Franklin Ethereum Trust 10-Q, filed Nov 12, 2024
Franklin Ethereum Trust (EZET)
About this 10-Q
Franklin Ethereum Trust filed this 10-Q on November 12, 2024, covering the quarter ended September 30, 2024.
Table of Contents
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the period ended |
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
Title of each class: |
Trading Symbol(s) |
Name of each exchange on which registered: | ||
| Large Accelerated Filer | ☐ | Accelerated Filer | ☐ | |||
Non-Accelerated Filer |
☒ | Smaller Reporting Company | ||||
| Emerging Growth Company | ||||||
Table of Contents
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This interim report on Form 10-Q includes statements which relate to future events or future performance. In some cases, you can identify such forward-looking statements by terminology such as “may,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or the negative of these terms or other comparable terminology. All statements (other than statements of historical fact) included in this report that address activities, events or developments that may occur in the future, including such matters as changes in commodity prices and market conditions (for ether and the Shares), the Fund’s operations, the Sponsor’s plans and references to the Fund’s future success and other similar matters are forward-looking statements. These statements are only predictions. Actual events or results may differ materially. These statements are based upon certain assumptions and analyses made by the Sponsor on the basis of its perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate in the circumstances. Whether or not actual results and developments will conform to the Sponsor’s expectations and predictions, however, is subject to a number of risks and uncertainties, including the special considerations discussed in this report, general economic, market and business conditions, changes in laws or regulations, including those concerning taxes, made by governmental authorities or regulatory bodies, and other world economic and political developments. All forward-looking statements made in this report are qualified by these cautionary statements, and there can be no assurance that the actual results or developments the Sponsor anticipates will be realized or, even if substantially realized, will result in the expected consequences to, or have the expected effects on, the Fund’s operations or the value of the Shares. None of the Trust, the Fund, the Sponsor, or the Trustee or their respective affiliates is under a duty to update any of the forward-looking statements to conform such statements to actual results or to a change in the Sponsor’s expectations or predictions.
EMERGING GROWTH COMPANY STATUS
The Trust is an “emerging growth company,” as defined in the JOBS Act. For as long as the Trust is an emerging growth company, the Trust may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes–Oxley Act of 2002 (the “Sarbanes-Oxley Act”), reduced disclosure obligations regarding executive compensation in the Fund’s periodic reports and audited financial statements in its prospectus, exemptions from the requirements of holding advisory “say-on-pay” votes on executive compensation and shareholder advisory votes on “golden parachute” compensation and exemption from any rules requiring mandatory audit firm rotation and auditor discussion and analysis and, unless otherwise determined by the SEC, any new audit rules adopted by the Public Company Accounting Oversight Board.
Under the JOBS Act, the Trust will remain an emerging growth company until the earliest of:
| • | the last day of the fiscal year during which the Trust has total annual gross revenues of $1.235 billion or more; |
| • | the last day of the fiscal year following the fifth anniversary of the completion of this offering; |
| • | the date on which the Trust has, during the previous three-year period, issued more than $1 billion in non-convertible debt; or |
| • | the date on which the Trust is deemed to be a “large-accelerated filer” (i.e., an issuer that (1) has more than $700 million in outstanding equity held by non-affiliates and (2) has been subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) for at least 12 calendar months and has filed at least one annual report on Form 10-K.) |
The JOBS Act also provides that an emerging growth company can utilize the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”) for complying with new or revised accounting standards.
Table of Contents
FRANKLIN ETHEREUM ETF
FRANKLIN ETHEREUM TRUST
TABLE OF CONTENTS
Table of Contents
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September 30, 2024* |
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Assets: |
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Investment in ether, at fair value (a) |
$ | |||
Total assets |
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Liabilities: |
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Sponsor’s fee payable |
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Total liabilities |
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Commitments and contingencies (Note 7) |
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Net assets |
$ | |||
Shares issued and outstanding (b) |
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Net asset value per Share |
$ | |||
| * | No comparative period presented as the Fund’s operations commenced on July 23, 2024. |
| (a) | Cost of investment in ether: $ |
| (b) |
Quantity of ether |
Cost |
Fair Value |
% of Net Assets |
