Investing in the Fund involves risks, including the risk that you may receive little or no return on your investment or that you may lose part or all of your investment. Consequently, you can lose money by investing in the Fund. No assurance can be given that the Fund will achieve its investment objective, and investment results may vary substantially over time and from period to period.
An investment in the Fund is not appropriate for all investors. An investment in the Fund is not a deposit of any bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency.
Risks of Digital Securities
Management Risk. The Fund intends to issue the shares as digital securities, using blockchain technology. Members of the Adviser’s management have experience in digital securities and blockchain since as early as 2015. Several members of management have experience working at companies in the digital security and blockchain sectors and have previously made investments in bitcoin and other digital assets. However, the Fund will be one of the first registered funds to offer digital securities. Accordingly, the Fund’s management has limited experience using blockchain technology to maintain records and facilitate transactions in the shares of a registered fund that issues digital securities.
Regulatory Risk. A courtesy copy of the Fund’s shareholder records is maintained using the Ethereum blockchain and peer-to-peer transfers may be initiated by shareholders on the blockchain. The entities that support the ability of shareholders to engage in peer-to-peer transactions, including the Transfer Agent and the Ethereum network, are not licensed under the virtual currency or money transmission regulations of any state in the United States or registered with the U.S. Department of the Treasury Financial Crimes Enforcement Network (“FinCEN”). If any regulatory authority were to assert that additional licensing or registration was required for any such party, it could affect their operations or viability, and could adversely affect the ability of shareholders to engage in peer-to-peer transfers of ArCoins. This in turn would have a material adverse effect on the liquidity of ArCoins and the holders’ ability to transfer ArCoins.
Liquidity Risk. The Fund’s shares will be issued as digital securities, meaning the securities will be uncertificated securities that may be transferred using blockchain technology (see “About the Digital Securities” and “Plan of Distribution – Peer-to Peer Transactions”). The shares will not be listed for trading on a national securities exchange or through a national market system (“NMS”) and are not available for secondary trading in any venue, such as a public decentralized or centralized electronic exchange platform that is a national securities exchange or on an alternative trading system (“ATS”) operated by a registered broker-dealer and that is subject to Regulation ATS. The Fund has no current agreements to make ArCoins available through any such electronic exchange platform. See “Potential Future Fund Attributes” and “—Risks Associated with Certain Potential Future Fund Attributes” beginning on page 33 of this prospectus for more information regarding potential secondary public markets for Fund shares that may, but are not guaranteed to, be available in the future, and the risks associated with those markets.
Investors are currently only able to dispose of their shares through the Fund’s Repurchase Offer Policy or in peer-to-peer transactions with other investors who have completed the Fund’s AML/KYC process and who are approved, or “whitelisted,” by the Transfer Agent to hold the Fund’s digital securities. An investor must be aware of other eligible investors who are available to enter into direct peer-to-peer transactions; neither the Fund nor its Transfer Agent will publish such information. There may be relatively few investors to whom ArCoins can be transferred in a peer-to-peer transaction and, as a result, there may be limited to no liquidity in ArCoins.
Emerging Technology Risk. Since ArCoins will be transferred using emerging technologies, transactions in ArCoins will be subject to associated risks including:
• A rapidly-evolving regulatory landscape, which might include security, privacy or other regulatory concerns that could require changes to digital systems that disrupt transactions in ArCoins;
• The possibility of undiscovered technical flaws in an underlying technology, including in the process by which transactions are recorded to the Ethereum blockchain or by which the validity of a copy of such blockchain can be authenticated;
• The possibility that security measures that authenticate prior transactions could be compromised, or “hacked,” which could allow an attacker to alter the Ethereum blockchain and thereby disrupt the ability to corroborate definitive transactions recorded on the blockchain;
• The possibility that new technologies or services will inhibit access to the Ethereum blockchain;
• The possibility that changes to policies of the Ethereum blockchain will limit the ability to withdraw and deposit fiat currency;
• The possibility that other participants in the Ethereum blockchain could collude to manipulate the share price or limit liquidity in ArCoins which could restrict a shareholder’s ability to divest their holdings in the Fund;
• The possibility of breakdowns and transaction halts as a result of undiscovered technology flaws that could prevent transactions for a period of time;
• The possibility that a digital “wallet” application or interface is hacked by a third party, resulting in a loss of the holder’s ArCoins; and
• The possibility that an investor’s private key is lost or stolen and the Fund is unable to verify the loss or theft could result in irreversible client losses.
