Invesco Galaxy Ethereum ETF S-1/A, filed May 31, 2024
Invesco Galaxy Ethereum ETF (QETH)
Table of Contents
As filed with the Securities and Exchange Commission on May 31, 2024
Registration No. 333-274767
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Invesco Galaxy Ethereum ETF
(Exact name of registrant as specified in its charter)
| Delaware |
6221 |
93-6866177 | ||
| (State or other jurisdiction of incorporation or organization) |
(Primary Standard Industrial Classification Code Number) |
(I.R.S. Employer Identification No.) |
c/o Adam Henkel, Esq.
Invesco Capital Management LLC
3500 Lacey Road, Suite 700
Downers Grove, IL 60515
800-983-0903
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Copy to:
| Paulita Pike, Esq. Ropes & Gray LLP 191 North Wacker Drive, 32nd Floor Chicago, IL 60606 |
Brian D. McCabe, Esq. Ropes & Gray LLP Prudential Tower, 800 Boylston Street Boston, MA 02199 |
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: ☒
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act of 1934.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ | |||
| Emerging growth company | ☒ | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☒
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
Table of Contents
The information in this Preliminary Prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This Preliminary Prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
Subject to Completion
Preliminary Prospectus dated May 31, 2024
PRELIMINARY PROSPECTUS
INVESCO GALAXY ETHEREUM ETF
COMMON SHARES
Invesco Galaxy Ethereum ETF (the “Trust”) is an exchange-traded fund that issues common shares of beneficial interest (the “Shares”) that trade on Cboe BZX (“Cboe” or the “Exchange”) under the ticker symbol “QETH”. The Trust’s investment objective is to reflect the performance of the spot price of ether as measured using Lukka Prime Ethereum Reference Rate (the “Benchmark”), less the Trust’s expenses and other liabilities.
In seeking to achieve its investment objective, the Trust will hold ether. The Trust will value its Shares each Business Day as of 4:00 p.m. ET. The value of ether held by the Trust is determined based on the fair market value (“FMV”) price for ether, reflecting the execution price of ether on its principal market as determined each day by Lukka Inc., an independent third-party digital asset data company (the “Benchmark Provider”). The Benchmark is designed to provide an estimated fair market value price for ether, based on the execution price of ether on its principal market. In this regard, the Benchmark Provider seeks to identify a “principal market” for ether each day by evaluating eligible ether trading platforms across a variety of different criteria, including the trading platforms’ oversight and governance frameworks, microstructure efficiency, trading volume, data transparency and data integrity. Invesco Capital Management LLC (the “Sponsor” or “Invesco”) is the sponsor of the Trust, CSC Delaware Trust Company (the “Trustee”) is the trustee of the Trust, The Bank of New York Mellon is the Trust’s transfer agent (“Transfer Agent”) and will hold all of the Trust’s cash on the Trust’s behalf as cash custodian (“Cash Custodian”), and Coinbase Custody Trust Company, LLC (the “Ethereum Custodian”) will hold all of the Trust’s ether on the Trust’s behalf as custodian.
Shareholders who decide to buy or sell Shares of the Trust will place their trade orders through their brokers and may incur customary brokerage commissions and charges. Such trades may occur at a premium or discount relative to the net asset value per share (“NAV”) of the Shares of the Trust.
The Trust intends to issue Shares on a continuous basis and is registering an indeterminate number of Shares with the SEC in accordance with Rule 456(d) and 457(u) under the Securities Act of 1933, as amended (the “Securities Act”). The Trust will process all creations and redemptions of Shares in transactions with financial firms that are authorized to do so (known as “Authorized Participants”). When the Trust issues or redeems its Shares, it will do so only in blocks of 5,000 Shares (a “Creation Basket”) based on the quantity of ether attributable to each Share of the Trust (net of accrued but unpaid Sponsor fees and any accrued but unpaid expenses or liabilities).
Creation and redemption transactions initially will take place in cash. Subject to Cboe in the future receiving the necessary regulatory approval to permit the Trust to create and redeem Creation Baskets in-kind for ether (the “In-Kind Regulatory Approval”), these transactions may also take place in exchange for ether. The timing of the In-Kind Regulatory Approval and the related in-kind creation model is unknown and there is no guarantee that the Cboe will receive such approval. If Cboe receives the In-Kind Regulatory Approval and the Sponsor chooses to allow in-kind creations and redemptions, notice to Shareholders will be provided on the Trust’s website, in a prospectus supplement, through a current report on Form 8-K and/or in the Trust’s annual or quarterly reports.
When purchasing Creation Baskets, Authorized Participants will deliver cash to the Cash Custodian. Galaxy Digital Funds LLC (the “Execution Agent”) will be responsible for acquiring the requisite amount of ether on behalf of the Trust on an agency basis. Once the Execution Agent selects a counterparty or digital asset trading platform (“Ethereum Counterparty”), the Cash Custodian will transfer cash to the Ethereum Counterparty in payment for the requisite amount of ether. The ether acquired from the Ethereum Counterparty will be transferred to the Ethereum Custodian. After receipt of the ether by the Ethereum Custodian, the Transfer Agent will issue Creation Baskets of Shares to the creating Authorized Participant in satisfaction of the creation order.
When redeeming Creation Baskets, the Execution Agent will be responsible for selling the requisite amount of ether on behalf of the Trust on an agency basis. Once the Execution Agent selects an Ethereum Counterparty, the Ethereum Custodian will transfer ether to the Ethereum Counterparty in return for the requisite cash payment. The cash received from the Ethereum Counterparty will be delivered to the Cash Custodian. After receipt of the cash payment, the Transfer Agent will redeem the Shares and the Cash Custodian will distribute the resulting cash to the redeeming Authorized Participant in satisfaction of the redemption order.
In connection with both creation and redemption transactions, the Execution Agent, pursuant to the oversight of the Sponsor, will decide how and with which Ethereum Counterparty to transact on the Trust’s behalf. The Authorized Participants will deliver only cash to create Shares and will receive only cash when redeeming Shares. Further, Authorized Participants will not directly or indirectly purchase, hold, deliver, or receive ether as part of the creation or redemption process or otherwise direct the Trust or a third-party with respect to purchasing, holding, delivering, or receiving ether as part of the creation or redemption process. The Trust will create Shares by receiving ether from a third-party that is not the Authorized Participant and the Trust (through the Execution Agent, on an agency basis)—not the Authorized Participant—is responsible for selecting the third-party to deliver the ether. Further, the third-party will not be acting as an agent of the Authorized Participant with respect to the delivery of the ether to the Trust or acting at the direction of the Authorized Participant with respect to the delivery of the ether to the Trust. The Trust will redeem shares by delivering ether to a third-party that is not the Authorized Participant and the Trust (through the Execution Agent, on an agency basis)—not the Authorized Participant—is responsible for selecting the third-party to receive the ether. Further, the third-party will not be acting as an agent of the Authorized Participant with respect to the receipt of the ether from the Trust or acting at the direction of the Authorized Participant with respect to the receipt of the ether from the Trust.
The Trust expects to purchase or sell ether in connection with cash creation and redemption transactions, and to sell ether to pay certain expenses, including the Sponsor Fee. Each creating or redeeming Authorized Participant will be charged a transaction fee in connection with each creation or redemption transaction. Authorized Participants are expected to sell Shares to the public at prices that reflect, among other factors, the value of the Trust’s assets, supply and demand for the Shares and market conditions at the time of a transaction.
The Trust was seeded with $[ ] on [ ], 2024 through the sale of [ ] Shares. In this transaction, the Sponsor purchased [ ] Shares ([ ] Creation Baskets) at a price of $[ ] per Share based on the Benchmark price as of 4:00 p.m. ET on [ ], 2024. Accordingly, as of the market close on [ ], 2024, the Trust had total assets of $[ ], solely represented by ether held in custody by the Ethereum Custodian, and had [ ] Shares outstanding, entirely held by the Sponsor. The Sponsor acted as a statutory underwriter in connection with these purchases.
Prior to this offering, pursuant to this Prospectus, there has been no public market for the Shares. The Shares are expected to be listed for trading, subject to notice of issuance, on the Exchange under the ticker symbol QETH. Investing in the Trust involves risks similar to those involved with an investment directly in ether, as well as other significant risks. See “Risk Factors” beginning on page 11.
The offering of the Trust’s Shares is registered with the Securities and Exchange Commission (the “SEC”) in accordance with the Securities Act. The offering is intended to be a continuous offering and is not expected to terminate until either all of the registered Shares have been sold or three years from the date of the original offering, whichever is earlier, unless extended as permitted by applicable rules under the Securities Act. The Trust is not a mutual fund, is not registered under the Investment Company Act of 1940, as amended (the “1940 Act”) and is not subject to regulation under the 1940 Act. The Trust is not a commodity pool for purposes of the Commodity Exchange Act of 1936, as amended (the “CEA”), and the Sponsor is not subject to regulation by the Commodity Futures Trading Commission (the “CFTC”) as a commodity pool operator or a commodity trading advisor. The Trust’s Shares are neither interests in, nor obligations of, the Sponsor or the Trustee.
AN INVESTMENT IN THE TRUST INVOLVES SIGNIFICANT RISKS AND MAY NOT BE SUITABLE FOR SHAREHOLDERS THAT ARE NOT IN A POSITION TO ACCEPT RISKS RELATED TO ETHER. THE SHARES ARE SPECULATIVE SECURITIES. THEIR PURCHASE INVOLVES A HIGH DEGREE OF RISK, AND YOU COULD LOSE YOUR ENTIRE INVESTMENT. YOU SHOULD CONSIDER ALL RISK FACTORS BEFORE INVESTING IN THE TRUST. PLEASE REFER TO “RISK FACTORS ” BEGINNING ON PAGE 11.
THE SHARES OF THE TRUST ARE NEITHER INTERESTS IN NOR OBLIGATIONS OF THE SPONSOR, THE TRUSTEE, THE BENCHMARK PROVIDER, THE ADMINISTRATOR, THE TRANSFER AGENT, THE EXECUTION AGENT, THE CASH CUSTODIAN, THE ETHEREUM CUSTODIAN, THE MARKETING AGENT OR ANY OF THEIR RESPECTIVE AFFILIATES. THE SHARES ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES OFFERED IN THIS PROSPECTUS, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE TRUST IS AN “EMERGING GROWTH COMPANY” AS THAT TERM IS USED IN THE JUMPSTART OUR BUSINESS STARTUPS ACT AND, AS SUCH, MAY ELECT TO COMPLY WITH CERTAIN REDUCED REPORTING REQUIREMENTS.
The date of this Prospectus is June [ ], 2024
Table of Contents
| Page | ||||
| iii | ||||
| 1 | ||||
| 2 | ||||
| 11 | ||||
| 44 | ||||
| 52 | ||||
| 58 | ||||
| 60 | ||||
| 63 | ||||
| 66 | ||||
| 69 | ||||
| 70 | ||||
| 71 | ||||
| 72 | ||||
| 78 | ||||
| 79 | ||||
| 79 | ||||
| 79 | ||||
| 81 | ||||
| 84 | ||||
| 87 | ||||
| 87 | ||||
| 87 | ||||
| 87 | ||||
| 88 | ||||
| 88 | ||||
| 88 | ||||
| 88 | ||||
| 93 | ||||
| 94 | ||||
| 94 | ||||
| 95 | ||||
| 97 | ||||
| A-1 | ||||
-i-
Table of Contents
This Prospectus contains information you should consider when making an investment decision about the Shares of the Trust. You may rely on the information contained in this Prospectus. The Trust and the Sponsor have not authorized any person to provide you with different information and, if anyone provides you with different or inconsistent information, you should not rely on it. This Prospectus is not an offer to sell the Shares in any jurisdiction where the offer or sale of the Shares is not permitted.
The Shares of the Trust are not registered for public sale in any jurisdiction other than the United States (the “U.S.”).
-ii-
Table of Contents
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes “forward-looking statements” that generally relate to future events or future performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “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 Prospectus that address activities, events or developments that will or may occur in the future, including such matters as movements in the digital asset markets, the Trust’s operations, the Sponsor’s plans and references to the Trust’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 the Sponsor has made based on its perception of historical trends, technology developments regarding the use of ether and other digital assets, including the systems used by the Sponsor and the Trust’s Ethereum Custodian in their provision of services to the Trust, current conditions and expected future developments, as well as other factors 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 Prospectus, general economic, market and business conditions, changes in laws or regulations, including those concerning taxes, made by governmental authorities or regulatory bodies, and other economic and political developments. Consequently, all the forward-looking statements made in this Prospectus are qualified by these cautionary statements, and there can be no assurance that actual results or developments the Sponsor anticipates will be realized or, even if substantially realized, that they will result in the expected consequences to, or have the expected effects on, the Trust’s operations or the value of its Shares. None of the Trust, 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.
-iii-
Table of Contents
EMERGING GROWTH COMPANY STATUS
The Trust is an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act (the “JOBS Act”) and, as such, may elect to comply with certain reduced reporting requirements. For as long as the Trust is an emerging growth company, unlike other public companies, it will not be required to:
| • | provide an auditor’s attestation report on management’s assessment of the effectiveness of its system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002; |
| • | comply with any new requirements adopted by the Public Company Accounting Oversight Board (“PCAOB”) requiring mandatory auditor rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer; |
| • | comply with any new audit rules adopted by the PCAOB after April 5, 2012, unless the Securities and Exchange Commission determines otherwise; |
| • | provide certain disclosure regarding executive compensation required of larger public companies; or |
| • | obtain shareholder approval of any golden parachute payments not previously approved. |
The Trust will cease to be an “emerging growth company” upon the earliest of (i) when it has $1.235 billion or more in annual revenues; (ii) when it is deemed to be a large accelerated filer under Rule 12b-2 promulgated pursuant to the Securities Exchange Act of 1934; (iii) when it issues more than $1.0 billion of non-convertible debt over a three-year period; or (iv) the last day of the fiscal year following the fifth anniversary of its initial public offering.
In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies; however, the Trust is choosing to “opt out” of such extended transition period, and as a result, the Trust will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that the Trust’s decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
-1-
Table of Contents
INVESCO GALAXY ETHEREUM ETF
TICKER: QETH
CUSIP: 143494113
This is only a summary of the Prospectus and, while it contains material information about the Trust and its Shares, it does not contain or summarize all of the information about the Trust and the Shares contained in the Prospectus that is material and/or that may be important to you. You should read this entire Prospectus before making an investment decision about the Shares. For a glossary of defined terms, see Appendix A.
As used below, “Ethereum” with an uppercase “E” is used to describe the system as a whole that is involved in maintaining the ledger of ether ownership and facilitating the transfer of ether among parties. When referring to the digital asset within the Ethereum network, “ether” is written with a lowercase “e.”
Overview of the Trust
Invesco Galaxy Ethereum ETF (the “Trust”) is an exchange-traded fund that issues common shares of beneficial interest (the “Shares”) that trade on Cboe BZX (the “Exchange”) under the ticker symbol QETH.
Invesco Capital Management LLC (the “Sponsor”) is the sponsor of the Trust.
The Trust’s investment objective is to reflect the performance of the spot price of ether as measured using the Lukka Prime Ethereum Reference Rate (the “Benchmark”), less the Trust’s expenses and other liabilities. The Trust is passively-managed and the Sponsor does not actively manage the ether held by the Trust. 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. It also means that the Sponsor does not make use of any of the hedging techniques available to professional ether investors to attempt to reduce the risks of losses resulting from price changes. The Trust, the Sponsor and the service providers will not loan or pledge the Trust’s assets, nor will the Trust’s assets serve as collateral for any loan or similar arrangement. The Trust will not utilize leverage, derivatives or any similar arrangements in seeking to meet its investment objective. The Trust is not a registered investment company under the Investment Company Act of 1940 (the “1940 Act”) and is not required to register under the 1940 Act. The Sponsor is not registered with the SEC as an investment adviser and is not subject to regulation by the SEC as such in connection with its activities with respect to the Trust. The Trust is not a commodity pool for purposes of the Commodity Exchange Act (the “CEA”), and the Sponsor is not subject to regulation by the CFTC as a commodity pool operator or a commodity trading advisor in connection with its activities with respect to the Trust.
The Trust intends to continuously offer Shares but may suspend the issuance of Shares at any time.
In seeking to achieve its investment objective, the Trust will hold ether. The Trust will value its Shares each Business Day as of 4:00 p.m. ET. The value of ether held by the Trust is determined based on the estimated fair market value (“FMV”) price for ether, reflecting the execution price of ether on its principal market as determined each day by Lukka Inc., an independent third-party digital asset data company (the “Benchmark Provider”). In this regard, the Benchmark Provider seeks to identify a “principal market” for ether each day, by evaluating eligible ether trading platform across a variety of different criteria, including the trading platforms’ oversight and governance frameworks, microstructure efficiency, trading volume, data transparency and data integrity.
CSC Delaware Trust Company (the “Trustee”) is the trustee of the Trust, The Bank of New York Mellon is the Trust’s transfer agent (“Transfer Agent”) and will hold all of the Trust’s cash on the Trust’s behalf as cash custodian (“Cash Custodian”), and Coinbase Custody Trust Company, LLC (the “Ethereum Custodian”) will hold all of the Trust’s ether on the Trust’s behalf as custodian.
The Trust will process all creations and redemptions of Shares in transactions with financial firms that are authorized to do so (known as “Authorized Participants”). When the Trust issues or redeems its Shares, it will do so only in blocks of 5,000 Shares (a “Creation Basket”) based on the quantity of ether attributable to each Share of the Trust (net of accrued but unpaid Sponsor fees and any accrued but unpaid expenses or liabilities).
Creation and redemption transactions initially will take place in cash. Subject to Cboe in the future receiving the necessary regulatory approval to permit the Trust to create and redeem Creation Baskets in-kind for ether (the “In-Kind Regulatory Approval”), these transactions may also take place in exchange for ether. The timing of the In-Kind Regulatory Approval and the related in-kind creation model is unknown and there is no guarantee that the Cboe will receive such approval. If Cboe receives the In-Kind Regulatory Approval and the Sponsor chooses to allow in-kind creations and redemptions, notice to Shareholders will be provided on the Trust’s website, in a prospectus supplement, through a current report on Form 8-K and/or in the Trust’s annual or quarterly reports.
When purchasing Creation Baskets, Authorized Participants will deliver cash to the Cash Custodian. Galaxy Digital Funds LLC (the “Execution Agent”) will be responsible for acquiring the requisite amount of ether on behalf of the Trust on an agency basis. Once the Execution Agent selects a counterparty or digital asset trading platform (“Ethereum Counterparty”), the Cash Custodian will transfer cash to the Ethereum Counterparty in payment for the requisite amount of ether. The ether acquired from the Ethereum Counterparty will be transferred to the Ethereum Custodian. After receipt of the ether by the Ethereum Custodian, the Transfer Agent will issue Creation Baskets of Shares to the creating Authorized Participant in satisfaction of the creation order.
When redeeming Creation Baskets, the Execution Agent will be responsible for selling the requisite amount of ether on behalf of the Trust on an agency basis. Once the Execution Agent selects an Ethereum Counterparty, the Ethereum Custodian will transfer ether to the Ethereum Counterparty in return for the requisite cash payment. The cash received from the Ethereum Counterparty will be delivered to the Cash Custodian. After receipt of the cash payment, the Transfer Agent will redeem the Shares and the Cash Custodian will distribute the resulting cash to the redeeming Authorized Participant in satisfaction of the redemption order.
In connection with both creation and redemption transactions, the Execution Agent, pursuant to the oversight of the Sponsor, will decide how and with which Ethereum Counterparty to transact on the Trust’s behalf. The Authorized Participants will deliver only cash to create Shares and will receive only cash when redeeming Shares. Further, Authorized Participants will not directly or indirectly purchase, hold, deliver, or receive ether as part of the creation or redemption process or otherwise direct the Trust or a third-party with respect to purchasing, holding, delivering, or receiving ether as part of the creation or redemption process. The Trust will create Shares by receiving ether from a third-party that is not the Authorized Participant and the Trust (through the Execution Agent, on an agency basis)—not the Authorized Participant—is responsible for selecting the third-party to deliver the ether. Further, the third-party will not be acting as an agent of the Authorized Participant with respect to the delivery of the ether to the Trust or acting at the direction of the Authorized Participant with respect to the delivery of the ether to the Trust. The Trust will redeem shares by delivering ether to a third-party that is not the Authorized Participant and the Trust (through the Execution Agent, on an agency basis)—not the Authorized Participant—is responsible for selecting the third-party to receive the ether. Further, the third-party will not be acting as an agent of the Authorized Participant with respect to the receipt of the ether from the Trust or acting at the direction of the Authorized Participant with respect to the receipt of the ether from the Trust. Each creating or redeeming Authorized Participant will be charged a transaction fee in connection with each creation or redemption transaction.
The Trust expects to purchase or sell ether in connection with cash creation or redemption transactions, and may sell ether to pay certain expenses, including the Sponsor Fee. In this capacity, the Sponsor has entered into an agreement with Execution Agent to facilitate the purchase or sale of ether by the Trust.
The quantity of ether required to create each Creation Basket (“Creation Basket Deposit”) changes from day to day. On each day that the Exchange is open for regular trading, the Sponsor will publish the Creation Basket after market close, which is composed of an amount of ether that will be used to determine the amount of cash required to purchase a Creation Basket the following day. After the Trust’s NAV is struck on a Business Day (as defined herein), The Bank of New York Mellon (the “Administrator”) adjusts the quantity of ether constituting the Creation Basket Deposit as appropriate to reflect accrued expenses. The computation is made by the Administrator as promptly as practicable after 4:00 p.m. ET. The Administrator calculates the Creation Basket Deposit for a given day by multiplying the NAV by the number of Shares in a Creation Basket (5,000) divided by the price of ether at 4:00 p.m. ET as determined consistent with the Benchmark to determine the cash amount required for a Creation Basket. Fractions of an ether smaller than .000000001 are disregarded for purposes of the computation of the Creation Basket Deposit. Although the Administrator applies the ether price to the calculate of the Creation Basket value, the Administrator plays no role in the determination of the ether price used by the Trust; rather the ether price used in calculating the cash value of a Creation Basket is identical to the ether price used in determining the Trust’s NAV.
To the extent there is a difference between the price actually paid by the Trust to acquire a Creation Basket worth of ether in the creation process compared to the cash value of the Creation Basket (i.e., if there is a difference between the amount paid by the Execution Agent on behalf of the Trust to purchase the requisite amount of ether and the valuation of ether as part of the Trust’s NAV calculation), that difference will also be charged to the creating Authorized Participant in the form of a variable fee.
To support the ability of Authorized Participants to provide liquidity at prices that reflect the value of the Trust’s assets and to facilitate orderly transactions in the Shares, the Trust will ordinarily process redemptions of Creation Baskets on the next day when the Exchange is open for regular trading (a “Business Day”) following receipt of a redemption request by an Authorized Participant.
-2-
Table of Contents
Creation Baskets are expected to be created when there is sufficient demand for Shares, including when the market price per Share is at a premium to the net asset value per Share (“NAV”). Authorized Participants are expected to sell such Shares to the public at prices that reflect, among other factors, the value of the Trust’s assets, supply of and demand for Shares and market conditions at the time of a transaction. Similarly, Creation Baskets are expected to be redeemed when the market price per Share is at a discount to the NAV. Investors (other than Authorized Participants) seeking to purchase or sell Shares on any day are expected to transact in the secondary market, on the Exchange or other national securities exchanges, at the market price per Share, rather than through the creation or redemption of Creation Baskets. Shares initially comprising the same Creation Basket but offered by the Authorized Participants to the public at different times may have different offering prices, which depend on various factors, including the supply and demand for Shares, the value of the Trust’s assets, and market conditions at the time of a transaction.
The Sponsor believes that the design of the Trust will enable investors to effectively and efficiently implement strategic and tactical asset allocation strategies that use ether by investing in the Shares rather than directly in ether.
The Trust’s Expenses
The Trust will pay the Sponsor a unified fee of [●]% per annum (the “Sponsor Fee”) as compensation for services performed under the Trust Agreement (as defined herein). The Trust’s only ordinary recurring expense is the Sponsor Fee.
The Sponsor Fee will be accrued daily and paid monthly in arrears in U.S. dollars, and will be calculated by the Administrator. The Administrator will calculate the Sponsor Fee on a daily basis by applying the [●]% annualized rate to the Trust’s total net assets. To cover the Sponsor Fee, and extraordinary expenses not assumed by the Sponsor, the Sponsor or its delegate will cause the Trust (or its delegate) to instruct the Execution Agent to convert ether held by the Trust into U.S. dollars. The NAV of the Trust and the number of ether represented by a Share will decline each time the Trust accrues the Sponsor Fee or any Trust expenses not assumed by the Sponsor. The Trust is not responsible for paying any costs associated with the transfer of ether to or from the Trust in connection with paying the Sponsor Fee or in connection with creation and redemption transactions.
Except as noted below, the Sponsor has agreed to pay all of the Trust’s ordinary expenses out of the Sponsor’s unified fee, including, but not limited to, the Trustee’s fees, the fees of The Bank of New York Mellon (for its services as the “Administrator,” “Transfer Agent,” and “Cash Custodian”), the fees of the Ethereum Custodian, the fees of the Execution Agent, Exchange listing fees, Securities and Exchange Commission (“SEC”) registration fees, printing and mailing costs, legal costs and audit fees. The Sponsor also paid the costs of the Trust’s organization.
The Trust may incur certain extraordinary expenses that are not assumed by the Sponsor. These include, but are not limited to, taxes and governmental charges, any applicable brokerage commissions, financing fees, Ethereum network fees and similar transaction fees, expenses and costs of any extraordinary services performed by the Sponsor (or any other service provider) on behalf of the Trust to protect the Trust or the interests of Shareholders (including, for example, in connection with any fork of the Ethereum blockchain), any indemnification of the Sponsor, Cash Custodian, Ethereum Custodian, Administrator or other agents, service providers or counterparties of the Trust and extraordinary legal fees and expenses, including any legal fees and expenses incurred in connection with litigation, regulatory enforcement or investigation matters.
The Trust from time to time will be required to sell ether in such quantities as necessary to permit payment of the Sponsor Fee and any Trust expenses and liabilities not assumed by the Sponsor. The Sponsor has engaged the Execution Agent to sell ether on the Trust’s behalf in such circumstances. At the direction of the Trust, the Execution Agent will seek to sell ether at approximately the price at which it is valued by the Trust and in the smallest amounts required to permit such payments as they become due, with the intention of minimizing the Trust’s holdings of assets other than ether. Accordingly, the amount of ether to be sold may vary from time to time depending on the level of the Trust’s expenses and liabilities and the market price of ether.
The Trust’s Legal Structure
The Trust is a Delaware statutory trust, formed on September 27, 2023, pursuant to the Delaware Statutory Trust Act (“DSTA”). The Trust continuously issues common shares representing fractional undivided beneficial interest in and ownership of the Trust that may be purchased and sold on the Exchange. The Trust operates pursuant to its Amended and Restated Declaration of Trust and Trust Agreement, dated as of May 31, 2024 (the “Trust Agreement”). CSC Delaware Trust Company, a Delaware trust company, is the Delaware trustee of the Trust (the “Trustee”). The Trust is managed and controlled by the Sponsor. Shareholders will have very limited voting rights, which will limit their ability to influence matters such as amendment of the Trust Agreement, change in the Trust’s basic investment policy, dissolution of the Trust, or the sale or distribution of the Trust’s assets.
-3-
Table of Contents
The Lukka Prime Ethereum Reference Rate
The Benchmark is designed to provide an estimated fair market value (“FMV”) for ether, in a manner that aligns with accounting principles generally accepted in the United States (“U.S. GAAP”) and International Financial Reporting Standards Foundation (“IFRS”) accounting guidelines regarding fair market value measurements. In this regard, the Benchmark Provider seeks to identify a “principal market” for ether each day, by evaluating eligible ether trading platforms across a variety of different criteria, including the trading platforms’ oversight and governance frameworks, microstructure efficiency, trading volume, data transparency and data integrity. As of May 2024, the following trading platforms are considered to be eligible trading platforms by the Benchmark Provider: Binance, Bitfinex, Bitflyer, Bitstamp, Coinbase, Crypto.com, Gate.io, Gemini, HitBTC, Huobi, itBit, Kraken, KuCoin, LMAX, MEXC Global, OKEx and Poloniex (collectively, “Benchmark Pricing Sources”). The Benchmark Provider reviews trading platforms eligible for inclusion in the Benchmark quarterly. In determining which trading platforms to include Benchmark Pricing Sources, the Benchmark Provider evaluates each trading platform using proprietary ratings criteria. The Benchmark Provider periodically reassesses the trading platforms eligible to be considered Benchmark Pricing Sources, and makes adjustments as needed.
For purposes of financial reporting, the Trust will determine the principal market for ether in accordance with ASC Topic 820-10, and such determination is considered from the Trust’s perspective. Procedures will be implemented to review and confirm the prices utilized to value ether reflect fair value in accordance with ASC Topic 820 and will be reviewed by the Sponsor’s Valuation Committee on a periodic basis.
With respect to the Trust’s Authorized Participants, the Trust has no authority over which trading platforms the Authorized Participants or their affiliates might transact on, although the Trust expects that most Authorized Participants or their affiliates may transact on several of the trading platforms used by the Benchmark Provider. The Trust notes that for transactions in which it is selling ether, it may do so in principal-to-principal transactions, although the Trust is eligible to execute trades on all of the trading platforms used by the Benchmark Provider. While the principal to principal market is the market in which the Execution Agent, on the Trust’s behalf, would normally transact for sales of ether, in considering all information reasonably available in accordance with the guidance in ASC 820-10-35-5A, the Trust notes that the identification of a principal market is completed by the Benchmark Provider based on a variety of different criteria including but not limited to trading platforms’ oversight and governance frameworks, microstructure efficiency, trading volume, data transparency and data integrity. The Trust views this evidence to the contrary as an appropriate basis to determine a primary market that is not the principal-to-principal market, in accordance with the guidance in ASC 820-10-35-5A.
The Trust’s Service Providers
The Sponsor
Invesco Capital Management LLC is the Sponsor of the Trust. The Sponsor arranged for the creation of the Trust and is responsible for the ongoing registration of the Shares for their public offering, the listing of Shares on the Exchange and valuing the ether held by the Trust. The Sponsor is a limited liability company formed in the State of Delaware on February 7, 2003, and is a wholly-owned subsidiary of Invesco Ltd. Invesco Ltd. and its subsidiaries, including the Sponsor, are an independent global investment management group. The Sponsor’s principal address is 3500 Lacey Road, Suite 700, Downers Grove, IL 60515.
The Trustee
CSC Delaware Trust Company, a Delaware trust company, acts as the Trustee of the Trust as required to create a Delaware statutory trust in accordance with the Trust Agreement and the DSTA. The Trustee’s principal address is located at 251 Little Falls Drive, Wilmington, DE 19808.
The Administrator
The Bank of New York Mellon (“BNYM”) serves as the Trust’s Administrator. Under the trust administration and accounting agreement, the Administrator provides necessary administrative, tax and accounting services and financial reporting for the maintenance and operations of the Trust, including calculating the NAV of the Trust, determining the net assets of the Trust, and calculating the size of the Creation Baskets. The Administrator’s principal address is 240 Greenwich Street, New York, New York 10286.
The Transfer Agent
BNYM also serves as the Transfer Agent for the Trust. The Transfer Agent is responsible for (1) issuing and redeeming Shares in connection with creation and redemption transactions, (2) responding to correspondence by holders of the Shares (“Shareholders”) and others relating to its duties, (3) maintaining Shareholder accounts and (4) making periodic reports to the Trust. The Transfer Agent’s principal address is 240 Greenwich Street, New York, New York 10286.
The Ethereum Custodian
Coinbase Custody Trust Company, LLC serves as the Trust’s Ethereum Custodian. The Trust has entered into a prime brokerage and custody agreement with the Ethereum Custodian (the “Ether Custody Agreement”), pursuant to which the Ethereum Custodian will hold in custody all of the Trust’s ether, other than that which may be maintained in a trading account with Coinbase, Inc. from time to time. See “Prospectus Summary – Custody of the Trust’s Assets,” below. The Ethereum Custodian is chartered as a limited purpose trust company by the New York State Department of Financial Services (“NYSDFS”) and is authorized by the NYSDFS to provide digital asset custody services. The Ethereum Custodian is a wholly-owned subsidiary of Coinbase Global, Inc.
The Ethereum Custodian is a third-party limited purpose trust company that was chartered in 2018 upon receiving a trust charter from the NYSDFS. The Ethereum Custodian is subject to regulation by the NYSDFS and has a long track record of providing custodial services for digital asset private keys. The Sponsor believes that the Ethereum Custodian’s policies, procedures, and controls for safekeeping, exclusively possessing, and controlling the Trust’s ether holdings are consistent with industry best practices to protect against theft, loss, and unauthorized and accidental use of the private keys. The Trust Ethereum Account and Sponsor Ethereum Account (each as defined herein) are segregated accounts and are therefore not commingled with the Ethereum Custodian’s corporate or other customer assets.
Although the Ethereum Custodian carries insurance for the benefit of its account holders, the Ethereum Custodian’s insurance does not cover any loss in value to ether and only covers losses caused by certain events such as fraud or theft and, in such covered events, it is unlikely the insurance would cover the full amount of any losses incurred by the Trust.
-4-
Table of Contents
The Cash Custodian
BNYM also serves as the cash custodian for the Trust (the “Cash Custodian”) pursuant to a custody agreement (the “Cash Custody Agreement”). The Cash Custodian is responsible for holding the Trust’s cash, including in connection with creation and redemption transactions effected in cash. The Cash Custodian is a New York state-chartered bank and a member of the Federal Reserve System. The Cash Custodian’s principal address is 240 Greenwich Street, New York, New York 10286.
The Execution Agent
The Sponsor has entered into an agreement with Galaxy Digital Funds LLC, a subsidiary of Galaxy Digital LP (“Galaxy” or the “Execution Agent”) to serve as Execution Agent. At the direction of the Sponsor, the Execution Agent is responsible for selling ether on behalf of the Trust to the extent necessary to permit the payment of the Trust’s expenses. The Trust also will utilize the services of the Execution Agent to purchase or sell ether in connection with cash creations and redemptions. When acquiring or disposing of ether on behalf of the Trust in connection with a creation or redemption transaction, the Sponsor will provide instructions to the Execution Agent, who will identify an Ethereum Counterparty. In connection with both creation and redemption transactions, the Execution Agent, pursuant to the oversight of the Sponsor, will decide how and with which Ethereum Counterparty to transact on the Trust’s behalf. In addition, as part of this agreement, the Execution Agent has agreed to co-brand and co-market the Trust and the Sponsor has licensed the use of certain Execution Agent trademarks, service marks and trade names in connection with the Trust. The Execution Agent’s principal address is 300 Vesey Street, New York City, New York 10282.
Galaxy is a subsidiary of Galaxy Digital Holdings LP (“Galaxy Holdings”). Galaxy Digital Holdings Ltd., which holds a limited partner interest in Galaxy Holdings, is listed on the Toronto Stock Exchange under the symbol “GLXY.”
Authorized Participants
The Trust will process all creations and redemptions of Shares in transactions with financial firms that are authorized to do so (known as “Authorized Participants”). Creation and redemption transactions initially will take place in cash. Subject to Cboe receiving the necessary regulatory approval to permit the Trust to create and redeem Creation Baskets in-kind for ether (the “In-Kind Regulatory Approval”), these transactions may also take place in exchange for ether. If Cboe receives the In-Kind Regulatory Approval and the Sponsor chooses to allow in-kind creations and redemptions, notice to Shareholders will be provided on the Trust’s website, in a prospectus supplement, through a current report on Form 8-K and/or in the Trust’s annual or quarterly reports.
When purchasing Creation Baskets, Authorized Participants will deliver cash to the Cash Custodian. The Execution Agent will be responsible for acquiring the requisite amount of ether on behalf of the Trust on an agency basis. Once the Execution Agent selects a counterparty or digital asset trading platform (“Ethereum Counterparty”), the Cash Custodian will transfer cash to the Ethereum Counterparty in payment for the requisite amount of ether. The ether acquired from the Ethereum Counterparty will be transferred to the Ethereum Custodian. After receipt of the ether by the Ethereum Custodian, the Transfer Agent will issue Creation Baskets of Shares to the creating Authorized Participant in satisfaction of the creation order.
When redeeming Creation Baskets, the Execution Agent will be responsible for selling the requisite amount of ether on behalf of the Trust on an agency basis. Once the Execution Agent selects an Ethereum Counterparty, the Ethereum Custodian will transfer ether to the Ethereum Counterparty in return for the requisite cash payment. The cash received from the Ethereum Counterparty will be delivered to the Cash Custodian. After receipt of the cash payment, the Transfer Agent will redeem the Shares and the Cash Custodian will distribute the resulting cash to the redeeming Authorized Participant in satisfaction of the redemption order.
In connection with both creation and redemption transactions, the Execution Agent, pursuant to the oversight of the Sponsor, will decide how and with which Ethereum Counterparty to transact on the Trust’s behalf. The Authorized Participants will deliver only cash to create Shares and will receive only cash when redeeming Shares. Further, Authorized Participants will not directly or indirectly purchase, hold, deliver, or receive ether as part of the creation or redemption process or otherwise direct the Trust or a third-party with respect to purchasing, holding, delivering, or receiving ether as part of the creation or redemption process. The Trust will create Shares by receiving ether from a third-party that is not the Authorized Participant and the Trust (through the Execution Agent, on an agency basis)—not the Authorized Participant—is responsible for selecting the third-party to deliver the ether. Further, the third-party will not be acting as an agent of the Authorized Participant with respect to the delivery of the ether to the Trust or acting at the direction of the Authorized Participant with respect to the delivery of the ether to the Trust. The Trust will redeem shares by delivering ether to a third-party that is not the Authorized Participant and the Trust (through the Execution Agent, on an agency basis)—not the Authorized Participant—is responsible for selecting the third-party to receive the ether. Further, the third-party will not be acting as an agent of the Authorized Participant with respect to the receipt of the ether from the Trust or acting at the direction of the Authorized Participant with respect to the receipt of the ether from the Trust.
Authorized Participants are expected to sell Shares to the public at prices that reflect, among other factors, the value of the Trust’s assets, supply of and demand for Shares and market conditions at the time of a transaction.
The Marketing Agent
Invesco Distributors, Inc. (the “Marketing Agent”) is responsible for: (1) working with the Transfer Agent to review and approve, or reject, purchase and redemption orders of Shares placed by Authorized Participants with the Transfer Agent; and (2) reviewing and approving the marketing materials prepared by the Trust for compliance with applicable SEC and Financial Industry Regulatory Authority (“FINRA”) advertising laws, rules, and regulations. The Marketing Agent’s principal address is 11 Greenway Plaza, Suite 1000, Houston, TX 77046.
Custody of the Trust’s Assets
The Ethereum Custodian will keep the private keys associated with the Trust’s ether in a “cold storage” environment where the private keys are generated and secured (the “Prime Custody Vault”). From time to time, such as when the Trust’s ether is being processed in connection with certain creation or redemption transactions or it is being sold, the Trust’s ether may be maintained in a trading account (the “Trading Balance”) with Coinbase, Inc. (“Coinbase” or the “Prime Broker”), an affiliate of the Ethereum Custodian. The Trust’s ether will be maintained by the Ethereum Custodian and Coinbase in accounts that are required to be segregated from the assets held by the Ethereum Custodian or Coinbase as principal and, when held in the Prime Custody Vault, the assets of their other customers. “Cold storage” refers to a safeguarding method by which the private keys corresponding to the Trust’s ethers are generated and stored in an offline manner using computers or devices that are not directly connected to the internet, which is intended to make them more resistant to hacking, or similarly secure technology. All of the Trust’s ether will be held in the Prime Custody Vault unless it is maintained in the Trading Balance in connection with certain creation or redemption transactions or it is being sold to pay the Sponsor Fee or Trust expenses not assumed by the Sponsor. The Trust will not participate in the proof-of-stake validation mechanism of the Ethereum network (i.e., the Trust will not “stake” its ether) to earn additional ether or seek other means of generating income from its ether holdings.
The ether in the Trust’s account at the Ethereum Custodian may be held across multiple wallets, any of which will feature the following safety and security measures to be implemented by the Ethereum Custodian:
Cold Storage: Cold storage in the context of ether means keeping the reserve of ether offline, which is a widely-used security precaution, especially when dealing with a large amount of ether. Ether held under custodianship with the Ethereum Custodian will be kept in high-security, offline, multi-layer cold storage vaults. This means that the private key materials, the cryptographic components that allow a user to access ether, are stored offline on hardware that has never been directly connected to the internet. Storing private key materials offline minimizes the risk of the ether being stolen. The Sponsor expects that all of the Trust’s ether will be held in cold storage of the Ethereum Custodian in the Prime Custody Vault on an ongoing basis, except as noted above. In connection with certain creations or redemptions, the Trust may process creations and redemptions by selling ether from its Prime Custody Vault balance.
Private Keys: All private keys are securely protected using multiple layers of high-quality encryption and in Ethereum Custodian-owned offline hardware in physically secure environments. No customers or third parties are given access to the Ethereum Custodian’s private keys.
Whitelisting: Transactions are only sent to vetted, known addresses. The Ethereum Custodian’s platform supports pre-approval and test transactions. The Ethereum Custodian requires authentication when adding or removing addresses for whitelisting. All instructions to initiate a whitelist addition or removal must be submitted via the Ethereum Custodian’s platform. When a whitelist addition or removal request is initiated, the initiating user will be prompted to authenticate their request using a two-factor authentication key. A consensus mechanism on the Ethereum Custodian’s platform dictates how many approvals are required in order for the consensus to be achieved to add or remove a whitelisted address. Only when the consensus is met is the underlying transaction considered officially approved. An account’s roster and user roles are maintained by the Ethereum Custodian in a separate log, an Authorized User List (“AUL”). Any changes to the account’s roster must be reflected on an updated AUL first and executed by an authorized signatory.
-5-
Table of Contents
Audit Trails: Audit trails exist for all movement of ether within Ethereum Custodian-controlled ether wallets and are audited annually for accuracy and completeness by an independent external audit firm.
In addition to the above measures, in accordance with the Ether Custody Agreement, ether held in custody with the Ethereum Custodian will be segregated from both the proprietary property of the Ethereum Custodian and the assets of any other customer in accounts that clearly identify the Trust as the owner of the accounts.
The Ethereum Custodian has insurance coverage as a subsidiary under its parent company, Coinbase Global, Inc., which procures fidelity (e.g., crime) insurance to protect the organization from risks such as theft of funds. Specifically, the fidelity program provides coverage for the theft of funds held in hot or cold storage. The insurance program is provided by a syndicate of industry-leading insurers. The insurance program does not cover, insure or guarantee the performance of the Trust. The Ethereum Custodian is not FDIC-insured.
The Trust relies on the Cash Custodian to hold or transfer any cash related to the purchase or sale of ether in connection with cash creation and redemption transactions, or held for payment of expenses not assumed by the Sponsor, such as the Sponsor Fee. In its role, the Cash Custodian helps facilitate the creations and redemptions of Shares done in exchange for cash.
Net Asset Value
NAV means the value of the total assets of the Trust including, but not limited to, all ether and cash (if any) less the total liabilities of the Trust (including accrued but unpaid expenses), divided by the number of outstanding Shares.
The Administrator determines the NAV of the Trust on each day that the Exchange is open for regular trading. In determining the Trust’s NAV, the Administrator values the ether held by the Trust based on the price established by the Benchmark Provider as of 4:00 p.m. ET each Business Day.
The amount of ether represented by the Shares will be reduced during the life of the Trust each time the Trust accrues the Sponsor Fee or pays for any extraordinary expenses. This dynamic will occur irrespective of whether the value of the Trust’s assets, or the trading price of the Shares, rises or falls. See “Risk Factors—Risks Related to the Trust and the Shares—The amount of ether represented by the Shares will decline over time” and “Calculation of NAV.”
Plan of Distribution
The Trust is an exchange-traded fund. Shareholders who decide to buy or sell Shares of the Trust will place their trade orders through their brokers and may incur customary brokerage commissions and charges, as well as any bid-ask spread. Such trades may occur at a premium or discount relative to the NAV of the Trust.
The Trust will process all creations and redemptions of Shares in transactions with financial firms that are authorized to do so (known as “Authorized Participants”). Creation and redemption transactions initially will take place in cash. Subject to Cboe in the future receiving the In-Kind Regulatory Approval, these transactions may also take place in exchange for ether. If Cboe receives the In-Kind Regulatory Approval and the Sponsor chooses to allow in-kind creations and redemptions, notice to Shareholders will be provided on the Trust’s website, in a prospectus supplement, through a current report on Form 8-K and/or in the Trust’s annual or quarterly reports.
When purchasing Creation Baskets, Authorized Participants will deliver cash to the Cash Custodian. The Execution Agent will be responsible for acquiring the requisite amount of ether on behalf of the Trust on an agency basis. Once the Execution Agent selects an Ethereum Counterparty, the Cash Custodian will transfer cash to the Ethereum Counterparty in payment for the requisite amount of ether. The ether acquired from the Ethereum Counterparty will be transferred to the Ethereum Custodian. After receipt of the ether by the Ethereum Custodian, the Transfer Agent will issue Creation Baskets of Shares to the creating Authorized Participant in satisfaction of the creation order.
When redeeming Creation Baskets, the Execution Agent will be responsible for selling the requisite amount of ether on behalf of the Trust on an agency basis. Once the Execution Agent selects an Ethereum Counterparty, the Ethereum Custodian will transfer ether to the Ethereum Counterparty in return for the requisite cash payment. The cash received from the Ethereum Counterparty will be delivered to the Cash Custodian. After receipt of the cash payment, the Transfer Agent will redeem the Shares and the Cash Custodian will distribute the resulting cash to the redeeming Authorized Participant in satisfaction of the redemption order.
Authorized Participants are expected to sell such Shares to the public at prices that reflect, among other factors, the value of the Trust’s assets, supply of and demand for Shares and market conditions at the time of a transaction.
Prior to this offering, there has been no public market for the Shares. The Shares are expected to be listed for trading, subject to notice of issuance, on the Exchange under the ticker symbol QETH.
Federal Income Tax Considerations
It is expected that owners of Shares will be treated, for U.S. federal income tax purposes, as if they own a proportionate share of the assets of the Trust, as if they directly receive a proportionate share of any income of the Trust, and as if they incur a proportionate share of the expenses of the Trust. Consequently, each sale of ether by the Trust (which includes, under current Internal Revenue Service guidance, using ether to pay expenses of the Trust, including the Sponsor Fee) would give rise to taxable gain or loss to Shareholders. See “U.S. Federal Income Tax Consequences—Taxation of U.S. Shareholders.”
-6-
Table of Contents
Use of Proceeds
Proceeds received by the Trust from the issuance of Creation Baskets will initially consist of cash deposits. Such cash deposits are held by the Cash Custodian on behalf of the Trust until (i) transferred in connection with the purchase of ether, (ii) delivered to Authorized Participants in connection with a redemption of Creation Baskets or (iii) transferred to pay the Sponsor Fee or for extraordinary expenses and liabilities not assumed by the Sponsor.
The Trust’s ether is held by the Ethereum Custodian (or held temporarily in the Trading Balance with Coinbase) on behalf of the Trust until sold by the Execution Agent to pay the Sponsor Fee or to pay for extraordinary expenses and liabilities not assumed by the Sponsor.
Ether and the Ethereum Network
Ether is a digital asset, also referred to as a digital currency or cryptocurrency, which serves as the unit of account on the open-source, decentralized, peer-to-peer Ethereum network (“Ethereum” or “Ethereum network”). Ether may be used to pay for goods and services, including to provide “gas” in connection with executing specific operations on the Ethereum network, stored for future use, or converted to a fiat currency, such as the U.S. dollar, at rates determined on digital asset trading platforms, or in individual end-user-to-end-user transactions under a barter system. In addition, ether is used to compensate node operators on the Ethereum network for using computational resources to confirm transactions and secure the network. Furthermore, the Ethereum network also allows users to write and implement smart contracts—that is, general-purpose code that executes on every computer in the network and can instruct the transmission of information and value based on a sophisticated set of logical conditions. Using smart contracts, users can create markets, store registries of debts or promises, represent the ownership of property, move funds in accordance with conditional instructions and create digital assets other than ether on the Ethereum network. Smart contract operations are executed on the Ethereum Blockchain in exchange for payment of ether. The Ethereum network is one of a number of projects intended to expand blockchain use beyond just a peer-to-peer money system. The value of ether is not backed by any government, corporation, or other identified body.
The value of ether is determined in part by the supply, of and demand for, ether in the markets for exchange that have been organized to facilitate the trading of ether. Ether is the second largest cryptocurrency by market capitalization behind bitcoin. As of [•], ether had a total market capitalization of approximately $[•] and represented approximately [•]% of the entire digital asset market. Ether is maintained on the Ethereum network. No single entity owns or operates the Ethereum network. The Ethereum network is accessed through software and governs ether’s creation and movement. The source code for the Ethereum network is open-source, and anyone can contribute to its development.
The Ethereum software source code allows for the creation of decentralized applications (“DApps”) that are supported by a transaction protocol referred to as “smart contracts,” which includes the cryptographic operations that verify and secure ether transactions. A smart contract operates by a predefined set of rules (i.e., “if/then statements”) that allows it to automatically execute code the same way on any Ethereum node on the network. Such actions taken by the predefined set of rules are not necessarily contractual in nature but are intended to eliminate the arbitration of a third party for carrying out code execution on behalf of users, making the system decentralized, while empowering developers to create a wide range of applications layering together different smart contracts. Although there are many alternatives, the Ethereum network is the oldest and largest smart contract platform in terms of market cap, availability of decentralized applications, and development activity. Smart contracts can be utilized across several different applications ranging from art to finance. Currently, one of the most popular applications is the use of smart contracts for underpinning the operability of decentralized financial services (“DeFi”), which consist of numerous highly interoperable protocols and applications. DeFi is believed by some to offer many opportunities for innovation and to have the potential to create an open, transparent, and immutable financial infrastructure, with democratized access.
Because the Ethereum network has no central authority, the release of updates to the network’s source code by developers does not guarantee that the updates will be automatically adopted by the other participants. Users and validators must accept any changes made to the source code by downloading the proposed modification and that modification is effective only with respect to those users and validators who choose to download it. As a practical matter, a modification to the source code becomes part of the Ethereum network only if it is accepted by participants that collectively have a majority of the processing power on the Ethereum network.
-7-
Table of Contents
If a modification is accepted by only a percentage of users and miners, a division will occur such that one network will run the pre-modification source code and the other network will run the modified source code. Such a division is known as a “fork.” A fork may be intentional such as the Ethereum “Merge.” The Merge represents the Ethereum Network’s shift from proof-of-work to proof-of-stake. This means that instead of being required to solve complex mathematical problems validators are required to stake ether.
New ether is created as a result of “staking” of ether by validators. Validators are required to stake ether in order to be selected to perform validation activities and then once selected, as a reward, they earn newly created ether. Validation activities include verifying transactions, storing data, and adding to the Ethereum blockchain. Investors must stake at least 32 ether to become an Ethereum validator. The Ethereum network provides the ability to execute peer-to-peer transactions to realize, via smart contracts, automatic, conditional transfer of value and information, including money, voting rights, and property.
Assets in the Ethereum network are held in accounts. Each account, or “wallet,” is made up of at least two components: a public address and a private key. An Ethereum private key controls the transfer or “spending” of ether from its associated public ether address. An ether “wallet” is a collection of public Ethereum addresses and their associated private key(s). This design allows only the owner of ether to send ether, the intended recipient of ether to unlock it, and the validation of the transaction and ownership to be verified by any third party anywhere in the world.
“Gas” refers to the unit that measures the amount of computational effort required to execute specific operations on the Ethereum network. Since each Ethereum transaction requires computational resources to execute, those resources have to be paid for to ensure Ethereum is not vulnerable to spam and cannot get stuck in infinite computational loops. Payment for computation is made in the form of a gas fee. The gas fee is the amount of gas used to do some operation, multiplied by the cost per unit gas. The Ethereum Improvement Proposal 1559 simplified the transaction fee process. Instead of performing complex calculations to estimate the gas, users instead pay an algorithmically determined transaction fee set by the protocol itself. Gas price is often a small fraction of ether, which is denoted in the unit of Gwei (10^9 Gwei = 1 ether). Gas is essential in sustaining the Ethereum network. It motivates validators to process and verify transactions for a monetary reward. Gas price fluctuates with supply and demand for processing power since validators can choose to not process transactions when gas prices are low. Gas has another important function in preventing unintentional waste of energy. Because the coding language for Ethereum is Turing-complete, there is a possibility of a program running indefinitely, and a transaction can be left consuming a lot of energy. A gas limit is imposed as the maximum price users are willing to pay to facilitate transactions. When gas runs out, the program will be terminated, and no additional energy would be used.
Ether may be regarded as a currency or digital commodity depending on its specific use in particular transactions. Ether may be used as a medium of exchange or unit of account. Although a number of large and small retailers accept ether as a form of payment in the United States and foreign markets, there is relatively limited use of ether for commercial and retail payments. Similarly, ether may be used as a store of value (i.e., an asset that maintains its value rather than depreciating), although it has experienced significant periods of price volatility.
There can be no assurance as to the future performance of ether; the past performance and volatility of ether should not be taken as an indication of future performance or volatility.
The Ethereum Market
Ether had a total market capitalization of approximately $[●] billion as of [●]. Ether spot trading occurs on venues in the U.S. that are licensed to conduct that business by the NYSDFS, other venues in the U.S. and non-U.S. venues. In addition, ether futures and options trading occurs on trading platforms in the U.S. regulated by the CFTC. The market for NYSDFS-licensed and CFTC-regulated trading of ether and ether derivatives has developed substantially. Ether market conditions in the three months ending on [●] are briefly summarized as follows:
| • | Ether: There are over 20 NYSDFS-licensed entities operating trading platforms with order books for spot trading of ether. Among the top NYSDFS-licensed trading platforms, year-to-date as-of [●], the average daily trading volume is approximately $[●] million. Across these venues, the average daily deviation of prices was less than [●]%. The largest NYSDFS-licensed trading platform by volume had an average bid-ask spread during the period of less than [●]%. |
| • | Futures: There are currently three CFTC-regulated trading platforms, two of which are open and facilitate trading of ether futures, with a total average daily trading volume of approximately $[●] billion. |
| • | Options: One CFTC-regulated trading platform facilitates trading of options on ether futures, with average monthly trading volume of approximately $[●] billion. |
-8-
Table of Contents
Principal Investment Risks of an Investment in the Trust
An investment in the Trust involves risks. You should consider carefully the risks summarized below, which are described in more detail under “Risk Factors.”
Shareholders may choose to use the Trust as means of investing indirectly in ether. Shareholders considering a purchase of Shares of the Trust should carefully consider how much of their total assets should be exposed to the ether market, and should fully understand, be willing to assume, and have the financial resources necessary to withstand, the risks involved in the Trust’s investment strategy, and be in a position to bear the potential loss of their entire investment in the Trust.
There is no assurance as to whether the Trust will be profitable or meet its expenses and liabilities. Any investment made in the Trust may result in a total loss of the investment.
Risks Related to Ether
Market and Volatility Risk. Ether has historically exhibited high price volatility relative to more traditional asset classes, which may be due to speculation regarding potential future appreciation in value. The value of the Trust’s investments in ether could decline rapidly, including to zero.
Some market observers have asserted that the ether market periodically experiences pricing “bubbles” and have predicted that, in time, the value of ether will fall to a fraction of its current value, or even to zero. Ether has not been in existence long enough for market participants to assess these predictions with any precision, but if these observers are even partially correct, an investment in the Shares may turn out to be substantially worthless.
Adoption Risk. The further development and acceptance of the Ethereum network, which is part of a new and rapidly changing industry, is subject to a variety of factors that are difficult to evaluate. The slowing, stopping or reversing of the development or acceptance of the Ethereum network may adversely affect the price of ether and therefore an investment in the Shares.
Currently, there is relatively limited use of ether in the retail and commercial marketplace in comparison to relatively extensive use as a store of value. Tax treatment of the use of ether as a medium of exchange and other factors could hinder expansion of ether into retail and commercial markets. A lack of expansion by ether into retail and commercial markets, or a contraction of such use, may result in damage to the public perception of ether and the utility of ether as a payment system, increased volatility or a reduction in the value of ether, all of which could adversely impact an investment in the Shares. Furthermore, while ether was among the first widely used digital assets, many other digital assets besides ether have also been created. To the extent market participants come to prefer these other digital assets, the value of ether, and therefore an investment in the Shares, may be adversely affected.
Regulatory Risk. Regulatory changes or actions may alter the nature of an investment in ether or restrict the use of ether or the operations of the Ethereum network or venues on which ether trades in a manner that adversely affects the price of ether and an investment in the Shares. For example, it may become difficult or illegal to acquire, hold, sell or use ether in one or more countries, which could adversely impact the price of ether.
-9-
Table of Contents
Cybersecurity Risk Related to Ether. In the past, flaws in the source code for ether have been discovered, including those that resulted in the theft of users’ ether. Several errors and defects have been publicly found and corrected, including those that disabled some functionality for users and exposed users’ personal information. Discovery of flaws in or exploitations of the source code that allow malicious actors to take or create money in contravention of known network rules has occurred.
Additionally, if a malicious actor or botnet (i.e., a volunteer or hacked collection of computers controlled by networked software coordinating the actions of the computers) obtains control of more than 50% of the processing power of the Ethereum network, such actor or botnet could alter the digital transaction ledger, or “blockchain,” that records transactions in and ownership of ether and adversely affect the value of ether.
By using computers that appear to be participating in the Ethereum network, but that are not in fact connected to the network (so-called “cancer nodes”), a malicious actor can disconnect the target user from the ether economy entirely by refusing to relay any blocks or transactions.
Separate from the cybersecurity risks of the Ethereum protocol, entities that custody or facilitate the transfers or trading of ether have been frequent and successful targets of cybersecurity attacks, leading to significant theft of ether. If any of these exploitations or attacks occur, it could result in a loss of public confidence in ether, a decline in the value of ether and, as a result, adversely impact an investment in the Shares.
Risks Related to the Trust and the Shares
Expense Risk. The Trust’s returns will not match the performance of ether because the Trust incurs the Sponsor Fee and may incur other expenses.
Risk That Market Price of Shares May Reflect a Discount or Premium to NAV. The NAV of the Trust may not always correspond to the market price of its Shares for a number of reasons, including price volatility, levels of trading activity, differences between the normal trading hours for the Trust and the underlying ether market, the calculation methodology of the NAV, demand or supply for Shares of the Trust in excess of an Authorized Participant’s ability to create or redeem Shares and/or the closing of ether trading platforms due to fraud, failure, security breaches or otherwise. As a result, the NAV of the Shares included in Creation Baskets may differ from the market price of the Shares.
-10-
Table of Contents
Cash Creations and Redemptions. The use of cash creations and redemptions, as opposed to in-kind creations and redemptions, may adversely affect the arbitrage transactions by Authorized Participants intended to keep the price of the Shares closely linked to the price of ether and, as a result, the price of the Shares may fall or otherwise diverge from NAV. The use of cash creations and redemptions could cause delays in trade execution due to potential operational issues arising from implementing a cash creation and redemption model. Such delays could cause the execution price associated with such trades to materially deviate from the Benchmark price used to determine the NAV. Even though the Authorized Participant is responsible for the dollar cost of such difference in prices, Authorized Participants could default on their obligations to the Trust, or such potential risks and costs could lead to Authorized Participants to elect to not participate in the Trust’s Share creation and redemption processes, which may adversely affect the arbitrage mechanism, and as a result, the price of the Shares may fall or otherwise diverge from NAV. If the arbitrage mechanism is not effective, purchases or sales of Shares on the secondary market could occur at a premium or discount to NAV, which could harm Shareholders.
You should consider carefully the risks described below before making an investment decision. You should also refer to the other information included in this Prospectus, as well as information found in documents incorporated by reference in this Prospectus, before you decide to purchase any Shares. These risk factors may be amended, supplemented or superseded from time to time by risk factors contained in any periodic report, prospectus supplement, post-effective amendment or in other reports filed with the SEC in the future.
Risks Related to Ether
Ether and Ethereum generally.
Ether is the native digital asset and unit of account on the Ethereum network. The market value of ether is not related to any specific company, government or asset. The valuation of ether depends on a number of factors, including future expectations for the value of the Ethereum network, the number of ether transactions, and the overall usage of ether as an asset. This means that a significant amount of the value of ether is speculative, which could lead to increased volatility. Investors could experience significant gains, losses and/or volatility in the Trust’s holdings, depending on the valuation of ether.
Several factors may affect the price of ether, including, but not limited to: supply and demand, investors’ expectations with respect to the rate of inflation, interest rates, currency exchange rates or future regulatory measures (if any) that restrict the trading of ether or the use of ether as a form of payment.
The Ethereum network is an open-source decentralized project without a controlling issuer or administrator of software development. As a result, core developers contribute their time and propose upgrades and improvements to the Ethereum network protocols and various software implementations thereof, often on the Ethereum repository on the website Github. Core developers’ roles evolve over time, largely based on self-determined participation. Although some market participants such as the Ethereum Foundation sponsor some developers, core developers are not generally compensated for their work on the Ethereum network, and such developers may cease to provide services or migrate to alternate digital asset networks. In addition, a lack of resources may result in an inability of the Ethereum network community to address novel technical issues or to achieve consensus around solutions therefor. As with other digital asset networks, the Ethereum network faces significant scaling challenges due to the fact that public blockchains generally face a tradeoff between security and scalability. One means through which public blockchains achieve security is decentralization, meaning that no intermediary is responsible for securing and maintaining these systems. For example, a greater degree of decentralization generally means a given digital asset network is less susceptible to manipulation or capture. A digital asset network may be limited in the number of transactions it can process by the capabilities of the participating nodes. The Ethereum network’s Ethereum 2.0 upgrade addresses some of Ethereum’s speed, efficiency and scalability issues through staking and sharding. However, both hard forks and future software upgrades designed to further address scaling may cause confusion or may not result in needed improvements, each of which could have a negative impact on the value of an investment in the Shares.
Moreover, in the past, flaws in the source code for digital assets have been exposed and exploited, including flaws that disabled some functionality for users, exposed users’ personal information and/or resulted in the theft of users’ digital assets. The cryptography underlying Ethereum could prove to be flawed or ineffective, or developments in mathematics and/or technology, including advances in digital computing, algebraic geometry and quantum computing, could result in such cryptography becoming ineffective. In any of these circumstances, a malicious actor may be able to take the Trust’s ether, which would adversely impact the value of the Shares. Moreover, functionality of the Ethereum network may be
-11-
Table of Contents
negatively affected such that it is no longer attractive to users, thereby dampening demand for ether and the Ethereum network. Even if another digital asset other than ether were affected by similar circumstances, any reduction in confidence in the source code or cryptography underlying digital assets generally could negatively affect the demand for digital assets and therefore adversely affect the value of the Shares.
Finally, as there is no centralized party controlling the development of the Ethereum network, there can be no assurance that the community as a whole will not implement changes to the Ethereum network protocols that have an adverse impact on the Trust or an investment in the Shares.
Moving from Proof-of-Work (PoW) to Proof-of-Stake (PoS) Consensus Mechanism.
In September 2022, the Ethereum network moved from a proof-of-work to a proof-of-stake mechanism called Serenity, or Ethereum 2.0. Unlike proof-of-work, in which miners expend computational resources to compete to validate transactions and are rewarded coins in proportion to the amount of computational resources expended, in proof-of-stake, validators risk or “stake” coins to compete to be randomly selected to validate transactions and are rewarded coins in proportion to the amount of coins staked. Any malicious activity, such as mining multiple blocks, disagreeing with the eventual consensus or otherwise violating protocol rules, results in the forfeiture or “slashing” of a portion of the staked coins. Proof-of-stake is viewed as more energy efficient and scalable than proof-of-work. There is no guarantee that the Ethereum community will embrace Ethereum 2.0, and the new protocol may never fully scale.
The possibility exists that Ethereum 2.0 may never achieve the goals of the Ethereum community, which may have a negative impact on the market value of ether, and consequently the NAV of the Trust.
The Trust will not participate in the proof-of-stake validation mechanism of the Ethereum network (i.e., the Trust will not “stake” its ether) to earn additional ether or seek other means of generating income from its ether holdings.
The scheduled creation of newly minted ether and their subsequent sale may cause the price of ether to decline, which could negatively affect an investment in the Trust.
In accordance with the Ethereum 2.0 upgrades, newly created or minted ether are generated through a process referred to as “staking” which involves the collection of a staking reward of new ether. To operate a node, a validator must acquire and lock 32 ether by sending a special transaction to the staking contract, which transaction associates the staked ether with a withdrawal address (to unlock the ether and receive any staking rewards) and a validator address (to designate the validator node performing transaction verification). When the recipient makes newly minted ether available for sale, there can be downward pressure on the price of ether as the new supply is introduced into the Ethereum market.
Market and Volatility Risk. Ether has historically exhibited high price volatility relative to more traditional asset classes. For example, there were steep increases in the value of certain digital assets, including ether, over the course of 2021. These increases were followed by steep drawdowns throughout 2022. These episodes of rapid price appreciation followed by steep drawdowns have occurred multiple times throughout ether’s history, including, for example, in 2017-2018, before repeating again in 2021-2022. Over the course of 2023 and in to 2024, ether prices have continued to exhibit significant volatility.
Extreme volatility may persist and the value of the Shares may significantly decline in the future without recovery. The digital asset markets may still be experiencing a bubble or may experience a bubble again in the future. For example, in the first half of 2022, each of Celsius Network, Voyager Digital Ltd., and Three Arrows Capital declared bankruptcy, resulting in a loss of confidence in participants of the digital asset ecosystem and negative publicity surrounding digital assets more broadly. In November 2022, FTX Trading Ltd. (“FTX”), one of the largest digital asset trading platforms by volume at the time, halted customer withdrawals amid rumors of the company’s liquidity issues and likely insolvency, which were subsequently corroborated by its CEO. Shortly thereafter, FTX’s CEO resigned and FTX and many of its affiliates filed for bankruptcy
-12-
Table of Contents
in the United States, while other affiliates have entered insolvency, liquidation, or similar proceedings around the globe, following which the U.S. Department of Justice brought criminal fraud and other charges, and the SEC and CFTC brought civil securities and commodities fraud charges, against certain of FTX’s and its affiliates’ senior executives, including its former CEO. In addition, several other entities in the digital asset industry filed for bankruptcy following FTX’s bankruptcy filing, such as BlockFi Inc. and Genesis Global Capital, LLC (“Genesis”). In response to these events, the digital asset markets have experienced extreme price volatility and other entities in the digital asset industry have been, and may continue to be, negatively affected, further undermining confidence in the digital asset markets. These events have also negatively impacted the liquidity of the digital asset markets as certain entities affiliated with FTX engaged in significant trading activity. If the liquidity of the digital asset markets continues to be negatively impacted by these or similar events, digital asset prices, including ether, may continue to experience significant volatility or price declines and confidence in the digital asset markets may be further undermined.
In addition, regulatory and enforcement scrutiny of digital assets has increased, including from, among others, the Department of Justice, the SEC, the CFTC, the White House and Congress, as well as state regulators and authorities. Developments in the regulation of digital assets are ongoing. For example, in July 2023, the U.S. District Court for the Southern District of New York ruled on the SEC’s action against Ripple Labs, Inc. The court found that offers and sales of XRP, a digital token, to institutions and sophisticated individuals constituted securities transactions, but that offers and sales of XRP on crypto trading platforms, distributions to employees, and other third-party developers were not securities transactions. More recently, the D.C. Circuit Court found that the SEC’s denial of the Grayscale Bitcoin Trust’s listing was “arbitrary and capricious” under the Administrative Procedures Act in light of the SEC’s approval of two similar bitcoin futures-based exchange-traded products (“ETPs”). In the immediate aftermath of this court decision, the price of bitcoin increased from nearly $26,000 to over $28,100. It is not possible to predict at this time all of the risks that regulatory developments may pose to the Trust, its service providers or to the digital asset industry as a whole.
Extreme volatility in the future, including further declines in the trading prices of ether, could have a material adverse effect on the value of the Shares and the Shares could lose all or substantially all of their value. The Trust is not actively managed and will not take any actions to take advantage, or mitigate the impacts, of volatility in the price of ether.
The value of the Trust’s investments in ether could decline rapidly, including to zero.
Ether’s historical volatility may be due to speculation regarding potential future appreciation in value, which could adversely affect an investment in the Shares.
Momentum investing typically is associated with growth stocks and other assets whose valuation, as determined by the investing public, is impacted by anticipated future appreciation in value. Momentum investing in ether may have contributed, and may continue to contribute, to speculation regarding potential future appreciation in the value of ether, inflating and making these prices more volatile. As a result, ether may be more likely to fluctuate in value due to changing investor confidence in future appreciation or depreciation in prices, which could adversely affect the price of ether, and, in turn, an investment in the Trust.
Some market observers have asserted that the ether market often experiences pricing “bubbles” and have predicted that, in time, the value of ether will fall to a fraction of its current value, or even to zero.
Ether has not been in existence long enough for market participants to assess these predictions with any precision, but if these observers are even partially correct, an investment in the Shares may turn out to be substantially worthless.
-13-
Table of Contents
The price of ether may be impacted by the behavior of a small number of influential individuals or companies.
The price of ether has experienced increased volatility resulting from the statements and actions of individuals in the ether and broader technology community. Filings by companies and social media statements by prominent individuals have in the past and may in the future have an outsized impact on the price of ether relative to fundamental value considerations. To the extent that the actions of one or more companies or individuals leads to an increase in the price of ether, a reversal of such position by the company or individual may have a sharp, negative impact on the price of ether and the value of the Shares.
Adoption Risk.
User adoption of ether may slow down, stop, or reverse.
The further development and acceptance of the Ethereum network, which is part of a new and rapidly changing industry, is subject to a variety of factors that are difficult to evaluate. For example, the Ethereum network faces significant obstacles to increasing the usage of ether without resulting in higher fees or slower transaction settlement times, and attempts to increase the volume of transactions may not be effective. The slowing, stopping or reversing of the development or acceptance of the Ethereum network may adversely affect the price of ether and therefore an investment in the Shares.
The use of ether to, among other things, buy and sell goods and services is part of a new and rapidly evolving industry that employs digital assets based upon computer-generated mathematical and/or cryptographic protocols. Ether is a prominent, but not unique, part of this industry. The growth of this industry is subject to a high degree of uncertainty. The factors affecting the further development of this industry, include, but are not limited to:
| • | continued worldwide growth or possible cessation or reversal in the adoption and use of ether and other digital assets; |
| • | government and quasi-government regulation of ether and other digital assets and their use, including taxation of ether transactions, or restrictions on or regulation of access to and operation of the Ethereum network and other digital asset networks; |
| • | changes in consumer demographics and public tastes and preferences, including the possibility that market participants may come to prefer other digital assets to ether for a variety of reasons, including that such other digital currencies may have features (like different consensus mechanisms) or uses that ether lacks; |
| • | the maintenance and development of the open-source software protocol of the Ethereum network; |
| • | the availability and popularity of other forms or methods of buying and selling goods and services, including new means of using fiat currencies; |
| • | the use of the networks supporting digital assets for developing smart contracts and distributed applications; |
| • | general economic conditions and the regulatory environment relating to digital assets; |
| • | because of the energy usage required for mining certain digital assets, regulation stemming from energy usage and/or climate concerns; and |
| • | negative consumer or public perception of ether specifically and other digital assets generally. |
-14-
Table of Contents
Currently, there is relatively limited use of ether in the retail and commercial marketplace in comparison to relatively extensive use as a store of value, thus contributing to price volatility that could adversely affect an investment in the Shares.
Ether has only recently and very selectively accepted as a means of payment for goods and services by some retail and commercial outlets, and the use of ether by consumers to pay such retail and commercial outlets remains extremely limited. Banks and other established financial institutions may refuse to process funds for ether transactions; process wire transfers to or from ether trading platforms, ether-related companies or service providers; or maintain accounts for persons or entities transacting in ether or providing ether-related services. In addition, some taxing jurisdictions, including the U.S., treat the use of ether as a medium of exchange for goods and services to be a taxable sale of ether, which could discourage the use of ether as a medium of exchange, especially for a holder of ether that has appreciated in value. See “—Regulatory Risk—The tax treatment of ether and transactions involving ether for U.S. federal income tax purpose is uncertain and may change, which could adversely affect the value of an investment in the Shares.”
Conversely, a significant portion of ether’s demand is generated by investors seeking a long-term store of value or speculators seeking to profit from the short- or long-term holding of the asset. Price volatility undermines ether’s role as a medium of exchange, as retailers are much less likely to accept it as a form of payment. Use of ether as a medium of exchange and payment method may always be low. A lack of expansion by ether into retail and commercial markets, or a contraction of such use, may result in damage to the public perception of ether and the utility of ether as a payment system, increased volatility or a reduction in the value of ether, all of which could adversely impact an investment in the Shares. There can be no assurance that such acceptance will grow, or not decline, in the future.
While bitcoin, the first widely used digital asset, and many other digital assets were created and mainly serve as a form of money, digital assets can be used to do more complicated things. Some digital assets were built specifically with more complex use cases in mind. For example, the Ethereum network was designed primarily to facilitate smart contracts, with the digital asset ether serving as the transactional mechanism for many portions of such contracts. Smart contracts are programs that automatically execute on a blockchain, allowing for a myriad of interesting applications to be built. It is possible that market demand for digital assets with use cases beyond serving as a form of money could over time reduce the market demand for ether, which would adversely impact the price of ether and, as a result, an investment in the Shares. Additionally, certain digital assets use non-blockchain technologies, like Directed Acyclic Graph data structures, to maintain consensus. To the extent market participants come to prefer these other consensus mechanisms or digital assets that use non-blockchain technology, the value of ether, and therefore an investment in the Shares, may be adversely affected.
Ethereum faces significant scaling obstacles that can lead to high fees or slow transaction settlement times, and attempts to increase the volume of transactions may not be effective.
The Ethereum network faces significant scaling challenges due to the fact that public blockchains generally face a tradeoff between decentralization, security and scalability. One means through which public blockchains such as the Ethereum network achieve security is decentralization, meaning that no intermediary is responsible for securing and maintaining these systems. For example, a greater degree of decentralization generally means a given digital asset network is less susceptible to manipulation or capture.
Historically, the development of the source code of the Ethereum protocol has been overseen by the Ethereum Foundation and the core developers. The core developers evolve over time, largely based on self-determined participation. However, the Ethereum network would cease to operate successfully without both validators and users, and the core developers cannot formally compel them to adopt the changes to the source code desired by core developers, or to continue to render services or participate in the Ethereum network. EIP 1559 is an example of a change where certain constituencies, such as miners, or sub-groups within a constituency, demonstrated differing interests from those of the core developers or certain users of the Ethereum network, such as decentralized application and smart contract developers. As a general matter, the governance of the Ethereum network generally depends on the majority of all members of the Ethereum community ultimately reaching some form of voluntary agreement on significant changes.
-15-
Table of Contents
The decentralized governance of the Ethereum network may make it difficult to find or implement solutions or marshal sufficient effort to overcome existing or future problems, especially protracted ones requiring substantial directed effort and resource commitment over a long period of time, such as scaling challenges and the implementation of Ethereum 2.0. Deeply-held differences of opinion have led to forks in the past, such as between Ethereum and Ethereum Classic following The DAO hack, and could lead to additional forks in the future, with potentially divisive effects. The Ethereum network’s failure to overcome governance challenges could exacerbate problems experienced by the network or cause the network to fail to meet the needs of its users, and could cause users, validators, and developer talent to abandon the Ethereum network or to choose competing blockchain protocols, or lead to a drop in speculative interest, which could cause the value of ether to decline.
If increases in throughput on the Ethereum network lag behind growth in usage of ether, average fees and settlement times may increase considerably. For example, the Ethereum network has been significantly congested at times, which has led to increased transaction fees. Increased fees and decreased settlement speeds could preclude certain uses for ether, and could reduce demand for, and the price of, ether, which could adversely impact the value of the Shares.
The implementation of Ethereum 2.0 has increased the speed and efficiency of the Ethereum network. However, there is no guarantee that any of the mechanisms in place or being explored for further increasing the speed, efficiency and scalability of the Ethereum network transactions will be effective, or how long these mechanisms will take to become effective, which could adversely impact the value of the Shares.
The prevailing level of transaction fees may adversely affect the usage of the Ethereum network.
New ether is created when ether validators use their stake on the Ethereum network to participate in the consensus mechanism, which records and verifies every ether transaction on the Ethereum blockchain. In return for their services, validators are rewarded through receipt of a set amount of ether. If transaction fees voluntarily paid by users are not sufficiently high or if transaction fees increase to the point of being prohibitively expensive for users, validators may not have an adequate incentive to continue validating. Further, if the price of ether or the reward for validating new blocks is not sufficiently high to incentivize validators, validators may cease participating in the consensus mechanism. Validators ceasing operations or participation in the consensus mechanism would reduce the collective processing power on the Ethereum network, which would adversely affect the confirmation process for transactions (i.e., temporarily decreasing the speed at which blocks are added to the blockchain) and make the Ethereum network more vulnerable to malicious actors obtaining sufficient control to alter the blockchain and hinder transactions. Any reduction in confidence in the confirmation process of the Ethereum network may adversely affect the Trust’s investments in ether.
The amount of new ether earned by staking may be adjusted. Historically, the validating reward associated with solving an Ethereum block has been reduced, although the supply of new ether is uncapped. If the transaction fees are too low, miners may not be incentivized to validate transactions and confirmations of transactions on the blockchain could be temporarily slowed. A reduction in the processing power expended by validators on the Ethereum network could reduce infrastructure security, reduce confidence in the Ethereum network, or expose the Ethereum network to a malicious actor or botnet obtaining a majority of processing power on the Ethereum network. Decreased demand for ether or reduced security on the Ethereum network may adversely impact an investment in the Shares.
-16-
Table of Contents
Competition from central bank digital currencies (“CBDCs”) and other digital assets could adversely affect the value of ether and other digital assets.
Central banks have introduced digital forms of legal tender (CBDCs). China’s CBDC project, known as Digital Currency Electronic Payment, has reportedly been tested in a live pilot program conducted in multiple cities in China. A recent study published by the Bank for International Settlements estimated that at least 36 central banks have published retail or wholesale CBDC work ranging from research to pilot projects. Whether or not they incorporate blockchain or similar technology, CBDCs, as a form of legal tender in the issuing jurisdiction, could have an advantage in competing with, or replace, ether and other digital assets as a medium of exchange or store of value. As a result, the value of ether could decrease, which could adversely affect an investment in the Trust.
Competing digital assets may adversely affect the value of ether and digital assets.
Promoters of other digital assets claim that those digital assets have solved certain of the purported drawbacks of the Ethereum network, for example, allowing faster settlement times, reducing gas fees, or reducing electricity usage in connection with mining. If these digital assets are successful, such success could reduce demand for ether and adversely affect the value of ether and an investment in the Trust.
Prices of ether may be affected due to stablecoins (including Tether and U.S. Dollar Coin (“USDC”)), the activities of stablecoin issuers and their regulatory treatment.
While the Trust does not invest in stablecoins, it may nonetheless be exposed to these and other risks that stablecoins pose for the ether market through its trading in ether. Stablecoins are digital assets designed to have a stable value over time as compared to typically volatile digital assets, and are typically marketed as being pegged to a fiat currency, such as the U.S. dollar. Although the prices of stablecoins are intended to be stable, in many cases their prices fluctuate, sometimes significantly. This volatility has in the past apparently impacted the price of ether. Stablecoins are a relatively new phenomenon, and it is impossible to know all of the risks that they could pose to participants in the ether market. In addition, some have argued that some stablecoins, particularly Tether, are improperly issued without sufficient backing in a way that could cause artificial rather than genuine demand for ether, raising its price, and also argue that those associated with certain stablecoins are involved in laundering money. For example, on February 17, 2021 the New York Attorney General entered into an agreement with Tether’s operators, requiring them to cease any further trading activity with New York persons and pay $18.5 million in penalties for false and misleading statements made regarding the assets backing Tether. On October 15, 2021, the CFTC announced a settlement with Tether’s operators in which they agreed to pay $42.5 million in fines to settle charges that, among others, Tether’s claims that it maintained sufficient U.S. dollar reserves to back every Tether stablecoin in circulation with the “equivalent amount of corresponding fiat currency” held by Tether were untrue.
USDC is a reserve-backed stablecoin issued by Circle Internet Financial that is commonly used as a method of payment in digital asset markets, including the ether market. The issuer of USDC uses the Circle Reserve Fund to hold cash, U.S. Treasury bills, notes and other obligations issued or guaranteed as to principal and interest by the U.S. Treasury, and repurchase agreements secured by such obligations or cash, which serve as reserves backing USDC stablecoins. While USDC is designed to maintain a stable value at 1 U.S. dollar at all times, on March 10, 2023, the value of USDC fell below $1.00 for multiple days after Circle Internet Financial disclosed that US$3.3 billion of the USDC reserves were held at Silicon Valley Bank, which had entered Federal Deposit Insurance Corporation (“FDIC”) receivership earlier that day. Stablecoins are reliant on the U.S. banking system and the U.S. treasuries market, and the failure of either to function normally could impede the function of stablecoins, and therefore could adversely affect the value of the Shares.
-17-
Table of Contents
Given the foundational role that stablecoins play in global digital asset markets, their fundamental liquidity can have a dramatic impact on the broader digital asset market, including the market for ether. Because a large portion of the digital asset market still depends on stablecoins such as Tether and USDC, there is a risk that a disorderly de-pegging or a “run” on Tether or USDC could lead to dramatic market volatility in digital assets more broadly. Volatility in stablecoins, operational issues with stablecoins (for example, technical issues that prevent settlement), concerns about the sufficiency of any reserves that support stablecoins or potential manipulative activity when unbacked stablecoins are used to pay for other digital assets (including ether), or regulatory concerns about stablecoin issuers or intermediaries, such as trading platforms, that support stablecoins, could impact individuals’ willingness to trade on trading platforms that rely on stablecoins, reduce liquidity in the ether market, and affect the value of ether, and in turn impact an investment in the Shares.
The open-source structure of the Ethereum network protocol means that certain core developers and other contributors may not be directly compensated for their contributions in maintaining and developing the Ethereum network protocol. A failure to properly monitor and upgrade the Ethereum network protocol could damage the Ethereum network.
The Ethereum network operates based on open-source protocol maintained by a group of core developers. There is no official developer or group of developers that controls the Ethereum network. However, historically the Ethereum network’s development has been overseen by the Ethereum Foundation and other core developers. The Ethereum Foundation and core developers are able to access and alter the Ethereum network source code and, as a result, they are responsible for quasi-official releases of updates and other changes to the Ethereum network’s source code. As the Ethereum network protocol is not sold and its use does not generate revenue for development teams, core developers may not be directly compensated for maintaining and updating the Ethereum network protocol. Consequently, developers may lack a financial incentive to maintain or develop the network, and the core developers may lack the resources to adequately address emerging issues with the network. There can be no guarantee that developer support will continue or be sufficient in the future. Additionally, some development and developers are funded by companies whose interests may be at odds with other participants in the network or with investors’ interests. To the extent that material issues arise with the Ethereum network protocol and the core developers and open-source contributors are unable or unwilling to address the issues adequately or in a timely manner, the Ethereum network and an investment in the Shares may be adversely affected.
Lack of clarity in the corporate governance of ether may lead to ineffective decision-making that slows development or prevents the Ethereum network from overcoming important obstacles.
Governance of decentralized networks, such as the Ethereum network, is by voluntary consensus and open competition. Ethereum has no central decision-making body or clear manner in which participants can come to an agreement other than through overwhelming consensus. Historically the development of the source code of the Ethereum protocol has been overseen by the Ethereum Foundation and the core developers. The core developers evolve over time, largely based on self-determined participation. However, the Ethereum network would cease to operate successfully without both miners and users, and the core developers cannot formally compel them to adopt the changes to the source code desired by core developers, or to continue to render services or participate in the Ethereum network. The lack of clarity on governance may adversely affect ether’s utility and ability to grow and face challenges, both of which may require solutions and a directed effort to overcome problems, especially long-term problems.
To the extent lack of clarity in corporate governance of ether leads to ineffective decision-making that slows development and growth, the value of the Shares may be adversely affected.
-18-
Table of Contents
A temporary or permanent blockchain “fork” could adversely affect an investment in the Shares.
The Ethereum network operates using open-source protocols, meaning that any user can download the software, modify it and then propose that the users and miners of ether adopt the modification. When a modification is introduced and a substantial majority of users and miners consent to the modification, the change is implemented and the network remains uninterrupted. However, if less than a substantial majority of users and miners (under the former proof-of-work model) or validators (under the current proof-of-stake model) consent to the proposed modification, and the modification is not compatible with the software prior to its modification, the consequence would be what is known as a “hard fork” of the Ethereum network, with one group running the pre modified software and the other running the modified software. The effect of such a fork would be the existence of two versions of ether running in parallel on separate networks using separate blockchain ledgers, yet lacking interchangeability. For example, The Ethereum network has forked in the past. In 2016, a fork resulted in the creation of Ethereum and Ethereum Classic networks. Following a fork, holders of one asset such as ETH will hold equal amounts of assets resulting from the fork, in this case, assets on the Ethereum proof-of-work blockchain.
Furthermore, a hard fork can introduce new security risks. For example, when Ethereum and Ethereum Classic split in July 2016, replay attacks, in which transactions from one network were rebroadcast to nefarious effect on the other network, plagued trading platforms through at least October 2016. An trading platform announced in July 2016 that it had lost 40,000 ether tokens from the Ethereum Classic network, which was worth about $100,000 at that time, as a result of replay attacks. Another possible result of a hard fork is an inherent decrease in the level of security. After a hard fork, it may become easier for an individual miner or mining pool’s hashing power to exceed 50% of the processing power of the Ethereum network, thereby making the network more susceptible to attack.
A fork could also be introduced by an unintentional, unanticipated software flaw in the multiple versions of otherwise compatible software users run. Such a fork could adversely affect ether’s viability. It is possible, however, that a substantial number of users and miners could adopt an incompatible version of ether while resisting community-led efforts to merge the two chains. This would result in a permanent fork, as in the case of Ethereum and Classic Ethereum Classic, as detailed above.
A fork could also be introduced by an unintentional, unanticipated software flaw in the multiple versions of otherwise compatible software users run. Such a fork could adversely affect ether’s viability. It is possible, however, that a substantial number of validators could adopt an incompatible version of ether while resisting community-led efforts to merge the two chains. This would result in a permanent fork, as in the case of Ethereum and Ethereum Classic, as detailed above.
As another example of the effects of hard forks on digital assets, on September 15th, 2022, the Ethereum network successfully completed its Merge, moving from a Proof-of-Work (“PoW”) model to a Proof-of-Stake (“PoS”) model. Ethereum PoW miners who disagreed with the new consensus mechanism forked the network, which resulted in the EthereumPoW network (“ETHW”). ETHW was driven by a small but vocal group of miners who wished to hold onto revenue as Ethereum switched to PoS. The vast majority of token holder votes preferred the new PoS consensus method. There was no material impact on the Ethereum network as a result of the fork. All ether holders were air dropped ETHW tokens as a result of the hard fork. However, not all liquidity providers were able to trade the new token and the ETHW token almost immediately lost most of its value.
In the event of a hard fork of the Ethereum network, the Sponsor will instruct the Trust to immediately and irrevocably disclaim all rights to the IR Assets so created. Ether is the only digital asset that will be held by the Trust. In the event the Trust seeks to change its treatment of Incidental Rights or IR Assets, an application would need to be filed with the SEC by the Exchange seeking approval to amend its listing rules.
In the event of a fork, the Sponsor will, as permitted by the terms of the Trust Agreement, determine which network it believes is generally accepted as the Ethereum network and should therefore be considered the appropriate network, and the associated asset as ether, for the Trust’s purposes. If the Trust modifies its policy on forks and air drops, notice to Shareholders will be provided on the Trust’s website, in a prospectus supplement, through a current report on Form 8-K and/or in the Trust’s annual or quarterly reports.
-19-
Table of Contents
Cybersecurity Risk Related to Ethereum.
Flaws in the source code of Ethereum, or flaws in the underlying cryptography, could leave the Ethereum network vulnerable to a multitude of attack vectors.
If the source code or cryptography underlying ether proves to be flawed or ineffective, malicious actors may be able to steal ether held by others, which could negatively impact the demand for ether and therefore adversely impact the price of ether. In the past, flaws in the source code for ether have been discovered, including those that resulted in the loss of users’ ether. Several errors and defects have been publicly found and corrected, including those that disabled some functionality for users and exposed users’ personal information. Discovery of flaws in or exploitations of the source code that allow malicious actors to take or create money in contravention of known network rules have occurred. In addition, the cryptography underlying ether could prove to be flawed or ineffective, or developments in mathematics and/or technology, including advances in digital computing, algebraic geometry and quantum computing, could result in such cryptography becoming ineffective. In any of these circumstances, a malicious actor may be able to steal ether held by others, which could adversely affect the demand for ether and therefore adversely impact the price of ether. Even if the affected digital asset is not ether, any reduction in confidence in the source code or cryptography underlying digital assets generally could negatively impact the demand for ether and therefore adversely affect an investment in the Shares.
Additionally, if a malicious actor or botnet (i.e., a volunteer or hacked collection of computers controlled by networked software coordinating the actions of the computers) obtains control of more than 50% of the processing power of a PoW network, such actor or botnet could alter the blockchain and adversely affect the value of certain digital assets, which would adversely affect the value of the Trust’s investments. The Ethereum network is subject to control by a significant number of developers or intermediaries important for the operation and maintenance of the Ethereum network. If a malicious actor or botnet obtains a majority of the processing power dedicated to mining on a PoW network, it may be able to alter the blockchain on which the network and most transactions rely by constructing fraudulent blocks or preventing certain transactions from being completed in a timely manner or at all. The malicious actor or botnet could control, exclude or modify the ordering of transactions. However, it could not generate new ether units or transactions using such control. The malicious actor could “double-spend” its own ether units (i.e., spend the same units in more than one transaction) and prevent the confirmation of other users’ transactions for so long as it maintained control. To the extent that such malicious actor or botnet did not yield its control of the processing power on the PoW network or the network community did not reject the fraudulent blocks as malicious, reversing any changes made to the blockchain may not be possible. Further, a malicious actor or botnet could create a flood of transactions in order to slow down confirmations of transactions on the impacted network.