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| Investment in ether |
$ | $ | % | |||||||||||||
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| Total investments |
$ | $ | % | |||||||||||||
| Less liabilities |
% | |||||||||||||||
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| Net assets |
$ | % | ||||||||||||||
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| * | No comparative period presented as the Fund’s operations commenced on July 23, 2024. |
For the period July 23, 2024 (Date of commencement of operations) through September 30, 2024* |
||||
| Expenses: |
||||
| Sponsor’s fee |
$ | |||
| |
|
|||
| Less waiver and reimbursement |
( |
) | ||
| |
|
|||
| Net investment loss |
||||
| |
|
|||
| Net realized and change in unrealized gain (loss) on investment in ether: |
||||
| Net realized gain (loss) on investment in ether |
( |
) | ||
| Net change in unrealized appreciation (depreciation) on investment in ether |
( |
) | ||
| |
|
|||
| Net realized and change in unrealized appreciation (depreciation) on investment in ether |
( |
) | ||
| |
|
|||
| Net increase (decrease) in net assets resulting from operations |
( |
) | ||
| |
|
|||
| Net increase (decrease) in net assets per Share(a)(b) |
$ | ( |
) | |
| * | No comparative period presented as the Fund’s operations commenced on July 23, 2024. |
| (a) | Net increase (decrease) in net assets per Share based on average shares outstanding during th e period. |
| (b) | The amount shown for a share outstanding may not agree with the change in the aggregate gains and losses on investment for the period because of the timing of transactions in the Fund’s shares in relation to fluctuating market values for the Fund’s underlying investment. |
For the period July 23, 2024 (Date of commencement of operations) through September 30, 2024* |
||||
Cash Flows from Operating Activities |
||||
Net increase (decrease) in net assets resulting from operations |
$ | ( |
) | |
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities: |
||||
Purchases of ether |
( |
) | ||
Sales of ether |
||||
Net realized (gain) loss on investment in ether |
||||
Net change in unrealized (appreciation) depreciation on investment in ether |
||||
Change in operating assets and liabilities: |
— | |||
Sponsor’s fee payable |
||||
Net cash provided by (used in) operating activities |
$ | ( |
) | |
Cash Flows from Financing Activities |
||||
Proceeds from issuance of Shares |
$ | |||
Payments on Shares redeemed |
( |
) | ||
Net cash provided by (used in) financing activities |
$ | |||
Cash |
||||
Net increase in cash |
$ | |||
Cash, beginning of period |
||||
Cash, end of period |
$ | |||
| * | No comparative period presented as the Fund’s operations co mm enced on July 23, 2024. |
For the period July 23, 2024 (Date of commencement of operations) through September 30, 2024*^ |
||||
| Net assets, beginning of period |
$ | |||
| Net investment loss |
||||
| Net realized gain (loss) on investment in ether |
( |
) | ||
| Net change in unrealized appreciation (depreciation) on investment in ether |
( |
) | ||
| |
|
|||
| Net increase (decrease) in net assets resulting from operations |
( |
) | ||
| |
|
|||
| Increase (decrease) in net assets from capital share transactions: |
||||
| Contributions for Shares issued |
||||
| Distributions for Shares redeemed |
( |
) | ||
| |
|
|||
| Net increase in net assets resulting from capital share transactions |
||||
| |
|
|||
| Net assets, end of period |
$ | |||
| |
|
|||
| * | No comparative period presented as the Fund’s operations commenced on July 23, 2024. |
| ^ | On May 21, 2024, Franklin Resources Inc. (the “Seed Capital Investor”), an affiliate of the Sponsor, subject to conditions, p urc hased |
| 1. | ORGANIZATION |
| 2. | SIGNIFICANT ACCOUNTING POLICIES |
| 2.1. | Basis of Presentation |
| 2.2. | Calculation of NAV and NAV per Share |
| 2.3. | Valuation of Ether |
| 2.4. | Fees, Expenses and Realized Gain (Loss) |
| 2.5. | Organizational and Offering Costs |
| 2.6. | Income Taxes |
| 2.7. | Creation and Redemption of Shares |
Shares |
Amount# |
|||||||
Balance at July 23, 2024 (Date of Commencement of operations) |
$ | |
||||||
Creation of Shares |
||||||||
Redemption of Shares |
( |
) | ( |
) | ||||
Balance at September 30, 2024 |
$ | |
||||||
| # | Dollar amount of balance represents the cumulative fair value of creation of shares less the redemption of shares, at the time of the specific creation or redemption. |
| * | No comparative period presented as the Fund’s operations commenced on July 23, 2024. |
| ^ | On May 21, 2024, Franklin Resources Inc. (the “Seed Capital Investor”), an affiliate of the Sponsor, subject to conditions, purchased |
| 2.8. | Recently Issued Accounting Pronouncements |
| 3. | INVESTMENT IN ETHER |
Quantity of ether |
Amount in US$ |
|||||||
Balance at July 23, 2024 (Date of Commencement of operations) |
$ |
|||||||
Ether purchased for the creation of Shares |
||||||||
Ether sold for the redemption of Shares |
( |
) | ( |
) | ||||
Principal on ether sales to pay expenses |
||||||||
Net realized gain (loss) from ether sold for the redemption of shares |
— | ( |
) | |||||
Net change in unrealized appreciation (depreciation) on investment in ether |
— | ( |
) | |||||
Balance at September 30, 2024 |
$ | |
||||||
| * | No comparative period presented as the Fund’s operations commenced on July 23, 2024. |
| ^ | On May 21, 2024, Franklin Resources Inc. (the “Seed Capital Investor”), an affiliate of the Sponsor, subject to conditions, purchased |
| 4. | RELATED PARTIES |
| 5. | CONCENTRATION OF RISK |
