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Federal Register / Vol. 86, No. 18 / Friday, January 29, 2021 / Notices
khammond on DSKJM1Z7X2PROD with NOTICES

source of governance and operating authority for BSTX. Among other things, the BSTX LLC Agreement includes provisions that are designed to prevent any owner of BSTX from exercising undue influence over the regulated activities of BSTX. As is the case with BOX Options, the Exchange would not hold an ownership interest in BSTX, but would regulate BSTX as a facility of the Exchange pursuant to a separate agreement between the Exchange and BSTX Facility Agreement. The Exchange currently regulates one facility, BOX Options, and recently amended the Exchanges governing documents to provide for the flexibility to regulate additional facilities.15
The Exchange separately filed a proposed rule change containing proposed trading rules for BSTX that would have established the kinds of securities that would be listed and traded on BSTX, the manner of operations of the BSTX Market, and eligibility to participate on the BSTX
Market BSTX Trading Rules Proposal.16 The Commission disapproved the BSTX Trading Rules Proposal on December 18, 2020.17 As discussed in further detail below, this Order finds that, given that the trading rules for the BSTX facility were not approved, and BOX relied upon those rules in the BSTX Governance Proposal with respect to how BSTX would operate the BSTX market and the Exchange would provide regulatory oversight of BSTX, the Commission is unable to assess the scope of the Exchanges regulatory operations, and therefore cannot find that the BSTX
Governance Proposal is consistent with the Exchange Act. Specifically, the BSTX Governance Proposal does not provide sufficient detail about aspects of the proposed operation of the BSTX
Market and regulation of BSTX that https www.sec.gov/rules/sro/box/2020/34-88949ex5a.pdf.
15 See Securities Exchange Act Release Nos.
88236 February 19, 2020, 85 FR 10765 February 25, 2020 Notice of Filing of Proposed Rule Change; 88934 May 22, 2020, 85 FR 32085 May 28, 2020 Order Granting Approval of a Proposed Rule Change SRBOX202004 BOX202004
Approval.
16 See Securities Exchange Act Release Nos.
88946 May 26, 2020, 85 FR 33454 June 1, 2020
Notice of Filing of Proposed Rule Change; 89536
August 12, 2020, 85 FR 51250 August 19, 2020
Notice of Filing of Amendment No. 1 and Order Instituting Proceedings SRBOX202014.
17 See Securities Exchange Act Release No. 90735
December 18, 2020, 85 FR 84403 December 28, 2020 SRBOX202014 Order Disapproving Proposed Rule Change, as Modified by Amendment No. 1, to Adopt Rules Governing the Trading of Equity Securities on the Exchange Through a Facility of the Exchange Known as the Boston Security Token Exchange LLC BSTX Trading Rules Disapproval.

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were addressed in the BSTX Trading Rules Proposal, including: 1 The rules that would establish which securities would be eligible for trading on BSTX, which the Exchange refers to as BSTX
Products; 18 2 the rules that would govern an Exchange members eligibility to trade on BSTX as a BSTX
Participant 19 and their ongoing obligations; 3 the rules for trading on the BSTX Market; and 4 how the Exchange proposes to comply with its regulatory obligations with respect to the BSTX Market. The Commission cannot, therefore, find that the BSTX
Governance Proposal is consistent with the Exchange Act, and in particular Section 6b1 of the Exchange Act.20
II. Description of the Proposed Rule Change and Exchanges Representations As described in the Notice, as modified by Amendment No. 1,21 the Exchange proposes to establish BSTX as a facility as defined in Section 3a2
of the Exchange Act of the Exchange that will operate the BSTX Market and adopt the BSTX LLC Agreement for BSTX as a facility of the Exchange.22
Specifically, the Exchange states that with the BSTX Governance Proposal the Exchange proposes to establish BSTX as a facility of the Exchange that operates a market for the trading of securities, which market it refers to in the proposal as the BSTX Market.23 The Exchange also states that it submitted a separate filing to establish rules relating to trading on BSTX, and that, subject to approval of those rules by the Commission, BSTX would operate the BSTX Market.24 The Exchange states that without Commission approval of the BSTX Trading Rules Proposal, the Exchange would not permit BSTX to commence operations of the BSTX
18 See 19 See
infra note 75 and accompanying text.
infra notes 39 and 52 and accompanying
text.
20 15