-20-
Table of Contents
Some digital asset networks have been subject to malicious activity achieved through control over 50% of the processing power on the network. For example, on May 24, 2018, it was reported that attackers compromised the Bitcoin Gold network in this manner and were successfully able to double-spend units of ether gold in a series of transactions over the course of at least one week and in a total amount of at least $18 million. In addition, in May 2019, the Bitcoin Cash network experienced a 51% attack when two large mining pools reversed a series of transactions in order to stop an unknown miner from taking advantage of a flaw in a recent Bitcoin Cash protocol upgrade. Although this particular attack was arguably benevolent, the fact that such coordinated activity was able to occur may negatively impact perceptions of the Bitcoin Cash network. Furthermore, in August 2020, the Ethereum Classic Network was the target of two double-spend attacks by an unknown actor or actors that gained more than 50% of the processing power of the Ethereum Classic network. The attacks resulted in reorganizations of the Ethereum Classic blockchain that allowed the attacker or attackers to reverse previously recorded transactions in excess of $5.0 million and $1.0 million. Other digital assets such as Verge, Monacoin and Electroneum have also suffered similar attacks. To the extent that the Ethereum ecosystem, including the core developers and the administrators of mining pools, does not act to ensure greater decentralization of mining processing power, the feasibility of a malicious actor obtaining control of the processing power on the Ethereum network will increase, which may adversely affect an investment in the Shares. See “—Regulatory Risk.”
A malicious actor may also obtain control over the Ethereum network through its influence over core or influential developers. For example, this could allow the malicious actor to stymie legitimate network development efforts or attempt to introduce malicious code to the network under the guise of a software improvement proposal by such a developer. To the extent that the Ethereum ecosystem fails to attract a significant number of users, the possibility that a malicious actor may be able to obtain control of the Ethereum network in this manner will remain heightened.
By using cancer nodes, a malicious actor can disconnect the target user from the ether economy entirely by refusing to relay any blocks or transactions.
Separate from the cybersecurity risks of the Ethereum protocol, entities that custody or facilitate the transfers or trading of ether have been frequent and successful targets of cybersecurity attacks, leading to significant theft of ether.
See “Ether and the Ethereum Market—The Ethereum Market—Forms of Attack.”
If any of these exploitations or attacks occur, it could result in a loss of public confidence in ether and a decline in the value of ether and, as a result, adversely impact an investment in the Shares.
-21-
Table of Contents
Smart contracts are new and their ongoing development and operation may result in problems or be subject to errors or hacks, which could reduce the demand for ether or cause a wider loss of confidence in the Ethereum network, either of which could have an adverse impact on the value of ether.
Since smart contracts typically cannot be stopped or reversed, vulnerabilities in their programming (i.e., coding errors) can have damaging effects. For instance, coding errors may potentially create vulnerabilities that allow an attacker to drain the funds associated with the smart contract, cause issues or render the protocol unusable. There have been a number of vulnerabilities in various smart contract implementations exploited by hackers since the launch of the Ethereum network in 2015 that have resulted in the loss of ether from accounts. Problems with the development, deployment, and operation of smart contracts may have an adverse effect on the value of ether.
In some cases, smart contracts can be controlled by one or more “admin keys” or users with special privileges, or “super users”. These users may have the ability to unilaterally make changes to the smart contract, enable or disable features on the smart contract, change how the smart contract receives external inputs and data, and make other changes to the smart contract.
Many applications associated with DeFi are currently deployed on the Ethereum network, and smart contracts relating to DeFi applications currently represent a significant source of demand for ether. For smart contracts that hold a pool of digital asset reserves, smart contract super users or admin key holders may be able to extract funds from the pool, liquidate assets held in the pool, or take other actions that decrease the value of the digital assets held by the smart contract in reserves. Even for digital assets that have adopted a decentralized governance mechanism, such as smart contracts that are governed by the holders of a governance token, such governance tokens can be concentrated in the hands of a small group of core community members, who would be able to make similar changes unilaterally to the smart contract. If any such super user or group of core members unilaterally make adverse changes to a smart contract, the design, functionality, features and value of the smart contract, its related digital assets may be harmed. In addition, assets held by the smart contract in reserves may be stolen, misused, burnt, locked up or otherwise become unusable and irrecoverable. Super users can also become targets of hackers and malicious attackers. Furthermore, the underlying smart contracts may be insecure, contain bugs or other vulnerabilities, or otherwise may not work as intended. Any of the foregoing could cause users of the DeFi application to be negatively affected, or could cause the DeFi application to be the subject of negative publicity. Because DeFi applications may be built on the Ethereum network and represent a significant source of demand for ether, public confidence in the Ethereum network itself could be negatively affected, and the value of ether could decrease.
Ether transactions are irrevocable and stolen or incorrectly transferred ether may be irretrievable. As a result, any incorrectly executed ether transactions could adversely affect an investment in the Trust.
Ether transactions are not reversible. Once a transaction has been verified and recorded in a block that is added to the Ethereum blockchain, an incorrect transfer of a digital asset, such as ether, or a theft of ether generally will not be reversible and the Trust may not be capable of seeking compensation for any such transfer or theft. To the extent that the Trust is unable to successfully seek redress for such error or theft, such loss could adversely affect an investment in the Trust.
The custody of the Trust’s ether is handled by the Ethereum Custodian, and the transfer of ether to and from Authorized Participants or their agents is directed by the Sponsor. If the Ethereum Custodian’s internal procedures and controls are inadequate to safeguard the Trust’s ether holdings, and the Trust’s private key(s) is (are) lost, destroyed or otherwise compromised and no backup of the private key(s) is (are) accessible, the Trust will be unable to access its ether, which could adversely affect an investment in the
-22-
Table of Contents
Shares of the Trust. In addition, if the Trust’s private key(s) is (are) misappropriated and the Trust’s ether holdings are stolen, including from or by the Ethereum Custodian, the Trust could lose some or all of its ether holdings, which could adversely impact an investment in the Shares of the Trust.
Security threats to the Trust’s account with the Ethereum Custodian could result in the halting of Trust operations and a loss of Trust assets or damage to the reputation of the Trust, each of which could result in a reduction in the price of the Shares.
The Trust and its service providers’ use of internet, technology and information systems (including mobile devices and cloud-based service offerings) may expose the Trust to potential risks linked to cyber-security breaches of those technological or information systems. Security breaches, computer malware, ransomware and computer hacking attacks have been a prevalent concern in relation to digital assets. The Sponsor believes that the Trust’s ether held in the Trust’s account with the Ethereum Custodian will be an appealing target to hackers or malware distributors seeking to destroy, damage or steal the Trust’s ether and will only become more appealing as the Trust’s assets grow. To the extent that the Trust, the Sponsor or the Ethereum Custodian is unable to identify and mitigate or stop new security threats or otherwise adapt to technological changes in the digital asset industry, the Trust’s ether may be subject to theft, loss, destruction or other attack.
The Sponsor has evaluated the security procedures in place for safeguarding the Trust’s ether. Nevertheless, the security procedures cannot guarantee the prevention of any loss due to a security breach, software defect or act of God that may be borne by the Trust.
The security procedures and operational infrastructure may be breached due to the actions of outside parties, error or malfeasance of an employee of the Sponsor, the Ethereum Custodian, or otherwise, and, as a result, an unauthorized party may obtain access to the Trust’s account with the Ethereum Custodian, the private keys (and therefore ether) or other data of the Trust. Additionally, outside parties may attempt to fraudulently induce employees of the Sponsor, the Ethereum Custodian, or the Trust’s other service providers to disclose sensitive information in order to gain access to the Trust’s infrastructure. As the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently, or may be designed to remain dormant until a predetermined event and often are not recognized until launched against a target, the Sponsor and the Ethereum Custodian may be unable to anticipate these techniques or implement adequate preventative measures.
An actual or perceived breach of the Trust’s account with the Ethereum Custodian could harm the Trust’s operations, result in partial or total loss of the Trust’s assets, damage the Trust’s reputation and negatively affect the market perception of the effectiveness of the Trust, all of which could in turn reduce demand for the Shares, resulting in a reduction in the price of the Shares. The Trust may also cease operations, the occurrence of which could similarly result in a reduction in the price of the Shares.
While the Sponsor has established business continuity plans and systems that it believes are reasonably designed to prevent cyber attacks, there are inherent limitations in such plans and systems including the possibility that certain risks have not been, or cannot be, identified. Service providers may have limited indemnification obligations to the Trust, which could be negatively impacted as a result.
If the Ether Custody Agreement is terminated or the Ethereum Custodian or Prime Broker fail to provide services as required, the Sponsor may need to find and appoint a replacement custodian and/or prime broker, which could pose a challenge to the safekeeping and safe transfer of the Trust’s ethers, and the Trust’s ability to continue to operate may be adversely affected.
-23-
Table of Contents
The Trust is dependent on the Ethereum Custodian to operate. The Ethereum Custodian performs essential functions in terms of safekeeping the Trust’s ether, and its affiliate, Coinbase may be utilized by the Trust to facilitate the selling of ether by the Trust to pay the Sponsor Fee and, to the extent applicable, other Trust expenses, or in certain circumstances, to purchase and sell ether in connection with cash creation or redemption transactions. If the Ethereum Custodian or Prime Broker fail to perform the functions they perform for the Trust due to insolvency, business failure or interruption, default, failure to perform, security breach, or other problems affecting the Ethereum Custodian or the Prime Broker, the Trust may be unable to operate or create or redeem Creation Baskets, which could force the Trust to liquidate or adversely affect the price of the Shares.
On March 22, 2023, Coinbase and the Ethereum Custodian’s parent company, Coinbase Global Inc. (“Coinbase Global” and together, the “Relevant Coinbase Entities”) received a “Wells Notice” from the SEC staff stating that the SEC staff made a “preliminary determination” to recommend that the SEC file an enforcement action against the Relevant Coinbase Entities alleging violations of the federal securities laws, including the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the Securities Act of 1933, as amended (the “Securities Act”). According to Coinbase Global’s public reporting company disclosure, based on discussions with the SEC staff, the Relevant Coinbase Entities believe these potential enforcement actions would relate to aspects of the Relevant Coinbase Entities’ Coinbase Prime service, spot market, staking service Coinbase Earn, and Coinbase Wallet and the potential civil action may seek injunctive relief, disgorgement, and civil penalties. On June 6, 2023, the SEC filed a complaint against the Relevant Coinbase Entities in federal district court in the Southern District of New York, alleging, inter alia: (i) that Coinbase has violated the Exchange Act by failing to register with the SEC as a national securities exchange, broker-dealer, and clearing agency, in connection with activities involving certain identified digital assets that the SEC’s complaint alleges are securities, (ii) that Coinbase has violated the Securities Act by failing to register with the SEC the offer and sale of its staking program, and (iii) that Coinbase Global is jointly and severally liable as a control person under the Exchange Act for Coinbase’s violations of the Exchange Act to the same extent as Coinbase The SEC’s complaint against the Relevant Coinbase Entities does not allege that ether is a security nor does it allege that Coinbase’s activities involving ether caused the alleged registration violations, and the Ethereum Custodian was not named as a defendant. The SEC’s complaint seeks a permanent injunction against the Relevant Coinbase Entities to prevent them from violations of the Exchange Act or Securities Act, disgorgement, civil monetary penalties, and such other relief as the court deems appropriate or necessary. Coinbase could be required, as a result of a judicial determination, or could choose, to restrict or curtail the services it offers, or its financial condition and ability to provide prime brokerage services to the Trust could be affected. If Coinbase were to be required or choose as a result of a regulatory action (including, for example, the litigation initiated by the SEC), to restrict or curtail the services it offers, it could negatively affect the Trust’s ability to operate or process creations or redemptions of Creation Baskets, which could force the Trust to liquidate or adversely affect the price of the Shares. While the Ethereum Custodian is not named in the complaint, if Coinbase Global, as the parent of the Ethereum Custodian, is required, as a result of a judicial determination, or could choose, to restrict or curtail the services its subsidiaries provide to the Trust, or its financial condition is negatively affected, it could negatively affect the Trust’s ability to operate.
If the Ether Custody Agreement is terminated, the Sponsor may not be able to find a party willing to serve as the custodian of the Trust’s ether or as the Trust’s prime broker under the same terms as the current Ethereum Custody Agreement or at all. To the extent that Sponsor is not able to find a suitable party willing to serve as the custodian or prime broker, the Sponsor may be required to terminate the Trust and liquidate the Trust’s ether. In addition, to the extent that the Sponsor finds a suitable party but must enter into a modified Ether Custody Agreement that is less favorable for the Trust or Sponsor, the value of the Shares could be adversely affected.
Loss of a critical banking relationship for, or the failure of a bank used by, the Execution Agent could adversely impact the Trust’s ability to create or redeem Creation Baskets, or could cause losses to the Trust.
The Execution Agent is responsible for selling ether on behalf of the Trust to pay the Sponsor Fee and, to the extent applicable, other Trust expenses. In addition, the Execution Agent will purchase or sell ether in connection with cash creations and redemptions. The Execution Agent may rely on bank accounts to provide its execution services and hold any cash related to a customer’s purchase or sale of ether. To the extent that the Execution Agent faces difficulty establishing or maintaining banking relationships, the loss of the Execution Agent’s banking partners or the imposition of operational restrictions by these banking partners and the inability for the Execution Agent to utilize other financial institutions may result in a disruption of creation and redemption activity of the Trust, or cause other operational disruptions or adverse effects for the Trust.
The Trust could also suffer losses in the event that a bank in which the Execution Agent holds customer cash fails, becomes insolvent, enters receivership, is taken over by regulators, enters financial distress, or otherwise suffers adverse effects to its financial condition or operational status. For example, Silvergate Bank, Silicon Valley Bank, Signature Bank, and First Republic Bank recently experienced financial distress, including voluntary liquidation and receiverships.
Changing circumstances and market conditions, some of which may be beyond the Trust’s or the Sponsor’s control, could impair the Trust’s ability to access the Trust’s cash associated with the Trust’s orders to purchase or sell ether in connection with payment of the Sponsor Fee, and to the extent applicable, other Trust expenses, or in connection with creation and redemption transactions. If the Execution Agent were to experience financial distress or its financial condition is otherwise affected by the failure of its banking partners, the Execution Agent’s ability to provide services to the Trust could be affected. Moreover, the future failure of a bank at which the Execution Agent maintains customer cash could result in losses to the Trust, to the extent the balances are not subject to deposit insurance.
The Execution Agent may utilize the services of the Prime Broker to route Trust orders through certain Connected Trading Venues. The loss or failure of any such Connected Trading Venues may adversely affect the Execution Agent’s ability to execute the Trust’s ether transactions and cause losses for the Trust.
In connection with selling ether on behalf of the Trust, the Execution Agent (acting as agent of the Trust) may elect to route ether purchase or sale orders to a trading platform operated by Coinbase, Inc., the Prime Broker. The Prime Broker provides access to a number of trading platforms and venues where the Execution Agent, acting on behalf of the Trust, may execute orders to buy and sell ether (each such venue, a “Connected Trading Venue”). In connection with these activities, the Prime Broker may hold ether with such Connected Trading Venues for a short time in order to effect the Trust’s orders. If the Prime Broker were unable to access to these Connected Trading Venues, its trading services (and therefore the Execution Agent’s services as well) could be adversely affected to the extent that the Execution Agent is limited in its ability to execute order flow for the Trust, and the Trust could suffer resulting losses or disruptions to its operations. While the Prime Broker has policies and procedures to oversee Connected Trading Venues, if any of these venues experience any technical, legal, regulatory or other adverse events, such as shutdowns, delays, system failures, suspension of withdrawals, illiquidity, insolvency, or loss of customer assets, the Execution Agent, on behalf of the Trust, might not be able to fully recover the Trust’s ether.
A disruption of the internet may affect the use of ether and subsequently the value of the Shares.
Ethereum is dependent upon the internet. A significant disruption in internet connectivity could disrupt the Ethereum network’s operations until the disruption is resolved and have an adverse effect on the price of ether. In particular, some variants of digital assets have been subjected to a number of denial-of-service attacks, which have led to temporary delays in block creation and in the transfer of the digital assets. While in certain cases in response to an attack, an additional hard fork has been introduced to increase the cost of certain network functions, the relevant network has continued to be the subject of additional attacks. Moreover, it is possible that if ether increases in value, it may become a bigger target for hackers and subject to more frequent hacking and denial-of-service attacks.
-24-
Table of Contents
Ether is also susceptible to border gateway protocol (“BGP”) hijacking. Such an attack can be a very effective way for an attacker to intercept traffic en route to a legitimate destination. BGP hijacking impacts the way different nodes and miners are connected to one another to isolate portions of them from the remainder of the network, which could lead to a risk of the network allowing double-spending and other security issues. If BGP hijacking occurs on the Ethereum network, participants may lose faith in the security of ether, which could affect ether’s value and consequently the value of the Shares.
Any future attacks that impact the ability to transfer ether could have a material adverse effect on the price of ether and the value of an investment in the Shares.
Regulatory Risk.
As ether and the broader digital assets ecosystem has grown, it has begun to attract more regulatory attention around the globe. The future regulatory environment is uncertain and may vary by country or even within countries. Failure to appropriately regulate the digital assets ecosystem could stifle innovation, which could adversely impact the value of the Shares.
As ether and digital assets have grown in both popularity and market size, the U.S. Congress and a number of U.S. federal and state agencies (including the Financial Crimes Enforcement Network (“FinCEN”), SEC, OCC, CFTC, FINRA, the Consumer Financial Protection Bureau (“CFPB”), the Department of Justice, the Department of Homeland Security, the Federal Bureau of Investigation, the IRS, state financial institution regulators, and others) have been examining the operations of digital asset networks, digital asset users and the digital asset trading platform market. Many of these state and federal agencies have brought enforcement actions and issued advisories and rules relating to digital asset markets. Ongoing and future regulatory actions with respect to digital assets generally or any single digital asset in particular may alter, perhaps to a materially adverse extent, the nature of an investment in the Shares and/or the ability of the Trust to continue to operate.
For example, the events of 2022, including among others the bankruptcy filings of FTX and its subsidiaries, Three Arrows Capital, Celsius Network, Voyager Digital, Genesis, BlockFi and others, and other developments in the digital asset markets, have resulted in calls for heightened scrutiny and regulation of the digital asset industry, with a specific focus on intermediaries such as digital asset trading platforms and custodians. Federal and state legislatures and regulatory agencies may introduce and enact new laws and regulations to regulate crypto asset intermediaries, such as digital asset trading platforms and custodians. The March 2023 collapses of Silicon Valley Bank, Silvergate Bank, and Signature Bank, which in some cases provided services to the digital assets industry, or similar future events, may amplify and/or accelerate these trends. On January 3, 2023, the federal banking agencies issued a joint statement on crypto-asset risks to banking organizations following events which exposed vulnerabilities in the crypto-asset sector, including the risk of fraud and scams, legal uncertainties, significant volatility, and contagion risk. Although banking organizations are not prohibited from crypto-asset related activities, the agencies have expressed significant safety and soundness concerns with business models that are concentrated in crypto-asset related activities or have concentrated exposures to the crypto-asset sector.
U.S. federal and state regulators, as well as the White House, have issued reports and releases concerning crypto assets, including Ethereum and crypto asset markets. Further, in 2023 the House of Representatives formed two new subcommittees: the Digital Assets, Financial Technology and Inclusion Subcommittee and the Commodity Markets, Digital Assets, and Rural Development Subcommittee, each of which were formed in part to analyze issues concerning crypto assets and demonstrate a legislative intent to develop and consider the adoption of federal legislation designed to address the perceived need for regulation of and concerns surrounding the crypto industry. However, the extent and content of any forthcoming laws and regulations are not yet ascertainable with certainty, and it may not be ascertainable in the near future. A divided Congress makes any prediction difficult. We cannot predict how these and other related events will affect us or the crypto asset business.
-25-
Table of Contents
In August 2021, the chair of the SEC stated that he believed investors using digital asset trading platforms are not adequately protected, and that activities on the platforms can implicate the securities laws, commodities laws and banking laws, raising a number of issues related to protecting investors and consumers, guarding against illicit activity, and ensuring financial stability. The chair expressed a need for the SEC to have additional authorities to prevent transactions, products, and platforms from “falling between regulatory cracks,” as well as for more resources to protect investors in “this growing and volatile sector.” The chair called for federal legislation centering on digital asset trading, lending, and decentralized finance platforms, seeking “additional plenary authority” to write rules for digital asset trading and lending. Moreover, President Biden’s March 9, 2022 Executive Order, asserting that technological advances and the rapid growth of the digital asset markets “necessitate an evaluation and alignment of the United States Government approach to digital assets,” signals an ongoing focus on digital asset policy and regulation in the United States. A number of reports issued pursuant to the Executive Order have focused on various risks related to the digital asset ecosystem, and have recommended additional legislation and regulatory oversight. There have also been several bills introduced in Congress that propose to establish additional regulation and oversight of the digital asset markets. It is not possible to predict whether, or when, any of these developments will lead to Congress granting additional authorities to the SEC or other regulators, what the nature of such additional authorities might be, how they might impact the ability of digital asset markets to function or how any new regulations or changes to existing regulations might impact the value of digital assets generally and ether held by the Trust specifically. The consequences of increased federal regulation of digital assets and digital asset activities could have a material adverse effect on the Trust and the Shares.
FinCEN requires any administrator or exchanger of convertible digital assets to register with FinCEN as a money transmitter and comply with the anti-money laundering regulations applicable to money transmitters. In 2015, FinCEN assessed a $700,000 fine against a sponsor of a digital asset for violating several requirements of the Bank Secrecy Act by acting as a money services business and selling the digital asset without registering with FinCEN, and by failing to implement and maintain an adequate anti-money laundering program. In 2017, FinCEN assessed a $110 million fine against BTC-e, a now defunct digital asset trading platform, for similar violations. The requirement that trading platforms that do business in the U.S. register with FinCEN and comply with anti-money laundering regulations may increase the cost of buying and selling ether and therefore may adversely affect the price of ether and an investment in the Shares. In a March 2018 letter from FinCEN’s assistant secretary for legislative affairs to U.S. Senator Ron Wyden, the assistant secretary indicated that under current law both the developers and the trading platforms involved in the sale of tokens in an initial coin offering (“ICO”) may be required to register with FinCEN as money transmitters and comply with the anti-money laundering regulations applicable to money transmitters.
The Office of Foreign Assets Control (“OFAC”) of the U.S. Department of the Treasury (the “U.S. Treasury Department”) has added digital currency addresses to the list of Specially Designated Nationals whose assets are blocked, and with whom U.S. persons are generally prohibited from dealing. Such actions by OFAC, or by similar organizations in other jurisdictions, may introduce uncertainty in the market as to whether a digital asset that has been associated with such addresses in the past can be easily sold. This “tainted” digital asset may trade at a substantial discount to an untainted digital asset. Reduced fungibility in the digital asset markets may reduce the liquidity of such digital assets and therefore adversely affect their price.
In February 2020, then-U.S. Treasury Secretary Steven Mnuchin stated digital assets were a “crucial area” on which the U.S. Treasury Department has spent significant time. Secretary Mnuchin announced that the U.S. Treasury Department is preparing significant new regulations governing digital asset activities to address concerns regarding the potential use for facilitating money laundering and other illicit activities. In December 2020, FinCEN, a bureau within the U.S. Treasury Department, proposed a rule that would require financial institutions to submit reports, keep records, and verify the identity of customers for certain transactions to or from so-called “unhosted” wallets, also commonly referred to as self-hosted wallets. In January 2021, U.S. Treasury Secretary nominee Janet Yellen stated her belief that regulators should “look closely at how to encourage the use of digital assets for legitimate activities while curtailing their use for malign and illegal activities.”
Under regulations from the New York State Department of Financial Services (“NYSDFS”), businesses involved in digital asset business activity for third parties in or involving New York, excluding merchants and consumers, must apply for a license, commonly known as a BitLicense, from the NYSDFS and must comply with anti-money laundering, cyber security, consumer protection, and financial and reporting requirements, among others. As an alternative to a BitLicense, a firm can apply for a charter to become a limited purpose trust company under New York law qualified to engage in digital asset business activity. Other states have considered or approved digital asset business activity statutes or rules, passing, for example, regulations or guidance indicating that certain digital asset business activities constitute money transmission requiring licensure.
-26-
Table of Contents
The inconsistency in applying money transmitting licensure requirements to certain businesses may make it more difficult for these businesses to provide services, which may affect consumer adoption of ether and its price. In an attempt to address these issues, the Uniform Law Commission passed a model law in July 2017, the Uniform Regulation of Virtual Currency Businesses Act, which has many similarities to the BitLicense and features a multistate reciprocity licensure feature, wherein a business licensed in one state could apply for accelerated licensure procedures in other states. It is still unclear, however, how many states, if any, will adopt some or all of the model legislation.
The transparency of blockchains has in the past facilitated investigations by law enforcement agencies. However, certain privacy-enhancing features have been or are expected to be introduced to a number of digital asset networks, and these features may provide law enforcement agencies with less visibility into transaction histories. Although no regulatory action has been taken to treat privacy-enhancing digital assets differently, this may change in the future.
In addition, a determination that ether is a security under U.S. or foreign law could adversely affect an investment in the Shares. See “—Future regulations may require the Trust and the Sponsor to become registered, which may cause the Trust to liquidate.”
As an owner of Shares, you will not have the rights normally associated with ownership of other types of shares.
Shares are not entitled to the same rights as shares issued by a corporation. By acquiring Shares, you are not acquiring the right to elect directors, to receive dividends, to vote on most matters regarding the issuer of the Shares or to take other actions normally associated with the ownership of shares.
The Sponsor and the Trustee may agree to amend the Trust Agreement without the consent of the Shareholders.
The Sponsor and the Trustee may agree to amend the Trust Agreement without Shareholder consent. The Sponsor shall determine the content and manner of delivery of any notice of any Trust Agreement amendment. Such notice may be provided on the Trust’s website, in a prospectus supplement, through a current report on Form 8-K and/or in the Trust’s annual or quarterly reports. If an amendment to the Trust Agreement imposes new fees and charges or increases existing fees or charges, including the Sponsor Fee (except for taxes and other governmental charges, registration fees or other such expenses), or prejudices a substantial existing right of Shareholders, it will become effective for outstanding Shares 30 days after notice of such amendment is given to registered owners. Shareholders that are not registered owners (which most Shareholders will not be) may not receive specific notice of a fee increase other than through an amendment to the Prospectus. Moreover, at the time an amendment becomes effective, by continuing to hold Shares, Shareholders are deemed to consent and agree to the amendment and to be bound by the Trust Agreement as amended without specific agreement to such increase (other than through the “negative consent” procedure described above).
Shareholders do not have the protections associated with ownership of Shares in an investment company registered under the 1940 Act or the protections afforded by the CEA.
The Trust is not an investment company subject to the 1940 Act, and the Sponsor believes that the Trust is not required to register under such act. Accordingly, investors do not have the protections afforded by that statute, which is designed to ensure that registered funds are acting in their investors’ best interests, minimize conflicts of interest and provide for the impartial oversight of investment companies. For example, registered investment companies subject to the 1940 Act must have a board of directors, a certain minimum percentage of whom must be independent (generally, at least a majority). Further, registered investment companies’ advisory and sub-advisory contracts must be annually reapproved by a majority of (1) the entire board of directors and (2) the independent directors. Additionally, such registered investment companies are subject to prohibitions and restrictions on transactions with their affiliates and required to maintain fund assets with special types of custodians (generally, banks or broker-dealers). Moreover, such registered investment companies are subject to significant limits on the use of leverage, as well as limits on the form of capital structure and the types of securities a registered fund can issue. In addition, under Section 36(b) of the 1940 Act, investment advisers to registered investment companies have an express fiduciary duty with respect to their receipt of compensation for services.
The Trust will not hold or trade in commodity interests regulated by the CEA, as administered by the CFTC. Furthermore, the Sponsor believes that the Trust is not a commodity pool for purposes of the CEA, and that neither the Sponsor nor the Trustee is subject to regulation by the CFTC as a commodity pool operator or a commodity trading advisor in connection with the operation of the Trust. Consequently, Shareholders will not have the regulatory protections provided to investors in CEA-regulated instruments or commodity pools.
The exclusive jurisdiction for certain types of actions and proceedings and waiver of trial by jury clauses set forth in the Trust Agreement may have the effect of limiting a Shareholder’s rights to bring legal action against the Trust and could limit a purchaser’s ability to obtain a favorable judicial forum for disputes with the Trust.
The Trust Agreement provides that the Court of Chancery of the State of Delaware or, if such court does not have subject matter jurisdiction, any other courts located in Delaware will be the exclusive jurisdiction for any claims, suits, actions or proceedings, provided that (i) the forum selection provisions do not apply to suits brought to enforce a duty or liability created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction and (ii) the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under any federal securities law. By purchasing Shares in the Trust, Shareholders waive certain claims that the courts of the State of Delaware and any other courts located in Delaware is an inconvenient venue or is otherwise inappropriate. As such, Shareholder could be required to litigate a matter relating to the Trust in a Delaware court, even if that court may otherwise be inconvenient for the Shareholder.
The Trust Agreement also provides that each Shareholder waives the right to trial by jury in any such claim, suit, action or proceeding. If a lawsuit is brought against the Trust, it may be heard only by a judge or justice of the applicable trial court, which would be conducted according to different civil procedures and may result in different outcomes than a trial by jury would have, including results that could be less favorable to the plaintiffs in any such action. No Shareholder can waive compliance with respect to the U.S. federal securities laws and the rules and regulations promulgated thereunder.
If a Shareholder opposed a jury trial demand based on the waiver, the applicable court would determine whether the waiver was enforceable based on the facts and circumstances of that case in accordance with applicable federal laws. To our knowledge, the enforceability of a contractual pre-dispute jury trial waiver in connection with claims arising under the U.S. federal securities laws has not been finally adjudicated by the U.S. Supreme Court. However, we believe that a contractual pre-dispute jury trial waiver provision is generally enforceable, including under the laws of the State of Delaware, which govern the Trust Agreement. By purchasing Shares in the Trust, Shareholders waive a right to a trial by jury which may limit a Shareholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with the Trust.
As the Sponsor and its management have limited history of operating investment vehicles like the Trust, their experience may be inadequate or unsuitable to manage the Trust.
While the Sponsor, its management team, and the Execution Agent operate other investment vehicles that, like the Trust, specifically invest in digital assets, they have a limited track record. This limited experience poses several potential risks to the effective management and operation of the Trust. Digital assets, such as ether, are known for their high volatility, unique technical, legal and regulatory challenges, and rapidly evolving market dynamics. The Sponsor’s limited experience in this specific field may not fully equip them to navigate these complexities effectively.
The past performance of the Sponsor’s or the Execution Agent’s management in other investment vehicles are no indication of their ability to manage an investment vehicle such as the Trust. The unique nature of digital assets makes past performance an unreliable indicator of future success in this area. The digital asset market is technology-driven and requires a deep understanding of the underlying blockchain technology and security considerations. The Sponsor’s limited experience may not fully encompass the technical expertise required to mitigate risks such as cyber threats, technological failures, or operational errors related to digital asset transactions and custody.
Should the experience of the Sponsor, its management team, or the Execution Agent prove inadequate or unsuitable for managing a digital asset-based investment vehicle like the Trust, it could result in suboptimal decision-making, increased operational risks, and potential legal or regulatory non-compliance. These factors could adversely affect the Trust’s operations, leading to potential losses for investors or a decrease in the Trust’s overall value.
Furthermore, the Sponsor and the Execution Agent are currently engaged in the management of other investment vehicles which could divert their attention and resources. If the Sponsor were to experience difficulties in the management of such other investment vehicles that damaged the reputation of either the Sponsor or the Execution Agent, it could have an adverse impact on their ability to continue to serve as Sponsor or Execution Agent, respectively, for the Trust.
-27-
Table of Contents
Future regulations may require the Trust and the Sponsor to become registered, which may cause the Trust to liquidate.
Current and future legislation, SEC and CFTC rulemaking, and other regulatory developments may impact the manner in which ether is treated for classification and clearing purposes. In particular, certain transactions in ether may be deemed to be commodity interests under the CEA or ether may be classified by the SEC as a “security” under U.S. federal securities laws. Public statements made in the past by senior officials at the SEC, including a June 2018 speech by the director of the SEC’s Division of Corporation Finance, indicate that such officials do not believe that ether is a security. Such statements are not official policy statements by the SEC and reflect only the speaker’s views, which are not binding on the SEC or any other agency or court. If ether is determined to be a “security” under federal or state securities laws by the SEC or any other agency, or in a proceeding in a court of law or otherwise, it may have material adverse consequences for ether as a digital asset. In the face of such developments, the required registrations and compliance steps may result in extraordinary, nonrecurring expenses to the Trust. If the Sponsor decides to dissolve the Trust in response to the changed regulatory circumstances, the Trust may be dissolved or liquidated at a time that is disadvantageous to Shareholders.
The SEC has not asserted regulatory authority over ether or trading or ownership of ether and has not expressed the view that ether should be classified or treated as a security for purposes of U.S. federal securities laws. In fact, senior members of the staff of the SEC have expressed the view that ether is not a security under the federal securities laws. However, the SEC has commented on ether and ether-related market developments and has taken action against investment schemes involving ether. In a recent letter regarding the SEC’s review of proposed rule changes to list and trade shares of certain bitcoin-related investment vehicles on public markets, the SEC staff stated that it has significant investor protection concerns regarding the markets for digital assets, including the potential for market manipulation and fraud. In March 2018, it was reported that the SEC was examining as many as 100 investment funds with strategies focused on digital assets. The reported focus of the examinations is on the accuracy of risk disclosures to investors in these funds, digital asset pricing practices, and compliance with rules meant to prevent the theft of investor funds, as well as on information gathering so that the SEC can better understand new technologies and investment products. It has further been reported that some of these funds have received subpoenas from the SEC’s Enforcement Division. The SEC also has determined that certain digital assets are securities under the U.S. securities laws. In these determinations, the SEC reasoned that the unregistered offer and sale of digital assets can, in certain circumstances, including ICOs, be considered illegal public offering of securities. A significant amount of funding for digital asset startups has come from ICOs, and if ICOs are halted or face obstacles, or companies that rely on them face legal action or investigation, it could have a negative impact on the value of digital assets, including ether. Finally, the SEC’s Division of Examinations (“Examinations”) has stated that digital assets are an examination priority. In particular, Examinations has expressed its intent to focus its examination on portfolio management of digital assets, safety of client funds and assets, pricing and valuation of client portfolios, compliance and internal controls, and supervision of employee outside business activities.
The CFTC has regulatory jurisdiction over the ether futures markets. In addition, because the CFTC has determined that ether is a “commodity” under the CEA and the rules thereunder, it has jurisdiction to prosecute fraud and manipulation in the cash, or spot, market for ether. Beyond instances of fraud or manipulation, the CFTC generally does not oversee cash or spot market trading platforms or transactions involving ether that do not utilize collateral, leverage, or financing. The National Futures Association (“NFA”) is the self-regulatory agency for the U.S. futures industry, and as such has jurisdiction over ether futures. However, the NFA does not have regulatory oversight authority for the cash or spot market for ether trading or transactions.
Ethereum and other digital assets currently face an uncertain regulatory landscape in many foreign jurisdictions such as the European Union, China, the United Kingdom, Australia, Russia, Israel, Poland, India and Canada. Cybersecurity attacks by state actors, particularly for the purpose of evading international economic sanctions, are likely to attract additional regulatory scrutiny to the acquisition, ownership, sale and use of digital assets, including ether. Moreover, other events, such as the interruption in telecommunications or internet services, cyber-related terrorist acts, civil disturbances, war or other catastrophes, could also negatively affect the digital asset economy in one or more jurisdictions. For example, Russia’s invasion of Ukraine on February 24, 2022 led to volatility in digital asset prices, with an initial steep decline followed by a sharp rebound in prices. The effect of any existing regulation or future regulatory change or other events on the Trust or ether is impossible to predict, but such change could be substantial and adverse to the Trust and the value of the Shares. Various foreign jurisdictions have adopted, and may continue to adopt in the near future, laws, regulations or directives that affect ether, particularly with respect to ether trading platforms and service providers that fall within such jurisdictions’ regulatory scope.
-28-
Table of Contents
Laws, regulations or directives in foreign countries may conflict with those of the United States and may negatively impact the acceptance of ether by users, merchants and service providers outside the United States and may therefore impede the growth or sustainability of the ether economy in these jurisdictions as well as in the United States and elsewhere, or otherwise negatively affect the value of ether, and, in turn, the value of the Shares.
In addition to financial regulation, because of the high energy usage required for mining some digital assets, digital assets may be subject to regulation stemming from energy usage and/or climate concerns. Depending on how futures regulations are formulated and applied, such policies could have the potential to negatively affect the price of digital assets, and, in turn, the value of the Shares.
If regulatory changes or interpretations of an Authorized Participant’s, the Trust’s or the Sponsor’s activities require the regulation of an Authorized Participant, the Trust or the Sponsor as a money service business under the regulations promulgated by FinCEN under the authority of the U.S. Bank Secrecy Act or as a money transmitter or digital asset business under state regimes for the licensing of such businesses, an Authorized Participant, the Trust or the Sponsor may be required to register and comply with such regulations, which could result in extraordinary, recurring and/or nonrecurring expenses to the Authorized Participant, Trust or Sponsor or increased commissions for the Authorized Participant’s clients, thereby reducing the liquidity of the Shares.
To the extent that the activities of any Authorized Participant, the Trust or the Sponsor cause it to be deemed a “money services business” under the regulations promulgated by FinCEN under the authority of the U.S. Bank Secrecy Act, such Authorized Participant, the Trust or the Sponsor may be required to comply with FinCEN regulations, including those that would mandate the Authorized Participant to implement anti-money laundering programs, make certain reports to FinCEN and maintain certain records. Similarly, the activities of an Authorized Participant, the Trust or the Sponsor may require it to be licensed as a money transmitter or as a digital asset business, such as under NYSDFS’ BitLicense regulation.
Such additional regulatory obligations may cause an Authorized Participant, the Trust or the Sponsor to incur extraordinary expenses. If an Authorized Participant, the Trust or the Sponsor decide to seek the required licenses, there is no guarantee that they will timely receive them. In addition, to the extent an Authorized Participant, the Trust, or the Sponsor is found to have operated without appropriate state or federal licenses, it may be subject to investigation, administrative or court proceedings, and civil or criminal monetary fines and penalties, all of which could harm the reputation of the Authorized Participant, the Trust or the Sponsor and affect the value of the Shares. Furthermore, an Authorized Participant, the Trust, or the Sponsor may not be able to timely acquire necessary state licenses or be capable of complying with certain federal or state regulatory obligations applicable to money services businesses, money transmitters, and businesses engaged in digital asset activity. An Authorized Participant may also instead decide to terminate its role as Authorized Participant of the Trust, or the Sponsor may decide to dissolve the Trust. Dissolution by an Authorized Participant may decrease the liquidity of the Shares, which may adversely affect the value of the Shares, and any dissolution of the Trust in response to the changed regulatory circumstances may be at a time that is disadvantageous to the Shareholders.
-29-
Table of Contents
The tax treatment of ether and transactions involving ether for U.S. federal income tax purpose is uncertain and may change, which could adversely affect the value of an investment in the Shares.
Current U.S. Internal Revenue Service (“IRS”) guidance indicates that ether should be treated and taxed as property, not as currency, for U.S. federal income tax purposes, and that transactions involving the payment of ether in return for goods and services should be treated as barter transactions. Such exchanges result in capital gain or loss measured by the difference between the price at which ether is exchanged and the taxpayer’s basis in the ether. However, because ether is a new technological innovation, because IRS guidance has taken the form of administrative pronouncements that may be modified without prior notice and comment, and because there is as yet little case law on the subject, the U.S. federal income tax treatment of an investment in ether or in transactions relating to investments in ether may change from that described in this Prospectus, possibly with retroactive effect. Any such change in the U.S. federal income tax treatment of ether may have a negative effect on prices of ether and may adversely affect the value of the Shares. In this regard, the IRS has indicated that it has made it a priority to issue additional guidance related to the taxation of virtual currency transactions, such as transactions involving ether. In addition, the IRS and U.S. Department of Treasury have proposed regulations regarding the tax information reporting rules for cryptocurrency transactions. While it has started to issue such additional guidance, whether any future guidance will adversely affect the U.S. federal income tax treatment of an investment in ether or in transactions relating to investments in ether is unknown. Moreover, future developments that may arise with respect to digital currencies may increase the uncertainty with respect to the treatment of digital currencies for U.S. federal income tax purposes.
Investors should consult their personal tax advisors before making any decision to purchase the Shares of the Trust. Additionally, the tax considerations contained herein are in summary form and may not be used as the sole basis for the decision to invest in the Shares from a tax perspective, since the individual situation of each investor must also be taken into account. Accordingly, the considerations regarding taxation contained herein should not be used as any sort of material information or tax advice nor are they in any way to be construed as a representation or warranty with respect to specific tax consequences.
The tax treatment of ether and transactions involving ether for state and local tax purposes is uncertain and may change, which could adversely affect the value of an investment in the Shares.
Because ether is a new technological innovation, the tax treatment of ether for state and local tax purposes, including without limitation state and local income and sales and use taxes, is not settled. A number of states have issued their own guidance regarding the tax treatment of certain digital assets for state income or sales and use tax purposes. For example, the New York State Department of Taxation and Finance (“NYSDTF”) has issued guidance regarding the application of state tax law to virtual currency. The agency determined that New York State would follow IRS guidance with respect to the treatment of virtual currency for state income tax purposes. Furthermore, the NYSDTF concluded that virtual currency is a form of “intangible property,” meaning that transactions using virtual currency to purchase goods or services may be subject to state sales tax under barter transaction treatment. It is uncertain what guidance, if any, on the treatment of ether for state and local tax purposes may be issued in the future. Such treatment may have negative consequences for investors in digital assets, including the potential imposition of a greater tax burden on investors in digital assets or the potential imposition of greater costs on the acquisition and disposition of digital assets. In either case, such different tax treatment may potentially have a negative effect on the price of ether and a negative impact on the NAV of the Trust.
A hard “fork” or airdrop of the Ethereum blockchain could result in Shareholders incurring a tax liability.
If a hard fork, airdrop or similar event occurs in the Ethereum blockchain, the Sponsor will instruct the Trust to immediately and irrevocably disclaim all rights to the IR Assets so created. Although the Sponsor will instruct the Trust to immediately and irrevocably disclaim all rights to the IR Assets so created, it is possible that Shareholders may still incur a federal income tax liability as a result of a hard fork, airdrop or similar event if, for example, the IRS does not recognize such a disclaimer. Under current guidance, the IRS has held that a hard fork resulting in the receipt of new units of cryptocurrency is a taxable event giving rise to ordinary income. While the IRS has not addressed all situations in which airdrops occur, it is clear from the reasoning of the IRS’s current guidance that it generally would treat an airdrop as a taxable event giving rise to ordinary income.
Current IRS guidance does not address whether income recognized by a non-U.S. person as a result of a hard fork, airdrop or similar occurrence could be subject to the 30% withholding tax imposed on U.S. source “fixed or determinable annual or periodical gains, profits and income” (“FDAP”). A Non-U.S. Shareholder (as defined under “U.S. Federal Income Tax Consequences” below) should assume that, in the absence of guidance, a withholding agent (including the Sponsor) is likely to withhold 30% of any such income recognized by a Non-U.S. Shareholder in respect of its Shares, including by deducting such withheld amounts from proceeds that such Non-U.S. Shareholder would otherwise be entitled to receive in connection with a distribution of the new digital asset.
The receipt, distribution and/or sale of the new digital asset may cause Shareholders to incur a United States federal, state, and/or local, or non-U.S. tax liability. Any tax liability could adversely impact an investment in the Shares and may require Shareholders to prepare and file tax returns they would not otherwise be required to prepare and file.
-30-
Table of Contents
A U.S. Tax-Exempt Shareholder may recognize “unrelated business taxable income” as a consequence of an investment in the Shares.
Under current IRS guidance, hard forks, airdrops and similar events with respect to digital assets will under certain circumstances be treated as taxable events giving rise to ordinary income. In the absence of guidance to the contrary, it is possible that any such income recognized by a U.S. Tax-Exempt Shareholder (as defined under “U.S. Federal Income Tax Consequences” below) would constitute “unrelated business taxable income” (“UBTI”). U.S. Tax-Exempt Shareholders should consult their tax advisers regarding whether such Shareholders may recognize UBTI as a consequence of an investment in the Shares.
Intellectual property rights claims may adversely affect the operation of the Ethereum network.
Third parties may assert intellectual property claims relating to the holding and transfer of ether and its source code. Regardless of the merit of any intellectual property or other legal action, any threatened action that reduces confidence in long-term viability or the ability of end-users to hold and transfer ether may adversely affect an investment in the Trust. Additionally, a meritorious intellectual property claim could prevent the Trust and other end-users from accessing, holding or transferring ether, which could force the liquidation of the Trust’s holdings of ether. As a result, an intellectual property claim against the Trust or other large ether participants could adversely affect an investment in the Shares.
Risks Related to the Markets and Service Ecosystems for Ether
The venues through which cryptocurrencies (including ether) trade are relatively new and may be more exposed to operational problems or failure than trading platforms for other assets, which could adversely affect the value of ether and therefore adversely affect an investment in the Shares.
Platforms through which ether trades are relatively new. Ether trading platforms are generally subject to different regulatory requirements than venues for trading more traditional assets, and may be subject to limited or no regulation, especially outside the U.S. Furthermore, many such trading platforms, including exchanges and over-the-counter trading venues, do not provide the public with significant information regarding their ownership structure, management teams, corporate practices or regulatory compliance, and may take the position that they are not subject to laws and regulations that would apply to a national securities exchange or designated contract market in the United States, or may, as a practical matter, be beyond the ambit of U.S. regulators. Ether trading platforms may impose daily, weekly, monthly or customer-specific transaction or distribution limits or suspend withdrawals entirely, rendering the exchange of ether for fiat currency difficult or impossible. Participation in ether trading on some venues requires users to take on credit risk by transferring digital assets from a personal account to a third party’s account, which could discourage trading on those platforms.
Over the past several years, a number of cryptocurrency trading platforms have been closed due to fraud, failure or security breaches. In many of these instances, the customers of such platforms were not compensated or made whole for the partial or complete losses of their account balances in such exchanges. While smaller trading platforms are less likely to have the infrastructure and capitalization that make larger trading platforms more stable, larger trading venues are more likely to be appealing targets for hackers and “malware” (i.e., software used or programmed by attackers to disrupt computer operation, gather sensitive information or gain access to private computer systems). For example, in 2014, the largest bitcoin trading platform at the time, Mt. Gox, filed for bankruptcy in Japan amid reports the trading platform lost up to 850,000 bitcoin, valued then at over $450 million.
As another example, in January 2015, Bitstamp announced that approximately 19,000 bitcoin had been stolen from its operational or “hot” wallets. In August 2016, it was reported that almost 120,000 bitcoin worth around $78 million were stolen from Bitfinex, a large bitcoin trading platform. The value of bitcoin immediately decreased by more than 10% following reports of the theft at Bitfinex. In addition, in December 2017, Yapian, the operator of Seoul-based digital asset trading platform Youbit, suspended digital asset trading and filed for bankruptcy following a hack that resulted in a loss of 17% of Yapian’s assets. Following the hack, Youbit users were allowed to withdraw approximately 75% of the digital assets in their trading platform accounts, with any potential further distributions to be made following Yapian’s pending bankruptcy proceedings. In January 2018, Japan-based exchange Coincheck reported that over $500 million worth of the digital asset NEM had been lost due to hacking attacks, resulting in significant decreases in the prices of bitcoin, ether and other digital assets as the market grew increasingly concerned about the security of digital assets. Following South Korean-based trading platform Coinrail’s announcement in early June 2018 about a hacking incident, the price of bitcoin and ether dropped more than 10%. In September 2018, Japan-based trading platform Zaif announced that approximately $60 million worth of digital assets, was stolen due to hacking activities. In May 2019, one of the world’s largest digital asset trading platforms, Binance, was hacked, resulting in losses of approximately $40 million. Further, in November 2022, FTX
-31-
Table of Contents
Trading Ltd. (“FTX”), one of the largest digital asset trading platforms by volume at the time, halted customer withdrawals amid rumors of the company’s liquidity issues and likely insolvency, which were subsequently corroborated by its CEO. Shortly thereafter, FTX’s CEO resigned and FTX and many of its affiliates filed for bankruptcy in the United States, while other affiliates have entered insolvency, liquidation, or similar proceedings around the globe, following which the U.S. Department of Justice brought criminal fraud and other charges, and the SEC and CFTC brought civil securities and commodities fraud charges, against certain of FTX’s and its affiliates’ senior executives, including its former CEO. Around the same time, there were reports that approximately $300-600 million of digital assets were removed from FTX and the full facts remain unknown, including whether such removal was the result of a hack, theft, insider activity, or other improper behavior. Various claims and issues related to FTX have not yet been fully resolved.
Ether trading platforms that are regulated typically must comply with minimum net worth, cybersecurity, and anti-money laundering requirements, but are not typically required to protect customers to the same extent as regulated securities exchanges or futures exchanges.
Some academics and market observers have put forth evidence to support claims that manipulative trading activity has occurred on certain digital asset trading platforms. For example, in a 2017 paper titled “Price Manipulation in the Bitcoin Ecosystem” sponsored by the Interdisciplinary Cyber Research Center at Tel Aviv University, a group of researchers used publicly available trading data, as well as leaked transaction data from a 2014 Mt. Gox security breach, to identify and analyze the impact of “suspicious trading activity” on Mt. Gox between February and November 2013, which, according to the authors, caused the price of bitcoin to increase from around $150 to more than $1,000 over a two-month period. In August 2017, it was reported that a trader or group of traders nicknamed “Spoofy” was placing large orders on Bitfinex without actually executing them, presumably in order to influence other investors into buying or selling by creating a false appearance that greater demand existed in the market. In December 2017, an anonymous blogger (publishing under the pseudonym Bitfinex’d) cited publicly available trading data to support his or her claim that a trading bot nicknamed “Picasso” was pursuing a paint-the-tape-style manipulation strategy by buying and selling bitcoin and bitcoin cash between affiliated accounts in order to create the appearance of substantial trading activity and thereby influence the price of such assets.
Furthermore, many ether trading platforms lack certain safeguards put in place by exchanges for more traditional assets to enhance the stability of trading on the exchanges and prevent “flash crashes,” such as limit-down circuit breakers. As a result, the prices of ether on trading platforms may be subject to larger and/or more frequent sudden declines than assets traded on more traditional exchanges. Tools to detect and deter fraudulent or manipulative trading activities such as market manipulation, front-running of trades, and wash-trading may not be available to or employed by digital asset trading platforms, or may not exist at all. The SEC has identified possible sources of fraud and manipulation in the ether market generally, including, among others (1) “wash trading”; (2) persons with a dominant position in ether manipulating ether pricing; (3) hacking of the Ethereum network and trading platforms; (4) malicious control of the Ethereum network; (5) trading based on material, non-public information (for example, plans of market participants to significantly increase or decrease their holdings in ether, new sources of demand for ether) or based on the dissemination of false and misleading information; (6) manipulative activity involving purported “stablecoins,” including Tether (for more information, see “Risk Factors—Risk Factors Related to Digital Assets—Prices of ether may be affected due to stablecoins (including Tether and US Dollar Coin (“USDC”), the activities of stablecoin issuers and their regulatory treatment”), the activities of stablecoin issuers and their regulatory treatment”); and (7) fraud and manipulation at ether trading platforms. The effect of potential market manipulation, front-running, wash-trading, and other fraudulent or manipulative trading practices may inflate the volumes actually present in crypto market and/or cause distortions in price, which could adversely affect the Trust or cause losses to Shareholders. Such trading could occur in the event that an individual associated with a trading venue uses information regarding the Trust’s trading activity to the detriment of the Trust. In addition, the lack of trading safeguards may permit “wash-trading” (sales of ether by the Trust for a loss followed by repurchases of ether that, under IRS rules, may prevent the Trust from claiming a tax loss on the sale of ether).
Operational problems or failures by ether trading platforms and fluctuations in ether prices may reduce confidence in these platforms or in ether generally, which could adversely affect the price of ether and therefore adversely affect an investment in the Shares.
Failure of funds that hold ether or bitcoin, or that have exposure to ether or bitcoin through derivatives, to receive SEC approval to list their shares on exchanges could adversely affect an investment in the Shares.
There have been a growing number of attempts to list on national securities exchanges the shares of funds that hold ether or bitcoin or that have exposure to ether or bitcoin through derivatives. These investment vehicles attempt to provide institutional and retail investors exposure to markets for digital assets including ether, bitcoin and related products. The SEC has repeatedly denied such requests of funds that have attempted to list their shares on exchanges. On January 18, 2018, the SEC’s Division of Investment Management outlined several questions that sponsors would be expected to address before it would consider granting approval for funds holding “substantial amounts” of digital assets or “cryptocurrency-related products.” The questions, which focus on specific requirements of the 1940 Act, generally fall into one of five key areas: valuation, liquidity, custody, arbitrage and potential manipulation. Further, by way of illustration, in the fall of 2021, NYSE Arca proposed listing
-32-
Table of Contents
shares of Grayscale Bitcoin Trust (“GBTC”) on the exchange as a spot bitcoin exchange-traded product (“ETP”). After delaying a decision for nearly eight months, the SEC denied GBTC’s application in June 2022, finding that NYSE Arca’s proposed rule change. After the SEC’s denial, Grayscale sued the SEC under the Administrative Procedures Act, arguing that the denial of GBTC’s listing was “arbitrary and capricious” in light of the SEC’s approval of two similar bitcoin futures-based ETPs. On August 29, 2023, a three-judge panel of the D.C. Circuit Court of Appeals unanimously sided with Grayscale, finding that GBTC was materially similar to SEC-approved bitcoin futures ETPs across the relevant regulatory factors. The listing of spot bitcoin ETPs has created more opportunities for institutional and retail investors to invest in digital assets. The recent approval of listing rules for spot ether ETPs could impact the demand for ether and therefore affect an investment in the Shares.
Political or economic crises may motivate large-scale sales of ether, which could result in a reduction in the prices of ether and adversely affect an investment in the Shares.
As an alternative to fiat currencies that are backed by central governments, ether is subject to supply and demand forces based upon the desirability of an alternative, decentralized means of buying and selling goods and services, and it is unclear how such supply and demand will be impacted by geopolitical events. Nevertheless, political or economic crises may motivate large-scale acquisitions or sales of ether, either globally or locally. Large-scale sales of ether would result in a reduction in its price and adversely affect an investment in the Shares.
Ownership of ether is pseudonymous, and the supply of accessible ether is unknown. Entities with substantial holdings in ether may engage in large-scale sales or distributions, either on nonmarket terms or in the ordinary course, which could result in a reduction in the price of ether and adversely affect an investment in the Shares.
There is no registry showing which individuals or entities own ether or the quantity of ether that is owned by any particular person or entity. It is possible, and in fact, reasonably likely, that a small group of early ether adopters hold a significant proportion of the ether that has been created to date. There are no regulations in place that would prevent a large holder of ether from selling ether it holds. To the extent such large holders of ether engage in large-scale sales or distributions, either on nonmarket terms or in the ordinary course, it could result in a reduction in the price of ether and adversely affect an investment in the Shares.
Risks Related to the Trust and the Shares
Several factors may affect the Trust’s ability to achieve its investment objective on a consistent basis.
There is no guarantee that the Trust will meet its investment objective. Factors that may affect the Trust’s ability to meet its investment objective include:
| • | the development and maintenance of an active trading market for Shares; |
| • | the continued participation of Authorized Participants; |
| • | the ability of Authorized Participants to obtain and dispose of ether in an efficient manner to effectuate creation and redemption orders; |
-33-
Table of Contents
| • | the liquidity of the ether market; |
| • | the functioning of the markets on which ether trades; |
| • | the compliance of the Trust’s portfolio holdings with investment restrictions, policies or regulatory or tax law requirements; and |
| • | the ability of the Trust to achieve or maintain an economically viable size. |
The Trust is subject to risks due to its concentration of investments in a single asset.
Unlike other funds that may invest in diversified assets, the Trust’s investment strategy is concentrated in a single asset: ether. This concentration maximizes the degree of the Trust’s exposure to a variety of market risks associated with ether, including the rise or fall in its price, sometimes rapidly or unexpectedly. By concentrating its investment strategy solely in ether, any losses suffered as a result of a decrease in the value of ether can be expected to reduce the value of an interest in the Trust and will not be offset by other gains if the Trust were to invest in underlying assets that were diversified.
Shareholders will not receive the benefits of any forks or “airdrops.”
The Ethereum blockchain may be subject to forks or airdrops that create new digital assets. See “Ether and the Ethereum Market—The Ethereum Market—Forks and Airdrops.” Shareholders may not receive the benefits of any forks, the Trust may not choose, or be able, to participate in an airdrop, and the timing of receiving any benefits from a fork, airdrop or similar event is uncertain. The Sponsor refers to the right to receive any such benefit as an “Incidental Right” and any such virtual currency acquired through an Incidental Right as “IR Assets.” If a hard fork, airdrop or similar event occurs in the Ethereum blockchain, the Sponsor will instruct the Trust to immediately and irrevocably disclaim all rights to the IR Assets so created. Ether is the only digital asset that will be held by the Trust. In the event the Trust seeks to change its treatment of Incidental Rights or IR Assets, an application would need to be filed with the SEC by the Exchange seeking approval to amend its listing rules.
-34-
Table of Contents
Although the Sponsor is under no obligation to do so, an inability to realize the economic benefit of a hard fork or airdrop could adversely affect the value of the Shares. Investors who prefer to have a greater degree of control over events such as forks, airdrops, and similar events, and any assets made available in connection with each, should consider investing in ether directly rather than purchasing Shares.
The Trust is subject to management and operational risks from its Sponsor and service providers.
The Trust is subject to management risk because it relies on the Sponsor’s ability to achieve its investment objective. Shareholders will have very limited voting rights, which will limit their ability to influence matters such as amendment of the Trust Agreement, change in the Trust’s basic investment policy, dissolution of the Trust, or the sale or distribution of the Trust’s assets.
The Trust also is subject to the risk of loss as a result of other services provided by the Sponsor and other service providers, including benchmark, custody, administrative, accounting, tax, legal, custody, transfer agency and other services. Operational risk includes the possibility of loss caused by inadequate procedures and controls, human error and cyber attacks, disruptions and failures affecting, or by, a service provider. In addition, the Sponsor may be required to indemnify its officers, directors and key employees with respect to their activities on behalf of the Trust and other accounts, if the need for indemnification arises. This potential indemnification could cause the Sponsor’s assets to decrease. If the Sponsor’s sources of income are not sufficient to compensate for the indemnification, it could cease operations, which could in turn result in Trust losses and/or dissolution of the Trust.
In addition, the Trust’s service providers, including the Etheeum Custodian, act in similar capacities for a number of other digital asset ETPs. If those digital asset ETPs experience operational challenges or regulatory problems that impact or implicate one or more of the Trust’s service providers, the Trust’s operations may be adversely impacted as a result. The Sponsor will monitor the services provided by the Trust’s service providers to detect and identify any such potential issues with the service providers.
-35-
Table of Contents
The Trust as well as the Sponsor and its service providers are vulnerable to the effects of the COVID-19 pandemic and other public crises that may arise in the future, which may adversely affect the performance of the Trust’s investment in ether and your investment in the Trust.
The recent spread of the human coronavirus disease 2019 (“COVID-19”) is an example. In the first quarter of 2020, the World Health Organization (the “WHO”) recognized COVID-19 as a global pandemic and both the WHO and the United States declared the outbreak a public health emergency. The subsequent spread of COVID-19 resulted in, among other significant adverse economic impacts, instances of market closures and dislocations, extreme volatility, liquidity constraints and increased trading costs. Efforts to contain the spread of COVID-19 resulted in travel restrictions, closed international borders, disruptions of healthcare systems, business operations (including business closures) and supply chains, employee layoffs and general lack of employee availability, lower consumer demand, and defaults and credit downgrades, all of which contributed to disruption of global economic activity across many industries and exacerbated other pre-existing political, social and economic risks domestically and globally. Although the WHO and the United States ended their declarations of COVID-19 as a global health emergency in May 2023, the full economic impact at the macro-level and on individual businesses, as well as the potential for a future reoccurrence of COVID-19 or the occurrence of a similar epidemic or pandemic, is unpredictable and could result in significant and prolonged adverse impact on economies and financial markets in specific countries and worldwide and thereby could negatively affect a Fund’s performance.
The Trust’s risk management processes and policies may prove to not be adequate to prevent any loss of the Trust’s ether.
The Sponsor will continue to monitor and evaluate the Trust’s risk management processes and policies and believes that the current risk management processes and procedures are reasonably designed and effective. The Sponsor believes that the security procedures that the Sponsor and the Ethereum Custodian utilize, such as hardware redundancy, segregation and offline data storage (i.e., the maintenance of data on computers and/or storage media that is not directly connected to or accessible from the internet and/or networked with other computers, also known as “cold storage”) protocols are reasonably designed to safeguard the Trust’s ether from theft, loss, destruction or other issues relating to hackers and technological attack. Despite the number of security procedures that the Sponsor and Ethereum Custodian employ, it is impossible to guarantee the prevention of any loss due to a security breach, software defect, act of God, pandemic or riot that may be borne by the Trust. Notwithstanding the above, the Ethereum Custodian is responsible for its own gross negligence, willful misconduct or bad faith. In the event that the Trust’s risk management processes and policies prove to not be adequate to prevent any loss of the Trust’s ether and such loss is not covered by insurance or is otherwise recoverable, the value of the Shares will decrease as a result and investors would experience a decrease in the value of their investment.
The development and commercialization of the Trust is subject to competitive pressures and may be adversely affected by competition from competing products and other investment vehicles focused on ether or other digital assets.
The Trust and the Sponsor face competition with respect to the creation of competing products. The Sponsor’s competitors may have greater financial, technical and human resources than the Sponsor. These competitors may also compete with the Sponsor in recruiting and retaining qualified personnel. Smaller or early-stage companies may also prove to be effective competitors, particularly through collaborative arrangements with large and established companies. Accordingly, the Sponsor’s competitors may commercialize a product involving ether more rapidly, effectively or for a lower fee than the Sponsor is able to, which could adversely affect the Sponsor’s competitive position, the likelihood that the Trust will achieve initial market acceptance and the Sponsor’s ability to generate meaningful revenues from the Trust. For exchange-traded products similar to the Trust, there have been significant “first-mover” advantages in terms of asset gathering, trading volume and media coverage. In many cases, the first mover in an asset class has been able to maintain these advantages for extended periods.
Investors may invest in ether through means other than the Shares, including through direct investments in ether and other potential financial vehicles, possibly including securities backed by or linked to ether and digital asset financial vehicles similar to the Trust, or ether futures-based products. Market and financial conditions, and other conditions beyond the Sponsor’s control, may make it more attractive to invest in other financial vehicles or to invest in ether directly, which could limit the market for, and reduce the liquidity of, the Shares. In addition, to the extent digital asset financial vehicles other than the Trust tracking the price of ether are formed and represent a significant proportion of the demand for ether, large purchases or redemptions of the securities of these digital asset financial vehicles, or private funds holding ether, could negatively affect the Benchmark, the Trust’s ether holdings, the price of the Shares, the net asset value of the Trust and the NAV.
If the Trust fails to achieve sufficient scale due to competition, the Sponsor may have difficulty raising sufficient revenue to cover the costs associated with launching and maintaining the Trust, and such shortfalls could impact the Sponsor’s ability to properly invest in robust ongoing operations and controls of the Trust to minimize the risk of operating events, errors, or other forms of losses to the Shareholders. In addition, the Trust may also fail to attract adequate liquidity in the secondary market due to such competition, resulting in a sub-standard number of Authorized Participants willing to make a market in the Shares, which in turn could result in a significant premium or discount in the Shares for extended periods and the Trust’s failure to reflect the performance of the price of ether.
In addition, the Trust will compete with direct investments in ether, ether futures-based products, other digital assets and other potential financial vehicles, possibly including securities backed by or linked to digital assets and other investment vehicles that focus on other digital assets. Market and financial conditions, and other conditions beyond the Trust’s control, may make it more attractive to invest directly or in other vehicles, which could adversely affect the performance of the Trust.
The value of the Shares may be influenced by a variety of factors unrelated to the value of ether.
The value of the Shares may be influenced by a variety of factors unrelated to the price of ether that may have an adverse effect on the price of the Shares. These factors include:
-36-
Table of Contents
| • | The Trust could experience unanticipated problems or issues with respect to the mechanics of the Trust’s operations and the trading of the Shares, in particular due to the fact that the mechanisms and procedures governing the creation and offering of the Shares and storage of ether have been developed specifically for this product; |
| • | The Trust could experience difficulties in operating and maintaining its technical infrastructure, including in connection with expansions or updates to such infrastructure, which are likely to be complex and could lead to unanticipated delays, unforeseen expenses and security vulnerabilities; |
| • | The Trust could experience unforeseen issues relating to the performance and effectiveness of the security procedures, such as algorithms, codes, passwords, multiple signature systems, encryption and telephone call-backs, used to protect the Trust’s account with the Ethereum Custodian, or the security procedures may not protect against all errors, software flaws or other vulnerabilities in the Trust’s technical infrastructure, which could result in theft, loss or damage of its assets; or |
| • | If the Ethereum network introduces privacy enhancing features in the future, service providers may decide to terminate their relationships with the Trust due to concerns that the introduction of privacy enhancing features to the Ethereum network may increase the potential for ether to be used to facilitate crime, exposing such service providers to potential reputational harm. |
Any of these factors could affect the value of the Shares, either directly or indirectly through their effect on the Trust’s assets.
The NAV may not always correspond to the market price of the Shares.
The NAV of the Trust may not always correspond to the market price of its Shares. Shareholders should be aware that the public trading price per Share may be different from the NAV for a number of reasons, including price volatility, trading activity, normal trading hours for the Trust, the calculation methodology of the NAV, demand or supply for Shares of the Trust in excess of an Authorized Participant’s ability to create or redeem Shares and/or the closing of ether trading platforms due to fraud, failure, security breaches or otherwise, and the fact that supply and demand forces at work in the secondary trading market for Shares are related, but not identical, to the supply and demand forces influencing the market price of ether. Additionally, ether is traded on trading platform markets and over-the-counter 24-hours a day and seven days a week, and the value of the Shares may therefore change on days and at times when an investor is not able to buy or sell Shares.
The Trust and the Sponsor believe that slippage in trading (i.e., the difference between the expected price and the price at which the trade is executed) is not necessarily more pronounced in the trading of digital assets as compared to other asset classes or in the trading of ether as compared to other digital assets. To monitor the trading of ether and other digital assets, the Execution Agent requests quotes from liquidity providers to trade ether or other digital asset as a spread off a corresponding index. While trading slippage is not expected to have a material impact on the Trust over the long term, trading slippage may from time to time be material on a given day. The Trust does not currently intend to take specific steps to limit the impact of trading slippage.
An Authorized Participant may be able to create or redeem a Creation Basket at a discount or a premium to the public trading price per Share. To the extent creations or redemptions take place in kind in the future, the Trust’s operations will therefore not be directly impacted by any discount or premium in the market price of its Shares.
Shareholders may be adversely affected by an overstatement or understatement of the NAV calculation of the Trust due to the valuation methodology employed on the date of the NAV calculation.
If the Benchmark is not available or the Sponsor determines, in its sole discretion, that the Benchmark should not be used, the Trust’s ether investments may be valued using techniques other than reliance on the price established by the Benchmark. The value established by using the Benchmark may be different from what would be produced through the use of another methodology. Ether valued using techniques other than those employed by the Benchmark, including ether investments that are “fair valued,” may differ from the value established by the Benchmark.
Benchmark tracking risk.
Although the Trust will attempt to structure its portfolio so that it is able to track the Benchmark, the Trust may not achieve the desired degree of correlation between its performance and that of the Benchmark and thus may not achieve its investment objective. The difference in performance may be due to factors such as fees, transaction costs, redemptions of, and subscriptions for, Shares, differences in the timing of the addition or removal of constituent trading platforms underlying the Benchmark, pricing differences or the cost to the Trust of complying with various new or existing regulatory requirements.
The use of cash creations and redemptions may adversely affect the arbitrage transactions by Authorized Participants intended to keep the price of the Shares closely linked to the price of ether and, as a result, the price of the Shares may fall or otherwise diverge from NAV.
The use of cash creations and redemptions, as opposed to in-kind creations and redemptions, could cause delays in trade execution due to potential operational issues arising from implementing a cash creation and redemption model, which involves greater operational steps (and therefore execution risk) than the originally contemplated in-kind creation and redemption model. Such delays could cause the execution price associated with such trades to materially deviate from the Benchmark price used to determine the NAV. Even though the Authorized Participant is responsible for the dollar cost of such difference in prices, Authorized Participants could default on their obligations to the Trust, or such potential risks and costs could lead to Authorized Participants, who would otherwise be willing to purchase or redeem Baskets to take advantage of any arbitrage opportunity arising from discrepancies between the price of the Shares and the price of the underlying ether, to elect to not participate in the Trust’s Share creation and redemption processes. This may adversely affect the arbitrage mechanism intended to keep the price of the Shares closely linked to the price of ether, and as a result, the price of the Shares may fall or otherwise diverge from NAV. If the arbitrage mechanism is not effective, purchases or sales of Shares on the secondary market could occur at a premium or discount to NAV, which could harm Shareholders by causing them buy Shares at a price higher than the value of the underlying ether held by the Trust or sell Shares at a price lower than the value of the underlying ether held by the Trust, causing Shareholders to suffer losses. Further, if and when In-Kind Regulatory Approval is obtained, the Trust may not be able to successfully implement in-kind creation and redemption transactions, which could put the Trust at a disadvantage compared to other digital asset ETPs that are able to implement in-kind creations and redemptions.
Ether buying and selling activity associated with the creation and redemption of Creation Baskets, or withdrawal from participation by an Authorized Participant, may adversely affect an investment in the Shares of the Trust.
The Trust’s or the Execution Agent’s purchase of ether in connection with Creation Basket purchase orders may cause the price of ether to increase, which will result in higher prices for the Shares. Increases in ether prices may also occur as a result of ether purchases by other market participants who attempt to benefit from an increase in the market price of ether when Creation Baskets are issued. The market price of ether may therefore decline immediately after Creation Baskets are issued.
Selling activity associated with sales of ether by the Trust or the Execution Agent in connection with redemption orders may decrease the ether prices, which will result in lower prices for the Shares. Decreases in ether prices may also occur as a result of selling activity by other market participants.
In addition to the effect that purchases and sales of ether by the Trust or the Execution Agent may have on the price of ether, sales and purchases of ether by similar investment vehicles (if developed) could impact the price of ether. If the price of ether declines, the trading price of the Shares will generally also decline.
-37-
Table of Contents
Authorized Participant Risk
The Trust has a limited number of financial institutions that may act as Authorized Participants and engage in creation or redemption transactions directly with the Trust, and none of those Authorized Participants is obligated to engage in creation and/or redemption transactions. In the event that one or more Authorized Participants that have substantial interests in the Trust’s Shares exit the business or are unable to proceed with participation in the purchase (creation) or sale (redemption) of the Trust’s Shares, and no other Authorized Participant is able to step forward to create or redeem Creation Baskets, this may result in a significantly diminished trading market for the Shares, and the Shares may be more likely to trade at a premium or discount to the Trust’s NAV and to face trading halts and/or delisting. Further, the Trust’s Authorized Participants may act as authorized participants for a number of other digital asset ETPs. If those digital asset ETPs experience operational challenges or regulatory problems that impact or implicate one or more of the Trust’s Authorized Participants, the Trust may be adversely impacted. In addition, if one or more of the Trust’s Authorized Participants discontinue serving as an Authorized Participant with respect to the Trust but not to other digital asset ETPs, the liquidity of Shares and the value of an investment in the Shares may be adversely affected. Finally, in periods of heightened ether price volatility, the Authorized Participants may not be able to effectively make markets in several impacted digital asset ETPs at once, which could lead to larger bid-ask spreads or Share price premiums and discounts. The Sponsor will monitor the activity and operations of the Trust’s Authorized Participants to identify any such potential issues.
The inability of Authorized Participants to hedge their ether exposure may adversely affect the liquidity of Shares and the value of an investment in the Shares.
Authorized Participants will generally want to hedge their exposure in connection with Creation Basket creation and redemption orders. To the extent Authorized Participants are unable to hedge their exposure due to market conditions (e.g., insufficient ether liquidity in the market, inability to locate an appropriate hedge counterparty, extreme volatility in the price of ether, etc.), such conditions may make it difficult to create or redeem Creation Baskets or cause them to not create or redeem Creation Baskets. In addition, the hedging mechanisms employed by Authorized Participants to hedge their exposure to ether may not function as intended, which may make it more difficult for them to enter into such transactions. Such events could negatively impact the market price of the Trust and the spread at which the Trust trades on the open market.
The market infrastructure of the ether spot market could result in the absence of active Authorized Participants able to support the trading activity of the Trust.
Ether is extremely volatile, and concerns exist about the stability and reliability of many trading platforms where ether trades. In a highly volatile market, or if one or more trading platforms supporting the ether market face an issue, it could be extremely challenging for any Authorized Participants to provide continuous liquidity in the Shares. There can be no guarantee that the Sponsor will be able to find an Authorized Participant to actively and continuously support the Trust.
Ether spot trading platforms are not subject to the same regulatory oversight as traditional equity exchanges, which could negatively impact the ability of Authorized Participants to implement arbitrage mechanisms.
The trading for spot ether occurs on multiple domestic and foreign trading platforms that have various levels and types of regulation, but are not regulated in the same manner as traditional stock and bond trading platforms. If these trading platforms do not operate smoothly or face technical, security or regulatory issues, that could impact the ability of Authorized Participants to make markets in the Shares. In such an event, trading in the Shares could occur at a material premium or discount to the NAV.
In addition, trading on these trading platforms may be halted or disrupted due to regulatory actions, operational problems at the trading platforms or third parties, cybersecurity incidents or acts of fraud or misconduct, among others. In the event a trading platform experiences such a disruption, the Trust may be impacted and the value of the Shares may decline. Further, the price and availability of ether on these trading platforms may differ, and if the Trust transacts at one trading platform at a time where the price and/or availability of ether is materially worse than that of another trading platform, the value of Shares may be impacted. Operational problems or failures by ether trading platforms and fluctuations in ether prices may reduce confidence in these platforms or in ether generally, which could adversely affect the price of ether and therefore adversely affect an investment in the Shares.
-38-
Table of Contents
Only Authorized Participants may transact in Creation Baskets.
The Trust will process all creations and redemptions of Shares in transactions with financial firms that are authorized to do so (known as “Authorized Participants”). Shareholders that are not Authorized Participants or who are unable to transact in Creation Baskets through Authorized Participants may only purchase or sell their Shares in secondary trading markets, and the conditions associated with trading in secondary markets may adversely affect Shareholders’ investment in the Shares. Although shares of the Trust are listed for trading on the Exchange, there can be no assurance that an active trading market for such shares will develop or be maintained. Secondary market trading in Shares may be halted by the Exchange because of market conditions or for other reasons. Shares of the Trust, similar to shares of other issuers listed on a stock exchange, may be sold short and are therefore subject to the risk of increased volatility and price decreases associated with being sold short. Shares trade on the Exchange at prices at, above or below the most recent NAV. The NAV is calculated at the end of each Business Day and fluctuates with changes in the market value of the Trust’s ether. The trading price of the Shares fluctuates continuously throughout trading hours based on both market supply of and demand for Shares and the underlying value of the Trust’s ether or the Trust’s NAV. As a result, the trading prices of Shares may deviate significantly from NAV during periods of market volatility. Any of these factors, among others, may lead to the Shares trading at
a premium or discount to NAV. While the creation/redemption feature is designed to make it more likely that Shares normally will trade on the Exchange at prices close to the next calculated NAV, market prices are not expected to correlate exactly with the Trust’s NAV due to timing reasons, supply and demand imbalances and other factors. In addition, disruptions to creations and redemptions, including disruptions at Authorized Participants, or other market participants, and during periods of significant market volatility, may result in trading prices for Shares that differ significantly from its NAV. Authorized Participants may be less willing to create or redeem Shares if there is a lack of an active market for such Shares or its underlying investments, which may contribute to the Shares trading at a premium or discount to NAV. Buying or selling Shares on the Exchange involves two types of costs that apply to all securities transactions. When buying or selling Shares through a broker, Shareholders will likely incur a brokerage commission and other charges. In addition, Shareholders may incur the cost of the “spread”; that is, the difference between what investors are willing to pay for Shares (the “bid” price) and the price at which they are willing to sell Shares (the “ask” price). The spread, which varies over time for Shares based on trading volume and market liquidity, is generally narrower if the Trust has more trading volume and market liquidity and wider if the Trust has less trading volume and market liquidity. In addition, increased market volatility may cause wider spreads. There may also be regulatory and other charges that are incurred as a result of trading activity. Because of the costs inherent in buying or selling Shares, frequent trading may detract significantly from investment results and an investment in Shares may not be advisable for investors who anticipate regularly making small investments through a brokerage account.
Ethereum Counterparty Risk.
There can be no guarantee that the Execution Agent will be able to find Ethereum Counterparties to actively and continuously provide ether liquidity to the Trust. Because the Ethereum Counterparties are not contractually obligated to provide ether liquidity to the Trust, if the Trust is unable to find sufficient sources of ether liquidity, the Execution Agent may not be able to purchase or sell ether on behalf of the Trust at prices and at times that will enable the Trust to track the Benchmark. If the Execution Agent is unable to transact in ether on the Trust’s behalf on a timely and cost-efficient basis, it could adversely affect the price of ether and therefore adversely affect an investment in the Shares. To the extent that the unavailability of ether liquidity results in a diminished trading market for the Shares, the Shares may be more likely to trade at a premium or discount to the Trust’s NAV and to face trading halts and/or delisting. Further, if one or more Ethereum Counterparties or trading platforms or venues supporting the ether market are unwilling or unable to provide liquidity to the Trust, it could be challenging for any Authorized Participants to provide continuous liquidity in the Shares.
Shareholders may be adversely affected by creation or redemption orders that are subject to postponement, suspension or rejection under certain circumstances.
The Trust may, in its discretion, suspend the right of creation or redemption or may postpone the purchase or redemption settlement date, for (1) any period during which the Exchange is closed other than customary weekend or holiday closings, or trading on the Exchange is suspended or restricted, (2) any period during which an emergency exists as a result of which the fulfillment of a purchase order or the redemption distribution is not reasonably practicable, (3) such other period as the Sponsor determines to be necessary for the protection of the Trust or its Shareholders (for example, where acceptance of the total deposit required to create each Creation Basket would have certain adverse tax consequences to the Trust or its Shareholders), or (4) as agreed upon between the Sponsor and Authorized Participant. An emergency could include situations where the Trust is unable to transact in ether or where the Trust is unable to value its ether holdings. Such a situation may arise when trading of ether is suspended on one or more of the digital asset trading platforms that are included in the Benchmark (for example, as a result of a significant technical failure, power outage or network error) or the Trust is unable to access the ether in the Trust’s ether custody account at the Ethereum Custodian due to technical or operating issues at the Trust or the Ethereum Custodian. Because the Trust’s ether transactions are expected to be effected by the Execution Agent over-the-counter, it is unlikely that the Trust’s ether transactions would be directly impacted by a trading halt on one or more digital asset trading platforms. However, such disruptions may have an effect on overall ether liquidity or cause price spreads of ether to widen.
In addition, the Trust may reject a redemption order if the order is not in proper form as described in the authorized participant agreement by and among the Trust, the Sponsor and the Authorized Participants (the “Authorized Participant Agreement”) or if the fulfillment of the order might be unlawful. Any such postponement, suspension or rejection could adversely affect a redeeming Authorized Participant. Suspension of creation privileges may adversely impact how the Shares are traded and arbitraged on the secondary market, which could cause them to trade at levels materially different (premiums and discounts) from the fair value of their underlying holdings.
The Exchange on which the Shares are listed may halt trading in the Trust’s Shares, which would adversely impact a Shareholder’s ability to sell Shares.
The Trust’s Shares are listed for trading on the Exchange under the ticker symbol QETH. Trading in Shares may be halted due to market conditions or, in light of the Exchange rules and procedures, for reasons that, in the view of the Exchange, make trading in Shares inadvisable. In addition, trading is subject to trading halts caused by extraordinary market volatility pursuant to “circuit breaker” rules that require trading to be halted for a specified period based on a specified market decline. Additionally, there can be no assurance that the requirements necessary to maintain the listing of the Trust’s Shares will continue to be met or will remain unchanged.
The lack of active trading markets for the Shares of the Trust may result in losses on Shareholders’ investments at the time of disposition of Shares.
Although Shares of the Trust are expected to be publicly listed and traded on an exchange, there can be no guarantee that an active trading market for the Trust will develop or be maintained. If Shareholders need to sell their Shares at a time when no active market for them exists, the price Shareholders receive for their Shares, assuming that Shareholders are able to sell them, will likely be lower than the price that Shareholders would receive if an active market did exist and, accordingly, a Shareholder may suffer losses.
Shareholders could incur a tax liability without an associated distribution of the Trust.
In the normal course of business, Shareholders could incur a taxable gain as a result of the sale of ether (including sales of ether to pay the Sponsor Fee and other Trust expenses), which gain does not correspond to a distribution to Shareholders (so-called “phantom income”). Any tax liability could adversely impact an investment in the Shares and may require Shareholders to prepare and file tax returns. In that event, Shareholders may be subject to tax on any realized capital gain resulting from their pro-rata share of the ethers sold by the Trust even though there is not a corresponding distribution from the Trust. See “U.S. Federal Income Tax Consequences—Taxation of U.S. Shareholders” and “U.S. Federal Income Tax Consequences—Taxation of the Trust.”
The amount of ether represented by the Shares will decline over time.
The amount of ether represented by the Shares will be reduced during the life of the Trust each time the Trust accrues the Sponsor Fee, and to pay for any extraordinary expenses. This dynamic will occur irrespective of whether the value of the Trust’s assets, or the trading price of the Shares, rises or falls.
-39-
Table of Contents
Each outstanding Share represents a fractional, undivided interest in the ether held by the Trust. The Trust transfers ether to pay for the Sponsor Fee, and to pay for any extraordinary expenses, including, but not limited to, taxes and governmental charges, any applicable brokerage commissions, financing fees, Ethereum network fees and similar transaction fees, expenses and costs of any extraordinary services performed by the Sponsor (or any other service provider) on behalf of the Trust to protect the Trust or the interests of Shareholders (including, for example, in connection with any fork of the Ethereum blockchain), any indemnification of the Sponsor, Cash Custodian, Ethereum Custodian, Administrator or other agents, service providers or counterparties of the Trust and extraordinary legal fees and expenses, including any legal fees and expenses incurred in connection with litigation, regulatory enforcement or investigation matters. Therefore, the amount of ether represented by each Share will gradually decline over time. This is also true with respect to Shares that are issued in exchange for additional deposits of ether or cash used to acquire ether over time, as the amount of ether required to create Shares proportionally reflects the amount of ether represented by the Shares outstanding at the time of such Share issuance. Assuming a constant ether price, the trading price of the Shares is expected to gradually decline relative to the price of ether at the rate of the Sponsor Fee and other expenses.
Any errors or changes in calculations used to value the Trust’s ether holdings and ether holdings per Share may have an adverse effect on the value of the Shares.
The value of Trust’s ether holdings is typically determined on a daily basis as of 4:00 p.m. ET on each Business Day. This determination is made utilizing data from the operations of the Trust, calculated as of 4:00 p.m. ET on such day. In the event that the value of the Trust’s ether holdings or ether holdings per Share is incorrectly calculated, the Sponsor and the Administrator will not be liable for any error and such misreporting of valuation data could adversely affect the value of the Shares.
The value of the Shares will be adversely affected if the Trust is required to indemnify the Sponsor, the Trustee, the Transfer Agent, the Ethereum Custodian or the Cash Custodian.
Under the Trust Agreement, the Trustee and the Sponsor will have a right to be indemnified by the Trust for certain liabilities or expenses that it incurs without gross negligence, bad faith or willful misconduct on its part. The Trust has also agreed to indemnify the Transfer Agent, Ethereum Custodian and Cash Custodian under their respective agreements with the Trust for certain liabilities or expenses that such party incurs, subject to certain qualifications. Therefore, the Trustee, Sponsor, Transfer Agent, the Ethereum Custodian or the Cash Custodian may require that the assets of the Trust be sold in order to cover losses or liability suffered by it. Any sale of that kind would reduce the ether holdings of the Trust and the value of the Shares.
The Sponsor and its affiliates are subject to conflicts of interest that could adversely affect an investment in the Trust.
The Sponsor and its affiliates and their respective officers, directors and employees and other related parties engage in a broad spectrum of activities and may expand the range of services that they provide over time. The Sponsor and its related parties will generally not be restricted in the scope of their business or in the performance of any such services (whether now offered or undertaken in the future), even if such activities could give rise to conflicts of interest, and whether or not such conflicts are described herein. In the ordinary course of their business activities, the Sponsor and its related parties may engage in activities where the interests of the Sponsor and its related parties or the interests of their clients conflict with the interests of the Trust. Certain employees of the Sponsor also have responsibilities relating to the business of one or more related parties. These employees are not restricted in the amount of time that may be allocated to the business activities of the Sponsor’s related parties, and the allocation of such employees’ time between the Sponsor and its related parties may change over time.
The Sponsor and its related parties are responsible for managing other accounts in addition to the services that they provide to the Trust, including other accounts of the Sponsor or its affiliates. Other accounts may include, without limitation, private or SEC-registered funds, separately managed accounts, offshore funds or accounts, or investments owned by the Sponsor or its affiliates. Management of other accounts in addition to services provided to the Trust can present certain conflicts of interest. The other accounts might have similar or different investment objectives or strategies as the Trust, or otherwise hold, purchase or sell investments that are eligible to be held, purchased or sold by the Trust, or may take positions that are opposite in direction from those taken by the Trust.
-40-
Table of Contents
The Sponsor may devote unequal time and attention to the management of different accounts. As a result, the Sponsor may not be able to fulfill its obligations to the Trust as might be the case if it were to devote substantially more attention to the management of a single account. The effects of this potential conflict may be more pronounced where accounts overseen by the Sponsor have different investment strategies.
A conflict of interest arises where the financial or other benefits available to the Sponsor or its related parties differ among the accounts that it manages. Where the structure of the Sponsor’s or its related party’s fee differs among accounts (such as where certain accounts pay higher management fees or a performance or incentive fee), the Sponsor might be motivated to help certain accounts over others. In addition, the Sponsor might be motivated to favor accounts in which it has an interest and/or its related parties have interests. Similarly, the desire to maintain or raise assets under management or to enhance the Sponsor’s or its related parties’ performance record or to derive other rewards, financial or otherwise, could influence the Sponsor to give preferential treatment to those accounts that could most significantly benefit the Sponsor.
The Trust’s service providers (including its Ethereum Custodian, Administrator, auditor and legal counsel) may provide services to other pooled investment vehicles with similar investment strategies and objectives and, accordingly, may have conflicts of interest. The Trust’s Sponsor and other service providers and their principals, employees or affiliates may invest or trade in digital assets for their own accounts, which activities may conflict or compete with the Trust.
The Sponsor or its related parties may purchase Shares from the Trust from time to time, and may hold a material position in the Trust. The Trust will not receive any of the proceeds from the resale by the Sponsor or its affiliates of these Shares, and the sale of such Shares may impact the price at which you may be able to sell your Shares. The Sponsor and its related parties reserve the right, subject to compliance with applicable law, to sell into the market or redeem in Creation Baskets through an Authorized Participant at any time some or all of the Shares of the Trust acquired for their own accounts. The Sponsor or its related parties face conflicting interests in determining whether, when and in what amount to sell or redeem Shares of the Trust. The Sponsor and its related parties are under no obligation to consider the effect of redemptions on the Trust and other Shareholders in deciding whether to sell or redeem their Shares.
-41-
Table of Contents
The Sponsor is responsible for selecting and engaging the Trust’s service providers, including the Benchmark Provider. To the extent that the Sponsor has other commercial arrangements with the service providers, the Sponsor may face conflicts of interest with respect to its oversight and supervision of the service providers. Further, to the extent that the Sponsor has investments in ether and/or in Shares, and due to the fact that the Sponsor Fee is payable based on the value of the Shares, the Sponsor may face potential conflicts of interest with respect to the Benchmark Provider’s valuation of Shares.
Investment vehicles advised or managed by affiliates of the Sponsor hold a minority interest in Coinbase Global, the parent of Coinbase Inc., which serves as the Trust’s Prime Broker and operates one of the digital asset trading platforms included in the Benchmark price and is the parent of the Ethereum Custodian.
Investment vehicles advised or managed by affiliates of the Sponsor own shares in many public companies listed in the United States, including Coinbase Global, the parent of Coinbase Inc. which operates the Coinbase trading platform and serves as the Trust’s Prime Broker. The Trust values its digital assets by reference to the Benchmark price. Coinbase is one of the digital asset trading platforms included in the Benchmark.
Although neither the Sponsor nor any affiliates of the Sponsor nor any investment vehicles managed or advised by any of them exercise control over Coinbase, it is possible that positions of investment vehicles managed by affiliates of the Sponsor in Coinbase may present risks to Shareholders to the extent affiliates of the Sponsor cause the Sponsor to favor Coinbase’s interests over the interests of the Trust or its Shareholders with respect to, for example, fees charged, and the quality of service provided by Coinbase as Prime Broker. Similarly, investors could have concerns that the Sponsor or affiliates of the Sponsor could influence market data provided by Coinbase in a way that benefits the Sponsor, for example by artificially inflating the values of ether in order to increase the Sponsor’s fees. This could make the Trust’s Shares less attractive to investors than the shares of similar vehicles that do not present these concerns, adversely affect investor sentiment about the Trust and negatively affect Share trading prices.
Coinbase Global is also the parent company of the Ethereum Custodian. The Ethereum Custodian serves as a fiduciary and custodian on the Trust’s behalf, and is responsible for safeguarding digital assets held by the Trust, and holding the private keys that provide access to the Trust’s digital wallets and vaults. The positions of investment vehicles managed by affiliates of the Sponsor in the parent company of the Ethereum Custodian may present risks to Shareholders to the extent affiliates of the Sponsor cause the Sponsor to favor the Ethereum Custodian’s interests over the interests of the Trust or its Shareholders with respect to, for example, fees charged, and the quality of service provided by the Ethereum Custodian. Similarly, it is possible that investors could have concerns that the interests owned by investment vehicles managed by affiliates of the Sponsor in Coinbase could cause it to refrain from taking actions that are in the best interests of the Trust but that could harm the Ethereum Custodian. This could make the Trust’s Shares less attractive to investors than the shares of similar vehicles that do not present these concerns, adversely affect investor sentiment about the Trust and negatively affect Share trading prices.
