21Shares Solana Staking ETF (TSOL) risk factors, FY2025 10-K

Other

1. 01The value of the Shares relates directly to the price of SOL, which may be highly volatile and subject to fluctuations due to a number of factors
2. 02SOL is a relatively new technological innovation with a limited operating history
3. 03SOL and Solana generally
4. 04Proof-of-History (PoH) and Proof-of-Stake (PoS) Consensus Mechanisms
5. 05The Trust is exposed to risks associated with Solana Labs
6. 06The scheduled creation of newly minted SOL and their subsequent sale may cause the price of SOL to decline, which could negatively affect an investment in the Trust
7. 07The proof-of-stake mechanism limits the total supply of SOL in circulation by effectively locking staked SOL for a certain period of time, making it temporarily unavailable for trading or selling
8. 08Operational cost may exceed the award for validating transaction, and increased transaction fees may adversely affect the usage of the Solana network
9. 09Digital assets may have concentrated ownership and large sales or distributions by holders of such digital assets, or any ability to participate in or otherwise influence a digital asset’s underlying network, could have an adverse effect on the market price of such digital asset
10. 10Spot markets on which SOL trades are relatively new and largely unregulated
11. 11Authorized Participants may act in the same or similar capacity for other competing products
12. 12Spot markets may be exposed to security breaches
13. 13Spot markets may be exposed to fraud and market manipulation
14. 14Over the past several years, a number of digital asset spot markets have been closed or faced issues due to fraud. In many of these instances, the customers of such spot markets were not compensated or made whole for the partial or complete losses of their account balances in such digital asset exchanges
15. 15Spot markets may be exposed to wash trading
16. 16Spot markets may be exposed to front-running
17. 17The Trust will stake its SOL only if it may do so without undue legal or regulatory risk, such as, without limitation, the risk of jeopardizing the Trust’s ability to qualify as a grantor trust for tax purposes, which could harm the value of the Shares
18. 18The Trust may be negatively impacted by Staking Activities
19. 19The Staking Services Providers may not optimally execute the Staking Activities
20. 20The Trust may vary the amount of SOL to be staked and the rewards received may accordingly change from time to time
21. 21The market value of SOL is subject to momentum pricing
22. 22The Sponsor will not have any strategy relating to the development of SOL and the Solana network. However, a lack of expansion in usage of SOL and the Solana network could adversely affect an investment in Shares
23. 23Irrevocable nature of blockchain-recorded transactions
24. 24The loss or destruction of a private key required to access SOL may be irreversible
25. 25An investment in the Trust is not a deposit and is not FDIC-insured. Shareholders’ limited rights of legal recourse against the Trust, Trustee, Sponsor, Administrator, Prime Broker and SOL Custodians expose the Trust and its Shareholders to the risk of loss of the Trust’s SOL for which no person or entity is liable
26. 26The amount of SOL that may be held in the Trading Balance is limited to the amount necessary to process a given creation or redemption transaction, as applicable, or to pay for Trust Expenses not assumed by the Sponsor in consideration for the Sponsor Fee
27. 27Loss of a critical banking relationship for, or the failure of a bank used by, the Trust or the Prime Broker could adversely impact the Trust’s ability to create or redeem Baskets, or could cause losses to the Trust
28. 28The SOL Custodians and the Prime Broker may act in the same or similar capacity for other competing products
29. 29The Prime Broker routes orders through Connected Trading Venues in connection with trading services under the Prime Broker Agreement. The loss or failure of any such Connected Trading Venues may adversely affect the Prime Broker’s business and cause losses for the Trust
30. 30A disruption of the Internet may affect Solana operations, which may adversely affect the Solana industry and an investment in the Trust
31. 31Potential changes to the Solana network’s protocols and software could, if accepted and authorized by the Solana network community, adversely affect an investment in the Trust
32. 32Decentralized governance of the Solana network could have a negative impact on the performance of the Trust
33. 33Anonymity and illicit financing risk
34. 34In accordance with their regulatory obligations, the Authorized Participants conduct customer due diligence and enhanced due diligence on their counterparties, which enable them to determine each counterparty’s AML and other risks and assign an appropriate risk rating
35. 35The actual or perceived use of SOL and other digital assets in illicit transactions may adversely affect the SOL industry and an investment in the Trust
36. 36The only digital asset to be held by the Trust is SOL
37. 37Any name change and any associated rebranding initiative of SOL may not be favorably received by the digital asset community, which could negatively impact the value of SOL and the value of the shares
38. 38Solana is subject to cybersecurity risks, which could adversely affect an investment in the Trust or the ability of the Trust to operate
39. 39At 50% of the staked SOL, a mischievous group of validators could theoretically split the chain into two equally sized forks and then simply use their entire 50% stake to vote contrarily to the honest validator set, thereby maintaining the two forks and preventing finality
40. 40Other digital asset networks have been subject to malicious activity achieved through control of over 50% of the processing power on the network. Any similar attacks on the Solana network could negatively impact the value of SOL and the value of the Shares
