocate the costs on a
pro rata basis, the types of expenses that may be allocated across the
entities on a pro rata
basis, the types of expenses that are specifically attributable to the
Fund or another Client
Account and the Sponsor's policies related to allocating the costs
across the entities. We
note that the Sponsor may do so on a pro rata basis or "on a basis it
considers to be
equitable." Disclose the criteria for determining whether the
allocation of costs is
equitable. Also, we note your disclosure on page 75 that "[t]he Trust
was formed and is
operated in a manner such that a series is liable only for obligations
attributable to such
series." Please revise to clarify how this statement is consistent
with your disclosure
regarding the allocation of costs across the entities of the fees
incurred with respect to the
Fund and other Client Accounts.
Forks, page 14
11. We note your disclosure on page 14 that [t]he Fund does not expect
to take any
Incidental Rights or IR Virtual Currency it may hold or to which it
may be entitled into
account for purposes of determining the Fund s NAV." Please revise
to disclose whether
there are any circumstances under which the fund would retain the
Incidental Rights or IR
Virtual Currency or take them into account for purposes of determining
the fund s NAV.
The Offering
Termination events, page 17
12. We note your disclosure on page 17 that the Sponsor may terminate and
liquidate the
Fund if "the value of the Fund is at a level at which continued
operation of the Fund is not
cost-efficient." Please revise to quantify or otherwise describe what
"cost efficient"
means.
Risk Factors Related to the Digital Asset Markets
Due to the unregulated nature and lack of transparency, page 30
13. Please revise to divide this risk factor into separate risk factors
with headings that describe
the specific risk highlighted. In this regard, we note, for example,
that this risk factor
currently addresses the risks related to the lack of regulation of
crypto asset exchanges, the
risk of fraud and security breaches on crypto asset exchanges, the
risk of business failures
David Mann
FirstName LastNameDavid Mann
Franklin Templeton Digital Holdings Trust
Comapany12,
December NameFranklin
2023 Templeton Digital Holdings Trust
December
Page 4 12, 2023 Page 4
FirstName LastName
of crypto asset exchanges and the risks related to reputational harm
regarding bitcoin
markets. In addition, please add separate risk factors that highlight
the risks related to
manipulation, front-running and wash trading.
The Index has a limited history, page 32
14. Please expand this risk factor to quantify the CF Benchmark Index's
limited history.
Similarly, please expand the last risk factor on page 39 that
continues to page 40 to
describe the Sponsor's limited history of operating investment
vehicles like the Fund.
Security threats to the Fund's account at the Bitcoin Custodian could result in
the halting of Fund
operations..., page 40
15. To the extent material, please expand this risk factor to address the
risks related to the
Bitcoin Custodian and the Prime Broker acting in the same capacities
for several of the
competing products.
The Declaration of Trust includes provisions that limit Shareholders' voting
rights, page 47
16. Please revise to clarify whether you have added additional standards
or restrictions related
to a Shareholder's right to bring a derivative action pursuant to
Section 3816(e) of the
Delaware Statutory Trust Act.
Risk Factors Related to the Regulation of the Fund and the Shares
If regulators or public utilities take actions that restrict or otherwise
impact mining activities,
page 53
17. Please expand this risk factor to address the reasons why bitcoin
mining may implicate
different risks than other crypto asset mining such as the differences
in proof-of-work and
proof-of-stake, and revise to discuss in greater detail the
regulations that states have
passed or are currently considering that impact crypto asset mining.