There is no guarantee that every employee, officer, director or similar person associated with the Sponsor, the Execution Agent or their affiliates will comply with the policies, duties and training and refrain from engaging in insider trading in violation of their duties to the Trust, the Sponsor or the Execution Agent.
While the Sponsor has adopted and implemented policies and will adopt standard operating practices requiring that certain applicable personnel pre-clear personal trading activity in which ether is the referenced asset, there is no way to guarantee that every employee, officer, director, or similar person associated the Sponsor, the Execution Agent or their affiliates will comply at all times with such policies, duties and training and refrain from engaging in insider trading in violation of their duties to the Trust, the Sponsor or the Execution Agent. This risk is present in traditional financial markets and is not unique to ether. If such employees or others affiliated with the Trust, Sponsor, Execution Agent, or affiliates respectively do engage in illegal conduct or conduct which fails to meet applicable regulatory standards, the Trust, Sponsor, Execution Agent, or relevant affiliate respectively could be the target of civil or criminal fines, penalties, punishments, or other regulatory or other sanctions or lawsuits or could be the target of an investigation, whether directly or indirectly, such as on a failure to diligently supervise theory. Any of these outcomes could cause the Trust and Shareholders to suffer harm.
The Sponsor, the Execution Agent and their affiliates may also participate in transactions related to ether, either for their own account (subject to certain internal employee trading operating practices) or for the account of other clients, and such transactions may occur prior to, during, or after the commencement of this offering. Such transactions may not serve to benefit the Shareholders of the Trust and may have a positive or negative effect on the value of the ether held by the Trust and, consequently, on the market value of ether.
Limited recourse
The Ethereum Custodian has limited liability for any loss, claim, or damage to the Trust, impairing the ability of the Trust to recover losses relating to its ether and any recovery may be limited, except to the extent that such loss, claim or damage directly resulted from the negligence, bad faith, willful misconduct or fraud of the Ethereum Custodian. In addition, the Ethereum Custodian is generally not liable for any loss caused, directly or indirectly, by the failure of the Trust to provide true, correct and complete information to the Ethereum Custodian, or a force majeure event. Furthermore, the Ethereum Custodian is generally not liable for a loss caused, directly or indirectly, by any failure or delay to act by any service provider to the Ethereum Custodian or any system failure in respect of a third party’s automated system that prevents the Ethereum Custodian from fulfilling its obligations.
Under the Trust Agreement, the Trustee and the Sponsor will not be liable for any liability or expense incurred absent fraud, gross negligence, bad faith or willful misconduct on the part of the Trustee or the Sponsor or breach by the Sponsor of the Trust Agreement, as the case may be. As a result, the recourse of the Trust or the Shareholder to Trustee or the Sponsor may be limited.
Risks Related to the Benchmark
The Benchmark has a limited history.
The Benchmark has a limited history. A longer history of actual performance through various economic and market conditions would provide greater and more reliable information for an investor to assess the Benchmark’s performance. The Benchmark Provider has substantial discretion at any time to change the methodology used to calculate the Benchmark, including the spot markets that contribute prices to the Trust’s NAV. The Benchmark Provider does not have any obligation to take the needs of the Trust, the Trust’s Shareholders, or anyone else into consideration in connection with such changes. There is no guarantee that the methodology currently used in calculating the Benchmark will appropriately track the price of ether in the future, and the Benchmark could be calculated now or in the future in a way that adversely affects an investment in the Trust.
The Benchmark Pricing Sources used by the Benchmark are digital asset spot markets that facilitate the buying and selling of ether and other digital assets. Although many Benchmark Pricing Sources refer to themselves as “exchanges,” they are not registered with, or supervised by, the SEC or CFTC and do not meet the regulatory standards of a national securities exchange or designated contract market. For these reasons, among others, purchases and sales of ether may be subject to temporary distortions or other disruptions due to various factors, including the lack of liquidity in the markets and government regulation and intervention. These circumstances could affect the price of ether used in Benchmark calculations and, therefore, could affect the ether price as reflected by the Benchmark.
The Benchmark is based on various inputs which include price data from various third-party ether spot markets. The Benchmark Provider does not guarantee the validity of any of these inputs, which may be subject to technological error, manipulative activity, or fraudulent reporting from their initial source.
Right to change the Benchmark.
The Sponsor, in its sole discretion, may cause the Trust to track (or price its portfolio based upon) an index or standard other than the Benchmark at any time, with at least 60 days’ prior notice to the Shareholders (where possible), if investment conditions change or the Sponsor believes that another index or benchmark better aligns with the Trust’s investment objective and strategy. The Sponsor, however, is under no obligation whatsoever to make such changes in any circumstance. In the event that the Sponsor intends to establish the Trust’s NAV by reference to an index, benchmark or standard other than the Benchmark, it will provide Shareholders with notice in a prospectus supplement and/or through a current report on Form 8-K or in the Trust’s annual or quarterly reports.
The trading platforms that may be designated as a principal market under the Benchmark Provider’s methodology face a number of risks.
Unlike traditional stock and commodity exchanges, cryptocurrency trading platforms face a number of risks, including but not limited to, distributed denial-of-service (“dDoS”), interruption of trading, hacking of user accounts, lack of standards and naming convention for symbols, and an unstable technological and legal environment (causing changes in fee structure, blocking of funds withdrawal, etc.). Suspension or disruption of market trading in ether on one or more Benchmark Pricing Sources may adversely affect the value of the Benchmark.
-42-
Table of Contents
The Benchmark is subject to the limitations of its methodology and the ether market.
Though the Benchmark is designed to be representative of the ether market or otherwise align with its stated objective, it may not be representative in every case or achieve its stated objective in all instances. The Benchmark is designed and calculated strictly to follow the rules of its methodology, and any Benchmark price or other output is limited in its usefulness to such design and calculation. In addition, the Benchmark will necessarily be composed of a limited number of potential principal markets, and thus the Benchmark may not reflect the value of ether on crypto trading platforms not considered in the Benchmark. Furthermore, the Benchmark Provider publicizes its methodology as a whitepaper available for download on the Benchmark Provider’s website.
The ether market can be volatile, including those market interests which the Benchmark intends to measure or upon which the Benchmark is dependent in order to achieve its stated objective. For example, illiquidity can have an impact on the quality or amount of data available to the Benchmark Provider for calculation, and may cause the Benchmark to produce unpredictable or unanticipated results. In addition, market trends and changes to market structure may render the objective of the Benchmark unachievable or cause the Benchmark to become impractical to replicate.
The Benchmark Provider could experience system failures or errors.
If the computers or other facilities of the Benchmark Provider, Benchmark Pricing Sources, data providers and/or relevant stock exchange malfunction for any reason, calculation and dissemination of the Benchmark may be delayed. Errors in Benchmark data, the Benchmark computations and/or construction may occur from time to time and may not be identified and/or corrected for a period of time or at all, which may have an adverse impact on the Trust and the Shareholders. Any of the foregoing may lead to the errors in the Benchmark, which may lead to a different investment outcome for the Trust and its Shareholders than would have been the case had such events not occurred. The Benchmark is the reference price for calculating the Trust’s NAV. Consequently, losses or costs associated with the Benchmark’s errors or other risks described above will generally be borne by the Trust and the Shareholders and neither the Sponsor nor its affiliates or agents make any representations or warranties regarding the foregoing.
If the Benchmark is not available, the Trust’s holdings may be fair valued in accordance with the policy approved by the Sponsor. See “Calculation of NAV—General.” To the extent the valuation determined in accordance with the policy approved by the Sponsor differs materially from the actual market price of ether, the price of the Shares may no longer track, whether temporarily or over time, the global market price of ether, which could adversely affect an investment in the Trust by reducing investors’ confidence in the Shares’ ability to track the global market price of ether. To the extent such prices differ materially from the market price for ether, investors may lose confidence in the Shares’ ability to track the market price of ether, which could adversely affect the value of the Shares. The Sponsor does not anticipate that the need to “fair value” ether will be a common occurrence.
Risks related to pricing.
As set forth under “Calculation of NAV” below, the Trust’s portfolio will be priced, including for purposes of determining the NAV, based upon the estimated fair market value (“FMV”) for ether determined by the Benchmark Provider. The price of ether in U.S. Dollars or in other currencies available from other data sources may not be equal to the prices used to calculate the NAV. The Benchmark Provider has substantial discretion at any time to change the methodology used to determine the FMV of ether, including the spot markets underlying its methodology. The Benchmark Provider does not have any obligation to take the needs of the Trust, the Trust’s Shareholders, or anyone else into consideration in connection with such changes.
The Benchmark Pricing Sources used by the Benchmark Provider are digital asset spot markets that facilitate the buying and selling of ether and other digital assets. Although many Benchmark Pricing Sources refer to themselves as “exchanges,” they are not registered with, or supervised by, the SEC or CFTC and do not meet the regulatory standards of a national securities exchange or designated contract market. For these reasons, among others, purchases and sales of ether may be subject to temporary distortions or other disruptions due to various factors, including the lack of liquidity in the markets and government regulation and intervention. These circumstances could affect the price of ether determined by the Benchmark Provider.
The NAV of the Trust will change as fluctuations occur in the market price of the Trust’s ether holdings. Shareholders should be aware that the public trading price per Share may be different from the NAV for a number of reasons, including price volatility, trading activity, the closing of ether trading platforms due to fraud, failure, security breaches or otherwise, and the fact that supply and demand forces at work in the secondary trading market for Shares are related, but not identical, to the supply and demand forces influencing the market price of ether.
An Authorized Participant may be able to create or redeem a Creation Basket at a discount or a premium to the public trading price per Share. To the extent creations or redemptions take place in-kind in the future, the Trust will therefore maintain its intended fractional exposure to a specific amount of ether per Share.
Shareholders also should note that the size of the Trust in terms of total ether held may change substantially over time and as Creation Baskets are created and redeemed.
In the event that the value of the Trust’s ether holdings or ether holdings per Share is incorrectly calculated, neither the Sponsor nor the Administrator will be liable for any error and such misreporting of valuation data could adversely affect the value of the Shares.
-43-
Table of Contents
This section of the Prospectus provides a more detailed description of ether, including information about the historical development of ether, how a person holds ether, how to use ether in transactions, how to trade ether, the markets where ether can be bought, held and sold, the ether over-the-counter (“OTC”) market and government oversight of ether.
Ether and the Ethereum Network
Ether is a digital asset that is created and transmitted through the operations of the Ethereum peer-to-peer network and associated blockchain ledger (the “Ethereum blockchain” and together the “Ethereum network”), a network of computers, known as nodes, that operates on cryptographic computer-code based logic, called a protocol. No single entity owns or operates the Ethereum network, the infrastructure of which is collectively maintained by a distributed user base, a phenomenon known as decentralization. Ether is not issued by governments, banks or any other centralized authority. The Ethereum network allows people to exchange tokens of value, called ether, which are recorded on a public transaction ledger known as the Ethereum blockchain. Ether can be used to pay for goods and services, including computational power on the Ethereum network, or it can be converted to fiat currencies, such as the U.S. dollar, at rates determined on digital asset exchanges or in individual end-user-to-end-user transactions under a barter system.
The Ethereum network allows users to write and implement computer programs called smart contracts-that is, general-purpose code that executes on every computer in the network and can instruct the transmission of information and value based on a sophisticated set of logical conditions. Using smart contracts, users can create markets, store registries of debts or promises, represent the ownership of property, move funds in accordance with conditional instructions and create digital assets other than ether on the Ethereum network. Smart contract operations are executed on the Ethereum blockchain in exchange for payment of ether. The Ethereum network is one of a number of projects intended to expand blockchain use beyond just a peer-to-peer money system.
The Ethereum network is commonly understood to be decentralized and does not require governmental authorities or financial institution intermediaries to create, transmit or determine the value of ether. Rather, following the initial distribution of ether, ether is created, burned and allocated by the Ethereum network protocol through a process that is currently subject to an issuance and burn rate as further described under “Limits on ether Supply” below. The value of ether is determined by the supply of and demand for ether on the digital asset exchanges or in private end-user-to-end-user transactions. There is no hard cap which would limit the number of outstanding ether at any one time to a predetermined maximum.
New ether are created and rewarded to the validators of a block in the Ethereum blockchain for verifying transactions. The Ethereum blockchain is effectively a decentralized database that includes all blocks that have been validated and it is updated to include new blocks as they are validated. Each ether transaction is broadcast to the Ethereum network and, when included in a block, recorded in the Ethereum blockchain. As each new block records outstanding ether transactions, and outstanding transactions are settled and validated through such recording, the Ethereum blockchain represents a complete, transparent and unbroken history of all transactions of the Ethereum network.
Among other things, ether is used to pay for transaction fees and computational services (i.e., smart contracts) on the Ethereum network; users of the Ethereum network pay for the computational power of the machines executing the requested operations with ether. Requiring payment in ether on the Ethereum network incentivizes developers to write quality applications and increases the efficiency of the Ethereum network because wasteful code costs more. It also ensures that the Ethereum network remains economically viable by compensating people for their contributed computational resources.
History of Ethereum
The Ethereum network was originally described in a 2013 white paper by Vitalik Buterin, a programmer involved with bitcoin, with the goal of creating a peer-to-peer, open-source network enabling users to create so-called decentralized applications powered by smart contracts, which are general-purpose code that executes on the Ethereum network. By combining the Ethereum blockchain with a flexible scripting language that is designed to be capable of implementing sophisticated logic and execute a wide variety of instructions, the Ethereum network was designed to act as a programmable infrastructure layer that would enable users to create their own rules for ownership, transaction formats and state transition functions that they could build into custom software programs of their own creation. The formal development of the Ethereum network began through a Swiss firm called Ethereum Switzerland GmbH (“EthSuisse”) in conjunction with several other entities. Subsequently, the Ethereum Foundation, a Swiss non-profit organization, was set up to oversee the protocol’s development. The Ethereum network went live on July 30, 2015. Decentralized applications may be controlled by a single user or small group. See “Risk Factors-Risk Factors Related to Digital Assets.” Smart contracts, including those relating to decentralized finance (“DeFi”) applications, are a new technology and their ongoing development and operation may result in problems, which could reduce the demand for ether or cause a wider loss of confidence in the Ethereum network, either of which could have an adverse impact on the value of ether.”
Ether is the digital asset that powers the Ethereum network and serves as the network’s native unit of account that is used to pay the “gas” fees needed to power decentralized applications and smart contracts and execute transactions. Unlike other digital assets, such as bitcoin, which are solely created through a progressive mining process, 72.0 million ether were created in connection with the launch of the Ethereum network. Coinciding with the network launch, it was decided that EthSuisse would be dissolved, designating the Ethereum Foundation as the sole organization dedicated to protocol development.
Smart Contracts and Development on the Ethereum network
Smart contracts are programs that run on a blockchain that can execute automatically when certain conditions are met. Smart contracts facilitate the exchange of anything representative of value, such as money, information, property, or voting rights. Using smart contracts, users can send or receive digital assets, create markets, store registries of debts or promises, represent ownership of property or a company, move funds in accordance with conditional instructions and create new digital assets.
Development on the Ethereum network involves building more complex tools on top of smart contracts, such as decentralized applications (“DApps”); organizations that are autonomous, known as decentralized autonomous organizations (“DAOs”); and entirely new decentralized networks. For example, a company that distributes charitable donations on behalf of users could hold donated funds in smart contracts that are paid to charities only if the charity satisfies certain pre-defined conditions.
Moreover, the Ethereum network has also been used as a platform for creating new digital assets and conducting their associated initial coin offerings. As of December 31, 2023, it is believed that a majority of digital assets not issued as the native token on their own blockchains were built on the Ethereum network, with such assets representing a significant amount of the total market value of all digital assets.
-44-
Table of Contents
More recently, the Ethereum network has been used for DeFi or open finance platforms, which seek to democratize access to financial services, such as borrowing, lending, custody, trading, derivatives and insurance, by removing third-party intermediaries. DeFi can allow users to lend and earn interest on their digital assets, exchange one digital asset for another and create derivative digital assets such as stablecoins, which are digital assets pegged to a reserve asset such as fiat currency. Over the course of 2023, between $19.6 billion and $31.5 billion worth of digital assets were locked up as collateral on DeFi platforms on the Ethereum network.
In addition, the Ethereum network and other smart contract platforms have been used for creating non-fungible tokens (“NFTs”). Unlike digital assets native to smart contract platforms which are fungible and enable the payment of fees for smart contract execution. Instead, NFTs allow for digital ownership of assets that convey certain rights to other digital or real world assets. This new paradigm allows users to own rights to other assets through NFTs, which enable users to trade them with others on the Ethereum network. For example, an NFT may convey rights to a digital asset that exists in an online game or a DApp, and users can trade their NFT in the DApp or game, and carry them to other digital experiences, creating an entirely new free-market internet-native economy that can be monetized in the physical world.
The DAO and Ethereum Classic
In July 2016, the Ethereum network experienced what is referred to as a permanent hard fork that resulted in two different versions of its blockchain: Ethereum and Ethereum Classic.
In April 2016, a blockchain solutions company known as Slock announced the launch of a decentralized autonomous organization, known as “the DAO” on the Ethereum network. The DAO was designed as a decentralized crowdfunding model, in which anyone could contribute ether to the DAO in order to become a voting member and equity stakeholder in the organization. Members of the DAO could then make proposals about different projects to pursue and put them to a vote. By committing to profitable projects, members would be rewarded based on the terms of a smart contract and their proportional interest in the DAO. As of May 27, 2016, $150 million, or approximately 14% of all ether outstanding, was contributed to, and invested in, the DAO.
On June 17, 2016, an anonymous hacker exploited the DAO smart contract code to syphon approximately $60 million, or 3.6 million ether, into a segregated account. Upon the news of the breach, the price of ether was quickly cut in half as investors liquidated their holdings and members of the Ethereum community worked to determine a solution.
In the days that followed, several attempts were made to retrieve the stolen funds and secure the Ethereum network. However, it soon became apparent that direct interference with the protocol (i.e., a hard fork) would be necessary. The argument for the hard fork was that it would create an entirely new version of the Ethereum blockchain, erasing any record of the theft, and restoring the stolen funds to their original owners. The counterargument was that it would be antithetical to the core principle of immutability of the Ethereum blockchain.
The decision over whether or not to hard fork the Ethereum blockchain was put to a vote of Ethereum community members. A majority of votes were cast in favor of a hard fork. On July 15, 2016, a hard fork specification was implemented by the Ethereum Foundation. On July 20, 2016, the Ethereum network completed the hard fork, and a new version of the blockchain, without recognition of the theft, was born.
Many believed that after the hard fork the original version of the Ethereum blockchain would dissipate entirely. However, a group of validators continued to mine the original Ethereum blockchain for philosophical and economic reasons. On July 20, 2016, the original Ethereum protocol was rebranded as “Ethereum Classic,” and its native token as ether classic (ETC), preserving the untampered transaction history (including the DAO theft). Following the hard fork of Ethereum, each holder of ether automatically received an equivalent number of ETC tokens.
Overview of the Ethereum network’s Operations
In order to own, transfer or use ether directly on the Ethereum network on a peer-to-peer basis (as opposed to through an intermediary, such as a custodian or centralized exchange), a person generally must have internet access to connect to the Ethereum network. Ether transactions may be made directly between end-users without the need for a third-party intermediary. To prevent the possibility of double-spending ether, a user must notify the Ethereum network of the transaction by broadcasting the transaction data to its network peers. The Ethereum network provides confirmation against double-spending by memorializing every peer-to-peer transaction in the Ethereum blockchain, which is publicly accessible and transparent. This memorialization and verification against double-spending of peer-to-peer transactions is accomplished through the Ethereum network validation process, which adds “blocks” of data, including recent transaction information, to the Ethereum blockchain.
Summary of an Ether Transaction
A “transaction request” refers to a request to the Ethereum network made by a user, in which the requesting user (the “sender”) asks the Ethereum network to send some ether or execute some code. A “transaction” refers to a fulfilled transaction request and the associated change in the Ethereum network’s state. An Ethereum client (“Ethereum Client”) is a software application that implements the Ethereum network specification and communicates with the Ethereum network. A node is a computer or other device, such as a mobile phone, running an individual Ethereum Client that is connected to other computers also running their own Ethereum Clients, which collectively form the Ethereum network. Nodes can be full nodes (meaning they host a local copy of the entire Ethereum blockchain), or light nodes, which only host a local copy of a sub-portion of the full Ethereum blockchain with reduced data. Nodes may (but do not have to) be validators, which requires them to download an additional piece of software in the node’s Ethereum Client and stake a certain amount of ether, which is discussed below.
Any user can broadcast a transaction request to the Ethereum network from a node located on the network. A user can run their own node, or they can connect to a node operated by others. For the transaction request to actually result in a change to the current state of the Ethereum network, it must be validated, executed, and “committed to the network” by another node (specifically, a validator node). Execution of the transaction request by the validator results in a change to Ethereum network’s state once the transaction is broadcast to all other nodes across the Ethereum network. Transactions can include, for example, sending ether from one account to another, as discussed below; publishing a new smart contract onto the Ethereum network; or activating and executing the code of an existing smart contract, in accordance with the terms and conditions specified in the sender’s transaction request.
The Ethereum blockchain can be thought of as a ledger recording a history of transactions and the balances associated with individual accounts, each of which has an address on the Ethereum network. An Ethereum network account can be used to store ether. There are two types of Ethereum accounts: “externally owned accounts,” which are controlled by a private key, and “smart contract accounts,” which are controlled by their own code. Externally owned accounts are controlled by users, do not contain executable code, and are associated with a unique “public key” and “private key” pair, commonly referred to as a “wallet,” with the private key being used to execute transactions. Smart contract accounts contain, and are controlled by, their own executable code: every time the smart contract account receives a transaction from, or is “called” by, another user, the smart contract account’s code activates, allowing it to read and write to internal storage, send ether, or perform other operations. Both externally owned accounts and smart contract accounts can be used to send, hold, or receive ether, and both can interact with other smart contracts. However, only externally owned accounts have the power to initiate transactions; smart contract accounts can only send transactions of their own after they are first activated or called by another transaction. An externally owned account is associated with both a public address on the Ethereum network and a private key, while a smart contract account is only associated with a public address. While a smart contract account does not use a private key to authorize transactions, including transfers of ether, the developer of a smart contract may hold an “admin key” to the smart contract account, or have special access privileges, allowing the developer to make changes to the smart contract, enable or disable features on the smart contract, or change how the smart contract receives external inputs and data, among others.
Accounts depend on nodes to access the peer-to-peer Ethereum network. Through the node’s Ethereum Client, a user’s Ethereum wallet and its associated Ethereum network address enable the user to connect to the Ethereum network and transfer ether to, and receive ether from, other users, and interact with smart contracts, on a peer-to-peer basis. A user with an externally owned account can either run their own node (and their own Ethereum Client) and connect that node to their Ethereum wallet, allowing them to make transactions from their Ethereum wallet on the Ethereum network, or a user’s wallet can connect to third-party nodes operated as a service (e.g., Infura) and access the Ethereum network that way. Multiple accounts can access the Ethereum network through one node.
Each user’s Ethereum wallet is associated with a unique “public key” and “private key” pair. To receive ether in a peer-to-peer transaction, the ether recipient must provide its public key to the sender. This activity is analogous to a recipient for a transaction in U.S. dollars providing a routing address in wire instructions to the payor so that cash may be wired to the recipient’s account. The sender approves the transfer to the address provided by the recipient by “signing” a transaction that consists of the recipient’s public key with the private key of the address from which the sender is transferring the ether. The recipient, however, does not make public or provide to the sender the recipient’s related private key, only its public key.
Neither the recipient nor the sender reveal their private keys in a peer-to-peer transaction because the private key authorizes transfer of the funds in that address to other users. Therefore, if a user loses their private key, the user may permanently lose access to the ether contained in the associated address. Likewise, ether is irretrievably lost if the private key associated with them is deleted and no backup has been made. When sending ether, a user’s Ethereum wallet must sign the transaction with the sender’s associated private key. In addition, since every computation on the Ethereum network requires processing power, there is a mandatory transaction fee involved with the transfer that is paid by the sender to the Ethereum network itself (“base fee”), plus additional transaction fees the sender can elect (or not) to pay at their discretion to the validators who validate their transaction (“tip”). The resulting digitally signed transaction is sent by the user’s Ethereum wallet, via a node (whether run by the user or operated by others), to other Ethereum network nodes, who in turn broadcast it on a peer-to-peer basis to validators to allow transaction confirmation.
Ethereum network validators record and confirm transactions when they validate and add blocks of information to the Ethereum blockchain. Validators operate through nodes whose Ethereum Clients have an extra piece of software that permits the node to perform validation transactions. In a proof-of-stake consensus protocol like that used by the Ethereum network, validators compete to be randomly selected to validate transactions. A validator must stake 32 ether to become a validator, which allows them to activate a unique validator key pair (consisting of a public and private validator key). Each 32 ether that is staked results in issuance of a validator key pair, meaning that multiple validators can operate through a single validator node (including a validator node operated by a third party as a service). Validators generally both propose blocks (“proposers”) and participate in a committee which approves the block (“attesters”). When a validator is randomly selected by the protocol’s algorithm to propose a block, it submits a proposal for the block to be committed to the blockchain subject to completion of validation by other validators on the network, which includes data relating to (i) the verification of newly submitted transaction requests submitted by senders and (ii) a reference to the prior block in the Ethereum blockchain to which the new block is being added. The proposing validator becomes aware of outstanding transaction requests through peer-to-peer data packet transmission and distribution enforced by the Ethereum protocol rules, which connects the proposer to users who want transactions recorded. If, once created, the proposing validator’s block is confirmed by a committee of randomly selected attesters, the block is committed to the Ethereum network and added to the Ethereum blockchain. Any smart contract code that has been called by the transaction request is also executed (provided the base fee is paid for the Ethereum network’s computational power associated with executing the code, and up to the amount of the base fee). Upon the addition of a block included in the Ethereum blockchain, an adjustment to the ether balance in both the sender and recipient’s Ethereum network public key will occur, completing the ether transaction. Once a transaction is confirmed on the Ethereum blockchain, it is irreversible.
As a reward for their services in adding the block to the Blockchain, the proposing validators receive redistributed ether (i.e., “tips”) and the attesting validators receive newly minted ether. If the proposing validator’s block is determined to be faulty or to break protocol rules by the approving validator committee, the proposer is penalized by having their staked ether reduced. Validators can also be penalized for attesting to transactions that break protocol rules or are inconsistent with the majority of other validators, or for inactivity or missing attestations that the Ethereum network protocol assigned to them. In extreme cases, a proposing or attesting validator can be “slashed”, meaning forcibly ejected by other validators, with their staked ether continuously drained, potentially up to the loss of their entire stake. In this way, the Ethereum network attempts to reduce double-spend and other attacks by validators and incentivize validator integrity.
Some ether transactions are conducted “off-blockchain” and are therefore not recorded in the Ethereum blockchain. Some “off-blockchain transactions” involve the transfer of control over, or ownership of, a specific digital wallet holding ether or the reallocation of ownership of certain ether in a pooled-ownership digital wallet, such as a digital wallet owned by a digital asset exchange. If a transaction can also take place through a centralized digital asset exchange or a custodian’s internal books and records, it is not broadcast to the Ethereum network or recorded on the Ethereum blockchain. In contrast to on-blockchain transactions, which are publicly recorded on the Ethereum blockchain, information and data regarding off-blockchain transactions are generally not publicly available. Therefore, off-blockchain transactions are not peer-to-peer ether transactions in that they do not involve a transaction on the Ethereum network and do not reflect a movement of ether between addresses recorded in the Ethereum blockchain. For these reasons, off-blockchain transactions are not immutable or irreversible as any such transfer of ether ownership is not cryptographically protected by the protocol behind the Ethereum network or recorded in, and validated through, the blockchain mechanism.
Creation of New Ether
Initial Creation of Ether
Unlike other digital assets, such as bitcoin, which are solely created through a progressive mining process, 72.0 million ether were created in connection with the launch of the Ethereum network. The initial 72.0 million ether were distributed as follows:
Initial Distribution: 60.0 million ether, or 83.33% of the supply, was sold to the public in a crowd sale conducted between July and August 2014 that raised approximately $18 million.
Ethereum Foundation: 6.0 million ether, or 8.33% of the supply, was distributed to the Ethereum Foundation for operational costs.
Ethereum Developers: 3.0 million ether, or 4.17% of the supply, was distributed to developers who contributed to the Ethereum network.
Developer Purchase Program: 3.0 million ether, or 4.17% of the supply, was distributed to members of the Ethereum Foundation to purchase at the initial crowd sale price.
Following the launch of the Ethereum network, ether supply initially increased through a progressive validation process. Following the introduction of EIP-1559, described below, ether supply and issuance rate varies based on factors such as recent use of the network.
Proof-of-Work Validation Process
Prior to September 2022, Ethereum operated using a proof-of-work consensus mechanism. Under proof-of-work, in order to incentivize those who incurred the computational costs of securing the network by validating transactions, there was a reward given to the computer (under proof-of-work, validators were known as “miners”) that was able to create the latest block on the chain. Every 12 seconds, on average, a new block was added to the Ethereum blockchain with the latest transactions processed by the network, and the miner that generated this block was awarded a variable amount of ether, depending on use of the network at the time. In certain validation scenarios, ether was sometimes sent to another miner if they were also able to find a solution, but their block was not included. This is referred to as an “uncle/aunt reward.” Due to the nature of the algorithm for block generation, this process (generating a “proof-of-work”) was guaranteed to be random. Prior to the Merge upgrade, described below, miners on the Ethereum network engaged in a set of prescribed complex mathematical calculations in order to add a block to the Ethereum blockchain and thereby confirm ether transactions included in that block’s data.
Proof-of-Stake Process
In the second half of 2020, the Ethereum network began the first of several stages of an upgrade that was initially known as “Ethereum 2.0.” and eventually became known as the “Merge” to transition the Ethereum network from a proof-of-work consensus mechanism to a proof-of-stake consensus mechanism. The Merge was completed on September 15, 2022 and the Ethereum network has operated on a proof-of-stake model since such time.
Unlike proof-of-work, in which validators expend computational resources to compete to validate transactions and are rewarded coins in proportion to the amount of computational resources expended, in proof-of-stake, validators risk or “stake” coins to compete to be randomly selected to validate transactions and are rewarded coins in proportion to the amount of coins staked. Any malicious activity, such as validating multiple blocks, disagreeing with the eventual consensus or otherwise violating protocol rules, results in the forfeiture or “slashing” of a portion of the staked coins. Proof-of-stake is believed by some to be more energy efficient and scalable than proof-of-work. Every 12 seconds, approximately, a new block is added to the Ethereum blockchain with the latest transactions processed by the network, and the validator that generated this block is awarded ether.
Limits on Ether Supply
The rate at which new ether are issued and put into circulation is expected to vary. In September 2022 the Ethereum network converted from proof-of-work to a new proof-of-stake consensus mechanism. Following the Merge, approximately 1,700 ether are issued per day, though the issuance rate varies based on the number of validators on the network. In addition, the issuance of new ether could be partially or completely offset by the burn mechanism introduced by the EIP-1559 modification, under which ether are removed from supply at a rate that varies with network usage. See “Modifications to the Ethereum Protocol.” On occasion, the ether supply has been deflationary over a 24-hour period as a result of the burn mechanism. The attributes of the new consensus algorithm are subject to change, but in sum, the new consensus algorithm and related modifications reduced total new ether issuances and could turn the ether supply deflationary over the long term.
-45-
Table of Contents
As of March 21, 2024, the current circulating supply of ether is estimated to be around 120.07 million coins.
Modifications to the Ethereum Protocol
The Ethereum network is an open-source project with no official developer or group of developers that controls it. However, historically the Ethereum network’s development has been overseen by the Ethereum Foundation and other core developers. The Ethereum Foundation and core developers are able to access and alter the Ethereum network source code and, as a result, they are responsible for quasi-official releases of updates and other changes to the Ethereum network’s source code. However, the release of proposed updates to the Ethereum network’s source code by core developers does not guarantee that the updates will be automatically adopted. Nodes must accept any changes made to the Ethereum source code by choosing to download the proposed modification of the Ethereum network’s source code in their individual Ethereum Client, and ultimately a critical mass (in practice, a substantial majority) of validators and users—such as DApp and smart contract developers, as well as users of DApps and smart contracts, and anyone else who transacts on the Ethereum blockchain or Ethereum network—must support the shift, or the upgrades will lack adoption. A modification of the Ethereum network’s source code is only effective with respect to the Ethereum nodes that download it and modify their Ethereum Clients accordingly, and in practice such decisions are heavily influenced by the preferences of validators and users. If a modification is accepted only by a percentage of nodes, a division in the Ethereum network will occur such that one network will run the pre-modification source code and the other network will run the modified source code. Such a division is known as a “fork.” See “Risk Factors-Risk Factors Related to Digital Assets.” A temporary or permanent “fork” could adversely affect an investment in the Shares.” Consequently, as a practical matter, a modification to the source code becomes part of the Ethereum network only if accepted by a sufficiently broad cross-section of the Ethereum network’s participants.
For example, in 2019 the Ethereum network completed a network upgrade called Metropolis that was designed to enhance the usability of the Ethereum network and was introduced in two stages. The first stage, called Byzantium, was implemented in October 2017. The purpose of Byzantium was to increase the network’s privacy, security, and scalability and reduce the block reward for validators (at that time, validators on the proof-of-work consensus version of Ethereum were known as “miners”) who created new blocks in proof-of-work consensus from 5.0 ether to 3.0 ether. The second stage, called Constantinople, was implemented in February 2019, along with another upgrade, called St. Petersburg. Another network upgrade, called Istanbul, was implemented in December 2019. The purpose of Istanbul was to make the network more resistant to denial of service attacks, enable greater ether and Zcash interoperability as well as other Equihash-based proof-of-work digital assets, and to increase the scalability and performance for solutions on zero-knowledge privacy technology like SNARKs and STARKs. The purpose of these upgrades was to prepare the Ethereum network for the introduction of a proof-of-stake algorithm and reduce the block reward from 3.0 ether to 2.0 ether.
In the second half of 2020, the Ethereum network began the first of several stages of an upgrade culminating in the Merge. The Merge amended the Ethereum network’s consensus mechanism to include proof-of-stake, and was intended to address the perceived shortcomings of the proof-of-work consensus mechanism in terms of labor intensity and duplicative computational effort expended by validators (known under proof-of-work as miners) who did not win the race, under proof of work, to be the first in time to solve the cryptographic puzzle that would allow them to be the only validator permitted to validate the block and receive the resulting block reward (which was only given to the first validator to successfully solve the puzzle and hash a given block, and not to others).
Following the Merge, core development of the Ethereum source code has increasingly focused on modifications of the Ethereum protocol to increase speed, throughput and scalability and also improve existing or next generation uses. Future upgrades to the Ethereum protocol and Ethereum blockchain to address scaling issues—such as network congestion, slow throughput and periods of high transaction fees owing to spikes in network demand—have been discussed by network participants, such as sharding. The purpose of sharding, which has been discussed for years, is to increase scalability of the Ethereum blockchain by splitting the blockchain into subsections, called shards, and dividing validation responsibility so that a defined subset of validators would be responsible for each shard, rather than all validators being responsible for the entire blockchain, allowing for parallel processing and validation of transactions. However, there appears to be uncertainty and a lack of existing widespread consensus among network participants about how to solve the scaling challenges faced by the Ethereum network.
The rapid development of other competing scalability solutions, such as those which would rely on handling the bulk of computational work relating to transactions or smart contracts and DApps outside of the main Ethereum network and Ethereum blockchain, has caused alternatives to sharding to emerge. “Layer 2” is a collective term for solutions which are designed to help increase throughput and reduce transaction fees by handling or validating transactions off the main Ethereum network (known as “Layer 1”) and then attempting to take advantage of the perceived security and integrity advantages of the Layer 1 Ethereum network by uploading the transactions validated on the Layer 2 protocol back to the Layer 1 Ethereum network. The details of how this is done vary significantly between different Layer 2 technologies and implementations. For example, “rollups” perform transaction execution outside the Layer 1 blockchain and then post the data, typically in batches, back to the Layer 1 Ethereum blockchain where consensus is reached. “Zero knowledge rollups” are generally designed to run the computation needed to validate the transactions off-chain, on the Layer 2 protocol, and submit a proof of validity of a batch of transactions (not the entire transactions themselves). By contrast, “optimistic rollups” assume transactions are valid by default and only run computation, via a fraud proof, in the event of a challenge. Other proposed Layer 2 scaling solutions include, among others, “state channels”, which are designed to allow participants to run a large number of transactions on the Layer 2 side channel protocol and only submit two transactions to the main Layer 1 Ethereum blockchain (the transaction opening the state channel, and the transaction closing the channel), “side chains”, in which an entire Layer 2 blockchain network with similar capabilities to the existing Layer 1 Ethereum blockchain runs in parallel with the existing Layer 1 Ethereum blockchain and allows smart contracts and DApps to run on the Layer 2 side chain without burdening the main Layer 1 network, and others. To date, the Ethereum network community has not coalesced overwhelmingly around any particular Layer 2 solution, though this could change.
Apart from solutions designed to address scalability challenges, there have been other upgrades as well. In 2021, the Ethereum network implemented the EIP-1559 upgrade. EIP-1559 changed the methodology used to calculate the fees paid to validators. EIP 1559 resulted in the splitting of fees into two components: a base fee and tip. Ether used to pay the base fee is as a result of EIP 1559 removed from circulation, or “burnt,” and the tip is paid to validators. EIP-1559 has reduced the total net issuance of ether fees to validators. Future updates may impact the supply of or demand for ether or its price.
The Trust’s activities will not directly relate to scalability or upgrade projects, though such projects may potentially increase demand for ether and the utility of the Ethereum network as a whole. Conversely, if they are unsuccessful or they cause users or application or smart contract developers to migrate away from the Ethereum blockchain, demand for ether could potentially be reduced. Also, projects that operate and are built within the Layer 1 Ethereum blockchain and network may increase the data flow on the Ethereum network and could either “bloat” the size of the Ethereum blockchain or slow confirmation times.
-46-
Table of Contents
Forks and Airdrops
A “hard fork” of the Ethereum network (or any other a digital asset network) occurs when there is a disagreement among users and miners (under the former proof-of-work model) or validators (under the current proof-of-stake model) over modifications to the network, which are typically made through software upgrades and subsequently accepted or rejected through downloads or lack thereof of the relevant software upgrade by users. If less than a substantial majority of users and miners consent to a proposed modification, and the modification is not compatible with the software prior to its modification, a fork in the blockchain results, with one prong running the pre-modified software and the other running the modified software. The effect of such a fork is the existence of two versions of the network running in parallel, yet lacking interchangeability. After a fork, holders of the original digital asset typically end up holding equal amounts of the original digital asset and the new digital asset.
For example, in June 2016, a smart contract developed and deployed on the Ethereum network was hacked and approximately $60 million worth of ether was stolen, which resulted in most participants in the Ethereum ecosystem electing to adopt a hard fork that effectively reversed the hack. However, a minority of users continued to develop the old blockchain, now referred to as “Ethereum Classic” with the digital asset on that blockchain also named ether, or ETC. Ethereum Classic’s ether remains traded on several digital asset trading platforms.
Additionally, a fork could be introduced by an unintentional, unanticipated software flaw in the multiple versions of otherwise compatible software users run for any given digital asset. Such a fork could adversely affect ether’s viability. It is possible, however, that a substantial number of users and miners could adopt an incompatible version of the network while resisting community-led efforts to merge the two chains, resulting in a permanent fork.
A hard fork can introduce new security risks. Another possible result of a hard fork is an inherent decrease in the level of security. After a hard fork, it may become easier for an individual miner or mining pool’s hashing power to exceed 50% of the processing power of the Ethereum network, thereby making the network more susceptible to attack. A fork in the Ethereum network could adversely affect an investment in the Shares.
In addition to forks, ether (or any other digital asset) may become subject to a similar occurrence known as an “airdrop.” In an airdrop, the promoters of a new digital asset announce to holders of another digital asset that they will be entitled to claim a certain amount of the new digital asset for free simply by virtue of having held the original digital asset at a certain point in time leading up to the airdrop. For example, in March 2017, the promoters of Stellar Lumens announced that anyone that owned ether as of June 26, 2017 could claim, until August 27, 2017, a certain amount of Stellar Lumens. Airdrops could create operational security, legal or regulatory, or other risks for the Trust, the Sponsor, Authorized Participants, or other entities.
From time to time, the Trust may be entitled to Incidental Rights or IR Assets by virtue of its ownership of ether, generally through a fork in the Ethereum blockchain, an airdrop offered to holders of ether or other similar event.
-47-
Table of Contents
In the event the Trust becomes entitled to Incidental Rights or IR Assets by virtue of its ownership of ether, the Sponsor will instruct the Trust to immediately and irrevocably disclaim all rights to the IR Assets so created. Ether is the only digital asset that will be held by the Trust. In the event the Trust seeks to change its treatment of Incidental Rights or IR Assets, an application would need to be filed with the SEC by the Exchange seeking approval to amend its listing rules.
In the event of a fork, the Sponsor will, as permitted by the terms of the Trust Agreement, determine which network it believes is generally accepted as the Ethereum network and should therefore be considered the appropriate network, and the associated asset as ether, for the Trust’s purposes.
If the Trust modifies its policy on forks and airdrops, notice to Shareholders will be provided on the Trust’s website, in a prospectus supplement, through a current report on Form 8-K and/or in the Trust’s annual or quarterly reports.
-48-
Table of Contents
Forms of Attack Against the Ethereum network
All networked systems are vulnerable to various kinds of attacks. As with any computer network, the Ethereum network contains certain flaws. For example, the Ethereum network is currently vulnerable to a “51% attack” where, if a validator or group of validators acting in concert were to gain control of more than 50% of the staked ether, a malicious actor would be able to gain full control of the network and the ability to manipulate the Ethereum blockchain. As of the date of this prospectus, the top three largest staking pools controlled nearly 50% of the ether staked on the Ethereum network.
In addition, many digital asset networks have been subjected to a number of denial of service attacks, which has led to temporary delays in block creation and in the transfer of Ethereum. Any similar attacks on the Ethereum network that impact the ability to transfer ether could have a material adverse effect on the price of ether and the value of the Shares.
This is not intended as an exhaustive list of all forms of attack against the Ethereum network. For additional information, see the “Risk Factors” section of this prospectus.
Market Participants
Validators
| In proof-of-stake, validators risk or stake coins to be pseudo randomly selected to validate transactions and are rewarded for performing their responsibilities and behaving in accordance with protocol rules. Malfunctions that cause validators to go offline and, in turn, inhibit them from performing their duties, can result in financial penalties (e.g., inactivity leak). Any malicious activity, such as proposing multiple blocks for the same slot, making incorrect attestations or otherwise violating protocol rules, results in the penalization or slashing of staked coins and forced exit from performing validator duties. The penalty varies depending on the type of offense and correlation to potential offenses by other validators. |
| Validators range from Ethereum enthusiasts to professional operations that design and build dedicated machines and data centers. On the Ethereum network, a validator must stake 32 ether in order to participate in maintaining the network. Once consensus is reached, the participating validator receives newly issued ETH as part of consensus rewards and the priority fee as part of execution rewards. The priority fee represents one of two components of the transaction fee. The second component is the base fee, which makes up the vast majority of the transaction fees paid by users and is not received by validators, but is instead taken out of circulation, or burnt. The base fee and the priority fee both fluctuate with network usership. |
Investment and Speculative Sector
| This sector includes the investment and trading activities of both private and professional investors and speculators. Historically, larger financial services institutions are publicly reported to have limited involvement in investment and trading in digital assets, although the participation landscape is beginning to change. Currently, there is relatively limited use of digital assets in the retail and commercial marketplace in comparison to relatively extensive use by speculators, and a significant portion of demand for digital assets is generated by speculators and investors seeking to profit from the short- or long-term holding of digital assets. |
Retail Sector
| The retail sector includes users transacting in direct peer-to-peer ether transactions through the direct sending of ether over the Ethereum network. The retail sector also includes transactions in which consumers pay for goods or services from commercial or service businesses through direct transactions or third-party service providers, although the use of ether as a means of payment is still developing and has not been accepted in the same manner as bitcoin due to ether’s relative nascency and because ether has a generally different purpose than bitcoin. |
-49-
Table of Contents
Service Sector
| This sector includes companies that provide a variety of services including the buying, selling, payment processing and storing of ether. For example, Coinbase, Kraken, Bitstamp, Gemini, and LMAX Digital are some of the largest digital asset trading platforms by volume traded. Coinbase Custody Trust Company, LLC, the Custodian for the Trust, is a digital asset custodian that provides custodial accounts that store ether for users. As the Ethereum network continues to grow in acceptance, it is anticipated that service providers will expand the currently available range of services and that additional parties will enter the service sector for the Ethereum network. |
Competition
As of December 31, 2023, more than 8,000 other digital assets, as tracked by CoinMarketCap.com, have been developed since the inception of bitcoin, which is currently the most developed digital asset because of the length of time it has been in existence, the investment in the infrastructure that supports it, and the network of individuals and entities that are using bitcoin in transactions. While ether has enjoyed some success in its limited history, the aggregate value of outstanding ether is smaller than that of bitcoin and may be eclipsed by the more rapid development of other digital assets. In addition, while ether was the first digital asset with a network that served as a smart contracts platform, a number of newer digital assets also function as smart contracts platforms, including Solana, Avalanche and Cardano. Some industry groups are also creating private, permissioned blockchain versions of Ethereum.
Government Oversight, Though Increasing, Remains Limited
As digital assets have grown in both popularity and market size, the U.S. Congress and a number of U.S. federal and state agencies (including FinCEN, SEC, CFTC, FINRA, the CFPB, the Department of Justice, the Department of Homeland Security, the Federal Bureau of Investigation, the IRS and state financial institution and securities regulators) have been examining the operations of digital asset networks, digital asset users and the digital asset markets, with particular focus on the extent to which digital assets can be used to launder the proceeds of illegal activities or fund criminal or terrorist enterprises and the safety and soundness of exchanges or other service providers that hold or custody digital assets for users. Many of these state and federal agencies have issued consumer advisories regarding the risks posed by digital assets to investors. On March 9, 2022, President Biden signed an Executive Order on Ensuring Responsible Development of Digital Assets (the “Executive Order”) asserting that technological advances and the rapid growth of the digital asset markets “necessitate an evaluation and alignment of the United States Government approach to digital assets,” signals an ongoing focus on digital asset policy and regulation in the United States. A number of reports issued pursuant to the Executive Order have focused on various risks related to the digital asset ecosystem, and have recommended additional legislation and regulatory oversight. In addition, federal and state agencies, and other countries and international bodies have issued rules or guidance about the treatment of digital asset transactions or requirements for businesses engaged in digital asset activity.
In addition, the SEC, U.S. state securities regulators and several foreign governments have issued warnings and instituted legal proceedings in which they argue that certain digital assets may be classified as securities and that both those digital assets and any related initial coin offerings are subject to securities regulations. The outcomes of these proceedings, as well as ongoing and future regulatory actions may alter, perhaps to a materially adverse extent, the nature of an investment in the Shares or the ability of the Trust to continue to operate. Additionally, U.S. state and federal, and foreign regulators and legislatures have taken action against virtual currency businesses or enacted restrictive regimes in response to adverse publicity arising from hacks, consumer harm, or criminal activity stemming from virtual currency activity.
The CFTC has regulatory jurisdiction over the ether futures markets. In addition, because the CFTC has determined that ether is a “commodity” under the CEA and the rules thereunder, it has jurisdiction to prosecute fraud and manipulation in the cash, or spot, market for ether. The CFTC has pursued enforcement actions relating to fraud and manipulation involving ether and ether markets. Beyond instances of fraud or manipulation, the CFTC generally does not oversee cash or spot market exchanges or transactions involving ether that do not use collateral, leverage, or financing.
On February 8, 2021, the CME, a designated contract market (“DCM”) registered with the CFTC launched new contracts for ether futures products. DCMs are boards of trades (or exchanges) that operate under the regulatory oversight of the CFTC, pursuant to Section 5 of the CEA. To obtain and maintain designation as a DCM, an exchange must comply on an initial and ongoing basis with twenty-three Core Principles established in Section 5(d) of the CEA. Among other things, DCMs are required to establish self- regulatory programs designed to enforce the DCM’s rules, prevent market manipulation and customer and market abuses, and ensure the recording and safe storage of trade information. The CFTC engaged in a “heightened review” of the self-certification of ether futures, which required DCMs to enter direct or indirect information sharing agreements with spot market platforms to allow access to
-50-
Table of Contents
trade and trader data; monitor data from cash markets with respect to price settlements and other ether prices more broadly, and identify anomalies and disproportionate moves in the cash markets compared to the futures markets; engage in inquiries, including at the trade settlement level when necessary; and agree to regular coordination with CFTC surveillance staff on trade activities, including providing the CFTC surveillance team with trade settlement data upon request.
In August 2021, the chair of the SEC stated that he believed investors using digital asset trading platforms are not adequately protected, and that activities on the platforms can implicate the securities laws, commodities laws and banking laws, raising a number of issues related to protecting investors and consumers, guarding against illicit activity, and ensuring financial stability. The chair expressed a need for the SEC to have additional authorities to prevent transactions, products, and platforms from “falling between regulatory cracks,” as well as for more resources to protect investors in “this growing and volatile sector.” The chair called for federal legislation centering on digital asset trading, lending, and decentralized finance platforms, seeking “additional plenary authority” to write rules for digital asset trading and lending. At the same time, the chair has also stated that the SEC has authority under existing laws to regulate the digital asset sector.
Various foreign jurisdictions have, and may continue to, in the near future, adopt laws, regulations or directives that affect a digital asset network, the digital asset markets, and their users, particularly digital asset exchanges and service providers that fall within such jurisdictions’ regulatory scope. For example:
| • | China has made transacting in cryptocurrencies illegal for Chinese citizens in mainland China, and additional restrictions may follow. China has banned initial coin offerings and there have been reports that Chinese regulators have taken action to shut down a number of China-based digital asset exchanges. |
| • | South Korea determined to amend its Financial Information Act in March 2020 to require virtual asset service providers to register and comply with its AML and counter-terrorism funding framework. These measures also provide the government with the authority to close digital asset exchanges that do not comply with specified processes. South Korea has also banned initial coin offerings. |
| • | The Reserve Bank of India in April 2018 banned the entities it regulates from providing services to any individuals or business entities dealing with or settling digital assets. In March 2020, this ban was overturned in the Indian Supreme Court, although the Reserve Bank of India is currently challenging this ruling. |
| • | The United Kingdom’s Financial Conduct Authority published final rules in October 2020 banning the sale of derivatives and exchange traded notes that reference certain types of digital assets, contending that they are “ill-suited” to retail investors citing extreme volatility, valuation challenges and association with financial crime. A new bill, the Financial Services and Markets Bill (“FSMB”), has made its way through the House of Commons and is expected to work through the House of Lords and become law in 2023. The FSMB would bring digital asset activities within the scope of existing laws governing financial institutions, markets and assets. |
| • | The European Council of the European Union approved the text of the Markets in Crypto-Assets Regulation (“MiCA”) in October 2022, establishing a regulatory framework for digital asset services across the European Union. MiCA is intended to serve as a comprehensive regulation of digital asset markets and imposes various obligations on digital asset issuers and service providers. The main aims of MiCA are industry regulation, consumer protection, prevention of market abuse and upholding the integrity of digital asset markets. MiCA is expected to pass the European Parliament in 2023 and come into effect in 2024. |
| • | There remains significant uncertainty regarding foreign governments’ future actions with respect to the regulation of digital assets and digital asset exchanges. Such laws, regulations or directives may conflict with those of the United States and may negatively impact the acceptance of ether by users, merchants and service providers outside the United States and may therefore impede the growth or sustainability of the Ethereum ecosystem in the United States and globally, or otherwise negatively affect the value of ether held by the Trust. The effect of any future regulatory change on the Trust or the ether held by the Trust is impossible to predict, but such change could be substantial and adverse to the Trust and the value of the Shares. |
-51-
Table of Contents
Government Oversight
Regulatory guidance and the possibility of government action has been significant in shaping the evolution of the ether market. A number of U.S. federal and state agencies and foreign governments and agencies have finalized or proposed rules or guidance, conducted investigations and issued subpoenas, engaged in successful prosecutions, and issued consumer advisories related to ether and other digital assets. For example, FinCEN and certain state financial regulatory agencies require that companies that provide certain services in digital assets obtain licenses or registrations, and have anti-money laundering and sanctions programs, among other requirements, which licenses or registrations can be difficult or costly to obtain or maintain. Additionally, there is uncertainty among regulators regarding ether’s treatment and classification as a “security” or a “commodity,” which may have material adverse consequences for ether as a digital asset. Continued government and agency actions are likely to continue to be significant to the development of the market and the price of ether, as described in more detail under “Risk Factors—Risks Related to Ether—Regulatory Risk” above.
Overview of the Trust
The Trust is an exchange-traded fund that issues Shares that trade on the Exchange under the ticker symbol QETH. The Trust’s investment objective is to reflect the performance of the spot price of ether as measured using the Benchmark, less the Trust’s expenses and other liabilities.
In seeking to achieve its investment objective, the Trust will hold ether. The Trust will value its Shares daily based on the value of the Benchmark as of 4:00 p.m. ET. The value of ether held by the Trust is determined based on the fair market value (“FMV”) price for ether, reflecting the execution price of ether on its principal market as determined by the Benchmark Provider. Invesco Capital Management LLC is the sponsor of the Trust, CSC Delaware Trust Company is the trustee of the Trust, and the Ethereum Custodian will hold all of the Trust’s ether on the Trust’s behalf.
The Trust will process all creations and redemptions of Shares in transactions with financial firms that are authorized to do so (known as “Authorized Participants”). When the Trust issues or redeems its Shares, it will do so only in blocks of 5,000 Shares (a “Creation Basket”) based on the quantity of ether attributable to each Share of the Trust (net of accrued but unpaid Sponsor fees and any accrued but unpaid expenses or liabilities).
Creation and redemption transactions initially will take place in cash. Subject to Cboe in the future receiving the In-Kind Regulatory Approval, these transactions may also take place in exchange for ether. The timing of the In-Kind Regulatory Approval and the related in-kind creation model is unknown and there is no guarantee that the Cboe will receive such approval. If Cboe receives the In-Kind Regulatory Approval and the Sponsor chooses to allow in-kind creations and redemptions, notice to Shareholders will be provided on the Trust’s website, in a prospectus supplement, through a current report on Form 8-K and/or in the Trust’s annual or quarterly reports.
When purchasing Creation Baskets, Authorized Participants will deliver cash to the Cash Custodian. The Execution Agent will be responsible for acquiring the requisite amount of ether on behalf of the Trust on an agency basis. Once the Execution Agent selects an Ethereum Counterparty, the Cash Custodian will transfer cash to the Ethereum Counterparty in payment for the requisite amount of ether. The ether acquired from the Ethereum Counterparty will be transferred to the Ethereum Custodian. After receipt of the ether by the Ethereum Custodian, the Transfer Agent will issue Creation Baskets of Shares to the creating Authorized Participant in satisfaction of the creation order.
When redeeming Creation Baskets, the Execution Agent will be responsible for selling the requisite amount of ether on behalf of the Trust on an agency basis. Once the Execution Agent selects an Ethereum Counterparty, the Ethereum Custodian will transfer ether to the Ethereum Counterparty in return for the requisite cash payment. The cash received from the Ethereum Counterparty will be delivered to the Cash Custodian. After receipt of the cash payment, the Transfer Agent will redeem the Shares and the Cash Custodian will distribute the resulting cash to the redeeming Authorized Participant in satisfaction of the redemption order.
In connection with both creation and redemption transactions, the Execution Agent, pursuant to the oversight of the Sponsor, will decide how and with which Ethereum Counterparty to transact on the Trust’s behalf. The Authorized Participants will deliver only cash to create Shares and will receive only cash when redeeming Shares. Further, Authorized Participants will not directly or indirectly purchase, hold, deliver, or receive ether as part of the creation or redemption process or otherwise direct the Trust or a third-party with respect to purchasing, holding, delivering, or receiving ether as part of the creation or redemption process. The Trust will
-52-
Table of Contents
create Shares by receiving ether from a third-party that is not the Authorized Participant and the Trust (through the Execution Agent, on an agency basis)—not the Authorized Participant—is responsible for selecting the third-party to deliver the ether. Further, the third-party will not be acting as an agent of the Authorized Participant with respect to the delivery of the ether to the Trust or acting at the direction of the Authorized Participant with respect to the delivery of the ether to the Trust. The Trust will redeem shares by delivering ether to a third-party that is not the Authorized Participant and the Trust (through the Execution Agent, on an agency basis)—not the Authorized Participant—is responsible for selecting the third-party to receive the ether. Further, the third-party will not be acting as an agent of the Authorized Participant with respect to the receipt of the ether from the Trust or acting at the direction of the Authorized Participant with respect to the receipt of the ether from the Trust.
Subject to specific instructions from the Sponsor, the Execution Agent in its discretion is responsible for selecting the method of transacting, the price, the Ethereum Counterparty or Counterparties and the trading platform or venue (if any) for the execution of each purchase and sale of ether on behalf of the Trust. The Execution Agent has established policies and procedures for identifying, monitoring and performing due diligence on potential Ethereum Counterparties and trading platforms or venues, with entities being added or removed from consideration on an ongoing basis. In addition, the Execution Agent evaluates Ethereum Counterparties and trading platforms or venues on a per-transaction basis. At the time it selects an Ethereum Counterparty for any specific transaction, the Execution Agent may consider a number of factors in an effort to seek to achieve “best execution,” including price, transaction costs, speed, and likelihood of execution and settlement, taking into account the size of the transaction and the experience and capabilities of the Ethereum Counterparty. Relying on its history of transacting in ether, the Execution Agent assesses Ethereum Counterparties in seeking to achieve the best overall outcome for the Trust. Although the Trust is new, and therefore does not have a history of trading ether, the Execution Agent (and its asset management affiliates) have extensive experience, having traded over $3.5 Billion in digital assets in 2023 across twelve counterparties for other accounts.
As of [ ], 2024, [●] have been identified by the Execution Agent as Ethereum Counterparties and have consented to be named in this Prospectus. Each of these Ethereum Counterparties are, and any other Ethereum Counterparty the Execution Agent, on behalf of the Trust, places orders with in the future will be, subject to U.S. federal and/or state licensing requirements or similar laws in non-U.S. jurisdictions, and maintain practices and policies designed to comply with AML and KYC regulations or similar laws in non-U.S. jurisdictions. The Execution Agent, on behalf of the Trust, may engage additional Ethereum Counterparties at any time. The Trust will include a list of Ethereum Counterparties in the Trust’s Annual Reports on Form 10-K.
The Trust expects to purchase or sell ether in connection with cash creation or redemption transactions, and may direct the Execution Agent to sell ether on behalf of the Trust to pay certain expenses, including the Sponsor Fee. Each creating or redeeming Authorized Participant will be charged a transaction fee in connection with each creation or redemption transaction.
To support the ability of Authorized Participants to provide liquidity at prices that reflect the value of the Trust’s assets and to facilitate orderly transactions in the Shares, the Trust will ordinarily process redemptions of Creation Baskets on the next Business Day following receipt of a redemption request by an Authorized Participant.
-53-
Table of Contents
Creation Baskets are expected to be created when there is sufficient demand for Shares, including when the market price per Share is at a premium to the NAV. Authorized Participants are expected to sell such Shares to the public at prices that reflect, among other factors, the value of the Trust’s assets, supply of and demand for Shares and market conditions at the time of a transaction. Similarly, Creation Baskets are expected to be redeemed when the market price per Share is at a discount to the NAV. Investors seeking to purchase or sell Shares on any day are expected to transact in the secondary market, on the Exchange or other national securities exchanges, at the market price per Share, rather than through the creation or redemption of Creation Baskets.
The Sponsor believes that the design of the Trust will enable Investors to effectively and efficiently implement strategic and tactical asset allocation strategies that use ether by investing in the Shares rather than directly in ether.
Description of Lukka Prime
The Benchmark is designed to provide an estimated fair market value for ether, in a manner that aligns with U.S. GAAP and IFRS accounting guidelines regarding fair market value measurements. In this regard, the Benchmark Provider seeks to identify a “principal market” each day for ether, by evaluating eligible ether trading platforms across a variety of different criteria, including the trading platforms’ oversight and governance frameworks, microstructure efficiency, trading volume, data transparency and data integrity. As of May 2024, the following trading platforms are considered to be eligible trading platforms by the Benchmark Provider: Binance, Bitfinex, Bitflyer, Bitstamp, Coinbase, Crypto.com, Gate.io, Gemini, HitBTC, Huobi, itBit, Kraken, KuCoin, LMAX, MEXC Global, OKEx and Poloniex (collectively, “ Benchmark Pricing Sources”). The Benchmark Provider reviews trading platforms eligible for inclusion in the Benchmark quarterly. In determining which trading platforms to include, the Benchmark Provider evaluates each trading platform using proprietary ratings criteria. The Benchmark Provider periodically reassesses the trading platforms eligible to be considered Benchmark Pricing Sources, and makes adjustments as needed.
In pursuit of its commitment to provide the highest quality, institutional grade product offerings, the Benchmark Provider adheres to strict oversight practices. As part of this oversight, the Benchmark Provider maintains formal governance boards to oversee its data products. The Benchmark Provider’s Price Integrity Oversight Board (“PIOB”) seeks to ensure the integrity and validity of the Benchmark Provider’s pricing and valuation products and to also ensure that products remain fit for purpose. One of the PIOB’s responsibilities, among others, is to determine the market data that is utilized in the Benchmark Provider’s pricing and valuation processes. This includes any approval of new sources of market data and the suspension or discontinuation of existing sources of market data. Additionally, the Benchmark Provider’s PIOB regularly reviews eligible trading platforms, including any new sources of pricing information. As it pertains to the impact on the NAV of the Trust, the continuous monitoring of pricing data helps ensure that pricing accurately reflects the economic reality that the benchmark is intended to measure. A change in the Benchmark Pricing Sources may result in a change in the Trust’s NAV.
The Benchmark Provider launched the Benchmark in January 2020, and the Benchmark has been back-populated to January 2014. The below graph compares the historical Benchmark returns to the prices on each of the Benchmark Pricing Sources with U.S. Dollar-ether trading pairs from January 1, 2023 to March 31, 2024.
As is evident from the foregoing graph and as expected given arbitrage activity across trading platforms, the historic Benchmark returns have aligned closely to the prices of ether on each of the Benchmark Pricing Sources with U.S. Dollar-ether trading pairs.
-54-
Table of Contents
The below table contains the market share and volume information for each Benchmark Pricing Source with U.S. Dollar-ether trading pairs. Note that the Benchmark Provider will prioritize U.S. Dollar trading pairs before using trading platforms where other pairs, such as stablecoins, are used:
| ETH- USD Lukka Prime Ethereum Volumes (January 1, 2023 - April 1, 2024) | ||
| Trading Platform |
Volume (%) | |
| Bitflyer |
0.10% | |
| Bitfinex |
4.83% | |
| Bittrex1 |
0.08% | |
| Bitstamp |
4.38% | |
| Coinbase |
71.06% | |
| Gemini |
1.66% | |
| itBit |
0.18% | |
| Kraken |
13.23% | |
| LMAX |
4.49% | |
| 1 | [Bittrex was removed as a Benchmark Pricing Source on November 21, 2023.] |
The Benchmark Pricing Sources are described below.
Trading platforms with U.S. Dollar trading pairs:
Bitfinex: A British Virgin Islands-based trading platform registered as a Money Services Business with the Financial Crimes Enforcement Network. Bitfinex is also licensed as a Digital Asset Service Provider from the Central Reserve Bank of El Salvador.
Bitflyer: A Japan-based trading platform registered as a Virtual Currency Exchange from the Japan Financial Services Agency. Bitflyer is also licensed as a virtual currency business under the NYSDFS BitLicense.
Bittrex: A Liechtenstein-based trading platform registered as a Money Services Business with the Financial Crimes Enforcement Network. Bittrex is also licensed in Bermuda and Liechtenstein. On November 20, 2023, Bittrex announced its intention to wind down its operations and disable trading activity effective December 4, 2023. On November 21, 2023, Bittrex was removed as a Benchmark Pricing Source as a result of its announcement.
Bitstamp: A U.K.-based trading platform registered as a Money Services Business with the Financial Crimes Enforcement Network. Bitstamp is also licensed as a virtual currency business under the NYSDFS BitLicense.
Coinbase: A U.S.-based trading platform registered as a Money Services Business with the Financial Crimes Enforcement Network. Coinbase is also licensed as a virtual currency business under the NYSDFS BitLicense.
Gemini: A U.S.-based trading platform registered as a Money Services Business with the Financial Crimes Enforcement Network. Gemini is also licensed as a virtual currency business under the NYSDFS BitLicense.
itBit: A U.S.-based trading platform registered as a Money Services Business with the Financial Crimes Enforcement Network. itBit is also chartered by the NYSDFS as a limited purpose trust company.
Kraken: A U.S.-based trading platform registered as a Money Services Business with the Financial Crimes Enforcement Network. Kraken is also registered as a Digital Currency Exchange Provider with the Australian Transaction Reports and Analysis Centre.
LMAX: A Gibraltar-based trading platform registered as a Money Services Business with the Financial Crimes Enforcement Network. LMAX is also registered as a DLT provider by the Gibraltar Financial Services Commission.
Trading platforms without U.S. Dollar trading pairs.
Binance: A Cayman Islands-based trading platform with a Digital Asset Service Provider registration from the Autorité des Marchés Financiers, MVP Preparatory License from Dubai’s Virtual Assets Regulatory Authority and a variety of other licenses across the European and Asia-Pacific regions.
Crypto.com: A Singapore-based trading platform with a Digital Token License from the Monetary Authority of Singapore. Crypto.com is also registered as a Money Services Business with the Financial Crimes Enforcement Network.
Gate.io: A Cayman Islands-based trading platform registered as a Money Services Business with the Financial Crimes Enforcement Network. Gate.io is also registered as a DLT provider by the Gibraltar Financial Services Commission and a variety of other licenses across the European and Asia-Pacific regions.
HitBTC: A British Virgin Islands-based trading platform that currently does not hold any licenses from any licensing authorities.
-55-
Table of Contents
Huobi: A Gibraltar-based trading platform with a Distributed Ledger Technology Provider License from the Gibraltar Financial Services Commission. Huobi is also registered as a Digital Currency Exchange Provider with the Australian Transaction Reports and Analysis Centre.
KuCoin: A Seychelles-based trading platform that currently does not hold any licenses from any licensing authorities.
MEXC Global: A Seychelles-based trading platform registered as a Digital Currency Exchange Provider with the Australian Transaction Reports and Analysis Centre and a variety of other licenses across the European region.
OKX (fka OKEx): A Seychelles-based trading platform with a MVP Preparatory License from Dubai’s Virtual Assets Regulatory Authority.
Poloniex: A Seychelles-based trading platform that currently does not hold any licenses from any licensing authorities.
FTX and FTX US were removed as a Benchmark Pricing Source by the Benchmark Provider on November 10, 2022 and November 11, 2022, respectively, as a result of the collapse and subsequent bankruptcy filings of those firms. On November 21, 2023, Bittrex was removed as a Benchmark Pricing Source as a result of its announcement that it intends to wind down its operations and disable trading activity effective December 4, 2023. There have been no other changes to the Benchmark Pricing Sources since the fourth quarter of 2022. A list of the Benchmark Pricing Sources is maintained on the Benchmark Provider’s website.
The Trust confirms that the Sponsor may, in its sole discretion, change either the Benchmark or Benchmark Provider without Shareholder approval.
In the event that the Benchmark Provider changes the methodology of the Benchmark, the Benchmark Provider will inform the Sponsor of the nature of the change and the timeline for implementation. The Sponsor will notify investors of material changes to the Benchmark, or the Sponsor’s decision to change the Benchmark or the Benchmark Provider, by providing notice to investors and market participants as promptly as practicable through some combination of press release, website disclosure, 8-K filing or registration statement supplement, in addition to any notice to the listing exchange required under applicable listing rules.
In determining the value of ether, the Benchmark Provider applies a five-step weighting process for identifying the principal trading platform for ether and the last price on that trading platform. A Base Exchange Score (“BES”) that takes into account the criteria above is assigned to each Benchmark Pricing Source in order to select the most appropriate primary trading platform and then an executed trading platform price is determined at 4:00 p.m. ET. The characteristics of each trading platform are weighted as follows for their BES:
| • | Oversight (35%): This score reflects the rules in place to protect and to give access to investors and is a function of a variety of factors. The score assigned for trading platform oversight will depend on parameters such as jurisdiction, regulation, “Know Your Customer and Anti-Money Laundering Compliance” (KYC/AML), etc. Benchmark Participants will receive a higher score if they are subject to more stringent regulation, including comprehensive KYC/AML screening, and the level of currency oversight and regulation in their home jurisdiction. |
| • | Microstructure Efficiency (30%): The second trading platform characteristic is microstructure efficiency. The Benchmark takes the effective bid-ask spread as a proxy for efficiency. For each trading platform and currency pair, the Benchmark takes an estimate of the “effective spread,” which is a common approach to measuring trade execution costs. |
| • | Data Integrity (25%): Data Integrity provides a metric of how consistent a trading platform’s trading activity is with its underlying market microstructure. This is done by aligning a trading platform’s trade data for a given product with quotes data pertaining to the same market. Trading platforms whose traded prices deviate outside the spreads indicated by the quotes data are penalized. This would potentially expose nefarious actions such as wash trading or other potential manipulation of data. The metric is computed by joining a sample of trades with quotes by trading platform, product and time. With this, the Benchmark Provider computes the maximum observed ask price and the minimum observed bid price over a rolling window in time. This serves to define a range of possible trade prices that would be expected based on the quotes data. The Benchmark Provider then aggregates this dataset by trading platform, computing the fraction of transactions where the trade price was within the expected range as computed in the prior step. This fraction is multiplied by 100 to give the data integrity score. |
| • | Data Transparency (10%): Transparency is the term used for a quality score that is determined by the level of detail of the data offered by a trading platform. Similar to the jurisdiction hierarchy, Level 1, the highest level in the transparency hierarchy, is assigned 100 points and is reduced by 20 points for each subsequent lower level. The most transparent (Level 1) trading platforms offer order-level data, followed by order book (Level 2), trade-level (Level 3), candles (Level 4), and then no data (Level 5). |
-56-
Table of Contents
For financial reporting purposes, the Trust will determine the principal market for ether in accordance with ASC Topic 820-10, and such determination is considered from the Trust’s perspective. The Benchmark follows a methodology designed to identify the principal market for ether at a given time. Procedures will be implemented by the Sponsor to review and confirm the prices utilized to value ether reflect fair value in accordance with ASC Topic 820 and will be reviewed by the Sponsor’s Valuation Committee on a periodic basis.
With respect to the Trust’s Authorized Participants or their affiliates, the Trust notes that it has no authority over which trading platforms the Authorized Participants or their affiliates might transact on, although the Trust expects that most Authorized Participants or their affiliates may transact on several of the trading platforms that are Benchmark Pricing Sources for the Benchmark Provider. The Trust notes that for transactions in which it is selling ether, it may do so in principal-to-principal transactions arranged by the Execution Agent, although the Trust is eligible to execute trades on all of the trading platforms used by the Benchmark Provider. While the principal to principal market is the market in which the Execution Agent, on the Trust’s behalf, would normally transact for sales of ether, in considering all information reasonably available in accordance with the guidance in ASC 820-10-35-5A, the Trust notes that the identification of a principal market is completed by the Benchmark Provider based on a variety of different criteria including but not limited to trading platforms’ oversight and governance frameworks, microstructure efficiency, trading volume, data transparency and data integrity. The Trust views this evidence to the contrary as appropriate basis to determine a primary market that is not the principal-to-principal market, in accordance with the guidance in ASC 820-10-35-5A. The Sponsor performed extensive back testing of the Benchmark, comparing the Benchmark Provider’s historical designation of the primary trading platform and the daily pricing from said trading platform, relative to where the Trust is expected to transact. The Sponsor concluded that the methodology consistently resulted in a principal market that aligns with the Trust’s expected transaction activities. Procedures will be implemented to review and confirm the above on at least a quarterly basis, adjusting the frequency of that review if determined necessary by the Sponsor’s Valuation Committee.
The Trust and the Sponsor are not responsible for the calculations performed by the Benchmark Provider or for the development or implementation of the Benchmark Provider’s methodologies.
WITHOUT LIMITING THE FOREGOING, NONE OF LUKKA INC., THE SPONSOR, OR ANY OF THEIR RESPECTIVE SUBSIDIARIES OR AFFILIATES SHALL HAVE ANY LIABILITY FOR ANY ERRORS, OMISSIONS, DELAYS OR INTERRUPTIONS IN THE BENCHMARK PRICING PROCESS NONE OF LUKKA INC., THE SPONSOR, OR ANY OF THEIR RESPECTIVE SUBSIDIARIES OR AFFILIATES MAKES ANY EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE PRICING SERVICES OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL LUKKA INC., THE SPONSOR, OR ANY OF THEIR RESPECTIVE SUBSIDIARIES OR AFFILIATES HAVE ANY LIABILITY FOR ANY LOST PROFITS OR INDIRECT, PUNITIVE, SPECIAL OR CONSEQUENTIAL DAMAGES OR LOSSES, EVEN IF NOTIFIED OF THE POSSIBILITY THEREOF. THERE ARE NO THIRD-PARTY BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS BETWEEN LUKKA INC. AND THE SPONSOR OTHER THAN THEIR RESPECTIVE SUBSIDIARIES AND AFFILIATES.
The Trust’s Expenses
The Trust will pay the Sponsor a unified fee of [●]% per annum (the “Sponsor Fee”) as compensation for services performed under the Trust Agreement (as defined herein). The Trust’s only ordinary, recurring expense is the Sponsor Fee.
The Sponsor Fee will be accrued daily and paid monthly in arrears in U.S. dollars, and will be calculated by the Administrator. The Administrator will calculate the Sponsor Fee on a daily basis by applying the [●]% annualized rate to the Trust’s total net assets. To cover the Sponsor Fee, and extraordinary expenses not assumed by the Sponsor, the Sponsor or its delegate will cause the Trust (or its delegate) to instruct the Execution Agent to convert ether held by the Trust into U.S. dollars. The NAV of the Trust and the number of ether represented by a Share will decline each time the Trust accrues the Sponsor Fee or any Trust expenses not assumed by the Sponsor. The Trust is not responsible for paying any costs associated with the transfer of ether to or from the Trust in connection with paying the Sponsor Fee or in connection with creation and redemption transactions.
-57-
Table of Contents
Except as noted below, the Sponsor has agreed to pay all of the Trust’s ordinary expenses out of the Sponsor Fee, including, but not limited to, the Trustee’s fees, the fees of the Administrator and the Transfer Agent, the fees of the Ethereum Custodian, the fees of the Execution Agent, Exchange listing fees, SEC registration fees, printing and mailing costs, legal costs and audit fees. The Sponsor also paid the costs of the Trust’s organization.
The Trust may incur certain extraordinary expenses that are not assumed by the Sponsor. These include, but are not limited to, taxes and governmental charges, any applicable brokerage commissions, financing fees, Ethereum network fees and similar transaction fees, expenses and costs of any extraordinary services performed by the Sponsor (or any other service provider) on behalf of the Trust to protect the Trust or the interests of Shareholders (including, for example, in connection with any fork of the Ethereum blockchain), any indemnification of the Sponsor, Cash Custodian, Ethereum Custodian, Administrator or other agents, service providers or counterparties of the Trust and extraordinary legal fees and expenses, including any legal fees and expenses incurred in connection with litigation, regulatory enforcement or investigation matters.
The Trust from time to time will be required to sell ether in such quantities as is necessary to permit payment of the Sponsor Fee and any Trust expenses and liabilities not assumed by the Sponsor. The Trust has authorized the Execution Agent to sell ether on its behalf in such quantity as is necessary to permit payment of such expenses in such circumstances. At the direction of the Trust, the Execution Agent will seek to sell ether at approximately the price at which it is valued by the Trust and in the smallest amounts required to permit such payments as they become due, with the intention of minimizing the Trust’s holdings of assets other than ether. Accordingly, the amount of ether to be sold may vary from time to time depending on the level of the Trust’s expenses and liabilities and the market price of ether. Any cash held by the Trustee will not bear any interest. Each sale of ether by the Trust to pay the Sponsor Fee or other Trust expenses will give rise to taxable gain or loss to Shareholders. See “U.S. Federal Income Tax Consequences—Taxation of U.S. Shareholders.”
General
The Shares are valued each Business Day as of 4:00 p.m. ET. The value of ether held by the Trust is determined based on the fair market value price for ether determined by the Benchmark Provider. In this regard, the Benchmark Provider seeks to identify a “principal market” for ether each day, by evaluating eligible ether trading platforms across a variety of different criteria, including the trading platforms’ oversight and governance frameworks, microstructure efficiency, trading volume, data transparency and data integrity. The Sponsor believes that use of the Benchmark mitigates against idiosyncratic exchange risk, as the failure of any individual Benchmark Pricing Source will not materially impact pricing for the Trust. It also allows the Administrator to calculate the NAV in a manner that significantly deters manipulation.
As discussed, the fact that the NAV is based on data from multiple trading platforms makes manipulation more difficult in a well-arbitraged and fractured market, as a malicious actor would need to manipulate multiple trading platforms simultaneously to impact the NAV.
The Trust’s NAV is an amount denominated in U.S. dollars and is not utilized in determining the number of Shares that an Authorized Participant will receive in creating Shares, or the value of ether that an Authorized Participant will receive in redeeming Shares, as those transactions are based on the Trust’s ether holdings per Share. See “Creation and Redemption of Shares.”
The Trust’s NAV is calculated by:
| • | taking the current market value of its ether (calculated by the Benchmark Provider) and any other assets; |
| • | subtracting any liabilities (including accrued but unpaid expenses); and |
| • | dividing that total by the total number of outstanding Shares. |
-58-
Table of Contents
The Administrator calculates the NAV of the Trust once each Business Day. The end-of-day ether price is calculated using the execution price of ether on the principal market selected by the Benchmark Provider as of 4:00 p.m. ET. However, NAVs are not officially struck until later in the day (often by 5:30 p.m. ET and almost always by 8:00 p.m. ET). The daily valuation process will be overseen by the Sponsor’s Valuation Team. The pause between 4:00 p.m. ET and 5:30 p.m. ET (or later) provides the Sponsor’s Valuation Team an opportunity to algorithmically detect, flag, investigate, and address unusual pricing should it occur.
Consistent with the daily pricing of all assets held in the Sponsor’s funds that are registered under the 1940 Act, daily valuation oversight resides with the Sponsor’s Valuation Team. The Sponsor’s Valuation Team is an independent control function within the Sponsor with the responsibility for oversight of asset pricing. Standardized controls (such as exception-based reports) are in place and run daily prior to NAV dissemination to detect “unusual pricing.” This includes, but is not limited to, missing price reports, unchanged price reports, and large daily price variance reports. Specifically with respect to the Trust, the Sponsor’s Valuation Team will monitor the pricing of the Benchmark to ensure that the Trust’s NAV is determined based on consistent, accurate pricing that the Sponsor believes is reflective of the value of the Trust’s ether, and also a transparent methodology and process. In addition, the Sponsor’s Valuation Team may seek information and recommendations from the Execution Agent, the Benchmark Provider, the Ethereum Custodian, the Prime Broker or others regarding ether valuation issues and potential ether market events.
All price updates are communicated to the Administrator only by the Sponsor’s pricing team. No members of the Sponsor’s investment or other business-related teams are authorized to provide pricing instructions to the Administrator. Price updates are communicated to the Administrator prior to NAV finalization and therefore would be incorporated in that day’s NAV.
The Sponsor’s Valuation Team will monitor for significant events related to digital assets that may impact the value of the Trust’s ether, and will determine in good faith whether to fair value the Trust’s ether on a given day based on whether certain pre-determined criteria have been met. For example, if the Benchmark deviates by more than a pre-determined amount from an alternate benchmark available to the Sponsor, then the Sponsor’s Valuation Team may determine to utilize the alternate benchmark. The Sponsor’s Valuation Team may also fair value the Trust’s ether using observed market transactions from various trading platforms, including some or all of the trading platforms included in the Benchmark.
In the event the Benchmark becomes unavailable or if the Sponsor or Administrator determines that the Benchmark does not reflect an accurate ether price, an independent assessment to designate the Trust’s principal market is performed by looking at pricing and transaction volume information from eligible trading platforms in which the Trust transacts only incorporating those. Typically, this will involve a multi-step process conducted by the Sponsor’s Valuation Team to identify the principal market for ether on a given day:
| • | First, a list of eligible ether trading platforms in which the Trust transacts is compiled and ranked in descending order based on the prior twelve months of volume of ether traded on each trading platform. |
| • | Second, any trading platforms that do not comply with licensing requirements which are applicable to the Trust and the Authorized Participants are excluded. |
| • | Third, reviews of intra-day pricing are completed to identify any material variances which may impact the price information provided by a particular trading platform. A ether trading platform is then selected as the Trust’s principal market and pricing consumed from that trading platform. |
Even if the Benchmark is deemed to be available and reliable, the aforementioned process is completed periodically as deemed necessary by the Sponsor’s Valuation Team in order to assess and evaluate the effectiveness of the process.
The ether markets are generally open on days when U.S. markets are closed, which means that the value of the ether owned by the Trust could change on days when Shares cannot be bought or sold.
The website for the Trust, www.invesco.com/QETH, which will be publicly accessible at no charge, will contain the following information: (a) the prior Business Day’s NAV; (b) the prior Business Day’s official closing price; (c) calculation of the premium or discount of such Cboe official closing price against such NAV; (d) data in chart form displaying the frequency distribution of discounts and premiums of the Cboe official closing price against the NAV, within appropriate ranges for each of the four previous calendar quarters (or for the life of the Trust, if shorter); (e) the Prospectus; and (f) other applicable quantitative information. The Administrator will also disseminate the Trust’s ether holdings on a daily basis on the Trust’s website. The NAV for the Trust will be calculated by the Administrator once a day and will be disseminated daily to all market participants at the same time. Quotation and last sale information regarding the Shares will be disseminated through the facilities of the Consolidated Tape Association (“CTA”).
The Trust’s periodic financial statements may not utilize the net asset value of the Trust determined by reference to the Benchmarks to the extent the methodology used to calculate the Benchmark is deemed not to be consistent with GAAP. The Trust’s periodic financial statements will be prepared in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 820, “Fair Value Measurements and Disclosures” (“ASC Topic 820”) and utilize an exchange-traded price from the Trust’s principal market for ether on the Trust’s financial statement measurement date. The Sponsor will determine in its sole discretion the valuation sources and policies used to prepare the Trust’s financial statements in accordance with GAAP. The Trust intends to engage a third-party vendor to obtain a price from a principal market for ether, which will be determined and designated by such third-party vendor daily based on its consideration of several trading platform characteristics, including oversight, and the volume and frequency of trades. Under GAAP, such a price is expected to be deemed a Level 1 input in accordance with the ASC Topic 820 because it is expected to be a quoted price in an active market for identical assets or liabilities.
To determine which market is the Trust’s principal market (or in the absence of a principal market, the most advantageous market) for purposes of determining fair value in preparing the Trust’s financial statements, the Trust follows ASC 820-10, which outlines the application of fair value accounting. ASC 820-10 determines fair value to be the price that would be received for ether in a current sale, which assumes an orderly transaction between market participants on the measurement date. ASC 820-10 requires the Trust to assume that ether is sold in its principal market to market participants or, in the absence of a principal market, the most advantageous market. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable, and willing and able to transact. The Trust may transact through Ethereum Counterparties, in multiple markets, and its application of ASC 820-10 reflects this fact. The Trust anticipates that, while multiple venues and types of markets will be available to the Ethereum Trading Counterparties from whom the Sponsor acquires or disposes of the Trust’s ether, the principal market in each scenario is determined by looking at the market-based level of volume and ether trading activity. Ethereum Counterparties, may transact in a Brokered Market, a Dealer Market, Principal-to-Principal Markets and Exchange Markets, each as defined in the FASB ASC Master Glossary. Based on information reasonably available to the Trust, Exchange Markets have the greatest volume and level of activity for the asset. The Trust therefore looks to accessible Exchange Markets as opposed to the Brokered Market, Dealer Market and Principal-to-Principal Markets to determine its principal market. As a result of the aforementioned analysis, an Exchange Market has been selected as the Trust’s principal market. The Trust determines its principal market (or in the absence of a principal market the most advantageous market) on a quarterly basis to determine which market is its Principal Market for the purpose of calculating fair value for the creation of quarterly and annual financial statements.
The process that the Sponsor has developed for identifying a principal market, as prescribed in ASC 820-10, which outlines the application of fair value accounting. The process begins by identifying publicly available, well established and reputable ether trading platforms (Exchange Markets, as defined in the FASB ASC Master Glossary), which are selected by the Sponsor and its affiliates in their sole discretion. Those markets include Binance, Bitfinex, Bitflyer, Bitstamp, Coinbase Pro, Crypto.com, Gate.io, Gemini, HitBTC, Huobi, itBit, Kraken, KuCoin, LMAX, MEXC Global, OKEx, and Poloniex. The Sponsor then, through a service provider, calculates on each valuation period, the highest volume venue during the 60-minute period prior to 4:00 ET for ether. The Sponsor then identifies that market as the principal market for ether during that period, and uses the price for ether from that venue at 4:00 ET as the principal market price.
Intraday Indicative Value
In order to provide updated information relating to the Trust for use by Shareholders and market professionals, the Benchmark
Provider will calculate and disseminate during each day the NYSE is open for regular trading an updated intraday indicative value (“IIV”). The IIV will be calculated by using the prior day’s closing NAV as a base and updating that
value throughout the trading day to reflect changes in the most recently reported price of
ether as reported by the Benchmark Provider or another reporting service.
The IIV disseminated during each day the NYSE is open for regular trading should not be viewed as an actual real time update of the NAV, because NAV is calculated only once at the end of each trading day based upon the relevant end of day value of the Trust’s ether. The IIV will be calculated every second from 9:30 a.m. to 4:00 p.m. ET and disseminated on a per Share basis every 15 seconds during each day the NYSE is open for regular trading. Lukka Inc. will disseminate the IIV value through the facilities of CTA/CQ High Speed Lines. In addition, the IIV will be published on the Exchange’s website and will be available through on-line information services such as Bloomberg and Reuters. The IIV as of the time that the NAV is calculated on a given day may differ from the NAV for such day due to the differences in the time window of trades used to calculate each price (the NAV uses a 15-minute window, whereas the IIV draws prices from the last trade on each trading platform in an effort to produce a relevant, real-time price).
There are many instances in the market today where the IIV as of the time that the NAV is calculated on a given day and the NAV of an ETF for such day are subtly different, whether due to the calculation methodology, market hours overlap or other factors. The Sponsor has seen limited or no negative impact on trading, liquidity or other factors for exchange-traded funds in this situation. The Sponsor believes that the IIV will closely track the globally integrated ether price as reflected on the Benchmark Pricing Sources.
Dissemination of the IIV provides additional information that is not otherwise available to the public and is useful to Shareholders and market professionals in connection with the trading of the Shares on the Exchange. Shareholders and market professionals will be able throughout the trading day to compare the market price of the Shares and the IIV. If the market price of the Shares diverges significantly from the IIV, market professionals will have an incentive to execute arbitrage trades. For example, if the Trust appears to be trading at a discount compared to the IIV, a market professional could buy Shares on the Exchange and sell short futures contracts. Such arbitrage trades can tighten the tracking between the market price of the Shares and the IIV, and thus can be beneficial to all market participants.
Stock Splits
The Sponsor reserves the right to adjust the Share price of the Trust in the future to maintain convenient trading ranges for Shareholders in the secondary market. Any adjustments would be accomplished through stock splits or reverse stock splits. Such splits would decrease (in the case of a split) or increase (in the case of a reverse split) the proportionate NAV, but would have no effect on the net assets of the Trust or the proportionate voting rights of Shareholders or the value of any Shareholder’s investment.
-59-
Table of Contents
Other Assets
The fair values of any liquid assets held by the Trust primarily in the form of cash and certificates of deposits are included in the determination of NAV.
Liabilities
The fair value of the Trust’s liabilities is included in the determination of NAV. These liabilities are expected generally to consist only of the Sponsor Fee, although liabilities may also include extraordinary expenses from time to time. See “The Trust—The Trust’s Fees and Expenses.”
Impact of Trust Expenses on the Trust’s NAV
The amount of ether represented by the Shares will be reduced during the life of the Trust each time the Trust accrues the Sponsor Fee, and to pay for any extraordinary expenses. This dynamic will occur irrespective of whether the value of the Trust’s assets, or the trading price of the Shares, rises or falls.
ADDITIONAL INFORMATION ABOUT THE TRUST
The Trust
The Trust is a Delaware statutory trust, formed on September 27, 2023 pursuant to the Delaware Statutory Trust Act (“DSTA”). The Trust continuously issues common shares representing fractional undivided beneficial interest in and ownership of the Trust that may be purchased and sold on the Exchange. The Trust operates pursuant to its Amended and Restated Declaration of Trust and Trust Agreement, dated as of May 31, 2024 (the “Trust Agreement”). CSC Delaware Trust Company, a Delaware trust company, is the Delaware trustee of the Trust. The Trust is managed and controlled by the Sponsor.
The Trust is not registered as an investment company under the 1940 Act and is not required to register under such act. The Trust will not hold or trade in commodity futures contracts regulated by the CEA, as administered by the CFTC. The Trust is not a commodity pool for purposes of the CEA and neither the Sponsor, nor the Trustee is subject to regulation as a commodity pool operator or a commodity trading adviser in connection with the Shares.
The Trust is passively-managed and the Sponsor does not actively manage the ether held by the Trust. 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. It also means that the Sponsor does not make use of any of the hedging techniques available to professional ether investors to attempt to reduce the risks of losses resulting from price changes. The Trust, the Sponsor and the service providers will not loan or pledge the Trust’s assets, nor will the Trust’s assets serve as collateral for any loan or similar arrangement. The Trust will not utilize leverage, derivatives or any similar arrangements in seeking to meet its investment objective.
The number of outstanding Shares is expected to increase and decrease from time to time as a result of the creation and redemption of Creation Baskets. The Trust creates and redeems Shares from time to time, but only in one or more Creation Baskets. Creation and redemption transactions initially will take place in cash. Subject to Cboe in the future receiving the In-Kind Regulatory Approval, these transactions may also take place in exchange for ether. The timing of the In-Kind Regulatory Approval and the related in-kind creation model is unknown and there is no guarantee that the Cboe will receive such approval. If Cboe receives the In-Kind Regulatory Approval and the Sponsor chooses to allow in-kind creations and redemptions, notice to Shareholders will be provided on the Trust’s website, in a prospectus supplement, through a current report on Form 8-K and/or in the Trust’s annual or quarterly reports.