| 6. | FINANCIAL HIGHLIGHTS |
For the period July 23, 2024 (Date of commencement of operations) through September 30, 2024* |
||||
Net asset value per Share, beginning of period (a) |
$ | |||
Net investment loss (b) |
||||
Net realized and unrealized gain (loss) on investment in ether |
( |
) | ||
Net change in net assets from operations (c) |
( |
) | ||
Net asset value per Share, end of period |
$ | |||
Total return, at net asset value (d)(e) |
( |
)% | ||
Ratio to average net assets |
||||
Net investment loss (f) |
% | |||
Net expenses (f) |
% | |||
| * | No comparative period presented as the Fund’s operations commenced on July 23, 2024. |
| (a) | The amount shown represents the NAV per share at commencement of the Fund’s investment operations. This amount includes proceeds to the Fund from the initial ether seed creation transaction conducted on June 27, 2024. Prior to June 27, 2024, |
| (b) | Calculated using average Shares outstanding. |
| (c) | The amount shown for a share outstanding may not agree with the change in the aggregate gains and losses on investment for the period because of the timing of transactions in the Fund’s shares in relation to fluctuating market values for the Fund’s underlying investment. |
| (d) | Percentage is not annualized. |
| (e) | Total Return at NAV is calculated assuming an initial investment made at the NAV at the beginning of the period, and redemption of Shares at NAV on the last day of the period. Total Return at NAV as shown above includes adjustments in accordance with U.S. GAAP. |
| (f) | Annualized based on the period from July 23, 2024 (Commencement of operations) to September 30, 2024. |
| 7. | COMMITMENTS AND CONTINGENCIES |
| 8. | INDEMNIFICATION |
| 9. | SUBSEQUENT EVENTS |
September 30, 2024* |
||||
| Assets: |
||||
| Investment in ether, at fair value (a) |
$ | |||
| |
|
|||
| Total assets |
||||
| |
|
|||
| Liabilities: |
||||
| Sponsor’s fee payable |
||||
| |
|
|||
| Total liabilities |
||||
| |
|
|||
| Commitments and contingencies (Note 7) |
||||
| |
|
|||
| Net assets |
$ | |||
| |
|
|||
| Shares issued and outstanding (b) |
||||
| Net asset value per Share |
$ | |||
| * | No comparative period presented as the Fund’s operations commenced on July 23, 2024. |
| (a) | Cost of investment in ether: $ |
| (b) | |
Quantity of ether |
Cost |
Fair Value |
% of Net Assets |
|||||||||||||
| Investment in ether |
$ | $ | % | |||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total investments |
$ | $ | % | |||||||||||||
| Less liabilities |
% | |||||||||||||||
| |
|
|
|
|||||||||||||
| Net assets |
$ | % | ||||||||||||||
| |
|
|
|
|||||||||||||
| * | No comparative period presented as the Fund’s operations commenced on July 23, 2 0 24. |
For the period July 23, 2024 (Date of commencement of operations) through September 30, 2024* |
||||
Expenses: |
||||
Sponsor’s fee |
$ | |||
Less waiver and reimbursement |
( |
) | ||
Net investment loss |
||||
Net realized and change in unrealized gain (loss) on investment in ether: |
||||
Net realized gain (loss) on investment in ether |
( |
) | ||
Net change in unrealized appreciation (depreciation) on investment in ether |
( |
) | ||
Net realized and change in unrealized appreciation (depreciation) on investment in ether |
( |
) | ||
Net increase (decrease) in net assets resulting from operations |
( |
) | ||
Net increase (decrease) in net assets per Share (a)(b) |
$ | ( |
) | |
| * | No comparative period presented as the Fund’s operations commenced on July 23, 2024. |
| (a) | Net increase (decrease) in net assets per Share based on average shares outstanding durin g the period. |
| (b) | The amount shown for a share outstanding may not agree with the change in the aggregate gains and losses on investment for the period because of the timing of transactions in the Fund’s shares in relation to fluctuating market values for the Fund’s underlying investment. |
For the period July 23, 2024 (Date of commencement of operations) through September 30, 2024* |
||||
Cash Flows from Operating Activities |
||||
Net increase (decrease) in net assets resulting from operations |
$ | ( |
) | |
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities: |
||||
Purchases of ether |
( |
) | ||
Sales of ether |
||||
Net realized (gain) loss on investment in ether |
||||
Net change in unrealized (appreciation) depreciation on investment in ether |
||||
Change in operating assets and liabilities: |
— | |||
Sponsor’s fee payable |
||||
Net cash provided by (used in) operating activities |
$ | ( |
) | |
Cash Flows from Financing Activities |
||||
Proceeds from issuance of Shares |
$ | |||
Payments on Shares redeemed |
( |
) | ||
Net cash provided by (used in) financing activities |
$ | |||
Cash |
||||
Net increase in cash |
$ | |||
Cash, beginning of period |
||||
Cash, end of period |
$ | |||
| * | No comparative period presented as the Fund’s operations commenced on July 23 , 2024. |
For the period July 23, 2024 (Date of commencement of operations) through September 30, 2024*^ |
||||
Net assets, beginning of period |
$ | |||
Net investment loss |
||||
Net realized gain (loss) on investment in ether |
( |
) | ||
Net change in unrealized appreciation (depreciation) on investment in ether |
( |
) | ||
Net increase (decrease) in net assets resulting from operations |
( |
) | ||
Increase (decrease) in net assets from capital share transactions: |
||||
Contributions for Shares issued |
||||
Distributions for Shares redeemed |
( |
) | ||
Net increase in net assets resulting from capital share transactions |
||||
Net assets, end of period |
