Bitcoin Fund
Updated March 19, 2014 9:22 p.m. ET
SecondMarket Inc. is racing to open up a private bitcoin investment fund to ordinary investors as soon as the fourth quarter, potentially beating a rival offering by two investors best known for their lawsuit against Facebook Inc. FB -1.86% Facebook Inc. Cl A U.S.: Nasdaq $66.97 -1.27 -1.86% March 20, 2014 4:00 pm Volume (Delayed 15m) : 44.15M AFTER HOURS $66.89 -0.08 -0.12% March 20, 2014 5:35 pm Volume (Delayed 15m): 189,035 P/E Ratio 109.79 Market Cap $173.99 Billion Dividend Yield N/A Rev. per Employee $1,242,230 03/20/14 Data Point: Google's Dominance... 03/19/14 SecondMarket Seeks to Open Bit... 03/19/14 Brazilian Lawmakers Remove Con... More quote details and news » chief executive Mark Zuckerberg.
SecondMarket, which launched the Bitcoin Investment Trust last September to cater to wealthy investors, has started lining up lawyers and investment banks to help with the process.
The Bitcoin Investment Trust buys and sells bitcoins, allowing investors to place bets on the digital currency without owning it directly. It held $54 million in assets under management as of Tuesday, according to its website.
The trust would compete with the Winklevoss Investment Trust, an effort sponsored by Cameron and Tyler Winklevoss, who won a $65 million settlement with Facebook's Mr. Zuckerberg in 2008 over their claim that he stole their idea for the social-networking site.
The Winklevoss brothers have applied to create an exchange-traded fund specializing in bitcoin.
SecondMarket, primarily a marketplace to trade shares of nonpublic companies, is taking a different route. It wants to take its existing fund, which is geared toward investors with more than $1 million in assets and annual incomes above $200,000, and make it available to ordinary people. It plans to list the fund on an electronic marketplace operated by OTC Markets OTCM -0.60% OTC Markets Group Inc. Cl A U.S.: OTC $8.25 -0.05 -0.60% March 20, 2014 2:31 pm Volume (Delayed 15m) : 990 P/E Ratio 15.87 Market Cap $87.55 Million Dividend Yield 2.91% Rev. per Employee $453,622 03/19/14 SecondMarket Seeks to Open Bit... More quote details and news » Group Inc.
SecondMarket is seeking approval from OTC Markets and the Financial Industry Regulatory Authority, a self-regulatory body, to market the trust to investors. The New York firm is lining up investment banks that would act as market-makers, or make commitments to buy or sell shares in the fund, and is screening law firms to act as a securities expert.
If OTC Markets and Finra approve the plan, the fund's shares could become publicly available as soon as the fourth quarter to investors with less than $1 million in assets and annual incomes below $200,000.
SecondMarket will make SEC-compliant financial disclosures. However, by publicly listing shares sold by the fund's existing high net-worth investors after a 12-month lockup expires in September, and by doing so away from a formally regulated exchange, it will be exempt for the commision's rigorous preapproval process.
SecondMarket's move comes as other firms ramp up efforts to build a more robust investment infrastructure for bitcoin and other digital currencies.
On Tuesday, Pantera Capital said it had joined forces with fellow hedge fund Fortress Investment Group FIG +0.38% Fortress Investment Group L.L.C. Cl A U.S.: NYSE $7.94 +0.03 +0.38% March 20, 2014 4:00 pm Volume (Delayed 15m) : 1.41M AFTER HOURS $7.94 0.00 0.00% March 20, 2014 4:53 pm Volume (Delayed 15m): P/E Ratio 9.80 Market Cap $3.59 Billion Dividend Yield 4.03% Rev. per Employee $1,352,730 03/19/14 SecondMarket Seeks to Open Bit... 03/18/14 Pantera, Fortress Set Bitcoin ... 03/14/14 Forward Motions: LightSquared ... More quote details and news » and two venture-capital firms to form a fund solely dedicated to bitcoin investments. Other initiatives, including one led by telecommunications provider Perseus Telecom and a separate venture by SecondMarket, aim to develop fully regulated, high-tech bitcoin exchanges for professional investors.
The Winklevoss fund applied in July for approval from the Securities and Exchange Commission to be classified as an exchange-traded fund, a lengthy process.
Evan Greebel, a lawyer at Katten Muchin Rosenman LLP's New York office who is handling the Winklevoss application, said it is "going smoothly and we don't anticipate any problems." Citing SEC rules, he said he couldn't estimate a timetable for completion of the approval process.
By circumventing the SEC approval process, SecondMarket expects to be the first firm to bring a regulated bitcoin fund to the general public.
Until now, ordinary investors have been able to invest directly in the digital currency only via one of many loosely regulated online exchanges. But that strategy carries risks, as highlighted by last month's collapse of Tokyo-based Mt. Gox, which said in a bankruptcy filing that 850,000 bitcoins had vanished from its coffers.
The Bitcoin Investment Trust pitches itself as a safer vehicle, with its obligations to investors denominated in dollars, not bitcoin, and with regulatory oversight giving investors a greater deal of confidence.
It is unclear how deep such demand for bitcoin runs among the general public. In December, The Wall Street Journal reported that mainstream financial advisers were recommending that their clients steer clear of the highly volatile digital currency.
In keeping with the volatile moves in the price of bitcoin versus the dollar, the SecondMarket trust has seen big swings in value. Since it started trading in September, it is up 371%, but is down 20% this year.
OTC Markets is an electronic successor to the decades-old "pink sheets," an unregulated market for stocks that don't meet the listing requirements of the New York Stock Exchange or the Nasdaq NDAQ -0.03% NASDAQ OMX Group Inc. U.S.: Nasdaq $37.49 -0.01 -0.03% March 20, 2014 4:00 pm Volume (Delayed 15m) : 2.10M AFTER HOURS $37.49 +0.00 +0.01% March 20, 2014 4:48 pm Volume (Delayed 15m): P/E Ratio 16.23 Market Cap $6.37 Billion Dividend Yield 1.39% Rev. per Employee $963,150 03/20/14 The Morning Download: Nasdaq T... 03/19/14 SecondMarket Seeks to Open Bit... 03/19/14 Nasdaq Plans to Emphasize Syst... More quote details and news » Stock Market. SecondMarket's fund is applying to list on a part of OTC Markets known as OTCQX, which has more rigorous financial disclosure requirements and includes big-name foreign companies such as Canada's Bombadier Inc. and Japan's Yamaha Corp. 7951.TO -3.69% Yamaha Corp. Japan: Tokyo ¥1306 -50 -3.69% March 20, 2014 3:00 pm Volume : 1.05M P/E Ratio 13.52 Market Cap ¥267.48 Billion Dividend Yield 2.30% Rev. per Employee ¥20,402,400 03/19/14 SecondMarket Seeks to Open Bit... 03/10/14 Drones Find Fans Among Farmers... More quote details and news »
Tyler Winklevoss argues that his fund, which would trade on a fully regulated exchange, is a safer option. "Because the [SEC] hurdles we are going to have to jump are higher and because it's a more rigorous process, the idea is that it is going to be more viable and open to mainstream investors," he said.
Write to Michael J. Casey at michael.j.casey@wsj.com and Paul Vigna at paul.vigna@wsj.com