When purchasing Creation Baskets, Authorized Participants will deliver cash to the Cash Custodian. The Execution Agent will be responsible for acquiring the requisite amount of ether on behalf of the Trust on an agency basis. Once the Execution Agent selects an Ethereum Counterparty, the Cash Custodian will transfer cash to the Ethereum Counterparty in payment for the requisite amount of ether. The ether acquired from the Ethereum Counterparty will be transferred to the Ethereum Custodian. After receipt of the ether by the Ethereum Custodian, the Transfer Agent will issue Creation Baskets of Shares to the creating Authorized Participant in satisfaction of the creation order.
When redeeming Creation Baskets, the Execution Agent will be responsible for selling the requisite amount of ether on behalf of the Trust on an agency basis. Once the Execution Agent selects an Ethereum Counterparty, the Ethereum Custodian will transfer ether to the Ethereum Counterparty in return for the requisite cash payment. The cash received from the Ethereum Counterparty will be delivered to the Cash Custodian. After receipt of the cash payment, the Transfer Agent will redeem the Shares and the Cash Custodian will distribute the resulting cash to the redeeming Authorized Participant in satisfaction of the redemption order.
In connection with both creation and redemption transactions, the Execution Agent, pursuant to the oversight of the Sponsor, will decide how and with which Ethereum Counterparty to transact on the Trust’s behalf. The Authorized Participants will deliver only cash to create Shares and will receive only cash when redeeming Shares. Further, Authorized Participants will not directly or indirectly purchase, hold, deliver, or receive ether as part of the creation or redemption process or otherwise direct the Trust or a third-party with respect to purchasing, holding, delivering, or receiving ether as part of the creation or redemption process. The Trust will create Shares by receiving ether from a third-party that is not the Authorized Participant and the Trust (through the Execution Agent, on an agency basis)—not the Authorized Participant—is responsible for selecting the third-party to deliver the ether. Further, the third-party will not be acting as an agent of the Authorized Participant with respect to the delivery of the ether to the Trust or acting at the direction of the Authorized Participant with respect to the delivery of the ether to the Trust. The Trust will redeem shares by delivering ether to a third-party that is not the Authorized Participant and the Trust (through the Execution Agent, on an agency basis)—not the Authorized Participant—is responsible for selecting the third-party to receive the ether. Further, the third-party will not be acting as an agent of the Authorized Participant with respect to the receipt of the ether from the Trust or acting at the direction of the Authorized Participant with respect to the receipt of the ether from the Trust.
The Sponsor recognizes that the size of the Creation Baskets may impact the effectiveness of the arbitrage mechanism of the Trust’s creation and redemption process, and accordingly may adjust the size of the Creation Baskets to enhance the activities of the Authorized Participants in the secondary market for the Trust’s shares.
The Trust has no fixed termination date.
-60-
Table of Contents
Dissolution of the Trust
The Trust will dissolve at the direction of the Sponsor, and the Sponsor will promptly notify Shareholders of such dissolution, if any of the following dissolution events occur:
| • | Shares are delisted from the Exchange and are not approved for listing on another national securities exchange within five Business Days of their delisting; |
| • | 180 days have elapsed since the Trustee notified the Sponsor of the Trustee’s election to resign or since the Sponsor removed the Trustee, and a successor trustee has not been appointed and accepted its appointment; |
| • | the SEC determines that the Trust is an investment company under the 1940 Act, and the Sponsor has made the determination that dissolution of the Trust is advisable; |
| • | the CFTC determines that the Trust is a commodity pool under the CEA, and the Sponsor has made the determination that dissolution of the Trust is advisable; |
| • | the Trust is determined to be a “money service business” under the regulations promulgated by FinCEN under the authority of the BSA and is required to comply with certain FinCEN regulations thereunder or is determined to be a “money transmitter” (or equivalent designation) under the laws of any state in which the Trust operates and is required to seek licensing or otherwise comply with state licensing requirements, and the Sponsor has made the determination that dissolution of the Trust is advisable; |
| • | a U.S. regulator requires the Trust to shut down or forces the Trust to liquidate its ether; |
| • | ether is determined to be a “security” and is subject to regulation under U.S. federal securities laws; |
| • | any ongoing event exists that either prevents the Trust from making or makes impractical the Trust’s reasonable efforts to make a fair determination of the price of ether for purposes of determining the NAV of the Trust; |
| • | the Sponsor determines that the aggregate net assets of the Trust in relation to the operating expenses of the Trust make it unreasonable or imprudent to continue the business of the Trust; |
| • | the Trust fails to qualify for treatment, or ceases to be treated, as a “grantor trust” under the Internal Revenue Code of 1986, as amended (the “Code”) or any comparable provision of the laws of any State or other jurisdiction where that treatment is sought, and the Sponsor determines that, because of that tax treatment or change in tax treatment, dissolution of the Trust is advisable; |
| • | 60 days have elapsed since DTC or another depository has ceased to act as depository with respect to the Shares, and the Sponsor has not identified another depository that is willing to act in such capacity; |
| • | the Trustee elects to dissolve the Trust after the Sponsor is conclusively deemed to have resigned effective immediately as a result of the Sponsor being adjudged bankrupt or insolvent, or a receiver of the Sponsor or of its property being appointed, or a trustee or liquidator or any public officer taking charge or control of the Sponsor or of its property or affairs for the purpose of rehabilitation, conservation or liquidation and a successor sponsor has not been appointed; or |
-61-
Table of Contents
| • | the Sponsor elects to dissolve the Trust after the Trustee, Execution Agent, Administrator or the Ethereum Custodian (or any successor trustee, administrator or custodian) resigns or otherwise ceases to be the trustee, administrator or custodian of the Trust, as applicable, and no replacement trustee, administrator and/or custodian acceptable to the Sponsor is engaged. |
In addition, the Trust may be dissolved at any time for any reason by the Sponsor in its sole discretion. In respect of dissolution events that rely on Sponsor determinations to dissolve the Trust (e.g., if the SEC determines that the Trust is an investment company under the 1940 Act; the CFTC determines that the Trust is a commodity pool under the CEA; the Trust is determined to be a money transmitter under the regulations promulgated by FinCEN; the Trust fails to qualify for treatment, or ceases to be treated, as a grantor trust for U.S. federal income tax purposes; or, following a resignation by a trustee or custodian, the Sponsor determines that no replacement is acceptable to it), the Sponsor may consider, without limitation, the profitability to the Sponsor and other service providers of the operation of the Trust, any obstacles or costs relating to the operation or regulatory compliance of the Trust and the ability to market the Trust to investors. To the extent that the Sponsor determines to continue operation of the Trust following a determination’s triggering event, the Trust will be required to alter its operations to comply with the triggering event. In the instance of a determination that the Trust is an investment company, the Trust and the Sponsor would have to comply with the regulations and disclosure and reporting requirements applicable to investment companies and investment advisers. In the instance of a determination that the Trust is a commodity pool, the Trust and the Sponsor would have to comply with regulations and disclosure and reporting requirements applicable to commodity pools and commodity pool operators or commodity trading advisers. In the event of a determination that the Trust is a money transmitter, the Trust and the Sponsor will have to comply with applicable federal and state registration and regulatory requirements for money transmitters and/or money service businesses. In the event that the Trust ceases to qualify for treatment as a grantor trust for U.S. federal income tax purposes, the Trust will be required to alter its disclosure and tax reporting procedures and may no longer be able to operate or to rely on pass-through tax treatment. In each such case and in the case of the Sponsor’s determination as to whether a potential successor trustee or custodian is acceptable to it, the Sponsor will not be liable to anyone for its determination of whether to continue or to dissolve the Trust.
If the Trust is required to terminate and liquidate, or the Sponsor determines in accordance with the Delaware Act that it is appropriate to terminate and liquidate the Trust, the Sponsor will instruct the Execution Agent to sell the Trust’s ether and will distribute to the Shareholders any amounts of the cash proceeds of the liquidation remaining after the satisfaction of all outstanding liabilities of the Trust and the establishment of reserves for applicable taxes, other governmental charges and contingent or future liabilities as the Sponsor will determine. Shareholders of record on the record date fixed by the Transfer Agent for a distribution will be entitled to receive their pro rata portions of any distribution. Following the liquidation of the Trust’s ether, any remaining outstanding Shares will be redeemed for cash and distributed to Shareholders in accordance with the provisions of the Trust Agreement.
Upon dissolution of the Trust, following completion of winding up of its business by the Sponsor, the Trustee, upon written directions of the Sponsor, will cause a certificate of cancellation of the Trust’s Certificate of Trust to be filed in accordance with applicable Delaware law. Upon completion of the winding up of the business of the Trust, the Sponsor will be discharged from all obligations under the Trust Agreement except for its certain obligations that survive dissolution of the Trust Agreement.
Amendments
The Trust Agreement provides that it may be amended by the Sponsor in its sole discretion and without the Shareholders’ consent. Any such amendment to the Trust Agreement will be effective on such date as designated by the Sponsor in its sole discretion, except that any amendment that imposes or increases any fees or charges or prejudices a substantial existing right of the Shareholders will not become effective until thirty (30) days after notice of such amendment is given to the Shareholders. However, any amendment to the Trust Agreement that affects the rights or duties of the Trustee will require the Trustee’s prior written consent. Every Shareholder, at the time any amendment so becomes effective, will be deemed, by continuing to hold any Shares or an interest therein, to consent and agree to such amendment and to be bound by the Trust Agreement as amended thereby. The Sponsor does not expect to make any amendment that would impair the right of Authorized Participants to surrender Creation Baskets and receive therefore the amount of Trust assets represented thereby (less fees in connection with the surrender of Shares and any applicable taxes or other governmental charges), except in order to comply with mandatory provisions of applicable law.
-62-
Table of Contents
The Sponsor
The Sponsor arranged for the creation of the Trust and is responsible for the ongoing registration of the Shares for their public offering and the listing of Shares on the Exchange. The Sponsor will not exercise day-to-day oversight over the Trustee or the Ethereum Custodian. Except as noted in “The Trust—The Trust’s Expenses” above, the Sponsor has agreed to pay all of the Trust’s ordinary expenses out of the Sponsor Fee, including, but not limited to, the Trustee’s fees, the Administrator’s fee, the Transfer Agent’s fee, the Ethereum Custodian’s fee, the Execution Agent’s fees, Exchange listing fees, SEC registration fees, printing and mailing costs, legal costs and audit fees. The Sponsor also paid the costs of the Trust’s organization. The Sponsor is a wholly-owned subsidiary of Invesco Ltd. Invesco Ltd. and its subsidiaries, including the Sponsor, are an independent global investment management group.
The Sponsor has significant experience overseeing exchange-traded products, including both 1940 Act-registered exchange-traded products and non-1940 Act-registered exchange-traded products. The Sponsor currently oversees over 200 exchange-traded products with assets totaling $634 billion as of December 31, 2023. By managing its own products and through its relationships with the Execution Agent and the Ethereum Custodian, the Sponsor has amassed significant knowledge regarding ether and the digital asset markets.
The Trustee
CSC Delaware Trust Company, a Delaware trust company located at 251 Little Falls Drive, Wilmington, DE 19808, acts as the trustee of the Trust as required to create a Delaware statutory trust in accordance with the Trust Agreement and the DSTA. The Trustee is appointed to serve as the trustee of the Trust in the State of Delaware for the sole purpose of satisfying the requirement of Section 3807(a) of the DSTA that the Trust have at least one trustee with a principal place of business in the State of Delaware.
General Duty of Care of Trustee
The Trust Agreement provides that, to the extent that, at law or at equity, the Trustee has duties (including fiduciary duties) and liabilities relating thereto to the Trust or the Sponsor, such duties and liabilities are eliminated and replaced by the duties and liabilities of the Trustee expressly set forth in the Trust Agreement. Under the Trust Agreement, the duties of the Trustee shall be limited to (i) accepting legal process served on the Trust in the State of Delaware and (ii) at the direction of the Sponsor, the execution of any certificates required to be filed with the Secretary of State of the State of Delaware which the Trustee is required to execute under Section 3811 of the Delaware Act.
Resignation, Discharge or Removal of Trustee; Successor Trustees
The Trustee may resign at any time by giving at least 60 days advance written notice to the Sponsor. The Sponsor may remove the Trustee at any time by giving at least 60 days advance written notice to the Trustee. Upon effective resignation or removal, the Trustee will be discharged of its duties and obligations.
If the Trustee resigns or is removed, the Sponsor, acting on behalf of the Shareholders, is required to use reasonable efforts to appoint a successor trustee. Any successor Trustee must satisfy the requirements of Section 3807 of the DSTA. Any resignation or removal of the Trustee and appointment of a successor Trustee cannot become effective until a written acceptance of appointment is delivered by the successor Trustee to the outgoing Trustee and the Sponsor and any fees and other expenses due to the outgoing Trustee are paid or waived by the outgoing Trustee. Following compliance with the preceding sentence, the successor will become fully vested with the rights, powers, duties and obligations of the outgoing Trustee under the Trust Agreement, with like effect as if originally named as Trustee, and the outgoing Trustee shall be discharged of its duties and obligations herein. If no successor Trustee shall have been appointed and shall have accepted such appointment within forty-five (45) days after the giving of such notice of resignation or removal, the Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee.
-63-
Table of Contents
If the Trustee resigns and no successor trustee is appointed within 180 days after the date the Trustee issues its notice of resignation, the Sponsor will dissolve and liquidate the Trust and distribute its remaining assets in cash, although in certain circumstances a Shareholder may request an in-kind liquidating distribution.
The Administrator
Under the trust administration and accounting agreement, the Administrator provides necessary administrative, tax and accounting services and financial reporting for the maintenance and operations of the Trust, including calculating the NAV of the Trust and determining the net assets of the Trust, and calculating the size of the Creation Baskets.
The Transfer Agent
The Transfer Agent is responsible for (1) issuing and redeeming Shares in connection with creation and redemption transactions, (2) responding to correspondence by Shareholders and others relating to its duties, (3) maintaining Shareholder accounts and (4) making periodic reports to the Trust.
The Ethereum Custodian
Under the Ether Custody Agreement, the Ethereum Custodian is responsible for (1) safekeeping all of the ether owned by the Trust, (2) opening one or more accounts that hold the Trust’s ether and (3) facilitating the transfer of ether required for the operation of the Trust as directed by the Sponsor. The Ethereum Custodian is chartered as a limited purpose trust company by the NYSDFS and is authorized by the NYSDFS to provide digital asset custody services. The Ethereum Custodian is a wholly-owned subsidiary of Coinbase Global, Inc.
The Cash Custodian
Under the Cash Custody Agreement, the Cash Custodian is responsible for holding the Trust’s cash in connection with creation and redemption transactions effected in cash. The Cash Custodian is a New York state-chartered bank and a member of the Federal Reserve System.
The Marketing Agent
The Marketing Agent is responsible for: (1) working with the Transfer Agent to review and approve, or reject, purchase and redemption orders of Creation Baskets placed by Authorized Participants with the Transfer Agent; and (2) reviewing and approving the marketing materials prepared by the Trust for compliance with applicable SEC and FINRA advertising laws, rules, and regulations.
-64-
Table of Contents
The Execution Agent
The Sponsor has entered into an agreement with Galaxy Digital Funds LLC, a subsidiary of Galaxy Digital LP (“Galaxy” or the “Execution Agent”) to serve as Execution Agent. At the direction of the Sponsor, the Execution Agent is responsible for selling ether on behalf of the Trust to the extent necessary to permit the payment of the Trust’s expenses. The Trust also will utilize the services of the Execution Agent to purchase or sell ether in connection with cash creations and redemptions. When acquiring or disposing of ether on behalf of the Trust in connection with a creation or redemption transaction, the Sponsor will provide instructions to the Execution Agent, who will identify an Ethereum Counterparty. In connection with both creation and redemption transactions, the Execution Agent, pursuant to the oversight of the Sponsor, will decide how and with which Ethereum Counterparty to transact on the Trust’s behalf.
Pursuant to the Execution Agent Agreement, and subject to specific instructions from the Sponsor, the Execution Agent in its discretion is responsible for selecting the method of transacting, the price, the Ethereum Counterparty or Counterparties and the trading platform or venue (if any) for the execution of each purchase and sale of ether on behalf of the Trust. The Execution Agent has established policies and procedures for identifying, monitoring and performing due diligence on potential Ethereum Counterparties and trading platforms or venues, with entities being added or removed from consideration on an ongoing basis. In addition, the Execution Agent evaluates Ethereum Counterparties and trading platforms or venues on a per-transaction basis. At the time it selects an Ethereum Counterparty for any specific transaction, the Execution Agent may consider a number of factors in an effort to seek to achieve “best execution,” including price, transaction costs, speed, and likelihood of execution and settlement, taking into account the size of the transaction and the experience and capabilities of the Ethereum Counterparty. Relying on its history of transacting in ether, the Execution Agent assesses Ethereum Counterparties in seeking to achieve the best overall outcome for the Trust. Although the Trust is new, and therefore does not have a history of trading ether, the Execution Agent (and its asset management affiliates) have extensive experience, having traded over $3.5 Billion in digital assets in 2023 across twelve counterparties for other accounts.
As of [ ], 2024, [●] have been identified by the Execution Agent as Ethereum Counterparties and have consented to be named in this Prospectus. Each of these Ethereum Counterparties are, and any other Ethereum Counterparty the Execution Agent, on behalf of the Trust, places orders with in the future will be, subject to U.S. federal and/or state licensing requirements or similar laws in non-U.S. jurisdictions, and maintain practices and policies designed to comply with AML and KYC regulations or similar laws in non-U.S. jurisdictions. The Execution Agent, on behalf of the Trust, may engage additional Ethereum Counterparties at any time. The Trust will include a list of Ethereum Counterparties in the Trust’s Annual Reports on Form 10-K.
In addition, as part of this agreement, the Execution Agent has agreed to co-brand and co-market the Trust, and the Sponsor has licensed the use of certain Execution Agent trademarks, service marks and trade names in connection with the Trust. The Execution Agent is a leader in digital asset investing and trading and has extensive knowledge of and experience with digital asset investing and related services and markets.
The Execution Agent offers passive private funds in both the Ethereum and Ethereum markets, including funds in Brazil and Canada which track the prices of ether and ether. Galaxy also offers active strategies such as its Flagship Liquid Alpha Fund, which seeks to provide access to the current and next generation of essential digital assets. Galaxy also has experience in the ether and digital asset markets through its affiliates, including Galaxy Digital Capital Management LP, which has been appointed as a fiduciary in the bankruptcy liquidation of FTX Trading Ltd. and acts as a fiduciary managing outside capital.
Galaxy is a subsidiary of Galaxy Digital Holdings LP (“Galaxy Holdings”). Galaxy Digital Holdings Ltd., which holds a limited partner interest in Galaxy Holdings, is listed on the Toronto Stock Exchange under the symbol “GLXY.”
Authorized Participants
The Trust will process all creations and redemptions of Shares in transactions with financial firms that are authorized to do so (known as “Authorized Participants”). Creation and redemption transactions initially will take place in cash. Subject to Cboe receiving the In-Kind Regulatory Approval, these transactions may also take place in exchange for ether.
When purchasing Creation Baskets, Authorized Participants will deliver cash to the Cash Custodian. The Execution Agent will be responsible for acquiring the requisite amount of ether on behalf of the Trust on an agency basis. Once the Execution Agent selects an Ethereum Counterparty, the Cash Custodian will transfer cash to the Ethereum Counterparty in payment for the requisite amount of ether. The ether acquired from the Ethereum Counterparty will be transferred to the Ethereum Custodian. After receipt of the ether by the Ethereum Custodian, the Transfer Agent will issue Creation Baskets of Shares to the creating Authorized Participant in satisfaction of the creation order.
When redeeming Creation Baskets, the Execution Agent will be responsible for selling the requisite amount of ether on behalf of the Trust on an agency basis. Once the Execution Agent selects an Ethereum Counterparty, the Ethereum Custodian will transfer ether to
-65-
Table of Contents
the Ethereum Counterparty in return for the requisite cash payment. The cash received from the Ethereum Counterparty will be delivered to the Cash Custodian. After receipt of the cash payment, the Transfer Agent will redeem the Shares and the Cash Custodian will distribute the resulting cash to the redeeming Authorized Participant in satisfaction of the redemption order.
In connection with both creation and redemption transactions, the Execution Agent, pursuant to the oversight of the Sponsor, will decide how and with which Ethereum Counterparty to transact on the Trust’s behalf. The Authorized Participants will deliver only cash to create Shares and will receive only cash when redeeming Shares. Further, Authorized Participants will not directly or indirectly purchase, hold, deliver, or receive ether as part of the creation or redemption process or otherwise direct the Trust or a third-party with respect to purchasing, holding, delivering, or receiving ether as part of the creation or redemption process. The Trust will create Shares by receiving ether from a third-party that is not the Authorized Participant and the Trust (through the Execution Agent, on an agency basis)—not the Authorized Participant—is responsible for selecting the third-party to deliver the ether. Further, the third-party will not be acting as an agent of the Authorized Participant with respect to the delivery of the ether to the Trust or acting at the direction of the Authorized Participant with respect to the delivery of the ether to the Trust. The Trust will redeem shares by delivering ether to a third-party that is not the Authorized Participant and the Trust (through the Execution Agent, on an agency basis)—not the Authorized Participant—is responsible for selecting the third-party to receive the ether. Further, the third-party will not be acting as an agent of the Authorized Participant with respect to the receipt of the ether from the Trust or acting at the direction of the Authorized Participant with respect to the receipt of the ether from the Trust.
Authorized Participants are expected to sell Shares to the public at prices that reflect, among other factors, the value of the Trust’s assets, supply of and demand for Shares and market conditions at the time of a transaction.
As of the date of the Prospectus, the Trust has entered into Authorized Participant Agreements with [Jane Street Capital, LLC and Virtu Americas LLC].
CUSTODY OF THE TRUST’S ETHEREUM
The Ethereum Custodian will keep the private keys associated with the Trust’s ether in a “cold storage” environment where the private keys are generated and secured (the “Prime Custody Vault”). From time to time, such as when the Trust’s ether is being processed in connection with certain creation or redemption transactions or it is being sold, the Trust’s ether may be maintained in a trading account (the “Trading Balance”) with Coinbase, Inc. (“Coinbase” or the “Prime Broker”), an affiliate of the Ethereum Custodian. The Trust’s ether will be maintained by the Ethereum Custodian and Coinbase in accounts that are required to be segregated from the assets held by the Ethereum Custodian or Coinbase as principal and, when held in the Prime Custody Vault, the assets of their other customers. “Cold storage” refers to a safeguarding method by which the private keys corresponding to the Trust’s ether are generated and stored in an offline manner using computers or devices that are not directly connected to the internet, which is intended to make them more resistant to hacking, or similarly secure technology. All of the Trust’s ether will be held in the Prime Custody Vault unless it is maintained in the Trading Balance in connection with certain creation or redemption transactions or it is being sold to pay the Sponsor Fee or Trust expenses not assumed by the Sponsor. To the extent the Trust maintains a Trading Balance with Coinbase, such short-term holdings represent an omnibus claim on Coinbase’s ether held on behalf of clients; these holdings exist across a combination of omnibus hot wallets, omnibus cold wallets or in accounts in Coinbase’s name on a trading platform (including third-party venues and Coinbase’s own execution venue) where Coinbase executes orders to buy and sell ether on behalf of clients.
Custody of ether typically involves the generation, storage and utilization of private keys. These private keys are used to effect transfer transactions (i.e., transfers of ether from an address associated with the private key to another address). Cold storage is a safeguarding method with multiple layers of protections and protocols, by which the private key(s) corresponding to the Trust’s ether is (are) generated and stored in an offline manner. Private keys are generated in offline computers that are not connected to the internet so that they are resistant to being hacked. Cold storage of private keys involves keeping key material on storage devices not directly connected to the internet. In accordance with the Trust’s instructions, the Ethereum Custodian will keep the Trust’s ether in cold storage on an ongoing basis; however, from time to time, portions of the Trust’s ether will be held in the Trading Balance outside of cold storage temporarily as part of trade facilitation in connection with creations and redemptions of Creation Baskets or to sell ether to pay Trust expenses. Please see “Cybersecurity Risk Related to Ethereum,” “Risks Related to the Markets and Service Ecosystem for Ethereum,” and “Risks Related to the Trust and the Shares” for a discussion of custody risks.
Ethereum Custodian Access to Private Keys and Whitelisting
The Ethereum Custodian uses two distinct wallet architectures to support the Trust’s operations. There is the Prime Custody Vault environment that provides the storage where assets will be secured when not involved in creation or redemption transactions. Additionally, there is the Trading Balance environment where assets move through the Coinbase trading wallets for matching, settlement, and trade execution.
-66-
Table of Contents
Prime Custody Vault
The following groups of personnel are involved in the Prime Custody Vault wallet digital signing process. Ethereum Custodian personnel that participate in wallet private key use activities each have access to material that is necessary to complete a transaction, but the material they have access to is not by itself sufficient to use a wallet private key and sign a transaction unilaterally (e.g., there is segregation of duties enforced between those that can initiate a private key use request, and those that can participate in wallet private key use).
| • | The Trust: The Sponsor, acting on behalf of the Trust is responsible for creating and approving the transaction (including specifying transaction details) within the Prime Custody Vault. Clients have the ability to manage address whitelist, where funds are permitted to be sent outside the boundaries of Ethereum Custodian’s environment. Modifications to the address book require client consensus and client-owned hardware two-factor authentication (2FA). |
| • | Facilitation: The Ethereum Custodian has a back-office operations team that supports validation of transaction intent, facilitates optional client video authorization calls, and collaborates with the operators to track transaction processing. |
| • | Key Management & Physical Access: Private keys are encrypted and secured with cryptographically enforced consensus policies and stored in offline vaults. A secure system is responsible for uploading encrypted key share materials from a secure storage facility based on authorization from human operators. Access to an Ethereum Custodian secure storage facility and materials therein is physically and logically restricted from a different operator group required for wallet private key use. |
| • | Key Use: A group of human operators is responsible for providing the necessary cryptographic material to allow access to the private key. Cryptographic consensus must be achieved across this group of human operators before a wallet private key can be used, and transactions signed to be broadcast on-chain. |
Upon cryptographic consensus being achieved the transaction is processed. The Ethereum Custodian securely signs the transaction and broadcasts to the blockchain. All system-to-system authentication and authorization is enforced to ensure that unauthorized services are blocked from accessing resources supporting wallet operations.
Trading Balance
For the ETF trading and settlement environment, clients have configurable security controls that mirror those of the Vault wallet.
Specifically, the Sponsor, on behalf of the Trust, has the ability to manage their address allowlist where funds are permitted to be sent outside the boundaries of the Ethereum Custodian’s environment. Modifications to the address book require client consensus and client- owned hardware two-factor authentication (2FA).
The wallet private keys are secured in an online, isolated, high security system that leverages hardware security modules (HSMs). Transaction signing occurs automatically within this secure environment.
In the Trading Balance, any human access to the environment is exceptional, requiring additional secure authentication protocols, and is actively monitored and logged. The private keys are encrypted at rest, and stored in a non-exportable format. All system-to-system authentication and authorization is enforced to ensure that unauthorized services are blocked from accessing resources supporting wallet operations.
Verifying Existence of Ethereum
The Ethereum Custodian issues Systems and Organizational Control (“SOC”) reports for the Prime Custody Vault, to verify the existence of digital assets among other objectives. It ensures controls are designed and operating effectively, providing reasonable assurance that customer digital asset positions held in the Ethereum Custodian and Prime Broker are authorized, executed, and accurately and completely recorded.
Moving Assets from Cold Storage
To summarize, any movement of funds initiated by the Ethereum Custodian on behalf of its customers adhere to the cold storage principles described above, which are inclusive of cryptographic consensus enforcement and segregation of duties between personnel among other security features.
Moving Assets into Cold Storage
The Ethereum Custodian supports transfer of funds between a client’s Trading Balance and Prime Custody Vault. This process requires a user to comply with the account’s configured Transfer Policy which governs the approval requirements to be met before a transfer can be processed. The transfer is considered processed when it receives the appropriate blockchain confirmations.
-67-
Table of Contents
Specifically, the transaction would be broadcasted from the Trading Balance wallet environment and received by a specific Prime Custody Vault wallet. Moving assets from the Trading Balance to Prime Custody Vault can be initiated by the client via the Ethereum Custodian’s platform UI/API and must comply with client configured Transfer Policies.
Insurance of the Ethereum Custodian
The Ethereum Custodian purchases commercial crime and cyber coverage with comprehensive coverage terms and conditions. This insurance program, which has continuously run since 2013, provides the Ethereum Custodian and its clients with some of the broadest and deepest insurance coverage in the digital asset industry.
The Commercial Crime insurance program covers both cold and hot storage assets held by Coinbase Global, Inc. (“Coinbase Global”) and all its subsidiaries, including Coinbase Custody Trust Company, LLC (“Coinbase Custody”) and Coinbase, Inc. (collectively, “Coinbase”). Assets held within Coinbase Custody are secured within Coinbase’s cold storage environment.
Ethereum which is custodied by the Ethereum Custodian is held in segregated wallets and is not commingled with assets of Ethereum Custodian or its affiliates or with assets of other customers of the Ethereum Custodian. Neither the Trust, the Sponsor, nor any other entity is permitted to lend, pledge, hypothecate or rehypothecate any of the Trust’s ether. The Ethereum Custodian has also agreed in the Ether Custody Agreement that it will not, directly or indirectly, lend, pledge, hypothecate or rehypothecate any of the Trust’s ether, and that the Trust’s ether assets are not treated as general assets of the Ethereum Custodian but are instead considered custodial assets that remain the Trust’s property. Additionally, the Ethereum Custodian has agreed to provide the Trust or its authorized independent public accountant with confirmation of or access to information sufficient to confirm the ether held by the Ethereum Custodian for the Trust and that the Trust’s ether is held in a separate, segregated account under the Trust’s name. Under the Ether Custody Agreement, the Ethereum Custodian is required to obtain and maintain, at its sole expense, commercially reasonable insurance coverage for the custody services it provides to the Trust. The Ether Custody Agreement does not require that private key information with respect to the Trust’s ether be kept in a particular physical location. The Sponsor will continuously evaluate the Ethereum Custodian’s performance and operations by engaging in regular communications and scheduled meetings to ensure that the Ethereum Custodian operates consistent with the standards set forth in the Ether Custody Agreement and the Ethereum Custodian’s policies and procedures.
The Ethereum Custodian may receive deposits of ether but may not send ether without use of the corresponding private keys. In order to send ether kept in cold storage, private keys must be accessed from offline cold storage and used to sign transactions. At that point, the Ethereum Custodian can upload the fully signed transaction to an online network and transfer the ether. Because the Ethereum Custodian may need to access private keys from offline storage prior to initiating transactions, the initiation or crediting of withdrawals or other transactions may be delayed.
The Ethereum Custodian carefully considers the design of the physical, operational and cryptographic systems for secure storage of the Trust’s private keys in an effort to lower the risk of loss or theft. No such system is perfectly secure and loss or theft due to operational or other failure is always possible. See “Risk Factors—Risks Related to Ethereum—Cybersecurity Risk Related to Ethereum.”
The Trust may engage third-party custodians or vendors besides the Ethereum Custodian and the Cash Custodian to provide custody and security services for all or a portion of its ether and/or cash, and the Sponsor will pay the custody fees and any other expenses associated with any such third-party custodian or vendor. The Sponsor is responsible for overseeing the Ethereum Custodian and the Trust’s other service providers. The Sponsor may, in its sole discretion, add or terminate ethereum custodians at any time. The Sponsor may, in its sole discretion, change the custodian for the Trust’s ether holdings, but it will have no obligation whatsoever to do so or to seek any particular terms for the Trust from other such custodians. However, the Sponsor will only enter into ether custody arrangements with custodians that meet the Sponsor’s criteria, including an agreement to maintain Trust assets in a segregated account, to maintain insurance and to store the Trust’s private keys in cold storage or in such other manner as the Sponsor determines provides reasonable protection for the Trust’s assets from loss or theft.
-68-
Table of Contents
Under the Ether Custody Agreement, the Ethereum Custodian’s liability is subject to the following limitations, among others: (i) other than with respect to claims and losses arising from fraud or willful misconduct, the Ethereum Custodian’s aggregate liability under the Ether Custody Agreement shall not exceed the greater of (A) the aggregate fees paid by the Trust to the Ethereum Custodian in the 12 months prior to the event giving rise to the Ethereum Custodian’s liability, and (B) the value of the affected ether giving rise to the Ethereum Custodian’s liability; (ii) the Ethereum Custodian’s aggregate liability in respect of each cold storage address shall not exceed $100 million; and (iii) in respect of any incidental, indirect, special, punitive, consequential or similar losses, the Ethereum Custodian is not liable, even if the Ethereum Custodian has been advised of or knew or should have known of the possibility thereof. The Ethereum Custodian is not liable for delays, suspension of operations, failure in performance, or interruption of service to the extent it is directly due to a cause or condition beyond the reasonable control of the Ethereum Custodian. While the Ethereum Custodian does not limit the size of each wallet to $100 million in ether, and there is no guarantee that the amount of ether in each Trust wallet will remain below this threshold, the Sponsor intends to monitor each Trust wallet and adjust the amount of ether (valued in USD) in any given Trust wallet (including moving ether into additional wallets) in an effort to maintain the amount of ether in each Trust wallet below $100 million.
The Trust Is not a banking institution and is not a member of the FDIC or Securities Investor Protection Corporation (“SIPC”) and, therefore, investments in the Trust are not subject to the protections enjoyed by depositors with FDIC or SIPC member institutions. Likewise, the Ethereum Custodian is not a depository institution and is not a member of the FDIC or SIPC and, therefore, the Trust’s assets held with the Ethereum Custodian are not subject to FDIC or SIPC insurance coverage. In addition, neither the Trust nor the Sponsor insure the Trust’s ether.
Also pursuant to the Ether Custody Agreement, Coinbase, an affiliate of the Ethereum Custodian, may provide prime broker services, including ether trade execution, from time to time as requested by the Sponsor. The Trust may engage in purchases or sales of ether by placing orders with Coinbase. Coinbase will route orders placed by the Sponsor through Coinbase’s execution platform to a Connected Trading Venue where the order will be executed. Each order placed with Coinbase by the Sponsor will be sent, processed and settled at each Connected Trading Venue to which it is routed. Subject to the foregoing, and to certain policies and procedures that the Ether Custody Agreement requires Coinbase to have in place to mitigate conflicts of interest when executing the Trust’s orders, the Ether Custody Agreement provides that Coinbase shall have no liability, obligation, or responsibility whatsoever for the selection or performance of any Connected Trading Venue, and that other Connected Trading Venues and/or trading platforms not used by Coinbase may offer better prices and/or lower costs than the Connected Trading Venue used to execute the Trust’s orders.
Orders to sell ether on behalf of the Trust may be executed by the Coinbase at venues that have been approved in accordance with the Coinbase’s due diligence and risk assessment process. Due diligence includes reviews conducted by the legal, compliance, security, privacy and finance/credit-risk teams for every trading venue that Coinbase’s multi-venue execution capability connects to, helping ensure that the Coinbase only partners with secure and compliant liquidity partners. Coinbase also adheres to a maximum amount of assets that can ever be held on a venue, which is unique for each venue based on Coinbase’s venue diligence and continually refreshed.
As of the date of this Prospectus, Coinbase’s multi-venue execution capability connects with eight (8) venues in total: Coinbase Exchange, Bitstamp, LMAX, Kraken, and four non-bank market makers that it is unable to name due to confidentiality restrictions.
Coinbase may execute orders as an agent on behalf of the Trust. Coinbase does not operate a dealer and does not trade against its clients–all orders are routed to the venues listed above based on a variety of routing criteria, including pricing, liquidity and depth of order book.
Custody of the Trust’s Cash
The Trust generally does not intend to hold cash or cash equivalents. However, the Trust may hold cash and cash equivalents on a temporary basis to pay expenses or in connection with cash creation and redemption transactions. The Trust has entered into the Cash Custody Agreement with BNYM under which BNYM acts as custodian of the Trust’s cash and cash equivalents, if any.
Registered Form
Shares are issued in registered form in accordance with the Trust Agreement. The Transfer Agent has been appointed registrar and transfer agent for the purpose of transferring Shares in certificated form. The Transfer Agent keeps a record of all Shareholders and holders of the Shares in certified form in the registry. The Sponsor recognizes transfers of Shares in certificated form only if done in accordance with the Trust Agreement. The beneficial interests in such Shares are held in book-entry form through participants and/or accountholders in DTC.
-69-
Table of Contents
Book Entry
Individual certificates are not issued for the Shares. Instead, Shares are represented by one or more global certificates, which are deposited by the Transfer Agent on behalf of the Trust with DTC and registered in the name of Cede & Co., as nominee for DTC. The global certificates evidence all of the Shares outstanding at any time. Shareholders are limited to (1) participants in DTC such as banks, brokers, dealers and trust companies (“DTC Participants”), (2) those who maintain, either directly or indirectly, a custodial relationship with a DTC Participant (“Indirect Participants”) and (3) those who hold interests in the Shares through DTC Participants or Indirect Participants, in each case who satisfy the requirements for transfers of Shares. DTC Participants acting on behalf of Shareholders holding Shares through such participants’ accounts in DTC will follow the delivery practice applicable to securities eligible for DTC’s Same-Day Funds Settlement System. Shares are credited to DTC Participants’ securities accounts following confirmation of receipt of payment.
DTC
The Trust understands that DTC is a limited purpose trust company organized under the laws of the State of New York and is a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code and a “clearing agency” registered pursuant to the provisions of Section 17A of the Exchange Act. DTC holds securities for DTC Participants and facilitates the clearance and settlement of transactions between DTC Participants through electronic book-entry changes in accounts of DTC Participants.
The Shares are only transferable through the book-entry system of DTC. Shareholders who are not DTC Participants may transfer their Shares through DTC by instructing the DTC Participant holding their Shares (or by instructing the Indirect Participant or other entity through which their Shares are held) to transfer the Shares. Transfers are made in accordance with standard securities industry practice.
Transfers of interests in Shares with DTC are made in accordance with the usual rules and operating procedures of DTC and the nature of the transfer. DTC has established procedures to facilitate transfers among the participants and/or accountholders of DTC. Because DTC can only act on behalf of DTC Participants, who in turn act on behalf of Indirect Participants, the ability of a person or entity having an interest in a global certificate to pledge such interest to persons or entities that do not participate in DTC, or otherwise take actions in respect of such interest, may be affected by the lack of a certificate or other definitive document representing such interest.
-70-
Table of Contents
The Trust understands that DTC will take any action permitted to be taken by a Shareholder (including, without limitation, the presentation of a global certificate for exchange) only at the direction of one or more DTC Participants in whose account with DTC interests in global certificates are credited and only in respect of such portion of the aggregate principal amount of the global certificate as to which such DTC Participant or Participants has or have given such direction.
Buying and Selling Shares
Most investors buy and sell Shares of the Trust in secondary market transactions through brokers. Shares trade on the Exchange under the ticker symbol QETH. Shares are bought and sold throughout the trading day like other publicly traded securities. When buying or selling Shares through a broker, most investors incur customary brokerage commissions and charges, as well as any bid-ask spread. Shareholders are encouraged to review the terms of their brokerage account for details on applicable charges.
Authorized Participants
The offering of Shares is a best efforts offering. The Trust continuously offers Creation Baskets consisting of 5,000 Shares to Authorized Participants. Authorized Participants may pay a transaction fee for each order they place to create or redeem Creation Baskets.
The offering of Shares is being made in compliance with Rule 2310 of the FINRA Rules. Accordingly, Authorized Participants will not make any sales to any account over which they have discretionary authority without the prior written approval of a purchaser of Shares. An Authorized Participant is not required to sell any specific number or dollar amount of Shares.
By executing an Authorized Participant Agreement, an Authorized Participant becomes part of the group of parties eligible to purchase Creation Baskets from, and have Creation Baskets redeemed by, the Trust. An Authorized Participant is under no obligation to create or redeem Creation Baskets or to offer to the public any Shares it does create.
Because new Shares can be created and issued on an ongoing basis, at any point during the life of the Trust, a “distribution,” as such term is used in the Securities Act, will be occurring. Authorized Participants, other broker-dealers and other persons are cautioned that some of their activities may result in their being deemed participants in a distribution in a manner that would render them statutory underwriters and subject them to the prospectus delivery and liability provisions of the Securities Act. Any purchaser who purchases Shares with a view towards distribution of such Shares may be deemed to be a statutory underwriter. In addition, an Authorized Participant, other broker-dealer firm or its client will be deemed a statutory underwriter if it purchases a Creation Basket from the Trust, breaks the Creation Basket down into the constituent Shares and sells the Shares to its customers; or if it chooses to couple its purchases of Shares from the Trust with an active selling effort involving solicitation of secondary market demand for the Shares. In contrast, Authorized Participants may engage in secondary market or other transactions in Shares that would not be deemed “underwriting.” For example, an Authorized Participant may act in the capacity of a broker or dealer with respect to Shares that were previously distributed by other Authorized Participants. A determination of whether a particular market participant is an underwriter must take into account all the facts and circumstances pertaining to the activities of the broker-dealer or its client in the particular case, and the examples mentioned above should not be considered a complete description of all the activities that would lead to designation as an underwriter and subject them to the prospectus delivery and liability provisions of the Securities Act.
-71-
Table of Contents
Dealers who are neither Authorized Participants nor “underwriters” but are nonetheless participating in a distribution (as contrasted to ordinary secondary trading transactions), and thus dealing with Shares that are part of an “unsold allotment” within the meaning of Section 4(a)(3)(C) of the Securities Act, would be unable to take advantage of the prospectus delivery exemption provided by Section 4(a)(3) of the Securities Act.
While the Authorized Participants may be indemnified by the Sponsor, they will not be entitled to receive a discount or commission from the Trust or the Sponsor for their purchases of Creation Baskets.
Seed Capital Investor; Selling Shareholders
In connection with the Trust’s launch, the Trust was seeded with $[●] on [●] through the sale of Shares (“Initial Seed Shares”) by the Trust to the Sponsor.
In this transaction, the Sponsor purchased [●] Shares ([●] Creation Baskets) at a price of $[●] per Share based on the Benchmark price as of 4:00 p.m. ET on [●]. The Execution Agent acquired [●] ether on behalf of the Trust. Accordingly, as of the market close on [●], the Trust had total assets of $[●], solely represented by ether held in custody by the Seed Capital Investor, and had [●] Shares outstanding, entirely held by the Sponsor. The Seed Capital Investor acted as a statutory underwriter in connection with these purchases. The price of the Shares acquired by the Seed Capital Investor was determined as described in this Prospectus, and such Shares could be sold at different prices if sold by the Seed Capital Investor at different times.
It is anticipated that the Seed Capital Investor will redeem its Shares or sell its Shares to a third party in the weeks following the initial listing of Shares on the Exchange, if the third-party investment in the Trust exceeds the value of the Seed Capital Investor’s entire investment. The Trust will not receive any of the proceeds of the redemption of any Seed Creation Baskets by the Seed Capital Investor.
Selling shareholders (each, a “Selling Shareholder”) may sell Shares owned by them directly or through broker-dealers, in accordance with applicable law, on any national securities exchange on which the Shares may be listed or quoted at the time of sale, through trading systems, in the OTC market or in transactions other than on these exchanges or systems at fixed prices, at prevailing market prices at the time of the sale, at varying prices determined at the time of sale, or at negotiated prices. These sales may be effected through brokerage transactions, privately negotiated trades, block sales, entry into options or other derivatives transactions or through any other means authorized by applicable law. Selling Shareholders may redeem Shares held in Creation Basket size through an Authorized Participant. See “Risk Factors—Risks Related to the Trust and Shares—The Sponsor and its affiliates are subject to conflicts of interest that could adversely affect your investment in the Trust.”
CREATION AND REDEMPTION OF SHARES
The Trust creates and redeems Shares from time to time, but only in one or more Creation Baskets. The value of Creation Baskets are based on the quantity of ether attributable to each Share of the Trust (net of accrued but unpaid Sponsor fees and any accrued but unpaid expenses or liabilities) being created or redeemed determined as of 4:00 p.m. ET on the Business Day the order to create or redeem Creation Baskets is properly received. Creation and redemption transactions initially will take place in cash. Subject to Cboe in the future receiving the In-Kind Regulatory Approval, these transactions may also take place in exchange for ether. The timing of the In-Kind Regulatory Approval and the related in-kind creation model is unknown and there is no guarantee that the Cboe will receive such approval. If Cboe receives the In-Kind Regulatory Approval and the Sponsor chooses to allow in-kind creations and redemptions, notice to Shareholders will be provided on the Trust’s website, in a prospectus supplement, through a current report on Form 8-K and/or in the Trust’s annual or quarterly reports.
When purchasing Creation Baskets, Authorized Participants will deliver cash to the Cash Custodian. The Execution Agent will be responsible for acquiring the requisite amount of ether on behalf of the Trust on an agency basis. Once the Execution Agent selects an Ethereum Counterparty, the Cash Custodian will transfer cash to the Ethereum Counterparty in payment for the requisite amount of ether. The ether acquired from the Ethereum Counterparty will be transferred to the Ethereum Custodian. After receipt of the ether by the Ethereum Custodian, the Transfer Agent will issue Creation Baskets of Shares to the creating Authorized Participant in satisfaction of the creation order.
When redeeming Creation Baskets, the Execution Agent will be responsible for selling the requisite amount of ether on behalf of the Trust on an agency basis. Once the Execution Agent selects an Ethereum Counterparty, the Ethereum Custodian will transfer ether to the Ethereum Counterparty in return for the requisite cash payment. The cash received from the Ethereum Counterparty will be delivered to the Cash Custodian. After receipt of the cash payment, the Transfer Agent will redeem the Shares and the Cash Custodian will distribute the resulting cash to the redeeming Authorized Participant in satisfaction of the redemption order.
In connection with both creation and redemption transactions, the Execution Agent, pursuant to the oversight of the Sponsor, will decide how and with which Ethereum Counterparty to transact on the Trust’s behalf. The Authorized Participants will deliver only cash to create Shares and will receive only cash when redeeming Shares. Further, Authorized Participants will not directly or indirectly purchase, hold, deliver, or receive ether as part of the creation or redemption process or otherwise direct the Trust or a third-party with respect to purchasing, holding, delivering, or receiving ether as part of the creation or redemption process. The Trust will create Shares by receiving ether from a third-party that is not the Authorized Participant and the Trust (through the Execution Agent, on an agency basis)—not the Authorized Participant—is responsible for selecting the third-party to deliver the ether. Further, the third-party will not be acting as an agent of the Authorized Participant with respect to the delivery of the ether to the Trust or acting at the direction of the Authorized Participant with respect to the delivery of the ether to the Trust. The Trust will redeem shares by delivering ether to a third-party that is not the Authorized Participant and the Trust (through the Execution Agent, on an agency basis)—not the Authorized Participant—is responsible for selecting the third-party to receive the ether. Further, the third-party will not be acting as an agent of the Authorized Participant with respect to the receipt of the ether from the Trust or acting at the direction of the Authorized Participant with respect to the receipt of the ether from the Trust.
The Sponsor recognizes that the size of the Creation Baskets may impact the effectiveness of the arbitrage mechanism of the Trust’s creation and redemption process, and accordingly may adjust the size of the Creation Baskets to enhance the activities of the Authorized Participants in the secondary market for the Trust’s shares.
-72-
Table of Contents
Authorized Participants are the only persons that may place orders to create and redeem Creation Baskets. Authorized Participants must be (1) registered broker-dealers or other securities market participants, such as banks or other financial institutions, that are not required to register as broker-dealers to engage in securities transactions as described below, and (2) DTC Participants. To become an Authorized Participant, a person must enter into an Authorized Participant Agreement. The Authorized Participant Agreement provides the procedures for the creation and redemption of Shares. The delivery of ether to or from the Trust in connection with creation and redemption transactions, may settle on the Ethereum network and is thus subject to the risks associated with Ethereum network transactions, including the irreversibility of transactions made in error. The Authorized Participant Agreement and the related procedures attached thereto may be amended by the Trust and the Sponsor, without the consent of any Shareholder or Authorized Participant. Authorized Participants will pay a transaction fee for each order they place to create or redeem Shares. The transaction fee may be reduced, increased or otherwise changed by the Trust and the Sponsor. Authorized Participants receive no fees, commissions or other form of compensation or inducement of any kind from either the Trust or the Sponsor, and no such person will have any obligation or responsibility to the Sponsor or the Trust to effect any sale or resale of Shares.
Certain Authorized Participants or their affiliates maybe capable of participating directly in the spot markets. Some Authorized Participants or their affiliates may from time to time buy or sell ether and may profit in these instances. See “Risk Factors—Risks Related to the Trust and Shares—The Sponsor and its affiliates are subject to conflicts of interest that could adversely affect your investment in the Trust.” To the extent that the activities of Authorized Participants or their affiliates have a meaningful effect on the ether market, it could affect the price of ether and impact the ability of the Authorized Participants or their affiliates to effectively arbitrage the difference between the price at which the shares trade and the NAV of the Trust’s Shares. While the Sponsor currently expects that Authorized Participants’ or their affiliates direct activities in the ether or the secondary market in connection with the creation and redemption activities of the Trust will not significantly affect the price of ether or the Shares, the impact of the activities of the Trust and its Authorized Participants on ether or secondary market is unknown and beyond the control of the Sponsor.
Each Authorized Participant will be required to be registered as a broker-dealer under the Exchange Act and a member in good standing with FINRA, or exempt from being or otherwise not required to be licensed as a broker-dealer or a member of FINRA, and will be qualified to act as a broker or dealer in the states or other jurisdictions where the nature of its business so requires. Certain Authorized Participants may also be regulated under federal and state banking laws and regulations. Each Authorized Participant has its own set of rules and procedures, internal controls and information barriers as it determines is appropriate in light of its own regulatory regime.
The following description of the procedures for the creation and redemption of Creation Baskets is only a summary and a Shareholder should refer to the relevant provisions of the form of Authorized Participant Agreement for more detail. The form of Authorized Participant Agreement is filed as an exhibit to the registration statement of which this Prospectus is a part.
Creations and redemptions may be “off-chain” transactions that are represented in the books and records of the Prime Broker or on “on-chain” transactions reflected in the Trust’s Prime Custody Vault Account. The creating or redeeming Authorized Participant will be responsible for any on-chain transaction fees, as well as any transaction fees imposed by the Trust and any transaction charges imposed by the Execution Agent in connection with acquiring or disposing of ether in connection with creation or redemption transactions.
Authorized Participants will place orders through the Transfer Agent. The Transfer Agent will coordinate with the Trust’s Ethereum Custodian in order to facilitate settlement of the Shares and cash and/or ether as described in more detail in the “—Creation Procedures” and “—Redemption Procedures” sections below.
Creation Procedures
On any Business Day, an Authorized Participant may place an order through the Transfer Agent’s electronic order delivery system to create one or more Creation Baskets. The Transfer Agent will acknowledge the purchase order unless the Trustee or the Sponsor decides to refuse the deposit as described below under “Rejection of Purchase Orders.” Orders to purchase Shares (“Purchase Orders”) must be placed by 2:30 p.m. ET or the close of regular trading on the Exchange, whichever is earlier. The day on which a valid order is received by the Transfer Agent is considered the “Purchase Order Date.”
The Sponsor may in its sole discretion limit the number of Shares created pursuant to Purchase Orders on any specified day without providing notice to the Authorized Participants and may direct the Transfer Agent to reject any Purchase Orders in excess of such capped amount. The Sponsor may choose to limit the number of Shares created pursuant to Purchase Orders when it deems so doing to be in the best interest of Shareholders. The Sponsor may choose to do so when it believes the market is too volatile to execute a ether transaction, when it believes the price of ether is being inconsistently, irregularly, or discontinuously published from ether trading platforms and other data sources, or when it believes other similar circumstances may create a scenario in which accepting Purchase Orders would not be in the best interests of the Shareholders. The Sponsor does not believe that the Trust’s ability to arrive
-73-
Table of Contents
at such a determination will have a significant impact on the Shares in the secondary market because it believes that the ability to create Shares would be reinstated shortly after such determination is made, and any entity desiring to create Shares would be able to do so once the ability to create Shares is reinstated. However, it is possible that such a determination would cause the Shares to trade at premiums or discounts relative to the Trust’s NAV on the secondary market if arbitrageurs believe that there is risk that the creation and redemption process is not available, as this process is a component of keeping the price of the Shares on the secondary market closely aligned to the Trust’s NAV.
If the Trustee accepts the Purchase Order, the Transfer Agent will transmit to the Authorized Participant, via electronic mail message or other electronic communication, no later than 5:00 p.m. ET on the date such Purchase Order is received, or deemed received, a copy of the Purchase Order endorsed “Accepted” by the Transfer Agent and indicating the Creation Basket Deposit that the Authorized Participant must deliver to the Ethereum Custodian or Prime Broker in exchange for each Creation Basket. In the case of Purchase Orders submitted via the Transfer Agent’s electronic order entry system, the Authorized Participant will receive an automated email indicating the acceptance of the Purchase Order and the Purchase Order will be marked “Accepted” in the Transfer Agent’s electronic order entry system. Prior to the Transfer Agent’s acceptance as specified above, a Purchase Order will only represent the Authorized Participant’s unilateral offer to deposit the requisite amount of cash in exchange for Creation Baskets and will have no binding effect upon the Trust, the Sponsor, the Trust Administrator, the Transfer Agent, the Ethereum Custodian or any other party.
If required by the Sponsor and the Trust, prior to the delivery of Creation Baskets for a Purchase Order, the Authorized Participant must have wired to the Transfer Agent the nonrefundable transaction fee due for the Purchase Order. Authorized Participants may not withdraw a Purchase Order.
The manner by which Creation Baskets are made is dictated by the terms of the Authorized Participant Agreement. By placing a Purchase Order, an Authorized Participant agrees to facilitate the deposit of the requisite amount of cash with the Trust’s Cash Custodian. If an Authorized Participant fails to consummate the foregoing, the Purchase Order will be cancelled. The Execution Agent will be responsible for acquiring the requisite amount of ether on behalf of the Trust.
-74-
Table of Contents
The total cash deposit required to create each Creation Basket is an amount of cash equivalent to the amount of ether described below in the subsection entitled “Determination of Required Deposits,” plus any amount above the Benchmark on each Purchase Order Date that the Trust agrees to pay in order to acquire the required amount of ether as described in the subsection entitled “Determination of Required Deposits.” The Sponsor causes to be published each night the amount of ether that will be acquired in exchange for each Purchase Order, from which can be computed the estimated amount of cash required to create each cash Creation Basket, prior to accounting for any additional cash required to acquire the requisite amount of ether if the price paid by the Trust is in excess of the Benchmark on each Purchase Order Date.
Creation and redemption transactions initially will take place in cash. Subject to Cboe in the future receiving the In-Kind Regulatory Approval, these transactions may also take place in exchange for ether. The timing of the In-Kind Regulatory Approval and the related in-kind creation model is unknown and there is no guarantee that the Cboe will receive such approval. If Cboe receives the In-Kind Regulatory Approval and the Sponsor chooses to allow in-kind creations and redemptions, notice to Shareholders will be provided on the Trust’s website, in a prospectus supplement, through a current report on Form 8-K and/or in the Trust’s annual or quarterly reports.
When purchasing Creation Baskets, Authorized Participants will deliver cash to the Cash Custodian. The Execution Agent will be responsible for acquiring the requisite amount of ether on behalf of the Trust on an agency basis. Once the Execution Agent selects an Ethereum Counterparty, the Cash Custodian will transfer cash to the Ethereum Counterparty in payment for the requisite amount of ether. The ether acquired from the Ethereum Counterparty will be transferred to the Ethereum Custodian. After receipt of the ether by the Ethereum Custodian, the Transfer Agent will issue Creation Baskets of Shares to the creating Authorized Participant in satisfaction of the creation order.
In connection with creation transactions (and, as noted below, redemption transactions), the Execution Agent, pursuant to the oversight of the Sponsor, will decide how and with which Ethereum Counterparty to transact on the Trust’s behalf. The Authorized Participants will deliver only cash to create Shares. Further, Authorized Participants will not directly or indirectly purchase, hold, deliver, or receive ether as part of the creation or redemption process or otherwise direct the Trust or a third-party with respect to purchasing, holding, delivering, or receiving ether as part of the creation or redemption process. The Trust will create Shares by receiving ether from a third-party that is not the Authorized Participant and the Trust (through the Execution Agent, on an agency basis)—not the Authorized Participant—is responsible for selecting the third-party to deliver the ether. Further, the third-party will not be acting as an agent of the Authorized Participant with respect to the delivery of the ether to the Trust or acting at the direction of the Authorized Participant with respect to the delivery of the ether to the Trust.
The Sponsor and Transfer Agent shall reject any purchase order or redemption order that is not in proper form. Upon receipt of the ether deposit amount in the Trust’s Ethereum Account, the Ethereum Custodian will notify the Transfer Agent, the Authorized Participant and the Sponsor that the ether has been deposited. The Transfer Agent will then direct DTC to credit the number of Shares created to the Authorized Participant’s DTC account.
As between the Trust and the Authorized Participant, the expense and risk of the difference between the value of ether calculated by the Administrator for daily valuation using the Benchmark and the price at which the Trust acquires the ether will be borne solely by the Authorized Participant to the extent that the Trust pays more for ether than the price used by the Trust for daily valuation. Any such additional cash amount will be included in the amount of cash calculated by the Administrator on the Purchase Order Date (identified as a variable transaction fee), communicated to the Authorized Participant on the Purchase Order Date, and wired by the Authorized Participant to the Cash Custodian on the day following the Purchase Order Date. If the Ethereum Counterparty fails to deliver the ether to the Ethereum Custodian, no cash is sent from the Cash Custodian to the Ethereum Counterparty, no Shares are transferred to the Authorized Participant’s DTC account, the cash is returned to the Authorized Participant, and the Cash Purchase Order is cancelled.
Ethereum transactions that occur on the blockchain are susceptible to delays due to Ethereum network outage, congestion, spikes in transaction fees demanded by miners, or other problems or disruptions. To the extent that ether transfers from the Trust’s Trading Balance to the Trust’s Prime Custody Vault are delayed due to congestion or other issues with the Ethereum network, such ether will not be held in cold storage in the Prime Custody Vault until such transfers can occur.
Determination of Required Deposits
The quantity of ether required to create each Creation Basket (“Creation Basket Deposit”) changes from day to day. On each day that the Exchange is open for regular trading, the Sponsor will publish the Creation Basket after market close, which is composed of an amount of ether that will be used to determine the amount of cash required to purchase a Creation Basket the following day. After the Trust’s NAV is struck on a Business Day, the Administrator adjusts the quantity of ether constituting the Creation Basket Deposit for the next Business Day as appropriate to reflect accrued expenses. The computation is made by the Administrator as promptly as practicable after 4:00 p.m. ET. The Administrator calculates the Creation Basket Deposit for a given day by multiplying the NAV by the number of Shares in a Creation Basket (5,000) divided by the price of ether at 4:00 p.m. ET as determined consistent with the Benchmark to determine the cash amount required for a Creation Basket. Fractions of an ether smaller than .000000001 are disregarded for purposes of the computation of the Creation Basket Deposit. Although the Administrator applies the ether price to the calculate of the Creation Basket value, the Administrator plays no role in the determination of the ether price used by the Trust; rather the ether price used in calculating the cash value of a Creation Basket is identical to the ether price used in determining the Trust’s NAV.
Each Business Day, the Sponsor will communicate the final Creation Basket Deposit for that same Business Day and an estimated Creation Basket Deposit for the next Business Day. The Creation Basket Deposit so determined is communicated daily via electronic mail message to all Authorized Participants. Authorized Participants may use the value of the ether in the Creation Basket to estimate the amount of cash needed for a Purchase Order.
The date the Transfer Agent receives a valid Purchase Order will determine the Creation Basket Deposit the Authorized Participant needs to deposit. However, Purchase Orders received by the Transfer Agent after 2:30 p.m. ET (or the close of regular trading on the Exchange, whichever is earlier) will be rejected and should be resubmitted on the following Business Day.
To the extent there is a difference between the price actually paid by the Trust to acquire a Creation Basket worth of ether in the creation process compared to the cash value of the Creation Basket (i.e., if there is a difference between the amount paid by the Execution Agent on behalf of the Trust to purchase the requisite amount of ether and the valuation of ether as part of the Trust’s NAV calculation), that difference will also be charged to the creating Authorized Participant in the form of a variable fee.
Delivery of Required Deposits
An Authorized Participant who places a Purchase Order must follow the procedures outlined in the “—Creation Procedures” section above. When purchasing Creation Baskets, Authorized Participants will deliver cash to the Cash Custodian. The Execution Agent will be responsible for acquiring the requisite amount of ether on behalf of the Trust on an agency basis. Once the Execution Agent selects an Ethereum Counterparty, the Cash Custodian will transfer cash to the Ethereum Counterparty in payment for the requisite amount of ether. The ether acquired from the Ethereum Counterparty will be transferred to the Ethereum Custodian. After receipt of the ether by the Ethereum Custodian, the Ethereum Custodian will notify the Sponsor and the Transfer Agent that the ether has been received, and the Transfer Agent will direct DTC to credit the number of Creation Baskets ordered to an Authorized Participant’s DTC account on the next Business Day following the Purchase Order Date. The expense and risk of delivery and ownership of ether until ether has been received by the Ethereum Custodian on behalf of the Trust, including transaction fees from the Ethereum network’s blockchain, will be borne solely by the Authorized Participant. If ether is to be delivered to the Trust other than as described above, the Sponsor is authorized to establish such procedures and to appoint such custodians and establish such custody accounts as the Sponsor determines to be desirable, or to reject such Purchase Order or Creation Basket Deposit.
-75-
Table of Contents
Rejection of Purchase Orders
The Sponsor or its designee has the absolute right, but does not have any obligation, to reject any Purchase Order or Creation Basket Deposit if the Sponsor determines that:
| • | the Purchase Order or Creation Basket Deposit is not in proper form as described in the Authorized Participant Agreement; |
| • | the acceptance of the Purchase Order or Creation Basket Deposit would not be in the best interest of the Trust; |
| • | the acceptance of the Purchase Order or the Creation Basket Deposit would have adverse tax consequences to the Trust or its Shareholders; |
| • | the acceptance of the Creation Basket Deposit presents a security or regulatory risk to the Trust, the Sponsor, the Transfer Agent or the Ethereum Custodian; |
| • | the acceptance or receipt of the Purchase Order or Creation Basket Deposit would, in the opinion of counsel to the Sponsor, be unlawful; or |
| • | circumstances outside the control of the Trust, the Sponsor or the Ethereum Custodian or Cash Custodian make it impractical or not feasible to process Creations Baskets. |
None of the Sponsor, the Transfer Agent or the Ethereum Custodian will be liable for the rejection of any Purchase Order or Creation Basket Deposit.
Redemption Procedures
An order to redeem Creation Baskets is a “Redemption Order.” When redeeming Creation Baskets, the Execution Agent will be responsible for selling the requisite amount of ether on behalf of the Trust on an agency basis. Once the Execution Agent selects an Ethereum Counterparty, the Ethereum Custodian will transfer ether to the Ethereum Counterparty in return for the requisite cash payment. The cash received from the Ethereum Counterparty will be delivered to the Cash Custodian. After receipt of the cash payment, the Transfer Agent will redeem the Shares and the Cash Custodian will distribute the resulting cash to the redeeming Authorized Participant in satisfaction of the Redemption Order. The Execution Agent, pursuant to the oversight of the Sponsor, will decide how and with which Ethereum Counterparty to transact on the Trust’s behalf.
In connection with redemption transactions (and, as noted above, creation transactions), the Execution Agent, pursuant to the oversight of the Sponsor, will decide how and with which Ethereum Counterparty to transact on the Trust’s behalf. The Authorized Participants will receive only cash when redeeming Shares. Further, Authorized Participants will not directly or indirectly purchase, hold, deliver, or receive ether as part of the creation or redemption process or otherwise direct the Trust or a third-party with respect to purchasing, holding, delivering, or receiving ether as part of the creation or redemption process. The Trust will redeem shares by delivering ether to a third-party that is not the Authorized Participant and the Trust (through the Execution Agent, on an agency basis)—not the Authorized Participant—is responsible for selecting the third-party to receive the ether. Further, the third-party will not be acting as an agent of the Authorized Participant with respect to the receipt of the ether from the Trust or acting at the direction of the Authorized Participant with respect to the receipt of the ether from the Trust.
When redeeming Creation Baskets, the Execution Agent will be responsible for selling the requisite amount of ether on behalf of the Trust on an agency basis. Once the Execution Agent selects an Ethereum Counterparty, the Ethereum Custodian will transfer ether to the Ethereum Counterparty in return for the requisite cash payment. The cash received from the Ethereum Counterparty will be delivered to the Cash Custodian. After receipt of the cash payment, the Transfer Agent will redeem the Shares and the Cash Custodian will distribute the resulting cash to the redeeming Authorized Participant in satisfaction of the redemption order.
When a Redemption Order is received, the Trust will instruct the Ethereum Custodian to move the corresponding amount of ether from the Trust’s Prime Custody Vault Balance to the Trading Balance by a specified time on the settlement date. Transfers of ether from the Trust’s Prime Custody Vault Balance to the Trust’s Trading Balance are “on-chain” transaction represented on the ether blockchain.
Ether transactions that occur on the blockchain are susceptible to delays due to Ethereum network outages, congestion, spikes in transaction fees demanded by miners, or other problems or disruptions. To the extent that ether transfers from the Trust’s Prime Custody Vault to the Trust’s Trading Balance are delayed due to congestion or other issues with the Ethereum network, redemptions in the Trust could be delayed.
Disruption of services at the Ethereum Custodian would have the potential to delay settlement of the ether related to Redemption Orders.
Determination of Redemption Distribution
The redemption distribution from the Trust will consist of a transfer to the redeeming Authorized Participant of an amount of cash that is determined in the same manner as the determination of Creation Basket Deposits discussed above.
-76-
Table of Contents
Delivery of Redemption Distribution
The redemption distribution due from the Trust will be delivered to the Authorized Participant on the first Business Day following the Redemption Order date if, by 9:00 a.m. ET on such Business Day, the Transfer Agent’s DTC account has been credited with the Creation Baskets to be redeemed. If the Transfer Agent’s DTC account has not been credited with all of the Creation Baskets to be redeemed by such time, the redemption distribution will also be delayed. The expense and risk of delivery and ownership of ether in redemption distributions, including transaction fees from the Ethereum network’s blockchain, will be borne solely by the Authorized Participant.
Suspension or Rejection of Redemption Orders
The Sponsor may, in its discretion, suspend the right of redemption, or postpone the redemption settlement date, (1) for any period during which the Exchange is closed other than customary weekend or holiday closings, or trading on the Exchange is suspended or restricted, (2) for any period during which an emergency exists as a result of which delivery, disposal or evaluation of ether is not reasonably practicable, (3) for such other period as the Sponsor determines to be necessary for the protection of the Trust or its Shareholders (for example, where acceptance of the total deposit required to create each Creation Basket would have certain adverse tax consequences to the Trust or its Shareholders), or (4) as agreed upon between the Sponsor and Authorized Participant. For example, the Sponsor may determine that it is necessary to suspend redemptions to allow for the orderly liquidation of the Trust’s assets. An emergency could include situations where the Trust is unable to transact in ether or where the Trust is unable to value its ether holdings. Such a situation may arise when trading of ether is suspended on one or more of the digital asset trading platforms that are included in the Benchmark (for example, as a result of a significant technical failure, power outage or network error) or the Trust is unable to access the ether in the Trust’s ether custody account at the Ethereum Custodian due to technical or operating issues at the Trust or the Ethereum Custodian. Because the Trust’s ether transactions are expected to be effected by the Execution Agent over-the-counter, it is unlikely that the Trust’s ether transactions would be directly impacted by a trading halt on one or more digital asset trading platforms. However, such disruptions may have an effect on overall ether liquidity or cause price spreads of ether to widen. None of the Sponsor, the person authorized to take Redemption Orders in the manner provided in the Authorized Participant Agreement, or the Ethereum Custodian will be liable to any person or in any way for any loss or damages that may result from any such suspension or postponement.
Redemption Orders must be made in whole Creation Baskets. The Sponsor or its designee has the absolute right, but does not have any obligation, to reject any Redemption Order if the Sponsor determines that:
| • | the Redemption Order is not in proper form as described in the Authorized Participant Agreement; |
| • | the acceptance of the Redemption Order would not be in the best interest of the Trust; |
| • | the acceptance of the Redemption Order would have adverse tax consequences to the Trust or its Shareholders; |
| • | the acceptance of the Redemption Order presents a security risk to the Trust, the Sponsor, the Transfer Agent or the Ethereum Custodian; |
| • | the acceptance of the Redemption Order would, in the opinion of counsel to the Sponsor, be unlawful; or |
| • | circumstances outside the control of the Trust, the Sponsor, or the Ethereum Custodian make it impractical or not feasible for the Shares to be delivered under the Redemption Order. |
The Sponsor may also reject a Redemption Order if the number of Shares being redeemed would reduce the remaining outstanding Shares to 100,000 Shares (i.e., 20 Creation Baskets) or less.
In the event that the Sponsor intends to suspend or postpone redemptions, it will provide Shareholders with notice in a prospectus supplement and/or through a current report on Form 8-K or in the Trust’s annual or quarterly reports.
Creation and Redemption Transaction Fee
To compensate the Transfer Agent for expenses incurred in connection with the creation and redemption of Creation Baskets, an Authorized Participant may be required to pay a transaction fee to the Transfer Agent to create or redeem Creation Baskets, which is not expected to vary in accordance with the number of Creation Baskets in such order, except to the extent that the fee in connection with a cash transaction is higher than the fee in connection with an in-kind transaction. The transaction fee may be reduced, increased or otherwise changed by the Sponsor and the Trust. The Sponsor will notify Authorized Participants of any change in the transaction fee and will not implement any increase in the fee for the redemption of Shares until thirty (30) days after the date of notice. Additionally, for any creation or redemption transaction, to the extent there is a difference (i) in the case of a creation, between the price actually paid by the Trust to acquire a Creation Basket worth of ether in the creation process compared to the cash value of the Creation Basket (i.e., if there is a difference between the amount paid by the Execution Agent on behalf of the Trust to purchase the requisite amount of ether and the valuation of ether as part of the Trust’s NAV calculation); or (ii) in the case of a redemption, between the cash proceeds of selling a Creation Basket worth of ether in the redemption value compared to the cash value of the Creation Basket (i.e., if there is a difference between the amount received by the Trust from an Ethereum Counterparty in selling the requisite amount of ether and the valuation of ether as part of the Trust’s NAV calculation), that difference will also be charged to the creating Authorized Participant in the form of a variable fee.
-77-
Table of Contents
Tax Responsibility
Authorized Participants are responsible for any transfer tax, sales or use tax, stamp tax, recording tax, value added tax or similar tax or governmental charge applicable to the creation or redemption of Creation Baskets, regardless of whether or not such tax or charge is imposed directly on the Authorized Participant, and agree to indemnify the Sponsor and the Trust if they are required by law to pay any such tax, together with any applicable penalties, additions to tax and interest thereon.
Secondary Market Transactions
As noted, the Trust will create and redeem Shares from time to time, but only in one or more Creation Baskets. The creation and redemption of Shares are made in exchange for delivery to the Trust or the distribution by the Trust of the amount of ether or cash determined as described above.
As discussed above, Authorized Participants are the only persons that may place orders to create and redeem Creation Baskets. Authorized Participants must be registered broker-dealers or other securities market participants, such as banks and other financial institutions that are not required to register as broker-dealers to engage in securities transactions. An Authorized Participant is under no obligation to create or redeem Creation Baskets, and an Authorized Participant is under no obligation to offer to the public any Shares it does create.
Authorized Participants that do offer to the public Shares from the Creation Baskets they create will do so at per-Share offering prices that reflect, among other factors, the value of the Trust’s assets, supply of and demand for Shares and market conditions at the time of a transaction. Creation Baskets are generally redeemed when the market price per Share is at a discount to the NAV. Shares initially constituting the same Creation Basket but offered by Authorized Participants to the public at different times may have different offering prices. An order for one or more Creation Baskets may be placed by an Authorized Participant on behalf of multiple clients. Authorized Participants who make deposits with the Trust in exchange for Creation Baskets receive no fees, commissions or other forms of compensation or inducement of any kind from either the Trust or the Sponsor, and no such person has any obligation or responsibility to the Sponsor to effect any sale or resale of Shares.
Shares are expected to trade in the secondary market on the Exchange. Shares may trade in the secondary market at prices that are lower or higher relative to their NAV. The amount of the discount or premium in the trading price relative to the NAV may be influenced by various factors, including the value of the Trust’s assets, supply and demand for the Shares and market conditions at the time of a transaction.
Proceeds received by the Trust from the issuance of Creation Baskets will initially consist of cash deposits. Such cash deposits are held by the Cash Custodian on behalf of the Trust until (i) transferred in connection with the purchase of ether, (ii) delivered to Authorized Participants in connection with a redemption of Creation Baskets or (iii) transferred to pay the Sponsor Fee or for extraordinary expenses and liabilities not assumed by the Sponsor.
The Trust’s ether is held by the Ethereum Custodian (or held temporarily in the Trading Balance with Coinbase) on behalf of the Trust until sold by the Execution Agent to pay the Sponsor Fee or to pay for extraordinary expenses and liabilities not assumed by the Sponsor.
-78-
Table of Contents
OWNERSHIP OR BENEFICIAL INTEREST IN THE TRUST
The beneficial interest in the Trust is divided into Shares. Each Share of the Trust represents an equal beneficial interest in the net assets of the Trust, and each holder of Shares is entitled to receive such holder’s pro rata share of distributions of income and capital gains, if any.
All Shares are fully paid and non-assessable. No Share will have any priority or preference over any other Share of the Trust. All distributions, if any, will be made ratably among all Shareholders from the assets of the Trust according to the number of Shares held of record by such Shareholders on the record date for any distribution or on the date of termination of the Trust, as the case may be. Except as otherwise provided by the Sponsor, Shareholders will have no preemptive or other right to subscribe to any additional Shares or other securities issued by the Trust.
The Sponsor will have full power and authority, in its sole discretion, without seeking the approval of the Trustee or the Shareholders (a) to establish and designate and to change in any manner and to fix such preferences, voting powers, rights, duties and privileges of the Trust as the Sponsor may from time to time determine, (b) to divide the beneficial interest in the Trust into an unlimited amount of Shares, with or without par value, as the Sponsor will determine, (c) to issue Shares without limitation as to number (including fractional Shares), to such persons and for such amount of consideration, subject to any restriction set forth in the By-Laws, if any, at such time or times and on such terms as the Sponsor may deem appropriate, (d) to divide or combine the Shares into a greater or lesser number without thereby materially changing the proportionate beneficial interest of the Shares in the assets held, and (e) to take such other action with respect to the Shares as the Sponsor may deem desirable. The ownership of Shares will be recorded on the books of the Trust or the Transfer Agent for the Trust. No certificates certifying the ownership of Shares will be issued except as the Sponsor may otherwise determine from time to time. The Sponsor may make such rules as it considers appropriate for the issuance of Share certificates, transfer of Shares and similar matters. The record books of the Trust as kept by the Trust, or the Transfer Agent, as the case may be, will be conclusive as to the identity of the Shareholders and as to the number of Shares held from time to time by each.
There are present and potential future conflicts of interest in the Trust’s structure and operation you should consider before you purchase Shares. The Sponsor will use this notice of conflicts as a defense against any claim or other proceeding made. If the Sponsor is not able to resolve these conflicts of interest adequately, it may impact the Trust’s ability to achieve its investment objective.
The officers, directors and employees of the Sponsor do not devote their time exclusively to the Trust. These persons are directors, officers or employees of other entities which may compete with the Trust for their services. They could have a conflict between their responsibilities to the Trust and to those other entities.
The Sponsor has the authority to manage the investments and operations of the Trust, and this may allow it to act in a way that furthers its own interests which may create a conflict with your best interests. Shareholders have very limited voting rights, which will limit their ability to influence matters such as amendment of the Trust Agreement, change in the Trust’s basic investment policy, dissolution of the Trust, or the sale or distribution of the Trust’s assets.
The Sponsor serves as the sponsor to the Trust. The Sponsor may have a conflict to the extent that its trading decisions for the Trust may be influenced by the effect they would have on other funds its affiliates may manage. In addition, the Sponsor may be required to indemnify its officers, directors and key employees with respect to their activities on behalf of other funds, if the need for indemnification arises. This potential indemnification could cause the Sponsor’s assets to decrease. If the Sponsor’s other sources of income are not sufficient to compensate for the indemnification, it could cease operations, which could in turn result in Trust losses and/or termination of the Trust.
If the Sponsor acquires knowledge of a potential transaction or arrangement that may be an opportunity for the Trust, it will have no duty to offer such opportunity to the Trust. The Sponsor will not be liable to the Trust or the Shareholders for breach of any fiduciary or other duty if Sponsor pursues such opportunity or directs it to another person or does not communicate such opportunity to the Trust. Neither the Trust nor any Shareholder has any rights or obligations by virtue of the Trust Agreement, the trust relationship created thereby, or this Prospectus in such business ventures or the income or profits derived from such business ventures. The pursuit of such business ventures, even if competitive with the activities of the Trust, will not be deemed wrongful or improper.
The Sponsor, the Prime Broker, the Execution Agent and their respective affiliates and/or employees may hold or participate in transactions related to ether, either for their own account or for the account of others, such as clients. Such transactions may occur prior to, during, or after the commencement of this offering. Such transactions may not serve to benefit the Shareholders of the Trust and may have a positive or negative effect on the value of the ether held by the Trust and, consequently, on the market value of ether. Because these parties may trade ether for their own accounts at the same time as the Trust, prospective Shareholders should be aware that such persons may take positions in ether which are opposite, or ahead of, the positions taken for the Trust. There can be no assurance that any of the foregoing will not have an adverse effect on the performance of the Trust.
The Prime Broker and the Execution Agent may be subject to certain conflicts of interest, including: (i) the Trust’s orders may be routed to the Prime Broker’s own execution venue or to the Execution Agent’s principal market, where the Trust’s orders may be executed against other customers of the Prime Broker or Execution Agent, or with the Prime Broker acting as principal, (ii) the beneficial identity of the counterparty purchaser or seller with respect to the Trust’s orders may be unknown and therefore may inadvertently be another client of the Prime Broker or the Execution Agent, (iii) neither the Prime Broker nor the Execution Agent engages in front-running, but each is aware of the Trust’s orders or imminent orders and may execute a trade for its own inventory (or the account of an affiliate) while in possession of that knowledge, and (iv) the Prime Broker or Execution Agent may act in a principal capacity with respect to certain orders. As a result of these and other conflicts, when acting as principal, the Prime Broker or the Execution Agent may have an incentive to favor its own interests and the interests of its affiliates over the Trust’s interests. While the Prime Broker and the Execution Agent each have in place procedures to mitigate conflicts of interest when executing the Trust’s orders, trading platforms or counterparties not used by the Prime Broker or Execution Agent may offer better prices and/or lower costs than the platforms or counterparties used to execute the Trust’s orders.
The Execution Agent has adopted and implemented policies and procedures that are reasonably designed to ensure compliance with applicable law, including among others a Personal Trading Accounts Policy, a Code of Ethics and Business Conduct, and a Global Policy on the Use of Confidential Information and the Prohibition of Insider Trading, which address certain conflicts of interest (together, the “Policies”). Consistent with the requirements of the Policies, the Execution Agent will implement standard operating protocols under which personnel who have access to information about creation and redemption activity in Shares of the Trust (“Ethereum Access Persons”) report and disclose personal trading activity and holdings in ether. All of the Execution Agent’s employees will be required to preclear personal transactions in the Shares of the Trust. In addition, the Sponsor will adopt a Code of Ethics that requires Ethereum Access Persons to report and pre-clear certain transactions in ether, Shares of the Trust, and certain other digital assets. Finally, trading on behalf of clients in the shares of the Trust will be subject to controls embedded in the Sponsor’s and the Execution Agent’s respective compliance programs and systems.
Resolution of Conflicts Procedures
The Trust Agreement provides that whenever a conflict of interest exists between the Sponsor or any of its affiliates, on the one hand, and the Trust or any Shareholders or any other person, on the other hand, the Sponsor will resolve such conflict of interest considering the relative interest of each party (including its own interest) and the benefits and burdens relating to such interests, any customary or accepted industry practices, and any applicable accepted accounting practices or principles.
The general fiduciary duties that would otherwise be imposed on the Sponsor (which would make its operation of the Trust as described herein impracticable due to the strict prohibition imposed by such duties on, for example, conflicts of interest on behalf of a fiduciary in its dealings with its beneficiaries), will be replaced entirely by the terms of the Trust Agreement (to which terms all Shareholders, by subscribing to the Shares, are deemed to consent). The Trust Agreement provides that the duty and authority to manage the affairs of the Trust is vested in the Sponsor, which duty and authority the Sponsor may further delegate.
Additionally, under the Trust Agreement, the Sponsor will have the power and authority as a sponsor of the Trust to cause the Trust, among other things:
| • | To own ether, cash or any asset received as a result of a hard fork or air drop in respect of ether (an “IR Asset”), to store ether, cash or IR Assets with a Custodian, and to transfer ether, cash or IR Assets; |
| • | To compromise, arbitrate or otherwise adjust claims in favor of or against the Trust or any matter in controversy, including claims for taxes; |
-79-
Table of Contents
| • | To operate as a trust with the purpose for which the Trust was established as described in the Trust Agreement, and exercise all the powers necessary or appropriate to the conduct of such operations; |
| • | To issue, sell, repurchase, redeem, cancel, retire, acquire, hold, resell, reissue, transfer, dispose of and otherwise deal in Shares pursuant to applicable federal law; to establish terms and conditions including any fees or expenses regarding the issuance, sale, repurchase, redemption, cancellation, retirement, acquisition, holding, resale, reissuance, disposition of or dealing in Shares; and to apply to any such repurchase, redemption, retirement, cancellation or acquisition of Shares any funds or Trust property; |
| • | To cause the Ethereum Custodian, in consultation with the Sponsor, to either (i) disclaim all rights to the IR Assets so created, (ii) sell the IR Assets as soon as reasonably practicable and thereafter distribute the cash proceeds to the Shareholders of record as of the date of the hard fork or air drop that resulted in the Trust’s acquisition of the IR Assets, or (iii) distribute the IR Assets in-kind as soon as reasonably practicable to the Shareholders of record as of the date of the hard fork or air drop that resulted in the Trust’s acquisition of the IR Assets or to an agent acting on behalf of such Shareholders; |
| • | To make such filings applications, statements, certificates, agreements and other instruments with the SEC, the Financial Industry Regulatory Authority or a national securities exchange as may be required by the federal securities laws or other applicable regulations or as deemed necessary or desirable in the sole judgment of the Sponsor; |
| • | To execute and deliver letters or documents to, or instruments for filing with, a depository relating to the Shares to be issued by the Trust and also any filing required to be made as determined by the Sponsor and any other filing or application necessary or desirable as determined by the Sponsor in connection with the registration and/or offering of Shares by the Trust; |
| • | To negotiate the terms of, and execute on behalf of the Trust, any agreement, including, but not limited to, any underwriting agreement or purchase agreement relating to the Shares to be issued by the Trust as determined by the Sponsor; |
| • | To do all other acts which, in the Sponsor’s judgment, are reasonably necessary or desirable for the registration and/or offering of Shares by the Trust; and |
| • | To enter into contracts and carry on any other activities in connection with or incidental to any of the foregoing powers or with the furtherance of the Trust’s purpose. |
The Sponsor will perform its duties in its subjective good faith belief as to what is in or not opposed to the best interests of the Trust, but only consistent with the terms of the Trust Agreement.
-80-
Table of Contents
Trustee
The Trustee shall not be liable for any action reasonably taken, suffered or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by the Trust Agreement. The Trustee shall not have any obligation or duty to supervise or monitor the performance of any other person, including the Trust or the Sponsor, and shall have no liability for the failure of any other person to perform its obligations or duties under the agreements to which the Trust or the Trustee is a party or otherwise. The Trustee will not be personally liable under any circumstances, except for its own willful misconduct, bad faith or gross negligence. In particular, but not by way of limitation:
| (a) | the duties and obligations of the Trustee shall be determined solely by the express provisions of the Trust Agreement; |
| (b) | the Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in the Trust Agreement; |
| (c) | no implied covenants, duties (including fiduciary duties and duties existing at law or in equity) or obligations shall be read into the Trust Agreement against the Trustee; |
| (d) | in the absence of willful misconduct on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Trustee and conforming to the requirements of the Trust Agreement; |
| (e) | the Trustee shall not be liable for an error of judgment made in good faith by an officer or employee of the Trustee; |
| (f) | the Trustee shall not be liable with respect to any action taken, suffered or omitted to be taken by it in good faith in accordance with the direction of the Sponsor or any other person with the right to direct the Trustee; |
| (g) | no provision of the Trust Agreement shall require the Trustee to expend or risk its personal funds or otherwise incur any financial liability in the performance of its rights or duties hereunder, if the Trustee shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured or provided to it; |
| (h) | under no circumstance shall the Trustee be personally liable for any representation, warranty, covenant, agreement or indebtedness of the Trust; |
| (i) | the Trustee shall not be personally responsible for or in respect of the genuineness, form or value of the Trust Property, the validity or sufficiency of the Trust Agreement or for the due execution hereof by the Sponsor; and |
| (j) | in the event that the Trustee is unsure of the course of action to be taken by it hereunder, the Trustee may request instructions from the Sponsor and to the extent the Trustee follows such instructions in good faith it shall not be liable to any person. In the event that no instructions are provided within the time requested by the Trustee, it shall have no duty or liability for its failure to take any action or for any action it takes in good faith. |
The Trustee will incur no liability to anyone in acting upon any document believed by it to be genuine and believed by it to be signed by the proper party or parties. The Trustee may accept a certified copy of a resolution of any governing body of any corporate party as conclusive evidence that such resolution has been duly adopted by such body and that the same is in full force and effect. As to any fact or matter the manner of ascertainment of which is not specifically prescribed herein, the Trustee may for all purposes hereof rely on a certificate, signed by an authorized officer of the Sponsor, as to such fact or matter, and such certificate will constitute full protection to the Trustee for any action taken or omitted to be taken by it in good faith in reliance thereon.
The Trustee may execute any of the trusts or powers vested in it by the Trust Agreement or perform any of its duties hereunder either directly or by or through agents, nominees, or attorney-in-fact appointed with due care and shall not be responsible for any willful misconduct or negligence on the part of any agent, custodian, nominee or attorney-in-fact so appointed, provided that the appointment of any agent, custodian, nominee or attorney-in-fact shall not relieve the Trustee of any of its obligations or liabilities under the Trust Agreement.
-81-
Table of Contents
Except as expressly provided in Section 2.2 of the Trust Agreement, in accepting the trust created by the Trust Agreement, the Trustee acts solely as a trustee under the Trust Agreement and not in its individual capacity, and all persons having any claim against the Trustee by reason of the transactions contemplated by the Trust Agreement will look only to the Trust’s property for payment or satisfaction thereof.
The Trustee will not be liable for special, indirect, punitive or consequential loss or damage of any kind whatsoever (including but not limited to lost profits), even if the Trustee has been advised of the likelihood of such loss or damage and regardless of the form of action. In no event shall the Trustee hereto be liable for any failure or delay in the performance of its obligations under the Trust Agreement or any related documents because of circumstances beyond its control.
Under the Trust Agreement, the Trust has agreed to be primary obligor and to indemnify, defend and hold harmless the Trustee, in its individual capacity and in its capacity as Trustee and any of the officers, directors, employees, affiliates and agents of the Trustee (the “Indemnified Persons”) from and against any and all losses, damages, liabilities, claims, actions, suits, costs, expenses, disbursements (including reasonable legal fees and expenses in connection with enforcement of its rights to indemnity hereunder and including the reasonable fees and expenses of counsel), taxes and penalties of any kind and nature whatsoever (collectively, “Expenses”), to the extent that such Expenses arise out of or are imposed upon or asserted at any time against such Indemnified Persons with respect to the performance of the Trust Agreement, the creation, operation or termination of the Trust or the transactions contemplated hereby; provided, however, that the Trust shall not be required to indemnify any Indemnified Person for any Expenses which are a result of the willful misconduct, bad faith or gross negligence of an Indemnified Person.
As security for any amounts owing to the Trustee under the indemnification provisions of the Trust Agreement described above, the Trustee shall have a lien against the Trust’s property, which lien shall be prior to the rights of the Sponsor or any other Shareholder of the Trust. The obligations of the Sponsor and the Trust to indemnify the Indemnified Persons will survive the termination of the Trust Agreement.
Sponsor
The Trust Agreement provides that the Trust will indemnify, defend and hold harmless the Sponsor, in its capacity as Sponsor, and any of the officers, directors, employees, affiliates and agents of the Sponsor (the “Sponsor Indemnified Persons”) from and against any and all Expenses, to the extent that such Expenses arise out of or are imposed upon or asserted at any time against such Sponsor Indemnified Persons with respect to the performance of the Trust Agreement, the creation, operation or termination of the Trust or the transactions contemplated by the Trust Agreement; provided, however, that the Trust shall not be required to indemnify any Sponsor Indemnified Person for any Expenses which are a result of the willful misconduct, bad faith or gross negligence of a Sponsor Indemnified Person. To the fullest extent permitted by law, Expenses to be incurred by a Sponsor Indemnified Person shall, from time to time, be advanced by, or on behalf of, the Trust prior to the final disposition of any matter upon receipt by the Trust of an undertaking by, or on behalf of, such Sponsor Indemnified Person to repay such amount if it shall be determined that the Sponsor Indemnified Person is not entitled to be indemnified under the Trust Agreement. The obligations of the Trust to indemnify the Sponsor Indemnified Parties will survive the termination of the Trust Agreement.
-82-
Table of Contents
The Trust Agreement provides that (i) whenever a conflict of interest exists or arises between the Sponsor, on the one hand, and the Trust, on the other hand; or (ii) whenever the Trust Agreement or any other agreement contemplated herein or therein provides that the Sponsor will act in a manner that is, or provides terms that are, fair and reasonable to the Trust, the Sponsor will resolve such conflict of interest, take such action or provide such terms, considering in each case the relative interest of each party (including its own interest) to such conflict, agreement, transaction or situation and the benefits and burdens relating to such interests, and any applicable generally accepted accounting practices or principles. In the absence of bad faith by the Sponsor, the resolution, action or terms so made, taken or provided by the Sponsor will not constitute a breach of the Trust Agreement or any other agreement contemplated therein or of any duty or obligation of the Sponsor at law or in equity or otherwise.