$ | |||
| * | No comparative period presented as the Fund’s operations commenced on Jul y 23, 2024. |
| ^ | On May 21, 2024, Franklin Resources Inc. (the “Seed Capital Investor”), an affiliate of the Sponsor, subject to conditions, purchased |
| 1. | ORGANIZATION |
| 2. | SIGNIFICANT ACCOUNTING POLICIES |
| 2.2. | Calculation of NAV and NAV per Share |
| 2.3. | Valuation |
| 2.4. | Fees, Expenses and Realized Gain (Loss) |
| 2.5. | Organizational and Offering Costs |
| 2.6. | Income Taxes |
| 2.7. | Creation and Redemption of Shares |
Shares |
Amount# |
|||||||
Balance at July 23, 2024 (Date of Commencement of operations) |
$ | |||||||
Creation of Shares |
||||||||
Redemption of Shares |
( |
) | ( |
) | ||||
Balance at September 30, 2024 |
$ | |||||||
| # | Dollar amount of balance represents the cumulative fair value of creation of shares less the redemption of shares, at the time of the specific creation or redemption. |
| * | No comparative period presented as the Fund’s operations commenced on July 23, 2024. |
| ^ | On May 21, 2024, Franklin Resources Inc. (the “Seed Capital Investor”), an affiliate of the Sponsor, subject to conditions, purchased |
| 2.8. | Recently Issued Accounting Pronouncements |
| 3. | INVESTMENT IN ETHER |
Quantity of ether |
Amount in US$ |
|||||||
Balance at July 23, 2024 (Date of Commencement of operations) |
$ | |||||||
Ether purchased for the creation of Shares |
||||||||
Ether sold for the redemption of Shares |
( |
) | ( |
) | ||||
Principal on ether sales to pay expenses |
||||||||
Net realized gain (loss) from ether sold for the redemption of shares |
— |
( |
) | |||||
Net change in unrealized appreciation (depreciation) on investment in ether |
— | ( |
) | |||||
Balance at September 30, 2024 |
$ | |||||||
| * | No comparative period presented as the Fund’s operations commenced on July 23, 2024. |
| ^ | On May 21, 2024, Franklin Resources Inc. (the “Seed Capital Investor”), an affiliate of the Sponsor, subject to conditions, purchased |
| 4. | RELATED PARTIES |
| 5. | CONCENTRATION OF RISK |
| 6. | FINANCIAL HIGHLIGHTS |
For the period July 23, 2024 (Date of commencement of operations) through September 30, 2024* |
||||
Net asset value per Share, beginning of period (a) |
$ | |||
Net investment loss (b) |
||||
Net realized and unrealized gain (loss) on investment in ether |
( |
) | ||
Net change in net assets from operations (c) |
( |
) | ||
Net asset value per Share, end of period |
$ | |||
Total return, at net asset value (d)(e) |
( |
)% | ||
Ratio to average net assets |
||||
Net investment loss (f) |
% | |||
Net expenses (f) |
% | |||
| * | No comparative period presented as the Fund’s operations commenced on July 23, 2024. |
| (a) | The amount shown represents the NAV per share at commencement of the Fund’s investment operations. This amount includes proceeds to the Fund from the initial ether seed creation transaction conducted on June 27, 2024. Prior to June 27, 2024, |
| (b) | Calculated using average Shares outstanding. |
| (c) | The amount shown for a share outstanding may not agree with the change in the aggregate gains and losses on investment for the period because of the timing of transactions in the Fund’s shares in relation to fluctuating market values for the Fund’s underlying investment. |
| (d) | Percentage is not annualized. |
| (e) | Total Return at NAV is calculated assuming an initial investment made at the NAV at the beginning of the period, and redemption of Shares at NAV on the last day of the period. Total Return at NAV as shown above includes adjustments in accordance with U.S. GAAP. |
| (f) | Annualized based on the period from July 23, 2024 (Commencement of operations) to September 30, 2024. |
7 . |
COMMITMENTS AND CONTINGENCIES |
8 . |
INDEMNIFICATION |
9 . |
SUBSEQUENT EVENTS |
Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This quarterly report on Form 10-Q, including this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and such forward-looking statements involve risks and uncertainties. All statements (other than statements of historical fact) included in this Form 10-Q that address activities, events or developments that may occur in the future, the Fund’s operations, the Sponsor’s plans and references to the Fund’s future success and other similar matters are forward-looking statements. Words such as “could,” “would,” “may,” “expect,” “intend,” “estimate,” “predict,” and variations on such words or negatives thereof, and similar expressions that reflect our current views with respect to future events and Fund performance, are intended to identify such forward-looking statements. These forward-looking statements are only predictions, subject to risks and uncertainties that are difficult to predict and many of which are outside of our control, and actual results could differ materially from those discussed. Forward-looking statements involve risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed therein. We express our estimates, expectations, beliefs, and projections in good faith and believe them to have a reasonable basis. However, we make no assurances that management’s estimates, expectations, beliefs, or projections will be achieved or accomplished. These forward-looking statements are based on assumptions about many important factors that could cause actual results to differ materially from those in the forward-looking statements. We do not intend to update any forward-looking statements even if new information becomes available or other events occur in the future, except as required by the federal securities laws.
