The Evolution Of GBTC: An Alternative Path From Private Offerings To Public Trading

• Within traditional capital markets, investors see the typical “exit” as either an acquisition or an IPO onto a major exchange. Even sophisticated investors often view private markets and public markets as separate and distinct. However, the industry often overlooks an alternative journey from private fundraising to public trading: one that brought the first ever SEC-regulated Bitcoin product to market.

  
  

  Under the federal securities laws that govern over-the-counter equities trading, companies can develop a vibrant public trading market, and without having to register with the SEC. Early-stage, private companies can strategically raise capital through private offerings and within one year create a pool of unrestricted stock that can be traded by retail investors through their brokerage accounts. Grayscale Investments, a prominent player in the digital asset space, undertook this process in collaboration with OTC Markets Group, facilitating public trading on the OTCQX Market and ultimately elevating Grayscale Bitcoin Trust (GBTC), one of their flagship products, to a new level of success.

  
  

  Journey from Private to Public

  
  

  1. Raise capital in a private offering to accredited investors.

  
  

  Early-stage companies often use Regulation D and other exempt offerings to raise capital from friends and family, private equity firms, or angel and venture capital investors.  Regulation D limits these private securities offerings to “accredited investors” and does not impose prescriptive disclosure requirements, though most companies provide a private placement memorandum (PPM) or other material disclosure to investors. Investors in these private funding rounds receive restricted securities that cannot be freely bought and sold in the public markets unless certain conditions are met under Rule 144, including a one year “holding period” following the capital raise.

  
  

  2. Work with your advisors to remove restrictions on the private shares.

  
  

  After a private capital raise, investors often seek liquidity options. Rather than conducting a tender offer or listing on a stock exchange like Nasdaq and NYSE, companies can turn their restricted shares into publicly tradable shares. After a one-year seasoning period following the private raise, the company can work with its advisors to make the shares eligible for public trading:

  
  

  Transfer agent:  To formally lift the restrictions on the shares, your transfer agent will need legal confirmation that the shares are eligible for resale. Generally, the transfer agent will request an opinion letter from the company’s counsel, confirming that the shares have met the one-year holding period and other requirements under Rule 144.

  Securities counsel:  Work with your securities lawyer to prepare an opinion letter for the transfer agent ensuring that the requirements of Rule 144 are met, including preparing “current information.”  For companies that are not required to register with the SEC, this includes basic information about the company, its products and services, management team, and financials (see Rule 144(c)(2), Rule 15c2-11(b)(5)). 

  Even after the shares are no longer restricted, company management, directors, and other “affiliates” and “control persons” of the issuer are subject to limitations and additional requirements under Rule 144. Non-affiliates (investors with no control over the issuer, such as non-executive employees and smaller shareholders), may freely buy and sell after the restrictions have been removed. 

  
  

  3. Go public on OTCQX or OTCQB.

  
  

  Once a portion of the company’s securities are no longer restricted (at least 50 shareholders representing a minimum of 10% of the total shares outstanding), the company can take steps to join the public market where brokers can quote and trade the securities on behalf of existing and new investors: 

  
  

  Obtain a CUSIP: The company must have a CUSIP for the class of shares to be publicly traded and can submit an Online Application with CUSIP Global Services. 

  Undergo an Initial Review by OTC Markets Group: Companies that meet the requirements of the OTCQX or the OTCQB markets (including audited financial statements), can apply to join these markets and can request a ticker symbol.  Companies that do not meet these requirements can work with a broker to file a Form 211 with FINRA. 

  Obtain DTC Eligibility:  To facilitate trading by major financial institutions, the unrestricted shares should be eligible to be held at the Depositary Trust Company, or DTC.  The company or its advisor should go through the Secondary Market Eligibility Program with a DTC Participant.

  4. Continue to move shares into the public and meet ongoing eligibility criteria.

  
  

  After the company establishes a public market with a ticker and a public trading price, it can continue to move tranches of restricted shares into the market (the company’s “public float”) by lifting the restrictions as described in the second part of the process.

  
  

  To stay on the OTCQX or OTCQB markets, the company must continue to publish quarterly and annual reports and disclose material information to the market.  Making this information available allows the company to meet the “current information” requirements under state “Blue Sky” laws, as well as federal securities laws such as Rule 144 and Rule 15c2-11.

  
  

  Conclusion

  
  

  Over 40 companies on the OTCQX and OTCQB markets are not required to register with the SEC and instead provide disclosure under the Alternative Reporting Standard described above – including many notable digital asset products. Grayscale’s Bitcoin Trust (GBTC) relied on this innovative disclosure model for over five years while trading on the OTCQX Market, before it chose to voluntarily register with the SEC.

  
  

  By choosing a path that involved private offerings, OTCQX trading, and eventually transitioning to a major exchange, Grayscale not only raised capital efficiently but also paved the way for broader market access to their innovative digital asset products. Grayscale’s journey exemplifies the versatility and strategic thinking required to navigate the evolving landscape of capital markets.