-83-
Table of Contents
VOTING BY SHAREHOLDERS; MANAGEMENT
The Shareholders of the Trust take no part in the management or control of, and have no voice in, the Trust’s operations or business. Except in limited circumstances, Shareholders will have no voting rights under the Trust Agreement.
The Sponsor will generally have the right to amend the Trust Agreement as it applies to the Trust provided that any amendment that imposes or increases any fees or charges or prejudices a substantial existing right of the Shareholders will not become effective until thirty (30) days after notice of such amendment is given to the Shareholders. No amendment affecting the Trustee will be binding upon or effective against the Trustee unless consented to by the Trustee.
Liquidation and Voting Rights. The Sponsor will act to terminate the Trust upon the agreement of Shareholders owning at least seventy-five (75) percent of the outstanding Shares. Consistent with the Trust Agreement, upon dissolution of the Trust, the Trustee will wind up the business and affairs of the Trust and direct the Execution Agent to sell all the bitcoin remaining in the Trust in an orderly manner. Following the liquidation of the Trust’s bitcoin, any remaining outstanding Shares will be redeemed for cash and distributed to Shareholders in accordance with the provisions of the Trust Agreement.
The Trust does not have any directors, officers or employees. The creation and operation of the Trust has been arranged by the Sponsor. Under the Trust Agreement, all management functions of the Trust will be delegated to and will be conducted by the Sponsor, its agents and its affiliates, including the Ethereum Custodian. The following persons, in their respective capacities as officers of the Sponsor perform certain functions with respect to the Trust that, if the Trust had officers, would typically be performed by them.
| Name | Capacity | |
| Brian Hartigan* | Chief Executive Officer, Board of Managers | |
| Peter Hubbard | Vice President and Director of Portfolio Management | |
| Jordan Krugman* | Board of Managers | |
| Terry Gibson Vacheron | Chief Financial Officer | |
| Kelli Gallegos* | Principal Financial and Accounting Officer, Investment Pools | |
| Melanie Zimdars | Chief Compliance Officer | |
| John Zerr* | Board of Managers | |
| * | Executive officer of the Trust, within the meaning of Rule 3b-7 under the Exchange Act. |
The Sponsor is managed by a Board of Managers. The Board of Managers is composed of Messrs. Hartigan, Krugman and Zerr.
Brian Hartigan (45) has been Chief Executive Officer of the Sponsor since November 2023. In this role, he has general oversight responsibilities for all of the Sponsor’s business. Mr. Hartigan has been a Member of the Board of Managers of the Sponsor since November 2023. Previously, Mr. Hartigan was Global Head of ETF Investments and Indexed Strategies at Invesco Ltd., a global investment management company and affiliate of the Sponsor, since 2015. In that role, he was responsible for oversight of all portfolio management activities of exchange-traded funds ( ETFs), as well as providing support to the US ETF Board, serving as a global ETF expert/resource and providing day-to-day support. In addition, he was a team leader for Invesco’s unit investment trusts. Mr. Hartigan earned a BA degree from the University of St. Thomas in Minnesota and an MBA in finance from DePaul University. He is a Chartered Financial Analyst® (CFA) charterholder and a member of the CFA Society of Chicago.
-84-
Table of Contents
Peter Hubbard (42) joined the Sponsor in May 2005 as a portfolio manager and has been Vice President, Director of Portfolio Management since September 2012. In his role, Mr. Hubbard manages a team of eight portfolio managers. His responsibilities include facilitating all portfolio management processes associated with more than 200 equity and fixed income Invesco Funds listed in the United States, Canada and Europe. He is a graduate of Wheaton College with a B.A. degree in Business & Economics.
Jordan Krugman (45) is Chief Financial Officer of the Americas for Invesco Ltd., a global investment management company affiliated with the Sponsor. He was appointed to this position in October 2020. In this capacity, Mr. Krugman is responsible for general management support, in addition to executing on various strategic initiatives and overseeing the financial framework for the business units operating within the Americas division of Invesco Ltd. He has also served as a Member of the Board of Managers of the Sponsor since October 2020. From March 2019 to October 2020, Mr. Krugman served as the Global Head of Financial Planning and Analysis at Invesco Ltd. In this role, he was responsible for overseeing Invesco’s forecasting, budgeting strategic planning and financial target setting processes, including analytics and decision support for Invesco Ltd.’s executive team. From March 2017 to March 2019, Mr. Krugman served as Invesco Ltd.’s Head of Finance & Corporate Strategy, North America. In this role, Mr. Krugman was responsible for strategic and financial planning for Invesco Ltd.’s global investments organization including global real estate, private equity and global fixed income. Prior to that, Mr. Krugman was Invesco Ltd.’s Treasurer and Head of Investor Relations from May 2011 to March 2017. In this role, he was responsible for management of Invesco Ltd.’s liquidity and capital management programs. Additionally, Mr. Krugman managed the communication with Invesco Ltd.’s external stakeholders including equity shareholders, debt investors, rating agencies, and research analysts. Mr. Krugman earned a BA degree in American civilizations, with a U.S. history concentration, from Middlebury College in Vermont in 1999, and earned an MBA from Santa Clara University in California in 2007. He is a Certified Treasury Professional (CTP).
Terry Vacheron CPA (58) is the Chief Accounting Officer (since April 2022) and Head of Global Tax (since November 2020) at Invesco Ltd. In this role, she leads the company’s financial reporting, accounting, corporate tax, payroll, and SOX functions. Ms. Vacheron also serves as the Chief Financial Officer (since June 2022) of the Sponsor and Invesco Advisers Inc. where she is responsible for overseeing all aspect of the companies’ financial operations, including financial reporting and accounting. Ms. Vacheron joined Invesco in November 2020 following a brief break while between roles in October 2020. Prior to joining the firm, she was with SunTrust Bank (and later Truist Bank, which was formed in 2019 following the merger of BB&T and SunTrust) from October 2009 until September 2020, where she served as the Chief Tax Officer. Ms. Vacheron directed the full spectrum of corporate tax matters and led the tax merger integration effort for the BBT and SunTrust merger. In an overlapping role as the Corporate Functions Risk Officer at SunTrust Bank from March 2013 to December 2019, she built and led multiple corporate risk programs to identify and manage risk while maintaining her Chief Tax Officer responsibilities. During her tenure, she oversaw the implementation of stronger guidelines and accountability for risk programs, including SOX, third-party risk management, and operational risk oversight. Ms. Vacheron earned a BS degree in accounting from the University of Tennessee. She is a Certified Public Accountant (CPA). Ms. Vacheron served on the board of the United Way of Greater Atlanta from 2013 to 2020. She served as a member of the United Way’s Community Engagement Council and is currently on the United Way’s Finance Committee.
-85-
Table of Contents
Kelli Gallegos (51) has been Principal Financial and Accounting Officer—Investment Pools for the Sponsor since September 2018. Additionally, since September 2018, Ms. Gallegos has been Principal Financial and Accounting Officer – Investment Pools of Invesco Specialized Products, LLC (sponsor to a suite of currency exchange-traded funds, “ISP”), Head of North America Fund Reporting of Invesco, Ltd. (“Invesco”, a global investment management company), and Vice President and Treasurer of Invesco Exchange Traded Fund Trust, Invesco Exchange-Traded Fund Trust II, Invesco India Exchange-Traded Fund Trust, Invesco Actively Managed Exchange-Traded Fund Trust, Invesco Actively Managed Exchange-Traded Commodity Fund Trust, and Invesco Exchange-Traded Self-Indexed Fund Trusts (each a registered investment company offering series of exchange-traded funds, the “Invesco ETFs”). She also serves as Vice President (since March 2016), Principal Financial Officer (since March 2016) and Assistant Treasurer (since December 2008) for a suite of mutual funds advised by Invesco Advisers, Inc., a registered investment adviser (the “Invesco Funds”). In her roles with the Sponsor, ISP, Invesco, the Invesco ETFs, and the Invesco Funds, Ms. Gallegos has financial and administrative oversight responsibilities for, and serves as Principal Financial Officer of the Invesco ETFs, the Trust and the exchange-traded funds for which ISP serves as sponsor (the “CurrencyShares Trusts”). Previously, she was Director of Fund Financial Services from December 2008 to September 2018, Assistant Treasurer for the Sponsor from January 2013 to September 2018, Assistant Treasurer of ISP from April 2018 to September 2018, Assistant Treasurer for the Invesco ETFs from September 2014 to September 2018 and Assistant Vice President for the Invesco Funds from December 2008 to March 2016. In such roles, Ms. Gallegos managed the group of personnel responsible for the preparation of fund financial statements and other information necessary for shareholder reports, fund prospectuses, regulatory filings, and for the coordination and oversight of third-party service providers of the Trust, the Invesco ETFs, the Invesco Funds, and the CurrencyShares Trusts. Ms. Gallegos earned a BBA in accounting from Harding University in Searcy, AR.
Melanie H. Zimdars (46) has been Chief Compliance Officer of the Sponsor since November 2017. In this role she is responsible for all aspects of regulatory compliance for the Sponsor. Ms. Zimdars has also served as Chief Compliance Officer of Invesco Exchange-Traded Fund Trust, Invesco Exchange-Traded Fund Trust II, Invesco India Exchange-Traded Fund Trust, Invesco Actively Managed Exchange-Traded Fund Trust and Invesco Actively Managed Exchange-Traded Commodity Fund Trust since November 2017. From September 2009 to October 2017, she served as Vice President and Deputy Chief Compliance Officer at ALPS Holdings, Inc. where she was Chief Compliance Officer for six different mutual fund complexes, including active and passive ETFs and open-end and closed-end funds. Through its subsidiary companies, ALPS Holdings, Inc. is a provider of investment products and customized servicing solutions to the financial services industry. Ms. Zimdars received a BS degree from the University of Wisconsin-La Crosse.
John Zerr (60) has been a Member of the Board of Managers of the Sponsor since September 2006. Mr. Zerr has also served as Chief Operating Officer of the Americas for Invesco Ltd. since February 2018. Prior to his current position, Mr. Zerr served as Managing Director and General Counsel – U.S. Retail of Invesco Management Group, Inc., a registered investment adviser affiliated with the Sponsor, from March 2006 until February 2018, where he was responsible for overseeing the U.S. Retail Legal Department for Invesco Ltd. and its affiliated companies. Mr. Zerr has also been a Senior Vice President and Secretary of IDI since March 2006 and June 2006, respectively. He also served as a Director of that entity until February 2010. Mr. Zerr has served as Senior Vice President of Invesco Advisers, Inc., a registered investment adviser affiliated with the Sponsor, since December 2009. Mr. Zerr serves as a Director, Vice President and Secretary of Invesco Investment Services, Inc., a registered transfer agency since May 2007. Mr. Zerr has served as Director, Senior Vice President, General Counsel and Secretary of a number of other Invesco Ltd. wholly-owned subsidiaries which service or serviced portions of Invesco Ltd.’s U.S. Retail business since May 2007 and since June 2010 with respect to certain Van Kampen entities engaged in the asset management business that were acquired by Invesco Ltd. from Morgan Stanley. In each of the foregoing positions Mr. Zerr is responsible for overseeing legal operations. In such capacity, Mr. Zerr also is responsible for overseeing the legal activities of the Invesco Funds. Mr. Zerr earned a BA degree in economics from Ursinus College. He graduated cum laude with a J.D. from Temple University School of Law.
-86-
Table of Contents
The Trust keeps its books of record and account at the office of the Sponsor or at the offices of the Administrator, or such office, including of an administrative agent, as it may subsequently designate upon notice. The books and records are open to inspection by any person who establishes to the Trust’s satisfaction that such person is a Shareholder upon reasonable advance notice at all reasonable times during usual business hours of the Trust.
The Trust will keep a copy of the Trust Agreement on file in the Sponsor’s office, which will be available for inspection by any Shareholder at all times during its usual business hours upon reasonable advance notice.
STATEMENTS, FILINGS, AND REPORTS TO SHAREHOLDERS
After the end of each fiscal year, the Sponsor will cause to be prepared an annual report for the Trust containing audited financial statements. The annual report will be in such form and contain such information as will be required by applicable laws, rules and regulations and may contain such additional information that the Sponsor determines shall be included. The annual report will be filed with the SEC and the Exchange and will be distributed to such persons and in such manner, as is required by applicable laws, rules and regulations.
The Sponsor is responsible for the registration and qualification of the Shares under the federal securities laws. The Sponsor will also prepare, or cause to be prepared, and file any periodic reports or updates required under the Exchange Act. The Administrator will assist and support the Sponsor in the preparation of such reports.
The Administrator will make such elections, file such tax returns, and prepare, disseminate and file such tax reports, as it is advised to by its counsel or accountants or as required from time to time by any applicable statute, rule or regulation.
The fiscal year of the Trust is the period ending December 31 of each year. The Sponsor may select an alternate fiscal year.
GOVERNING LAW; CONSENT TO DELAWARE JURISDICTION
The rights of the Sponsor, the Trust, DTC (as registered owner of the Trust’s global certificate for Shares) and the Shareholders are governed by the laws of the State of Delaware. The Sponsor, the Trust, and, by accepting Shares, each DTC Participant and each Shareholder, consent to the exclusive jurisdiction of the Court of Chancery of the State of Delaware or, if such court does not have subject matter jurisdiction, any other courts located in Delaware for any claims, suits, actions or proceedings, provided that (i) the forum selection provisions do not apply to suits brough to enforce a duty or liability created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction and (ii) the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under any federal securities law. By purchasing Shares in the Trust, Shareholders waive certain claims that the courts of the State of Delaware and any other courts located in Delaware is an inconvenient venue or is otherwise inappropriate.
-87-
Table of Contents
Litigation and Claims
Within the past five years of the date of this Prospectus, there have been no material administrative, civil or criminal actions against the Sponsor, the Trust or any principal or affiliate of any of them. This includes any actions pending, on appeal, concluded, threatened, or otherwise known to them.
Legal Opinions
[ ] has advised the Sponsor in connection with the Shares being offered. [ ] advises the Sponsor with respect to its responsibilities as sponsor of, and with respect to matters relating to, the Trust. Certain opinions of counsel will be filed with the SEC as exhibits to the Registration Statement of which this Prospectus is a part.
The financial statement as of [ ], 2024 included in this Prospectus has been so included in reliance on the report of [•], an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
Amended and Restated Trust Agreement
The following is a description of the material terms of the Trust Agreement.
Appointment and Duties of Trustee
The Trust Agreement provides that the Trustee is appointed to serve as the trustee of the Trust in the State of Delaware for the sole purpose of satisfying the requirement of Section 3807(a) of the Delaware Act that the Trust have at least one trustee with a principal place of business in Delaware. The Sponsor shall have the exclusive authority to manage the affairs of the Trust as an agent of the Trust pursuant to Section 3806(b)(7) of the Delaware Act.
Under the Trust Agreement, the Trustee has no obligation to supervise or monitor the Trust’s service providers or otherwise manage the Trust. The duties of the Trustee shall be limited to (i) accepting legal process served on the Trust in the State of Delaware and (ii) at the direction of the Sponsor, the execution of any certificates required to be filed with the Secretary of State of the State of Delaware which the Trustee is required to execute under Section 3811 of the Delaware Act.
The Trust Agreement provides that the Trustee shall serve for the duration of the Trust and until the effective date of the Trustee’s resignation. The Trustee may resign upon sixty (60) days’ prior notice to the Sponsor, which shall promptly appoint a successor. If no successor has been appointed by the Sponsor within such sixty (60) day period, the Trustee may, at the expense of the Trust, petition a court to appoint a successor trustee.
Jurisdiction and Waiver of Jury Trial
The Trust Agreement provides that the Court of Chancery of the State of Delaware or, if such court does not have subject matter jurisdiction, any other courts located in Delaware will be the exclusive jurisdiction for any claims, suits, actions or proceedings, provided that the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under any federal securities law. By purchasing Shares in the Trust, Shareholders waive certain claims that the courts of the State of Delaware and any other courts located in Delaware is an inconvenient venue or is otherwise inappropriate. As such, Shareholder could be required to litigate a matter relating to the Trust in a Delaware court, even if that court may otherwise be inconvenient for the Shareholder.
Matters Pertaining to Shares and Shareholders of the Trust
The Trust Agreement authorizes the Trust to issue an unlimited number of shares unless otherwise determined and subject to any conditions set forth by the Sponsor. The Trust will issue and redeem the Shares in Creation Baskets only to certain Authorized Participants on an ongoing basis, or to such other purchaser or purchasers, including the Seed Capital Investor, as otherwise determined by the Sponsor in its sole discretion, and only in exchange for ether and/or cash. The creation and redemption mechanics are further described above under “Creation and Redemption of Shares.”
The Trust Agreement provides that all of the Shares are of the same class with equal rights and privileges. Each of the Shares is transferable, is fully paid and nonassessable and entitles the holder to vote on the limited matters upon which Shareholders may vote under the Trust Agreement. The Shares do not entitle their holders to any conversion or pre-emptive rights or, except as provided below, any redemption rights or rights to distributions. Shareholders have no voting rights except in limited circumstances. Shareholder voting rights are further described above under “Voting by Shareholders; Management—Liquidation and Voting Rights.”
Powers and Duties of the Sponsor
The Trust Agreement provides that the duty and authority to manage the affairs of the Trust is vested in the Sponsor, which duty and authority the Sponsor may further delegate, all pursuant to Section 3806(b)(7) of the Delaware Act. The duties of the Sponsor under the Trust Agreement are further described above under “Duties of the Sponsor.”
Indemnification
Under the Trust Agreement, the Trustee and the Sponsor will have a right to be indemnified by the Trust for certain liabilities or expenses that each incurs without gross negligence, bad faith or willful misconduct on its part.
Amendments
The Trust Agreement provides that it may be amended by the Sponsor in its sole discretion and without the Shareholders’ consent. Any such amendment to the Trust Agreement will be effective on such date as designated by the Sponsor in its sole discretion, except that any amendment that imposes or increases any fees or charges or prejudices a substantial existing right of the Shareholders will not become effective until thirty (30) days after notice of such amendment is given to the Shareholders. However, any amendment to the Trust Agreement that affects the rights or duties of the Trustee will require the Trustee’s prior written consent. Every Shareholder, at the time any amendment so becomes effective, will be deemed, by continuing to hold any Shares or an interest therein, to consent and agree to such amendment and to be bound by the Trust Agreement as amended thereby.
Tax Matters
The Trust Agreement provides that the Sponsor intends that the Trust shall be treated, for federal, state and local income tax purposes, as a grantor trust, and that, notwithstanding anything contained in the Trust Agreement to the contrary, neither the Sponsor nor the Trustee, nor any other person acting for or on behalf of the Trust, shall take any action that is inconsistent with such treatment.
Governing Law
The validity and construction of the Trust Agreement and all amendments thereto shall be governed by the laws of the State of Delaware, and the rights of all parties hereto and the effect of every provision thereof shall be subject to and construed according to the laws of the State of Delaware without regard to the conflicts of law provisions thereof.
Derivative Actions
Under the Trust Agreement, no person who is not a Shareholder shall be entitled to bring any derivative action, suit or other proceeding on behalf of the Trust. The Trust Agreement provides that no Shareholder may maintain a derivative action on behalf of the Trust unless holders of at least ten percent (10%) of the outstanding Shares join in the bringing of such action. In addition to the requirements set forth in Section 3816 of the Delaware Act, a Shareholder may bring a derivative action on behalf of the Trust only if it meets additional conditions described in the Trust Agreement.
Merger and Consolidation
Under the Trust Agreement, the Sponsor may cause (i) the Trust to be merged into or consolidated with, converted to or to sell all or substantially all of its assets to, another trust or entity; (ii) the Shares of the Trust to be converted into beneficial interests in another statutory trust (or series thereof); or (iii) the Shares of the Trust to be exchanged for units in another trust or company under or pursuant to any U.S. state or federal statute to the extent permitted by law. Under the Trust Agreement, the Sponsor, with written notice to the Shareholders, may approve and effect any such transactions without any vote or other action of the Shareholders, but will not do so if doing so would cause the Trust, its successor or other trust or company in which the Shareholders hold beneficial interests as a result of such transaction to fail or cease to qualify as a grantor trust for U.S. federal income tax purposes and any purported approval or effecting of such a transaction shall be null and void ab initio and without legal effect.
Fund Administration and Accounting Agreement
Pursuant to the Fund Administration and Accounting Agreement, the Administrator is generally responsible for the day-to-day administration of the Trust. The responsibilities of the Administrator include (i) establishing appropriate expense accruals and compute expense ratios, maintaining expense files and coordinating the payment of Trust approved invoices; (ii) calculating Trust approved income and per Share amounts required for periodic distributions to be made by the Trust; (iii) calculating total return information; (iv) coordinating the Trust’s annual audit; (v) supplying various normal and customary portfolio and Trust statistical data as requested on an ongoing basis; and (vi) preparing financial statements for the Trust.
The responsibilities of the Administrator also include providing various valuation and computation accounting services for the Trust, including (i) maintaining certain financial books and records for the Trust, including creation and redemptions books and records, and Trust accounting records; (ii) computing the Trust’s NAV; (iii) obtaining quotes from pricing services as directed and approved by the Sponsor, or if such quotes are unavailable, then obtaining such prices from the Sponsor, and in either case, calculating the market value of the Trust’s assets in accordance with the Trust’s valuation policies or guidelines; and (iv) transmitting or making available a copy of the daily portfolio valuation to the Sponsor.
The Trust will indemnify the Administrator and any affiliate of the Administrator (“Indemnitees”), and the Indemnitees will incur no liability for its reliance upon (i) any law, act, regulation or interpretation of the same even though the same may thereafter have been altered, changed, amended or repealed, (ii) the Trust’s offering materials or documents (excluding information provided by the Administrator), (iii) any instructions or (iv) any written opinion of legal counsel for the Trust or the Administrator, or arising out of transactions or other activities of the Trust which occurred prior to the commencement of the Fund Administration and Accounting Agreement; provided however, that the Trust shall not indemnify any Indemnitee for any losses arising out of the Indemnitees’ own bad faith, gross negligence or willful misconduct in the performance of the Fund Administration and Accounting Agreement.
Transfer Agency and Services Agreement
Pursuant to the Transfer Agency and Services Agreement, the Transfer Agent is generally responsible for the day-to-day administration of the Trust. The responsibilities of the Transfer Agent include: (i) performing and facilitating the performance of purchases and redemption of Baskets in connection with creation and redemption transactions; (ii) preparing and transmitting by means of DTC’s book entry system payments for dividends and distributions on or with respect to the Shares, if any, declared by the Trust; (iii) maintaining the record of the name and address of the Shareholder and the number of Shares issued by the Trust and held by the Shareholder; and (iv) recording the issuance of Shares of the Trust and maintain a record of the total number of Shares of the Trust which are outstanding and authorized, based upon data provided to it by the Trust.
The Transfer Agency and Services Agreement will have a three-year initial term and will automatically be renewed for successive one-year periods, unless terminated pursuant to the terms of the agreement.
Ether Custody Agreement
Pursuant to the Ether Custody Agreement, the Ethereum Custodian is responsible for providing the Trust with segregated cold wallet digital asset custody. The Trust’s assets with the Ethereum Custodian are held in segregated wallets and are therefore not commingled with corporate or other customer assets. The Ethereum Custodian also segregates each of the accounts (comprising multiple wallets in some cases) that a client (such as the Trust) may hold with the Ethereum Custodian, and each such account’s balance represents the account’s on-chain balance, which can be independently verified by the client or third-party auditors as needed. This approach applies to each asset supported by the Ethereum Custodian.
Private key materials are generated and subsequently stored in a form whereby no private key is stored in a decrypted format. The private key materials are stored within the Ethereum Custodian’s secure storage facilities within the U.S. and Europe. For security reasons, these exact locations are never disclosed.
Personnel supporting key operations are very limited and the Ethereum Custodian requires a background check prior to onboarding, and where required, annually thereafter. No single individual associated with the Ethereum Custodian has access to full private keys. Private key use and subsequent transaction signing instead require access to multiple systems and human operators in order to access a key and perform an on-chain transaction. For security purposes, the Ethereum Custodian does not disclose specifics around the roles and numbers of individuals involved in these processes.
The Ethereum Custodian maintains an annually renewed insurance policy with comprehensive coverage terms and conditions. This insurance policy covers the loss of client assets held in cold storage at the Ethereum Custodian. This insurance program, which has continuously run since 2013, provides the Ethereum Custodian and its clients with some of the broadest and deepest insurance coverage in the digital asset industry, with coverage designed to be comprehensive, including losses from employee collusion or fraud, physical loss (including theft), or damage of key material, security breach or hack, and fraudulent transfer. Furthermore, Coinbase also maintains a Cyber insurance program covering security failures.
The Ethereum Custodian maintains an Internal Audit team that performs periodic internal audits over custody operations. SOC attestations are also performed on the Ethereum Custodian’s services. The SOC 1 Type 2 and SOC 2 Type 2 reports produced cover private key management controls as well as ensure controls are designed and operating effectively, providing reasonable assurance that customer digital asset positions held in custody and prime brokerage accounts are authorized, executed and accurately and completely recorded. A SOC 1 Type 2 report addresses the controls at a service organization that are likely to be relevant to user entities’ internal control over financial reporting. A SOC 2 Type 2 report addresses controls at a service organization relevant to security, availability, processing integrity, confidentiality, or privacy in order to support users’ evaluations of their own systems of internal control.
The Ethereum Custodian will not be liable for any amount greater than the greater of (i) the aggregate amount of custodial fees paid in a 12-month period from the Trust to the Ethereum Custodian or (ii) the value of the supported digital assets on deposit in the Trust’s custodial account(s) at the time of the event giving rise to the liability, subject further to the maximum liability limit of $100 million for each cold storage address. Additionally, in respect of any incidental, indirect, special, punitive, consequential or similar losses, the Ethereum Custodian is not liable, even if the Ethereum Custodian has been advised of or knew or should have known of the possibility thereof. The Ethereum Custodian is not liable for delays, suspension of operations, failure in performance, or interruption of service to the extent it is directly due to a cause or condition beyond the reasonable control of the Ethereum Custodian.
Cash Custody Agreement
The Sponsor has entered into a Cash Custody Agreement with the Cash Custodian (the “Cash Custody Agreement”). Under the Cash Custody Agreement, the Cash Custodian will keep safely all cash and other non-ether assets of the Trust delivered to the Cash Custodian and, on behalf of the Trust, the Cash Custodian shall, from time to time, accept delivery of cash and other non-ether assets for safekeeping.
In performing its duties under the Cash Custody Agreement, the Cash Custodian will exercise the standard of care and diligence that a professional custodian would observe in these affairs taking into account the prevailing rules, practices, procedures and circumstances in the relevant market and shall perform its duties without negligence, fraud, bad faith or willful misconduct. The Cash Custodian’s liability arising out of or relating to the Cash Custody Agreement will be limited solely to those direct damages that are caused by the Cash Custodian’s failure to perform its obligations under the Cash Custody Agreement in accordance with this standard of care.
Marketing Agent Agreement
Pursuant to the Marketing Agent Agreement, the Marketing Agent is generally responsible for certain aspects of the day-to-day administration of the Trust. The responsibilities of the Marketing Agent include (i) at the request of the Trust, assisting the Trust with facilitating Authorized Participant Agreements between and among Authorized Participants, the Trust, and the applicable Transfer Agent, for the creation and redemption of Creation Baskets of the Trust; (ii) maintaining copies of confirmations of Creation Basket creation and redemption order acceptances and producing such copies upon reasonable request from the Trust or Sponsor; (iii) making available copies of the Prospectus to Authorized Participants who have purchased Baskets in accordance with the Authorized Participant Agreements; (iv) maintaining telephonic, facsimile and/or access to direct computer communications links with the Transfer Agent; (v) reviewing and approving, prior to use, certain Trust marketing materials submitted by the Trust for review (“Marketing Materials”) for compliance with applicable SEC and FINRA advertising rules, and filing all such Marketing Materials required to be filed with FINRA; (vi) ensuring that all direct requests by Authorized Participants for Prospectuses are fulfilled; and (vii) working with the Transfer Agent to review and approve orders placed by Authorized Participants and transmitted to the Transfer Agent.
The Trust shall indemnify, defend and hold the Marketing Agent, its affiliates and each of their respective members, managers, directors, officers, employees, representatives and any person who controls or previously controlled the Marketing Agent within the meaning of Section 15 of the Securities Act (collectively, the “Marketing Agent Indemnitees”), free and harmless from and against any and all losses, claims, demands, liabilities, damages and expenses (including the costs of investigating or defending any alleged losses, claims, demands, liabilities, damages or expenses and any reasonable counsel fees incurred in connection therewith) (collectively, “Losses”) that any Marketing Agent Indemnitee may incur arising out of or relating to (i) the Trust’s breach of any of its obligations, representations, warranties or covenants contained in the Marketing Agent Agreement; (ii) the Trust’s failure to comply in all material respects with any applicable laws, rules or regulations; or (iii) any claim that the Prospectus, sales literature and advertising materials or other information filed or made public by the Trust (as from time to time amended) includes or included an untrue statement of a material fact or omits or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading provided, however, that the Trust’s obligation to indemnify any of the Marketing Agent Indemnitees shall not be deemed to cover any Losses arising out of any untrue statement or alleged untrue statement or omission or alleged omission made in the Prospectus or any such advertising materials or sales literature or other information filed or made public by the Trust in reliance upon and in conformity with information provided by the Marketing Agent to the Trust, in writing, for use in such Prospectus or any such advertising materials or sales literature.
Execution Agent Agreement
The Sponsor and the Execution Agent have entered into an agreement pursuant to which the Execution Agent will provide certain execution services on behalf of the Trust. Pursuant to the Execution Agent Agreement, and subject to specific instructions from the Sponsor, the Execution Agent in its discretion is responsible for selecting the method of transacting, the price, the Ethereum Counterparty or Counterparties and the trading platform or venue (if any) for the execution of each purchase and sale of ether on behalf of the Trust. The Execution Agent has established policies and procedures for identifying, monitoring and performing due diligence on potential Ethereum Counterparties and trading platforms or venues, with entities being added or removed from consideration on an ongoing basis. In addition, the Execution Agent evaluates Ethereum Counterparties and trading platforms or venues on a per-transaction basis. At the time it selects an Ethereum Counterparty for any specific transaction, the Execution Agent may consider a number of factors in an effort to seek to achieve “best execution,” including price, transaction costs, speed, and likelihood of execution and settlement, taking into account the size of the transaction and the experience and capabilities of the Ethereum Counterparty or any other consideration relevant to the execution of the relevant transaction, giving priority to transacting at a price that is the same or similar to the Benchmark Price.
The Execution Agent shall designate, validate and maintain the Trust’s digital asset wallets in accordance with instructions received from the Sponsor. The Execution Agent shall cooperate with the Trust’s administrator and custodian(s) as necessary and in accordance with agreed upon procedures.
In addition to the duty of care provisions contained in the Agreement, the Execution Agent is expressly prohibited from using any information that it has gained about the Trust’s trading activities in ether pursuant to instructions to inform (in whole or in part) any decision to purchase or sell ether that it makes either for its own account or on behalf of any other person. The Execution Agent shall not aggregate any purchases or sales of ether it makes on behalf of the Trust with any purchases or sales of ether it makes either for its own account or on behalf of any other person unless it does so in a manner that is not reasonably expected to operate to the disadvantage of the Trust.
Master Services Agreement
The Sponsor has entered into a Master Services Agreement with the Benchmark Provider (the “Master Services Agreement”). Under the Master Services Agreement, the Benchmark Provider grants to Fund a license to access and use the Benchmark in addition to other services of the Benchmark Provider. The Master Services Agreement limits the Benchmark Provider’s liability to exclude, among others, (i) loss of profits and any indirect damages arising out of the Master Services Agreement and (ii) any breach of the Benchmark Provider’s servers or systems, including any hacking or unauthorized access to customer data. The Master Services Agreement also includes master terms that apply to other agreements between the Trust and the Benchmark Provider, including the Benchmark Provider Agreement, discussed below.
Calculation Services Subscription Agreement
The Sponsor has entered into a Calculation Services Subscription Agreement with the Benchmark Provider (the “Benchmark Provider Agreement”). Under the Benchmark Provider Agreement, the Benchmark Provider agrees to provide and update the Sponsor and other identified parties with the value of ether as calculated according to the methodology described in the “Description of Lukka Prime” section above, at agreed upon time frames, in exchanged for a fixed annual fee payable by the Sponsor.
U.S. FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of certain material U.S. federal income tax consequences that generally will apply to the purchase, ownership and disposition of Shares by Shareholders. The discussion below is based on the Code, Treasury Regulations promulgated thereunder and judicial and administrative interpretations of the Code, all as in effect on the date of this Prospectus and all of which are subject to change either prospectively or retroactively. The tax treatment of Shareholders may vary depending upon their own particular circumstances. Certain Shareholders (including but not limited to banks, financial institutions, insurance companies, regulated investment companies, real estate investment trusts, tax-exempt organizations, tax-exempt or tax-advantaged retirement plans or accounts, brokers or dealers, traders, partnerships for U.S. federal income tax purposes, persons holding Shares as a position in a “hedging,” “straddle,” “conversion,” “constructive sale” or other integrated transaction for U.S. federal income tax purposes, persons whose “functional currency” is not the U.S. dollar, persons required for U.S. federal income tax purposes to accelerate the recognition of any item of gross income with respect to the Shares as a result of such income being recognized on an applicable financial statement, or other investors with special circumstances) may be subject to special rules not discussed below. In addition, the following discussion applies only to investors who will hold Shares as “capital assets” (generally, property held for investment). Moreover, the discussion below does not address the effect of any state, local or foreign tax law consequences that may apply to an investment in Shares. Purchasers of Shares are urged to consult their own tax advisers with respect to all U.S. federal, state, local and foreign tax law considerations potentially applicable to their investment in Shares.
-88-
Table of Contents
For purposes of this discussion, a “U.S. Shareholder” is a Shareholder that is:
| • | an individual who is treated as a citizen or resident of the U.S. for U.S. federal income tax purposes; |
| • | a corporation (or entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the U.S., any state thereof or the District of Columbia; |
| • | an estate, the income of which is includible in gross income for U.S. federal income tax purposes regardless of its source; or |
| • | a trust, if a court within the U.S. is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust. |
For purposes of this discussion, a “U.S. Tax-Exempt Shareholder” is a U.S. Shareholder that is exempt from tax under Section 501(a) of the Code.
For purposes of this discussion, a “Non-U.S. Shareholder” is a Shareholder that is (or is treated as), for U.S. federal income tax purposes:
| • | a nonresident alien individual; |
| • | a foreign corporation; or |
| • | an estate or trust whose income is not subject to U.S. federal income tax on a net income basis. |
If a partnership or other entity or arrangement treated as a partnership for U.S. federal income tax purposes holds Shares, the tax treatment of a partner generally depends upon the status of the partner and the activities of the partnership. If you are a partner of a partnership holding Shares, the discussion below may not be applicable, and the Trust urges you to consult your own tax adviser for the U.S. federal income tax implications of the purchase, ownership and disposition of such Shares.
Taxation of the Trust
The Sponsor and the Trustee will treat the Trust as a “grantor trust” for U.S. federal income tax purposes. In the opinion of [ ], although not free from doubt due to the lack of directly governing authority, the Trust should be classified as a “grantor trust” for U.S. federal income tax purposes (and the following discussion assumes such classification). As a result, the Trust itself should not be subject to U.S. federal income tax. Instead, the Trust’s income and expenses should “flow through” to the Shareholders, and the Trustee intends to report the Trust’s income, gains, losses and deductions to the IRS on that basis. The opinion of [ ] is not binding on the IRS or any court. Accordingly, there can be no assurance that the IRS will agree with the conclusions of counsel’s opinion and it is possible that the IRS or another tax authority could assert a position contrary to one or all of those conclusions and that a court could sustain that contrary position.
As discussed below in “Taxation of U.S. Shareholders,” if a hard fork, airdrop or similar event occurs in the Ethereum blockchain, the Sponsor will instruct the Trust to immediately and irrevocably disclaim all rights to the IR Assets so created. Although the Sponsor will instruct the Trust to immediately and irrevocably disclaim all rights to the IR Assets so created, it is possible that Shareholders may incur a federal income tax liability if, for example, the IRS does not recognize such a disclaimer. The occurrence of a hard fork, airdrop or the Trust’s or Sponsor’s actions with respect thereto or with respect to any alternative digital asset the Trust receives may affect the Trust’s ability to qualify as a “grantor trust” for U.S. federal income tax purposes.
Neither the Sponsor nor the Trustee will request a ruling from the IRS with respect to the classification of the Trust for U.S. federal income tax purposes or with respect to any other matter. If the IRS were to assert successfully that the Trust is not classified as a “grantor trust,” the Trust would likely be classified as a partnership for U.S. federal income tax purposes, which may affect the timing and other tax consequences to the Shareholders, and might be classified as a publicly traded partnership that would be taxable as a corporation for U.S. federal income tax purposes, in which case the Trust would be taxed in the same manner as a corporation on its taxable income and distributions to Shareholders out of the earnings and profits of the Trust would be taxed to Shareholders as ordinary dividend income (which may be eligible for preferential rates, in the case of non-corporate taxpayers, or a dividends received deduction, in the case of corporate taxpayers). However, due to the uncertain treatment of digital currency for U.S. federal income tax purposes, there can be no assurance in this regard. Except as otherwise indicated, the remainder of this discussion assumes that the Trust is classified as a grantor trust for U.S. federal income tax purposes.
-89-
Table of Contents
Taxation of U.S. Shareholders
Shareholders will be treated, for U.S. federal income tax purposes, as if they directly owned a pro rata share of the underlying assets held in the Trust. Shareholders also will be treated as if they directly received their respective pro rata shares of the Trust’s income, if any, and as if they directly incurred their respective pro rata shares of the Trust’s expenses. For purposes of this discussion, and unless stated otherwise, it is assumed that all of a Shareholder’s Shares are acquired on the same date and at the same price per Share. Shareholders that hold multiple lots of Shares, or that are contemplating acquiring multiple lots of Shares, should consult their own tax advisers as to the determination of the tax basis and holding period for the underlying ether related to such Shares.
Current IRS guidance on the treatment of convertible virtual currencies classifies ether as “property” that is not currency for U.S. federal income tax purposes and clarifies that ether could be held as a capital asset, but it does not address several other aspects of the U.S. federal income tax treatment of ether. Because ether is a new technological innovation, the U.S. federal income tax treatment of ether or transactions relating to investments in ether may evolve and change from those discussed below, possibly with retroactive effect. In this regard, the IRS indicated that it has made it a priority to issue additional guidance related to the taxation of virtual currency transactions, such as transactions involving ether. While it has started to issue such additional guidance, whether any future guidance will adversely affect the U.S. federal income tax treatment of an investment in ether or in transactions relating to investments in ether is unknown. Moreover, future developments that may arise with respect to digital currencies may increase the uncertainty with respect to the treatment of digital currencies for U.S. federal income tax purposes. This discussion assumes that any ether the Trust may hold is properly treated for U.S. federal income tax purposes as property that may be held as a capital asset and is not currency for purposes of the provisions of the Code relating to foreign currency gain and loss.
The Trust may use ether to pay the Sponsor Fee, which under current IRS guidance would be treated as a sale of such ether. Although the Trust generally does not intend to sell ether for other purposes, it may do so in connection with cash redemption transactions, or if necessary to pay certain expenses that must be paid in cash. As and when the Trust sells ether (for example to pay any such expenses) or is treated as selling ether (for example, by using ether to pay the Sponsor Fee), a Shareholder will generally recognize a gain or loss in an amount equal to the difference between (a) the Shareholder’s pro rata share of the amount realized by the Trust upon the sale and (b) the Shareholder’s tax basis for its pro rata share of the ether that was sold. A Shareholder’s tax basis for its share of any ether sold by the Trust should generally be determined by multiplying the Shareholder’s total basis for its share of all of the ether held in the Trust immediately prior to the sale, by a fraction the numerator of which is the amount of ether sold, and the denominator of which is the total amount of the ether held in the Trust immediately prior to the sale. After any such sale, a Shareholder’s tax basis for its pro rata share of the ether remaining in the Trust should be equal to its tax basis for its share of the total amount of the ether held in the Trust immediately prior to the sale, less the portion of such basis allocable to its share of the ether that was sold or treated as sold.
-90-
Table of Contents
Upon a Shareholder’s sale of some or all of its Shares (other than a redemption), the Shareholder will be treated as having sold the portion or all, respectively, of its pro rata share of the ether held in the Trust at the time of the sale that is attributable to the Shares sold. Accordingly, the Shareholder generally will recognize a gain or loss on the sale in an amount equal to the difference between (a) the amount realized pursuant to the sale of the Shares, and (b) the Shareholder’s tax basis for the portion of its pro rata share of the ether held in the Trust at the time of sale that is attributable to the Shares sold, as determined in the manner described in the preceding paragraph. Based on current IRS guidance, such gain or loss (as well as any gain or loss realized by a Shareholder on account of the Trust selling ether) will generally be long-term or short-term capital gain or loss, depending upon whether the Shareholder has a holding period of greater than one year in its pro rata share of the ether that was sold.
Gains or losses from the sale of ether to fund cash redemptions are expected to be treated as incurred by the Shareholder that is being redeemed, and the amount of such gain or loss will generally equal the difference between (a) the amount realized pursuant to the sale of the ether, and (b) the Shareholder’s tax basis for the portion of its pro rata share of the ether held in the Trust that is sold to fund the redemption, as determined in the manner described in the paragraph that is two paragraphs above this one. A redemption of some or all of a Shareholder’s Shares in exchange for the cash received from such sale is not expected to be treated as a separate taxable event to the Shareholder.
Following the In-Kind Regulatory Approval, an in-kind redemption of some or all of a Shareholder’s Shares in exchange for the underlying ether represented by the Shares redeemed generally will not be a taxable event to the Shareholder. The Shareholder’s tax basis for the ether received in the in-kind redemption generally will be the same as the Shareholder’s tax basis for the portion of its pro rata share of the ether held in the Trust immediately prior to the in-kind redemption that is attributable to the Shares redeemed. The Shareholder’s holding period with respect to the ether received generally should include the period during which the Shareholder held the Shares redeemed in-kind. A subsequent sale of the ether received by the Shareholder generally will be a taxable event, unless a nonrecognition provision of the Code or Treasury Regulations applies to such sale.
After any sale or redemption of less than all of a Shareholder’s Shares, the Shareholder’s tax basis for its pro rata share of the ether held in the Trust immediately after such sale or redemption generally will be equal to its tax basis for its share of the total amount of the ether held in the Trust immediately prior to the sale or redemption, less the portion of such basis that is taken into account in determining the amount of gain or loss recognized by the Shareholder upon such sale or redemption for cash or, in the case of an in-kind redemption, that is treated as the basis of the ether received by the Shareholder in the in-kind redemption.
If a hard fork, airdrop or similar event occurs in the Ethereum blockchain, the Sponsor will instruct the Trust to immediately and irrevocably disclaim all rights to the IR Assets, as discussed above. Although the Sponsor will instruct the Trust to immediately and irrevocably disclaim all rights to the IR Assets so created, it is possible that Shareholders may still incur a federal income tax liability as a result of a hard fork, airdrop or similar event if, for example, the IRS does not recognize such a disclaimer. Under current guidance, the IRS has held that a hard fork resulting in the receipt of new units of a digital asset is a taxable event giving rise to ordinary income. While the IRS has not addressed all situations in which airdrops occur, it is clear from the reasoning of the IRS’s current guidance that it generally would treat an airdrop as a taxable event giving rise to ordinary income, and it is anticipated that any gain or loss from disposition of any assets received in the airdrop would generally be treated as giving rise to capital gain or loss that generally would be short-term capital gain or loss, unless the holding period of those assets were treated as being greater than one year as of the time they are sold.
3.8% Tax on Net Investment Income
The Code generally imposes an additional 3.8% Medicare contribution tax on the net investment income of certain individuals, trusts, and estates to the extent their income exceeds certain threshold amounts. Shareholders are advised to consult their tax advisors regarding the possible implications of this additional tax on their investment in the Shares.
Brokerage Fees and Trust Expenses
Any brokerage or other transaction fee incurred by a Shareholder in purchasing Shares will be treated as part of the Shareholder’s tax basis in the underlying assets of the Trust. Similarly, any brokerage fee incurred by a Shareholder in selling Shares will reduce the amount realized by the Shareholder with respect to the sale.
-91-
Table of Contents
Shareholders will be required to recognize the full amount of gain or loss upon a sale or deemed sale of ether by the Trust (as discussed above), even though some or all of the proceeds of such sale are used by the Trustee to pay Trust expenses. Shareholders may deduct their respective pro rata shares of each expense incurred by the Trust to the same extent as if they directly incurred the expense. Shareholders who are individuals, estates or trusts, however, may be required to treat some or all of the expenses of the Trust as miscellaneous itemized deductions. An individual may not deduct miscellaneous itemized deductions for tax years beginning after December 31, 2017 and before January 1, 2026. For tax years beginning after December 31, 2025, individuals may deduct certain miscellaneous itemized deductions only to the extent they exceed in the aggregate 2% of the individual’s adjusted gross income. Similar rules apply to certain miscellaneous itemized deductions of estates and trusts. In addition, such deductions may be subject to phase outs and other limitations under applicable provisions of the Code.
Investment by Certain Retirement Plans
Individual retirement accounts (“IRAs”) and participant-directed accounts under tax-qualified retirement plans are limited in the types of investments they may make under the Code. Potential purchasers of Shares that are IRAs or participant-directed accounts under a Code section 401(a) plan should consult with their own tax advisors as to the potential tax consequences of a purchase of Shares.
U.S. Information Reporting and Backup Withholding
The Trustee will file certain information returns with the IRS, and provide certain tax-related information to Shareholders, in connection with the Trust. To the extent required by applicable regulations, each Shareholder will be provided with information regarding its allocable portion of the Trust’s annual income, expenses, gains and losses (if any). A U.S. Shareholder may be subject to U.S. backup withholding tax in certain circumstances unless it provides its taxpayer identification number and complies with certain certification procedures. Non-U.S. Shareholders may have to comply with certification procedures to establish that they are not a U.S. person, and some Non-U.S. Shareholders may be required to meet certain information reporting or certification requirements imposed by the Foreign Account Tax Compliance Act, in order to avoid certain information reporting and withholding tax requirements.
The amount of any backup withholding will be allowed as a credit against a Shareholder’s U.S. federal income tax liability and may entitle the Shareholder to a refund, provided that the required information is furnished to the IRS in a timely manner.
U.S. Federal Income Taxation of U.S. Tax-Exempt Shareholders
The Trust’s investments and activities relating thereto may cause a U.S. Tax-Exempt Shareholder to realize UBTI. In the absence of any guidance on the matter, a U.S. Tax-Exempt Shareholder’s share of income from a hard fork, airdrop, or similar event with respect to digital currencies may be treated as UBTI. If the Trust were to incur liabilities, and thus, be treated as holding property constituting debt-financed property (generally, assets purchased with borrowed funds), income attributable to such property generally would constitute UBTI.
Tax-Exempt Shareholders should consult their tax advisors with respect to the U.S. federal income tax consequences of an investment in the Shares.
U.S. Federal Income Taxation of Non-U.S. Shareholders
The Trust generally does not expect to generate taxable income except for gain (if any) upon the sale or transfer of ether. A Non-U.S. Shareholder generally will not be subject to U.S. federal income tax with respect to gain recognized upon the sale or other disposition of the Shares, or upon the sale or transfer of ether by the Trust, unless (i) the Non-U.S. Shareholder is an individual and is present in the U.S. for one hundred and eighty-three (183) days or more during the taxable year of the sale, transfer or other disposition, and the gain is treated as being from U.S. sources; or (ii) the gain is (or is treated as) effectively connected with the conduct by the Non-U.S. Shareholder of a trade or business in the United States (“ECI”).
A Non-U.S. Shareholder’s allocable share of U.S. source dividend, interest, rental and other FDAP income that is not ECI generally will be subject to U.S. federal withholding tax at a rate of 30% (unless reduced or eliminated by an applicable income tax treaty or statutory exemption). There is currently no guidance as to whether income recognized by the Trust as a result of a fork, airdrop or similar event would constitute U.S. source FDAP.
Non-U.S. Shareholders should consult their tax advisors with respect to the U.S. federal income tax consequences of an investment in the Shares.
-92-
Table of Contents
Taxation in Jurisdictions Other Than the U.S.
Prospective purchasers of Shares that are based in or acting out of a jurisdiction other than the U.S. are advised to consult their own tax advisers as to the tax consequences under the laws of such jurisdiction (or any other jurisdiction to which they are subject) of their purchase, holding, sale and redemption of or any other dealing in Shares and, in particular, as to whether any value added tax, other consumption tax or transfer tax is payable in relation to such purchase, holding, sale, redemption or other dealing.
PROSPECTIVE SHAREHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISERS BEFORE DECIDING WHETHER TO INVEST IN THE SHARES OF THE TRUST.
PURCHASES BY EMPLOYEE BENEFIT PLANS
The Employee Retirement Income Security Act of 1974 (“ERISA”) and/or Section 4975 of the Code impose certain requirements on: (i) employee benefit plans and certain other plans and arrangements, including individual retirement accounts and annuities, Keogh plans and certain collective investment funds or insurance company general or separate accounts in which such plans or arrangements are invested, that are subject to Title I of ERISA and/or Section 4975 of the Code (collectively, “Plans”); and (ii) persons who are fiduciaries with respect to the investment of assets treated as “plan assets” within the meaning of U.S. Department of Labor regulation 29 C.F.R. § 2510.3-101, as modified by Section 3(42) of ERISA (the “Plan Assets Regulation”), of a Plan. Investments by Plans are subject to the fiduciary requirements and the applicability of prohibited transaction restrictions under ERISA and the Code.
“Governmental plans” within the meaning of Section 3(32) of ERISA, certain “church plans” within the meaning of Section 3(33) of ERISA and “non-U.S. plans” described in Section 4(b)(4) of ERISA, while not subject to the fiduciary responsibility and prohibited transaction provisions of Title I of ERISA or Section 4975 of the Code, may be subject to federal, state, local, non-U.S. or other law or regulation that are substantially similar to the foregoing provisions of ERISA and the Code. Fiduciaries of any such plans are advised to consult with their counsel prior to an investment in the Shares.
In considering an investment of a portion of Plan assets in the Shares, the Plan fiduciary responsible for making such investment should carefully consider, taking into account the facts and circumstances of the Plan, the “Risk Factors” discussed above and whether such investment is consistent with its fiduciary responsibilities. The Plan fiduciary should consider, among other issues, whether: (1) the fiduciary has the authority to make the investment under the appropriate governing plan instrument; (2) the investment could constitute a direct or indirect non-exempt prohibited transaction with a “party in interest” or “disqualified person” within the meaning of ERISA and Section 4975 of the Code respectively; (3) the investment is in accordance with the Plan’s funding objectives; and (4) such investment is appropriate for the Plan under the fiduciary standards under ERISA including investment prudence and diversification, taking into account the overall investment policy of the Plan, the composition of the Plan’s investment portfolio and the Plan’s need for sufficient liquidity to pay benefits when due.
By investing, each Plan shall be deemed to acknowledge and agree that: (a) none of the Sponsor, the Trustee, the Ethereum Custodian or any of their respective employees, representatives, agents or affiliates (the “Transaction Parties”) has, through this report and related materials, provided any investment advice within the meaning of Section 3(21) of ERISA to the Plan in connection with the decision to purchase, acquire, hold or dispose of such Shares; (b) no Transaction Party is intended to be treated as fiduciary to the Plan with respect to any decision by the Plan to purchase, acquire, hold or dispose of the Shares; and (c) no Transaction Party is expected to serve in a trusted advisor role with respect to the Plan’s investment in the Shares.
-93-
Table of Contents
This Prospectus contains information you should consider when making an investment decision about the Shares. You should rely only on the information contained in this Prospectus. None of the Trust or the Sponsor has authorized any person to provide you with different information and, if anyone provides you with different or inconsistent information, you should not rely on it. This Prospectus is not an offer to sell the Shares in any jurisdiction where the offer or sale of the Shares is not permitted.
The information contained in this Prospectus was obtained from the Trust, the Sponsor, the Ethereum Custodian, the Execution Agent and other sources the Trust believes to be reliable.
You should disregard anything the Trust or the Sponsor said in an earlier document that is inconsistent with what is included in this Prospectus.
You should not assume that the information in this Prospectus is current as of any date other than the date on the front page of this Prospectus.
We include cross references in this Prospectus to captions in these materials where you can find further related discussions. The table of contents tells you where to find these captions.
WHERE YOU CAN FIND MORE INFORMATION
The Trust has filed a registration statement on Form S-1 with the SEC under the Securities Act. This Prospectus does not contain all of the information set forth in the registration statement (including the exhibits to the registration statement), parts of which have been omitted in accordance with the rules and regulations of the SEC. For further information about the Trust or the Shares, please refer to the registration statement, which is available online at www.sec.gov.
Information about the Trust and the Shares can also be obtained from the Trust’s website, which is www.invesco.com/QETH. The Trust’s website address is only provided here as a convenience to you and the information contained on or connected to the website is not part of this Prospectus or the registration statement of which this Prospectus is part. The Trust is subject to the informational requirements of the Exchange Act and will file certain reports and other information with the SEC under the Exchange Act.
The reports and other information are available online at www.sec.gov.
-94-
Table of Contents
INVESCO CAPITAL MANAGEMENT LLC PRIVACY NOTICE
Rev. March 5, 2020
| FACTS | WHAT DOES INVESCO DO WITH YOUR PERSONAL INFORMATION?* | |
| Why? | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. | |
| What? | The types of personal information we collect and share depend on the product or service you have with us. This information can include:
• Social Security number and income
• Transaction history and investment experience
• Investment experience and assets
When you are no longer our customer, we continue to share information about you according to our policies. | |
| How? | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reasons Invesco chooses to share; and whether you can limit this sharing. | |
| Reasons we can share your personal information |
Does Invesco |
Can you limit this | ||
| For our everyday business purposes— such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus |
Yes | No | ||
| For our marketing purposes— to offer our products and services to you |
No | We do not share | ||
| For joint marketing with other financial companies |
No | We do not share | ||
| For our affiliates’ everyday business purposes— information about your transactions and experiences |
No | We do not share | ||
| For our affiliates’ everyday business purposes— information about your credit worthiness |
No | We do not share | ||
| For our affiliates to market to you |
No | We do not share | ||
| For non-affiliates to market to you |
No | We do not share |
| Questions? | Call 1-800-959-4246 (toll free). |
| * | This privacy notice applies to individuals who obtain or have obtained a financial product or service from the Invesco family of companies. For a complete list of Invesco entities, please see the section titled “Who is providing this notice” on page 2. |
-95-
Table of Contents
| Page 2 |
| Who we are | ||
| Who is providing this notice? | Invesco Advisers, Inc., Invesco Private Capital, Inc., Invesco Senior Secured Management, Inc., WL Ross & Co. LLC, Invesco Distributors, Inc., Invesco Managed Accounts, LLC, and the Invesco family of mutual funds. |
| What we do | ||
| How does Invesco protect my personal information? | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include computer safeguards and secured files and buildings. | |
| How does Invesco collect my personal information? | We collect your personal information, for example, when you
• Open an account or give us your contact information
• Make deposits or withdrawals from your account or give us your income information
• Make a wire transfer
We also collect your personal information from others, such as credit bureaus, affiliates or other companies. | |
| Why can’t I limit all sharing? | Federal law gives you the right to limit only
• Sharing for affiliates’ everyday business purposes—information about your creditworthiness
• Affiliates from using your information to market to you
• Sharing for nonaffiliates to market to you | |
| Definitions | ||
| Affiliates | Companies related by common ownership or control. They can be financial and nonfinancial companies.Invesco does not share with our affiliates so that they can market to you. | |
| Nonaffiliates | Companies not related by common ownership or control. They can be financial and nonfinancial companies.Invesco does not share with non-affiliates so that they can market to you. | |
| Joint marketing | A formal agreement between nonaffiliated financial companies that together market financial products or services to you.Invesco doesn’t jointly market. | |
-96-
Table of Contents
Table of Contents
GLOSSARY OF DEFINED TERMS
In this Prospectus, each of the following terms have the meanings set forth after such term:
“1940 Act”: Investment Company Act of 1940, as amended.
“Administrator”: The Bank of New York Mellon.
“ASC Topic 820”: the Financial Accounting Standards Board Accounting Standards Codification Topic 820, “Fair Value Measurements and Disclosures”.
“AUL”: Authorized User List.
“Authorized Participant”: One that purchases or redeems Creation Baskets from or to the Trust.
“Authorized Participant Agreement”: The authorized participant agreement by and among the Trust, the Sponsor and the Authorized Participant(s).
“Benchmark”: Lukka Prime Ethereum Reference Rate.
“Benchmark Pricing Source”: A ether pricing source included in the Benchmark.
“Benchmark Provider”: Lukka, Inc.
“Benchmark Provider Agreement”: Calculation Services Subscription Agreement between the Sponsor and the Benchmark Provider.
“BES”: Base Exchange Score.
“BGP”: Border gateway protocol.
“BNYM”: The Bank of New York Mellon.
“BSA”: U.S. Bank Secrecy Act, as amended.
“Business Day”: Any day other than a day when the Exchange is closed for regular trading.
“Cash Custodian”: The Bank of New York Mellon.
“Cash Custody Agreement”: Custody agreement by and between the Cash Custodian and the Trust.
“Cash Purchase Order”: An order to purchase one or more Creation Baskets with the Transfer Agent in exchange for cash.
“CBDCs”: Central bank digital currencies.
“Cboe”: Cboe BZX.
“CEA”: Commodity Exchange Act of 1936, as amended.
“CFIX”: Bloomberg Crypto Price Fixings.
“CFTC”: Commodity Futures Trading Commission, an independent agency with the mandate to regulate commodity futures and options in the U.S.
“Code”: Internal Revenue Code of 1986, as amended.
“Coinbase”: Coinbase, Inc.
“Coinbase Custody”: Coinbase Custody Trust Company, LLC.
“Coinbase Global”: Coinbase Global, Inc.
“Connected Trading Venue”: Third-party trading platform or other trading platform where the Prime Broker routes orders to buy and sell ether on behalf of the Trust if the Execution Agent opts to utilize the Prime Broker to execute such orders.
“Creation Basket”: A block of 5,000 Shares used by the Trust to issue or redeem Shares.
“Creation Basket Deposit”: The total deposit required to create each Creation Basket.
“CTA”: Consolidated Tape Association
“CurrencyShares Trusts”: Exchange-traded funds for which ISP serves as sponsor.
“DSTA”: Delaware Statutory Trust Act.
“DTC”: Depository Trust Company. DTC will act as the securities depository for the Shares.
“DTC Participant”: An entity that has an account with DTC.
“ECI”: Effectively Connected Income.
“ERISA”: The Employee Retirement Income Security Act of 1974.
A-1
Table of Contents
“Ether”: Ether with a lowercase “e” is used when referring to the digital asset within the Ethereum network.
“Ether Custody Agreement”: Prime brokerage and custody agreement between the Trust and Coinbase Custody Trust Company, LLC.
“Ethereum”: Ethereum with an uppercase “E” is used to describe the system as a whole that is involved in maintaining the ledger of ether ownership and facilitating the transfer of ether among parties.
“Ethereum Access Persons”: Execution Agent personnel who have access to information about creation and redemption activity in Shares of the Trust.
“Ethereum Counterparty”: Digital asset trading platforms or counterparties with whom the Execution Agent transacts in acquiring or disposing of ether on behalf of the Trust.
“Ethereum Custodian”: Coinbase Custody Trust Company, LLC.
“ETHW”: EthereumPoW network.
“ETP”: Exchange-traded product.
“Examinations”: The U.S. Securities and Exchange Commission’s Division of Examinations.
“Exchange”: Cboe BZX.
“Exchange Act”: The Securities Exchange Act of 1934, as amended.
“Execution Agent”: Galaxy Digital Funds LLC
“Expenses”: losses, damages, liabilities, claims, actions, suits, costs, expenses, disbursements (including the reasonable fees and expenses of counsel), taxes and penalties of any kind and nature whatsoever.
“FASB”: Financial Accounting Standards Board.
“FDAP”: Fixed or determinable annual or periodical gains, profits and income.
“FDIC”: Federal Deposit Insurance Corporation.
“FinCEN”: The Financial Crimes Enforcement Network.
“FINRA”: Financial Industry Regulatory Authority, formerly the National Association of Securities Dealers.
“FMV”: Fair market value.
“FTX”: FTX Trading Ltd.
“Galaxy”: Galaxy Digital LP.
“Galaxy Holdings”: Galaxy Digital Holdings LP.
“GBTC”: Grayscale Bitcoin Trust.
“Genesis”: Genesis Global Capital, LLC.
“ICO”: Initial coin offering.
“IFRS”: International Financial Reporting Standards Foundation
“IIV”: Intraday indicative value.
“Incidental Rights”: Rights to acquire, or otherwise establish dominion and control over, any virtual currency or other asset or right, which rights are incident to the Trust’s ownership of ether and arise without any action of the Trust or of the Sponsor on behalf of the Trust.
“Indemnified Person”: The Trustee as well as any officers, directors, employees and agents of the Trustee.
“Indirect Participants”: Banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a DTC Participant, either directly or indirectly.
“Initial Seed Shares”: 4,000 shares of the Trust sold to Invesco Ltd. in connection with the Trust’s launch.
“In-Kind Regulatory Approval”: Regulatory approval that may be received by Cboe to permit the Trust to create and redeem Creation Baskets in-kind for Ethereum.
“Invesco”: Invesco Capital Management LLC.
“Invesco ETFs”: Invesco Exchange Traded Fund Trust, Invesco Exchange-Traded Fund Trust II, Invesco India Exchange-Traded Fund Trust, Invesco Actively Managed Exchange-Traded Fund Trust, Invesco Actively Managed Exchange-Traded Commodity Fund Trust, and Invesco Exchange-Traded Self-Indexed Fund Trusts.
“Invesco Funds”: Mutual funds advised by Invesco Advisers, Inc., a registered investment adviser.
“IR Assets”: Virtual currency tokens, or other asset or right, acquired by the Trust through the exercise (subject to the applicable provisions of the Trust Agreement) of any Incidental Right.
“IRAs”: Individual retirement accounts.
“IRS”: U.S. Internal Revenue Service.
“ISP”: Invesco Specialized Products, LLC.
“JOBS Act”: Jumpstart Our Business Startups Act.
“KYT”: Know-Your-Transaction.
“Losses”: Losses, claims, demands, liabilities, damages and expenses (including the costs of investigating or defending any alleged losses, claims, demands, liabilities, damages or expenses and any reasonable counsel fees incurred in connection therewith).
“Marketing Agent”: Invesco Distributors, Inc.
“Marketing Agent Indemnitees”: The Marketing Agent, its affiliates and each of their respective members, managers, directors, officers, employees, representatives and any person who controls or previously controlled the Marketing Agent within the meaning of Section 15 of the Securities Act.
“Marketing Materials”: Certain Trust marketing materials submitted by the Trust for review.
“Master Services Agreement”: Master Services Agreement between the Sponsor and the Benchmark Provider.
“NAV”: Net asset value per share of the Trust.
“NFA”: National Futures Association.
“NYSDFS”: The New York State Department of Financial Services.
“NYSDTF”: The New York State Department of Taxation and Finance.
“OFAC”: The Office of Foreign Assets Control of the United States Department of the Treasury.
A-2
Table of Contents
“OTC”: Over-the-counter markets.
“PCAOB”: Public Company Accounting Oversight Board.
“PIOB”: Benchmark Provider’s Price Integrity Oversight Board.
“Plans”: Employee benefit plans and certain other plans and arrangements, including individual retirement accounts and annuities, Keogh plans and certain collective investment funds or insurance company general or separate accounts in which such plans or arrangements are invested, that are subject to Title I of ERISA and/or Section 4975 of the Code.
“PoS”: Proof-of-Stake.
“PoW”: Proof-of-Work.
“Prime Broker”: Coinbase, Inc.
“Prime Custody Vault”: “Cold storage” environment where the private keys associated with the Trust’s ether are generated and secured.
“Redemption Order Date”: The date a redemption order is received in satisfactory form and approved by the Transfer Agent.
“Relevant Coinbase Entities”: Coinbase and Coinbase Global Inc.
“SEC”: The U.S. Securities and Exchange Commission.
“Securities Act”: Securities Act of 1933, as amended.
“Seed Capital Investor”: Invesco Ltd. or a subsidiary thereof.
“Seed Creation Baskets”: Creation Baskets comprising $[ ] million worth of Shares purchased by the Seed Capital Investor.
“Selling Shareholder”: Each initial seed investor, and each affiliate of the Trust and the Sponsor who may hold Shares from time to time, that sells some or all of the Shares held by them pursuant to the registration statement for the Trust.
“Shareholders”: Holders of Shares.
“Shares”: Common shares representing fractional undivided beneficial interests in the Trust.
“SIPC”: Securities Investor Protection Corporation.
“SOC”: Systems and Organizational Control.
“Sponsor”: Invesco Capital Management LLC.
“Sponsor Ethereum Account”: The Sponsor’s account, if any, at the Ethereum Custodian.
“Sponsor Fee”: The unified fee of [●]% per annum paid by the Trust to the Sponsor.
“Trading Balance”: Trading account used to maintain the Trust’s ether when it is being processed in connection with certain creation or redemption transactions or it is being sold.
“Transaction Parties”: The Sponsor, the Trustee, the Ethereum Custodian or any of their respective affiliates.
“Transfer Agent”: The Bank of New York Mellon.
“Trust”: Invesco Galaxy Ethereum ETF.
“Trust Agreement”: Amended and Restated Declaration of Trust and Trust Agreement of [ ], 2024.
“Trust” Ethereum Account”: Each Trust account at the Ethereum Custodian.
“Trustee”: CSC Delaware Trust Company, a Delaware trust company.
“U.S.”: United States of America.
“U.S. GAAP”: U.S. generally accepted accounting principles.
“U.S. Treasury Department”: United States Department of the Treasury.
“UBTI”: Unrelated Business Taxable Income.
“USDC”: U.S. Dollar Coin.
“WHO”: World Health Organization.
“You”: The current and prospective owner or holder of Shares.
A-3
Table of Contents
INVESCO GALAXY ETHEREUM ETF
[ ]
COMMON SHARES
PROSPECTUS
[ ], 2024
Until [ ], 2024 (25 calendar days after the date of the initial Prospectus) all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a Prospectus. This is in addition to the dealers’ obligation to deliver a Prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
Table of Contents
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The Trust shall not bear any expenses incurred in connection with the issuance and distribution of the securities being registered. These expenses shall be paid by Invesco Capital Management LLC, the sponsor of the Trust. Except for the Securities and Exchange Commission Registration Fee and Exchange Listing Fee, all such expenses are estimated:
| Securities and Exchange Commission Registration Fee |
$ | |||
| Exchange Listing Fee |
$ | |||
| Printing and engraving expenses |
$ | |||
| Legal fees and expenses |
$ | |||
| Accounting fees and expenses |
$ | |||
| Total |
$ |
| * | Subject to revision upon completion of the offering. |
Item 14. Indemnification of Directors and Officers.
Under the Trust Agreement, the Trust has agreed to be primary obligor and to indemnify, defend and hold harmless the Trustee, in its individual capacity and in its capacity as Trustee and any of the officers, directors, employees, affiliates and agents of the Trustee (the “Indemnified Persons”) from and against any and all losses, damages, liabilities, claims, actions, suits, costs, expenses, disbursements (including reasonable legal fees and expenses in connection with enforcement of its rights to indemnity hereunder and including the reasonable fees and expenses of counsel), taxes and penalties of any kind and nature whatsoever (collectively, “Expenses”), to the extent that such Expenses arise out of or are imposed upon or asserted at any time against such Indemnified Persons with respect to the performance of the Trust Agreement, the creation, operation or termination of the Trust or the transactions contemplated hereby; provided, however, that the Trust shall not be required to indemnify any Indemnified Person for any Expenses which are a result of the willful misconduct, bad faith or gross negligence of an Indemnified Person. As security for any amounts owing to the Trustee under the indemnification provisions of the Trust Agreement described above, the Trustee shall have a lien against the Trust’s property, which lien shall be prior to the rights of the Sponsor or any other Shareholder of the Trust. The obligations of the Sponsor and the Trust to indemnify the Indemnified Persons will survive the termination of the Trust Agreement.
The Trust Agreement provides that the Trust shall indemnify, defend and hold harmless the Sponsor, in its capacity as Sponsor, and any of the officers, directors, employees, affiliates and agents of the Sponsor (the “Sponsor Indemnified Persons”) from and against any and all Expenses, to the extent that such Expenses arise out of or are imposed upon or asserted at any time against such Sponsor Indemnified Persons with respect to the performance of the Trust Agreement, the creation, operation or termination of the Trust or the transactions contemplated by the Trust Agreement; provided, however, that the Trust shall not be required to indemnify any Sponsor Indemnified Person for any Expenses which are a result of the willful misconduct, bad faith or gross negligence of a Sponsor Indemnified Person. To the fullest extent permitted by law, Expenses to be incurred by a Sponsor Indemnified Person shall, from time to time, be advanced by, or on behalf of, the Trust prior to the final disposition of any matter upon receipt by the Trust of an undertaking by, or on behalf of, such Sponsor Indemnified Person to repay such amount if it shall be determined that the Sponsor Indemnified Person is not entitled to be indemnified under the Trust Agreement. The obligations of the Trust to indemnify the Sponsor Indemnified Parties will survive the termination of the Trust Agreement.
Item 15. Recent Sales of Unregistered Securities.
In connection with the Trust’s launch, the Trust was seeded with $[●] on [●] through the sale of Shares (“Initial Seed Shares”) by the Trust to the Sponsor.
In this transaction, the Sponsor purchased [●] Shares ([●] Creation Baskets) at a price of $[●] per Share based on the Benchmark price as of 4:00 p.m. ET on [●]. The Execution Agent acquired [●] ether on behalf of the Trust. Accordingly, as of the market close on [●], the Trust had total assets of $[●], solely represented by ether held in custody by the Ethereum Custodian, and had [●] Shares outstanding, entirely held by the Seed Capital Investor. These transactions were effected pursuant to Section 4(a)(2) of the Securities Act. The Seed Capital Investor acted as a statutory underwriter in connection with these transactions.
II-1
Table of Contents
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibit.
The exhibits to this registration statement are listed in the Exhibit Index to this registration statement, which is incorporated herein by reference.
(b) Financial Statement Schedules.
Not applicable.
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
| (1) | To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: |
| (i) | to include any prospectus required by section 10(a)(3) of the Securities Act; |
| (ii) | to reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and |
| (iii) | to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; |
| (2) | That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
| (3) | To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. |
| (4) | That, for the purpose of determining liability under the Securities Act to any purchaser: |
| (i) | If the registrant is relying on Rule 430B: |
| (A) | each prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and |
| (B) | each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of providing the information required by section 10(a) of the Securities Act shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date; or |
II-2
Table of Contents
| (ii) | If the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use. |
| (5) | That, for the purpose of determining liability of the registrant under the Securities Act to any purchaser in the initial distribution of the securities: |
The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
| (i) | any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424; |
| (ii) | any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant; |
| (iii) | the portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and |
| (iv) | any other communication that is an offer in the offering made by the undersigned registrant to the purchaser. |
| (6) | Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. |
II-3
Table of Contents
EXHIBIT INDEX
| Exhibit No. | Exhibit Description | |
| 3.1 | Declaration of Trust and Trust Agreement1 | |
| 3.2 | Amended and Restated Declaration of Trust and Trust Agreement* | |
| 3.3 | Certificate of Trust1 | |
| 5.1 | Opinion of [ ] as to legality** | |
| 8.1 | Opinion of [ ] as to tax matters** | |
| 10.1 | [Reserved] | |
| 10.2 | Form of Initial Authorized Participant Agreement* | |
| 10.3 | Form of Marketing Agent Agreement* | |
| 10.4 | Ether Custody Agreement* | |
| 10.5 | ||
| 10.6 | Form of Trust Administration and Accounting Agreement* | |
| 10.7 | Form of Transfer Agency Agreement* | |
| 10.8 | Form of Calculation Services Subscription Agreement* | |
| 10.9 | Execution Agent Agreement* | |
| 10.10 | Lukka Master Services Agreement* | |
| 23.1 | Consent of Independent Registered Public Accounting Firm** | |
| 23.2 | Consent of [ ] (included in Exhibit 5.1) ** | |
| 23.3 | Consent of [ ] (included in Exhibit 8.1)** | |
| 107 | Filing Fee Table* | |
| * | Filed herewith. |
| ** | To be filed by amendment. |
| 1 | Previously filed as an exhibit to the Registration Statement on Form S-1 filed September 29, 2023 and incorporated herein by reference. |
II-4
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Downers Grove, and the State of Illinois, on May 31, 2024.
| INVESCO GALAXY ETHEREUM ETF
Invesco Capital Management LLC, as Sponsor of the Trust | ||
| By: | /s/ Brian Hartigan | |
| Name: Brian Hartigan Title: Chief Executive Officer and Manager | ||
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities* and on the dates indicated.
| Signature |
Title |
Date | ||
| /S/ Brian Hartigan Name: Brian Hartigan |
Chief Executive Officer, Manager (principal executive officer) |
May 31, 2024 | ||
| /S/ Kelli Gallegos | Principal Financial and Accounting Officer, Investment Pools (principal financial officer and principal accounting officer) |
May 31, 2024 | ||
|
Name: Kelli Gallegos | ||||
| /S/ Jordan Krugman Name: Jordan Krugman |
Manager | May 31, 2024 | ||
| /S/ John Zerr Name: John Zerr |
Manager | May 31, 2024 | ||
| * | The registrant is a trust and the persons are signing in their capacities as officers of Invesco Capital Management LLC, the Sponsor of the registrant. |
II-5
Exhibit 3.2
INVESCO GALAXY ETHEREUM ETF
AMENDED AND RESTATED DECLARATION OF TRUST
AND TRUST AGREEMENT
THIS AMENDED AND RESTATED DECLARATION OF TRUST AND TRUST AGREEMENT (this “Amended and Restated Declaration of Trust”), dated as of May 31, 2024 amends and restates the Trust Agreement dated as of September 26, 2023 (the “Prior Trust Agreement”), between Invesco Capital Management LLC, a Delaware limited liability company, as sponsor (the “Sponsor”), and CSC Delaware Trust Company, a Delaware corporation (“CSC Delaware Trust Company”), as trustee.
WHEREAS, the Trust was formed under the Delaware Act (as defined herein) on September 27, 2023, by the filing of the Certificate of Trust in the Office of the Secretary of State of the State of Delaware and the execution and delivery of the Prior Trust Agreement; and
WHEREAS, the Prior Trust Agreement is superseded by this Amended and Restated Declaration of Trust.
NOW, THEREFORE, the Trustee and the Sponsor do hereby (i) amend and restate the Prior Trust Agreement in its entirety and (ii) declare that the Trust will hold the Trust Property, including all ether, cash and any other assets that the Trust now possesses or may hereafter acquire from time to time in any manner, and manage and dispose of the same upon the following terms and conditions. The Trust Property shall be held in trust for the benefit of the Shareholders. Accordingly, the Sponsor and the Trustee hereby agree as follows:
ARTICLE I
Formation of the Trust; Definitions; General Interpretive Matters
Section 1.1 Formation of Trust.
| a. | The trust is known as “Invesco Galaxy Ethereum ETF” (the “Trust”) in which name the Sponsor, the Trustee, the Administrator, the Custodian or other duly authorized parties may conduct the activities of the Trust to the extent provided herein, make and execute contracts, and sue and be sued. Any name change of the Trust shall become effective upon the effectiveness of the filing of a certificate of amendment under the Delaware Act reflecting such change. Any such action shall have the status of an amendment to this Amended and Restated Declaration of Trust. In the event of any name change, the Trustee shall cause notice to be given to the Sponsor for further distribution to the affected Shareholders within a reasonable time after the implementation of such change, which notice will be deemed given if the changed name is reflected in any Registration Statement. The principal executive office of the Trust shall be 3500 Lacey Road, Suite 700, Downers Grove, IL 60515. |
| b. | It is the intention of the parties hereto that the Trust continued hereby constitute a statutory trust under Chapter 38 of Title 12 of the Delaware Code, 12 Del. C. § 3801 et seq. (the “Delaware Act”) and that this Amended and Restated Declaration of Trust constitute the governing instrument of the Trust. Pursuant to authorization granted to it under the Prior Trust Agreement, the Trustee executed and filed the Certificate of Trust with the Delaware Secretary of State. |
| c. | The purpose of the Trust is to invest in and hold ether for the benefit of the Shareholders and to engage in only those other activities necessary, advisable or incidental thereto. |
Section 1.2 Definitions. Whenever used herein, unless otherwise required by the context or specifically provided:
| a. | “Administrator” shall mean Bank of New York Mellon, or any successor thereto, or any other entity who acts as administrator to the Trust pursuant to a written agreement with the Trust. |
| b. | “Amended and Restated Declaration of Trust” shall have the meaning assigned to such term in the preamble hereto. |
| c. | “Authorized Participant” shall mean a market participant who (i) is a registered broker-dealer or other securities market participant such as a bank or other financial institution which is not required to register as a broker-dealer to engage in securities transactions, (ii) is a direct participant in DTC, and (iii) has entered into an Authorized Participant Agreement with the Sponsor and the Trust, subject to acceptance by the Transfer Agent. To facilitate the creation and redemption of Creation Baskets, Authorized Participants may, but are not required to, establish an ether custody account with the Custodian. Only Authorized Participants may place orders to create or redeem Creation Baskets; |
| d. | “Authorized Participant Agreement” shall mean an agreement entered into by an Authorized Participant, the Trust and the Sponsor on behalf of the Trust which provides the procedures for the creation and redemption of Creation Baskets and for the delivery of the ether and distribution of the Shares required for such creations and redemptions; |
| e. | “Certificate of Trust” shall mean the certificate of trust of the Trust, as amended or restated from time to time, filed by the Trustee in the Office of the Secretary of State of the State of Delaware in accordance with the Delaware Act to form the Trust; |
| f. | “Creation Basket” shall mean a block of 5,000 Shares (or such other number of Shares that the Sponsor shall determine from time to time in its sole discretion); |
| g. | “CTA” shall have the meaning assigned to such term in Section 10.12 hereof. |
| h. | “Custodian” shall mean Coinbase or such other custodian(s) appointed by the Sponsor to serve as custodian of the Trust Property pursuant to a custody agreement between and among the Sponsor, the Trust and a Custodian (each a “Custody Agreement”), or any other entity who acts as custodian to the Trust pursuant to a written agreement with the Trust; |
| i. | “Delaware Act” shall have the meaning assigned to such term in Section 1.1(b) hereof. |
| j. | “Digital Asset Network Fork” shall mean a substantial software modification to the Blockchain where the Trust’s Property is reflected that results in two or more competing and incompatible Blockchain implementations; |
| k. | “DTC” shall mean the Depository Trust Company. DTC is a limited purpose trust company organized under New York law, a member of the U.S. Federal Reserve System and a clearing agency registered with the U.S. Securities and Exchange Commission. DTC will act as the securities depository for the Shares; |
| l. | “ether” shall mean a type of a digital asset based on an open source protocol existing on the Ethereum Network and utilizing cryptographic security. Ether constitutes the assets underlying the Trust’s Shares; |
| m. | “Ethereum” or “Ethereum Network” shall mean the online, end-user-to-end-user network hosting the public transaction ledger, known as the blockchain (the “Blockchain”), and the source code comprising the basis for the protocols and cryptographic security governing the Ethereum Network; |
| n. | “Person” shall mean and include individuals, corporations, limited liability companies, partnerships, trusts, associations, joint ventures, estates and other entities, whether or not legal entities, governments and agencies and political subdivisions thereof, whether domestic or foreign, and any other “person” within the meaning of Section 3801(f) of the Delaware Act; |
| o. | “Prior Trust Agreement” shall have the meaning assigned to such term in the preamble hereto. |
| p. | “Registration Statement” shall mean the Trust’s registration statement or statements as filed with the U.S. Securities and Exchange Commission, as in effect and as may be amended from time to time and shall include any prospectus or statement of additional information forming a part thereof; |
| q. | “Seed Investor” shall mean the purchaser of the initial Creation Baskets acting solely in its capacity as purchaser of such initial Creation Baskets; |
| r. | “Shareholder” shall mean a record owner of outstanding Shares; |
| s. | “Shares” shall mean units of fractional undivided beneficial interest in and ownership of the Trust which are issued by the Trust; |
| t. | “Sponsor” shall have the meaning assigned to such term in the preamble hereto. |
| u. | “Sponsor’s Fee” shall mean the fee paid by the Trust to the Sponsor in consideration for the Sponsor’s duties and its assumption of the ordinary administrative and marketing expenses that the Trust is expected to incur. The Sponsor’s Fee will accrue daily and will be payable in cash as provided pursuant to the Trust’s Registration Statement monthly in arrears. |
| v. | “Transfer Agent” shall mean BNY Mellon Corporation, or any successor thereto, or any other entity who acts as transfer agent to the Trust pursuant to a written agreement with the Trust. |
| w. | “Trust” shall have the meaning assigned to such term in Section 1.1(a) hereof. |
| x. | “Trust Property” shall mean the ether and any other property that is from time to time owned or held by or for the account of the Trust under this Amended and Restated Declaration of Trust. |
| y. | “Trustee” shall mean CSC Delaware Trust Company, not in its individual capacity but solely in its capacity as trustee of the Trust hereunder, and its permitted successors and assigns in such capacity. |
Section 1.3 General Interpretive Principles. For purposes of this Amended and Restated Declaration of Trust, except as otherwise expressly provided or unless the context otherwise requires:
| a. | the terms defined in this Amended and Restated Declaration of Trust have the meanings assigned to them in this Amended and Restated Declaration of Trust and include the plural as well as the singular, and the use of any gender herein shall be deemed to include the other gender, and capitalized terms not defined in this Amended and Restated Declaration of Trust have the meanings assigned to them in the Registration Statement; |
| b. | accounting terms not otherwise defined herein have the meanings assigned to them in accordance with United States generally accepted accounting principles as in effect from time to time; |
| c. | references herein to “Articles”, “Sections”, “Subsections”, “Paragraphs” and other subdivisions without reference to a document are to designated Articles, Sections, Subsections, Paragraphs and other subdivisions of this Amended and Restated Declaration of Trust; |
| d. | a reference to a Subsection without further reference to a Section is a reference to such Subsection as contained in the same Section in which the reference appears, and this rule shall also apply to Paragraphs and other subdivisions; |
| e. | the words “herein”, “hereof”, “hereunder”, “hereto”, “hereby” and other words of similar import refer to this Amended and Restated Declaration of Trust as a whole and not to any particular provision unless the context requires otherwise; |
| f. | the terms “include,” “includes” and “including” and any comparable term shall be deemed to be followed by the phrase “without limitation”; |
| g. | any definition referencing any agreement, instrument or other document shall be construed as referencing to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified. |
Section 1.4 The Trustee is appointed to serve as the trustee of the Trust in the State of Delaware for the sole purpose of satisfying the requirement of Section 3807(a) of the Delaware Act that the Trust have at least one trustee with a principal place of business in Delaware. The Sponsor shall have the exclusive authority to manage the affairs of the Trust as an agent of the Trust pursuant to Section 3806(b)(7) of the Delaware Act. It is understood and agreed by the parties hereto that the Trustee shall have none of the duties or liabilities of the Sponsor, Administrator or Custodian and shall have no obligation to supervise or monitor the Sponsor, Administrator or Custodian or any other Person or otherwise manage the Trust. The duties of the Trustee shall be limited to (i) accepting legal process served on the Trust in the State of Delaware and (ii) at the direction of the Sponsor, the execution of any certificates required to be filed with the Secretary of State of the State of Delaware which the Trustee is required to execute under Section 3811 of the Delaware Act. The Trustee shall provide notice to the Sponsor of its performance of any of the foregoing. The Sponsor shall reasonably keep the Trustee informed of any actions taken by the Sponsor with respect to the Trust that would reasonably be expected to affect the rights, obligations or liabilities of the Trustee hereunder or under the Delaware Act.
ARTICLE II
Representations and Warranties
Section 2.1 Representations and Warranties of the Sponsor.
| a. | The Sponsor hereby represents and warrants to the Trustee as of the date hereof, that: |
| i. | The Sponsor is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization. |
| ii. | The Sponsor has the full limited liability company power and authority to enter into and consummate all transactions contemplated by this Amended and Restated Declaration of Trust, has duly authorized the execution, delivery and performance of this Amended and Restated Declaration of Trust, and has duly executed and delivered this Amended and Restated Declaration of Trust. |
| iii. | This Amended and Restated Declaration of Trust, assuming due authorization, execution and delivery by the Trustee, constitutes a valid, legal and binding obligation of the Sponsor, enforceable against the Sponsor in accordance with the terms hereof, subject to (A) applicable bankruptcy, insolvency, reorganization, moratorium and other laws affecting the enforcement of creditors’ rights generally, and (B) general principles of equity, regardless of whether such enforcement is considered in a proceeding in equity or at law. |
| iv. | The execution, delivery and performance of the Sponsor of this Amended and Restated Declaration of Trust will not violate, conflict with, result in a breach of, or constitute a default under (a) the organizational documents of the Sponsor, (b) any agreement or instrument to which the Sponsor is a party or by which it may be bound, (c) any law, any order or decree of any court or arbiter, or any order, regulation or demand of any federal, state or local governmental or regulatory authority, and (d) any order, decision, judgment or decree that may be applicable to the Sponsor or any of its affiliates or any of their properties. |
| v. | No consent, approval, authorization or order of any state or federal court or governmental agency or body is required for the consummation by the Sponsor of the transactions contemplated herein, except for those consents, approvals, authorizations or orders that previously have been obtained. |
| b. | The representations and warranties of the Sponsor set forth in this Section 2.1 shall survive the execution and delivery of this Amended and Restated Declaration of Trust and shall inure to the benefit of the Trustee for so long as the Trust remains in existence. Upon discovery by any party hereto of any breach of any of the foregoing representations and warranties, the party discovering such breach shall give prompt written notice thereof to the other parties hereto. The Sponsor will be deemed to have made the representation and warranties of the Sponsor set forth in this Section 2.1 with respect to any future contributions of funds upon the effectiveness of such contribution. |
Section 2.2 Representations and Warranties of the Trustee.
| a. | The Trustee hereby represents, warrants and covenants for the benefit of the Sponsor, as of the date hereof, that: |
| i. | The Trustee is a Delaware corporation duly organized and validly existing under the laws of the State of Delaware. |
| ii. | The Trustee has the full power and authority to enter into and consummate all transactions contemplated by this Amended and Restated Declaration of Trust, has duly authorized the execution, delivery and performance of this Amended and Restated Declaration of Trust, and has duly executed and delivered this Amended and Restated Declaration of Trust. |
| iii. | This Amended and Restated Declaration of Trust, assuming due authorization, execution and delivery by the Sponsor, constitutes a valid, legal and binding obligation of the Trustee, enforceable against the Trustee in accordance with the terms hereof, subject to (A) applicable bankruptcy, insolvency, reorganization, moratorium and other laws affecting the enforcement of creditors’ rights generally and the rights of creditors of banks, and (B) general principles of equity, regardless of whether such enforcement is considered in a proceeding in equity or at law. |
| iv. | The Trustee’s execution and delivery of, performance under and compliance with this Amended and Restated Declaration of Trust, will not violate the Trustee’s organizational documents or constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, or result in a material breach of, any material agreement or other material instrument to which it is a party or by which it is bound. |
| v. | The execution, delivery and performance by the Trustee, in its individual capacity, of this Amended and Restated Declaration of Trust do not (i) violate or contravene any judgment, injunction, order or decree binding on the Trustee or (ii) result in the creation or imposition of any lien attributable to the Trustee, in its individual capacity, on the Trust Property. |
| vi. | No consent, approval or authorization of any Delaware governmental agency governing the trust powers of the Trustee is required for the consummation by the Trustee of the transactions contemplated herein. |
| vii. | No litigation is pending or, to the best of the Trustee’s knowledge, threatened against the Trustee that, if determined adversely to the Trustee, would prohibit the Trustee from entering into this Amended and Restated Declaration of Trust or that, in the Trustee’s good faith and reasonable judgment, is likely to materially and adversely affect the ability of the Trustee to perform its obligations under this Amended and Restated Declaration of Trust. |
| b. | The representations and warranties of the Trustee set forth in this Section 2.2 shall survive the execution and delivery of this Amended and Restated Declaration of Trust and, to the fullest extent permitted by law, shall inure to the benefit of the Sponsor for so long as the Trust remains in existence. Upon discovery by any party hereto of a breach of any such representations and warranties, the party discovering such breach shall give prompt written notice thereof to the other parties hereto. |
| c. | Any successor Trustee shall be deemed to have made, as of the date of its succession, each of the representations and warranties set forth in this Section 2.2. |
Except as otherwise provided in this Section 2.2, in accepting the trust hereby created, CSC Delaware Trust Company is acting solely as Trustee hereunder and not in its individual capacity, and all Persons having any claim against the Trustee by reason of the transactions contemplated by this Amended and Restated Declaration of Trust shall look only to the Trust Property for payment or satisfaction thereof.
ARTICLE III
Matters Pertaining to Shares of the Trust
Section 3.1 Division of Beneficial Interest. The beneficial interest in the Trust shall be divided into Shares, which shall all be of a single class, and which may be issued or redeemed from time to time only in one or more whole Creation Baskets in accordance with Article VI. Notwithstanding anything to the contrary in this Amended and Restated Declaration of Trust, the Trust will issue and redeem the Shares in Creation Baskets only to certain Authorized Participants on an ongoing basis, or to such other purchaser or purchasers, including the Seed Investor, as otherwise determined by the Sponsor in its sole discretion, and only in exchange for ether and/or cash. The number of Shares authorized hereunder is unlimited. The Trust is authorized to issue an unlimited number of Shares unless otherwise determined and subject to any conditions set forth by the Sponsor. Subject to the further provisions of this ARTICLE III and ARTICLE VI, the Sponsor shall have full power and authority, in its sole discretion, (i) to authorize and cause the Trust to issue Creation Baskets of Shares without limitation as to number to such Authorized Participants, or to such other purchaser or purchasers, including the Seed Investor, as otherwise determined by the Sponsor in its sole discretion, and for such amount of ether or cash, at such time or times and on such terms as the Sponsor may deem appropriate, (ii) to divide or combine the Shares of the Trust into a greater or lesser number without thereby materially changing the proportionate beneficial interest of the Shares of the Trust in the assets held with respect to the Trust, and (iii) to take such other action with respect to the Shares of the Trust as the Sponsor may deem necessary or desirable to further the purpose of the Trust; provided in each case that the Sponsor shall not have any power or authority to take any action that would constitute a power to vary the investment of (within the meaning of Treasury Regulation section 301.7701-4(c)) of the Trust or the Shareholders. The Trust shall not issue securities or other evidences of beneficial ownership of, or beneficial interest in, the Trust other than Shares issued in accordance with this ARTICLE III and ARTICLE VI.