Organization and Trust Overview
The Franklin Ethereum Trust (the “Trust”) was formed as a Delaware statutory trust on February 8, 2024, and is governed by the provisions of an Amended and Restated Agreement and Declaration of Trust dated as of May 30, 2024. The Trust is not registered as an investment company under the Investment Company Act of 1940, as amended (the “Investment Company Act”) and is not a commodity pool for purposes of the Commodity Exchange Act (“CEA”). The Trust currently offers a single series, the Franklin Ethereum ETF (the “Fund”), which is the sole series of the Trust. The Sponsor of the Trust and the Fund (the “Sponsor”) is Franklin Holdings, LLC. The Sponsor is not subject to regulation by the Commodity Futures Trading Commission (“CFTC”) as a commodity pool operator with respect to the Fund, or a commodity trading advisor with respect to the Fund. The Fund issues shares (the “Shares”), which represent units of fractional undivided beneficial interest in the Fund. The Shares of the Fund are listed on the Cboe BZX Exchange, Inc. (“Cboe BZX Exchange” or the “Exchange”).
On May 21, 2024, Franklin Resources Inc. (the “Seed Capital Investor”), an affiliate of the Sponsor, subject to conditions, purchased 4,000 Shares at a per-Share price equal to $25.00 (the “Initial Seed Shares”). Delivery of the Initial Seed Shares was made on May 21, 2024. Total proceeds to the Fund from the sale of the Initial Seed Shares were $100,000. On June 27, 2024, the Initial Seed Shares were redeemed for $100,000 and the Seed Capital Investor purchased two creation units in a cash transaction comprised of a total of 100,000 Shares at a per-Share price based on 380 ether per Creation Unit (or 0.0076 ether per Share), for a total of 760 ether (the “Seed Creation Units”). The cash proceeds to the Fund from the sale of the Seed Creation Units were used by the Fund to purchase 760 ether at the price of $3,446.37 per ether on June 27, 2024 (exclusive of transaction and other costs incurred in connection with the conversion of the cash proceeds to ether, which were paid by the Seed Capital Investor). Thus, the ultimate total proceeds to the Fund from the sale of the Seed Creation Units were $2,619,241.20 (an amount representing 760 ether). As noted above, the transaction and other costs incurred in connection with the Seed Creation Units were paid by the Seed Capital Investor and not borne by the Fund.
The Fund seeks to reflect generally the performance of the price of ether. The Fund seeks to reflect such performance before payment of the Fund’s expenses and liabilities. The Shares are intended to constitute a simple means of making an investment similar to an investment in ether rather than by acquiring, holding, and trading ether directly on a peer-to-peer or other basis or via a digital asset exchange. The Fund is a passive investment vehicle and is not a leveraged product. The Sponsor does not actively manage the ether held by the Fund.
The Fund issues Shares only to eligible financial institutions called Authorized Participants and only in one or more blocks of 50,000 Shares (“Creation Units”). Creation Units are redeemable only by Authorized Participants. Creation Units are issued and redeemed in exchange for cash. The Shares are listed and traded on the Exchange under the ticker symbol “EZET.” The market price of the Shares may be different than the Fund’s NAV per Share. The Fund issues Shares in Creation Units on a continuous basis at the applicable NAV per Share on the creation order date.
28
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The Fund’s only ordinary recurring expense is expected to be the Sponsor’s fee. In exchange for the Sponsor’s fee, the Sponsor has agreed to assume the ordinary fees and expenses incurred by the Fund, including but not limited to the following: the fees charged by the Administrator, the Marketing Agent, the Custodians and the Trustee, Cboe BZX Exchange listing fees, typical maintenance and transaction fees of the DTC, SEC registration fees, printing and mailing costs, tax reporting fees, audit fees, license fees and expenses, and up to $500,000 per annum in ordinary legal fees and expenses. The Sponsor will also pay the costs of the Fund’s organization and the initial offering costs, and may not seek reimbursement of such costs.
The Sponsor’s fee is accrued daily at an annualized rate equal to 0.19% of the net asset value of the Fund and is payable at least quarterly in arrears in U.S. dollars or in-kind or any combination thereof. The Sponsor may, at its sole discretion and from time to time, waive all or a portion of the Sponsor’s fee for stated periods of time. The Sponsor is under no obligation to waive any portion of its fees and any such waiver shall create no obligation to waive any such fees during any period not covered by the waiver. The Fund will sell ether as needed to pay the Sponsor’s fee. The Fund bears transaction costs, including any ether network fees or other similar transaction fees, in connection with any sales of ether necessary to pay the Sponsor’s fee, as well as other Fund expenses (if any) that are not assumed by the Sponsor (expenses assumed by the Sponsor are specified above). Any ether network fees and similar transaction fees incurred in connection with the creation or redemption of Creation Units are borne by the Authorized Participant. For a period from July 23, 2024 (the day the Shares were initially listed on the Exchange) to January 31, 2025, the Sponsor will waive the entire Sponsor’s Fee on the first $10.0 billion of the Fund’s assets. In the future, if the Sponsor decides to waive all or a portion of the Sponsor’s Fee, Shareholders will be notified in a prospectus supplement, in the Fund’s periodic reports, and/or on the Fund’s website.