Operational and Technology Risk. The blockchain record, which can be used to validate transactions in the Fund’s shares, will be available to the public on Ethereum, which is an open source, public, distributed ledger. The complete transaction history from the issuance of the ArCoins will be viewable on the Ethereum blockchain. As a result, robust and transparent transaction data, but not shareholder identity, will be publicly available via the published blockchain. The transaction data will be secured by cryptography and only a public-key-derived wallet address (and not a shareholder’s personal identifying information) will be exposed to the public on the blockchain. The personal identifying information necessary to associate a public key representing a given block of shares with the record owner of those shares will be maintained by the Transfer Agent and will not be available to the public. The data maintained by the Transfer Agent will also include current information regarding an investor’s account holdings and balance. If there are data security breaches with respect to the Transfer Agent’s records resulting in theft of the information necessary to link personal identity with public keys, the stolen information could be used to determine a shareholder’s complete transaction history in the Fund’s shares. Moreover, concerns over these privacy issues may limit adoption of blockchain technology by a range of potential investors, reducing liquidity in ArCoins. See “About the Digital Securities” for procedures if a private key is lost or stolen.
If there is a cyberattack on the Fund’s web platform, internal or affiliate platforms, or the Ethereum blockchain network, the Transfer Agent or the Developer may lose the ability to control compliance and transfer restrictions programmed into the Fund’s smart contracts which could increase the possibility of loss or theft of investors’ shares in the Fund. Such loss or theft could result in claims against the Fund, and could have a substantial adverse effect on the financial and business operations of the Fund.
If, for any reason, the smart contract technology utilized with respect to the Fund’s shares were to become unavailable and suitable alternative technology were not available, investors in the shares would not have a means of proving the validity of the publicly available blockchain record. As a result, the accuracy of publicly available transfer information could be called into question and investors could stop transacting in digital securities. As there will not be an option to purchase ArCoins in a non-digital format, in the event that investors are no longer able to transact in digital securities on a peer-to-peer basis, the only source of liquidity in the shares would be quarterly redemption offers made by the Fund, and the Board would consider whether such an environment would warrant discontinuing operating the Fund.
The Fees and Risks Related to Use of the Ethereum Blockchain. Transactions on the Ethereum network are subject to the terms and conditions of Ethereum. An investor who initiates a transaction on the Ethereum network must pay fees in the form of “ether,” the fundamental token for the operation of Ethereum. These transaction fees (sometimes called “gas”) are paid to validate a transaction. Gas measures the amount of computational effort that it will take to validate a given transaction. If an investor does not maintain adequate ether in their wallet, the Transfer Agent may withhold the U.S. dollar equivalent of such transaction fees from the proceeds of a transaction or reduce the amount of an investment in the Fund by the U.S. dollar equivalent of the gas. The amount of gas required to execute a transaction will vary from transaction to transaction depending on, among other things, the complexity or size of a particular transaction and the congestion on the Ethereum network. Congestion on the Ethereum network may be due to increased transactions involving smart contracts that are unrelated to ArCoins, and the Fund cannot control such congestion.
The time it takes to complete a transaction will depend on how much gas is paid and how congested the Ethereum network is. On an average day, it can take between 15 seconds to 5 minutes to process a transaction with standard fees. Since the Ethereum network will prioritize transactions offering higher gas prices over those offering lower gas prices, shareholders who wish to have a transaction processed faster should be aware that they may incur higher transaction fees. The Fund does not establish the amount of gas required to complete a transaction and there is no limit on the gas price a transaction may need to complete in a timely manner.
When an investor desires to engage in a peer-to-peer transaction, the investor who initiates the transaction is required to pay the gas. If an investor is unwilling or unable to pay for gas at a high enough rate, the transaction may not be completed in a timely manner. Additionally, an error in the smart contract creating ArCoins could result in unintended or uncontrolled gas usage which, if not limited by an investor through its wallet interface, may deplete the amount of ether held by the investor.
When the Fund makes a distribution of a shareholder’s interest or pays a dividend, the gas will be the responsibility of the Fund. Under the arrangement with the Developer, such transaction fees will be paid by the Developer and reimbursed by the Fund in U.S. dollars. If an investor tenders shares for redemption, any transaction fees required by the Ethereum network will be paid directly by the investor or the Transfer Agent may add the U.S. dollar equivalent of the ether required to pay for the gas to the transaction amount or withhold the U.S. dollar equivalent of the ether required to pay the gas from the tender proceeds. An investor who initiates a peer-to-peer transaction with another whitelisted account (as described below) will need to hold sufficient ether to pay the gas required to use the Ethereum blockchain or such transaction may not be processed.
The Fund does not control Ethereum, and there is no guarantee that the Ethereum network will continue to operate under its current terms in the future. If Ethereum moves to a different mechanism for validating transactions in the future, it could negatively impact the amount or character of the fees due on transactions in ArCoins.
New Offering with No Operating History. The Fund is a closed-end investment company with no history of operations. If the Fund commences operations under inopportune market or economic conditions, it may not be able to achieve its investment objective.