Each Creation Basket of Shares shall initially consist of 5,000 Shares or such other number of Shares as the Sponsor may determine from time to time in its sole discretion. Each Share of the Trust shall represent units of fractional undivided beneficial interest in and ownership of the Trust, and shall have no par value.
Notwithstanding any other provision of this Amended and Restated Declaration of Trust, all Shares issued hereunder, including Shares issued in connection with a split or reverse split of Shares, when issued on the terms contemplated by this Agreement, shall be duly authorized, validly issued, fully paid and non-assessable. Shares held in the Trust’s treasury shall not confer any voting rights and shall not be entitled to any dividends or other distributions declared with respect to the Shares.
Section 3.2 Ownership of Shares. The ownership of Shares shall be recorded on the books of the Trust or the Transfer Agent or similar agent for the Trust, which books shall contain the names and addresses of the Shareholders and the Shares held by each Shareholder. No certificates certifying the ownership of Shares shall be issued except as the Transfer Agent or the Sponsor may otherwise determine from time to time. The Sponsor (or the Transfer Agent, in consultation with the Sponsor), may make such rules as it considers appropriate for the issuance of Share certificates, the transfer of Shares and similar matters. The record books of the Trust as kept by the Trust or the Transfer Agent or similar agent, as the case may be, shall be conclusive as to the identity of the Shareholders and as to the number of Shares of the Trust held from time to time by each Shareholder. No Shareholder shall be entitled to receive payment of any distribution or to have notice given to such Shareholder of any meeting or other action in respect of the Trust until such Shareholder has given its address and such other information as shall be required to such Transfer Agent, officer or agent of the Trust as shall keep the record books of the Trust for entry thereof.
Section 3.3 Transfer of Shares. Except as otherwise provided in the Registration Statement, Shares shall be transferable on the books of the Trust only by the record holder thereof or by his duly authorized agent upon delivery to the Sponsor or the Trust’s Transfer Agent or similar agent of a duly executed instrument of transfer, together with a Share certificate if one is outstanding, and such evidence of the genuineness of each such execution and authorization and of such other matters as may be required by the Sponsor. Upon such delivery, and subject to any further requirements specified by the Sponsor, the transfer shall be recorded on the books of the Trust. Until a transfer is so recorded, the Shareholder of record of Shares shall be deemed to be the Shareholder with respect to such Shares for all purposes hereunder and neither the Sponsor nor the Trust, nor the Transfer Agent or any similar agent or registrar or any officer, employee or agent of the Trust, shall be affected by any notice of a proposed transfer.
Section 3.4 Status of Shares and Limitation of Personal Liability. Shares shall be deemed to be personal property giving only the rights provided in this Amended and Restated Declaration of Trust. Every Shareholder by virtue of having become a Shareholder shall be held to have expressly assented and agreed to the terms hereof. The death, incapacity, dissolution, termination or bankruptcy of a Shareholder during the existence of the Trust shall not operate to terminate the Trust, nor entitle the representative of any such Shareholder to an accounting or to take any action in court or elsewhere against the Trust or the Trustee, but entitles such representative only to the rights of such Shareholder under this Trust. Ownership of Shares shall not entitle the Shareholder to any title in or to the whole or any part of the Trust Property or right to call for a partition or division of the same or for an accounting, nor shall the ownership of Shares constitute the Shareholders as partners. Neither the Trust nor the Trustee, nor any officer, employee or agent of the Trust shall have any power to bind personally any Shareholder, nor to call upon any Shareholder for the payment of any sum of money whatsoever other than such as the Shareholder may at any time personally agree to pay. Ownership of Shares shall not make any Shareholder a third-party beneficiary of any
contract entered into by the Trust.
ARTICLE IV
Powers and Obligations of the Trustee and the Sponsor
Section 4.1 Eligibility Requirements for Trustee. The Trustee hereunder shall at all times satisfy the requirements of Section 3807 of the Delaware Act and be authorized to exercise corporate trust powers under the laws of the jurisdiction of its organization, having a combined capital, surplus and undivided profits of at least $50,000,000 and subject to supervision or examination by federal or state authorities. If the Trustee publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this ARTICLE IV the combined capital, surplus and undivided profits of the Trustee shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section 4.1, the Trustee shall resign promptly in the manner and with the effect specified in ARTICLE IX. The trust company or banking institution serving as Trustee may have normal banking and trust relationships with the Sponsor and their respective affiliates; provided that none of (i) the Sponsor, (ii) any Person involved in the organization or operation of the Sponsor or the Trust, or (iii) any affiliate of any of them, may be the Trustee hereunder.
Section 4.2 Instructions or Directions Pursuant to E-mail, Facsimile or Other Similar Unsecured Electronic Methods. Written instructions or directions pursuant to this Amended and Restated Declaration of Trust sent by the Sponsor, as the case may be, may be sent by unsecured or secured e-mail, facsimile transmission or other similar unsecured or secured electronic methods, provided that the Sponsor shall provide to the Trustee an incumbency certificate listing designated persons with the authority to provide such instructions, which incumbency certificate shall be amended whenever a person is to be added or deleted from the listing. The Sponsor shall confirm the receipt of any such instructions by the Trustee, and the Trustee shall have no liability for the failure to respond to any instructions or directions that it has not actually
received. The Trustee shall not be liable for any losses, costs or expenses arising directly or indirectly from the Trustee’s reliance upon and compliance with such instructions notwithstanding that such instructions conflict, or are inconsistent, with a subsequent written instruction (provided that the Trustee shall notify the sender of any such conflict or inconsistency before acting thereon). The Sponsor agrees to assume all risks arising out of the use of such electronic methods to submit instructions and directions to the Trustee, including without limitation the risk of the Trustee acting on unauthorized instructions, and the risk of interception and misuse by third parties.
Section 4.3 Powers. The duty and authority to manage the affairs of the Trust is vested in the Sponsor, which duty and authority the Sponsor may further delegate, all pursuant to Section 3806(b)(7) of the Delaware Act. In furtherance of the foregoing, it is understood and agreed that all obligations, duties and responsibilities of the Trust under all documents to which the Trust is a party or otherwise has obligations shall be effected and undertaken by or at the discretion of the Sponsor, Administrator, Transfer Agent, or the Custodian, as applicable. To the extent that, at law or at equity, the Trustee has duties (including fiduciary duties) and liabilities relating thereto to the Trust or the Sponsor, it is understood and agreed by the other parties hereto and the Sponsor that such duties and liabilities are eliminated and replaced by the duties and liabilities of the Trustee expressly set forth in this Amended and Restated Declaration of Trust. The Sponsor (or any service provider authorized by the Sponsor or the Trust) is hereby authorized to execute and deliver each and every document on behalf of the Trust or any of them to which the Trust, or Trustee acting for and on behalf of the Trust, is a party, and is authorized and empowered to execute and deliver, on behalf of the Trust or any of them, any and all other documents, to receive on behalf of the Trust, all notices, statements, reports, invoices, communications and other information to be delivered to the Trust under all such documents, and to make or cause to be made deposits and withdrawals from accounts of the Trust in accordance with the terms of this Amended and Restated Declaration of Trust, provided that Trustee shall not be liable for any action of the Sponsor (or any such service provider to the Trust). The Sponsor (or any service provider authorized by the Sponsor of the Trust) is authorized and empowered to pay or cause such other Persons to pay out of the Trust Property any amounts that are required to be paid by the Trust, including for the payment of fees, the reimbursement of expenses and the making of indemnity payments not otherwise payable by the Sponsor pursuant to this Amended and Restated Declaration of Trust or as described in the Registration Statement.
Without limiting the foregoing, the Sponsor shall have the power and authority to cause the Trust (or to act on behalf of the Trust);
| a. | To own ether, cash or any asset received as a result of a Digital Asset Network Fork or airdrop in respect of ether (an “IR Asset”), to store ether, cash or IR Assets with the Custodian subject to the conditions set forth in the Trust Custody Agreement and to transfer ether, cash or IR Assets in accordance with the Registration Statement; |
| b. | To compromise, arbitrate or otherwise adjust claims in favor of or against the Trust or any matter in controversy, including claims for taxes; |
| c. | To operate as a trust with the purpose for which the Trust was established as described herein, and exercise all the powers necessary or appropriate to the conduct of such operations; |
| d. | Subject in each case to ARTICLE III and ARTICLE VI, to issue, sell, repurchase, redeem, cancel, retire, acquire, hold, resell, reissue, transfer, dispose of and otherwise deal in Shares pursuant to applicable federal law; to establish terms and conditions including any fees or expenses regarding the issuance, sale, repurchase, redemption, cancellation, retirement, acquisition, holding, resale, reissuance, disposition of or dealing in Shares; and to apply to any such repurchase, redemption, retirement, cancellation or acquisition of Shares any funds or Trust Property; |
| e. | Subject to the terms of the Trust Custody Agreement and the Registration Statement, in the event of an upcoming modification to the Ethereum Network that could potentially result in a Digital Asset Network Fork or in the event of an upcoming airdrop, to cause the Custodian, in consultation with the Sponsor, to either (i) disclaim all rights to the IR Assets so created, (ii) sell the IR Assets as soon as reasonably practicable and thereafter distribute the cash proceeds to the Shareholders of record as of the date of the Digital Asset Network Fork or airdrop that resulted in the Trust’s acquisition of the IR Assets, or (iii) distribute the IR Assets in-kind as soon as reasonably practicable to the Shareholders of record as of the date of the Digital Asset Network Fork or airdrop that resulted in the Trust’s acquisition of the IR Assets or to an agent acting on behalf of such Shareholders; |
| f. | (i) To make such filings applications, statements, certificates, agreements and other instruments with the Securities and Exchange Commission (the “Commission”), the Financial Industry Regulatory Authority or a national securities exchange as may be required by the federal securities laws or other applicable regulations or as deemed necessary or desirable in the sole judgment of the Sponsor; (ii) to prepare and file and execute, in each case on behalf of the Trust, such applications, reports, surety bonds, irrevocable consents, appointments of attorney for service of process; (iii) to execute and deliver letters or documents to, or instruments for filing with, a depository relating to the Shares to be issued by the Trust and also any filing required to be made as determined by the Sponsor and any other filing or application necessary or desirable as determined by the Sponsor in connection with the registration and/or offering of Shares by the Trust; (iv) to negotiate the terms of, and execute on behalf of the Trust, any agreement, including, but not limited to, any underwriting agreement or purchase agreement relating to the Shares to be issued by the Trust as determined by the Sponsor; and (v) to do all other acts which, in the Sponsor’s judgment, are reasonably necessary or desirable for the registration and/or offering of Shares by the Trust.; and |
| g. | To enter into contracts and carry on any other activities in connection with or incidental to any of the foregoing powers or with the furtherance of the Trust’s purpose. |
To the fullest extent permitted by law, the Trust shall not in any way be bound or limited by any present or future law or custom in regard to investment by fiduciaries. The Trust shall not be required to obtain any court order to deal with any assets of the Trust or take any other action hereunder. Notwithstanding anything contained in this Amended and Restated Declaration of Trust to the contrary, the Trust and the Sponsor shall not, and any other Person acting for or on behalf of the Trust shall cause the Trust not to: (i) acquire any asset other than ether and, subject to the further restrictions herein, cash and IR Assets; (ii) acquire IR Assets other than as a result of a Digital Asset Network Fork or airdrop in respect of ether; (iii) sell or otherwise dispose of Trust Property other than in order to pay expenses of the Trust, to facilitate the termination of the Trust, to facilitate a redemption in accordance with Article VI or to dispose of any IR Asset; (iv) have any power to, or consent to any action that would, vary the investment (within the meaning of Treasury Regulation section 301.7701-4(c)) of the Trust or the Shareholders or (v) take any action or fail to take any action that would cause the Trust to fail or cease to qualify as a grantor trust for U.S. federal income tax purposes. In furtherance of the foregoing, the Trust shall, and the Sponsor shall cause the Trust to: (A) immediately use any cash received in connection with any issuance of Shares to purchase ether, such purchase to take place as soon as reasonably practicable after receipt of such cash but in any event prior to the first calculation of the Trust’s NAV following the receipt of such cash; (B) upon the Trust acquiring any rights to IR Assets either (1) disclaim all rights to such IR Assets, (2) sell such IR Assets as soon as reasonably practicable and thereafter promptly distribute the cash proceeds to the Shareholders of record as of the date of the Digital Asset Network Fork or airdrop that resulted in the Trust’s acquisition of the IR Assets, or (3) distribute such IR Assets in-kind as soon as reasonably practicable to the Shareholders of record as of the date of the Digital Asset Network Fork or airdrop that resulted in the Trust’s acquisition of the IR Assets or to an agent acting on behalf of such Shareholder; and (C) any sales of Trust Property necessary to make the payments contemplated by clause (iii) of the immediately preceding sentence shall be in the smallest amounts required to permit such payments as they become due, it being the intention of the Trust at all times to minimize the holding of assets other than ether.
Section 4.4 Duties of Trustee; Limitation of Liability.
a. The Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Amended and Restated Declaration of Trust. Except as otherwise expressly required by this Section 4.4, the Trustee shall not have any duty or liability with respect to the administration of the Trust, the investment of the Trust’s property or the payment of dividends or other distributions of income or principal to the Trust’s beneficiaries, and no implied obligations shall be inferred from this Amended and Restated Declaration of Trust on the part of the Trustee. Any permissive right of the Trustee contained in this Amended and Restated Declaration of Trust shall not be construed as a duty. The Trustee is authorized to execute and deliver such documents and any amendment thereto, in each case, in such form as the Sponsor shall provide and direct in writing, and the approval by the Sponsor shall be evidenced conclusively by the Trustee’s execution thereof.
b. The Trustee accepts the trusts hereby created and agrees to perform its duties hereunder with respect to the same but only upon the terms of this Amended and Restated Declaration of Trust. No provision of this Amended and Restated Declaration of Trust shall be construed to relieve the Trustee from liability for its own grossly negligent action, its own grossly negligent failure to act or its own willful misconduct. In particular, but not by way of limitation:
| i. | the duties and obligations of the Trustee shall be determined solely by the express provisions of this Amended and Restated Declaration of Trust; the Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Amended and Restated Declaration of Trust; no implied covenants, duties (including fiduciary duties and duties existing at law or in equity) or obligations shall be read into this Amended and Restated Declaration of Trust against the Trustee, all such duties which are hereby eliminated; and, in the absence of willful misconduct on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Trustee and conforming to the requirements of this Amended and Restated Declaration of Trust; |
| ii. | the Trustee shall not be liable for an error of judgment made in good faith by an officer or employee of the Trustee; |
| iii. | the Trustee shall not be liable with respect to any action taken, suffered or omitted to be taken by it in good faith in accordance with the direction of the Sponsor or any other person with the right to direct the Trustee; |
| iv. | no provision of this Amended and Restated Declaration of Trust shall require the Trustee to expend or risk its personal funds or otherwise incur any financial liability in the performance of its rights or duties hereunder, if the Trustee shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured or provided to it; |
| v. | under no circumstance shall the Trustee be personally liable for any representation, warranty, covenant, agreement or indebtedness of the Trust; |
| vi. | the Trustee shall not be personally responsible for or in respect of the genuineness, form or value of the Trust Property, the validity or sufficiency of this Amended and Restated Declaration of Trust or for the due execution hereof by the Sponsor; and |
| vii. | in the event that the Trustee is unsure of the course of action to be taken by it hereunder, the Trustee may request instructions from the Sponsor and to the extent the Trustee follows such instructions in good faith it shall not be liable to any person. In the event that no instructions are provided within the time requested by the Trustee, it shall have no duty or liability for its failure to take any action or for any action it takes in good faith. |
Section 4.5 Payment of Expenses by the Trust. The Trust shall pay the Sponsor’s Fee as calculated by the Administrator. The Sponsor is authorized to pay or cause to be paid out of the Trust, all extraordinary, nonrecurring expenses, fees, charges, taxes and liabilities incurred or arising in connection with the Trust, including expenses and charges for the services of agents or independent contractors and such other expenses and charges as the Sponsor may, in its sole discretion, deem necessary or proper to incur.
Section 4.6 Trustee’s Fees. The Trust hereby agrees to be primary obligor and shall (i) compensate the Trustee in accordance with a separate fee agreement with the Trustee, (ii) reimburse the Trustee for all reasonable expenses (including reasonable fees and expenses of counsel and other experts) and (iii) indemnify the Trustee in accordance with Section 8.1 hereof. Notwithstanding any other provisions of this Amended and Restated Declaration of Trust, all payments to the Trustee, including fees, expenses and any amounts paid in connection with indemnification of the Trustee in accordance with the terms of this Amended and Restated Declaration of Trust, will be payable only in United States Dollars.
Section 4.7 Service Contracts.
| a. | The Trust may enter into contracts with one or more Persons, to act as administrator, sub-administrator, transfer agent, or other agent, and as such to perform such functions as the Sponsor may deem reasonable and proper to further the purpose of the Trust, including, without limitation, valuation of assets, clerical and administrative functions, under such terms and conditions, and for such compensation, as the Sponsor may deem advisable. Without limiting the foregoing, the Sponsor may also authorize any administrator to employ one or more sub-administrators from time to time, any custodian to employ one or more sub-custodians from time to time, and any transfer agent to employ one or more sub-transfer agents upon such terms and conditions as shall be approved by the Sponsor. |
| b. | The Trust may enter into a contract or contracts with one or more Persons to act as underwriters, distributors or placement agents whereby the Trust may either agree to sell Shares of the Trust to the other party or parties or appoint such other party or parties its sales agent or agents for such Shares and with such other provisions as the Sponsor may deem reasonable and proper, and the Trust may from time to time enter into transfer agency, sub-transfer agency and or shareholder servicing contract(s), in each case with such terms and conditions, and providing for such compensation, as the Sponsor may deem advisable. |
| c. | Any contract of the character described in this Section 4.7 may be entered into with any Person, although one or more of the Trustee, officers, or Shareholders of the Trust may be an officer, director, trustee, shareholder, or member of such other party to the contract, or otherwise interested in such contract, and no such contract shall be invalidated or rendered voidable by reason of the existence of any such relationship, nor shall any Person holding such relationship be liable merely by reason of such relationship for any loss or expense to the Trust under or by reason of said contract or accountable for any profit realized directly or indirectly therefrom. The same Person may be a party to more than one contract entered into pursuant to this Section 4.7 and any individual may be financially interested or otherwise affiliated with Persons who are parties to any or all of the contracts mentioned in this Section 4.7. |
| d. | The authority of the Sponsor hereunder to authorize the Trust to enter into contracts or other agreements or arrangements shall include the authority of the Sponsor to modify, amend, waive any provision of, or supplement, assign all or a portion of, novate, or terminate such contracts, agreements or arrangements. The enumeration of any specific contracts in this Section 4.7 shall in no way be deemed to limit the power and authority of the Sponsor as otherwise set forth in this Amended and Restated Declaration of Trust to authorize the Trust to employ, contract with or make payments to such Persons as the Sponsor may deem desirable for the transaction of the business of the Trust. |
| e. | The Sponsor is further empowered, at any time and from time to time, to contract with any Person to provide such other services to the Trust as the Sponsor determines to be in the best interests of the Trust and in furtherance of the purpose of the Trust. |
Section 4.8 Determinations by Sponsor. The Sponsor may make any determinations it deems necessary with respect to the provisions of this Amended and Restated Declaration of Trust, including the following matters: the amount of the assets, obligations, liabilities and expenses of the Trust; the amount of the net income of the Trust from capital gains or other sources for any period and the amount of assets at any time legally available for the payment of dividends or distributions; which items are to be treated as income and which as capital; the amount, purpose, time of creation, increase or decrease, alteration or cancellation of any reserves or charges and the propriety thereof (whether or not any obligation or liability for which such reserves or charges were created shall have been paid or discharged); the market value, or any other price to be applied in determining the market value, or the fair value, of any ether owned or held by the Trust; the number of Shares of the Trust issued or issuable; and the net asset value per Share.
Section 4.9 State of Delaware. Notwithstanding anything contained herein to the contrary, the Trustee shall not be required to take any action in any jurisdiction other than in the State of Delaware if the taking of such action will (i) require the registration with, licensing by or the taking of any other similar action in respect of, any State or other governmental authority or agency of any jurisdiction other than the State of Delaware by or with respect to the Trustee (as
such or in its individual capacity); (ii) result in any fee, tax or other governmental charge under the laws of any jurisdiction or any political subdivisions thereof in existence on the date hereof other than the State of Delaware becoming payable by the Trustee (as such or in its individual capacity); or (iii) subject the Trustee (as such or in its individual capacity) to personal jurisdiction in any jurisdiction other than the State of Delaware for causes of action arising from acts unrelated to the consummation of the transactions by the Trustee contemplated hereby.
Section 4.10 Certain Matters Affecting the Trustee.
| a. | The Trustee shall be under no obligation to exercise any of the duties or powers vested in it by this Amended and Restated Declaration of Trust; or to make any investigation of matters arising hereunder; or to institute, conduct or defend any litigation hereunder or in relation hereto; or (except as provided in Section 4.4(b)) to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond or other paper or document, unless requested in writing to do so by the Sponsor; in each case, at the request, order or direction of the Sponsor, unless the Sponsor shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby; and the Trustee shall not be required to expend or risk its own funds or otherwise incur any liability financial or otherwise in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or indemnity reasonably satisfactory to it against such risk or liability is not reasonably assured to it. |
| b. | The Trustee shall not be liable for any action reasonably taken, suffered or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Amended and Restated Declaration of Trust. |
| c. | The Trustee shall not be required to give any bond or surety in respect of the execution of the trusts created hereby or the powers granted hereunder. |
| d. | The Trustee may execute any of the trusts or powers vested in it by this Amended and Restated Declaration of Trust or perform any of its duties hereunder either directly or by or through agents, nominees, or attorney-in-fact appointed with due care and shall not be responsible for any willful misconduct or negligence on the part of any agent, custodian, nominee or attorney-in-fact so appointed, and the Trustee shall provide notice to the Sponsor upon the appointment of any such agent, custodian, nominee or attorney-in- fact, provided that the appointment of any agent, custodian, nominee or attorney-in-fact shall not relieve the Trustee of any of its obligations or liabilities under this Amended and Restated Declaration of Trust. |
| e. | Whenever in the administration of the provisions of this Amended and Restated Declaration of Trust, the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering any action to be taken hereunder, such |
| matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of gross negligence, willful misconduct or bad faith on the part of the Trustee, be deemed to be conclusively proved and established by a certificate signed by the Sponsor and delivered to the Trustee, and such certificate, in the absence of gross negligence, willful misconduct or bad faith on the part of the Trustee, shall be full warrant to the Trustee for any action taken, suffered or omitted by it under the provisions of this Amended and Restated Declaration of Trust upon the faith thereof. |
| f. | Anything in this Amended and Restated Declaration of Trust to the contrary notwithstanding, in no event shall the Trustee be liable for special, indirect, punitive or consequential loss or damage of any kind whatsoever (including but not limited to lost profits), even if the Trustee has been advised of the likelihood of such loss or damage and regardless of the form of action. |
| g. | In no event shall the Trustee hereto be liable for any failure or delay in the performance of its obligations under this Amended and Restated Declaration of Trust or any related documents because of circumstances beyond its control, including, but not limited to, a failure, termination, or suspension of, or limitations or restrictions in respect of post- payable adjustments through, a clearing house, securities depositary, settlement system or central payment system in any applicable part of the world or acts of God, flood, war (whether declared or undeclared), civil or military disturbances or hostilities, nuclear or natural catastrophes, political unrest, explosion, severe weather or accident, earthquake, terrorism, fire, riot, epidemics, pandemics, labor disturbances, strikes or work stoppages for any reason, embargo, government action, including any laws, ordinances, regulations or the like (whether domestic, federal, state, county or municipal or foreign) which delay, restrict or prohibit the providing of the services contemplated by this Amended and Restated Declaration of Trust or any related documents, or the unavailability of communications or computer facilities, the failure of equipment or interruption of communications or computer facilities, or the unavailability of the Federal Reserve Bank wire or telex or other wire or communication facility, or any other causes beyond its control whether or not of the same class or kind as specified above. |
| h. | The Trustee shall take such action or refrain from taking such action under this Amended and Restated Declaration of Trust as it may be directed in writing by the Sponsor from time to time; provided, however, that the Trustee shall not be required to take or refrain from taking any such action if it shall have reasonably determined or shall have been advised by counsel, that such performance may involve the Trustee in personal liability or is contrary to the terms of this Amended and Restated Declaration of Trust or of any document contemplated hereby to which the Trust is a party or is otherwise contrary to law. In the absence of bad faith, the Trustee shall have no liability for following any such instructions. |
| i. | The Trustee shall not have any obligation or duty to supervise or monitor the performance of any other Person and shall have no liability for the failure of any other Person to perform its obligations or duties under the agreements to which the Trust or the Trustee is a party or otherwise. |
| j. | The Trustee shall have no obligation or duty to monitor the Trust’s obligations and duties under the agreements to which the Trust or the Trustee is a party or to ensure its compliance with the terms thereof. In addition, the Trustee shall not have any duty or obligation to manage, make any payment in respect of, register, record, sell, dispose of or otherwise deal with the Trust Property, or to otherwise take or refrain from taking any action under, or in connection with, any document contemplated hereby to which the Trustee or the Trust is a party, except as expressly provided by the terms of this Amended and Restated Declaration of Trust. |
| k. | It shall be the Sponsor’s duty and responsibility, and not the Trustee’s duty or responsibility, to cause the Trust to respond to, defend, participate in or otherwise act in connection with any regulatory, administrative, governmental, investigative or other proceeding or inquiry relating in any way to the Trust, its assets or the conduct of its business. |
| l. | Each of the parties hereto hereby agrees and, as evidenced by its acceptance of any benefits hereunder, any Shareholder agrees that the Trustee in any capacity (i) has not provided and will not provide in the future, any advice, counsel or opinion regarding the tax, financial, investment, securities law or insurance implications and consequences of the formation, funding and ongoing administration of the Trust, including, but not limited to, income, gift and estate tax issues, insurable interest issues, doing business or other licensing matters and the initial and ongoing selection and monitoring of financing arrangements, (ii) has not made any investigation as to the accuracy of any representations, warranties or other obligations of the Trust under any of the documents to which the Trust is a party and shall have no liability in connection therewith and (iii) the Trustee has not prepared or verified, and shall not be responsible or liable for, any information, disclosure or other statement in any disclosure or offering document or in any other document issued or delivered in connection with the sale or transfer of Shares. |
Section 4.11 Sponsor’s Duties.
| a. | The Sponsor agrees to perform its duties under this Amended and Restated Declaration of Trust in its subjective good faith belief as to what is in or not opposed to the best interests of the Trust, but only upon the express terms of this Amended and Restated Declaration of Trust. To the fullest extent permitted by law, the Sponsor shall not have any implied duties (including fiduciary duties) or liabilities otherwise existing at law or in equity with respect to the Trust, the Shareholders or any other Person, all of which duties are hereby eliminated. To the fullest extent permitted by law, the provisions of this Amended and Restated Declaration of Trust, to the extent that they restrict or eliminate the duties (including fiduciary duties) and liabilities of the Sponsor otherwise existing at law or in equity are agreed by the parties hereto to replace such other duties and |
| liabilities of the Sponsor. Unless otherwise determined by the Sponsor, each officer of the Trust shall owe to the Trust and the Shareholders the same fiduciary duties (and only such fiduciary duties) as owed by officers of private corporations for profit to such corporations and their stockholders under the Delaware General Corporation Law. |
| b. | Unless otherwise expressly provided herein: |
| i. | whenever a conflict of interest exists or arises between the Sponsor or any of its affiliates, on the one hand, and the Trust or any Shareholder or any other Person, on the other hand; or |
| ii. | whenever this Amended and Restated Declaration of Trust or any other agreement contemplated herein provides that the Sponsor shall act in a manner that is, or provides terms that are, fair and reasonable to the Trust, any Shareholder or any other Person, |
the Sponsor shall use its good faith efforts to resolve such conflict of interest, take such action or provide such terms, considering in each case the relative interest of each party (including its own interest) to such conflict, agreement, transaction or situation and the benefits and burdens relating to such interests, any customary or accepted industry practices, and any applicable generally accepted accounting practices or principles. In the absence of bad faith by the Sponsor, the resolution, action or terms so made, taken or provided by the Sponsor shall not constitute a breach of this Amended and Restated Declaration of Trust or any other agreement contemplated herein or of any duty or obligation of the Sponsor at law or in equity or otherwise.
| c. | The Sponsor and any affiliate of the Sponsor may engage in or possess an interest in other profit-seeking or business ventures of any nature or description, independently or with others, whether or not such ventures are competitive with the Trust and the doctrine of corporate opportunity, or any analogous doctrine, shall not apply to the Sponsor. If the Sponsor acquires knowledge of a potential transaction, agreement, arrangement or other matter that may be an opportunity for the Trust, it shall have no duty to communicate or offer such opportunity to the Trust, and the Sponsor shall not be liable to the Trust or to the Shareholders for breach of any fiduciary or other duty by reason of the fact that the Sponsor pursues or acquires for, or directs such opportunity to another Person or does not communicate such opportunity or information to the Trust. Neither the Trust nor any Shareholders shall have any rights or obligations by virtue of this Amended and Restated Declaration of Trust or the trust relationship created hereby in or to such independent ventures or the income or profits or losses derived therefrom, and the pursuit of such ventures, even if competitive with the activities of the Trust, shall not be deemed wrongful or improper. Except to the extent expressly provided herein, the Sponsor may engage or be interested in any financial or other transaction with the Trust, the Shareholders or any affiliate of the Trust or the Shareholders. |
| d. | To the fullest extent permitted by law and notwithstanding any other provision of this Amended and Restated Declaration of Trust or in any agreement contemplated herein or applicable provisions of law or equity or otherwise, whenever in this Amended and Restated Declaration of Trust a Person is permitted or required to make a decision (a) in its “sole discretion” or “discretion” or under a grant of similar authority or latitude, the Person shall be entitled to consider only such interests and factors as it desires, including its own interests, and shall have no duty or obligation to give any consideration to any interest of or factors affecting the Trust, the Shareholders or any other Person, or (b) in its “good faith” or under another express standard, the Person shall act under such express standard and shall not be subject to any other or different standard. The term “good faith” as used in this Amended and Restated Declaration of Trust shall mean subjective good faith as such term is understood and interpreted under Delaware law. |
Section 4.12 Virtual Currencies. It is the intent of the parties that the execution, delivery and performance of the transactions contemplated by this Amended and Restated Declaration of Trust will not result in the Trustee being required to obtain a license or make a registration under any federal or state law including rules pertaining to virtual currencies under Title 23, Part 200 of New York Codes, Rules and Regulations, the Commodities Act or any federal or state law regulating, money transmitters, money services business, providers of prepaid or stored value or similar entities, or virtual currency business.
ARTICLE V
Matters Pertaining to Shareholders
Section 5.1 Shareholders’ Rights, Voting, Transferability and Splits. All of the Shares are of the same class with equal rights and privileges. Each of the Shares is transferable, is fully paid and nonassessable and entitles the holder to vote on the limited matters upon which Shareholders may vote under the Amended and Restated Declaration of Trust. The Shares do not entitle their holders to any conversion or pre-emptive rights or, except as provided below, any redemption rights or rights to distributions. Shareholders have no voting rights except in limited circumstances. The Sponsor will act to terminate the Trust upon the agreement of Shareholders owning at least seventy-five (75) percent of the outstanding Shares. If the Sponsor believes that the Share price in the secondary market for the Shares has risen or fallen outside a desirable trading price range, the Sponsor may direct the Transfer Agent to declare a split or reverse split in the number of Shares outstanding and to make a corresponding change in the number of Shares constituting a Creation Basket.
Section 5.2 Amendments.
| a. | The Sponsor may amend any provision of this Amended and Restated Declaration of Trust without the consent of any Shareholder. Any amendment that imposes or increases any fees or charges or prejudices a substantial existing right of the Shareholders will not become effective until thirty (30) days after notice of such |
| amendment is given to the Shareholders as provided herein or by means of an amendment to the Registration Statement or other filing with the Commission. Every Shareholder, at the time any such amendment becomes effective, shall be deemed, by continuing to hold any Shares or an interest therein, to consent and agree to such amendment and to be bound by this Amended and Restated Declaration of Trust as amended thereby. Notwithstanding any other provision of this Amended and Restated Declaration of Trust, without the consent of Shareholders representing a majority of the outstanding Shares, no amendment to this Amended and Restated Declaration of Trust may be made if, as a result of such amendment, it would cause the Trust to be treated as anything other than a grantor trust for U.S. federal income tax purposes. |
| b. | Notwithstanding any provision to the contrary contained in Section 5.2(a) hereof, the Sponsor may, without the approval of the Shareholders, amend the provisions of this Amended and Restated Declaration of Trust if the Trust is advised at any time by the Trust’s accountants or legal counsel that the amendments made are necessary to ensure that the Trust will qualify as a grantor trust for U.S. federal income tax purposes. |
| c. | Upon amendment of this Amended and Restated Declaration of Trust, the Certificate of Trust shall also be amended, if required by the Delaware Act, to reflect such change. At the expense of the Sponsor, the Trustee shall execute and file any amendment to the Certificate of Trust if so directed by the Sponsor. |
| d. | No amendment affecting the rights or duties of the Trustee shall be binding upon or effective against the Trustee unless consented to by the Trustee in writing. The Trustee shall be under no obligation to execute any amendment to the Amended and Restated Declaration of Trust or to any agreement to which the Trust is a party until it has received an instruction letter from the Sponsor, in form and substance reasonably satisfactory to the Trustee (i) directing the Trustee to execute such amendment, (ii) representing and warranting to the Trustee that such execution is authorized and permitted by the terms of the Amended and Restated Declaration of Trust and (if applicable) such other agreement to which the Trust is a party and does not conflict with or violate any other agreement to which the Trust is a party and (iii) confirming that such execution and acts related thereto are covered by the indemnity provisions of the Amended and Restated Declaration of Trust in favor of the Trustee and do not adversely affect the Trustee. |
| e. | To the fullest extent permitted by law, no provision of this Amended and Restated Declaration of Trust may be amended, waived or otherwise modified orally but only by a written instrument adopted in accordance with this Section. |
ARTICLE VI
Net Asset Value, Creations and Redemptions
Section 6.1 Determination of Net Asset Value, Net Income, and Distributions. The Administrator will calculate the net asset value per share (“NAV”) of the Trust in accordance with the Registration Statement and the relevant provisions of the Amended and Restated Declaration of Trust, Fund Administration and Accounting Agreement, Transfer Agency and Service Agreement and Trust Custody Agreements (collectively, the “Trust Documents”).
The Sponsor will publish the Trust’s NAV on the Trust’s website as soon as practicable after its calculation by the Administrator based on the rate set forth in the Registration Statement (or such other similar rate as determined by the Sponsor in its sole discretion from time to time). To the extent that the NAV has been calculated using a price per ether other than the rate set forth in the Registration Statement for such Business Day, the publication on the Trust’s website will note the valuation methodology and the price per ether resulting from such calculation.
The Administrator’s estimation of accrued but unpaid fees, expenses and liabilities will be conclusive upon all persons interested in the Trust and no revision or correction in any computation made under the Administration Agreement will be required by reason of any difference in amounts estimated from those actually paid.
Section 6.2 Creations, Redemptions and Repurchases. The Trust will issue and redeem Shares from time to time, in accordance with the Registration Statement and the relevant provisions of the Trust Documents and Authorized Participant Agreements as they may be amended from time to time. The Trust is expected to issue or redeem Shares from time to time only in one or more whole Creation Baskets. The Trust will issue and redeem the Shares in Creation Baskets only to certain Authorized Participants on an ongoing basis, or as otherwise determined by the Sponsor in its sole discretion, including the issuance of the initial Creation Baskets to the Seed Investor (if any). On a creation, Creation Baskets will be distributed to the creating Authorized Participant by the Trust in exchange for the delivery to the Trust of the appropriate number of ether (i.e., ether equal in value to the NAV multiplied by the number of Shares in the Creation Basket) or an equivalent amount of cash. On a redemption, the Trust will distribute ether equal in value to the NAV multiplied by the number of Shares in the Creation Basket to the redeeming Authorized Participant in exchange for the delivery to the Trust of one or more Creation Baskets or an equivalent amount of cash. On each Business Day, the value of each Creation Basket accepted by the Transfer Agent in a creation or redemption transaction will be the same (i.e., each Creation Basket will initially consist of 5,000 Shares and the value of the Creation Basket will be equal to the value of 5,000 Shares (or such other amount as determined by the Sponsor from time to time in its sole discretion) at their net asset value per Share on that day). The Trust will not issue or redeem fractions of a Creation Basket. Except as may be otherwise permitted by the Sponsor pursuant to Article III, or as otherwise determined by the Sponsor in its sole discretion, including the issuance of the initial Creation Baskets to the Seed Investor (if any), only Authorized Participants will be able to place orders to create or redeem Creation Baskets. Authorized Participants must be (i) registered broker-dealers or other securities market participants, such as banks and other financial institutions, which are not required to register as broker-dealers to engage in securities transactions, and (ii) DTC Participants. To become an Authorized Participant, a person must enter into an Authorized Participant Agreement with the
Sponsor on behalf of the Trust, subject to acceptance by the Transfer Agent. Authorized Participant Agreements provide the procedures for the creation and redemption of Creation Baskets as well as the quantity of ether required for delivery or distribution for such creations and redemptions. An Authorized Participant Agreement and the related procedures attached thereto may be amended by the Trust and the Sponsor without the consent of any Shareholder or Authorized Participant. A transaction fee (“Transaction Fee”) may be imposed to offset the transfer and other transaction costs associated with creation or redemption, and such Transaction Fee will be used by the Transfer Agent and/or the Trust to promptly pay such transfer and other transaction costs. Authorized Participants will not receive a fee, or any other form of compensation or inducement from either the Sponsor or the Trust, and no Authorized Participant has any obligation or responsibility to the Sponsor or the Trust to effect any sale or resale of the Shares.
The number of ether required for deposit with the Trust to create one or more Creation Baskets initially is the equivalent of the net asset value of 5,000 shares per Creation Basket (or an equivalent amount of cash). The number of ether required to create a Creation Basket, or to be delivered upon the redemption of a Creation Basket, will gradually decrease over time, due to the accrual of the Trust’s expenses, the transfer of the Trust’s ether to pay the Sponsor’s Fee and the transfer of the Trust’s ether to pay any Trust expenses not assumed by the Sponsor.
Authorized Participants may sell to other investors all or part of the Shares included in the Creation Baskets they purchase from the Trust. The Seed Investor (if any) will not be subject to a Transaction Fee for the purchase of the initial Creation Baskets issued to it in its capacity as the purchaser of such initial Creation Baskets.
Subject to this Section 6.2, Shares may be redeemed or repurchased at their NAV which may be reduced by any Transaction Fee or other form of charge authorized by the Sponsor. NAV shall be determined as set forth in Section 6.1 hereof. Payment for Shares redeemed or repurchased shall be made in ether out of the Trust Property.
The Sponsor may require any Authorized Participant or group of Authorized Participants to redeem Shares for any reason as determined by the Sponsor, in its sole discretion. Any such redemption shall be effected at the redemption price and in the manner provided in this Article VI.
The Authorized Participants shall upon demand disclose to the Sponsor in writing such information with respect to direct and indirect ownership of Shares as the Sponsor deems necessary to comply with the provisions of the Internal Revenue Code of 1986, as amended (or any successor statute thereto), or to comply with the requirements of any other taxing authority.
Notwithstanding the foregoing, the Trust may issue and redeem Creation Baskets of Shares in exchange for cash rather than ether. The Trust will use any cash received in connection with any such issuance of Shares to purchase ether, such purchase to take place as soon as reasonably practicable after receipt of such cash but in any event prior to the first calculation of the Trust’s NAV following the receipt of such cash.
ARTICLE VII
Tax Matters
Section 7.1 Tax Status of the Trust. The Sponsor intends that the Trust shall be treated, for federal, state and local income tax purposes, as a grantor trust, and, notwithstanding anything contained in this Amended and Restated Declaration of Trust to the contrary, neither the Sponsor nor the Trustee, nor any other Person acting for or on behalf of the Trust, shall take any action that is inconsistent with such treatment.
Section 7.2 Certain Costs. The Sponsor shall pay out of its own funds any and all routine tax administration expenses incurred with respect to the Trust, but not including any professional fees or expenses related to audits or any administrative or judicial proceedings with respect to the Trust that involve the IRS or state, local or other taxing authorities, which extraordinary expenses shall be payable or reimbursable pursuant to Section 4.5.
ARTICLE VIII
Compensation and Indemnification
Section 8.1 Indemnification of the Trustee. The Trust hereby agrees to be primary obligor and shall indemnify, defend and hold harmless CSC Delaware Trust Company, in its individual capacity and in its capacity as Trustee and any of the officers, directors, employees, affiliates and agents of the Trustee (the “Trustee Indemnified Persons”) from and against any and all losses, damages, liabilities, claims, actions, suits, costs, expenses, disbursements (including reasonable legal fees and expenses in connection with enforcement of its rights to indemnity hereunder and including the reasonable fees and expenses of counsel), taxes and penalties of any kind and nature whatsoever (collectively, “Expenses”), to the extent that such Expenses arise out of or are imposed upon or asserted at any time against such Trustee Indemnified Persons with respect to the performance of this Amended and Restated Declaration of Trust, the creation, operation or termination of the Trust or the transactions contemplated hereby; provided, however, that the Trust shall not be required to indemnify any Trustee Indemnified Person for any Expenses which are a result of the willful misconduct, bad faith or gross negligence of a Trustee Indemnified Person. If the Trust shall have insufficient assets or improperly refuses to pay a Trustee Indemnified Person within sixty (60) days of a request for payment owed hereunder, the Sponsor shall, as secondary obligor, compensate or reimburse the Trustee or indemnify, defend and hold harmless a Trustee Indemnified Person as if it were the primary obligor hereunder; provided, however, that the Sponsor shall not be required to indemnify any Trustee Indemnified Person for any Expenses which are a result of the willful misconduct, bad faith or gross negligence of a Trustee Indemnified Person. To the fullest extent permitted by law, Expenses to be incurred by a Trustee Indemnified Person shall, from time to
time, be advanced by, or on behalf of, the Sponsor prior to the final disposition of any matter upon receipt by the Sponsor of an undertaking by, or on behalf of, such Trustee Indemnified Person to repay such amount if it shall be determined that the Trustee Indemnified Person is not entitled to be indemnified under this Amended and Restated Declaration of Trust.
Section 8.2 Indemnification of the Sponsor. The Trust shall indemnify, defend and hold harmless the Sponsor, in its capacity as Sponsor, and any of the officers, directors, employees, affiliates and agents of the Sponsor (the “Sponsor Indemnified Persons”) from and against any and all Expenses, to the extent that such Expenses arise out of or are imposed upon or asserted at any time against such Sponsor Indemnified Persons with respect to the performance of this Amended and Restated Declaration of Trust, the creation, operation or termination of the Trust or the transactions contemplated hereby; provided, however, that the Trust shall not be required to indemnify any Sponsor Indemnified Person for any Expenses which are a result of the willful misconduct, bad faith or gross negligence of a Sponsor Indemnified Person. To the fullest extent permitted by law, Expenses to be incurred by a Sponsor Indemnified Person shall, from time to time, be advanced by, or on behalf of, the Trust prior to the final disposition of any matter upon receipt by the Trust of an undertaking by, or on behalf of, such Sponsor Indemnified Person to repay such amount if it shall be determined that the Sponsor Indemnified Person is not entitled to be indemnified under this Amended and Restated Declaration of Trust.
Section 8.3 Security Interest. As security for any amounts owing to the Trustee or Sponsor hereunder, the Trustee or Sponsor, as applicable, shall have a lien against the Trust Property, which lien shall be prior to the rights of the Sponsor (in the case of a lien held by the Trustee) or any other Shareholder of the Trust. The obligations of the Sponsor and the Trust, as applicable, to indemnify the Trustee Indemnified Persons and the Sponsor Indemnified Persons under this Section 8.3 shall survive the termination of this Amended and Restated Declaration of Trust.
ARTICLE IX
Resignation and Removal of the Trustee
Section 9.1 Resignation and Removal of the Trustee. The Trustee shall serve for the duration of the Trust and until the effective date of the Trustee’s resignation. The Trustee may resign upon sixty (60) days’ prior notice to the Sponsor, which shall promptly appoint a successor. If no successor has been appointed by the Sponsor within such sixty (60) day period, the Trustee may, at the expense of the Trust, petition a court to appoint a successor trustee. Any Person into which the Trustee may be merged or with which it may be consolidated, or any Person resulting from any merger or consolidation to which the Trustee shall be a party, or any Person which succeeds to all or substantially all of the corporate trust business of the Trustee, shall be the successor Trustee under this Amended and Restated Declaration of Trust without the execution, delivery or filing of any paper or instrument or further act to be done on the part of the parties hereto, except as may be required by applicable law. Any successor Trustee shall file any necessary amendments to the Certificate of Trust with the Secretary of State. Any
successor trustee appointed pursuant to this ARTICLE IX shall be eligible to act in such capacity in accordance with this Amended and Restated Declaration of Trust and, following compliance with this ARTICLE IX, shall become fully vested with the rights, powers, duties and obligations of its predecessor under this Amended and Restated Declaration of Trust, with like effect as if it was originally named as trustee. Any such successor trustee shall notify the Trustee of its appointment by providing a written instrument to the Trustee. At such time the Trustee shall be discharged of its duties herein. The respective obligations and responsibilities of the Trustee created hereby shall terminate after the payment of all claims, obligations and liabilities of the Trust pursuant to the instructions of the Sponsor as to the disposition of the assets in the Trust Property. After payment to the Sponsor of all amounts held by or on behalf of the Trustee and required to be paid to the Sponsor hereunder on the termination of the Trust, the Sponsor shall provide written confirmation to the Trustee that the Trust has terminated.
| a. | If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Amended and Restated Declaration of Trust, or if at any time the Trustee shall become incapable of acting, or shall be adjudged bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then the Sponsor may remove the Trustee and appoint a successor trustee by written instrument, in duplicate, which instrument shall be delivered to the Trustee so removed and the successor trustee. |
| b. | The Sponsor may at any time, upon sixty (60) days’ prior notice to the Trustee, remove the Trustee with or without cause and appoint a successor trustee by written instrument or instruments, in triplicate, signed by the Sponsor or its attorney-in-fact duly authorized, one complete set of which instruments shall be delivered to the Trustee so removed and one complete set to the successor so appointed. |
| c. | Notwithstanding anything to the contrary contained herein, any resignation or removal of the Trustee and appointment of a successor trustee pursuant to any of the provisions of this ARTICLE IX shall become effective only upon acceptance of appointment by the successor trustee as provided herein. |
| d. | Effect of Removal, Resignation, etc. of the Trustee. The declination to serve, resignation, removal of the Trustee, or all of them, shall not operate to annul the Trust or to revoke any existing agency created pursuant to the terms of this Amended and Restated Declaration of Trust. As evidence of such vacancy, an instrument certifying the existence of such vacancy may be executed by an officer of the Sponsor, acting on behalf of the Trust, or by the Trustee. In the event of the declination, resignation, or removal of the Trustee within a short period of time and without the opportunity for the Sponsor being able to appoint a new Trustee, the Trust’s Sponsor is empowered to appoint a new Trustee subject to Section 4.1 and this ARTICLE IX. |
ARTICLE X
Miscellaneous
Section 10.1 Entire Agreement. This Amended and Restated Declaration of Trust represents the entire agreement between the parties hereto with respect to the subject matter hereof, and supersedes all prior agreements and understandings between the parties, whether written or oral.
Section 10.2 Governing Law. The validity and construction of this Amended and Restated Declaration of Trust and all amendments hereto shall be governed by the laws of the State of Delaware, and the rights of all parties hereto and the effect of every provision hereof shall be subject to and construed according to the laws of the State of Delaware without regard to the conflicts of law provisions thereof; provided, however, that the parties hereto and the Shareholders intend that the provisions hereof shall control over any contrary or limiting statutory or common law of the State of Delaware (other than the Delaware Act) and that, to the maximum extent permitted by applicable law, there shall not be applicable to the Trust, the Sponsor, the Trustee, the Shareholders or this Amended and Restated Declaration of Trust any provision of the laws (statutory or common) of the State of Delaware (other than the Delaware Act) pertaining to trusts which relate to or regulate in a manner inconsistent with the terms hereof: (a) the filing with any court or governmental body or agency of trustee accounts or schedules of trustee fees and charges, (b) affirmative requirements to post bonds for trustees, officers, agents, or employees of a trust, (c) the necessity for obtaining court or other governmental approval concerning the acquisition, holding or disposition of real or personal property, (d) fees or other sums payable to trustees, officers, agents or employees of a trust, (e) the allocation of receipts and expenditures to income or principal, (f) restrictions or limitations on the permissible nature, amount or concentration of trust investments or requirements relating to the titling, storage or other manner of holding of trust assets, (g) the existence of rights or interests (beneficial or otherwise) in trust assets, (h) the ability of beneficial owners or other persons to terminate or dissolve a trust, or (i) the establishment of fiduciary or other standards or responsibilities or limitations on the acts or powers of trustees or beneficial owners that are inconsistent with the limitations on liability or authorities and powers of the Trustee or the Shareholders set forth or referenced in this Amended and Restated Declaration of Trust. Sections 3540, 3542 and 3561 of Title 12 of the Delaware Code shall not apply to the Trust.
Section 10.3 Counterparts. This Amended and Restated Declaration of Trust may be executed in two or more counterparts, each of which shall be an original, but all such counterparts shall together constitute one and the same agreement.
Section 10.4 Merger and Consolidation. The Sponsor may cause (i) the Trust to be merged into or consolidated with, converted to or to sell all or substantially all of its assets to, another trust or entity; (ii) the Shares of the Trust to be converted into beneficial interests in another statutory trust (or series thereof); or (iii) the Shares of the Trust to be exchanged for units in another trust or company under or pursuant to any U.S. state or federal statute to the extent permitted by law. For the avoidance of doubt, the Sponsor, with written notice to the Shareholders, may approve
and effect any of the transactions contemplated under (i) – (iii) above without any vote or other action of the Shareholders. Notwithstanding the foregoing, the Sponsor shall not approve or effect any of the transactions contemplated under (i) - (iii) above if doing so would cause the Trust, its successor or other trust or company in which the Shareholders hold beneficial interests as a result of such transaction to fail or cease to qualify as a grantor trust for U.S. federal income tax purposes and any purported approval or effecting of such a transaction shall be null and void ab initio and without legal effect.
Section 10.5 Dissolution of the Trust. The Trust may dissolve at the written direction of the Sponsor under the circumstances described in the Registration Statement. On and after the date of dissolution of the Trust, the Sponsor shall wind up the Trust’s business and affairs in its sole discretion in accordance with the Delaware Act and upon completion of the winding up of the Trust’s business and affairs by the Sponsor in accordance with the Delaware Act, including the payment of the expenses of liquidation and termination and any fee to the Transfer Agent in connection therewith and payment of any applicable taxes or other governmental charges, Shareholders will be entitled to the distribution of the amount of Trust Property (paid in cash) represented by those Shares upon surrender or termination of the Shares then held. Upon completion of the winding up of the Trust’s business and affairs by the Sponsor, the Trustee shall, at the written direction and expense of the Sponsor, file a certificate of cancellation in accordance with the Delaware Act and thereafter shall be released from any further duties or liabilities. Any remaining expenses of the Trust shall be paid by the Sponsor.
Section 10.6 Notices. Any communications provided for or permitted hereunder shall be in writing and, unless otherwise expressly provided herein, shall be deemed to have been duly given when delivered to: (i) in the case of the Sponsor, Invesco Capital Management LLC c/o Adam Henkel, 3500 Lacey Road, Suite 700, Downers Grove, Illinois 60515; (ii) in the case of the Trustee, CSC Delaware Trust Company, 251 Little Falls Drive, Wilmington, DE 19808; or (iii) as to each such Person (including, without limitation, a Shareholder) such other address, facsimile number and/or telecopy number as may hereafter be furnished by such Person to the other party hereto in writing. Unless expressly set forth herein to the contrary, any communication required or permitted to be delivered to the Sponsor shall be deemed to have been duly given when mailed first class, postage prepaid, to the address of the Sponsor. Unless expressly set forth herein to the contrary, any communication required or permitted to be delivered to a Shareholder shall be deemed to have been duly given upon personal delivery, when mailed first class, postage prepaid, or if sent by facsimile or telecopy. In addition, to the fullest extent permitted by federal law, any document, consent, instrument or notice referenced in or contemplated by this Amended and Restated Declaration of Trust that is to be delivered by the Sponsor may be delivered by electronic means (including e-mail).
Section 10.7 Inspection of Records and Reports. The Trustee shall have the right at any reasonable time to inspect all books, records, and documents of every kind and the physical properties of the Trust. This inspection by the Trustee may be made in person or by an agent or attorney, and the right of inspection includes the right to copy and make extracts of documents. No Shareholder shall have any right to inspect any account, book or document of the Trust that
is not publicly available, except as conferred by the Trustee. The books and records of the Trust may be kept at such place or places as the Trustee may from time to time determine, except as otherwise required by law.
Section 10.8 Jurisdiction and Waiver of Jury Trial. The Amended and Restated Declaration of Trust and the rights of the Sponsor, Trustee, DTC (as registered owner of the Trust’s global certificates for Shares) and Shareholders under the Amended and Restated Declaration of Trust are governed by the laws of the State of Delaware. Each of the Sponsor, Trustee, each DTC Participant, each Shareholder and each Person beneficially owning an interest in a Share of the Trust (whether through a broker, dealer, bank, trust company or clearing corporation or an agent of any of the foregoing or otherwise), to the fullest extent permitted by law, including Section 3804(e) of the Delaware Act, (i) irrevocably agrees that any claims, suits, actions or proceedings arising out of or relating in any way to the Trust or its business and affairs, the Delaware Act, this Amended and Restated Declaration of Trust or asserting a claim governed by the internal affairs (or similar) doctrine (including, without limitation, any claims, suits, actions or proceedings to interpret, apply or enforce (A) the provisions of this Amended and Restated Declaration of Trust, or (B) the duties, obligations or liabilities of the Trust to the Shareholders or the Trustees, or of officers or the Trustee to the Trust, to the Shareholders or each other, or (C) the rights or powers of, or restrictions on, the Trust, the officers, the Trustee or the Shareholders, or (D) any provision of the Delaware Act or other laws of the State of Delaware pertaining to trusts made applicable to the Trust pursuant to Section 3809 of the Delaware Act, or (E) any other instrument, document, agreement or certificate contemplated by any provision of the Delaware Act, the Amended and Restated Declaration of Trust relating in any way to the Trust or (F) the federal securities laws of the United States and the securities or antifraud laws of any international, national, state, provincial, territorial, local or other governmental or regulatory authority, including, in each case, the applicable rules and regulations promulgated thereunder (regardless, in every case, of whether such claims, suits, actions or proceedings (x) sound in contract, tort, fraud or otherwise, (y) are based on common law, statutory, equitable, legal or other grounds, or (z) are derivative or direct claims)), shall be exclusively brought, unless the Trust, in its sole discretion, consents in writing to an alternative forum, in the Court of Chancery of the State of Delaware or, if such court does not have subject matter jurisdiction thereof, any other court in the State of Delaware with subject matter jurisdiction; provided, however, that unless the Trust consents in writing to the selection of an alternative forum, the Federal District Courts of the United States of America shall be the sole and exclusive forum for the resolution of any complaint asserting a cause of action arising under any federal securities law, (ii) irrevocably submits to the exclusive jurisdiction of such courts in connection with any such claim, suit, action or proceeding, (iii) irrevocably agrees not to, and waives any right to, assert in any such claim, suit, action or proceeding that (A) it is not personally subject to the jurisdiction of such courts or any other court to which proceedings in such courts may be appealed, (B) such claim, suit, action or proceeding is brought in an inconvenient forum, or (C) the venue of such claim, suit, action or proceeding is improper, (iv) consents to process being served in any such claim, suit, action or proceeding by mailing, certified mail, return receipt requested, a copy thereof to such party at the address in effect for notices hereunder, and agrees that such service shall constitute good and sufficient service of process and notice
thereof; provided, nothing in clause (iv) hereof shall affect or limit any right to serve process in any other manner permitted by law, and (v) irrevocably waives any and all right to trial by jury in any such claim, suit, action or proceeding.
Section 10.9 Derivative Actions.
| a. | No person who is not a Shareholder shall be entitled to bring any derivative action, suit or other proceeding on behalf of the Trust. No Shareholder may maintain a derivative action on behalf of the Trust unless holders of at least ten percent (10%) of the outstanding Shares join in the bringing of such action. |
| b. | In addition to the requirements set forth in Section 3816 of the Delaware Act, a Shareholder may bring a derivative action on behalf of the Trust only if the following conditions are met: |
| i. | the Shareholder or Shareholders must make a pre-suit demand upon the Sponsor to bring the subject action unless an effort to cause the Sponsor to bring such an action is not likely to succeed; and a demand on the Sponsor shall only be deemed not likely to succeed and therefore excused if the Sponsor has a personal financial interest in the transaction at issue, and the Sponsor shall not be deemed interested in a transaction or otherwise disqualified from ruling on the merits of a Shareholder demand by virtue of the fact that the Sponsor receives remuneration for his service as the Sponsor; and |
| ii. | unless a demand is not required under clause (i) of this paragraph, the Sponsor must be afforded a reasonable amount of time to consider such Shareholder request and to investigate the basis of such claim; and the Sponsor shall be entitled to retain counsel or other advisors in considering the merits of the request. |
| c. | In addition to all suits, claims or other actions (collectively, “claims”) that under applicable law must be brought as derivative claims, each Shareholder agrees that any claim that affects all Shareholders of the Trust equally, that is, proportionately based on their number of Shares in the Trust, must be brought as a derivative claim subject to this Section 10.9 irrespective of whether such claim involves a violation of the Shareholder’s rights under this Amended and Restated Declaration of Trust or any other alleged violation of contractual or individual rights that might otherwise give rise to a direct claim (and regardless, in each case, of whether such claims sound in tort, fraud or otherwise, or are based on common law, statutory, equitable, legal or other grounds). |
| d. | Notwithstanding the foregoing, however, if a provision of this Section 10.9 is found to violate the U.S. federal securities laws, then such provision shall not apply to any claims asserted under such U.S. federal securities law. |
Section 10.10 Action Without a Meeting. Any action required or permitted to be taken by Shareholders by vote may be taken without a meeting by written consent setting forth the actions so taken. Such written consents shall be treated for all purposes as votes at a meeting. If the vote or consent of any Shareholder to any action of the Trust or any Shareholder, as contemplated by this Amended and Restated Declaration of Trust, is solicited by the Sponsor, the solicitation shall be effected by notice to each Shareholder given in the manner provided in Section 10.6. The vote or consent of each Shareholder so solicited shall be deemed conclusively to have been cast or granted as requested in the notice of solicitation, whether or not the notice of solicitation is actually received by that Shareholder, unless the Shareholder expresses written objection to the vote or consent by notice given in the manner provided in Section 10.6 above and actually received by the Trust within twenty (20) days after the notice of solicitation is effected. The Sponsor and all persons dealing with the Trust shall be entitled to act in reliance on any vote or consent which is deemed cast or granted pursuant to this Section and shall be fully indemnified by the Trust in so doing. Any action taken or omitted in reliance on any such deemed vote or consent of one or more Shareholders shall not be void or voidable by reason of timely communication made by or on behalf of all or any of such Shareholders in any manner other than as expressly provided in Section 10.6.
Section 10.11 Statutory Trust Only. It is the intention of the parties hereto to create a statutory trust pursuant to the Delaware Act. It is not the intention of the parties hereto to create a general partnership, limited partnership, joint stock association, corporation, bailment, or any form of legal relationship other than a statutory trust pursuant to the Delaware Act. Nothing in this Amended and Restated Declaration of Trust shall be construed to make the Shareholders, either by themselves or with the Trustee, partners or members of a joint stock association.
Section 10.12 Corporate Transparency Act. The Corporate Transparency Act (31 U.S.C. § 5336) and its implementing regulations (collectively, the “CTA”), may require the Trust to file reports with Financial Crimes Enforcement Network. It shall be Sponsor’s duty and not the Trustee’s duty to prepare such filings, cause the Trust to make such filings, and to cause the Trust to comply with its obligations under the CTA, if any.
[Remainder of Page Intentionally Blank; Signature Page Follows.]
IN WITNESS WHEREOF, the parties hereto have caused this Amended and Restated Declaration of Trust to be duly executed by their respective officers or representatives hereunto duly authorized, as of the day and year first above written.
| Invesco Capital Management LLC, as Sponsor: | ||
| By: | /s/ Brian Hartigan | |
| Name: | Brian Hartigan | |
| Title: | Chief Executive Office and Manager | |
| CSC Delaware Trust Company, as Trustee: | ||
| By: | /s/ Gregory Daniels | |
| Name: | Gregory Daniels | |
| Title: | Vice President | |
Exhibit 10.2
FORM OF PARTICIPATION AGREEMENT
INVESCO GALAXY ETHEREUM ETF
This Participant Agreement (this “Agreement”) is entered into between Invesco Capital Management LLC (the “Sponsor”), [__________] (the “Participant”), and is subject to acceptance by Invesco Galaxy Ethereum ETF (the “Trust”) and The Bank of New York Mellon (the “Transfer Agent”). The Transfer Agent serves as the transfer agent of the Trust. The Sponsor and the Participant acknowledge and agree that the Trust shall be a third-party beneficiary of the Agreement and shall receive the benefits contemplated by the Agreement to the extent specified herein.
As provided in the Declaration of Trust and Trust Agreement of the Trust, as amended from time to time (the “Trust Agreement”) as currently in effect and described in the Trust’s Prospectus (the “Prospectus”) included as part of the Registration Statement, as amended, on Form S-1 (the “Registration Statement”) as currently effective and on file with the Securities and Exchange Commissions (the “SEC”) and as the same may be amended from time to time thereafter or any successor registration statement (on Form S-1 or otherwise), units of fractional undivided beneficial interest in and ownership of the Trust (“Shares”) may be created or redeemed only in aggregations of shares, as identified in the Prospectus (a “Creation Unit”). Capitalized terms not otherwise defined herein are used herein as defined in the Prospectus. This Agreement is intended to set forth certain premises and the procedures by which the Participant may create and/or redeem Creation Units.
The parties hereto in consideration of the premises and of the agreements contained herein agree as follows:
| 1. | STATUS OF PARTICIPANT. The Participant hereby represents, covenants and warrants that with respect to orders for the creation or redemption of Creation Units by means of the Fed Book Entry System or DTC, it is eligible to utilize the Fed Book Entry System and/or DTC and it is a DTC Participant (as defined in the Trust’s Prospectus, a “DTC Participant”). The Participant may place orders for the creation or redemption of Creation Units through the Fed Book-Entry System and/or DTC, subject to the procedures for creation and redemption referred to in Sections 2 and 3 of this Agreement and the procedures described in Attachment A hereto. Any change in the foregoing status of the Participant shall terminate this Agreement, and the Participant shall give prompt notice to the Sponsor and the Transfer Agent of such change. |
The Participant further represents that it is a broker-dealer registered with the SEC and a member of the Financial Industry Regulatory Authority (“FINRA”) or is exempt from or otherwise not required to be licensed as a broker-dealer or a member of FINRA. The Participant is qualified, registered and/or licensed to act as a broker or dealer, or is otherwise exempt, as required according to all applicable laws of the state(s) in which the Participant conducts its activities as defined hereunder. The Participant shall comply with all applicable U.S. federal laws and all applicable rules of the SEC and the laws of the states or other jurisdictions concerned, and the rules and regulations promulgated thereunder to the extent such laws, rules and regulations relate to the Participant’s transactions in, and activities with respect to, the Shares. The Participant is a qualified institutional buyer as defined in Rule 144A under the U.S. Securities Act of 1933, as amended (the “1933 Act”). The Participant agrees to conform to the rules of FINRA (if it is a member of FINRA), and shall not offer or sell Shares in any state or jurisdiction where they may not lawfully be offered and/or sold.
1
The Participant understands and acknowledges that the proposed method by which Creation Units will be created and traded may raise certain issues under applicable securities laws. The Participant understands and acknowledges that, for example, because new Shares can be created and issued on an ongoing basis, at any point during the life of a Trust, a “distribution,” as such term is used in the 1933 Act, may be occurring. The Participant is cautioned that some of its activities may result in its being deemed a participant in a distribution in a manner that would render it a statutory underwriter and subject it to the prospectus delivery and liability provisions of the 1933 Act. The Participant should review the “Plan of Distribution” section of the Prospectus and consult with its own counsel in connection with entering into this Agreement and submitting an order for the creation of Creation Unit(s).
If the Participant is offering or selling Shares in jurisdictions outside the several states, territories and possessions of the United States and is not otherwise required to be registered, qualified or a member of FINRA as set forth in the second paragraph of this Section 1, the Participant shall, with respect to the Participant’s transactions in, and activities regarding, the Shares (i) observe the applicable laws of the jurisdiction in which such offer and/or sale is made, (ii) comply with the full disclosure requirements of the 1933 Act, and the regulations promulgated thereunder, and (iii) conduct its business in accordance with the spirit of the FINRA Conduct Rules.
The Participant has entered into an Agreement with at least one of the custodians of the Trust (each, a “Custodian” and collectively, the “Custodians”) to establish an account (the “Participant Ether Account”) for depositing and holding ether. The Participant shall maintain such Participant Ether Account for purposes of effecting receipt and delivery of ether to/from the Trust’s account with such Custodian(s) to facilitate in-kind creation and redemption transactions.
| 2. | EXECUTION OF ORDERS. All orders for the creation or redemption of Creation Units shall be handled in accordance with the terms of the Prospectus, the Trust Agreement, this Agreement and the procedures described in Attachment A to this Agreement. The Trust expects that creation and redemption transactions will take place in kind (“In-Kind Transactions”), unless the Trust permits or requires creation and redemption transactions to be in cash (“Cash Transactions”). In the event the procedures include the use of recorded telephone lines, the Participant hereby consents to such use. The Trust reserves the right to amend its Prospectus and the Trust Agreement and to issue additional or other procedures relating to the manner of creating or redeeming Creation Units, and the Participant, and the Sponsor agree to comply with such procedures as may be issued from time to time, upon reasonable notice thereof. |
Any ether to be transferred in connection with any In-Kind Transaction order shall be transferred between the Participant Ether Account and a Trust account established for such transfers pursuant to the Trust Agreement (each a “Ether Custody Account”) in accordance with the Prospectus, this Agreement and the procedures described in Attachment A hereto. Any cash transferred in connection with any Cash Transaction order shall be transferred between the between the Participant’s bank account (“Participant Bank Account”) and a
2
Trust account established for such transfers pursuant to the Trust Agreement (the “Cash Custody Account” and together with the Ether Custody Accounts, the “Custody Accounts”). When placing an order to create one or more Creation Units, the Participant must designate the Participant Ether Account or Participant Bank Account that will transmit ether or cash to one of the Trust’s Custody Accounts. When placing an order to redeem one or more Creation Units, the Participant must designate the Participant Ether Account or Participant Bank Account to which the Trust will transmit ether. Participant acknowledges that the Trust and the Sponsor can determine in their discretion which Custody Account will receive ether or cash from or transmit ether or cash to the Participant Ether Account or Participant Bank Account, as applicable, and Participant agrees to transact with the Custody Account specified by the Trust and the Sponsor in connection with each Creation Unit transaction. The Participant shall be responsible for all costs and expenses relating to or connected with any transfer of ether or cash between the Participant Ether Account or Participant Bank Account and a Custody Account, including any late fees and other charges, if any, for which the Trust or Sponsor becomes responsible in the event that ether or cash is not transferred from the Participant Ether Account or Participant Bank Account in accordance with this Agreement.
The Participant understands and acknowledges that the Transfer Agent will not effect a creation or redemption until it has received confirmation of receipt from the applicable Custodian of the Participant’s ether or cash transfer to one of the Trust’s Custody Accounts (in the case of a creation), or the confirmation of receipt of incoming security transfer via the Fed Book Entry System and/or DTC (in the case of a redemption).
The Participant acknowledges and agrees on behalf of itself and any party for which it is acting (whether such party is a customer or otherwise) that each order to create or redeem a Creation Unit (“Order”) may not be revoked by the Participant after its delivery to and acceptance by the Sponsor. Notwithstanding the foregoing, the Sponsor and the Transfer Agent on behalf of the Trust each agrees to undertake commercially reasonable efforts to accommodate requests by the Participant to cancel any Purchase Order or Redemption Order (as defined in Attachment A) before the applicable order cut-off time specified in Attachment A. In the event that the Sponsor and/or the Transfer Agent cancels a Purchase Order or Redemption Order at the Participant’s request, the Participant agrees to bear reasonable exchange or processing fees, if applicable. A form of Creation/Redemption Order Form is attached hereto as Attachment B.
As set forth in Attachment A, the Sponsor shall have the absolute right, but shall have no obligation, to reject any Purchase Order or Redemption Order (i) it determines not to be in proper form; (ii) the acceptance or receipt of which could, in the opinion of counsel to the Sponsor, be unlawful; or (iii) if circumstances outside the control of the Sponsor, the Transfer Agent or the Trust’s Custodians, as applicable, make it, for all practical purposes, not feasible to process Creation Units. The Sponsor shall reject a Purchase or Redemption Order if it believes that such order would have adverse tax consequences to the Trust or its shareholders. The Sponsor shall notify the Participant prior to such rejection of its intention to reject such Purchase Order or Redemption Order and (to the extent it is permitted to do so) the reason for such rejection, and in the event that the rejection was due to the Purchase Order or Redemption Order not being in proper form, to the extent possible, provide the Participant an opportunity to place the Purchase Order or Redemption Order in proper form prior to rejection. Neither the Sponsor nor the Transfer Agent shall be liable to any person by reason of the rejection of any Purchase Order or Redemption Order.
3
Notwithstanding the foregoing, the Sponsor will promptly cause to be returned to the Participant upon rejection of a Purchase Order or Redemption Order all consideration, including Shares, ether or cash tendered by the Participant, including any transaction fees, in respect of such rejected Purchase Order or Redemption Order.
| 3. | ROLE OF PARTICIPANT. The Participant acknowledges and agrees that for all purposes of this Agreement, the Participant shall have no authority in any matter or in any respect to act as agent of the Sponsor, the Transfer Agent, the Custodians or the Trust. |
(a) In executing this Agreement, the Participant agrees, in connection with any purchase or redemption transactions in which it acts for a customer or for any other DTC Participant or indirect participant, or any other beneficial owner of Shares (each a “Beneficial Owner”), that it shall extend to any such party all of the rights, and shall be bound by all of the obligations, of a DTC Participant in addition to any obligations that it undertakes hereunder or in accordance with the Prospectus.
(b) The Participant agrees (i) subject to any privacy obligations or other obligations arising under the federal or state securities laws it may have to its customers, to assist the Sponsor in ascertaining certain information regarding sales of Shares made by or through Participant upon the request of the Trust or the Sponsor necessary for the Trust to comply with its obligations to distribute information to its shareholders as may be required from time to time under applicable state or federal securities laws, and (ii) to deliver prospectuses, as may be amended or supplemented from time to time, proxy material, annual and other reports of the Trust or other similar information that the Trust is obligated to deliver to their shareholders to the Participant’s customers that custody Shares with the Participant, after receipt from the Trust or the Sponsor of sufficient quantities to allow mailing thereof to such customers. None of the Sponsor, the Trust or any of their respective affiliates shall use the names, addresses and other information concerning Participant’s customers for any purpose except in connection with the performance of their duties and responsibilities hereunder and except for servicing and informational mailings described in this clause (b) of Section 3, or as may otherwise be required by applicable law.
(c) The Participant affirms that it has procedures in place reasonably designed to protect the privacy of non-public personal consumer/customer financial information to the extent required by applicable law, rule and regulation.
(d) The Participant further represents that its Anti-Money Laundering Program (“AML Program”), at a minimum, (i) designates a compliance officer to administer and oversee the AML Program, (ii) provides ongoing employee training, (iii) includes an independent audit function to test the effectiveness of the AML Program, (iv) establishes internal policies, procedures and controls that are tailored to its particular business, (v) includes a customer identification program consistent with the rules under Sec. 326 of the USA Patriot Act, (vi) provides for the filing of all necessary anti-money laundering reports including, but not limited to, currency transaction reports and suspicious activity reports, (vii) provides for screening all new and existing customers against the Office of Foreign Assets Control list and any other government list that is or becomes required under the Act and (viii) allows for appropriate regulators to examine its AML books and records.
4
(e) The Participant represents that from time to time it may be a Beneficial Owner (as that term is defined in Rule 16a-1(a)(2) of the Securities Exchange Act of 1934 (the “Exchange Act”)) of Shares. To the extent that it is a Beneficial Owner of Shares, the Participant agrees to irrevocably appoint the Sponsor as its attorney and proxy with full authorization and power to vote (or abstain from voting) its beneficially owned Shares. The Sponsor, as attorney and proxy for the Participant under this Section 3(e), (i) is hereby given full power of substitution and revocation; (ii) may act through such agents, nominees or attorneys as it may appoint from time to time; and (iii) may provide voting instructions to such agents, nominees or substitute attorneys. For the avoidance of doubt, the Shares will not include those Shares for which the Participant is the record owner but which are held for the benefit of third parties or in customer or fiduciary accounts in the ordinary course of business. It shall be the responsibility of the Participant to instruct the Sponsor in writing as to which Shares will be voted by the Sponsor as attorney, agent and proxy and provide the Sponsor with any notices it receives with respect to voting Shares.
| 4. | PARTICIPANT REPRESENTATIONS; MARKETING MATERIALS; IDENTIFICATION IN REGISTRATION STATEMENT. |
(a) The Participant represents, warrants and agrees that it will not make any representations concerning the Trust, the Creation Units or the Shares other than those consistent with the then current Prospectus or any promotional or sales literature furnished to the Participant by the Sponsor or the Trust, or any such other information or materials permitted by clause (b) of this Section 4, or filed by the Trust with the SEC or made available on any website controlled Sponsor or the Trust. Participant shall not furnish or cause to be furnished to any person or display or publish any information or material relating to the Shares or the Trust that are not consistent with the Trust’s then-current Prospectus. Copies of the then-current Prospectus and any such printed supplemental information or amendments thereto will be supplied by the Sponsor to the Participant in reasonable quantities upon request.
(b) The Participant agrees not to furnish or cause to be furnished by Participant or its employees to any person or display or publish any information or materials relating to the Trust (including, without limitation, promotional materials and sales literature, advertisements, press releases, announcements, statements, posters, signs or other similar materials, but not including any materials prepared and used for Participant’s internal use only or brokerage communications prepared by the Participant in the normal course of its business and consistent with the Trust’s then current Prospectus and in accordance with applicable laws and regulations) (“Marketing Materials”), except such Marketing Materials as may be furnished to the Participant by the Sponsor or the Trust and such other Marketing Materials as are consistent with the Trust’s then current Prospectus and have been approved by the Sponsor in writing prior to use; provided that such Marketing Materials clearly indicate that such Marketing Materials are prepared and distributed by Participant. All Marketing Materials prepared by the Participant shall be filed with FINRA or the SEC, as applicable, by the Participant, and shall comply with all applicable rules and regulations of FINRA and the SEC.
5
(c) The Participant understands that the Trust will not be advertised or marketed as an open-end investment company, i.e., as a mutual fund, which offers redeemable securities, and that any advertising materials will prominently disclose that Shares are redeemable only in Creation Unit size by or through a Participant and on an in-kind basis, as applicable, as described in the Prospectus. Further, the Participant understands that the Trust will not be registered as an investment company under the Investment Company Act of 1940, as amended. In addition, the Participant understands that any advertising material that addresses redemptions of Shares, including the Prospectus, will disclose that the owners of Shares may acquire Shares and tender Shares for redemption to the Fund in Creation Unit aggregations only.
Notwithstanding anything to the contrary in this Agreement, the Participant and its affiliates may prepare and circulate in the regular course of their businesses research reports that include information, opinions or recommendations relating to Shares (i) for public dissemination; provided that such research reports compare the relative merits and benefits of Shares with other products and are not used for the purpose of marketing shares and comply with all applicable rules and regulations of FINRA or the SEC, or (ii) for internal use by the Participant and other materials that include information, opinions or recommendations relating to Shares.
Participant will be identified in the Prospectus, Marketing Materials, or on the Trust’s website to the extent required by law, rule, or other regulation. If the Participant is identified in the Prospectus, Marketing Materials, or on the Trust’s website, within a reasonable amount of time upon the termination of this Agreement, (i) the Sponsor shall remove such identification from the Prospectus in the amendment of either the Registration Statement or a supplement to the Prospectus, as applicable, next occurring after the date of the termination of this Agreement and (ii) the Sponsor shall promptly update the Trust’s website to remove any identification of the Participant as an authorized participant of the Trust.
| 5. | TITLE TO ETHER / TRUST SHARES. |
(a) The Participant represents and warrants on behalf of itself and any party for which it acts that, upon delivery of ether to a Custodian, the Trust will acquire good and unencumbered right to such ether, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claims, including, without limitation, any restriction upon the sale or transfer of such ether imposed by any agreement or arrangement entered into by the Participant or any party for which it is acting in connection with a transaction to purchase Shares.
(b) The Participant represents and warrants that it will not submit a Redemption Order with the Transfer Agent for the purpose of redeeming a Creation Unit unless it first ascertains that it or its customer, as the case may be, owns outright or has full legal authority and legal and beneficial right to tender for redemption the requisite number of Shares, and that such Shares have not been loaned or pledged to another party and are not the subject of a repurchase agreement, securities lending agreement, or any other agreement that would preclude the delivery of such Shares to the Trust. In the event that the Sponsor, the Trust and/or the Transfer Agent reasonably believes that the Participant does not have the requisite number of Shares to be redeemed as a Creation Unit, the Trust and/or the Sponsor or the Transfer Agent, upon consultation with the Trust, may reject without liability the Participant’s Redemption Order.
| 6. | FEES. In connection with the creation or redemption of Creation Units, the Transfer Agent shall charge, and the Participant agrees to pay, the Transaction Fee prescribed in the Prospectus applicable to creations or redemptions, or, when applicable, the Transaction Fee and such additional amounts as may be prescribed pursuant to the Prospectus. The Transaction Fee and such additional amounts may be waived or otherwise adjusted from time to time subject to the provisions relating thereto and any limitations as prescribed in the Prospectus. |
6
| 7. | AUTHORIZED PERSONS. Concurrently with the execution of this Agreement and as requested from time to time thereafter, the Participant shall deliver to the Sponsor and the Transfer Agent, duly certified as appropriate by its secretary or other duly authorized officer, a certificate setting forth the names and signatures of all persons authorized to give instructions relating to activity contemplated hereby or any other notice, request or instruction on behalf of the Participant (each, an “Authorized Person”). A form of such certificate is attached hereto as Attachment C. Such certificate may be accepted and relied upon by the Sponsor and the Transfer Agent as conclusive evidence of the facts set forth therein and shall be considered to be in full force and effect until receipt by the Sponsor and the Transfer Agent of a superseding certificate bearing a subsequent date. The Transfer Agent shall issue to each Authorized Person a unique personal identification number (“PIN Number”) by which such Authorized Person and the Participant shall be identified and instructions issued by the Participant hereunder shall be authenticated. Upon the termination or revocation of authority of such Authorized Person by the Participant, the Participant shall give prompt written notice of such fact to the Sponsor and the Transfer Agent and such notice shall be effective upon receipt by both the Sponsor and the Transfer Agent. |
| 8. | INDEMNIFICATION. This Section 8 shall survive the termination of this Agreement. |
(a) The Participant hereby agrees to indemnify and hold harmless the Sponsor, Transfer Agent and the Trust, as well as their respective affiliates, directors, officers, employees and agents, and each person, if any, who controls such persons within the meaning of Section 15 of the 1933 Act (each a “Sponsor Indemnified Party”) from and against any loss, liability, cost and expense (including reasonable attorneys’ fees) incurred by such Sponsor Indemnified Party as a result of (i) any material breach by the Participant of any provision of this Agreement that relates to the Participant, unless such breach occurred as a result of the Authorized Participant’s reasonable adherence on instructions reasonably given to it by such Sponsor Indemnified Party; (ii) any failure on the part of the Participant to perform any of its obligations set forth in the Agreement, unless such failure occurred as a result of the Authorized Participant’s reasonable adherence on instructions reasonably given to it by such Sponsor Indemnified Party; (iii) any failure by the Participant to comply with applicable laws, including rules and regulations of self-regulatory organizations in relation to its role as the Participant, except that the Participant shall not be required to indemnify a Sponsor Indemnified Party to the extent that such failure was caused by the Participant’s adherence to instructions given or representations made by the Sponsor, or any Sponsor Indemnified Party, as applicable; (iv) any breach by the Participant of any representation provided in this Agreement or provided pursuant to Attachment A; or (v) actions of such Sponsor Indemnified Party in reliance upon any instructions issued and reasonably believed by the Sponsor or the Transfer Agent, as applicable, to be genuine and to have been given by the Participant except to the extent that the Participant had previously revoked a PIN Number used in giving such instructions or representations (where applicable) and such revocation was given by the Participant and received by the Sponsor and the Transfer Agent in accordance with the terms of Section 7 hereto. The Participant and the Sponsor understand and agree that the Trust is entitled and
7
intends to proceed directly against the Participant in the event that the Participant fails to honor any of its obligations pursuant to this Agreement that benefit the Trust. The foregoing shall not apply to any loss, damage, charge, liability, cost, expense, cause of action, obligation, judgment or fee incurred by such Sponsor Indemnified Party arising out of Sponsor Indemnified Party’s gross negligence or reckless or willful acts or omissions or the Sponsor Indemnified Party’s failure to perform any of its obligations or responsibilities under this Agreement. With respect to (i) through (iii) above, Sponsor Indemnified Party’s failure to promptly acknowledge the Participant’s breach of, failure to perform or failure to comply with, the terms of this Agreement shall not negate the foregoing indemnification.
(b) The Sponsor hereby agrees to indemnify and hold harmless the Participant, its respective subsidiaries, affiliates, directors, officers, employees and agents, and each person, if any, who controls such persons within the meaning of Section 15 of the 1933 Act (each a “Participant Indemnified Party”) from and against any loss, liability, cost and expense (including reasonable attorneys’ fees) incurred by such Participant Indemnified Party as a result of (i) any breach by the Sponsor of any provision of this Agreement that relates to the Sponsor; (ii) any failure on the part of the Sponsor to perform any of its obligations set forth in this Agreement; (iii) any failure by the Sponsor to comply with applicable laws, including rules and regulations of self-regulatory organizations in relation to its role as Sponsor of the Trust, (iv) actions of such Participant Indemnified Party in reliance upon any instructions issued or representations made in accordance with Attachment A (as it may be amended from time to time) reasonably believed by the Participant to be genuine and to have been given by the Sponsor, in connection with the Participant’s acting in its capacity as an authorized participant, or (v) any untrue statement of a material fact contained in the Registration Statement of the Trust or in any amendment thereof, or in any Prospectus or any statement of additional information, or any amendment thereof or supplement thereto, or arising out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in connection with the Participant’s acting in its capacity as an authorized participant. The foregoing shall not apply to any loss, damage, charge, liability, cost, expense, cause of action, obligation, judgment or fee incurred by such Participant Indemnified Party arising out of Participant Indemnified Party’s gross negligence or reckless or willful acts or omissions or the Participant Indemnified Party’s failure to perform any of its obligations or responsibilities under this Agreement. With respect to (i) through (iv) above, Participant Indemnified Party’s failure to promptly acknowledge Sponsor’s breach of, failure to perform or failure to comply with, the terms of this Agreement shall not negate the foregoing indemnification.
No party to this Agreement shall be liable to the other party or to any other person for any damages arising out of mistakes or errors in data provided to such Sponsor Indemnified Party or Participant Indemnified Party, as the case may be, by a third party, or out of interruptions or delays of electronic means of communications with the Sponsor Indemnified Party or Participant Indemnified Party.
The indemnity agreements contained in this Section shall remain in full force and effect regardless of any investigation made by or on behalf of the Participant, its partners, stockholders, members, directors, officers, employees or any person (including each partner, stockholder, member, director, officer or employee of such person) who controls the Participant within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, or
8
by or on behalf of the Sponsor, its partners, stockholders, members, managers, directors, officers, employees or any person who controls the Sponsor within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, and shall survive any termination of this Agreement. The Sponsor, for itself and on behalf of the Trust, Sponsor Indemnified Party, and the Participant agree promptly to notify, to the extent practicable and legally permissible, each other of the commencement of any proceeding against it or any Participant Indemnified Party or Sponsor Indemnified Party, as the case may be, relating to this Agreement and, in the case of the Sponsor, against any of the Sponsor’s officers or directors, in connection with the issuance and sale of the Shares or in connection with the Registration Statement.
| 9. | ACKNOWLEDGEMENT. The Participant acknowledges receipt of the Prospectus and represents that it has reviewed such document and understands the terms thereof. |
| 10. | NOTICES. Except as otherwise specifically provided in this Agreement, all notices required or permitted to be given pursuant to this Agreement shall be given in writing and delivered by personal delivery or by postage prepaid registered or certified U.S. first class mail, return receipt requested, or by electronic mail, telex, telegram or facsimile or similar means of same day delivery (with a confirming copy by mail as provided herein). Unless otherwise notified in writing, all notices shall be given or sent as follows: |
If to the Sponsor:
Invesco Capital Management LLC
3500 Lacy Road, Suite 700
Downers Grove, Illinois 60515
Attn: Head of Legal, US ETFs
If to the Trust:
Invesco Galaxy Ethereum ETF
3500 Lacy Road, Suite 700
Downers Grove, Illinois 60515
Attn: Head of Legal, US ETFs
If to the Transfer Agent
The Bank of New York Mellon
240 Greenwich Street
New York, New York 10286
Attn: ETF Services Group
If to the Participant
[ ]
[ ]
[ ]
Attn: [ ]
All notices to the Trust, Sponsor, Transfer Agent and Participant shall be directed to the address or telephone or email provided by such party in writing, except in the case of communications by the Sponsor or Transfer Agent to the Participant during, or as part of, the order creation or redemption process as detailed in Attachment A to this Agreement, especially the Sponsor’s or Transfer Agent’s attempt to contact an Authorized Person of the Participant with respect to, among other things, ambiguous instructions, the suspension or cancellation of an order as discussed in Attachment A, the Sponsor and the Transfer Agent agree to contact a representative of the ETF Trading Desk of the Participant.
9
| 11. | TERMINATION AND AMENDMENT. This Agreement shall become effective in this form as of the date accepted by the Transfer Agent and may be terminated at any time by any party upon thirty (30) days’ prior notice to the other parties (i) unless earlier terminated by the Transfer Agent in the event of a breach of this Agreement or the procedures described herein by the Participant or (ii) in the event that the Trust is terminated pursuant to the Trust Agreement. This Agreement supersedes any prior agreement between the parties with respect to the subject matter contained herein. This Agreement may be amended by the Sponsor from time to time upon ten (10) days’ prior written notice (unless such notice is otherwise waived) by the following procedure. The Sponsor will provide a copy of the amendment to the Transfer Agent and the Participant via electronic mail. Any such amendment will become effective ten (10) days after such transmission. Titles and section headings are included solely for convenient reference and are not a part of this Agreement. This Agreement and Attachment A hereto, which is hereby incorporated herein by reference, constitute the entire agreement between the parties regarding the matters contained herein and may be amended or modified only by a written document signed by an authorized representative of each party. |
| 12. | PROSPECTUS. The Sponsor will provide to the Participant copies of the then current Prospectus and any printed supplemental information in reasonable quantities upon request. The Participant shall, upon request of the Trust, provide the Trust with sufficient documentation and other evidence that the Participant is providing prospectuses and, where applicable, any printed supplemental information, to the purchasers of any Shares. The Sponsor represents, warrants and agrees that it will notify the Participant when a revised, supplemented or amended prospectus for any Shares is available and deliver or otherwise make available to the Participant copies of such revised, supplemented or amended prospectus at such time and in such numbers as to enable the Participant to comply with any obligation it may have to deliver such prospectus to customers. The Sponsor will make such revised, supplemented or amended prospectus available to the Participant no later than its effective date. The Sponsor shall be deemed to have complied with this Section 13 when the Participant has received such revised, supplemented or amended prospectus by email to the address noted for the Participant in Section 11, in printable form, with such number of hard copies as may be agreed from time to time by the parties promptly thereafter. |
| 13. | NO PROMOTION. Each of the Trust and the Sponsor agrees that it will not, without the prior written consent of the Participant in each instance, (i) use in advertising, publicity, or otherwise the name of the Participant or any affiliate of the Participant, or any partner or employee of the Participant, nor any trade name, trademark, trade device, service mark, symbol or any abbreviation, contraction or simulation thereof owned by the Participant or its affiliates, or (ii) represent, directly or indirectly, that any product or any service provided by the Trust or Sponsor has been approved or endorsed by the Participant. Notwithstanding the foregoing, the Trust may name the Participant and describe the Participant’s role as an authorized participant of the Trust in the Prospectus to the extent required by law, rule, or other regulation. Furthermore, the Sponsor and the Participant agree that they will not, |
10
| without the prior written consent of the other party in each such instance, disclose the terms of this Agreement, except for use in accordance with this Agreement or to the parties’ respective officers, directors, employees, agents and representatives for use in accordance with this Agreement or as required by any applicable law or regulatory body. This provision shall survive termination or expiration of this Agreement. |
| 14. | COUNTERPARTS. This Agreement may be simultaneously executed in several counterparts, each of which shall be an original and all shall constitute but one and the same instrument. |
| 15. | GOVERNING LAW. This Agreement shall be governed by and interpreted in accordance with the laws of the State of Illinois without regard to the conflicts of laws provisions thereof. The parties irrevocably submit to the personal jurisdiction and service and venue of any federal or state court within the State of Illinois having subject matter jurisdiction, for the purpose of any action, suit or proceeding arising out of or relating to this Agreement. |
| 16. | ASSIGNMENT. Neither party may assign its rights or obligations under this Agreement (in whole or in part) without the prior written consent of the other party, which shall not be unreasonably withheld; provided, that either party may assign its rights and obligations hereunder (in whole, but not in part) without such consent to an entity acquiring all, or substantially all, of its assets or business. Notwithstanding the aforementioned termination provisions, in the event that an entity acquires all or substantially all of the Participant’s assets or business, the Sponsor may elect within a limited period of time not to exceed thirty (30) days from the date upon which such acquisition was publicly announced to immediately terminate this Agreement. |
| 17. | SEVERANCE. If any provision of this Agreement is held by any court pursuant to any Act, Regulation, Rule or decision or by any other governmental or supranational body or authority or regulatory or self regulatory organization to be invalid, illegal or unenforceable for any reason, it shall be invalid, illegal or unenforceable only to the extent so held and all parties shall remain responsible for all actions or omissions not relating to such provision and the invalidity, illegality or unenforceability of such provisions shall not affect the validity, legality or enforceability of the other provisions of this Agreement, so long as this Agreement, as so modified, continues to express, without material change, the original intentions of the parties as to the subject matter of this Agreement and the deletion of such portion of this Agreement will not substantially impair the respective benefits, obligations or expectations of the parties to this Agreement. |
11
IN WITNESS WHEREOF, the duly authorized representatives of the below parties hereto have executed this Agreement the effective date of which shall be date of the last dated signature below (the “Effective Date”).
| INVESCO CAPITAL MANAGEMENT LLC | ||
| SPONSOR | ||
| BY: |
| |
| Name: |
| |
| TITLE: |
| |
| DATE: |
| |
| [PARTICIPANT] | ||
| PARTICIPANT | ||
| BY: |
| |
| Name: |
| |
| TITLE: |
| |
| DATE: |
| |
Accepted by:
| INVESCO GALAXY ETHEREUM ETF | ||
| By Invesco Capital Management LLC | ||
| As Sponsor of Invesco Galaxy Ethereum ETF | ||
| BY: |
| |
| Name: |
| |
| TITLE: |
| |
| DATE: |
| |
12
| BANK OF NEW YORK MELLON | ||
| TRANSFER AGENT | ||
| BY: |
| |
| Name: |
| |
| TITLE: |
| |
| DATE: |
| |
13
ATTACHMENT A
CREATION AND REDEMPTION PROCEDURES
Scope of Procedures and Overview
This Attachment A to the Participant Agreement (the “Participant Agreement”) supplements the Participant Agreement, the Prospectus and the Trust Agreement with respect to the procedures (the “Procedures”) to be used in processing (1) a creation order for the creation of one or more Baskets (as defined below) (“Creation Order”) of Shares of Invesco Galaxy Ethereum ETF (the “Trust”) and a (2) redemption order for the redemption of one or more Baskets (as defined below) (“Redemption Order”) of Shares of the Trust. Shares may be created or redeemed only in blocks of 5,000 Shares (each such block, a “Basket”) for the Trust.