The Fund is an “emerging growth company” as that term is used in the Securities Act of 1933, as amended (the “Securities Act”), and, as such, the Fund may elect to comply with certain reduced public company reporting requirements.
The NAV of the Trust is used by the Trust in its day-to-day operations to measure the net value of the Trust’s assets. The NAV is calculated on each business day and is equal to the aggregate value of the Trust’s assets less its liabilities based on the Index price. In determining the NAV of the Trust on any business day, the Administrator will calculate the price of the ether held by the Trust as of 4:00 p.m. ET on such day. The Administrator will also calculate the “NAV per Share” of the Trust, which equals the NAV of the Trust divided by the number of outstanding Shares. For purposes of making these calculations, a business day means any day other than a day when the Exchange is closed for regular trading.
The Administrator will rely on the Index as the index price to be used when determining NAV. However, determining the value of the Trust’s ether using the Index is not in accordance with GAAP, and therefore is not used in the Trust’s financial statements. The Trust’s ether is carried, for financial statement purposes, at fair value, as required by GAAP. The Trust determines the fair value of ether based on the price provided by the ether market that the Trust considers its “principal market” as of 4:00 p.m., ET on the valuation date. The net asset value of the Trust determined on a GAAP basis is referred to as the “Principal Market NAV” and the net asset value of the Trust per Share determined on a GAAP basis is referred to as the “Principal Market NAV per Share.”
NAV and NAV per Share are not measures calculated in accordance with GAAP and are not intended as substitute for Principal Market and Principal Market NAV per Share, respectively.
Critical Accounting Policy
The Trust’s and the Fund’s financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements relies on estimates and assumptions that impact the Fund’s as well as the Trust’s financial position and results of operations. These estimates and assumptions affect the Fund’s as well as the Trust’s application of accounting policies. Please refer to Note 2 to the financial statements included in this report for further discussion of the Trust’s and the Fund’s accounting policies.
Discussion of Operations (Financing Activities)
On May 21, 2024, Franklin Resources Inc. (the “Seed Capital Investor”), an affiliate of the Sponsor, subject to conditions, purchased 4,000 Shares at a per-Share price equal to $25.00 (the “Initial Seed Shares”). Delivery of the Initial Seed Shares was made on May 21, 2024. Total proceeds to the Fund from the sale of the Initial Seed Shares were $100,000. On June 27, 2024, the Initial Seed Shares were redeemed for $100,000 and the Seed Capital Investor purchased two creation units in a cash transaction comprised of a total of 100,000 Shares at a per-Share price based on 380 ether per Creation Unit (or 0.0076 ether per Share), for a total of 760 ether (the “Seed Creation Units”). The cash proceeds to the Fund from the sale of the Seed Creation Units were used by the Fund to purchase 760 ether at the price of $3,446.37 per ether on June 27, 2024 (exclusive of transaction and other costs incurred in connection with the conversion of the cash proceeds to ether, which were paid by the Seed Capital Investor). Thus, the ultimate total proceeds to the Fund from the sale of the Seed Creation Units were $2,619,241.20 (an amount representing 760 ether). Further, the transaction and other costs incurred in connection with the Seed Creation Units were paid by the Seed Capital Investor and not borne by the Fund. The Seed Capital Investor will act as a statutory underwriter with respect to the Seed Creation Units. Shares of the Fund were first listed and began trading on July 23, 2024.
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Results of Operations for the period July 23, 2024 (Date of commencement of operations) to September 30, 2024*
For the period July 23, 2024 (Date of commencement of operations) to September 30, 2024, 1,500,000 Shares were issued in exchange for 11,400.0000 ether and 50,000 Shares were redeemed in exchange for (380.0000) ether. The Fund’s NAV per Share began the period at $26.21 and ended the period at $19.98. The decrease in NAV per Share was due to a lower price of ether of $2,628.44 at period end, which represented a decrease of 23.79% from $3,448.77 at July 23, 2024.
The change in net assets from operations for the period July 23, 2024 (Date of commencement of operations) to September 30, 2024 was $(6,971,976), which was due to (i) payment of the Sponsor’s Fee of $(10,129), (ii) less waiver and reimbursement of $10,129, and (iii) net realized loss from ether sold for the redemption of shares and sold to pay expenses of $(194,831) and (iii) a net change in unrealized appreciation (depreciation) on investment in ether of $(6,777,145). Other than the Sponsor Fee the Fund had no expenses during the period July 23, 2024 to September 30, 2024.
| * | No comparative period presented as the Fund’s operations commenced on July 23, 2024. |
Liquidity and Capital Resources
The Fund is not aware of any trends, demands, commitments, events, or uncertainties that are reasonably likely to result in material changes to its liquidity needs.