41. 41Additionally, an attacker with 66% or more of the total staked SOL can finalize their preferred chain without having to coerce any honest validators. The attacker can simply vote for their preferred fork and then finalize it, simply because they can vote with a dishonest supermajority
42. 42A temporary or permanent “fork” or a “clone” of the Solana network could adversely affect the value of the Shares
43. 43If validators expend less processing power on the Solana network, it could increase the likelihood of a malicious actor obtaining control
44. 44Denial of Service Attacks
45. 45Proof-of-History blockchains are a relatively recent innovation, and have not been subject to as widespread use or adoption over as long of a period of time as traditional proof-of-work or proof-of-stake blockchains
46. 46Validators may suffer losses due to staking, which could make the Solana network less attractive
47. 47The Solana network faces scaling challenges and efforts to increase the volume of transactions may not be successful
48. 48Smart contracts are new and their ongoing development and operation may result in problems or be subject to errors or hacks, which could reduce the demand for SOL or cause a wider loss of confidence in the Solana network, either of which could have an adverse impact on the value of SOL
49. 49New competing digital assets may pose a challenge to SOL’s current market position, resulting in a reduction in demand for SOL, which could have a negative impact on the price of SOL and may have a negative impact on the performance of the Trust
50. 50Competition from central bank digital currencies (“CBDCs”) could adversely affect the value of SOL and other digital assets
51. 51Prices of SOL may be affected due to stablecoins, the activities of stablecoin issuers and their regulatory treatment
52. 52Given the role that stablecoins play in global digital asset markets, their fundamental liquidity can have a dramatic impact on the broader digital asset market, including the market for SOL
53. 53Operational cost may exceed the award for validating transaction fees, and increased transaction fees may adversely affect the usage of the Solana network
54. 54Validators may cease to record transactions as a result of low transaction fees, which may adversely affect the usage of the Solana network
55. 55Large-Scale Sales or Distributions
56. 56Congestion or delay in the Solana network may delay purchases or sales of SOL by the Trust
57. 57Investment Related Risks
58. 58The NAV or the Principal Market NAV may not always correspond to the market price of SOL
59. 59Deviations between the Trust’s NAV and NAV per Share versus the Trust’s Principal Market NAV and Principal Market NAV per Share may occur
60. 60Owning Shares is different from directly owning SOL
61. 61Pricing Benchmark tracking risk
62. 62The value of the Shares may be influenced by a variety of factors unrelated to the value of SOL
63. 63The Administrator is solely responsible for determining the value of the Trust’s SOL, the Trust’s NAV and the Trust’s Principal Market NAV. The value of the Shares may experience an adverse effect in the event of any errors, discontinuance or changes in such valuation calculations
64. 64SOL Counterparties’ buying and selling activity associated with the creation and redemption of Baskets may adversely affect an investment in the Shares
65. 65Selling activity associated with sales of SOL in connection with redemption orders may decrease the SOL prices, which will result in lower prices for the Shares. Decreases in SOL prices may also occur as a result of selling activity by other market participants
66. 66The inability of SOL Counterparties to hedge their SOL exposure may adversely affect the liquidity of Shares and the value of an investment in the Shares
67. 67Arbitrage transactions intended to keep the price of Shares closely linked to the price of SOL may be problematic if the process for the creation and redemption of Baskets encounters difficulties, which may adversely affect an investment in the Shares
68. 68Security threats and cyber-attacks could result in the halting of Trust operations and a loss of Trust assets or damage to the reputation of the Trust, each of which could result in a reduction in the price of the Shares
69. 69The Trust’s SOL Custodians could become insolvent
70. 70The Trust is subject to risks due to its concentration of investments in a single asset
71. 71The lack of active trading markets for the Shares may result in losses on Shareholders’ investments at the time of disposition of Shares
72. 72Several factors may affect the Trust’s ability to achieve its investment objective on a consistent basis
73. 73The amount of SOL represented by the Shares will continue to be reduced during the life of the Trust due to the transfer of the Trust’s SOL to pay for the Sponsor Fee and other liabilities
74. 74The development and commercialization of the Trust is subject to competitive pressures
75. 75A loss of confidence in or breach of a SOL Custodian may adversely affect the Trust and the value of an investment in the Shares
76. 76The Sponsor may need to find and appoint a replacement custodian or prime broker quickly, which could pose a challenge to the safekeeping of the Trust’s SOL
77. 77The value of the Shares will be adversely affected if the Trust is required to indemnify the Sponsor, the Trustee, the Administrator, the Transfer Agent, the SOL Custodians or the Prime Broker
78. 78Intellectual property rights claims may adversely affect the Trust and the value of the Shares
79. 79Amendment of Trust Agreement Without Shareholder Consent
80. 80The Sponsor’s receipt of a portion of staking rewards may create conflicts of interest
81. 81The Pricing Benchmark has a limited history
82. 82Right to change the pricing benchmark