For purposes of these Procedures, a “Business Day” means a day other than Saturday, Sunday or other day when banks and/or securities exchanges are open for regular trading.
Baskets are issued pursuant to the Prospectus, which will be obtained by each Participant from the Trust’s website at http://www.Invesco.com or its successor thereof and are issued and redeemed in accordance with the Trust Agreement and the Participant Agreement. Baskets may be created and redeemed on any Business Day.
Creation Orders and Redemption Orders are, collectively, the “Orders.”
Authorized Participants (“Participants”) may submit Orders to the Transfer Agent (i) through the Transfer Agent’s electronic order entry system, as such may be made available and constituted from time to time, the use of which shall be subject to the terms and conditions of the Electronic Services Agreement, which is incorporated by reference herein (the “Website Based Orders”), and (ii) by telephone (and faxed order form(s)) according to these Procedures as provided in Annex I (the “Telephone/Fax Based Orders”).
The Participant must execute the Electronic Access Service Agreement (“ESA”) with the Transfer Agent in order for a Participant to be able to submit Website Based Orders. RSA SecurID token cards are issued to each of the Authorized Persons, which may be used to access the Transfer Agent’s website and input Orders as described herein and pursuant to the Authorized Participant Interface User Guide, incorporated herein by reference.
“Order Cut-Off Time” means, for an in-kind transaction, 4:00 p.m. Eastern time for a T+1 Order, and for a cash transaction, 2:30 p.m. Eastern time for a T+1 Order.
“Creation Order Date” means a Business Day on which an order to create one or more Creation Baskets was placed by a Participant with the Transfer Agent by the Order Cut-Off Time.
“Redemption Order Date” means a Business Day on which an order to redeem one or more Creation Baskets placed by a Participant with the Transfer Agent by the Order Cut-Off Time.
“Settlement Time” means any time within two Business Days immediately following the Creation Order Date or the Redemption Order Date, as applicable.
“Redemption Distribution” means, subject to deduction of any tax or other governmental charges due thereon, the cash in an amount equal to the product obtained by multiplying (i) the number of Creation Baskets set forth in the relevant Redemption Order by (ii) the Net Asset Value Per Basket of the Trust as of the close of the Trading Session of the exchange on the Redemption Order Date.
14
“Creation Basket” means the number of shares issued or redeemed by the Trust in a creation or redemption transaction as set forth in the Prospectus.
“Creation Basket Deposit” means the quantity of ether required to create each Creation Basket in a creation transaction as determined by the Administrator each Business Day.
Each Participant is responsible for ensuring that the Creation Basket Deposit and/or the Creation Basket it intends to transfer to the Trust in exchange for Creation Baskets or redemption proceeds, as applicable, is available for transfer to such Trust in the manner and at the times described in these Procedures.
Participants will be required to pay a nonrefundable per order transaction fee of $500 to the Transfer Agent (the “Transaction Fee”).
IMPORTANT NOTES:
| • | Any Creation Order is subject to acceptance or rejection by the Transfer Agent, in consultation with the Sponsor, for the reasons set forth in the Trust Agreement or the Participant Agreement. |
| • | Any Redemption Order is subject to acceptance or rejection by the Transfer Agent, in consultation with the Sponsor, for the reasons set forth in the Trust Agreement or the Participant Agreement. |
| • | All Orders are subject to the provisions of the Trust Agreement and the Participant Agreement relating to unclear or ambiguous instructions. |
TRANSFER AGENT CONTACT INFORMATION:
BNY Mellon ETF Order Desk
240 Greenwich Street
New York, NY 10286
Email: BNYMETFOrderDesk@bnymellon.com
Phone: 1-844-545-1258
Fax: 1-732-667-9478 / 9549
15
ANNEX I
WEBSITE BASED ORDERS
AND
TELEPHONE/FAX BASED ORDERS
CREATION PROCEDURES
| 1. | PLACING A CREATION ORDER. |
Participants may submit Website Based Orders or Fax/Telephone Based Orders to the Transfer Agent as provided by these Procedures.
NOTE THAT IF THE PARTICIPANT PLACES A TELEPHONE/FAX BASED ORDER, THE TELEPHONE CALL OR FAX IN WHICH THE CONFIRMATION NUMBER IS ISSUED INITIATES THE CREATION ORDER PROCESS BUT DOES NOT ALONE CONSTITUTE THE CREATION ORDER. A CREATION ORDER IS CONSIDERED A COMPLETE CREATION ORDER ONLY UPON RECEIPT OF THE CONFIRMATION NUMBER.
Creation Orders for Creation Baskets may be initiated only on Business Days. Creation Orders may only be made in whole Creation Baskets of the Trust.
To begin a Creation Order, an Authorized Person of the Participant may telephone the Transfer Agent at 1-844-545-1258 or such other number as the Sponsor designates in writing to the Participant. This telephone call must be made by an Authorized Person of the Participant and answered by the Transfer Agent before the Order Cut-Off Time. Upon verifying the authenticity of the Authorized Person (as determined by the use of the appropriate PIN Number), the Transfer Agent will request that the Authorized Person place the Creation Order. To do so, the Authorized Person must provide the appropriate ticker symbol when referring to the Trust. After the Authorized Person has placed the Creation Order, the Transfer Agent will read the Creation Order back to the Authorized Person. The Authorized Person then must confirm that the Creation Order has been taken correctly by the Transfer Agent. If the Authorized Person confirms that the Creation Order has been taken correctly, the Transfer Agent will issue a confirmation number (the “Confirmation Number”) to the Authorized Person.
All Creation Orders may also be placed by an Authorized Person as a Website Based Order by the Order Cut-Off Time.
PLEASE NOTE: A CREATION ORDER REQUEST IS NOT COMPLETE UNTIL THE CONFIRMATION NUMBER IS ISSUED BY THE TRANSFER AGENT. WITH RESPECT TO THE TRUST, A CREATION ORDER FOR CREATION BASKETS CANNOT BE CANCELED BY THE PARTICIPANT AFTER THE ORDER CUT-OFF TIME. INCOMING TELEPHONE CALLS ARE QUEUED AND WILL BE HANDLED IN THE SEQUENCE RECEIVED. ACCORDINGLY, THE PARTICIPANT SHOULD NOT HANG UP AND REDIAL. CALLS THAT ARE IN PROGRESS AT THE ORDER CUT-OFF TIME ARE VALID AND THE CREATION ORDER WILL BE TAKEN. PLEASE NOTE THAT “IN PROGRESS” IS DEFINED AS A PARTICIPANT ACTUALLY SPEAKING WITH THE TRANSFER AGENT. CALLS THAT ARE PLACED BEFORE
16
THE ORDER CUT-OFF TIME THAT ARE IN THE HOLDING QUEUE UNANSWERED AT OR AFTER THE ORDER CUT-OFF TIME WILL BE VERBALLY DENIED. INCOMING CALLS THAT ARE RECEIVED AFTER THE ORDER CUT-OFF TIME WILL NOT BE ANSWERED BY THE TRANSFER AGENT. ALL TELEPHONE CALLS WILL BE RECORDED.
| 2. | RECEIPT OF CONFIRMATION. |
Subject to the conditions that a properly completed telephone or fax Creation Order has been placed by the Participant not later than the Order Cut-Off Time, and other provisions contained in these procedures, the Sponsor will accept the Creation Order on behalf of the Trust and will confirm in writing to the Participant that its Creation Order has been accepted within 45 minutes after the designated Order Cut-Off Time on the Business Day that the Creation Order is received. Once the Creation Order has been approved by the Sponsor, the Sponsor will sign or time-stamp the Creation Order and send that Creation Order to the Transfer Agent.
Typically, if a Web-Based Order is submitted, the Sponsor may confirm the order on-line. Alternatively, if the Sponsor prefers to confirm Orders via fax, the Transfer Agent will download and print the Order Form and fax it to the Sponsor for review and approval. Upon receipt of the Order Form signed by the Sponsor, the Transfer Agent will issue an email confirmation to the Participant and the Sponsor to reflect the Order status (approval or cancellation).
| 3. | QUALITY ASSURANCE. |
After a Confirmation Number is issued by the Transfer Agent to the Participant, the Participant will fax a written version of the Creation Order to the Transfer Agent. Upon receipt, the Transfer Agent should immediately telephone the Participant if the Transfer Agent believes that the Creation Order has not been completed correctly by the Participant. In addition, the Transfer Agent will telephone the Participant if the Transfer Agent is in non-receipt of the Creation Order within 15 minutes after the Creation Order has been called into the Transfer Agent.
| 4. | REJECTING OR SUSPENDING CREATION ORDERS. |
The Sponsor reserves the absolute right to reject acceptance of a Creation Order or Creation Basket Deposit if (i) the Sponsor or Transfer Agent has determined the Creation Order or Creation Basket Deposit is not in proper form; (ii) the Sponsor has determined the acceptance or receipt of which would have adverse tax consequences to the Trust or to the Shareholders; (iii) the acceptance or receipt of which could, in the opinion of counsel to the Sponsor, be unlawful; or (iv) circumstances outside the control of the Sponsor or the Transfer Agent make it for all practical purposes not feasible to process Creation Baskets. The Sponsor shall notify the Participant of a rejection of any Creation Order. The Sponsor may not revoke a previously accepted Creation Order, as defined in these Procedures.
Neither the Sponsor nor its delegate will be liable to any person or in any way for any loss or damages that may result from any such rejection.
17
| 5. | DETERMINATION OF PAYMENT AMOUNT. |
As promptly as practicable following the publication of the net asset value of the Trust and the net asset value per Share of the Shares on the Creation Order Date, the Sponsor shall communicate to the Participant the amount of ether or cash necessary for the Creation Basket Deposit and details of the method of payment (e.g., wiring instructions) required for the Creation Basket Deposit.
| 6. | CONTRACTUAL SETTLEMENT. |
The Creation Basket Capital Contribution must be delivered through the DTC to an account at the DTC maintained by the Custodian on behalf of the Sponsor and the Trust, or Federal Fund Wire, on or before the Settlement Time, together with the applicable Transaction Fee. The Creation Basket will be credited to the Participant at the Settlement Time. The Custodian on behalf of both the Sponsor and the Trust will cause the Trust to deposit the Creation Basket with the DTC in accordance with the DTC’s customary procedures, for the credit of the account of the Participant that placed the Creation Order.
18
REDEMPTION PROCEDURES
| 1. | PLACING A REDEMPTION ORDER. |
Participants may submit Website Based Orders or Telephone/Fax Based Orders to the Transfer Agent as provided by these Procedures.
NOTE THAT IF THE PARTICIPANT PLACES A TELEPHONE/FAX BASED ORDER, THE TELEPHONE CALL OR FAX IN WHICH THE CONFIRMATION NUMBER IS ISSUED INITIATES THE REDEMPTION ORDER PROCESS BUT DOES NOT ALONE CONSTITUTE THE REDEMPTION ORDER. A REDEMPTION ORDER IS CONSIDERED COMPLETE ONLY UPON RECEIPT OF THE CONFIRMATION NUMBER.
Redemption Orders may be initiated only on Business Days. Redemption Orders may only be made in whole Creation Baskets of the Trust.
To begin a Redemption Order, the Authorized Person of the Participant may telephone the Transfer Agent at 1-844-545-1258 or such other number as the Sponsor designates in writing to the Participant. This telephone call must be made by an Authorized Person of the Participant and answered by the Transfer Agent before the Order Cut-Off Time. Upon verifying the authenticity of the Authorized Person (as determined by the use of the appropriate PIN Number), the Transfer Agent will request that the Authorized Person place the Redemption Order. To do so, the Authorized Person must provide the appropriate ticker symbol when referring to the Trust. After the Authorized Person has placed the Redemption Order, the Transfer Agent will read the Redemption Order back to the Authorized Person. The Authorized Person then must confirm that the Redemption Order has been taken correctly by the Transfer Agent. If the Authorized Person confirms that Redemption Order has been taken correctly, the Transfer Agent will issue a confirmation number (the “Confirmation Number”) to the Authorized Person.
All Redemption Orders may also be placed by an Authorized Person as a Website Based Order by the Order Cut-Off Time.
PLEASE NOTE: A REDEMPTION ORDER REQUEST IS NOT COMPLETE UNTIL THE CONFIRMATION NUMBER IS ISSUED BY THE TRANSFER AGENT. WITH RESPECT TO THE TRUST, A REDEMPTION ORDER FOR CREATION BASKETS CANNOT BE CANCELED BY THE PARTICIPANT AFTER THE ORDER CUT-OFF TIME. INCOMING TELEPHONE CALLS ARE QUEUED AND WILL BE HANDLED IN THE SEQUENCE RECEIVED. ACCORDINGLY, THE PARTICIPANT SHOULD NOT HANG UP AND REDIAL. CALLS THAT ARE IN PROGRESS AT THE ORDER CUT-OFF TIME ARE VALID AND THE REDEMPTION ORDER WILL BE TAKEN. PLEASE NOTE THAT “IN PROGRESS” IS DEFINED AS A PARTICIPANT ACTUALLY SPEAKING WITH THE TRANSFER AGENT. CALLS THAT ARE PLACED BEFORE THE ORDER CUT-OFF TIME THAT ARE IN THE HOLDING QUEUE UNANSWERED AT OR AFTER THE ORDER CUT-OFF TIME WILL BE VERBALLY DENIED. INCOMING CALLS THAT ARE RECEIVED AFTER THE ORDER CUT-OFF TIME WILL NOT BE ANSWERED BY THE TRANSFER AGENT. ALL TELEPHONE CALLS WILL BE RECORDED.
19
| 2. | RECEIPT OF CONFIRMATION. |
Subject to the conditions that a properly completed telephone or fax Redemption Order has been placed by the Participant not later than the Order Cut-Off Time, and except as otherwise provided in these procedures, the Sponsor will accept the Redemption Order on behalf of the Trust and will confirm in writing to the Participant that its Redemption Order has been accepted within 45 minutes after the designated Order Cut-Off Time on the Business Day that the Redemption Order is received. Once the Redemption Order has been approved by the Sponsor, the Sponsor will sign or time-stamp the Redemption Order and send that Redemption Order to the Transfer Agent.
Typically, if a Web-Based Order is submitted, the Sponsor may confirm the order on-line. Alternatively, if the Sponsor prefers to confirm Orders via fax, the Transfer Agent will download and print the Order Form and fax it to the Sponsor for review and approval. Upon receipt of the Order Form signed by the Sponsor, the Transfer Agent will issue an email confirmation to the Participant and the Sponsor to reflect the Order status (approval or cancellation).
| 3. | QUALITY ASSURANCE. |
After a Confirmation Number is issued by the Transfer Agent to the Participant, the Participant will fax a written version of the Redemption Order to the Transfer Agent. Upon receipt, the Transfer Agent should immediately telephone the Participant if the Transfer Agent believes that the Redemption Order has not been completed correctly by the Participant. In addition, the Transfer Agent will telephone the Participant if the Transfer Agent is in non-receipt of the Redemption Order within 15 minutes after the Redemption Order has been called into the Transfer Agent.
| 4. | REJECTING OR SUSPENDING REDEMPTION ORDERS. |
The Sponsor shall reject any Redemption Order the fulfillment of which its counsel advises would be illegal under applicable laws and regulations. The Sponsor may, in its discretion, suspend the right of redemption, or postpone the Settlement Time, (i) for any period during which an Exchange is closed other than customary weekend or holiday closings, or trading is suspended or restricted; (ii) for any period during which an emergency exists as a result of which delivery, disposal or evaluation of the Trust’s assets is not reasonably practicable; or (iii) for such other period as the Sponsor determines to be necessary for the protection of Shareholders. The Sponsor will reject a Redemption Order if the order is not in proper form or if the fulfillment of the order, in the opinion of its counsel, might be unlawful. The Sponsor shall notify the Participant of a rejection or suspension of any Redemption Order. The Sponsor may not revoke a previously accepted Redemption Order, as defined in these Procedures.
Neither the Sponsor nor its delegate will be liable to any person or in any way for any loss or damages that may result from any such suspension or postponement.
| 5. | DETERMINATION OF CASH DISTRIBUTION. |
In the event of a hard fork or other similar event, as promptly as practicable following the publication of the net asset value of the Trust and the net asset value per Share of the Shares on the Redemption Order Date, the Sponsor shall communicate to the Participant the amount of cash to be delivered in the Redemption Distribution.
20
| 6. | CONTRACTUAL SETTLEMENT. |
The Creation Baskets must be credited to an account at the DTC maintained by the Custodian along with the Transaction Fee on or before the Settlement Time. The Redemption Distribution shall be delivered through the DTC to the account of the Participant as recorded on the book entry system of the DTC at the Settlement Time.
21
ATTACHMENT B
CREATION / REDEMPTION ORDER FORM
(for use only in connection with ______________ orders)
INVESCO GALAXY ETHEREUM ETF
CONTACT INFORMATION FOR ORDER EXECUTION:
Telephone Order Number: 1-844-545-1258; Fax Number: 1-732-667-9478 / 9549
ALL ITEMS IN PART I MUST BE COMPLETED BY THE AUTHORIZED PARTICIPANT. THE SPONSOR, THE TRANSFER AGENT, AND/OR THE TRUST, IN THEIR DISCRETION, MAY REJECT ANY ORDER NOT SUBMITTED IN COMPLETE FORM OR CONTAINING AMBIGUOUS INSTRUCTIONS. DEFINED TERMS SET FORTH BELOW SHALL HAVE THE MEANING AS SET FORTH IN THE PARTICIPANT AGREEMENT.
I. TO BE COMPLETED BY AUTHORIZED PARTICIPANT
Date:________________________ Time: _____________________ Authorized Person:________________________
Firm Name:___________________________________ NSCC/DTC Participant Number:______________________________
Telephone Number:________________________ Fax Number:________________________
| Type of Order (Check one): | CREATION ☐ | REDEMPTION ☐ |
Indicate Order Type:
| ☐ | Standard Order (In-Kind) |
| ☐ | Cash Order |
The Authorized Participant represents and warrants that it will not redeem a Creation Basket unless it, or the party for which it is acting, as the case may be, first owns outright or has a reasonable basis to believe that it can acquire the requisite number of Shares to be redeemed as a Creation Basket.
THIS TRANSACTION SHALL BE EFFECTED IN ACCORDANCE WITH THE TERMS AND CONDITIONS OF THE TRUST’S CURRENT REGISTRATION STATEMENT, THE ETF ORDER PROCEDURES AND THE AUTHORIZED PARTICIPANT AGREEMENT.
Number of Creation Baskets (CU) Being Transacted: Number: Number Written Out:
(One Creation Basket = 5,000 Shares)
| ORDER NUMBER: | ||
| (To be entered by Authorized Participant after issuance | Authorized Person’s Signature | |
| by telephone representative) |
II. TO BE COMPLETED BY TRANSFER AGENT
This certifies that the above order has been:
☐ Accepted ☐ Declined -Reason: ____________________________________________
|
Date |
Time |
Authorized Signature |
22
ATTACHMENT C
CERTIFIED AUTHORIZED PERSONS OF AUTHORIZED PARTICIPANT
The following are the names, titles and signatures of all persons (each an “Authorized Person”) authorized to give instructions relating to any activity contemplated by the Participant Agreement or any other notice, request or instruction on behalf of the Authorized Participant pursuant to the Invesco Galaxy Ethereum ETF Participant Agreement.
Authorized Participant: _______________________
DTC Participant Number: _______________________
Authorized Person(s)
|
Name|Title |
Phone|E-mail |
Signature |
||||
|
|
|
|
||||
| Name|Title | Phone|E-mail | Signature | ||||
|
|
|
|
||||
| Name|Title | Phone|E-mail | Signature | ||||
|
|
|
|
||||
| Name|Title | Phone|E-mail | Signature | ||||
The undersigned does hereby certify that the persons listed above have been duly authorized to act as Authorized Persons pursuant to the Invesco Galaxy Ethereum ETF Participant Agreement.
.
| By: |
| |
| Name: |
| |
| Title: |
| |
| Date: |
| |
23
Exhibit 10.3
FORM OF MARKETING AGENT AGREEMENT
MARKETING AGENT AGREEMENT dated and effective as of [ ], 2024 (this “Agreement”) among Invesco Galaxy Ethereum ETF, a Delaware statutory trust (the “Trust”), Invesco Distributors, Inc., a Delaware corporation (the “Marketing Agent”), and Invesco Capital Management LLC, a Delaware limited liability company (the “Sponsor”). Capitalized terms used but not defined in this Agreement shall have the meaning ascribed thereto in the Trust’s Prospectus (as defined herein) included in its Registration Statement (as defined herein).
WHEREAS, the Sponsor has filed the Registration Statement on Form S-1 (Registration No. 333-274767 with the U.S. Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended (the “1933 Act”);
WHEREAS, the Trust intends to create and redeem shares of beneficial interest in the Trust (the “Shares”) only in large aggregations (“Creation Baskets”) on a continuous basis, and list the Shares on one or more national securities exchanges;
WHEREAS, the Sponsor desires to retain the Marketing Agent to provide certain services in connection with the offering of the Shares (as amended from time to time);
WHEREAS, the Marketing Agent is registered as a broker-dealer under the Securities Exchange Act of 1934, as amended (the “1934 Act”), and is a member of the Financial Industry Regulatory Authority, Inc. (“FINRA”);
WHEREAS, the Trust and the Sponsor wish to employ Marketing Agent in connection with the performance of the services listed in Schedule A and additional services as may be agreed to from time-to-time; and
WHEREAS, the Marketing Agent is willing to provide such services on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual promises and undertakings herein contained, the parties agree as follows:
1. Documents — The Trust has furnished or will furnish, upon request, the Marketing Agent with copies of the Trust’s Amended and Restated Declaration of Trust, custodian agreements, transfer agency agreement, fund administration agreement, execution agent agreement, current Prospectus and Registration Statement, and all forms relating to any plan, program or service offered by the Trust. The Trust shall furnish, within a reasonable time period, to the Marketing Agent a copy of any amendment or supplement to any of the above-mentioned documents. Upon request, the Trust shall furnish promptly to the Marketing Agent any additional documents necessary or advisable to perform its functions hereunder. As used in this Agreement the terms “registration statement” and “prospectus” shall mean any registration statement, prospectus and statement of additional information filed by the Trust with the Securities and Exchange Commission (“SEC”) and any amendments and supplements thereto that are filed with the SEC. “Prospectus” means the Prospectus constituting part of the Registration Statement of the Trust under the 1933 Act as such Prospectus may be amended or supplemented and filed with the SEC from time to time. “Registration Statement” means the registration statement most recently filed from time to time by the Trust with the SEC and effective under the 1933 Act, as such registration statement is amended by any amendments thereto at the time in effect.
2. Authorized Representations — The Marketing Agent is not authorized by the Trust to give any information or to make any representations other than those contained in the Registration Statement or Prospectus, or contained in shareholder reports or other material that may be prepared by or on behalf of the Trust for the Marketing Agent’s use. Consistent with the foregoing, the Marketing Agent may prepare and distribute sales literature or other material as it may deem appropriate in consultation with the Trust and the Sponsor, provided such sales literature is approved in accordance with this agreement and complies with applicable law and regulations.
3. Registration of Shares — The Trust agrees that it will take all action necessary to register the Shares of the Trust under the 1933 Act. The Trust shall make available to the Marketing Agent, at the Marketing Agent’s expense, such number of copies of its Prospectus as the Marketing Agent may reasonably request. The Trust shall furnish to the Marketing Agent copies of all information, financial statements and other papers related to the Funds, which the Marketing Agent may reasonably request for use in connection with the marketing Shares of the Trust.
4. Fees and Fund Expenses — (a) In consideration of the services to be performed for the Trust by the Marketing Agent hereunder as set forth on Schedule A attached hereto and as it may be amended from time-to-time, the Sponsor (and not the Trust) will pay the Marketing Agent a fee in an amount set forth in Schedule B hereto, subject to any limitation imposed by any law, rule or regulation applicable to any of the parties hereto.
(b) The Sponsor shall reimburse the Marketing Agent for any reasonable fees or disbursements incurred by the Marketing Agent in connection with the performance by the Marketing Agent of its duties under and pursuant to this Agreement with the prior written consent of the Sponsor.
5. Use of the Marketing Agent’s Name — The Trust shall not use the name of the Marketing Agent, or any of its affiliates, in any Prospectus, sales literature, and other material relating to the Trust in any manner without the prior written consent of the Marketing Agent (which shall not be unreasonably withheld); provided, however, that the Marketing Agent hereby approves all lawful uses of the names of the Marketing Agent and its affiliates in the Prospectus and in all other materials which merely refer to accurate terms to their appointment hereunder or which are required by the SEC, FINRA, OCC, CFTC, NFA or any state securities authority.
6. Use of the Trust’s Name — Neither the Marketing Agent nor any of its affiliates shall use the name of the Trust in any publicly disseminated materials, including sales literature in any manner without the prior consent of the Trust (which shall not be unreasonably withheld); provided, however, that the Trust hereby approves all lawful uses of their respective names in any required regulatory filings of the Marketing Agent which merely refer in accurate terms to the appointment of the Marketing Agent hereunder, or which are required by the SEC, FINRA, OCC, CFTC, NFA or any state securities authority.
7. Indemnification — (a) Subject to the limitations set forth in Paragraph 12 below, the Sponsor agrees to indemnify and hold harmless the Marketing Agent and each of its directors and officers and each person, if any, who controls the Marketing Agent within the meaning of Section 15 of the Securities Act, against any loss, liability, claim, damage or expense (including the reasonable cost of investigating or defending any alleged loss, liability, claim, damage or expense and reasonable counsel fees incurred in connection therewith) by reason of any person acquiring any Shares, based upon the ground that the Registration Statement, Prospectus, shareholder reports or other information filed or made public by the Trust (as from time-to-time amended) included an untrue statement of a material fact or omitted to state a material fact required to be stated or necessary in order to make the statements not misleading under the Securities Act or any other statute or the common law. However, the Trust does not agree to indemnify the Marketing Agent or hold it harmless to the extent that the statement or omission was made in reliance upon, and in conformity with, information furnished to it by or on behalf of the Marketing Agent. In no case (i) is the indemnity of the Trust in favor of the Marketing Agent or any person indemnified to be deemed to protect the Marketing Agent or any person against any liability to a Trust or its security holders to which the Marketing Agent or such person would otherwise be subject by reason of willful misfeasance, bad faith or negligence in the performance of its duties or by reason of its reckless disregard of its obligations and duties under this Agreement, or (ii) is a Trust to be liable under its indemnity agreement contained in this paragraph with respect to any claim made against the Marketing Agent or any person indemnified unless the Marketing Agent or person, as the case may be, shall have notified the Trust in writing of the claim promptly after the summons or other first written notification giving information of the nature of the claims shall have been served upon the Marketing Agent or any such person (or after the Marketing Agent or such person shall have received notice of service on any designated agent). However, failure to notify a Trust of any claim shall not relieve that Trust from any liability which it may have to any person against whom such action is brought otherwise than on account of its indemnity agreement contained in this paragraph. The Trust shall be entitled to participate at its own expense in the defense, or, if it so elects, to assume the defense of any suit brought to enforce any claims, and if a Trust elects to assume the defense, the defense shall be conducted by counsel chosen by such Trust. In the event a Trust elects to assume the defense of any suit and retain counsel, the Marketing Agent, officers or directors or controlling person(s) or defendant(s) in the suit, shall bear the fees and expenses of any additional counsel retained by them. If a Trust does not elect to assume the defense of any suit, it will reimburse the Marketing Agent, officers or directors or controlling person(s) or defendant(s) in the suit for the reasonable fees and expenses of any counsel retained by them. The Trust agrees to notify the Marketing Agent promptly of the commencement of any litigation or proceeding against it or any of its officers in connection with the issuance or sale of any of the Shares.
-2-
(b) The Marketing Agent also covenants and agrees to indemnify and hold harmless the Trust, the Sponsor, and each of their respective officers, representatives or agents and each person, if any, who controls the Trust or the Sponsor within the meaning of Section 15 of the Securities Act (each, an “Indemnified Party”), against any loss, liability, claim, damage or expense (including the reasonable cost of investigating or defending any alleged loss, liability, claim, damage or expense and reasonable counsel fees incurred in connection therewith) arising by reason of any person acquiring any Shares, based upon the Securities Act or any other statute or common law, alleging (a) any wrongful act of the Marketing Agent or any of its employees or (b) that any sales literature, advertisements, information, statements or representations used or made by the Marketing Agent or any of its affiliates or employees or that the Registration Statement or Prospectus (as from time-to-time amended) included an untrue statement of a material fact or omitted to state a material fact required to be stated or necessary in order to make the statements not misleading, insofar as the statement or omission was made in reliance upon, and in conformity with, information furnished to such Trust or Sponsor by or on behalf of the Marketing Agent. In no case (i) is the indemnity of the Marketing Agent in favor of any Indemnified Party to be deemed to protect any such party against any liability to which the Indemnified Party would otherwise be subject by reason of willful misfeasance, bad faith or negligence in the performance of its duties or by reason of its reckless disregard of its obligations and duties under this Agreement, or (ii) is the Marketing Agent to be liable under its indemnity agreement contained in this paragraph with respect to any claim made against any Indemnified Party unless such Indemnified Party shall have notified the Marketing Agent in writing of the claim promptly after the summons or other first written notification giving information of the nature of the claim shall have been served upon such Indemnified Party (or after such Indemnified Party shall have received notice of service on any designated agent). However, failure to notify the Marketing Agent of any claim shall not relieve the Marketing Agent from any liability which it may have to the Indemnified Party against whom the action is brought otherwise than on account of its indemnity agreement contained in this paragraph. In the case of any notice to the Marketing Agent it shall be entitled to participate, at its own expense, in the defense or, if it so elects, to assume the defense of any suit brought to enforce any claims, and if the Marketing Agent elects to assume the defense, the defense shall be conducted by counsel chosen by it and satisfactory to the Indemnified Party, to its officers and to any controlling person(s), or defendant(s) in the suit. In the event that the Marketing Agent elects to assume the defense of any suit and retain counsel, the Indemnified Party or controlling person(s), defendant(s) in the suit, shall bear the fees and expenses of any additional counsel retained by them. If the Marketing Agent does not elect to assume the defense of any suit, it will reimburse the Indemnified Party, officers or controlling person(s) or defendant(s) in the suit for the reasonable fees and expenses of any counsel retained by them. The Marketing Agent agrees to notify the Indemnified Party promptly of the commencement of any litigation or proceeding against it in connection with the Indemnified Party and sale of any of the Shares.
8. Supplemental Information — The Marketing Agent and the Sponsor, on behalf of the Trust, shall regularly consult with each other regarding the Marketing Agent’s performance of its obligations under this Agreement. In connection therewith, the Sponsor shall submit to the Marketing Agent at a reasonable time in advance of filing with the SEC reasonably final copies of any amended or supplemented registration statement (including exhibits) under the Securities Act; provided, however, that nothing contained in this Agreement shall in any way limit the Trust’s right to file at any time such amendments to any Registration Statement and/or supplements to any Prospectus, of whatever character, as the Trust may deem advisable, such right being in all respects absolute and unconditional.
The Marketing Agent acknowledges that the only information provided to it by the Trust or the Sponsor is that contained in the Registration Statement, the Prospectus and reports and financial information referred to herein. Neither the Marketing Agent nor any other person is authorized by the Trust to give any information or to make any representations, other than those contained in such documents.
9. Term — This Agreement shall become effective as of the date first written above, and shall continue until one year from such date and thereafter shall continue automatically for successive annual periods. This Agreement is terminable, with respect to the Trust, without penalty on sixty (60) days’ written notice by the Sponsor, the Trust or by the Marketing Agent. This Agreement shall automatically terminate in the event of its assignment.
-3-
Upon the termination of this Agreement by the Trust, at the expense and direction of the Trust, the Marketing Agent shall transfer to such successor, as the Trust shall specify all relevant books, records and other data established or maintained by the Marketing Agent for the Trust under this Agreement.
10. Notice — Any notice required or permitted to be given by any party to another party shall be deemed sufficient if sent by (i) email or (ii) registered or certified mail, postage prepaid, addressed by the party giving notice to the other party at the last address furnished by the other party to the party giving notice:
if to the Trust or the Sponsor, at:
Invesco Capital Management LLC
3500 Lacey Road, Suite 700
Downers Grove, IL 60515
Attn: Head of Legal
if to the Marketing Agent at:
Invesco Distributors, Inc.
11 Greenway Plaza, Suite 1000
Houston, TX 77046
Attn: General Counsel
or such other email address as may be furnished by one party to the other.
11. Confidential Information — The Marketing Agent, its officers, directors, employees and agents will treat confidentially and as proprietary information of the Trust, all records and other information relative to the Trust and to prior or present shareholders or to those persons or entities who respond to the Marketing Agent’s inquiries concerning investment in a particular Trust, and will not use such records and information for any purposes other than performance of its responsibilities and duties hereunder. If the Marketing Agent is requested or required by, but not limited to, depositions, interrogatories, requests for information or documents, subpoena, civil investigation, demand or other action, proceeding or process or as otherwise required by law, statute, regulation, writ, decree or the like to disclose such information, the Marketing Agent will provide the Trust with prompt written notice of any such request or requirement so that particular Trust may seek an appropriate protective order or other appropriate remedy and/or waive compliance with this provision. If such order or other remedy is not sought, or obtained, or waiver not received within a reasonable period following such notice, then the Marketing Agent may without liability hereunder, disclose to the person, entity or agency requesting or requiring the information, that portion of the information that is legally required in the reasonable opinion of the Marketing Agent’s counsel.
12. Limitation of Liability —The Marketing Agent agrees that, pursuant to Section 3804(a) of the Delaware Statutory Trust Act, the liabilities of the Trust shall be limited such that the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing and relating to this Agreement with respect to the Trust shall be enforceable against the assets of the Trust. The Marketing Agent further agrees that it shall not seek satisfaction of any such obligation from the Trustee, shareholders, any individual shareholder, officer, representative or agent of the Trust, nor shall the Marketing Agent seek satisfaction of any such obligation from the Sponsor, its members, managers, directors or officers.
Any obligations of the Trust entered into in the name or on behalf thereof by the Sponsor, members managers, officers, representatives or agents are made not individually, but in such capacities, and are not binding upon any of the Sponsor, the Trustee, members, managers, or officers, representatives or agents personally, but bind only the property of the Trust party to said obligation, and all persons dealing with such Trust must look solely to that Trust’s property for the enforcement of any claims.
-4-
It is expressly understood and agreed by the Marketing Agent that:
(a) this Agreement is executed and delivered on behalf of the Trust by the Sponsor, not individually or personally, but solely as Sponsor of the Trust in the exercise of the powers and authority conferred and vested in it;
(b) the representations, covenants, undertakings and agreements herein made on the part of the Trust are made and intended not as personal representations, undertakings and agreements by the Sponsor but are made and intended for the purpose of binding only the Trust;
(c) nothing herein contained shall be construed as creating any liability on the Sponsor, individually or personally, to perform any covenant of the Trust either expressed or implied contained herein, all such liability, if any, being expressly waived by the parties hereto and by any person claiming by, through or under the parties hereto; and
(d) under no circumstances shall the Sponsor be personally liable for the payment of any indebtedness or expenses of the Trust or be liable for the breach or failure of any obligation, duty, representation, warranty or covenant made or undertaken by the Trust under this Agreement or any other related document.
13. Miscellaneous — Each party agrees to perform such further acts and execute such further documents as are necessary to effectuate the purposes hereof. Except with respect to Paragraph 12 above, which shall be construed, interpreted, and enforced in accordance with and governed by the laws of the State of Delaware, this Agreement shall be construed, interpreted, and enforced in accordance with and governed by the laws of the State of Illinois. The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. This Agreement may not be changed, waived, discharged or amended except by written instrument that shall make specific reference to this Agreement and which shall be signed by the party against which enforcement of such change, waiver, discharge or amendment is sought. This Agreement may be executed simultaneously in two or more counterparts, each of which taken together shall constitute one and the same instrument.
All activities by the Marketing Agent and its agents and employees as Marketing Agent of the Shares shall comply with all applicable laws, rules and regulations including, without limitation, all rules and regulations made or adopted by the SEC, FINRA or any securities association registered under the Exchange Act or futures association registered under the Commodity Exchange Act, as amended. Should the Marketing Agent, or any of its agents and employees, materially fail to maintain compliance with all applicable laws, rules and regulations to which it is subject, or otherwise lose its status as a registered broker-dealer in good standing with FINRA, the Marketing Agent agrees to promptly notify the Sponsor.
All activities by the Sponsor and its agents and employees as Marketing Agent of the Shares shall comply with all applicable laws, rules and regulations including, without limitation, all rules and regulations made or adopted by the SEC, CFTC or any securities association registered under the Exchange Act or futures association registered under the Commodity Exchange Act, as amended. Should the Sponsor, or any of its agents and employees, materially fail to maintain compliance with all applicable laws, rules and regulations to which it is subject, or otherwise lose its status as a commodity pool operator in good standing with the CFTC, the Sponsor agrees to promptly notify the Marketing Agent.
14. Anti-Money Laundering. The Marketing Agent and Sponsor both represent and warrant to the other that it has, and shall maintain, an anti-money laundering program (“AML Program”) that, at a minimum, (i) designates a compliance officer to administer and oversee the AML Program, (ii) provides ongoing employee training, (iii) includes an independent audit function to test the effectiveness of the AML Program, (iv) establishes internal policies, procedures, and controls that are tailored to its particular business, (v) provides for the filing of all necessary anti-money laundering reports including, but not limited to, currency transaction reports and suspicious activity reports, and (vi) allows for appropriate regulators to examine its anti-money laundering books and records.
Remainder of page intentionally left blank. Signature page follows.
-5-
IN WITNESS WHEREOF, each of the undersigned have executed this instrument in its name and behalf, and the Marketing Agent has executed this instrument in its name and behalf, as of the date and year first above written.
| INVESCO GALAXY ETHEREUM ETF | ||
| By: INVESCO CAPITAL MANAGEMENT LLC, | ||
| as Sponsor of Invesco Galaxy Ethereum ETF | ||
| By: |
| |
| Name: | ||
| Title: | ||
| INVESCO DISTRIBUTORS, INC. | ||
| By: |
| |
| Name: | ||
| Title: | ||
| INVESCO CAPITAL MANAGEMENT LLC | ||
| By: |
| |
| Name: | ||
| Title: | ||
-6-
Schedule A
List of Services for the Trust
| 1. | Duties of the Marketing Agent |
The Marketing Agent shall use commercially reasonable efforts to provide, or cause an affiliate to provide, the following services to the Trust:
| • | At the request of the Trust, the Marketing Agent shall assist the Trust with facilitating Authorized Participant Agreements between and among Authorized Participants, the Trust, and the applicable Transfer Agent, for the creation and redemption of Creation Baskets of the Trust. |
| • | Make available copies of the Prospectus to Authorized Participants who have purchased Creation Baskets in accordance with the Authorized Participant Agreements. |
| • | Maintain telephonic, facsimile and/or access to direct computer communications links with the Transfer Agent. |
| • | Review and approve, prior to use, all Trust marketing materials submitted to the Marketing Agent for review by the Sponsor (“Marketing Materials”) for compliance with applicable SEC and FINRA advertising rules, and file all such Marketing Materials required to be filed with FINRA. The Marketing Agent agrees to furnish to the Trust or the Sponsor any comments provided by FINRA with respect to such materials. |
| • | Ensure that all direct requests by Authorized Participants for Prospectuses are fulfilled. |
| • | Work with the Transfer Agent to review and approve orders placed by Authorized Participants and transmitted to the Transfer Agent. The Trust acknowledges that the Marketing Agent shall not be obligated to approve any certain number of orders for Creation Baskets. |
| • | Review distribution related legal documents and contracts. |
| • | Consult with sponsor’s marketing staff on development of FINRA compliant marketing campaigns. |
| • | Consult with sponsor on marketing/sales strategy. |
| • | Maintain books and records in respect of the Trust that relate to the services provided pursuant to this Agreement. |
| • | Perform such additional marketing and distribution related services as may be agreed among the parties from time-to-time. |
| 2. | Duties of the Sponsor |
| • | The Trust agrees to create, issue, and redeem Creation Baskets of the Trust in accordance with the procedures described in the Prospectus. Upon reasonable notice to the Marketing Agent, and in accordance with the procedures described in the Prospectus, the Trust reserves the right to reject any order for Creation Baskets or to stop all receipts of such orders at any time. |
| • | The Sponsor shall deliver to the Marketing Agent copies of the following documents: |
| (i) | the then current Prospectus for the Trust; |
| (ii) | any relevant policies and procedures adopted by the Sponsor or the Trust or its service providers that are applicable to the services provided by the Marketing Agent; and |
| (iii) | any other documents, materials or information that the Marketing Agent shall reasonably request to enable it to perform its duties pursuant to this Agreement. |
A-1
| • | The Sponsor shall thereafter deliver to the Marketing Agent as soon as is reasonably practical any and all amendments to the documents required to be delivered under this Section. |
| • | The Trust shall arrange to provide the listing exchanges with copies of Prospectuses and product descriptions that are required to be provided by the Trust to purchasers in the secondary market. |
| • | The Trust will make it known that Prospectuses and product descriptions are available by making sure such disclosures are in all marketing and advertising materials prepared by the Trust. |
A-2
Schedule B
Pursuant to Section 4(a)
In consideration of the services to be provided by the Marketing Agent under and pursuant to this Agreement, Sponsor shall pay to the Marketing Agent as reimbursement for actual costs associated with the Marketing Agent performing the services provided herein, with such compensation to be capped at $[ ] annually. Marketing Agent’s compensation will be paid quarterly in arrears on the last business day of each calendar quarter and prorated for partial quarters in the event the Marketing Agent Agreement becomes effective on a date that is not the first day of a calendar quarter or is terminated on a date that is not the last day of a calendar quarter.
B-1
Exhibit 10.4
COINBASE PRIME BROKER AGREEMENT
General Terms and Conditions
Exhibit A: Coinbase Custody Custodial Services Agreement
Exhibit B: Coinbase Master Trading Agreement
Appendix 1: Prohibited Use, Prohibited Business, and Conditional Use
Appendix 2: E-sign Disclosure and Consent
Appendix 3: Coinbase Prime Fee Schedule
General Terms and Conditions
| 1. | Introduction |
This Coinbase Prime Broker Agreement (as defined below), dated as of May 23, 2024, is entered into by and between Invesco Galaxy Ethereum ETF (“Client”) and Coinbase, Inc. (“Coinbase”), on behalf of itself and as agent for the Coinbase Entities (as defined below), for purposes of establishing a Coinbase prime broker account for Client (the “Prime Broker Account”). This Coinbase Prime Broker Agreement sets forth the terms and conditions on which the Coinbase Entities will open and maintain Client accounts for services relating to custody, trade execution and other services for certain digital assets (“Digital Assets”) and to otherwise transact business with Client (the “Prime Broker Services”). Certain Prime Broker Services are not available to all clients, including clients residing outside the United States. Capitalized terms not defined in these General Terms and Conditions (“General Terms”) shall have the meanings assigned to them in the respective exhibit, appendix, addendum or supplement hereto.
Notwithstanding anything to the contrary herein, Coinbase, on behalf of itself and as agent for the Coinbase Entities, and Client acknowledge and agree that this Coinbase Prime Broker Agreement shall not become effective until such date as Client’s registration statement on Form S-1 (Registration No. 333-274767), originally filed with the Securities and Exchange Commission (“SEC”) on September 29, 2023, as amended, shall have been declared effective by the SEC by the filing of a Notice of Effectiveness on the SEC’s EDGAR system (the “Effective Date”). Accordingly, no rights, remedies, duties, obligations or liabilities shall arise hereunder until on and after the Effective Date.
| 2. | Prime Broker Services & the Coinbase Entities |
Each of Coinbase Custody Trust Company, LLC (“Coinbase Custody”), Coinbase, and, as applicable based on Client’s election of additional services from time to time, Coinbase Credit, Inc. (“Coinbase Credit,” and collectively with Coinbase and Coinbase Custody, the “Coinbase Entities”) shall administer specified Prime Broker Services. Client and each Coinbase Entity may also be referred to individually as a “Party”; and Client and the Coinbase Entities (collectively or specific entities together, as applicable) may collectively be referred to as the “Parties”. The Prime Broker Services made available to Client are subject to and made on these General Terms and each applicable legal agreement that Client enters into with each relevant Coinbase Entity (including each legal agreement as contemplated in Section 3 of this Coinbase Prime Broker Agreement). In particular, execution of these General Terms by Client and by Coinbase on behalf of itself and Coinbase Custody constitutes the relevant Parties’ respective agreement to be bound by the Coinbase Custody Custodial Services Agreement between Client and Coinbase Custody attached as Exhibit A (“Custody Agreement”) and the Coinbase Master Trading Agreement between Client and Coinbase attached as Exhibit B (the “MTA”), in each case with the same force and effect as though fully set forth herein. These General Terms, together with all agreements, exhibits, appendices, addenda, policies referenced herein, and supplements attached hereto or referenced herein, shall constitute a single, integrated agreement (the “Coinbase Prime Broker Agreement”) and shall be interpreted to the extent reasonably necessary to be consistent with each other. The documents that together create the Coinbase Prime Broker Agreement shall not be deemed in conflict based on the fact that a document is silent on a topic that is affirmatively addressed in another document. In the event of an irreconcilable conflict between these General Terms and any documents that together create the Coinbase Prime Broker Agreement, or between any such documents, then the document governing the specific relevant Prime Broker Service shall control in respect of such Prime Broker Service. Consult each enclosed or referenced legal agreement for additional information and terms.
| 3. | Optional Services |
In addition to the General Terms, the Custody Agreement, and the MTA, the Coinbase Entities and Client may agree to execute agreement(s) for additional Prime Broker Service(s), including certain over the counter trading, lending, post-trade credit, and other services. In each such case, the additional Prime Broker Service(s) and the agreement(s) related thereto (together with all agreements, exhibits, appendices, addenda, policies referenced therein, and supplements attached thereto or referenced therein) will form part of the Coinbase Prime Broker Agreement and be subject to these General Terms. To the extent any additional Prime Broker Service is provided by a Coinbase affiliate that is not a Coinbase Entity, such affiliate shall execute such agreement with Client and shall be deemed a “Coinbase Entity” and a “Party” as defined in these General Terms.
| 4. | Information Sharing |
| 4.1 | By executing this Coinbase Prime Broker Agreement, including any selected optional agreements, Client is establishing a Prime Broker Account, which is a master relationship consisting of accounts with each of (a) Coinbase; (b) Coinbase Custody; and (c) at Client’s election, Coinbase Credit. By executing this Coinbase Prime Broker Agreement, Client acknowledges that Coinbase (as agent for Coinbase Custody and Coinbase Credit, as applicable) may share Client’s information with Coinbase Custody and Coinbase Credit, as applicable, in accordance with the Confidentiality provision of these General Terms and as otherwise provided in the Coinbase Privacy Policy, as amended and updated from time to time at https://www.coinbase.com/legal/privacy or a successor website (the “Coinbase Privacy Policy”), including to facilitate opening and maintaining of Client accounts. |
Page 2 of 56
| 4.2 | Client agrees that its use of data made available to it through the Trading Platform’s application programming interface(s), which may include the prices and quantities of orders and transactions executed on the Trading Platform (collectively “Market Data”), is subject to the Market Data Terms of Use, as amended and updated from time to time at https://www.coinbase.com/legal/market_data or a successor website. |
| 5. | Anti-Money Laundering Notice |
Client understands and acknowledges that the Coinbase Entities are, or may in the future become, subject to money laundering statutes, regulations and conventions of the United States or other international jurisdictions (“AML Laws”), and Client agrees to provide the Coinbase Entities with information for the purpose of conducting due diligence as may be required under such AML Laws. Client agrees that it will provide the Coinbase Entities with any information required to comply with applicable AML Laws. Client understands, acknowledges and agrees that to the extent required by applicable AML Laws, the Coinbase Entities may provide information, including Confidential Information, to United States or international government agencies in connection with a request for information relating to such AML Laws.
| 6. | Bank Secrecy Act Warning |
| 6.1 | IMPORTANT INFORMATION ABOUT COMPLIANCE PROCEDURES FOR OPENING A NEW COINBASE PRIME BROKER ACCOUNT: |
In accordance with government regulations, financial institutions are required to obtain, verify, and record information that identifies each legal entity or natural person that opens a Prime Broker Account. What this means for Client: When Client opens a Prime Broker Account, Coinbase, on behalf of all the Coinbase Entities, will ask for Client’s name, address, government issued identification number, and other information that will allow the Coinbase Entities to form a reasonable belief as to the identity of Client and its representatives. Coinbase may also require that Client provide copies of such documentation.
6.2 Client agrees to provide true, correct, and complete information in opening its Prime Broker Account and, if any such information becomes inaccurate, incorrect, or obsolete, to promptly notify Coinbase following Client becoming aware that such information is inaccurate, incorrect, or obsolete and provide updated information. The Coinbase Entities shall not have any liability, obligation, or responsibility for, and Client shall be solely responsible and liable for, any and all Claims and Losses arising out of or relating to Client’s failure to comply with this Section 6.2.
Page 3 of 56
| 7. | Role of Coinbase Entities |
By executing this Coinbase Prime Broker Agreement, Client will form legal relationships with each of Coinbase, Coinbase Custody, and Coinbase Credit, as applicable. In the course of Client’s use of Prime Broker Services offered by Coinbase Custody and Coinbase Credit, Coinbase may act as agent on behalf of Coinbase Entities and Client.
| 8. | Conflicts of Interest |
8.1 Client acknowledges that the Coinbase Entities may have actual or potential conflicts of interest in connection with providing the Prime Broker Services. As a result of these conflicts, the Coinbase Entities may have an incentive to favor their own interests and the interests of their affiliates over Client’s interests. The Coinbase Entities have certain policies and procedures in place that are designed to mitigate conflicts, although there is no guarantee that they will be successful in identifying or fully mitigating those conflicts as they arise, and such conflicts may change over time. A non-exhaustive list of the potential conflicts of interest that may arise between the Coinbase Entities and Client are set forth in this Section 8.
| 8.2 | Potential Conflicts |
| (a) | Orders (as such term is defined in the MTA) may be routed to Coinbase’s exchange platform (i.e., the cryptocurrency exchange operated by Coinbase, Inc.). Orders are typically executed on the Coinbase exchange against other Coinbase customers, but may in certain instances be executed with Coinbase acting as principal. |
| (b) | Coinbase may also execute client trades on trading venues where the identity of the beneficial purchaser or seller is unknown and therefore may inadvertently be a Coinbase client. |
| (c) | Coinbase does not engage in front-running, but is aware of Orders or imminent Orders and may execute a trade for its own inventory (or the account of an affiliate) while in possession of that knowledge. |
| (d) | Coinbase generally acts in an agency capacity for purposes of Orders, but may also act in a principal capacity with respect to certain Orders (e.g., to fill residual Order size when a portion of an Order may be below the minimum size accepted by the Connected Trading Venues (as defined in the MTA)). |
| 8.3 | Variation in Compensation. The Coinbase Entities may charge different clients different prices for the Prime Broker Services, which may cause the Coinbase Entities to favor certain clients over others. |
| 9. | Client |
9.1 Client is the legal owner of the Custodial Account and the Trading Account, Trading Balance and Vault Balance (as each such term is defined in the MTA). The singular of Client where appropriate shall include the plural and may also refer to any such person or legal entity that owns a legal or beneficial interest in the Custodial Account, Trading Account, Trading Balance and Vault Balance.
Page 4 of 56
| 9.2 | Client may be (a) a legal entity or (b) a natural person over 18 years of age who has the full legal capacity to enter into this Coinbase Prime Broker Agreement and will use the Prime Broker Services solely for commercial, business purposes and not for personal, family, or household purposes. |
| 9.3 | To the extent Client is a natural person, if Coinbase receives legal documentation confirming Client’s death or other information leading Coinbase to believe Client is deceased, Coinbase will freeze Client’s Prime Broker Account (“Freeze Period”). During the Freeze Period, no transactions may be completed until: (i) Client’s designated fiduciary has opened a new Prime Broker Account, as further described below, and the entirety of Client’s Prime Broker Account has been transferred to such new Prime Broker Account, or (ii) Client has received proof in a form satisfactory to Coinbase that Client is not deceased. If Coinbase has reason to believe Client is deceased but Coinbase does not have proof of Client’s death in a form satisfactory to Coinbase, Client authorizes Coinbase to make inquiries, whether directly or through third parties, that Coinbase considers necessary to ascertain whether Client is deceased. Upon receipt by Coinbase of proof satisfactory to Coinbase that Client is deceased, the fiduciary Client designated in a valid will or similar testamentary document will be required to open a new Prime Broker Account. If Client has not designated a fiduciary, then Coinbase reserves the right to (i) treat as Client’s fiduciary any person entitled to inherit Client’s Prime Broker Account, as determined by Coinbase upon receipt and review of the documentation Coinbase, in its sole and absolute discretion, deems necessary or appropriate, including (but not limited to) a will, a living trust or a Small Estate Affidavit, or (ii) require an order designating a fiduciary from a court having competent jurisdiction over Client’s estate. In the event Coinbase determines, in its sole and absolute discretion, that there is uncertainty regarding the validity of the fiduciary designation, Coinbase reserves the right to require an order resolving such issue from a court of competent jurisdiction before taking any action relating to Client’s Prime Broker Account. Pursuant to the above, the opening of a new Prime Broker Account by a designated fiduciary is mandatory following the death of Client, and Client hereby agrees that its fiduciary shall be required to open a new Prime Broker Account and provide required account opening information to gain access to the contents of Client’s Prime Broker Account. |
| 10. | Account Statements |
Client acknowledges that although it will have multiple and separate underlying accounts with the Coinbase Entities, Client may receive a number of Prime Broker Services through a single account interface and receive combined statements reflecting Client activity with respect to multiple Coinbase Entities. Client authorizes Coinbase to combine information regarding the separate activities into a single statement. Coinbase will provide Client with an electronic account statement every quarter, at a minimum. Each account statement will identify the amount of cash and each Digital Asset in Client’s Prime Broker Account at the end of the period and set forth all Prime Broker Account activity during that period.
Page 5 of 56
| 11. | Trading Account and Portfolio |
| 11.1 | Although only Client shall be associated with the Prime Broker Account, Coinbase shall permit Client to create and maintain multiple portfolios under the Prime Broker Account (each a “Portfolio”), each of which shall be associated with the Prime Broker Account and belong to Client. Client is permitted to transfer Client Assets (as such term is defined in the MTA) between Portfolios. Each Portfolio will be opened, maintained and operated under the terms and provisions of this Coinbase Prime Broker Agreement. The creation of separate Portfolios within the Prime Broker Account is for Client’s recordkeeping convenience only. In all other respects, all Portfolios are treated as a single account unless specifically provided herein or in another exhibit, addendum or supplement to this Coinbase Prime Broker Agreement. |
| 12. | Authorized Representatives |
Client shall provide, in writing, the names of the persons and entities with full right, power, authority, and capacity to act on behalf of Client with respect to the Prime Broker Account, including each Portfolio, unless otherwise indicated in the applicable operational documentation and procedures (each an “Authorized Representative”). Each Authorized Representative will continue in such capacity until such time as Coinbase receives Instructions from Client that its Authorized Representatives have changed.
| 13. | Client Instructions |
| 13.1 | The Coinbase Entities may act upon written instructions received from Client (if Client is a natural person) or Client’s Authorized Representatives (“Instructions”). When taking action upon Instructions, the applicable Coinbase Entity shall act in a reasonable manner, and in conformance with the following: (a) Instructions shall continue in full force and effect until cancelled or superseded by subsequent Instructions (except in respect of Instructions executed by a Coinbase Entity, which can no longer be cancelled); (b) if any Instructions are ambiguous, the applicable Coinbase Entity shall refuse to execute such Instructions, promptly provide notice to Client of such refusal, and shall not execute such Instructions until any such ambiguity has been resolved to the Coinbase Entity’s reasonable satisfaction; (c) the Coinbase Entities may refuse to execute Instructions if in the applicable Coinbase Entity’s reasonable opinion such Instructions are outside the scope of its obligations under this Coinbase Prime Broker Agreement or are contrary to any applicable laws, rules and regulations (whether arising from any governmental authority or self-regulatory organization); and (d) each Coinbase Entity may rely, in the performance of its duties under this Coinbase Prime Broker Agreement and without any liability, obligation, or responsibility whatsoever on its part, upon any Instructions given by Client’s Authorized Representatives (or otherwise to have been given on Client’s behalf) and upon any notice, request, consent, certificate or other instrument signed or furnished by Client or any of Client’s Authorized Representatives. Client is responsible for losses resulting from inaccurate Instructions. The applicable Coinbase Entity is responsible for losses resulting from its errors in executing a Client Instruction. |
Page 6 of 56
| 13.2 | Coinbase will comply with Client’s Instructions to stake, stack or vote Client’s Digital Assets to the extent Coinbase or the applicable Coinbase Entity supports proof of stake validation, proof of transfer validation, or voting for such Digital Assets. The Coinbase Entities may, in their sole discretion, decide whether or not to support (or cease supporting) staking services or stacking or voting for a Digital Asset. For further information about any specific terms and fees applicable to staking or stacking services or voting, please consult the applicable agreements provided to you by Coinbase. |
| 14. | Representations, Warranties, and Additional Covenants |
In addition to the obligations arising under this Coinbase Prime Broker Agreement and as a condition of and in consideration of Client accessing and using the Prime Broker Services, Client represents, warrants, and covenants that:
| 14.1 | Client operates in compliance in all material respects with (A) all applicable laws, rules, and regulations, including applicable U.S. securities laws and regulations and any applicable state and federal laws, in each jurisdiction in which Client operates, the non-compliance with which would adversely effect Client’s use of the Prime Broker Account or Prime Broker Services or Client’s performance of its obligations under this Coinbase Prime Broker Agreement and (B) applicable AML Laws, USA PATRIOT Act and Bank Secrecy Act requirements, applicable governmental sanctions and other applicable anti-terrorism statutes, regulations, and conventions of the United States or other international jurisdictions, including but not limited to those implemented by the U.S. Department of Treasury’s Office of Foreign Assets Control. Client further understands and agrees that any fines or penalties imposed on the Coinbase Entities as a direct result of a violation by Client of any applicable securities regulation or law may, at the relevant Coinbase Entity’s reasonable discretion, be passed on to Client and Client acknowledges and represents that Client will be fully liable and responsible for payment to the Coinbase Entity of such fines or penalties, provided that Client shall be given prior notice of any such fines or penalties and will, to the extent permitted by law and Coinbase’s policies and procedures, be permitted to intercede at its own expense; |
| 14.2 | To the extent applicable to Client’s business and activities, Client is currently registered with or a member in good standing of all relevant governmental, regulatory, self-regulatory and supervisory agencies, departments and bodies in all relevant jurisdictions in which Client does business, including, to the extent applicable, the Financial Industry Regulatory Authority, the Municipal Securities Rulemaking Board, the Securities Investor Protection Corporation, the National Futures Association, the Commodity Futures Trading Commission and the Securities and Exchange Commission, and Client will promptly notify Coinbase if Client ceases to be registered with or a member in good standing of any such authority; |
| 14.3 | Client will promptly provide information as the Coinbase Entities may reasonably request from time to time regarding any transaction relating to the use of the Prime Broker Services, to the extent necessary to comply with any applicable laws, rules, and regulations, or the guidance or direction of, or request from, any regulatory authority or financial institution; provided that Client may redact such information or remove Confidential Information not relevant to the requirements of this Coinbase Prime Broker Agreement; |
Page 7 of 56
| 14.4 | Client’s use of the Prime Broker Services is limited to business activities disclosed in the due diligence information submitted to Coinbase, and will not include any personal, family or household purposes. Client will promptly notify Coinbase in writing in the event it intends to use the Prime Broker Services in connection with any business activities not previously disclosed to Coinbase. Coinbase may, in its sole discretion, prohibit Client from using the Prime Broker Services in connection with any new business activities not previously disclosed; |
| 14.5 | Client has the full right, power, authority, and capacity to transact with all Digital Assets involved in the provision of Prime Broker Services to Client; and |
| 14.6 | Client’s Authorized Representatives have the (a) full right, power, authority, and capacity, to access and use the Prime Broker Services, and (b) appropriate training, sophistication, expertise, and knowledge necessary to understand the nature and risks, and make informed decisions, in respect of Digital Assets and the Prime Broker Services. |
Coinbase, on behalf of itself and each other Coinbase Entity, represents, warrants, and covenants that:
| 14.7 | It possesses and will maintain, all licenses, registrations, authorizations and approvals required by any government agency, regulatory authority, or other party for it to operate its business and provide or use, as applicable, the Prime Broker Services; |
| 14.8 | Its performance under this Coinbase Prime Broker Agreement will not breach (a) any agreement between it and a third party; (b) any obligation of confidentiality regarding the proprietary information of a third party; or (c) any applicable law, rule or regulation applicable to such Coinbase Entity in any material respect; |
| 14.9 | It has the full right, power, authority, and capacity to enter into and be bound by this Coinbase Prime Broker Agreement, and the person executing or otherwise accepting this Coinbase Prime Broker Agreement on its behalf has full legal right, power, authority, and capacity to do so; |
| 14.10 | This Coinbase Prime Broker Agreement is its legal, valid and binding obligation, enforceable against it in accordance with its terms; and |
| 14.11 | It will not make any public statement, including any press release, media release, or blog post which mentions or refers to Client or a partnership between it and Client, without the prior written consent of Client. |
Page 8 of 56
| 15. | No Investment Advice or Brokerage |
| 15.1 | Client assumes full responsibility for the investment decision making for each and every transaction Client directs in or for its Prime Broker Account. Client understands and agrees that the Coinbase Entities (as defined herein) are not an SEC/FINRA registered broker-dealer, or an investment adviser to Client in any respect, and the Coinbase Entities have no liability, obligation, or responsibility whatsoever for Client investment decision making relating to the Prime Broker Services. Client should consult its legal, tax, and accounting professionals regarding Client’s specific situation. |
| 15.2 | While the Coinbase Entities may make certain general information available to Client, the Coinbase Entities do not provide Client with any investment, legal, tax or accounting advice. Client further acknowledges that Client is solely responsible for making all investment decision making relating to the Prime Broker Services and that Client shall not rely on the Coinbase Entities in making an investment or any other decision, including with regard to the suitability or value of any Digital Assets or the tax consequences of any such decision, and that the Coinbase Entities shall have no liability, obligation, or responsibility whatsoever regarding any transaction with respect to a Digital Asset through the Prime Broker Services, other than with respect to their respective duties and obligations hereunder. The Coinbase Entities do not make investment decisions for, nor do they exercise any investment discretion over, the Prime Broker Account. All investment decisions relating to the Prime Broker Account are based on Client’s Instructions and Client is solely responsible for determining whether any investment, investment strategy, or transaction involving Digital Assets is appropriate for Client based on Client’s investment objectives, financial circumstances, and risk tolerance. |
| 16. | Opt-In to Article 8 of the Uniform Commercial Code |
| 16.1 | Coinbase and Coinbase Custody are each a “securities intermediary” as that term is defined in Article 8 of the Uniform Commercial Code (“UCC”) as enacted in the State of New York (“Article 8”) because in the ordinary course of its business it maintains securities accounts for others. Coinbase is acting as a securities intermediary when it creates Client’s Trading Balance and holds Client Assets in Client’s Trading Balance. Coinbase Custody is acting as securities intermediary when it creates Client’s Vault Balance and holds Client Assets in Client’s Vault Balance. Although they hold only Client Assets and not securities, the Trading Balance and Vault Balance are each a “securities account” under Article 8, and Client is the “entitlement holder” of the securities account under Article 8. Client agrees with Coinbase and Coinbase Custody that Client Assets in the Trading Balance and Vault Balance will be treated as “financial assets” under Article 8. Coinbase and Coinbase Custody are obligated by Article 8 to maintain sufficient cash and Digital Assets to satisfy all entitlements of clients of Coinbase and Coinbase Custody, as applicable, to such cash and Digital Assets. Coinbase and Coinbase Custody may not grant a security interest in the Client Assets in Client’s Trading Balance or Vault Balance to any third party except, to the extent expressly permitted under this Coinbase Prime Broker Agreement or any other executed agreement between the Parties, to any Coinbase Entity or any affiliate thereof. Client Assets in the Trading Balance and Vault Balance are custodial assets. Under Article |
Page 9 of 56
| 8, the Client Assets in the Trading Balance and Vault Balance are not general assets of Coinbase or Coinbase Custody, as applicable, and are not available to satisfy claims of creditors of Coinbase and Coinbase Custody, as applicable. The treatment of Client Assets in the Trading Balance and Vault Balance as financial assets under Article 8 does not determine the characterization or treatment of the cash and Digital Assets under any other law or rule. |
| 16.2 | All property credited to Client’s Trading Balance and Vault Balance will be treated as a financial asset within the meaning of Article 8 of the UCC. Coinbase and Coinbase Custody will credit Client with any payments or distributions on any Client Assets it holds for Client’s Trading Balance and Vault Balance. Coinbase and Coinbase Custody, as applicable, will comply with Client’s directions with respect to any Client Assets credited to Client’s Trading Balance or Vault Balance, as applicable. Coinbase and Coinbase Custody will comply with Client’s Instructions to transfer Client Assets in Client’s Trading Balance and Vault Balance subject to the terms of the MTA or Custody Agreement, as applicable, including the Coinbase Trading Rules (as such term is defined in the MTA), and other Coinbase rules. New York will be the securities intermediary’s jurisdiction with respect to Coinbase and Coinbase Custody, and New York law will govern all issues addressed in Article 2(1) of the Hague Securities Convention. |
| 16.3 | This Coinbase Prime Broker Agreement describes the entire agreement among the Parties hereto with respect to Article 8 of the applicable Uniform Commercial Code and sets forth the way in which the Coinbase Entities will satisfy their Article 8 duties. |
| 17. | General Use; Prohibited Use |
| 17.1 | Prime Broker Site and Content. During the term of this Coinbase Prime Broker Agreement, Coinbase, on behalf of the Coinbase Entities, hereby grants Client a limited, nonexclusive, non-transferable, non-sublicensable, revocable, and royalty-free license, subject to the terms of this Coinbase Prime Broker Agreement, to access and use the Coinbase Prime Broker Site accessible at prime.coinbase.com (“Coinbase Prime Broker Site”) and related content, materials, and information (collectively, the “Content”) solely for Client’s internal business use and other purposes as permitted by Coinbase in writing from time to time. Any other use of the Coinbase Prime Broker Site or Content is expressly prohibited. All other right, title, and interest (including all copyright, trademark, patent, trade secrets, and all other intellectual property rights) in the Coinbase Prime Broker Site, Content, and Prime Broker Services is and will remain the exclusive property of the Coinbase Entities and their licensors. Client shall not copy, transmit, distribute, sell, license, reverse engineer, modify, publish, or participate in the transfer or sale of, create derivative works from, or in any other way exploit any of the Prime Broker Services or Content, in whole or in part. “Coinbase,” “Coinbase Prime,” “prime.coinbase.com,” and all logos related to the Prime Broker Services or displayed on the Coinbase Prime Broker Site are either trademarks or registered marks of the Coinbase Entities or their licensors. Client may not copy, imitate or use them without Coinbase’s prior written consent. The license granted under this Section 17.1 will automatically terminate upon termination of this Coinbase Prime Broker Agreement, or the suspension or termination of Client’s access to the Coinbase Prime Broker Site or Prime Broker Services. |
Page 10 of 56
| 17.2 | Website Accuracy. Although the Coinbase Entities intend to provide accurate and timely information on the Coinbase Prime Broker Site, the Coinbase Prime Broker Site (including the Content) may not always be entirely accurate, complete, or current and may also include technical inaccuracies or typographical errors. In an effort to continue to provide Client with as complete and accurate information as possible, information may be changed or updated from time to time without notice, including information regarding Prime Broker Services policies, products and services. Accordingly, Client should verify all information before relying on it, and all decisions based on information contained on the Coinbase Prime Broker Site are Client’s sole responsibility, and the Coinbase Entities shall have no liability, obligation, or responsibility whatsoever for such decisions. Links to third party materials (including websites) may be provided as a convenience but are not controlled by the Coinbase Entities. The Coinbase Entities are not responsible for any aspect of the information, content, or services contained in any third party materials or on any third party sites accessible from or linked to the Coinbase Prime Broker Site. |
| 17.3 | Unauthorized Users. Client shall not permit any person or entity that is not an Authorized Representative (each, an “Unauthorized User”) to access, connect to, and/or use Client’s Prime Broker Account in any way, including through the Coinbase Prime Broker Site or through any third party product or service. Except to the extent caused by a Coinbase Entity’s negligence, bad faith, fraud or willful misconduct, the Coinbase Entities shall have no liability, obligation, or responsibility whatsoever for, and Client shall be solely responsible and liable for, any and all Claims and Losses arising out of or relating to the acts and omissions of any Unauthorized User in respect of the Prime Broker Services, Prime Broker Account, and/or the Prime Broker Site. Client must notify the relevant Coinbase Entity immediately if Client believes or becomes aware that an Unauthorized User has accessed, connected to, or used Client’s Prime Broker Account. |
| 17.4 | Prohibited Use. Client represents and warrants that Client will not use the Prime Broker Services or Prime Broker Account for any illegal activity, including illegal gambling, money laundering, fraud, blackmail, extortion, ransoming data, the financing of terrorism, other violent activities or any prohibited market practices, including activities and business set forth in Appendix 1. |
| 17.5 | Password Security; Contact Information. Client is solely responsible for maintaining adequate security and control of any and all IDs, passwords, hints, personal identification numbers (PINs), API keys, YubiKeys, other security or confirmation information or hardware, and any other codes that Client uses to access the Prime Broker Account and Prime Broker Services. Any loss or compromise of the foregoing information and/or Client’s personal information may result in unauthorized access to Client’s Prime Broker Account by third parties and the loss (including theft) of any of Client’s Digital Assets. Client agrees to keep Client’s email address and telephone number up to date in Client’s Prime Broker Account in order to receive any notices or alerts that the Coinbase Entities may send to Client. Client shall be solely responsible for any Losses that Client may sustain due to compromise of Prime Broker Account login credentials that are caused by or attributable to Client’s failure to maintain the security and control of such credentials. In the event Client believes Client’s Prime Broker Account information has been compromised, Client must contact Coinbase immediately. |
Page 11 of 56
| 18. | Taxes |
| 18.1 | Taxes. It is Client’s sole responsibility to determine whether, and to what extent, any present and future tariffs, duties, or taxes (including federal, state and local income taxes, use taxes, value added taxes, withholding taxes, transfer taxes, stamp taxes, documentary taxes, personal property taxes and all similar costs) imposed or levied by any government or governmental agency (collectively, “Taxes”) apply to any transactions, deposits or withdrawals Client conducts through the Prime Broker Services. Except as otherwise expressly stated herein, Client acknowledges that the Coinbase Entities shall have no liability, obligation, or responsibility whatsoever for the accounting or reporting of income or other Taxes with respect to the execution, delivery, or performance of this Coinbase Prime Broker Agreement, each related agreement, and each transaction in respect of any account hereunder or thereunder (for the sake of clarity, including with respect to any related margin lending agreement, post-trade settlement agreement and each related transaction), including unrelated business taxable income under Section 514 of the U.S. Internal Revenue Code of 1986, as amended (the “Code) or effectively connected income of a U.S. trade or business under Section 864(b) of the Code. Client shall be solely responsible for the payment of any and all Taxes and related penalties, interests and costs arising from or relating to such transactions in any such account and Client shall file all tax returns, reports, and disclosures required by applicable law. Client represents and warrants that Client has in place policies and procedures necessary to ensure proper accounting and reporting of any and all taxation of Client, and any and all payment of Taxes by Client, in connection with the transactions. |
| 18.2 | Withholding Tax. Except as required by applicable law, each payment under this Coinbase Prime Broker Agreement or collateral deliverable by Client to any Coinbase Entities shall be made, and the value of any collateral or margin shall be calculated, without withholding or deducting any Taxes. If any Taxes are required to be withheld or deducted, Client (a) authorizes the Coinbase Entities to effect such withholding or deduction and remit such Taxes to the relevant taxing authorities and (b) shall pay such additional amounts or deliver such further collateral as necessary to ensure that the actual net amount received by the Coinbase Entities is equal to the amount that the Coinbase Entities would have received had no such withholding or deduction been required. |
| 18.3 | Account Tax Documentation. Client will provide the Coinbase Entities with any tax forms or documentation reasonably requested by the Coinbase Entities (“Account Tax Documentation”), including a duly completed IRS Form W-9 or applicable IRS Form W-8 (both available at www.irs.gov). Client represents and warrants that such Account Tax Documentation is true, correct and complete. If any such Account Tax Documentation becomes inaccurate, incorrect or obsolete, Client will promptly notify the Coinbase Entities and promptly provide updated Account Tax Documentation. Client understands that the Coinbase Entities may disclose any information with respect to Client Assets, the Prime Broker Account, Custodial Accounts, Trading Accounts, and transactions required by any applicable taxing authority or other governmental entity. |
Page 12 of 56
| 18.4 | The Coinbase Entities shall have no liability, obligation, or responsibility whatsoever for, and Client shall be solely responsible and liable for, any and all Claims and Losses arising out of or relating to Taxes imposed on Client’s assets, cash, other property, or any income or gain derived therefrom. |
| 19. | Prime Broker Services Fees |
| 19.1 | Client agrees to pay all commissions and fees in connection with the Orders and Prime Broker Services on a timely basis as set forth in the Fee Schedule attached as Appendix 3 and any associated pass-through fees (collectively, “Fees”). Client authorizes the Coinbase Entities to satisfy such Fees by deducting the amount thereof from the Vault Balance or Trading Balance, as applicable. |
| 19.2 | Subject to the Fee Schedule, Client acknowledges that Coinbase’s fees may include but are not limited to: (a) bank wire fees to deposit and/or withdraw Client Cash; (b) fees in connection with internal transfers from its Vault Balance to its Trading Balance; and (c) fees in connection with external withdrawals of Client Assets. Client further acknowledges that Coinbase Custody will charge fees for any balance of Digital Assets that Client keeps in the Vault Balance. Client acknowledges that certain clients may have a different pricing structure. |
| 19.3 | Client acknowledges that it is solely responsible for ensuring knowledge of applicable fees prior to use of the Prime Broker Services. |
| 20. | Confidentiality |
| 20.1 | Client and Coinbase on behalf of itself and the Coinbase Entities each agree that the recipient of any non-public, confidential or proprietary information of the other Party including the existence and terms of this Coinbase Prime Broker Agreement and information relating to the other party’s business operations or business relationships or pursuant to this Coinbase Prime Broker Agreement, including the Coinbase Entities’ fees (collectively “Confidential Information”) (a) will not disclose such Confidential Information except to such party’s affiliates and its and their officers, directors, agents, employees, consultants, contractors and professional advisors who need to know the Confidential Information for the purpose of using, carrying out, or receiving the Prime Broker Services or assisting in the performance of this Coinbase Prime Broker Agreement and who are informed of the confidentiality obligations set forth in this Section 20 and are bound by such obligations of confidentiality or reasonably similar obligations of confidentiality (“Representatives”); and (b) will protect such Confidential Information from unauthorized use and disclosure. Each Party and its Representatives shall use any Confidential Information that it receives pursuant to or in connection with this Coinbase Prime Broker Agreement solely for purposes of (i) providing or using the Prime Broker |
Page 13 of 56
| Services; (ii) exercising a Party’s rights and performing a Party’s obligations under the Coinbase Prime Broker Agreement; and (iii) complying with any applicable laws, rules and regulations; provided that, in addition, the Coinbase Entities may use Confidential Information of Client for (1) risk management; (2) to develop and enhance their products and services; and (3) as set forth in Section 4 of this Coinbase Prime Broker Agreement. Confidential Information shall not include any: (w) information that is or becomes generally publicly available through no fault of the recipient or its Representatives; (x) information that the recipient or its Representatives obtains from a third party (other than in connection with this Coinbase Prime Broker Agreement) that, to the recipient’s best knowledge, is not bound by a duty or obligation of confidentiality prohibiting such disclosure; (y) information that is independently developed by the recipient or its Representatives without the use of Confidential Information provided by the disclosing party; or (z) information disclosed with the prior written consent of the disclosing party. |
| 20.2 | Notwithstanding the foregoing, each Party may disclose Confidential Information of the other Party to the extent required by a court of competent jurisdiction or governmental authority or otherwise as required by law; provided, however, the Party making such required disclosure shall first notify the other Party (to the extent legally permissible) and shall afford the other Party a reasonable opportunity to seek confidential treatment if it wishes to do so and will consider in good faith reasonable and timely requests for redaction. All documents and other tangible objects containing or representing Confidential Information and all copies or extracts thereof or notes derived therefrom that are in the possession or control of the receiving party or its Representatives shall be and remain the property of the disclosing party and shall be promptly returned to the disclosing party or destroyed, each upon the disclosing party’s request; provided, however, notwithstanding the foregoing, the receiving party (a) may retain one (1) copy of Confidential Information if required by law or regulation; or (b) may retain Confidential Information pursuant to an established document retention policy; provided, further, that in either case, any Confidential Information so retained shall remain subject to the confidentiality obligations of this Coinbase Prime Broker Agreement. |
| 21. | Recording of Conversations |
For compliance and monitoring purposes, Client is aware that each Coinbase Entity may record conversations at its sole discretion between such Coinbase Entity and Client or its Authorized Representatives relating to this Coinbase Prime Broker Agreement, the Prime Broker Account and the Prime Broker Services. Client and its Authorized Representatives have no objection and hereby agree to such recording. Client acknowledges that such recordings will not be made available to it at any time, except to the extent required by law or legal process.
Page 14 of 56
| 22. | Security |
The Coinbase Entities have implemented and will maintain a reasonable information security program that includes policies and procedures that are reasonably designed to safeguard the Coinbase Entities’ electronic systems and Client’s Confidential Information from, among other things, unauthorized access or misuse. In the event of a Data Security Incident (defined below), the applicable Coinbase Entity shall promptly notify Client and such notice shall include the following information: (a) the timing and nature of the Data Security Incident; (b) the information related to Client that was compromised, including the names of any individual acting on Client’s behalf in his or her corporate capacity whose personal information was compromised; (c) when the Data Security Incident was discovered; and (d) remedial actions that have been taken and that the applicable Coinbase Entity plans to take. “Data Security Incident” is defined as an incident whereby (i) an unauthorized person (whether within a Coinbase Entity or a third party) acquired or accessed Client’s Confidential Information; or (ii) Client’s Confidential Information is otherwise lost, stolen, or compromised, each case, while in the possession or control of the Coinbase Entities.
| 23. | Acknowledgement of Risks |
Coinbase hereby notifies Client, and Client hereby acknowledges, that:
| 23.1 | Digital Assets are not legal tender, are not backed by the government, and are not subject to protections afforded by the Federal Deposit Insurance Corporation or Securities Investor Protection Corporation protections; |
| 23.2 | Legislative and regulatory changes or actions at the state, federal, or international level may adversely affect the use, transfer, exchange, and/or value of Digital Assets; |
| 23.3 | Transactions in Digital Assets may be irreversible, and, accordingly, Digital Assets lost due to fraudulent or accidental transactions may not be recoverable; |
| 23.4 | Some Digital Assets transactions shall be deemed to be made when recorded on a public blockchain ledger, which is not necessarily the date or time that Client initiates the transaction; |
| 23.5 | The value of Digital Assets may be derived from the continued willingness of market participants to exchange any government issued currency (“Fiat Currency”) for Digital Assets, which may result in the potential for permanent and total loss of value of a particular Digital Asset should the market for that Digital Asset disappear; |
| 23.6 | There is no assurance that a person who accepts a Digital Asset as payment today will continue to do so in the future; |
| 23.7 | The volatility and unpredictability of the price of Digital Assets relative to Fiat Currency may result in significant loss over a short period of time; |
| 23.8 | The nature of Digital Assets may lead to an increased risk of fraud or cyber-attack; |
| 23.9 | The nature of Digital Assets means that any technological difficulties experienced by a Coinbase Entity may prevent the access or use of Client’s Digital Assets; and |
Page 15 of 56
| 23.10 | Any bond or trust account maintained by Coinbase Entities for the benefit of its customers may not be sufficient to cover all losses (including Losses) incurred by customers. |
| 24. | ERISA |
| 24.1 | Client represents and warrants that at all times the assets used to consummate the transactions hereunder (hereinafter referred to as “ERISA Transactions for purposes of this Section 24 and Section 25) do not, and shall not, constitute the assets of (i) an “employee benefit plan” that is subject to Part 4, Subtitle B, Title I of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”); (ii) a “plan” within the meaning of Section 4975 of the Internal Revenue Code of 1986, as amended (the “Code”), that is subject to Section 4975 of the Code; or (iii) a person or entity the underlying assets of which are deemed to include plan assets as determined under Section 3(42) of ERISA and the regulations thereunder, and Client will notify Coinbase (1) if Client is aware in advance that it will breach the foregoing representation and warranty (the “Representation”), reasonably in advance of it breaching the Representation; or (2) promptly upon becoming aware that it is in breach of the Representation. If Client provides such notice or if Coinbase is aware that Client is in breach or will be in breach of the Representation, upon a Coinbase Entity’s written request, Client will terminate any or all transactions under this Coinbase Prime Broker Agreement (x) if Client gave advance notice that it would breach the Representation, prior to breaching the Representation (unless Client avoids the occurrence of such breach); (y) if Client gave no notice but Coinbase is aware that Client will be in breach of the Representation, prior to breaching the Representation (unless Client avoids the occurrence of such breach); or (z) if Client is in breach of the Representation, immediately. |
| 24.2 | Client acknowledges that Coinbase is entering into this Coinbase Prime Broker Agreement and each ERISA Transaction based on the representations, warranties, covenants and agreements in this Coinbase Prime Broker Agreement and specifically this Section 24. |
| 24.3 | Without prejudice to or any limitation on the rights and obligations set forth in this Coinbase Prime Broker Agreement, the Coinbase Entities shall have no liability, obligation, or responsibility whatsoever for, and Client, to the extent permitted by law, is solely responsible and liable for, any and all Claims and Losses arising out of or relating to any of the representations, warranties, covenants or agreements in this Section 24, being or becoming untrue. |
| 25. | Other Plans |
The assets used to consummate the ERISA Transactions provided hereunder do not, and shall not, constitute the assets of a governmental plan that is subject to any federal, state or local law that is substantially similar to the provisions of Section 406 of ERISA or Section 4975 of the Code.