Business of the Fund
Net Asset Value, page 67
18. We acknowledge your response to prior comment 7 and the related
changes to your
disclosure. Please address the following with respect to your
valuation of bitcoin for
financial statement purposes:
Provide us with your revised financial statement accounting policy
for determining
the fair value of bitcoin in accordance with ASC Topic 820;
Tell us, and revise your disclosure to clearly state, whether you
believe the
methodology used to calculate the Index price is consistent with
U.S. GAAP;
As the trust is expected to primarily transact with the bitcoin
markets through the
Authorized Participant, confirm for us that your determination of
the principal market
will be from the perspective of the Authorized Participant;
Tell us if you and/or your Authorized Participant plan to transact
in multiple
David Mann
FirstName LastNameDavid Mann
Franklin Templeton Digital Holdings Trust
Comapany12,
December NameFranklin
2023 Templeton Digital Holdings Trust
December
Page 5 12, 2023 Page 5
FirstName LastName
markets. If so, please ensure that your accounting policy
reflects that fact and
describes the types of markets in which you and/or your
Authorized Participant
expect to transact. In that regard, we note that ASC
820-10-35-36A includes
definitions of four types of markets (e.g. brokered market,
dealer market, exchange
market, and principal to principal market);
Confirm for us that your principal market will be one which you
and/or your
Authorized Participant will be able to access and clarify whether
you anticipate your
principal market to be one in which you and/or your Authorized
Participant will
normally transact. Refer to ASC Topics 820-10-35-6A and
820-10-35-5A
respectively;
In your disclosure you state you will "utilize an
exchange-traded price from the
principal market for bitcoin as of the Fund's financial statement
measurement date".
Please revise your disclosure to state, if true, that you intend
to use a price from the
reporting entity's principal market; and
Tell us how the third party vendor will be involved in
determining the fair value of
bitcoin for financial statement purposes, including the
determination of the principal
market. In that regard, we note your disclosure that you will
engage a third-party
vendor to obtain a price from a principal market for bitcoin.
Please confirm for us
that you expect the third party vendor to determine the principal
market for the
reporting entity, and not a principal market for bitcoin in
general (as suggested by
your disclosure). Reference is made to ASC Topic 820-10-35-6A
which indicates the
principal market shall be considered from the perspective of the
reporting entity.
19. We note your disclosure on page 68 that "[i]f the CF Benchmarks Index
is not available or
the Sponsor determines, in its sole discretion, that the CF Benchmarks
Index should not be
used, the Fund s holdings may be fair valued in accordance with the
policy approved by
the Sponsor." Please revise to disclose here whether the Sponsor has
selected a
methodology to use if the CF Benchmarks Index is not available, and,
if so, please
describe the methodology. In addition, please disclose the "policy
approved by the
Sponsor." To the extent that the Sponsor has not selected an
alternative methodology,
please describe the Sponsor's criteria or policies related to
selecting a different
methodology. Further, we note your disclosure on page 47 that "[t]here
are no predefined
criteria to make a good faith assessment as to which of the rules the
Sponsor will apply."
Please revise to disclose here the rules that the Sponsor may apply
related to determining
the net asset value of the Fund. Please disclose whether the Sponsor
will notify investors
that the CF Benchmarks Index was not and/or will not be used, and, if
so, how the
Sponsor will notify investors.
20. Please disclose whether an intra-day indicative value per Share is
calculated throughout
the day, and, if so, please disclose the methodology of the
calculation and where the
calculation is published.
21. Please disclose whether the Administrator or the Sponsor monitors for
unusual pricing
such that the price may be corrected after 4:00 p.m. ET.
David Mann
FirstName LastNameDavid Mann
Franklin Templeton Digital Holdings Trust
Comapany12,
December NameFranklin
2023 Templeton Digital Holdings Trust
December
Page 6 12, 2023 Page 6
FirstName LastName
Valuation of Bitcoin; The CF Benchmarks Index, page 68
22. Please tell us what you mean by your disclosure on page 72 that "[t]he
selection of
exchanges for use in the CF Benchmarks Index is based on the
accessible venues on
which the Fund will primarily execute transactions" and that "[t]he
Index Administrator
may make changes to the Constituent Exchanges comprising the Index
from time to time
for this or other reasons." Also disclose the characteristics of a
trading venue that is
eligible to be a Constituent Exchange for the CF Benchmarks Index.