The Fund’s only ordinary recurring expense is expected to be the Sponsor’s fee. In exchange for the Sponsor’s fee, the Sponsor has agreed to assume the ordinary fees and expenses incurred by the Fund, including but not limited to the following: the fees charged by the Administrator, the Marketing Agent, the Custodians and the Trustee, Cboe BZX Exchange listing fees, typical maintenance and transaction fees of the DTC, SEC registration fees, printing and mailing costs, tax reporting fees, audit fees, license fees and expenses, and up to $500,000 per annum in ordinary legal fees and expenses. The Sponsor will also pay the costs of the Fund’s organization and the initial offering costs, and may not seek reimbursement of such costs. The Sponsor is not required to pay any extraordinary or non-routine expenses.
The Sponsor’s fee is accrued daily at an annualized rate equal to 0.19% of the net asset value of the Fund and is payable at least quarterly in arrears in U.S. dollars or in-kind or any combination thereof. The Sponsor may, at its sole discretion and from time to time, waive all or a portion of the Sponsor’s fee for stated periods of time. The Sponsor is under no obligation to waive any portion of its fees and any such waiver shall create no obligation to waive any such fees during any period not covered by the waiver. The Fund will sell ether as needed to pay the Sponsor’s fee. For a period from July 23, 2024 (the day the Shares were initially listed on the Exchange) to January 31, 2025, the Sponsor will waive the entire Sponsor’s Fee on the first $10.0 billion of the Fund’s assets. In the future, if the Sponsor decides to waive all or a portion of the Sponsor’s Fee, Shareholders will be notified in a prospectus supplement or on the Sponsor’s website for the Fund.
The Fund bears transaction costs, including any ether network fees or other similar transaction fees, in connection with any sales of ether necessary to pay the Sponsor’s fee, as well as other Fund expenses (if any) that are not assumed by the Sponsor (expenses assumed by the Sponsor are specified above). Any ether network fees and similar transaction fees incurred in connection with the creation or redemption of Creation Units are borne by the Authorized Participant.
Off-Balance Sheet Arrangements
At September 30, 2024, the Fund as well as the Trust do not have any off-balance sheet arrangements.
Historical Digital Asset Holdings and Ether Prices
Analysis of Movements in the Price of Ether
As movements in the price of Ether are expected to directly affect the price of the Fund’s shares, it is important for investors to understand and follow movements in the price of Ether. Past movements in the Ether price are not indicators of future movements.
The following chart shows movements in the price of Ether based on the CME CF Ether Reference Rate – New York Variant for the Ether – U.S. Dollar trading pair (the “CF Benchmarks Index”) in U.S. dollars per unit over the period from July 23, 2024 to September 30, 2024.
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The average, high, low and end-of-period Ether prices based on the CME CF Ether Price for are as below:
| Period |
Average | High | Date | Low | Date | End of period |
Last business day (1) | |||||||||||||||||||||
| July 23, 2024 to September 30, 2024 |
2,653.21 | 3,467.55 | July 23, 2024 | 2,224.82 | Sep 06, 2024 | 2,591.07 | September 30, 2024 | |||||||||||||||||||||
| (1) | The end of period Ether price is the CME CF Ether Price on the last business day of the period. |
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Fund is a passive investment vehicle and is not a leveraged product. The Sponsor does not actively manage the ether held by the Fund. This means that the Sponsor does not sell ether at times when its price is high or acquire ether at low prices in the expectation of future price increases. The Fund will not utilize leverage, derivatives or similar instruments or transactions in seeking to meet its investment objective.
Except for transactions with the Trade Credit Lender, the Fund’s assets may not be loaned, pledged, hypothecated or re-hypothecated by any entity, including the Fund, Sponsor, Prime Broker or Ether Custodian.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
The duly authorized officers of the Sponsor, performing functions equivalent to those a principal executive officer and principal financial officer of the Trust would perform if the Trust had any officers, have evaluated the effectiveness of the Trust’s disclosure controls and procedures, and have concluded as of the end of the period covered by this filing on Form 10-Q that the disclosure controls and procedures of the Trust operated effectively at reasonable assurance levels.
The disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in the reports that the Trust files or submits under the Securities Exchange Act of 1934, as amended, are recorded, processed, summarized and reported, within the time period specified in the applicable rules and forms, and that such information is accumulated and communicated to the duly authorized officers of the Sponsor performing functions equivalent to those a principal executive officer and principal financial officer of the Trust would perform if the Trust had any officers, as appropriate, to allow timely decisions regarding required disclosure. It is important to note that no set of controls, no matter how reasonably designed, can detect every error.
The duly authorized officers of the Sponsor, performing functions equivalent to those a principal executive officer and principal financial officer of the Trust would perform if the Trust had any officers, have evaluated the effectiveness of the Fund disclosure controls and procedures, and have concluded as of the end of the period covered by this filing on Form 10-Q that the disclosure controls and procedures of the Fund operated effectively at reasonable assurance levels.