Conflicts of Interest. The Adviser and/or its affiliates provide investment advice to other parties and manage other accounts and private investment vehicles, including accounts that have performance or other fees that are higher than the fees paid by the Fund to the Adviser. Additionally, the Fund’s officers serve or may serve as officers, directors or principals of other investment funds managed by the Adviser or its affiliates. Serving in multiple capacities and with respect to more than one entity or fund gives rise to conflicts of interest. Conflicts may also arise when the Fund’s investment objective overlaps, in part or in whole, with the investment objective of affiliated investment funds, accounts or other investment vehicles, including with respect to the allocation of investment opportunities among the Fund and other investment funds or accounts advised by the Adviser or its affiliates. The Adviser has adopted compliance policies, procedures and systems designed to protect against potential incentives that may favor one account over another, including policies and procedures that address the allocation of investment opportunities, execution of portfolio transactions, personal trading by employees and other potential conflicts of interest. These policies and procedures are designed to ensure that all client accounts are treated equitably over time.
Interval Fund Risk. The Fund is a closed-end fund operating as an interval fund. Among other things, interval funds differ from open-end management investment companies (commonly referred to as mutual funds) in that they do not generally redeem their shares at the option of the shareholder (other than pursuant to the Repurchase Offer Policy). By comparison, mutual funds issue securities that are redeemable daily at NAV at the option of the shareholder and typically engage in a continuous offering of their shares. Mutual fund shares do not trade in the secondary market. Mutual funds are subject to continuous asset in-flows and out-flows that can complicate portfolio management, whereas closed-end funds, including interval funds, generally can stay more fully invested in securities consistent with the fund’s investment objective and policies.
No Minimum Amount of Proceeds Required. The Fund is not required to raise a minimum amount of proceeds from this offering in order to commence operations. In order to maintain viable operations, however, the Fund estimates that it needs to raise $100 million. There can be no assurance that the Fund will raise an adequate amount in a timely manner.
Risk of Fund Closure. Notwithstanding the continuous nature of this offering, the Fund may close to new investors at the discretion of the Adviser (subject to Board approval). If the Fund is closed to new investors, then only existing shareholders of the Fund will be eligible to purchase the Fund’s shares, receive shares from another existing investor in a peer-to peer transfer, or reinvest dividends in new shares of the Fund. The Fund may re-open to new investments and subsequently close again to new investors at any time at the discretion of the Adviser (subject to Board approval). Any such opening and closing of the Fund will be disclosed to potential new investors and existing shareholders through a supplement to this prospectus.
Liquidity Risk. The shares will not be listed for trading on any national securities exchange nor made available for trading through a NMS. The shares are also not available for secondary trading in any venue, such as a public decentralized or centralized electronic exchange platform that is a national securities exchange or an ATS operated by a registered broker-dealer and that is subject to Regulation ATS. Although the shares may be transferred in peer-to-peer transactions, the availability of counterparties to such transactions is limited to other holders of ArCoins or other eligible purchasers who have submitted to the Fund’s AML/KYC procedures, have established a Fund account with the Transfer Agent, and have been whitelisted by the Transfer Agent. In addition, a current shareholder must know the Ethereum wallet address and/or identity of an approved potential counterparty in order to engage in peer-to-peer transactions; neither the Fund nor its Transfer Agent will publish such information. There may be relatively few investors to whom ArCoins can be transferred in peer-to-peer transactions and, as a result, there may be limited to no liquidity in ArCoins. As a result, shareholders may not be able to sell their ArCoins on a timely basis or at all.
Risks Relating to the Fund’s Tax Status. To remain eligible for the tax treatment accorded to RICs and their shareholders under the Code, the Fund must meet certain source of income, asset diversification, and annual distribution requirements. If the Fund were to fail to qualify as a RIC, all of its taxable income regardless of whether timely distributed to shareholders will be subject to fund-level tax at the applicable corporate income tax rate and all of its distributions from earnings and profits (including from net long-term capital gains) will be taxable to shareholders as ordinary income. In any such event, the resulting corporate taxes could substantially reduce the Fund’s net assets, the amount of income available for distribution and the amount of its distributions. Such a failure would have a material adverse effect on the Fund and its shareholders.
Reliance on the Transfer Agent. Ownership of ArCoins is based upon the books and records of the Transfer Agent. The Fund’s agreement with the Transfer Agent can be terminated by either party on not less than 60 days’ notice before the expiration of the agreement with the Transfer Agent or any renewal thereof. If the Transfer Agent chooses to exercise its termination rights or otherwise ceases to operate as a transfer agent, the Fund would seek to engage a successor transfer agent. In the absence of finding such a successor, an affiliate of the Adviser would likely assume the role of transfer agent. While Arca believes its affiliate could successfully assume the role of transfer agent, no assurance can be given that it would be able to do so and if such affiliate is unable to do so, the ability to transfer ArCoins would be adversely affected and it could be difficult or impossible for the Fund to pay dividends, execute its Repurchase Offer Policy or provide voting rights to the correct holders of record of the Fund’s shares.