23. Please revise to describe the oversight procedures to ensure that the
Index is administered
through the Index Administrator's codified policies for index
integrity, and provide a brief
description of the material codified policies for Index integrity. In
addition, we note your
disclosure on page 72 that the Trust will notify the Shareholders in a
prospectus
supplement and a current report on Form 8-K or in its annual or
quarterly reports of
changes to the Constituent Exchanges. Please revise to clarify if the
Trust will notify
Shareholders in the same way for any other material changes made to
the CF Benchmarks
Index.
Fund Expenses, page 73
24. We note your disclosure on page 73 that "[t]he Sponsor may, at its
discretion and from
time to time, waive all or a portion of the Sponsor s Fee for stated
periods of
time." Please revise to disclose the criteria the Sponsor will
consider or the reasons the
Sponsor may choose to waive the fee. Also disclose whether, and, if
so, how the Sponsor
will notify Shareholders of the "stated periods of time" for the
waiver. In addition, we
note your disclosure that there is a cap on the ordinary legal fees
and expenses that the
Sponsor will pay but that the Sponsor may determine to assume legal
fees and expenses in
excess of the cap. Please disclose the criteria the Sponsor will
consider or the reasons the
Sponsor may choose to pay expenses beyond the cap amount, and, if so,
whether and how
Shareholders will be notified. Also please disclose whether there is a
cap on the aggregate
expenses that the Sponsor will assume, and, if so, please disclose.
25. We note your disclosure on page 74 that "[t]o cover the Sponsor s
Fee and expenses not
assumed by the Sponsor, the Sponsor or its delegate will cause the
Fund (or its delegate)
to convert bitcoin into U.S. dollars or other fiat currencies at the
prevailing exchange rate
(less applicable fees) which the Sponsor is able to obtain using
commercially reasonable
efforts." Please revise to expand your disclosure to discuss how the
Sponsor will
determine the "prevailing exchange rate" and disclose the "other fiat
currencies."
Creation Procedures, page 75
26. Please disclose why and under what circumstances the Authorized
Participants will utilize
designated third parties to deliver bitcoin to the Fund's Trading
Balance with the Prime
Broker. Also disclose when the bitcoin will be transferred to the
account with the Bitcoin
Custodian and who will be responsible for the cost of the on-chain
transactions from the
David Mann
FirstName LastNameDavid Mann
Franklin Templeton Digital Holdings Trust
Comapany12,
December NameFranklin
2023 Templeton Digital Holdings Trust
December
Page 7 12, 2023 Page 7
FirstName LastName
Prime Broker to the Bitcoin Custodian in connection with creations.
Similarly, please
revise to disclose who will be responsible for the cost of the
on-chain transactions from
the Bitcoin Custodian to the Prime Broker in connection with
redemptions.
Description of the Shares and the Trust, page 75
27. Please revise to include the disclosure required by Item 202 of
Regulation S-K, including
disclosure regarding the liquidation rights. In addition, please
revise your disclosure on
page 83 to include the information required by Item 401 of Regulation
S-K.
28. You disclose in this section that the creation and redemption of
shares may be done in
cash or in-kind. With respect to in-kind creations and redemptions,
please revise here, in
your risk factors and in the summary to address the following:
Please describe the risk that any registered broker-dealer that
participates in the in-
kind creation or redemptions of shares for bitcoin may be unable
to demonstrate
compliance with the applicable requirements of the federal
securities laws, including
the Financial Responsibility Rules;
Please also describe the potential consequences to the
broker-dealer, its customers
and shareholders of the Trust if any such broker-dealer is unable
to comply with the
federal securities laws, including the Financial Responsibility
Rules, in connection
with in-kind creation and redemption transactions.
29. Please revise your disclosure here to discuss who bears the risk of
price movements with
respect to cash creations and cash redemptions. To the extent that the
Fund bears the risk,
please add risk factor disclosure that addresses the risks of cash
creations and cash
redemptions. In addition, to the extent the Authorized Participant
bears the risk, please
explain how that is accomplished. Please also explain how the Prime
Broker is
compensated in connection with cash creation and redemption
transactions.