U.S.C. 78fb1.
Notice, supra note 3; Amendment No. 1
Form 19b4, supra note 6.
22 See Notice, supra note 3, 85 FR at 33259;
Amendment No. 1 Form 19b4, supra note supra note 6.
23 See Amendment No. 1 Form 19b4, supra note 6, at 4.
24 See id. citing BSTX Trading Rules Proposal, supra note 16. The proposed trading rules for BSTX, titled the BSTX Rulebook BSTX Rules, were attached as Exhibit 5A to the 19b4 for SR
BOX202014 available on the Commissions website at https www.sec.gov/rules/sro/box/2020/
34-89536-ex5a.pdf. Proposed amendments to the Exchanges existing rules to facilitate trading on BSTX were attached as Exhibit 5B to the 19b4 for SRBOX202014 available on the Commissions website https www.sec.gov/rules/sro/box/2020/3489536-ex5b.pdf.
21 See
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Market.25 Further, the Exchange states that it will not permit BSTX to commence operations of the BSTX
Market, and the Exchanges regulatory oversight responsibilities with respect to BSTX would not be triggered, unless the BSTX Governance Proposal is approved by the Commission.26
Pursuant to the proposal, ownership interests in BSTX are represented by two classes of units Units: Class A
Units, which represent equal units of limited liability interest in BSTX, including an interest in the ownership and profits and losses of BSTX and the right to receive distributions from BSTX
as set forth in the BSTX LLC Agreement Class A Units; and Class B Units, which are generally identical to the Class A Units, except that they do not have the right to vote on any matter related to BSTX Class B Units.27
According to the Exchange, 50% of the voting Class A Units are owned by BOX
Digital, which is 98% owned by BOX
Holdings, and the other 50% of the voting Class A Units are owned by tZERO.28 According to the Exchange, BOX Digital and tZERO each have over a 45% economic interest in BSTX, and the non-voting Class B Units are held by various employees and directors of BSTX, each of whom hold less than a 5% economic interest in BSTX.29
Holders of Units are referred to as Members of BSTX BSTX LLC
Members.30 The Exchange also states that BSTX is an affiliate of the Exchange and, if approved as a facility of the Exchange, will be subject to regulatory oversight by the Exchange.31
The Exchange states that BOX
Holdings wholly owns BOX Options, which is a facility of the Exchange 32
and the only facility that the Exchange currently operates.33 According to the Exchange, the BSTX LLC Agreement provisions are generally the same as 25 See Amendment No. 1 Form 19b4, supra note 6, at 4.
26 See id.
27 See Notice, supra note 3, 85 FR at 33259, nn.1012 and accompanying text.
28 See id. at 33260. The Exchange also provides additional information about the upstream ownership of BOX Digital and tZERO. See id.
29 See id.
30 See Notice, supra note 3, 85 FR at 3325960.
Members are defined by the Exchange as the duly admitted holders of BSTX Units and would include any person later admitted to BSTX as an additional or substitute LLC Member as provided by the BSTX
LLC Agreement. See id.; BSTX LLC Agreement, supra note 14, Section 1.1.
31 See Amendment No. 1 Form 19b4, supra note 6, at 4. The Exchange also states that tZERO and BSTX are affiliates of Overstock. See Notice, supra note 3, 85 FR at 33260.
32 See Notice, supra note 3, 85 FR at 33259.
33 See Amendment No. 1 Form 19b4, supra note 6, at 5.

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