Credit and Non-Payment Risk. Issuers of certain Fixed-Income Securities or the counterparties of a repurchase contract might be unable or unwilling (or perceived as being unable or unwilling) to make interest and/or principal payments when due, or to otherwise honor their obligations. Fixed-Income Securities are subject to the risk of non-payment of scheduled interest and/or principal. Nonpayment would result in a reduction of income to the Fund, a reduction in the value of the security experiencing nonpayment and a potential decrease in the NAV of the Fund. There can be no assurance that the liquidation of any collateral would satisfy the borrower’s obligation in the event of non-payment of scheduled interest or principal payments, or that such collateral could be readily liquidated.
Interest Rate Risk. Interest rate risk is the risk that securities held by the Fund will decline in value because of changes in interest rates. When interest rates decline, the value of portfolio securities already held by the Fund can be expected to rise. Conversely, when interest rates rise, the value of existing portfolio securities can be expected to decline. A fund with a longer average portfolio duration will be more sensitive to changes in interest rates than a fund with a shorter average portfolio duration.
Liquidity Risk. Liquidity risk is the risk that low trading volume, lack of a market maker, large position size, or legal restrictions (including daily price fluctuation limits or “circuit breakers”) limits or prevents the Fund from selling particular portfolio holdings at desirable prices. At times, a major portion of a security held by the Fund may be held by relatively few institutional purchasers. Even if the Fund considers such securities liquid because of the availability of an institutional market, such securities may become difficult to value or sell in adverse market or economic conditions.
Portfolio Management Risk. Portfolio management risk is the risk that the investment techniques and risk analyses applied by the Adviser will not produce the desired results and that legislative, regulatory, or tax restrictions, policies or developments may affect the investment techniques available to the Adviser in connection with managing the Fund. There is no guarantee that the investment objective of the Fund will be achieved.
Market Risk. An investment in ArCoins is subject to investment risk, including the possible loss of the entire principal amount invested. An investment in ArCoins represents an indirect investment in the securities owned by the Fund. The value of ArCoins, like other market investments, may move up or down, sometimes rapidly and unpredictably. In addition, if you are able to sell your ArCoins through a peer-to-peer transaction, that transaction may not occur at NAV, as peer-to-peer transactions occur at individually negotiated prices. Because ArCoins do not trade on an exchange, NMS, or similar venue, there will be no public disclosure of bid or ask prices for the shares, although the Fund will publish its NAV on its website daily in order to facilitate price discovery. The value of your ArCoins at any point in time may be worth less than the value of your original investment, even after taking into account any reinvestment of dividends and distributions.
Illiquid Securities Risk. Fixed-Income Investments held by the Fund may become illiquid. Illiquid securities are subject to legal or contractual restrictions on disposition or lack an established secondary trading market. The sale of illiquid securities often requires more time and results in higher brokerage charges or dealer discounts and other selling expenses than does the sale of liquid securities traded on national securities exchanges or in the over-the-counter markets.
Call Risk. The issuer of a Fixed-Income Security may exercise its right to redeem earlier than expected (a “call”). Issuers may call outstanding securities prior to their maturity for a number of reasons (e.g., declining interest rates, changes in credit spreads and improvements in the issuer’s credit quality). If an issuer calls a security in which the Fund has invested, the Fund may not recoup the full amount of its initial investment and may be forced to reinvest in lower-yielding securities, securities with greater credit risks or securities with other, less favorable features.
Valuation Risk. If a security held by the Fund does not have a market value, the security will be “fair valued” by the Adviser in good faith under procedures adopted by the Board. Fair value is defined as the amount for which assets could be sold in an orderly disposition over a reasonable period of time, taking into account the nature of the asset. Fair value pricing, however, involves judgments that are inherently subjective and inexact, since fair valuation procedures are used only when it is not possible to be sure what value should be attributed to a particular asset or when an event will affect the market price of an asset and to what extent. As a result, fair value pricing may not reflect actual market value, and it is possible that the fair value determined for a security will be materially different from the value that actually could be or is realized upon the sale of that asset. Since the Fund’s portfolio will consist primarily of Treasury Securities, the likelihood that the Fund will own securities subject to fair valuation is remote.
Issuer Risk. The value of a Fixed-Income Security may decline for a reason directly related to the issuer, such as management performance, financial leverage and reduced demand for the issuer’s goods or services.