30. Please describe, including in your risk factor disclosure as
appropriate, the impact that
utilizing cash creations and redemptions may have on the efficiency of
the arbitrage
mechanism.
Redemption Procedures, page 77
31. We note your disclosure on page 77 that "[t]he redemption distribution
from the Fund
consists of a movement of bitcoin representing the amount of bitcoin
held by the Fund
evidenced by the Shares being redeemed or the cash proceeds of a sale
of such bitcoin."
Please revise to clarify, if true, that for cash redemptions, the
Authorized Participant
receives the cash per Share amount determined by the Administrator on
the order date and
that the number of bitcoins sold may differ from the bitcoins per
Share calculated by the
Administrator on the order date due to potential changes in the value
of bitcoin between
the time of calculation of the Fund's NAV per Share and the time of
the sale of the
bitcoin.
David Mann
FirstName LastNameDavid Mann
Franklin Templeton Digital Holdings Trust
Comapany12,
December NameFranklin
2023 Templeton Digital Holdings Trust
December
Page 8 12, 2023 Page 8
FirstName LastName
Suspension of Redemption Orders, page 78
32. Please expand this subsection or add a separate subsection that
describes the suspension of
creations. In this regard, we note your disclosure that "[t]he
Administrator may, and upon
the direction of the Sponsor shall, suspend the acceptance of purchase
orders or the
delivery or registration of transfers of Shares generally or in
certain specified situations."
In addition, please revise to disclose here whether and, if so, how
you will notify
Shareholders if the Fund has suspended creations and redemptions, and
describe the
potential impact of suspending creations and redemptions. Also revise
to provide
examples of periods in which the Sponsor may determine that delivery,
disposal or
evaluation of bitcoin is not reasonably practicable and reasons why
the Sponsor may
determine that the suspension or delay in delivery of bitcoin or cash
is necessary for the
protection of the Shareholders.
Fund Expenses and Bitcoin Sales, page 79
33. Please disclose mechanics of how the Fund's bitcoin is sold to cover
the Sponsor's Fee and
the fund expenses or liabilities not assumed by the Sponsor.
Amendments to Declaration of Trust, page 81
34. We note your disclosure on page 39 that "[i]f an amendment imposes new
fees and
charges or increases existing fees or charges, including the Sponsor
s Fee (except for
taxes and other governmental charges, registration fees or other such
expenses), or
prejudices a substantial right of Shareholders, it will become
effective for outstanding
Shares 30 days after notice of such amendment is given to registered
owners." Please
revise to disclose how notice will be given to the Shareholders.
Termination of the Trust or Fund, page 81
35. Please revise your disclosure here and in the Prospectus Summary to
clarify, if true,
that Shareholders will be entitled to cash upon the termination of the
Fund. In addition, if
Shareholders will be entitled to cash, please revise your disclosure
here to explain how the
Fund's bitcoin will be sold in connection with the termination of the
Trust. Also revise
this section to provide examples of termination events or include a
cross-reference to
where such information is disclosed.
The Trustee
Resignation, Discharge or Removal of Trustee; Successor Trustees, page 84
36. Your disclosure on page 85 that "[i]f the Trustee resigns and no
successor trustee is
appointed within 90 days after the date the Trustee issues its notice
of resignation, the
Sponsor may, in its sole discretion, liquidate the Fund and distribute
its remaining assets
and dissolve the Trust" appears to be inconsistent with your
disclosure on page 17 that the
Sponsor may terminate the Fund after "60 days have elapsed since the
Trustee notified the
David Mann
FirstName LastNameDavid Mann
Franklin Templeton Digital Holdings Trust
Comapany12,
December NameFranklin
2023 Templeton Digital Holdings Trust
December
Page 9 12, 2023 Page 9
FirstName LastName
Sponsor of the Trustee s election to resign . . . and a successor
trustee has not been
appointed and accepted its appointment." Please revise for clarity and
consistency.