Risks related to pricing

1. 83Shareholders also should note that the size of the Trust in terms of total SOL held may change substantially over time and as Baskets are created and redeemed

Regulatory Risk

1. 84SOL’s status as being offered or sold as a “security” under U.S. federal securities laws remains unsettled
2. 85There is a lack of consensus regarding the regulation of digital assets, including SOL
3. 86In March 2022, Senators Elizabeth Warren, Jack Reed, Mark Warner, and Jon Tester introduced the Digital Asset Sanctions Compliance Enhancement Act in an attempt to ensure blacklisted Russian individuals and businesses do not use digital assets to evade economic sanctions
4. 87U.S. leadership in the digital asset space and established an inter-agency working group for artificial intelligence and digital assets that is tasked with proposing a regulatory framework governing the issuance and operation of digital assets, including stablecoins, in the United States
5. 88Shareholders do not have the protections associated with ownership of shares in an investment company registered under the 1940 Act or commodity pools under the CEA
6. 89The Trust is not registered as an investment company under the 1940 Act, and the Sponsor believes that the Trust is not permitted or required to register under such act. Consequently, Shareholders do not have the regulatory protections provided to investors in investment companies
7. 90Future and current laws and regulations by a United States or foreign government or quasi-governmental agencies could have an adverse effect on an investment in the Trust
8. 91Future legal or regulatory developments may negatively affect the value of SOL or require the Trust or the Sponsor to become registered with the SEC or CFTC, which may cause the Trust to incur unforeseen expenses or liquidate

Tax Risk

1. 92The ongoing activities of the Trust may generate tax liabilities for Shareholders
2. 93The tax treatment of SOL and transactions involving SOL for United States federal income tax purposes may change
3. 94The tax treatment of SOL and transactions involving SOL for state and local tax purposes is not settled
4. 95A hard “fork” of the Solana blockchain could result in Shareholders incurring a tax liability
5. 96SOL staking may result in adverse tax consequences for Shareholders
6. 97The treatment of staking in a grantor trust for U.S. federal income tax purposes is still developing
7. 98The intended tax treatment of the Trust will limit the flexibility of the Trust’s investment decisions

Other Risks

1. 99The Exchange on which the Shares are listed may halt trading in the Trust’s Shares, which would adversely impact a Shareholder’s ability to sell Shares
2. 100The liquidity of the Shares may also be affected by the withdrawal from participation of Authorized Participants, which could adversely affect the market price of the Shares
3. 101The market infrastructure of the SOL spot market could result in the absence of active Authorized Participants able to support the trading activity of the Trust, which would affect the liquidity of the Shares in the secondary market and make it difficult to dispose of Shares
4. 102Shareholders that are not Authorized Participants may only purchase or sell their Shares in secondary trading markets, and the conditions associated with trading in secondary markets may adversely affect Shareholders’ investment in the Shares
5. 103The Sponsor relies heavily on key personnel. The departure of any such key personnel could negatively impact the Trust’s operations and adversely impact an investment in the Trust
6. 104In addition, certain personnel performing services on behalf of the Sponsor are shared with the respective affiliates of the Sponsor, including with respect to execution, Trust operations and legal, regulatory and tax oversight. Such individuals devote a small percentage of their time to those activities
7. 105The Trust is new, and if it is not profitable, the Trust may terminate and liquidate at a time that is disadvantageous to Shareholders
8. 106Shareholders do not have the rights enjoyed by investors in certain other vehicles and may be adversely affected by a lack of statutory rights and by limited voting and distribution rights
9. 107Shareholders may be adversely affected by creation or redemption orders that are subject to postponement, suspension or rejection under certain circumstances
10. 108Shareholders may be adversely affected by an overstatement or understatement of the NAV or the Principal Market NAV calculation of the Trust due to the valuation methodology employed on the date of the NAV or the Principal Market NAV calculation
11. 109Amendment of the Trust Agreement without shareholder consent