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The disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in the reports that the Trust files or submits under the Securities Exchange Act of 1934, as amended, on behalf of the Fund, are recorded, processed, summarized and reported, within the time period specified in the applicable rules and forms, and that such information is accumulated and communicated to the duly authorized officers of the Sponsor performing functions equivalent to those a principal executive officer and principal financial officer of the Trust would perform if the Trust had any officers, as appropriate, to allow timely decisions regarding required disclosure. It is important to note that no set of controls, no matter how reasonably designed, can detect every error.
Internal Control over Financial Reporting
There were no changes in the Trust’s and the Fund’s internal control over financial reporting that occurred during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Trust’s and/or the Fund’s internal control over financial reporting.
Each of the Sarbanes-Oxley certifications included as exhibits to this filing apply with respect to both the operations of both the Fund, as the sole series of the Trust, and the Trust as registrant.
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| a) | None. |
| b) | Not applicable. |
| c) | The Fund does not purchase Shares directly from its Shareholders. In connection with its redemption of Creation Units held by Authorized Participants, the Fund redeemed 1 Creation Unit (comprising 50,000 Shares) during the quarter ended September 30, 2024. The following table summarizes the redemptions by Authorized Participants during the period: |
| Period |
Total Shares Redeemed |
Average Price Per Share |
||||||
| July 23, 2024 – July 31, 2024 |
— | $ | — | |||||
| August 1, 2024 – August 31, 2024 |
50,000 | $ | 20.45 | |||||
| September 1, 2024 – September 30, 2024 |
— | $ | — | |||||
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Exhibit Index
| Exhibit No |
Description of Exhibit | |
| 31.1(1) | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2(1) | Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1(1) | Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U. S. C. 1350). | |
| 32.2(1) | Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U. S. C. 1350). | |
| 101.INS | XBRL Instance Document. | |
| 101.SCH | XBRL Taxonomy Extension Schema. | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase. | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase. | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase. | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase. | |
| (1) | Filed herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned in the capacities* indicated thereunto duly authorized.
Franklin Holdings, LLC
| Sponsor of the Franklin Ethereum Trust (registrant) | ||
| By: | /s/ David Mann | |
| David Mann* | ||
| President and Chief Executive Officer | ||
| (serving in the capacity of principal executive officer) | ||
| By: | /s/ Matthew Hinkle | |
| Matthew Hinkle* | ||
| Chief Financial Officer | ||
| (serving in the capacity of principal financial officer) | ||
Date: November 12, 2024
| * | The registrant is a trust and the person is signing in his capacity as an officer of Franklin Holdings, LLC, the Sponsor of the registrant. |
35
Exhibit 31.1
Certification by Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, David Mann, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Franklin Ethereum Trust (the “Trust” or “registrant”); |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (c) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| By: | /s/ David Mann | |
| David Mann* | ||
| President and Chief Executive Officer | ||
| (serving in the capacity of principal executive officer) | ||
| Date: November 12, 2024 | ||
| * | The registrant is a trust and the person is signing in his capacity as an officer of Franklin Holdings, LLC, the Sponsor of the registrant. |
Exhibit 31.2
Certification by Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Matthew Hinkle, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Franklin Ethereum Trust (the “Trust” or “registrant”); |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (c) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| By: | /s/ Matthew Hinkle | |
| Matthew Hinkle* | ||
| Chief Financial Officer | ||
| (serving in the capacity of principal financial officer) | ||
| Date: November 12, 2024 | ||
| * | The registrant is a trust and the person is signing in his capacity as an officer of Franklin Holdings, LLC, the Sponsor of the registrant. |
Exhibit 32.1
Certification by Principal Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q for the quarter ended September 30, 2024 (the “Report”) of Franklin Ethereum Trust (the “Trust” or “registrant”), as filed with the Securities and Exchange Commission on the date hereof, I, David Mann, the Principal Executive Officer of the Sponsor of the Registrant, hereby certify, to the best of my knowledge, that:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
| By: | /s/ David Mann | |
| David Mann* | ||
| President and Chief Executive Officer | ||
| (serving in the capacity of principal executive officer) | ||
| Date: November 12, 2024 | ||
| * | The Registrant is a trust and the person is signing in his capacity as an officer of Franklin Holdings, LLC, the Sponsor of the registrant. |
Exhibit 32.2
Certification by Principal Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q for the quarter ended September 30, 2024 (the “Report”) of Franklin Ethereum Trust (the “Trust” or “registrant”), as filed with the Securities and Exchange Commission on the date hereof, I, Matthew Hinkle, the Principal Financial Officer of the Sponsor of the Registrant, hereby certify, to the best of my knowledge, that:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
| By: | /s/ Matthew Hinkle | |
| Matthew Hinkle* | ||
| Chief Financial Officer | ||
| (serving in the capacity of principal financial officer) | ||
| Date: November 12, 2024 | ||
| * | The Registrant is a trust and the person is signing in his capacity as an officer of Franklin Holdings, LLC, the Sponsor of the registrant. |