The Custodians, page 86
37. Please disclose the percentage of private keys held in cold storage,
the limit on the amount
of bitcoin that may be held in each wallet, the percentage of the
Fund's bitcoin that is held
in the Cold Vault Balance, the degree to which the Bitcoin Custodian's
crime insurance
policy covers the Trust's assets held by the Custodian or the amount
of coverage provided
to the Bitcoin Custodian pursuant to this policy, whether the
insurance provider or any
other entity will be responsible for verifying the existence of
bitcoin and the instructions
that the Sponsor has provided to the Bitcoin Custodian regarding
airdrops or forks.
The Prime Broker and the Trade Credit Lender
The Prime Broker, page 88
38. Please disclose the termination provisions and term of the Prime
Broker Agreement. In
this regard, we note your disclosure that the "Sponsor may, in its
sole discretion, add or
terminate prime brokers at any time" and that the "Prime Broker is
permitted to suspend or
terminate the Prime Broker Agreement under certain circumstances."
39. Please disclose the Prime Broker's policies related to whether the
Fund's assets are held in
hot wallets, cold wallets or accounts in the Prime Broker's name on a
trading venue, and
disclose here and on page 44 whether you have opted-in to Article 8
and describe here the
potential impact of Article 8 to the assets held in the Trading
Balance. Also identify the
Connected Trading Venues, how the Prime Broker selects the Connected
Trading Venues
and, whether the Fund may direct the Prime Broker to use a specific
Connected Trading
Venue. In addition, we note your disclosure that "[w]ithin the Trading
Balance, the Prime
Broker Agreement provides that the Fund does not have an identifiable
claim to any
particular bitcoin. Instead, the Fund s Trading Balance represents
an entitlement to a pro
rata share of the bitcoin the Prime Broker has allocated to the
omnibus hot wallets,
omnibus cold wallets, and the accounts in the Prime Broker s name
that the Prime Broker
maintains at Connected Trading Venues (which are typically held on an
omnibus, rather
than segregated, basis)." Please clarify what you mean by "a pro rata
share of the
bitcoin." Please also disclose the insurance coverage of the Prime
Broker and the degree
to which the insurance policy protects the Trust's assets held by the
Prime Broker.
Further, disclose the policies and procedures that the Prime Broker
Agreement requires
the Prime Broker to have in place to mitigate conflicts of interests
when executing the
Fund's orders.
The Trade Credit Lender, page 89
40. Please revise to disclose the maximum amount of Trade Credit that the
Trade Financing
Agreement permits to be outstanding at any one time. In addition,
please disclose the
Trade Credit interest rate. Also disclose the Sponsor's policy
regarding whether it
David Mann
Franklin Templeton Digital Holdings Trust
December 12, 2023
Page 10
generally intends to fund the Trading Balance at the Prime Broker with
sufficient cash or
bitcoin to pay the Fund's fees and expenses or whether it regularly
expects to utilize the
Trade Financing Agreement for such fees and expenses. Also please
disclose the term and
termination provisions of the Trade Financing Agreement and revise the
Prospectus
Summary to provide a brief description of the Trade Credit Lender,
including the
identification of the Trade Credit Lender.
Conflicts of Interest, page 96
41. Please describe the standard operating practices requiring that
certain applicable personnel
pre-clear personal trading activity in which bitcoin is the referenced
asset that the Sponsor
intends to adopt.
Seed Capital Investor, page 96
42. Please describe how the proceeds from the sale of the Seed Creation
Baskets will be
converted to bitcoin, including any costs or transaction fees payable
by the Fund
associated with such conversion.
Please contact David Irving at 202-551-3321 or Robert Telewicz at
202-551-3438 if you
have questions regarding comments on the financial statements and related
matters. Please
contact Sonia Bednarowski at 202-551-3666 or Sandra Hunter Berkheimer at
202-551-3758 with
any other questions.
FirstName LastNameDavid Mann Sincerely,
Comapany NameFranklin Templeton Digital Holdings Trust
Division of Corporation
Finance
December 12, 2023 Page 10 Office of Crypto Assets
FirstName LastName