Grayscale Aave Trust (AAVE) S-1 Filing Summary: Your Guide to Investing in Aave via an ETF

Are you considering investing in Aave through a traditional brokerage account? The Grayscale Aave Trust plans to convert into an Exchange Traded Fund (ETF), offering a new way to access this decentralized finance (DeFi) token. This summary breaks down the key aspects of their preliminary SEC filing, dated February 13, 2024, which outlines their intentions. Remember, this is a plan, and details are "SUBJECT TO COMPLETION" and may change.

1. Business Description

The Grayscale Aave Trust, soon to be renamed the Grayscale Aave Trust ETF, aims to give investors exposure to Aave token price movements without the complexities of direct ownership. Think of it as a professionally managed fund that holds Aave tokens on your behalf. When you buy shares of the GAVE ETF, you own a piece of this fund, which in turn holds Aave. The ETF's primary goal is for its share value to mirror the value of the Aave it holds, minus operating expenses. The CoinDesk Aave Benchmark Rate, an industry-recognized price index established on January 1, 2021, will determine Aave's value.

The Trust initially formed on October 26, 2021. Grayscale, the Sponsor, generates revenue by charging a management fee for overseeing the Trust's operations, security, and administration. This fee, 1.50% of the Trust's Assets Under Management (AUM) annually, is deducted daily. This fee impacts your overall returns, regardless of Aave's performance.

2. How the ETF Works (Use of Proceeds)

Unlike a traditional company IPO, this ETF conversion does not raise capital for Grayscale's operations. Instead, new ETF shares are created through a process involving "Authorized Participants" (APs), typically large financial institutions.

Here's how it works:

• When APs want to create new ETF shares, they deliver Aave tokens directly to the Trust (an "in-kind" transaction). Less commonly, they provide cash for the Trust to purchase Aave.
• In return, Grayscale issues them new ETF shares.

This mechanism ensures that the number of ETF shares generally aligns with the amount of Aave the Trust holds, aiming to keep the share price close to the underlying Aave value. The Trust uses proceeds from share sales to acquire Aave tokens for its portfolio, not for the Sponsor's general corporate purposes.

3. Risk Factors

Investing in the Grayscale Aave Trust ETF carries significant risks, including:

• Aave Price Volatility: Aave, like all cryptocurrencies, is highly volatile. Its price can experience rapid and substantial fluctuations, leading to significant losses. The digital asset market has recently faced extreme volatility and negative sentiment.
• Management Fee Impact: The annual management fee of 1.50% will reduce your returns, even if Aave's price remains stable or declines.
• Discount/Premium to NAV: While ETFs aim to trade close to their Net Asset Value (NAV – the value of the underlying assets per share), factors like market demand or inefficient creation/redemption processes can cause shares to trade at a discount (below the value of the underlying Aave) or a premium (above). Historically, similar Grayscale trusts have experienced significant and persistent discounts. Grayscale intends for the ETF structure to minimize these deviations through efficient creation/redemption.
• Regulatory Uncertainty: The regulatory landscape for digital assets is evolving. New laws or interpretations could negatively impact Aave or the ETF's operations. As an "emerging growth company" and "smaller reporting company," the Trust may provide less detailed financial and operational disclosures than larger, more established companies, potentially limiting investor transparency.
• Lack of Traditional Protections: The Trust is not registered under the Investment Company Act of 1940 or the Commodity Exchange Act. This means shareholders do not benefit from the same regulatory oversight and investor protections afforded to traditional mutual funds or commodity pools.
• Security & Custody Risks: While Coinbase Custody Trust Company, LLC, a reputable custodian, holds the Aave tokens, no system is entirely immune to hacks, theft, or operational failures. Counterparty risk is also associated with the custodian.
• Aave Protocol Risks: Aave is a decentralized finance (DeFi) protocol. It faces inherent technological risks, such as smart contract vulnerabilities that could lead to loss of funds, governance risks where changes to the protocol could be detrimental, and potential impacts from blockchain "forks" or "clones."
• Digital Asset Trading Platform Risks: The platforms where Aave trades are largely unregulated, potentially leading to price manipulation, flash crashes, or limited oversight. These factors can affect Aave's price and, consequently, the ETF's value.
• Tax Implications: Investing in digital asset products can have complex tax consequences, including capital gains taxes. Investors should consult with a tax advisor regarding their specific situation.
• Limited Index History: The CoinDesk Aave Benchmark Rate has a relatively short operating history since its inception on January 1, 2021, making it challenging to assess its long-term performance under various market conditions.
• Liquidity Risk: Although listing on NYSE Arca aims to improve liquidity, if Authorized Participants cease or reduce their creation/redemption activities, it could lead to wider bid-ask spreads and difficulty in buying or selling ETF shares at desired prices.

