BlackRock Inc.'s iShares Gold Trust may be penalized after the U.S.-listed fund sold $296 million in shares of the exchange traded fund between 19 February and 3 March without its proper registration to the U.S. Securities and Exchange Commission.
The company described the problem as "inadvertent" and suspended the issuance when it learnt of the situation. Regardless, the company may be required to repurchase the excess shares at the original price plus interest if investors decide to exercise their rescission rights, Reuters reported.
The iShares Gold Trust registered with the Securities and Exchange Commission for 300 million shares, after it said it sold between late February and early March nearly 25 million more shares than it had previously registered for, according to a filing.
Dave Nadig, Director of Exchange-Traded Funds at Fact Set Research Systems stated, "In 23 years in the ETF business, I have never heard of this. Whether it actually is anything more than a hand wave by the SEC to grandfather the new shares, or whether it will actually be an issue, I simply have no idea. This is pretty undiscovered country."
However, BlackRock said it may have to sell gold in the fund in order to meet its obligations by buying back the shares that were inadvertently not registered and paying interest to investors who purchased the shares. Those investors "may have the right to collect damages" from the fund.
BlackRock, nonetheless, contended that it stopped selling new shares of the funds after learning its undeliberate error. Thus, in excess of the shares that the company had officially registered with federal authorities, it may be required to re-acquire nearly 25 million shares of the fund it issued between Feb 19 and March 3, according to the affiliate that supervises IAU.
Ben Johnson, director of global ETF research, said that he is unfamiliar with any precedent for the sale of unregistered shares of an exchange-traded product. He underscored that not all exchange-traded products are created equal.
The gold fund is not a typical ETF. It is registered as an exchange-traded commodity, and regulations require that the firm make a filing when it wants to create new shares in excess of those already registered.