4. Financial Highlights

While the Trust currently holds approximately $75 million in Aave tokens as Assets Under Management (AUM), the filing didn't provide detailed historical financial performance data like specific revenue, expenses, or profit/loss figures for the Trust itself. The Sponsor, Grayscale Investments Sponsors, LLC, generates revenue through an annual management fee of 1.50% of the Trust's AUM. As a passive investment vehicle, Aave's price movements, minus operating expenses, primarily drive the Trust's financial performance.

5. Management Team

Grayscale Investments Sponsors, LLC, a subsidiary of Digital Currency Group (DCG), a prominent player in the crypto asset management space, manages the Grayscale Aave Trust. Key operational roles include:

• Sponsor: Grayscale Investments Sponsors, LLC (responsible for overall management).
• Trustee: CSC Delaware Trust Company (holds legal title to the Trust's assets).
• Transfer Agent & Administrator: The Bank of New York Mellon (handles shareholder records and administrative services).
• Prime Broker: Coinbase, Inc. (facilitates trading and other services).
• Custodian: Coinbase Custody Trust Company, LLC (securely holds the Trust's Aave tokens).

The leadership team includes Michael Sonnenshein (Grayscale CEO), Edward McGee (CFO of Grayscale Investments Sponsors, LLC), and Barry Silbert (Founder of parent company DCG), all with extensive experience in the digital asset sector.

6. Competitive Landscape

Investors have several ways to gain exposure to Aave, which represent the competitive landscape for the Grayscale Aave Trust ETF:

• Direct Aave Ownership: Buying Aave tokens directly on a crypto exchange offers full control but requires managing your own digital wallet and security, often with lower fees.
• Other Spot Aave ETFs: If other spot Aave ETFs emerge, they would directly compete, potentially offering different fee structures, custodians, or liquidity profiles.
• Other Crypto Investment Products: Various trusts or ETFs for other cryptocurrencies exist, each with its own characteristics and offering exposure to different digital assets.

7. Offering Details

Grayscale intends to list the shares of the Grayscale Aave Trust ETF on NYSE Arca, Inc. ("NYSE Arca"), a major U.S. stock exchange, under the anticipated trading symbol GAVE.

Unlike a traditional IPO with a fixed number of shares and price range, the GAVE ETF's share count is dynamic. Authorized Participants can continuously create new shares (in "Baskets" of 10,000 shares) as demand increases. The price of each GAVE share will fluctuate throughout the trading day on NYSE Arca, driven by supply and demand, and will generally track Aave's market price. For example, if Aave is priced at $100 and each GAVE share represents 0.1 Aave, the theoretical share price would be around $10 (before fees or any premium/discount). As a retail investor, you will buy and sell individual GAVE shares at the prevailing market price through your brokerage account.

This conversion to an ETF aims to make Aave investing more accessible. However, it's crucial to thoroughly understand the unique risks and operational aspects before making any investment decisions. Consult with a financial advisor to determine if this investment aligns with your financial goals and risk tolerance.