Page 16 of 56
| 26. | Operation of Digital Asset Protocols |
| 26.1 | The Coinbase Entities do not own or control the underlying software protocols which govern the operation of Digital Assets involved in connection with the Prime Broker Services. In general, the underlying protocols are open source and anyone can use, copy, modify, and distribute them. By using the Prime Broker Services, Client acknowledges and agrees (i) that the Coinbase Entities make no guarantee of the functionality, security, or availability of underlying protocols; (ii) that some underlying protocols are subject to consensus-based proof of stake validation methods which may allow, by virtue of their governance systems, changes to the associated blockchain or digital ledger (“Governance Modifiable Blockchains”), and that any transactions made by or on behalf of Client validated on such Governance Modifiable Blockchains may be affected accordingly; and (iii) that the underlying protocols are subject to sudden changes in operating rules (a/k/a “forks”), and that such forks may materially affect the value, function, and/or even the name of the Digital Assets involved in the provision of Prime Broker Services to Client. In the event of a fork, Client agrees that the Coinbase Entities may temporarily suspend Prime Broker Services (and shall notify Client of such suspension where possible) and that the Coinbase Entities may, in their sole but reasonable, good faith discretion, decide whether or not to support (or cease supporting) either branch of the forked protocol entirely. Client acknowledges and agrees that the Coinbase Entities shall have no liability, obligation or responsibility whatsoever arising out of or relating to the operation of underlying software protocols, transactions affected by Governance Modifiable Blockchains, or an unsupported branch of a forked protocol that the Coinbase Entities decide reasonably and in good faith not to support, except as the result of a Coinbase Entity’s negligence, bad faith, fraud or willful misconduct, and, accordingly, Client acknowledges and assumes the risk of the same (other than the risk of a Coinbase Entity’s negligence, bad faith, fraud or willful misconduct). |
| 26.2 | Unless specifically communicated by the Coinbase Entities through an official public statement on the Coinbase website, the Coinbase Entities do not support airdrops, metacoins, colored coins, side chains, or other derivative, enhanced, or forked protocols, tokens, or coins which supplement or interact with a Digital Asset (collectively, “Advanced Protocols”) in connection with the Prime Broker Services. Client shall not use Client’s Prime Broker Account to attempt to receive, request, send, store, or engage in any other type of transaction involving an Advanced Protocol. The Prime Broker Services are not configured to detect, process, and/or secure Advanced Protocol transactions and neither Client nor the Coinbase Entities will be able to retrieve any unsupported Advanced Protocol. Coinbase shall have no liability, obligation, or responsibility whatsoever in respect to Advanced Protocols. |
Page 17 of 56
| 27. | Set-off |
If any of the following events or conditions occur with respect to Client: (i) Client (x) fails to make, when due, any payment or delivery required under the Coinbase Prime Broker Agreement (including any payment or delivery of collateral or margin but excluding any Fees) and fails to remedy such failure within twenty-four (24) hours following written notice of such failure from Coinbase or (y) fails to make, when due, any payment of Fees and fails to remedy such failure within two (2) Business Days following written notice of such failure from Coinbase (unless the relevant Coinbase Entity satisfies such Fees by deducting the amount thereof from the Vault Balance or Trading Balance, as applicable); (ii) any representation or warranty made by Client in connection with the Coinbase Prime Broker Agreement or the Prime Broker Services is breached or is not or ceases to be accurate and complete, in each case in any material respect; (iii) either (A) a case in bankruptcy is commenced or a proceeding under any insolvency or other law for the protection of creditors or for the appointment of a receiver, trustee or similar officer is filed against Client and such case or proceeding is not stayed or dismissed within fifteen (15) days or (B) Client is insolvent or a case in bankruptcy is commenced or a proceeding under any insolvency or other law for the protection of creditors or for the appointment of a receiver, trustee or similar officer is filed by Client, or Client makes or proposes to make any arrangement for the benefit of its creditors, or Client or any of its property is subject to any agreement, order or judgment providing for Client’s dissolution, liquidation or reorganization, or for the appointment of a receiver, trustee or similar officer of Client or such property; (iv) Client is dissolved or in any other way terminated; (v) Client breaches any other obligation or covenant to a Coinbase Entity under the Coinbase Prime Broker Agreement and, to the extent capable of remedy, such breach is not cured within five (5) Business Days following written notice of such breach from Coinbase to Client; (vi) this Coinbase Prime Broker Agreement is terminated for Cause (as defined below) and Client’s obligations to each Coinbase Entity have not been fully satisfied; (vii) Client fails to timely settle an executed OTC Order in accordance with its settlement terms and fails to remedy such failure within twenty-four (24) hours following written notice of such failure from Coinbase; or (viii) a default, event of default, termination event or other similar condition or event occurs in respect of Client under any agreement with a Coinbase Entity or any affiliate of a Coinbase entity (other than the Coinbase Prime Broker Agreement), after giving effect to any applicable notice requirement or grace period that may apply under such agreement, resulting in the liquidation of, acceleration of obligations under or early termination of all transactions governed under such agreement (each, a “Default”), then each Coinbase Entity may, in its sole discretion, set off and otherwise apply any and all of the obligations of any and all Coinbase Entities then due to Client against any and all obligations of Client then due to any Coinbase Entities (whether matured or unmatured, fixed or contingent, or liquidated or unliquidated). Without limiting the generality of the foregoing, upon the occurrence and continuation of a Default (unless, with respect to a non-continuing Default, any Coinbase Entity has already commenced exercising its rights under this Section 27 or has otherwise notified Client that it will promptly due so) each Coinbase Entity shall have the right to net the amounts due (including any payments, unpaid trade credits (as applicable), or any other obligations) from it to Client and from Client to it, so that a single settlement payment (the “Net Payment”) shall be payable by one Party to the other, which Net Payment shall be immediately due and payable (subject to the other provisions hereof and of any other agreement with a Coinbase Entity); provided that if any amounts may not be netted against all other amounts, such excluded amounts shall be netted among themselves to the fullest extent permitted under any applicable law, rule or regulation. Upon the occurrence and continuation of a Default (unless, with respect to a non-continuing Default, any Coinbase Entity has already commenced exercising its rights under this Section 27 or has otherwise notified Client that it will promptly due so), each Coinbase Entity may also (a) liquidate, apply and set off any or all Client Assets (as such term is defined in the MTA) or the proceeds thereof against any Net Payment owed to it or any Net Payment owed to another Coinbase Entity by Client; and (b) set off and net any Net Payment owed by it or any other
Page 18 of 56
Coinbase Entity to Client against (i) any or all collateral or margin (or the U.S. dollar value thereof, which shall be determined by Coinbase on the basis of a recent price at which the relevant Digital Asset was sold to customers on the Trading Platform) posted by it or any other Coinbase Entity to Client; and (ii) any Net Payment owed by Client to any Coinbase Entity or any other obligation owing by Client to a Coinbase Entity (whether mature or unmatured, fixed or contingent, or liquidated or unliquidated). With respect to Digital Assets, Client agrees that the Digital Assets held in its Prime Broker Account are of a kind or type customarily sold on recognized markets, subject to standard price quotations and may threaten to decline speedily in value. Client agrees that if any of the Coinbase Entities exercises its setoff rights or secured party remedies against Client’s Digital Assets, that the Coinbase Entity may value the Digital Assets using the same valuation method and same process that is otherwise used when a Coinbase customer sells an asset on the Trading Platform (as such term is defined in the MTA) or any other commercially reasonable valuation method. “Business Day” means any day, other than a Saturday or Sunday, on which commercial banks in New York, New York are open for general business.
| 28. | Disclaimer of Warranties |
EXCEPT AS OTHERWISE PROVIDED HEREIN, TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, THE PRIME BROKER SERVICES ARE PROVIDED ON AN “AS IS” AND “AS AVAILABLE” BASIS, AND THE COINBASE ENTITIES HEREBY SPECIFICALLY DISCLAIM ALL WARRANTIES AND/OR CONDITIONS OF MERCHANTABILITY, SATISFACTORY QUALITY AND FITNESS FOR A PARTICULAR PURPOSE, WHETHER EXPRESS, IMPLIED OR STATUTORY. EXCEPT AS OTHERWISE PROVIDED HEREIN, THE COINBASE ENTITIES DO NOT WARRANT THAT THE PRIME BROKER SERVICES, INCLUDING ACCESS TO AND USE OF THE COINBASE WEBSITES (INCLUDING THE COINBASE PRIME BROKER SITE AND THE COINBASE CUSTODY SITE), OR ANY OF THE CONTENT CONTAINED THEREIN, WILL BE CONTINUOUS, UNINTERRUPTED, TIMELY, COMPATIBLE OR ABLE TO WORK WITH ANY SOFTWARE, SYSTEM OR OTHER SERVICES, SECURE, COMPLETE, FREE OF HARMFUL CODE, OR ERROR-FREE.
| 29. | Indemnification |
| 29.1 | Client shall defend and indemnify and hold harmless each Coinbase Entity, its affiliates and licensors, and each of its and their respective officers, directors and employees from and against: any and all Claims and Losses arising out of or relating to Client’s violation of any law, rule or regulation, or rights of any third party; and any and all Losses arising out of or relating to third party Claims that arise out of or relate to Client’s breach of this Coinbase Prime Broker Agreement or Client’s gross negligence, fraud, or willful misconduct, in each case except to the extent such Claim or Loss arises out of or relates to a Coinbase Entity’s negligence, bad faith, fraud or willful misconduct. This obligation will survive any termination of this Coinbase Prime Broker Agreement. |
Page 19 of 56
| 29.2 | Each Coinbase Entity shall defend and indemnify and hold harmless Client, its affiliates and each of its and their respective officers, directors and employees from and against any and all Losses arising out of or relating to third party Claims that Client’s access or use of the Prime Broker Services, as provided by such Coinbase Entity, in accordance with the terms and conditions of this Coinbase Prime Broker Agreement, violates, misappropriates, or infringes upon any United States patent, copyright, trademark, trade secret or other intellectual property right of a third party, except to the extent such Claims or Losses arise out of or relate to Client’s negligence, bad faith, fraud, willful misconduct, or material breach of this Coinbase Prime Broker Agreement. This obligation will survive any termination of this Coinbase Prime Broker Agreement. For the avoidance of doubt, no Coinbase Entity shall be obligated to defend or indemnify or hold harmless Client, its affiliates or its and their respective officers, directors and employees for any such Claims or Losses: (a) based upon any information, specification, instruction, software, service, data, or material not furnished directly to Client by the Coinbase Entities; (b) based upon the combination of the Prime Broker Services with any information, specification, instruction, software, service, data, or material not provided directly to Client by the Coinbase Entities; or (c) based upon access or use of any of the Prime Broker Services other than in accordance with the terms and conditions of this Coinbase Prime Broker Agreement or any applicable third party terms and conditions previously furnished to Client or known to Client or any other indemnified person with respect to Client at the relevant time the Prime Broker Services are accessed or used. |
| 29.3 | Each Party’s (the “indemnifying Party‘s”) indemnification obligation under this Section 29 shall apply in respect of a Claim or any Losses arising out of or relating to a Claim only if the other Party seeking indemnification (the “indemnified Party”) does the following: (a) notifies the indemnifying Party promptly in writing after the indemnified Party receives notice of the Claim (or sooner if required by applicable law); (b) gives the indemnifying Party the right to assume the defense and any settlement negotiations (subject to Section 29.4 below), which defense shall be conducted by counsel chosen by the indemnifying Party and reasonably satisfactory to the indemnified Party; and in the event that the indemnifying Party elects to assume the defense of any such Claim and retain such counsel, the indemnified Party will bear the fees and expenses of any additional counsel thereafter retained by it; and (c) if the indemnifying Party assumes the defense of such Claim, gives the indemnifying Party the information, authority, and assistance the indemnifying Party reasonably needs to defend against or settle the Claim. If the indemnifying Party fails to notify the indemnified Party that it will assume the defense of such Claim within a reasonable time after its receipt of written notice of such Claim, the indemnified Party shall have the right to undertake the defense of such Claim on behalf of, and for the account and at the risk of, the indemnifying Party. Notwithstanding the preceding sentence, in no event shall the indemnifying Party be liable for the fees and expenses of more than one external counsel (in addition to local counsel of record) for all the indemnified Parties in any jurisdiction in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. |
| 29.4 | No Party providing indemnification pursuant to this Section 29 shall accept any settlement of any Claims or Losses if such settlement imposes any financial or non-financial liabilities, obligations, or restrictions on, or requires an admission of guilt or wrong-doing from, any party indemnified pursuant to this Section 29, without such party’s prior written consent. |
Page 20 of 56
| 29.5 | For the purposes of this Coinbase Prime Broker Agreement: |
| (a) | “Claim” means any action, suit, litigation, demand, charge, arbitration, proceeding (including any civil, criminal, administrative, investigative or appellate proceeding), hearing, inquiry, audit, examination or investigation commenced, brought, conducted or heard by or before, or otherwise involving, any court or other governmental, regulatory, or administrative body or any arbitrator or arbitration panel; and |
| (b) | “Losses” means any liabilities, damages, payments, obligations, losses, interest, costs and expenses, security or other remediation costs (including any regulatory investigation or third party subpoena costs, reasonable attorneys’ fees, court costs, expert witness fees, and other expenses relating to investigating or defending any Claim); fines, taxes, fees, restitution, or penalties imposed by any governmental, regulatory, or administrative body, interest on and additions to tax with respect to, or resulting from, Taxes imposed on Client’s assets, cash, other property, or any income or gains derived therefrom; and judgments (at law or in equity) or awards of any nature. |
| 30. | Computer Viruses |
The Coinbase Entities shall not have any liability, obligation, or responsibility whatsoever, for any damage or interruptions caused by any computer viruses, spyware, scareware, Trojan horses, worms or other malware that may affect Client’s computer or other equipment, or any phishing, spoofing or other attack, unless such damage or interruption directly resulted from a Coinbase Entity’s negligence, bad faith, fraud, or willful misconduct. The Coinbase Entities advise the regular use of a reputable and readily available virus screening and prevention software. Client should also be aware that SMS and email services are vulnerable to spoofing and phishing attacks and should use care in reviewing messages purporting to originate from the Coinbase Entities. Client should always access and use its Prime Broker Account through the Coinbase Prime Broker Site to review any Orders, deposits or withdrawals or required actions if Client has any uncertainty regarding the authenticity of any communication or notice.
| 31. | Business Continuity Plan |
The Coinbase Entities have established a business continuity plan(s) that will support their ability to conduct business in the event of a significant business disruption (“SBD”). This plan(s) is reviewed and updated annually, and can be updated more frequently, if deemed necessary by the Coinbase Entities in their sole discretion. Should any Coinbase Entity be impacted by an SBD, it aims to minimize business interruption as quickly and efficiently as possible. To receive more information about the Coinbase Entities’ business continuity plan, please send a written request to security@coinbase.com.
Page 21 of 56
| 32. | Limitation of Liability |
| 32.1 | TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW AND NOTWITHSTANDING ANY OTHER PROVISION IN THIS COINBASE PRIME BROKER AGREEMENT, IN NO EVENT SHALL ANY PARTY BE LIABLE FOR ANY INCIDENTAL, INDIRECT, SPECIAL, PUNITIVE, CONSEQUENTIAL, OR SIMILAR LOSSES ARISING OUT OF OR RELATING TO THE PRIME BROKER ACCOUNT, THE PRIME BROKER SERVICES, THIS COINBASE PRIME BROKER AGREEMENT, OR THE PARTIES’ RELATIONSHIP, REGARDLESS OF THE THEORY OF LIABILITY (WHETHER CONTRACT, TORT, STATUTORY, OR OTHER THEORY), EVEN IF SUCH PARTY (OR AUTHORIZED REPRESENTATIVE THEREOF) HAD BEEN ADVISED OF OR KNEW OR SHOULD HAVE KNOWN OF THE POSSIBILITY THEREOF. |
| 32.2 | CLIENT CONSENTS TO THE USE OF AUTOMATED SYSTEMS BY THE COINBASE ENTITIES IN CONJUNCTION WITH CLIENT’S PRIME BROKER ACCOUNT AND THE PRIME BROKER SERVICES, INCLUDING AUTOMATED ORDER ENTRY AND EXECUTION, ROUTING, RECORDKEEPING, REPORTING, AND ACCOUNT RECONCILIATION AND RISK MANAGEMENT SYSTEMS (COLLECTIVELY, “AUTOMATED SYSTEMS”). CLIENT AGREES AND UNDERSTANDS THAT THE USE OF AUTOMATED SYSTEMS ENTAILS RISKS, INCLUDING INTERRUPTION OR DELAYS OF SERVICE, SYSTEM FAILURE, AND ERRORS IN THE DESIGN OR FUNCTIONING OF SUCH AUTOMATED SYSTEMS (COLLECTIVELY, A “SYSTEM FAILURE”) THAT COULD CAUSE SUBSTANTIAL LOSSES TO CLIENT. WITHOUT LIMITING SECTION 32.1, NOTWITHSTANDING ANY OTHER PROVISION IN THIS COINBASE PRIME BROKER AGREEMENT, IN NO EVENT SHALL ANY COINBASE ENTITY HAVE ANY LIABILITY, OBLIGATION, OR RESPONSIBILITY WHATSOEVER FOR ANY CLAIMS OR LOSSES ARISING OUT OF OR RELATING TO A SYSTEM FAILURE IN RESPECT OF ANY AUTOMATED SYSTEM ESTABLISHED AND MAINTAINED BY A PARTY THAT IS NOT A COINBASE ENTITY OR AN AFFILIATE OF A COINBASE ENTITY. |
| 32.3 | WITHOUT LIMITING SECTIONS 32.1 OR 32.2, NOTWITHSTANDING ANY OTHER PROVISION IN THIS COINBASE PRIME BROKER AGREEMENT, IN NO EVENT SHALL ANY COINBASE ENTITY HAVE ANY LIABILITY, OBLIGATION, OR RESPONSIBILITY WHATSOEVER TO CLIENT OR ANY THIRD PARTY FOR THE ACTS OR OMISSIONS OF, OR ANY LOSSES PAID OR PAYABLE TO CLIENT OR ANY THIRD PARTY BY, ANY OTHER COINBASE ENTITY IN RESPECT OF THE PRIME BROKER ACCOUNT, THE PRIME BROKER SERVICES, THIS COINBASE PRIME BROKER AGREEMENT, OR THE PARTIES’ RELATIONSHIP. FOR THE AVOIDANCE OF DOUBT, NOTHING IN THIS COINBASE PRIME BROKER AGREEMENT SHALL BE DEEMED TO CREATE ANY JOINT OR JOINT AND SEVERAL LIABILITY AMONG ANY OF THE COINBASE ENTITIES. |
Page 22 of 56
| 32.4 | WITHOUT LIMITING SECTIONS 32.1, 32.2, OR 32.3, NOTWITHSTANDING ANY OTHER PROVISION IN THIS COINBASE PRIME BROKER AGREEMENT, IN NO EVENT SHALL ANY COINBASE ENTITY HAVE ANY LIABILITY, OBLIGATION, OR RESPONSIBILITY WHATSOEVER TO CLIENT OR ANY THIRD PARTY FOR ANY CLAIMS OR LOSSES ARISING FROM OR RELATING TO CLIENT ASSETS ALLOCATED TO THE COINBASE CONNECTED TRADING VENUE DIGITAL ASSET BALANCE, EXCEPT TO THE EXTENT OF CLIENT’S PRO RATA SHARE OF LOSSES DUE TO THE THEFT OF SUPPORTED DIGITAL ASSETS ARISING OUT OF OR RELATING TO THE NEGLIGENCE, BAD FAITH, FRAUD, OR WILLFUL MISCONDUCT OF THE RELEVANT CONNECTED TRADING VENUE; PROVIDED THAT COINBASE SHALL BE SUBROGATED TO ANY CLAIM CLIENT MAY HAVE AGAINST SUCH CONNECTED TRADING VENUE, AND CLIENT SHALL COOPERATE IN ANY ATTEMPT BY COINBASE TO RECOVER AGAINST SUCH CONNECTED TRADING VENUE. |
| 32.5 | EXCEPT (i) WITH RESPECT TO THE EXCLUDED LIABILITIES OR (ii) TO THE EXTENT CAUSED BY THE RELEVANT PARTY’S FRAUD OR WILLFUL MISCONDUCT, WITHOUT LIMITING SECTIONS 32.1, 32.2, 32.3, OR 32.4, NOTWITHSTANDING ANY OTHER PROVISION IN THIS COINBASE PRIME BROKER AGREEMENT, IN NO EVENT (x) SUBJECT TO CLAUSE (y) IMMEDIATELY BELOW, SHALL ANY COINBASE ENTITY’S OR CLIENT’S AGGREGATE LIABILITY ARISING OUT OF OR RELATING TO THE PRIME BROKER ACCOUNT, THE PRIME BROKER SERVICES, THIS COINBASE PRIME BROKER AGREEMENT, OR THE PARTIES’ RELATIONSHIP EXCEED AN AMOUNT GREATER THAN THE VALUE OF THE SUPPORTED DIGITAL ASSETS INVOLVED IN THE TRANSACTION(S) GIVING RISE TO SUCH LIABILITY; AND (y) SOLELY IN RESPECT OF CUSTODIAL SERVICES PROVIDED PURSUANT TO THE CUSTODY AGREEMENT, SHALL COINBASE CUSTODY’S AGGREGATE LIABILITY EXCEED THE GREATER OF (A) THE AGGREGATE AMOUNT OF FEES PAID BY CLIENT TO COINBASE CUSTODY IN RESPECT OF THE CUSTODIAL SERVICES DURING THE TWELVE (12) MONTH PERIOD PRIOR TO THE EVENT GIVING RISE TO SUCH LIABILITY; AND (B) THE VALUE OF THE SUPPORTED DIGITAL ASSETS ON DEPOSIT IN CLIENT’S CUSTODIAL ACCOUNT(S) GIVING RISE TO SUCH LIABILITY AT THE TIME OF THE EVENT GIVING RISE TO SUCH LIABILITY (THE VALUE OF WHICH SHALL BE CALCULATED AT THE AVERAGE UNITED STATES DOLLAR ASK PRICE, AT THE TIME OF SUCH EVENT, OF THE THREE (3) LARGEST U.S.-BASED EXCHANGES (BY TRAILING 30-DAY VOLUME) WHICH OFFER THE RELEVANT DIGITAL CURRENCY OR DIGITAL ASSET/USD TRADING PAIR, AS RELEVANT); PROVIDED, HOWEVER, THAT IN NO EVENT SHALL COINBASE CUSTODY’S AGGREGATE LIABILITY IN RESPECT OF EACH COLD STORAGE ADDRESS EXCEED ONE HUNDRED MILLION US DOLLARS (US$100,000,000). |
Page 23 of 56
“EXCLUDED LIABILITIES” MEANS (w) THE OBLIGATION OF CLIENT TO PAY ANY FEES OWED BY IT UNDER THIS COINBASE PRIME BROKER AGREEMENT; (x) ANY LIABILITY OF CLIENT ARISING FROM ITS BREACH OF SECTION 17.1 OF THIS COINBASE PRIME BROKER AGREEMENT; (y) ANY LIABILITY OF CLIENT ARISING FROM ITS BREACH OF ITS REPRESENTATIONS, WARRANTIES OR COVENANTS IN SECTION 14.1 OF THIS COINBASE PRIME BROKER AGREEMENT AND (z) ANY LIABILITY OR OBLIGATION OF A PARTY ARISING UNDER SECTION 20 OF THIS COINBASE PRIME BROKER AGREEMENT (PROVIDED THAT IN NO EVENT WILL ANY PARTY’S LIABILITY ARISING UNDER SECTION 20 OF THIS COINBASE PRIME BROKER AGREEMENT EXCEED AN AMOUNT OF FIVE MILLION US DOLLARS (US$5,000,000) IN THE AGGREGATE).
| 32.6 | WITHOUT LIMITING SECTIONS 32.1, 32.2, 32.3, 32.4, OR 32.5, NOTWITHSTANDING ANY OTHER PROVISION IN THIS COINBASE PRIME BROKER AGREEMENT, IN NO EVENT SHALL ANY COINBASE ENTITY HAVE ANY LIABILITY, OBLIGATION, OR RESPONSIBILITY WHATSOEVER TO CLIENT OR ANY THIRD PARTY FOR ANY CLAIMS OR LOSSES ARISING OUT OF OR RELATING TO THE PRIME BROKER ACCOUNT, THE PRIME BROKER SERVICES, THIS COINBASE PRIME BROKER AGREEMENT, OR THE PARTIES’ RELATIONSHIP, EXCEPT TO THE EXTENT SUCH LOSSES RESULT FROM SUCH COINBASE ENTITY’S NEGLIGENCE, BAD FAITH, FRAUD, OR WILLFUL MISCONDUCT. |
| 32.7 | CLIENT UNDERSTANDS AND AGREES THAT THE FOREGOING LIMITATIONS AND DISCLAIMERS OF LIABILITY SHALL APPLY EQUALLY TO ANY COINBASE ENTITY’S AFFILIATES AND LICENSORS, AND EACH OF ITS AND THEIR RESPECTIVE OFFICERS, DIRECTORS, AND EMPLOYEES. |
| 33. | Privacy |
The Coinbase Entities shall use and disclose Client’s and its Authorized Representatives’ non-public personal information in accordance with the Coinbase Privacy Policy.
| 34. | Arbitration |
[Reserved].
| 35. | Term, Termination and Suspension |
This Coinbase Prime Broker Agreement is effective as of the date written below and shall remain in effect until terminated by Coinbase or Client as follows:
| (a) | Either Party may terminate this Coinbase Prime Broker Agreement in its entirety for any reason and without Cause by providing at least ninety (90) days’ prior written notice to the other Party. For such purpose, the Coinbase Entities shall be considered a single Party and Client must provide its notice to Coinbase as agent for the Coinbase Entities. |
Page 24 of 56
| (b) | Regardless of any other provision of this Coinbase Prime Broker Agreement, the Coinbase Entities may, in their sole discretion, terminate this Coinbase Prime Broker Agreement in its entirety or suspend, restrict or terminate Client’s Prime Broker Services, including by suspending, restricting or closing Client’s Prime Broker Account and/or any associated Trading Account, Custodial Account or any credit account (as applicable), for Cause, at any time upon written notice to Client. |
“Cause” for purposes of this Section 35 shall include:
| (i) | A Default (other than a Default described in clause (vi) of Section 27 of this Coinbase Prime Broker Agreement) occurs and is continuing with respect to Client; |
| (ii) | Client materially breaches this Coinbase Prime Broker Agreement, including any agreement, exhibit, appendix, addendum, policy referenced herein, or supplement attached hereto, and, to the extent capable of remedy, such breach is not cured within five (5) Business Days following written notice from Coinbase to Client of such breach; |
| (iii) | A requirement of a facially valid subpoena, court order, or binding order of a government authority; |
| (iv) | Client’s Prime Broker Account is subject to any pending litigation, investigation, or government proceeding and/or Coinbase reasonably perceives a heightened risk of legal or regulatory non-compliance associated with Client’s use of the Prime Broker Services; or |
| (v) | Coinbase reasonably suspects Client of attempting to circumvent Coinbase’s controls or uses the Prime Broker Services in a manner Coinbase otherwise deems inappropriate or potentially harmful to itself or third parties. |
| (c) | Client acknowledges that the Coinbase Entities’ decision to take certain actions, including suspending, restricting or terminating Client’s Prime Broker Account or Prime Broker Services, may be based on confidential criteria that are essential to Coinbase’s risk management and security practices. Client agrees that the Coinbase Entities are under no obligation to disclose the details of its risk management and security practices to Client. |
| (d) | Notwithstanding the foregoing, each exhibit, addendum and supplement to this Coinbase Prime Broker Agreement is separately terminable in accordance with any terms set forth therein explicitly addressing termination thereof; provided, however, that if the MTA or Custody Agreement is terminated, the remainder of this Coinbase Prime Broker Agreement, including each other exhibit, addendum and supplement, shall terminate concurrently. The consequences of termination of each of the Prime Broker Services shall be as set forth in the respective exhibit, addendum or supplement. |
Page 25 of 56
| 36. | Severability |
If any provision or condition of this Coinbase Prime Broker Agreement shall be held invalid or unenforceable, the remainder of this Coinbase Prime Broker Agreement shall continue in full force and effect.
| 37. | Waiver |
Any waivers of rights by a Party under this Coinbase Prime Broker Agreement must be expressed in writing and signed by such Party (or in the case of a Coinbase Entity, by Coinbase on behalf of itself or another relevant Coinbase Entity). A waiver will apply only to the particular circumstance giving rise to the waiver and will not be considered a continuing waiver in other similar circumstances unless the intention to grant a continuing waiver is expressed in writing. Any Party’s failure to insist on strict compliance with this Coinbase Prime Broker Agreement or any other course of conduct by such Party shall not be considered a waiver of its rights under this Coinbase Prime Broker Agreement (including all agreements, exhibits, appendices, addenda, policies referenced herein, and supplements attached hereto or referenced herein).
| 38. | Survival |
All provisions of this Coinbase Prime Broker Agreement which by their nature extend beyond the expiration or termination of this Coinbase Prime Broker Agreement, including sections pertaining to suspension or termination, cancellation of Prime Broker Services, debts owed to the Coinbase Entities, general use of the Coinbase websites (including the Coinbase Prime Broker Site and the Coinbase Custody Site), disputes with the Coinbase Entities, the treatment of Confidential Information, and general provisions such as indemnification and limitation of liability, shall survive the termination or expiration of this Coinbase Prime Broker Agreement.
| 39. | Governing Law; Consent to Jurisdiction |
This Coinbase Prime Broker Agreement, Client’s Prime Broker Account, and the Prime Broker Services, and any Claim or other cause of action based upon, arising out of or related thereto (whether based on law, in equity, in contract, in tort or any other theory), will be governed by and construed in accordance with the laws of the State of New York, excluding its conflicts of laws principles, except to the extent such state law is preempted by federal law.
Client and each Coinbase Entity agree that any action, suit, or proceeding based upon, arising out of or related to this Agreement shall be brought only in the state or federal courts in New York County, New York. In the event of such an action, suit, or proceeding, Client and each Coinbase Entity agree to waive and not raise as an affirmative defense any claim that such courts lack personal jurisdiction or are an improper or inconvenient venue.
Page 26 of 56
| 40. | Force Majeure |
The Coinbase Entities shall not be liable for delays, suspension of operations, whether temporary or permanent, failure in performance, or interruption of service which result directly or indirectly from any cause or condition beyond the reasonable control of the Coinbase Entities, including any act of God; embargo; natural disaster; act of civil or military authorities; act of terrorists including cyber-related terrorist acts; hacking; government restrictions; any ruling by any Connected Trading Venue, exchange or market (other than Coinbase’s exchange platform); market volatility or disruptions in order trading on any Connected Trading Venue, exchange or market; suspension of trading; civil disturbance; war; strike or other labor dispute; fire; severe weather; interruption in telecommunications, Internet services, or network provider services; failure of equipment and/or software; failure of computer or other electronic or mechanical equipment or communication lines; plague; epidemic; pandemic; outbreaks of infectious disease or any other public health crises, including quarantine or other employee restrictions; failure of third parties to follow instructions; acts or omissions of any Connected Trading Venue; or any other catastrophe or other occurrence which is beyond the reasonable control of the Coinbase Entities, in each case, except to the extent caused by or attributable to the negligence, fraud, bad faith or willful misconduct of a Coinbase Entity.
| 41. | Entire Agreement; Headings |
This Coinbase Prime Broker Agreement, together with all agreements, exhibits, appendices, addenda, policies referenced herein, and supplements attached hereto or referenced herein, comprises the entire understanding between Client and the Coinbase Entities as to the Prime Broker Services and supersedes all prior discussions, agreements and understandings, including any previous version of this Coinbase Prime Broker Agreement and the Custodial Services Agreement between Client and any Coinbase Entity, including all exhibits, appendices, addenda, policies referenced therein, and supplements attached thereto or referenced therein. Section headings in this Coinbase Prime Broker Agreement are for convenience only and shall not govern the meaning or interpretation of any provision of this Coinbase Prime Broker Agreement.
| 42. | Amendments |
Any modification or addition to this Coinbase Prime Broker Agreement must be in writing and either (a) signed by a duly authorized representative of each Party, or (b) accepted and agreed to by Client.
| 43. | Assignment |
No Party may assign any rights and/or licenses granted under this Coinbase Prime Broker Agreement without the written consent of the other Parties. However, Coinbase reserves the right to assign its rights under this Coinbase Prime Broker Agreement to any of the Coinbase Entities or their affiliates or subsidiaries, or to any successor in interest of any business associated with the Prime Broker Services, provided that Coinbase will notify Client within a reasonable amount of time after such assignment. Any attempted transfer or assignment in violation hereof shall be null and void. Subject to the foregoing, this Coinbase Prime Broker Agreement will bind and inure to the benefit of the Parties, their successors and permitted assigns.
Page 27 of 56
| 44. | Relationship of the Parties |
Nothing in this Coinbase Prime Broker Agreement shall be deemed or is intended to be deemed as creating a joint venture, nor shall it cause Client and any Coinbase Entity to be treated as partners, joint venturers, or otherwise as joint associates for profit, nor shall Client or any Coinbase Entity be treated as the agent of the other except to the extent otherwise expressly set forth herein.
| 45. | Notice and Contacts |
| 45.1 | All notices required or permitted to be given hereunder (excluding, for the avoidance of doubt, any Communications which Client has agreed and consented to receive electronically pursuant to Appendix 2 attached hereto) shall be in writing delivered to the Party at its address specified below via an overnight mailing company of national reputation. Any Party that changes its notice address must notify the other Party promptly of such change. |
If to any Coinbase Entity:
Legal Department
Coinbase, Inc.
248 3rd St #434
Oakland CA, 94607
legal@coinbase.com
If to Client, the address specified in its signature block on the Execution Page.
| 45.2 | In the event of any market operations, connectivity, or erroneous trade issues that require immediate attention including any unauthorized access to Client’s Prime Broker Account, please contact: |
To Coinbase: support@coinbase.com.
To Client: the email address specified in its signature block on the Execution Page.
| 46. | Contact Coinbase; Complaints |
| 46.1 | If Client has any feedback, questions, or complaints, Client may contact Coinbase Customer Support at support@coinbase.com. |
| 46.2 | To see more information about our regulators, licenses, and contact information for feedback, questions or complaints, please visit https://www.coinbase.com/legal/licenses. |
| 47. | Construction |
As used in this Coinbase Prime Broker Agreement, (a) the words “including”, “includes” and their other derivations are non-exclusive and are in each case deemed to be followed by the words “without limitation”; and (b) the words “agrees to” and “will” are in each case deemed to mean “shall”.
Page 28 of 56
| 48. | Counterparts |
This Coinbase Prime Broker Agreement may be executed in one or more counterparts, including by facsimile or email of .pdf signatures or DocuSign (or similar electronic signature software), each of which shall be deemed to be an original document, but all such separate counterparts shall constitute only one and the same Coinbase Prime Broker Agreement.
[Signatures on following page]
Page 29 of 56
IN WITNESS WHEREOF, the Parties have caused this Coinbase Prime Broker Agreement, including the Custody Agreement and MTA, to be duly executed and delivered as of the date below.
COINBASE, INC. For itself and as agent for the Coinbase Entities
| By: | /s/ Lauren Abendschein | |
| Name: | Lauren Abendschein | |
| Title: | Senior Director | |
| Date: | May 24, 2024 |
| CLIENT: | INVESCO GALAXY ETHEREUM ETF |
By: Invesco Capital Management LLC, as its Sponsor
| By: | /s/ Rudolf Reitmann | |
| Name: | Rudolf Reitmann | |
| Title: | Global Head of UIT & ETF Services | |
| Date: | May 24, 2024 |
| Address: | c/o Invesco Capital Management LLC, 3500 Lacey Road, Suite 700, Downers Grove, IL 60515, Attention: Legal Department |
| E-Mail: | adam.henkel@invesco.com |
Page 30 of 56
EXHIBIT A
to the Coinbase Prime Broker Agreement
COINBASE CUSTODY CUSTODIAL SERVICES AGREEMENT
This Custody Agreement is entered into between Client and Coinbase Custody and governs Client’s use of the Custodial Services (as defined herein) provided by Coinbase Custody. Capitalized terms used in this Custody Agreement that are not defined herein shall have the meanings assigned to them in the General Terms.
| 1. | Custodial Services |
Client hereby appoints Coinbase Custody as its provider of Custodial Services in accordance with the terms and conditions of this Custody Agreement. Coinbase Custody shall provide Client with a segregated custody account controlled and secured by Coinbase Custody (“Custodial Account”) to store certain Digital Assets supported by Coinbase Custody, on Client’s behalf (“Custodial Services”). Coinbase Custody represents that it is, and during all times that it maintains a Custodial Account on behalf of, or provides Custodial Services to, Client will be, a fiduciary under § 100 of the New York Banking Law and a qualified custodian for purposes of Rule 206(4)-2(d)(6) under the Investment Advisers Act of 1940, as amended, and is licensed to custody Client’s Digital Assets in trust on Client’s behalf. Digital Assets in Client’s Custodial Account are not treated as general assets of Coinbase Custody. Rather, Coinbase Custody serves as a fiduciary and custodian on Client’s behalf, and the Digital Assets in Client’s Custodial Account are considered custodial assets that remain Client’s property.
| 2. | Custodial Account |
| 2.1 | In General. The Custodial Services allow (i) Client to hold its Vault Balance (as that term is defined in the MTA) in its Custodial Account and transfer Digital Assets to and from its Trading Balance (as that term is defined in the MTA), (ii) Client to deposit supported Digital Assets from a public blockchain address controlled by Client into its Custodial Account, (iii) withdraw supported Digital Assets from its Custodial Account to a public blockchain address controlled by Client, and (iv) for certain additional services as may be agreed to between Client and Coinbase Custody from time to time in an addendum or attachment hereto. Each such deposit or withdrawal shall be a “Custody Transaction” and conform to Instructions provided by Client through the Coinbase Prime Broker Site. Client shall withdraw Digital Assets only to public blockchain addresses and accounts owned by Client or to an address for which Client has conducted the necessary Know Your Customer (KYC) and anti-money laundering (AML) due diligence. Digital Assets are stored in Client’s Custodial Account in accordance with the terms of this Custody Agreement and are not commingled with other clients’ Digital Assets. Coinbase Custody reserves the right to refuse to process or to cancel any pending Custody Transaction as required by law or in response to a subpoena, court order, or other binding government order or to enforce transaction, threshold, and condition limits or if Coinbase Custody reasonably believes that the Custody Transaction may violate or facilitate the violation of an applicable law, regulation or applicable rule of a governmental authority or self-regulatory organization. Coinbase Custody cannot reverse a Custody Transaction which has been broadcast to a Digital Asset network. |
Page 31 of 56
| 2.2 | Digital Asset Deposits and Withdrawals. Coinbase Custody processes supported Digital Asset Custody Transactions according to Instructions received from Client or Client’s Authorized Representatives, and Coinbase Custody does not guarantee the identity of any user, receiver, requestee, or other party. Client should verify all deposit and withdrawal information prior to submitting Instructions to Coinbase Custody regarding a Custody Transaction. Client agrees that it will not withdraw Digital Assets to a blockchain address or account that is not owned by Client or to an address for which Client has not conducted the necessary KYC and AML due diligence. Coinbase Custody reserves the right to charge network fees (including miner fees) to process a Custody Transaction on Client’s behalf. Coinbase Custody will calculate the network fee, if any, in its sole and absolute discretion, although Coinbase Custody will always notify Client of the network fee at or before the time Client authorizes the Custody Transaction. Coinbase Custody reserves the right to delay any Custody Transaction if it perceives a risk of fraud or illegal activity. |
| 2.3 | Digital Asset Storage and Transmission Delays. With respect to Digital Assets held in the Cold Vault Balance (as that term is defined in the MTA), Coinbase Custody requires up to twenty-four (24) hours between any request to withdraw Digital Assets from Client’s Custodial Account and submission of Client’s withdrawal to the applicable Digital Asset network. Since Coinbase Custody securely stores all Digital Asset private keys in offline storage, it may be necessary to retrieve certain information from offline storage in order to facilitate such a withdrawal of Digital Assets held in the Cold Vault Balance in accordance with Client’s Instructions, which may delay the initiation or crediting of such withdrawal. Client acknowledges and agrees that a Custody Transaction may be delayed, and that Digital Assets held in the Cold Vault Balance shall not be withdrawn upon less than twenty-four (24) hours’ notice initiated from Client’s Custodial Account. The time of such request shall be the time such notice is transmitted from Client’s Custodial Account. While Coinbase Custody will make reasonable efforts to process Client initiated deposits in a timely manner, Coinbase Custody makes no representations or warranties regarding the amount of time needed to complete processing as such processing is dependent upon many factors outside of Coinbase Custody’s control. |
| 2.4 | Supported Digital Assets. The Custodial Services are available only in connection with those Digital Assets that Coinbase Custody, in its sole discretion, decides to support. The Digital Assets that Coinbase Custody supports may change from time to time. Prior to initiating a deposit of a Digital Asset to Coinbase Custody, Client must confirm that Coinbase Custody offers Custodial Services for that specific Digital Asset. By initiating a deposit of a Digital Asset to a Custodial Account, Client attests that Client has confirmed that the Digital Asset being transferred is a supported Digital Asset offered by Coinbase Custody. Under no circumstances should Client attempt to use the Custodial Services to deposit or store Digital Assets in any forms that are not supported by Coinbase Custody. Depositing or attempting to deposit Digital Assets that are not supported by Coinbase Custody may result in such Digital Asset being irretrievable by Client and Coinbase Custody. Coinbase Custody shall have no liability, obligation, or responsibility whatsoever |
Page 32 of 56
| regarding any unsupported Digital Asset sent or attempted to be sent to it, or regarding any attempt to use the Custodial Services for Digital Assets that Coinbase Custody does not support. To confirm which Digital Assets are supported by Coinbase Custody, Client should login at the Coinbase Prime Broker Site and carefully review the list of supported Digital Assets. Coinbase Custody recommends that Client deposit a small amount of supported Digital Asset as a test prior to initiating a deposit of a significant amount of supported Digital Asset. Coinbase Custody may from time to time determine types of Digital Asset that will be supported or cease to be supported by the Custodial Services. Coinbase Custody shall provide Client with thirty (30) days’ written notice before ceasing to support a Digital Asset, unless Coinbase Custody is required to cease such support by court order, statute, law, rule (including a self-regulatory organization rule), regulation, code, or other similar requirement. |
| 2.5 | Monitoring of Use of the Custodial Services. Client acknowledges and agrees that Coinbase Custody may monitor use of the Custodial Account and the Custodial Services and the resulting information may be utilized, reviewed, retained and/or disclosed by Coinbase Custody for its internal purposes or in accordance with the rules of any applicable legal, regulatory or self-regulatory organization or as otherwise may be required to comply with relevant law, sanctions programs, legal process or government request. |
| 2.6 | Independent Verification. Coinbase Custody shall, upon written request, provide Client’s or its investment adviser’s authorized independent public accountant with confirmation of or access to information sufficient to confirm (i) Client’s Digital Assets as of the date of an examination conducted pursuant to Rule 206(4)-2(a)(4), and (ii) Client’s Digital Assets are held in a separate account under Client’s name. |
| 2.7 | Third Party Payments. The Custodial Services are not intended to facilitate third party payments of any kind. As such, Coinbase Custody has no control over, or liability for, the delivery, quality, safety, legality or any other aspect of any goods or services that Client may purchase or sell to or from a third party (including other users of Custodial Services) involving Digital Assets that Client intends to store, or has stored, in Client’s Custodial Account. |
| 2.8 | Termination and Cancellation. If, pursuant to Section 35 of the General Terms, Coinbase Custody closes Client’s Custodial Account or terminates Client’s use of the Custodial Services, Client will be permitted to withdraw Digital Assets associated with Client’s Custodial Account for ninety (90) days after Custodial Account deactivation or cancellation unless such withdrawal is otherwise prohibited (i) under applicable law, including applicable sanctions programs, or (ii) by a facially valid subpoena, court order, or binding order of a government authority. If a shorter time frame than the ninety (90) days prescribed in the preceding sentence is required by an applicable court order, subpoena or regulatory or governmental authority, Client shall use commercially reasonable efforts to withdraw such Digital Assets within such shorter time frame. |
Page 33 of 56
| 3. | Coinbase Custody Obligations |
| 3.1 | Bookkeeping. Coinbase Custody will keep timely and accurate records as to the deposit, disbursement, investment, and reinvestment of the Digital Assets. Coinbase Custody will maintain accurate records and bookkeeping of the Custodial Services as required by applicable law and in accordance with Coinbase Custody’s internal document retention policies. |
| 3.2 | Insurance. Coinbase Custody will obtain and maintain, at its sole expense, insurance coverage in such types and amounts as are commercially reasonable for the Custodial Services provided hereunder. |
| 3.3 | Statements. Coinbase Custody will provide Client with an account statement on at least a quarterly basis that identifies the amount of each Digital Asset in the Custodial Account at the end of the period and sets forth all transactions in the Custodial Account during that period. Client acknowledges that such information may be provided as part of the account statement provided pursuant to Section 10 of the General Terms. |
| 4. | Coinbase Custody Representations and Warranties |
Coinbase Custody represents and warrants the following:
| (a) | Coinbase Custody will safekeep Client’s Digital Assets and segregate all such Digital Assets from both the (a) property of Coinbase Custody and of any other Coinbase Entities, and (b) assets of other customers of Coinbase Custody; |
| (b) | subject to Section 27 of the General Terms, Coinbase Custody has no right, interest, or title in Client’s Digital Assets; |
| (c) | Coinbase Custody will maintain adequate capital and reserves to the extent required by applicable law; and |
| (d) | Coinbase Custody will not, directly or indirectly, lend, pledge, hypothecate or re-hypothecate any of Client’s Digital Assets. |
| 5. | Additional Matters |
In addition to any additional service providers that may be described in an addendum or attachment hereto, Client acknowledges and agrees that the Custodial Services may be provided from time to time by, through or with the assistance of affiliates of, or vendors to, Coinbase Custody. Client shall receive notice of any material change in the entities that provide the Custodial Services. Unless Client terminates this Custody Agreement as permitted herein, any new agreements or amended terms and conditions associated with such change shall be governed by Sections 41 and 42 of the General Terms.
[Remainder of page intentionally left blank]
Page 34 of 56
EXHIBIT B
to the Coinbase Prime Broker Agreement
COINBASE MASTER TRADING AGREEMENT
Client should carefully consider whether trading or holding Digital Assets is suitable for its purpose, including in relation to Client’s knowledge of Digital Assets and Digital Asset markets and Client’s financial condition. All investments involve risk, and the past performance of a financial product does not guarantee future results or returns.
This Master Trading Agreement (“MTA”) provides terms and conditions for clients to trade Digital Assets through the Coinbase prime broker execution platform (“Trading Platform”) and is entered into between Client and Coinbase. Upon executing this MTA and completion of standard account opening procedures, Coinbase will open a Trading Account for Client on the Trading Platform consisting of linked accounts at Coinbase and Coinbase Custody, each accessible via the Trading Platform (“Trading Account”). The Trading Platform shall provide Client with access to trade execution and automated trade routing services and Coinbase Execution Services (as described below) to enable Client to submit orders (“Orders”) to purchase and sell specified Digital Assets in accordance with this MTA and the Coinbase Trading Rules, as amended and updated from time to time at https://www.coinbase.com/legal/trading_rules or a successor website (the “Coinbase Trading Rules”) (such services, the “Trading Services”). Capitalized terms used in this MTA that are not defined herein shall have the meanings assigned to them in the General Terms.
| 1. | Order Routing and Connected Trading Venues |
| 1.1 | The Trading Platform operates a trade execution service through which Client may submit Orders to purchase or sell Digital Assets. After Client submits an Order, the Trading Platform will automatically route the Order (or a portion of the Order) to one of the trading venues to which the Trading Platform has established connections (each such venue, a “Connected Trading Venue”). Each Order shall be sent, processed and settled at each Connected Trading Venue to which it is routed. Once an Order to purchase Digital Assets has been placed, the associated Client Assets (as defined below) used to fund the Order will be placed on hold and will generally not be eligible for use or withdrawal. |
| 1.2 | With each Connected Trading Venue, Coinbase shall establish an account in its name, or in its name for the benefit of clients, to trade on behalf of its clients. The establishment of a Trading Account will not cause Client to have a direct legal relationship, or account with, any Connected Trading Venue. The Trading Platform shall not intentionally match the buy and sell orders of its clients against each other and shall not intentionally settle Orders against or otherwise trade with Coinbase’s principal funds. Client acknowledges that Coinbase and its other clients may trade in their own interest on the Connected Trading Venues and could, therefore, be the counterparty to a Client Order on a Connected Trading Venue. |
Page 35 of 56
| 1.3 | Client acknowledges that Coinbase has sole discretion to determine the Connected Trading Venues to which it establishes connections. Coinbase directs Orders to the Connected Trading Venues on an automated basis and generally does not manually route orders. In designing the algorithms that determine an Order’s routing logic, Coinbase considers a variety of factors relating to the Order and the Connected Trading Venues, including the speed of execution, whether the venue is able to consummate off-chain transactions, the availability of efficient and reliable systems, the level of service provided, and the cost of executing orders. Coinbase may receive cash payments or other financial incentives (such as reciprocal business arrangements) from the Connected Trading Venues. |
| 1.4 | Coinbase makes no representation or warranty of any kind regarding any Connected Trading Venue, including as to its financial condition, data, security or quality of its execution services, and shall have no liability, obligation, or responsibility whatsoever for the selection or performance of any Connected Trading Venue, except (i) to the extent set forth in Section 32.4 of the General Terms and (ii) to the extent of Coinbase’s negligence, bad faith, fraud or willful misconduct. Digital Assets may trade at different prices on different trading venues, and other Connected Trading Venues and/or trading venues not used by Coinbase may offer better prices and/or lower costs than the Connected Trading Venue used to execute Client’s Order. |
| 1.5 | Coinbase acts in an agency capacity for purposes of certain Orders, but may also act in a principal capacity for certain Orders, as specified in the Coinbase Trading Rules. In the Request For Quotation (“RFQ”) service, Coinbase acts as principal to fill Orders by providing indicative firm pricing in accordance with a variety of market factors, at its sole discretion. Client should independently evaluate whether such services are appropriate given its investing profile and sophistication, among other considerations. |
| 2. | Client Trading Balance and Vault Balance |
| 2.1 | For purposes of this MTA, Client’s Digital Assets are referenced as “Client Digital Assets,” Client’s cash is referenced as “Client Cash,” and Client Digital Assets and Client Cash are together referenced as “Client Assets.” |
| 2.2 | Within the Trading Platform, Coinbase provides access to two types of accounts with balances relating to Client Assets: (1) the “Trading Balance” (as described below in Section 2.3) and (2) the “Vault Balance” (as described below in Section 2.5). The Trading Account provides a record of both the Trading Balance and the Vault Balance. Client decides how much Client Digital Assets to allocate from time to time between the Trading Balance and the Vault Balance. Client’s Trading Balance is separate from any Digital Assets Client maintains directly with Coinbase Custody. |
| 2.3 | Client Digital Assets credited to the Trading Balance are immediately available to Client for purposes of submitting an Order. Coinbase holds Digital Assets credited to the Trading Balance in one of three ways: (i) in omnibus hot wallets (each, an “Omnibus Hot Wallet”); (ii) in omnibus cold wallets (each, an “Omnibus Cold Wallet”); and (iii) in Coinbase’s accounts with the Connected Trading Venues (“Coinbase Connected Trading Venue Digital Asset Balance”). Client agrees that Coinbase has sole discretion in deciding how to allocate Digital Assets credited to the Trading Balance. Because Digital Assets credited to |
Page 36 of 56
| the Trading Balance are held on an omnibus basis and because of the nature of certain Digital Assets, Client does not have an identifiable claim to any particular Digital Asset. Instead, Client’s Trading Balance represents an entitlement to a pro rata share of the Digital Assets Coinbase has allocated to the Omnibus Hot Wallets, Omnibus Cold Wallets and Coinbase Connected Trading Venue Digital Asset Balance. Coinbase relies on the Connected Trading Venues for the Coinbase Connected Trading Venue Digital Asset Balance, and Client has no contractual relationship with Coinbase Custody or the Connected Trading Venues with respect to Digital Assets credited to the Trading Balance. |
| 2.4 | Client may maintain Client Cash in the Trading Balance (not the Vault Balance). Coinbase holds Client Cash credited to the Trading Balance in one of three ways: (i) in one or more omnibus accounts in Coinbase’s name for the benefit of customers at one or more U.S. insured depository institutions (each, an “FBO account”); (ii) with respect to USD, in liquid investments, which may include but are not limited to U.S. treasuries and money market funds, in accordance with state money transmitter laws; and (iii) in Coinbase’s omnibus accounts at Connected Trading Venues. Coinbase will title the FBO accounts it maintains with U.S. depository institutions and maintain records of Client’s interest in a manner designed to enable receipt of Federal Deposit Insurance Corporation (“FDIC”) deposit insurance, where applicable and up to the deposit insurance limits applicable under FDIC regulations and guidance, on Client Cash for Client’s benefit on a pass-through basis. Coinbase cannot guarantee that pass-through FDIC deposit insurance will apply, since such insurance is dependent in part on compliance of the depository institutions. Coinbase may also title its accounts at some or all Connected Trading Venues and maintain records of Client interests in those accounts in a manner consistent with FDIC requirements for pass-through deposit insurance, but availability of pass-through deposit insurance, up to the deposit insurance limits applicable under FDIC regulations and guidance, is also dependent on the actions of the Connected Trading Venues and any depository institutions they use, which may not be structured to provide pass-through deposit insurance. FDIC insurance applies to cash deposits at banks and other insured depository institutions in the event of a failure of that institution. It does not apply to any Coinbase Entity or to any Digital Asset held by a Coinbase Entity on Client’s behalf. Client Cash is immediately available to Client for purposes of submitting an Order, unless a restriction applies. |
| 2.5 | At Client’s election, Client Digital Assets may also be allocated to the Vault Balance which is held in a Custodial Account (as defined in the Custody Agreement) in Client’s name at Coinbase Custody pursuant to the Custody Agreement. The custody of Client Digital Assets in the Vault Balance held in Client’s Custodial Account will be divided between segregated hot storage in Client’s name, or if applicable, Portfolio name, (“Hot Vault Balance”) and segregated cold storage in Client’s name, or if applicable, Portfolio name, (“Cold Vault Balance”). Client maintains sole discretion in deciding how to allocate Digital Assets among the Hot Vault Balance and Cold Vault Balance. Digital Assets in the Hot Vault Balance can be transferred immediately to Client’s Trading Balance, unless a restriction applies. Digital Assets in the Cold Vault Balance can be transferred to Client’s Trading Balance subject to Coinbase Custody’s standard cold storage withdrawal procedures. Client appoints Coinbase as Client’s agent for purposes of instructing Coinbase Custody to transfer Client Digital Assets between Client’s Vault Balance and Client’s Trading Balance. Client agrees that an Instruction to Coinbase to settle an Order to or from Client’s Vault Balance constitutes authorization to Coinbase to transfer Client Digital Assets to or from Client’s Vault Balance as necessary or appropriate to consummate such settlement. |
Page 37 of 56
| 2.6 | In all circumstances and consistent with laws and regulations applicable to Coinbase, Coinbase will keep an internal ledger that indicates the Client Assets credited to Client’s Trading Balance and enables Coinbase and its auditors and regulators to identify Client and the Client Assets. Maintenance of the Vault Balance shall be subject to the terms of the Custody Agreement. |
| 2.7 | Coinbase treats all Client Assets as custodial assets held for the benefit of Client. No Client Assets credited to the Trading Balance shall be considered to be the property of, or loaned to, Coinbase, except as provided in any loan agreement between Client and any Coinbase Entity. Coinbase does not represent or treat Client Digital Assets or Client Cash as Coinbase assets on its balance sheet. Neither Coinbase nor any Coinbase Entity will sell, transfer, loan, rehypothecate or otherwise alienate Client Assets credited to Client’s Trading Balance unless instructed by Client pursuant to an agreement between Client and a Coinbase Entity. |
| 3. | Role of Coinbase Custody |
| 3.1 | To facilitate the Trading Services, Coinbase may maintain the Omnibus Hot Wallet and the Omnibus Cold Wallet in one or more custodial FBO accounts with its affiliate, Coinbase Custody. In such cases, although the Omnibus Hot Wallet and the Omnibus Cold Wallet are held in Coinbase’s FBO accounts with Coinbase Custody, Client’s legal relationship for purposes of Digital Assets held in the Omnibus Hot Wallet and the Omnibus Cold Wallet is not directly or indirectly with Coinbase Custody and the terms, conditions and agreements relating to those wallets are governed by this MTA. |
| 3.2 | Client Digital Assets held in the Hot Vault Balance and Cold Vault Balance are maintained directly between Client and Coinbase Custody in Client’s name and are subject to the terms of Client’s Custody Agreement. |
| 4. | Cash and Digital Asset Deposits and Withdrawals |
| 4.1 | To deposit Client Cash, Client must initiate a transfer from a linked bank account, a wire transfer, a SWIFT transfer, a deposit or other form of electronic payment approved by Coinbase from time to time to Coinbase’s bank account, the instructions for which are available on the Coinbase Prime Broker Site. Coinbase will credit the Trading Balance with Client Cash once the associated cash is delivered to Coinbase. Client Cash is held as described in Section 2.4 of this MTA. As noted in Section 2.4 of this MTA, Coinbase intends for Client to benefit from FDIC deposit insurance on Client Cash in the Trading Balance on a pass-through basis, but does not guarantee or warrant that treatment. |
Page 38 of 56
| 4.2 | To withdraw Client Cash, Client may also initiate a withdrawal of Client Cash from the Trading Balance at any time using the withdrawal function on the Trading Platform. |
| 4.3 | To deposit Client Digital Assets, Client can transfer Client Digital Assets directly to the Omnibus Hot Wallet or Omnibus Cold Wallet, the instructions for which are available on the Coinbase Prime Broker Site. In addition, Client may transfer Client Digital Assets to and among its Hot Vault Balance or Cold Vault Balance that Client holds with Coinbase Custody. When Client transfers Digital Assets to Coinbase or Coinbase Custody, it delivers custody and control of the Digital Assets to Coinbase, Coinbase Custody or Coinbase’s designee. Client represents and warrants that any Digital Asset transferred to Coinbase or Coinbase Custody is free and clear of all liens, claims and encumbrances. |
| 4.4 | To withdraw Client Digital Assets, Client must provide Coinbase with Instructions via the Coinbase Prime Broker Site (“Withdrawal Transfer”). Once Client has initiated a Withdrawal Transfer, the associated Client Digital Assets will be in a pending state and will not be included in Client’s Trading Balance or Vault Balance. Client acknowledges that Coinbase may not be able to reverse a Withdrawal Transfer once initiated. Client may withdraw Client Digital Assets at any time, subject to delays for Digital Assets held in the Cold Vault Balance, and any applicable account, platform or network delay or restriction. |
| 4.5 | Client must verify all transaction information prior to submitting withdrawal Instructions to Coinbase, as Coinbase cannot and does not guarantee the identity of the wallet owner or bank account to which Client is sending Client Digital Assets or Client Cash, as applicable. Coinbase shall have no liability, obligation, or responsibility whatsoever for Client Cash or Client Digital Asset transfers sent to or received from a wrong party in reliance on inaccurate Instructions. |
| 5. | Order Submission, Settlement and Cancellation |
| 5.1 | After Client has submitted an Order, Client cannot cancel, reverse, or change any Order marked as complete, and Coinbase does not guarantee that Client will be able to cancel, reverse or change any other Order once it has been submitted. Coinbase will use reasonable efforts to fulfill bona fide Orders and cancellation requests that comply with the terms of this MTA, including the Coinbase Trading Rules, but Coinbase shall have no liability, obligation, or responsibility whatsoever if Coinbase is unable to do so or is delayed in doing so. Coinbase also will have no liability, obligation, or responsibility whatsoever for inaccurate Instructions Coinbase receives or for delays in receiving or failure to receive Instructions. Coinbase’s security procedures are designed to control access to the Prime Broker Account, not the accuracy of Client Instructions, and Coinbase may execute any Order on the terms received. |
| 5.2 | Client agrees to make full payment for all Orders in the Trading Account and authorizes Coinbase to debit the Prime Broker Account to settle any Order submitted using the Trading Services. |
Page 39 of 56
| 6. | Order Confirmations and Order Errors |
| 6.1 | Coinbase will confirm the execution or cancellation of any Order solely by transmitting an electronic confirmation to Client via e-mail or through the Trading Platform. Client agrees to accept electronic trade confirmations in lieu of printed confirmations. Client agrees to monitor each Order until Coinbase has confirmed the Order’s execution or cancellation through the Trading Platform (“Order Confirmations”). |
| 6.2 | Client acknowledges that Order Confirmations may be delayed or erroneous. Client agrees to notify Coinbase promptly in writing through the Trading Platform or through the Coinbase dedicated customer service email address or website form (available at: help.coinbase.com/en/contact-us) if: (i) Client fails to receive an accurate Order Confirmation; (ii) Client receives an Order Confirmation different than Client’s Order; (iii) Client receives an Order Confirmation for an order that Client did not place; or (iv) the Order Confirmation otherwise reflects any inaccuracy regarding Client’s Orders, balances, positions, transaction history, or any other feature of Client’s use of the Trading Services. |
| 6.3 | Client agrees to return to Coinbase any assets erroneously distributed to Client promptly upon Coinbase’s evidence to Client of such distribution error, but in any event within thirty (30) days of such evidence being provided. Client further agrees not to withdraw the erroneously distributed assets from its Trading Account, or to return it entirely to Coinbase if Client has already withdrawn the assets. |
| 6.4 | All Orders are subject to Coinbase Trading Rules, the rules and policies of the Connected Trading Venues, and all applicable laws, rules and regulations. Client agrees that Coinbase may adjust Client’s Trading Balance or Vault Balance to correct any error, in accordance with this MTA and the Coinbase Trading Rules. |
| 6.5 | Coinbase may modify the terms of or cancel any Order executed on the Trading Platform if Coinbase determines in its reasonable discretion that the Order was clearly erroneous according to the Coinbase Trading Rules. |
| 7. | Disruption to Trading Platform; Limits on Client’s Orders |
| 7.1 | Client acknowledges that electronic facilities and systems such as the Trading Platform are vulnerable to disruption, delay or failure and, consequently, such facilities and systems may be unavailable to Client as a result of foreseeable and unforeseeable events. Client understands and agrees that Coinbase does not guarantee uninterrupted access to the Trading Platform or all features of the Trading Services. Client acknowledges that although Coinbase will attempt to provide notice of any scheduled or unscheduled unavailability that would result in Client being unable to access the Trading Platform or the Trading Services, Coinbase cannot guarantee advanced notice to Client. |
| 7.2 | Coinbase may, in its sole discretion, take the following actions and shall use reasonable efforts to provide Client with as much prior notice as practicable in each case: (i) halt or suspend trading on the Trading Platform, (ii) halt or suspend trading of any Digital Assets or currency, or (iii) to the extent provided in the Coinbase Prime Broker Agreement, halt or suspend Client’s Trading Services. Further, Coinbase may impose, in its sole discretion, limits on the amount or size of Client’s Orders and Coinbase shall use reasonable efforts to provide Client with as much prior notice as practicable of any such limits. |
Page 40 of 56
| 8. | Coinbase Trading Rules and Order Types |
Client agrees to comply with the Coinbase Trading Rules in effect at the time of any Order or use of the Trading Services. Clients can select from various types of Orders (each an “Order Type”) and the terms of each Order Type may vary. Client agrees to review and become familiar with the terms of all Order Types available through the Trading Service. A detailed description of the terms of all Orders is contained in the Coinbase Trading Rules. Coinbase reserves the right to modify the terms of any Order Type and the Coinbase Trading Rules at any time without prior notice to Client, and Client acknowledges that it is solely responsible for ensuring knowledge of applicable Order Types and the Coinbase Trading Rules prior to placing an Order.
| 9. | Coinbase Supported Digital Assets |
Coinbase determines in its sole discretion to support Digital Assets for use with the Trading Services. For an updated list of supported Digital Assets, please visit the Coinbase Prime Broker Site. Not all Digital Assets supported for Custodial Services are also supported for Trading Services.
| 10. | Coinbase Execution Services; Security Interest in Connection with OTC Orders |
| 10.1 | At Coinbase’s sole discretion, Client may elect to submit Orders to Coinbase Execution Services (“CES”), a Trading Service through which CES personnel will execute Orders on behalf of Client. CES will execute Orders by using automated trade routing services through Client’s Prime Broker Account or by fulfilling Orders on Coinbase’s over-the-counter (“OTC”) trading service (“OTC Services”). Coinbase has sole and absolute discretion to accept or reject any Order submitted to CES. Coinbase and Client may communicate regarding Instructions related to Orders submitted to CES on a mutually agreed communication medium, including instant messaging, email, and telephone. |
| 10.2 | CES brokers Orders on a best efforts basis as Client’s agent and may exercise discretion in executing Orders. Client must pre-fund its Trading Balance and/or establish a credit arrangement with Coinbase Credit prior to submitting such Orders. By electing to use CES, Client agrees that it is authorizing CES personnel to access its Prime Broker Account to initiate and execute Orders. Client acknowledges that CES personnel will retain access to the Client Prime Broker Account until Client’s Authorized Representative(s) provides Coinbase with Instructions to terminate such access. Absent express written agreement between the Parties, Coinbase will accept Orders only from Authorized Representatives that are designated as having trading authority with respect to the Prime Broker Account; Client is solely responsible for updating the identities of the Authorized Representatives that have such trading authority. |
Page 41 of 56
| 10.3 | For OTC Services, CES personnel will confirm the terms of an Order (which terms shall include asset, quantity, price, settlement timing, and fees) with Client prior to executing the Order. Coinbase has policies and procedures in place that are reasonably designed to prevent the disclosure of the Client’s identity to its OTC counterparty. Coinbase may, in its sole and absolute discretion, accept the following statements (or similar or analogous statements) as Client’s final and binding agreement to the terms of an Order: “done,” “I buy,” “bought,” “I sell,” or “sold.” A completed, executed, and settled Order will be reflected in Client’s Prime Broker Account. |
| 10.4 | For Orders fulfilled via OTC Services (“OTC Orders”), each of Client’s and its OTC counterparty’s confirmations of the terms of the OTC Order deems such OTC Order as binding and final, and thereby executed. Client hereby grants to Coinbase a continuing first priority security interest in, lien on and right of set off against all of Client’s right, title and interest, whether now owned or existing or hereafter acquired or arising, in Client’s Trading Balance and Vault Balance and all Client Assets held in the Trading Balance and the Vault Balance together with proceeds thereof, in order to secure Client’s settlement obligations arising in connection with OTC Orders. |
| 10.5 | [Reserved]. |
| 11. | Determination of Suitability; All Risks Not Disclosed |
Coinbase’s provision of the Trading Services is neither a recommendation that Client enter into a particular Order nor a representation that any product described on the Trading Platform is suitable or appropriate for Client. Many of the Trading Services described on the Trading Platform involve significant risks, and Client should not use the Trading Services unless it has fully understood all such risks and has independently determined that such Orders are appropriate. Any discussion of the risks contained in this MTA or on the Trading Platform should not be considered to be a disclosure of all risks or a complete discussion of the applicable risks.
| 12. | Characterization of Trading Services; Not a Registered Broker-Dealer or Investment Adviser |
Client understands and acknowledges that no transactions executed in connection with Client’s Trading Account or the Trading Services are securities transactions, and Coinbase is not registered with the U.S. Securities and Exchange Commission as a broker-dealer or an investment adviser or licensed under any state securities laws. Coinbase is not acting as a fiduciary in respect of Client (including in connection with its rights under this MTA) and does not have any responsibility under the standards governing the conduct of broker-dealers, fiduciaries, investment advisers or investment managers. Client agrees and acknowledges that any information or advice provided by Coinbase or any other Coinbase Entity does not and will not serve as the basis of any investment decision by Client.
Page 42 of 56
| 13. | Coinbase Corporate Accounts |
Coinbase and its affiliates may transact through trading accounts on the Trading Platform (“Coinbase Corporate Accounts”) for purposes including inventory management, to facilitate Client Orders, and for other corporate purposes. To the extent that a Coinbase Corporate Account transacts on the Trading Platform, the Coinbase Corporate Account (i) will not have any special priority vis-a-vis Client Orders and will be subject to the Coinbase Trading Rules, (ii) will trade only on Market Data available to all clients, and (iii) will not access any non-public data of any clients. Coinbase’s internal ledger will indicate the amount of each Digital Asset held for each client and each such Coinbase Corporate Account.
| 14. | Term, Termination and Suspension |
| 14.1 | Regardless of any other provision of this MTA, Coinbase may, in its sole discretion, suspend, restrict or terminate Client’s Trading Services, including by suspending, restricting or closing Client’s Trading Account, in accordance with Section 35 of the General Terms. |
| 14.2 | If Client is subject to termination, Client agrees to transfer any Client Assets off the Trading Platform within thirty (30) days of receipt of the termination notice unless such transfer is otherwise prohibited (i) under applicable law, including applicable sanctions programs, or (ii) by a facially valid subpoena or court order. Client agrees to promptly provide Coinbase with Instructions as to where its Client Assets should be transferred, and agrees that failure to do so within thirty (30) days of receipt of notice of termination may result in Client Assets being transferred to Client’s linked bank account or Digital Asset wallet on file, in each case subject to off-set for any outstanding obligations to any Coinbase Entity in accordance with the General Terms. Final disbursement of assets may be delayed until any remaining obligations or indebtedness have been satisfied. Client is responsible for all debits, costs, commissions, and losses arising from any actions Coinbase must take to liquidate or close transactions in Client’s Trading Account. |
| 15. | Unclaimed Property |
If Coinbase is holding Client Assets in the Trading Balance, has no record of Client’s use of the Trading Services for an extended period, and is otherwise unable to contact Client, Coinbase may be required under applicable laws, rules or regulations to report these assets as unclaimed property and to deliver such unclaimed property to the applicable jurisdiction. Coinbase may deduct a dormancy fee or other administrative charge from such unclaimed funds, as permitted by applicable laws, rules or regulations.
| 16. | Tax Reporting Information |
| 16.1 | At Client’s cost, Coinbase shall use good faith efforts to provide such information, cooperation and assistance as is reasonably requested by Client to enable Client to satisfy any applicable tax reporting requirements directly related to Client’s use of the Prime Broker Services. |
Page 43 of 56
| 16.2 | Coinbase will provide Client with transaction history for the Trading Account, including purchase dates, purchase price information, sale dates (including conversion and/or transfer dates, if applicable) and sales price (including conversion and/or transfer price, if applicable) for each Digital Asset and the Trading Account. |
| 16.3 | Coinbase will provide Client with an applicable Form 1099 for the Trading Account each calendar year. |
Page 44 of 56
API Supplement to the MTA
Developer Tools
| 1. | Use of Developer Tools. If Client elects to use developer tools rather than interface through the Trading Platform, this API Supplement shall be incorporated into the MTA by reference and all defined terms in the MTA shall apply to this API Supplement. The terms of the MTA and this API Supplement shall govern Client’s use of any and all development applications provided by Coinbase, including Coinbase’s application programming interface and any accompanying or related documentation, source code, executable applications and other materials (the “Coinbase API”), the Coinbase Sandbox, and any other resources or services available on or through the Coinbase systems (“Coinbase API Services”) (collectively, the “Developer’s Tools”). |
| 2. | License Grant. Subject to the terms and restrictions set forth in the MTA, Coinbase grants Client a limited, revocable, non-exclusive, non-transferrable and non-sublicensable license solely to use and integrate the Developer’s Tools and underlying content into Client’s website or application (Client’s “Application”) so that Client’s Application can interface directly with Coinbase devices, applications, or services. |
| 3. | Security. Client shall take steps to adequately secure its APi Keys and OAuth Tokens, including the security measures specified at: https://developers.coinbase.com/docs/wallet/api-key-authentication and https://developers.coinbase.com/docs/wallet/coinbase-connect/security-best-practices. |
| 4. | Limitation on Use. Unless otherwise agreed with Coinbase, Developer Tools may only be used to facilitate Client and its Authorized Representatives’ access to the Coinbase API Services and not to re-sell or otherwise provide parties other than Client and its Authorized Representatives with access to the Coinbase API Services. |
| 5. | Restrictions. Client shall not: |
| (a) | Copy, rent, lease, sell, sublicense, or otherwise transfer Client’s rights in the Developer’s Tools to a third party. |
| (b) | Alter, reproduce, adapt, distribute, display, publish, reverse engineer, translate, disassemble, decompile or otherwise attempt to create any source code that is derived from the Developer’s Tools. |
| (c) | Cache, aggregate, or store data or content accessed via the Developer’s Tools other than for purposes allowed under the MTA. |
| (d) | Use the Developer’s Tools for any Application that constitutes, promotes or is used in connection with spyware, adware, or any other malicious programs or code. |
Page 45 of 56
| (e) | Use the Developer’s Tools to encourage, promote, or participate in illegal activity, violate third party rights, including intellectual property rights or privacy rights, or engage in any Prohibited Use or Prohibited Business as defined in www.coinbase/legal/prohibited. |
| (f) | Use the Developer’s Tools in a manner that exceeds reasonable request volume, constitutes excessive or abusive usage, or otherwise impacts the stability of Coinbase’s servers or impacts the behavior of other applications using the Developer’s Tools. |
| (g) | Attempt to cloak or conceal Client’s identity or application’s identity when requesting authorization to the Developer’s Tools. |
| 6. | API Calls and Compliance. Coinbase may at its sole discretion set limits on the number of API calls that Client can make, for example in the interest of service stability. If Client exceeds these limits, Coinbase may moderate its activity or cease offering it access to the Coinbase APIs altogether in Coinbase’s reasonable discretion. Client agrees to such limitations and will not attempt to circumvent such limitations. Coinbase may immediately suspend or terminate access to the Developer’s Tools without notice if Coinbase believes, in its reasonable discretion, that Client is in violation of the MTA. |
| 7. | Updates and Support. Coinbase may elect to provide Client with support or modifications for the Developer’s Tools, in its sole discretion, and may terminate such support at any time without notice. Coinbase may change, suspend, or discontinue any aspect of the Developer’s Tools at any time, including the availability of any Developer’s Tools. |
[Remainder of page intentionally left blank]
Page 46 of 56
Appendix 1
to the Coinbase Prime Broker Agreement
PROHIBITED USE, PROHIBITED BUSINESS, AND CONDITIONAL USE
This policy sets forth the limitations concerning Client’s use of Client’s Prime Broker Account. Coinbase, on behalf of the Coinbase Entities, may amend this policy at any time by providing a revised version on the Coinbase Prime Broker Site. The revised version will be effective at the time Coinbase posts it. Coinbase will provide Client with prior notice of any material changes via the Coinbase Prime Broker Site.
| 1. | PROHIBITED USE. Client may not use Client’s Custodial Account to engage in the following categories of activity (“Prohibited Uses”). The Prohibited Uses extend to any third party that gains access to the Prime Broker Services through Client’s account or otherwise, regardless of whether such third party was authorized or unauthorized by Client to use the Prime Broker Services associated with the Prime Broker Account. The specific types of use listed below are representative, but not exhaustive. If Client is uncertain as to whether or not Client’s use of Prime Broker Services involves a Prohibited Use, or has questions about how these requirements apply to Client, please contact Coinbase. By opening a Prime Broker Account, Client confirms that Client will not use Client’s Prime Broker Account to do any of the following: |
| (a) | Unlawful Activity: Activity which would violate, or assist in violation of, any law, statute, ordinance, or regulation, sanctions programs administered in the countries where the Coinbase Entities conduct business, including the U.S. Department of Treasury’s Office of Foreign Assets Control, or which would involve proceeds of any unlawful activity; publish, distribute or disseminate any unlawful material or information. |
| (b) | Abusive Activity: Actions which impose an unreasonable or disproportionately large load on the Coinbase Entities’ infrastructure, or detrimentally interfere with, intercept, or expropriate any system, data, or information; transmit or upload any material to the Prime Broker Site that contains viruses, Trojan horses, worms, or any other harmful or deleterious programs; attempt to gain unauthorized access to the Prime Broker Site, other Prime Broker Accounts, computer systems or networks connected to the Prime Broker Site, through password mining or any other means; use Prime Broker Account information of another party to access or use the Prime Broker Site; or transfer Client’s Prime Broker Account access or rights to Client’s Prime Broker Account to a third party, unless by operation of law or with the express permission of Coinbase. |
| (c) | Abuse Other Users: Interfere with another Coinbase Prime Broker user’s access to or use of any Prime Broker Services; defame, abuse, extort, harass, stalk, threaten or otherwise violate or infringe the legal rights (including rights of privacy, publicity and intellectual property) of others; incite, threaten, facilitate, promote, or encourage hate, racial intolerance, or violent acts against others; harvest or otherwise collect information from the Prime Broker Site about others, including email addresses, without proper consent. |
Page 47 of 56
| (d) | Fraud: Activity which operates to defraud the Coinbase Entities, Coinbase Prime Broker users, or any other person; provide any false, inaccurate, or misleading information to the Coinbase Entities. |
| (e) | Gambling: Lotteries; bidding fee auctions; sports forecasting or odds making; fantasy sports leagues with cash prizes; Internet gaming; contests; sweepstakes; games of chance. |
| (d) | Intellectual Property Infringement: Engage in transactions involving items that infringe or violate any copyright, trademark, right of publicity or privacy or any other proprietary right under the law, including sales, distribution, or access to counterfeit music, movies, software, or other licensed materials without the appropriate authorization from the rights holder; use of the Coinbase Entities’ intellectual property, name, or logo, including use of Coinbase Prime Broker trade or service marks, without express consent from the Coinbase Entities or in a manner that otherwise harms the Coinbase Entities, or any Coinbase brand; any action that implies an untrue endorsement by or affiliation with the Coinbase Entities. |
| (e) | Written Policies: Client may not use the Prime Broker Account or the Prime Broker Services in a manner that violates, or is otherwise inconsistent with, any operating instructions promulgated by the Coinbase Entities. |
| 2. | PROHIBITED BUSINESSES. Although Coinbase may offer a Prime Broker Account to any entity that can successfully create an account in accordance with the terms of this Coinbase Prime Broker Agreement, the following categories of businesses, business practices, and sale items are barred from the Prime Broker Services (“Prohibited Businesses”). The specific types of use listed below are representative, but not exhaustive. If Client is uncertain as to whether or not Client’s use of the Prime Broker Services involves a Prohibited Business, or has questions about how these requirements apply to Client, please contact Coinbase. By opening a Prime Broker Account, Client confirms that Client will not use the Prime Broker Services in connection with any of following businesses, activities, practices, or items: |
| (a) | Restricted Financial Services: Check cashing, bail bonds, collections agencies. |
| (b) | Intellectual Property or Proprietary Rights Infringement: Sales, distribution, or access to counterfeit music, movies, software, or other licensed materials without the appropriate authorization from the rights holder. |
| (c) | Counterfeit or Unauthorized Goods: Unauthorized sale or resale of brand name or designer products or services; sale of goods or services that are illegally imported or exported or which are stolen. |
Page 48 of 56
| (d) | Regulated Products and Services: Marijuana dispensaries and related businesses; sale of tobacco, e-cigarettes, and e-liquid; online prescription or pharmaceutical services; age-restricted goods or services; weapons and munitions; gunpowder and other explosives; fireworks and related goods; toxic, flammable, and radioactive materials; products and services with varying legal status on a state-by-state basis. |
| (e) | Drugs and Drug Paraphernalia: Sale of narcotics, controlled substances, and any equipment designed for making or using drugs, such as bongs, vaporizers, and hookahs. |
| (f) | Pseudo-Pharmaceuticals: Pharmaceuticals and other products that make health claims that have not been approved or verified by the applicable local and/or national regulatory body. |
| (g) | Substances designed to mimic illegal drugs: Sale of a legal substance that provides the same effect as an illegal drug (e.g., salvia, kratom). |
| (h) | Adult Content and Services: Pornography and other obscene materials (including literature, imagery and other media); sites offering any sexually-related services such as prostitution, escorts, pay-per view, adult live chat features. |
| (i) | Multi-level Marketing: Pyramid schemes, network marketing, and referral marketing programs. |
| (j) | Unfair, Predatory or Deceptive Practices: Investment opportunities or other services that promise high rewards; sale or resale of a service without added benefit to the buyer; resale of government offerings without authorization or added value; sites that Coinbase determines in our sole discretion to be unfair, deceptive, or predatory towards consumers. |
| (k) | Gambling Services. |
| (l) | Weapons Manufacturers/Vendors. |
| (m) | Money Services: Gift cards; prepaid cards; sale of in-game currency unless the merchant is the operator of the virtual world; act as a payment intermediary or aggregator or otherwise resell any of the Custodial Services. |
| (n) | Crowdfunding |
| (o) | High-risk Businesses: any businesses that Coinbase believes pose elevated financial risk or legal liability. |
| (p) | Hate Groups |
Page 49 of 56
| 3. | CONDITIONAL USE. Express written consent and approval from Coinbase on behalf of the Coinbase Entities must be obtained prior to using Prime Broker Services for the following categories of business and/or use (“Conditional Uses”). Coinbase may also require Client to agree to additional conditions, make supplemental representations and warranties, complete enhanced on-boarding procedures, and operate subject to restrictions if Client uses the Prime Broker Services in connection with any of following businesses, activities, or practices: |
| (a) | Charities: Acceptance of donations for nonprofit enterprise. |
| (b) | Games of Skill: Games which are not defined as gambling under this Coinbase Prime Broker Agreement or by law, but which require an entry fee and award a prize. |
| (c) | Religious/Spiritual Organizations: Operation of a for-profit religious or spiritual organization. |
[Remainder of page intentionally left blank]
Page 50 of 56
Appendix 2
to the Coinbase Prime Broker Agreement
E-SIGN DISCLOSURE AND CONSENT
This policy describes how the Coinbase Entities deliver communications to Client electronically. Coinbase, on behalf of the Coinbase Entities, may amend this policy at any time by providing a revised version on the Coinbase Prime Broker Site. The revised version will be effective at the time Coinbase posts it. Coinbase will provide Client with prior notice of any material changes via the Coinbase Prime Broker Site.
| 1. | ELECTRONIC DELIVERY OF COMMUNICATIONS. |
Client agrees and consents to receive electronically all communications, agreements, documents, notices and disclosures (collectively, “Communications”) that Coinbase provides in connection with Client’s Prime Broker Account and Client’s use of Prime Broker Services. Communications include:
| (a) | Terms of use and policies Client agrees to (e.g., this Coinbase Prime Broker Agreement, including all agreements, exhibits, appendices, addenda, policies referenced herein, and supplements attached hereto), including updates to these agreements or policies; |
| (b) | Prime Broker Account details, history, transaction receipts, confirmations, and any other Prime Broker Account deposit, withdrawal or transaction information; |
| (c) | Legal, regulatory, and tax disclosures or statements the Coinbase Entities may be required to make available to Client; and |
| (d) | Responses to claims or customer support inquiries filed in connection with Client’s Prime Broker Account. |
Coinbase will provide these Communications to Client by posting them on the Prime Broker Site, emailing them to Client at the primary email address on file with Coinbase, communicating to Client via instant chat, and/or through other electronic communication. For the sake of clarity, the Parties hereby acknowledge and agree that Client’s consent herein allows for electronically delivered Communications to be accepted and agreed to by Client through the Prime Broker Services interface. Furthermore, the Coinbase Entities may use electronic signatures and obtain them from Client in connection with Client’s use of the Prime Broker Services. Client consents and agrees that Client’s electronic signature on Communications, including agreements, terms of use, addenda, consents, authorizations or updates relating thereto has the same effect as if Client signed them in ink.
| 2. | HARDWARE AND SOFTWARE REQUIREMENTS. |
In order to access and retain electronic Communications, Client will need the following computer hardware and software:
Page 51 of 56
| (a) | A device with an Internet connection; |
| (b) | A current web browser that includes 128-bit encryption (e.g. , Internet Explorer version 9.0 and above, Firefox version 3.6 and above, Chrome version 31.0 and above, or Safari 7.0 and above) with cookies enabled; |
| (c) | A valid email address (Client’s primary email address on file with Coinbase); and |
| (d) | Sufficient storage space to save past Communications or an installed printer to print them. |
| 3. | HOW TO WITHDRAW CLIENT’S CONSENT. |
Client may withdraw Client’s consent to receive Communications electronically by contacting Coinbase. If Client fails to provide or if Client withdraws Client’s consent to receive Communications electronically, Coinbase reserves the right to immediately close Client’s Prime Broker Account or charge Client additional fees for paper copies.
| 4. | UPDATING CLIENT’S INFORMATION. |
It is solely Client’s responsibility to provide Coinbase with a true, accurate, and complete e-mail address and Client’s contact information, and to keep such information up to date. Client understands and agrees that if Coinbase sends Client an electronic Communication but Client does not receive it because Client’s primary email address on file is incorrect, out of date, blocked by Client’s service provider, or Client is otherwise unable to receive electronic Communications, Coinbase will be deemed to have provided the Communication to Client. Client may update Client’s information by logging into Client’s Prime Broker Account and visiting settings or by contacting Coinbase.
[Remainder of page intentionally left blank]
Page 52 of 56
Appendix 3
to the Coinbase Prime Broker Agreement
COINBASE PRIME FEE SCHEDULE
This Fee Schedule is effective upon the Effective Date of the Coinbase Prime Broker Agreement between Coinbase and Client, and sets forth the fees payable to the Coinbase Entities in connection with the Prime Broker Services. All capitalized terms not defined in this Fee Schedule shall have the meaning given to them in the Coinbase Prime Broker Agreement.
This Fee Schedule is subject to modification from time to time upon mutual written agreement of Coinbase, on behalf of itself and as agent for the Coinbase Entities, and Client. Notwithstanding the foregoing, Coinbase, on behalf of itself and as agent for the Coinbase Entities, shall also have the right to modify the fees set forth in this Fee Schedule at its discretion at any time upon not less than thirty (30) days’ prior written notice to Client.
Client acknowledges that it is solely responsible for ensuring knowledge of applicable fees prior to use of the Prime Broker Services including the Trading Services and Custodial Services.
SETTLEMENT FEES
Client shall pay the aggregate amount of Settlement Fees on a monthly basis:
| • | The “Settlement Fee” shall be [ ] per settlement in Client’s Trading Balance. |
| • | Each settlement is (i) a withdrawal or deposit of Digital Assets using the Prime Broker Services and (ii) between Client and other identified participants involved in Client’s share creations and redemptions. |
PRIME BROKER CUSTODY ETP SERVICES FEE
On a monthly basis, Client shall pay a Prime Broker Custody ETP Services Fee associated with (x) the Custody Account and associated Custodial Services provided by Coinbase Custody Trust Company, LLC and (y) other exchange traded product (ETP) services provided to Client:
The “Prime Broker Custody ETP Services Fee” will be the Monthly Average AUC multiplied by the Custodial Billing Rate. The Prime Broker Custody ETP Services Fee is a tiered, annualized fee. See Notes below for further details.
Notes
| • | “Monthly Average AUC” shall equal the USD denominated sum of Client’s Daily AUC (as defined below) for each calendar day of the billing month, for each Digital Asset on deposit in the Custodial Account, divided by the number of calendar days in the billing month. |
Page 53 of 56
| • | The “Custodial Billing Rate” is defined as the proportion of total calendar days in the billing month to total calendar days in the billing year multiplied by the Annualized Prime Broker Custody ETP Services Fee Rate (as defined below). |
| • | With respect to each Digital Asset on deposit in the Custodial Account on any calendar day, the “Client’s Daily AUC” shall equal the daily Digital Asset price for such Digital Asset as listed on Coinbase Pro multiplied by Client’s daily Digital Asset balance for such Digital Asset on deposit in the Custodial Account as of 4PM ET. |
| • | The “Annualized Prime Broker Custody ETP Services Fee Rate” is applied on a marginal basis and shall equal the sum of each Monthly Average AUC tier multiplied by the associated rate tier. For example, if Client had a Monthly Average AUC of $1.5M, Client would have an Annualized Prime Broker Custody ETP Services Fee Rate that equals: ($999,999.99 at rate tier 1) + ($500,000 at rate tier 2): |
| Monthly Average AUC |
Rate Tier (in basis points) |
|||
| Less than $1 million |
||||
| $1 million or more up to and including $10 million |
||||
| More than $10 million up to and including $25 million |
||||
| More than $25 million up to and including $50 million |
||||
| More than $50 million up to and including $100 million |
||||
| More than $100 million up to and including $250 million |
||||
| More than $250 million up to and including $500 million |
||||
| More than $500 million up to and including $1 billion |
||||
| More than $1 billion up to and including $2 billion |
||||
| More than $2 billion up to and including $3 billion |
||||
| More than $3 billion up to and including $5 billion |
||||
| More than $5 billion |
||||
Page 54 of 56
Notwithstanding the foregoing, Client shall have the right at any time upon notice to Coinbase to decline the receipt of the ETP services that are constituted by surveillance sharing agreement services with Client’s listing exchange, in which case the Annualized Prime Broker Custody ETP Services Fee Rate shall instead be determined on the basis of the Monthly Average AUC tiers and the associated rate tiers set forth below:
| Monthly Average AUC |
Rate Tier (in basis points) |
|||
| Up to and including $3 billion |
||||
| More than $3 billion |
||||
| TRADING | ACCOUNT FEES (“All-in”) |
Fees associated with the Trading Account and associated Trading Services provided by Coinbase, Inc.:
For each executed Order, Client will pay a fixed rate of [ ] basis points, which includes Coinbase’s commission, the provision of Trading Services and the actual variable transaction fees associated with the executed Order that Coinbase incurs from Connected Trading Venues. No fees are charged for canceled portions of Orders. Please see the Coinbase Trading Rules for additional details.
Coinbase Prime-assisted trading is available through Coinbase Execution Services. Orders executed using Coinbase Execution Services will pay an additional [ ] basis points for BTC and ETH Orders and [ ] basis points for all other Orders.
Notes
| • | 1 basis point= 0.01%. |
| • | Client will be provided a preview of estimated fees prior to Order submission and can view the Order Confirmation for details of the actual fees associated with executed Orders. |
Page 55 of 56
| • | Fees are assessed at the time of Order execution. |
IMPLEMENTATION FEE
Coinbase Custody is pleased to waive the Implementation Fee at this time.
PAYMENT TERMS
Coinbase will invoice Client for the Settlement Fee and the Prime Broker Custody ETP Services Fee on a monthly basis and Client shall pay all amounts to Coinbase within thirty (30) days of Client’s receipt of an invoice for such fees. Client will pay any amounts owed hereunder in the form and manner selected by Client and approved by Coinbase, and according to any additional terms found on the Coinbase Prime Broker Site or in the Coinbase Prime Broker Agreement, including but not limited to transfer of cryptocurrency to an address designated by Coinbase, as a debit from Client’s Prime Broker Account.
The pricing and other terms set forth herein are confidential and shall not be shared with any third parties without the prior written approval of Coinbase.
Page 56 of 56
Exhibit 10.5
Form Of
CUSTODY AGREEMENT
By and Between
THE BANK OF NEW YORK MELLON
And
INVESCO GALAXY ETHEREUM ETF
| BNY MELLON AND CUSTOMER CONFIDENTIAL | EXECUTION VERSION |
TABLE OF CONTENTS
| 1. | DEFINITIONS | 1 | ||||||
| 2. | APPOINTMENT OF CUSTODIAN; ACCOUNTS | 3 | ||||||
| 2.1 | Appointment of Custodian | 3 | ||||||
| 2.2 | Establishment of Accounts | 3 | ||||||
| 3. | AUTHORIZED PERSONS AND INSTRUCTIONS; ELECTRONIC ACCESS | 3 | ||||||
| 3.1 | Authorized Persons | 3 | ||||||
| 3.2 | Instructions | 4 | ||||||
| 3.3 | BNY Mellon Actions Without Instructions | 5 | ||||||
| 3.4 | Funds Transfers | 5 | ||||||
| 3.5 | Electronic Access | 5 | ||||||
| 4. | AGENTS | 5 | ||||||
| 4.1 | Use of Agents | 5 | ||||||
| 5. | TAX MATTERS | 6 | ||||||
| 5.1 | Responsibility for Taxes | 6 | ||||||
| 5.2 | Payments | 6 | ||||||
| 6. | CREDITS AND ADVANCES | 6 | ||||||
| 6.1 | Advances | 6 | ||||||
| 6.2 | Repayment | 6 | ||||||
| 6.3 | Securing Repayment | 6 | ||||||
| 6.4 | Setoff | 7 | ||||||
| 7. | STATEMENTS; BOOKS AND RECORDS; THIRD PARTY DATA | 7 | ||||||
| 7.1 | Statements | 7 | ||||||
| 7.2 | Books and Records | 7 | ||||||
| 7.3 | Third Party Data | 8 | ||||||
| 8. | DISCLOSURES | 8 | ||||||
| 8.1 | Foreign Exchange Transactions | 8 | ||||||
| 8.2 | Investment of Cash | 8 | ||||||
| 9. | REGULATORY MATTERS | 9 | ||||||
| 9.1 | USA PATRIOT Act | 9 | ||||||
| 9.2 | Sanctions; Anti-Money Laundering | 9 | ||||||
| 10. | COMPENSATION | 10 | ||||||
| 10.1 | Fees and Expenses | 10 | ||||||
| 10.2 | Other Compensation | 10 | ||||||
| 11. | REPRESENTATIONS, WARRANTIES AND COVENANTS | 11 | ||||||
| 11.1 | BNY Mellon | 11 | ||||||
| 11.2 | Customer | 11 | ||||||
| 12. | LIABILITY | 12 | ||||||
| 12.1 | Standard of Care | 12 | ||||||
| 12.2 | Limitation of Liability | 12 | ||||||
| 12.3 | Force Majeure | 13 | ||||||
| 12.4 | Indemnification | 13 | ||||||
i
EXECUTION VERSION
| 13. | CONFIDENTIALITY | 13 | ||||||
| 13.1 | Confidentiality Obligations | 13 | ||||||
| 13.2 | Exceptions | 14 | ||||||
| 14. | TERM AND TERMINATION | 14 | ||||||
| 14.1 | Term | 14 | ||||||
| 14.2 | Termination | 14 | ||||||
| 14.3 | Effect of Termination | 15 | ||||||
| 14.4 | Survival | 15 | ||||||
| 15. | GENERAL | 15 | ||||||
| 15.1 | Assignment | 15 | ||||||
| 15.2 | Amendment | 15 | ||||||
| 15.3 | Governing Law/Forum | 16 | ||||||
| 15.4 | Business Continuity/Disaster Recovery | 16 | ||||||
| 15.5 | Non-Fiduciary Status | 16 | ||||||
| 15.6 | Notices | 16 | ||||||
| 15.7 | Entire Agreement | 16 | ||||||
| 15.8 | No Third Party Beneficiaries | 17 | ||||||
| 15.9 | Counterparts/Facsimile | 17 | ||||||
| 15.10 | Interpretation | 17 | ||||||
| 15.11 | No Waiver | 17 | ||||||
| 15.12 | Headings | 17 | ||||||
| 15.13 | Severability | 17 | ||||||
ii
EXECUTION VERSION
CUSTODY AGREEMENT
This Custody Agreement is made and entered into as of the latest date set forth on the signature page hereto (the “Effective Date”) by and between THE BANK OF NEW YORK MELLON, a New York state chartered bank (“BNY Mellon”), and INVESCO GALAXY ETHEREUM ETF, a Delaware statutory trust (“Customer”). BNY Mellon and Customer are collectively referred to as the “Parties” and individually as a “Party”.
RECITALS
WHEREAS, Customer wishes to appoint BNY Mellon as the custodian of certain of its assets, and BNY Mellon is willing to provide such services on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, and intending to be legally bound, the Parties agree as follows.
| 1. | DEFINITIONS |
Whenever used in this Agreement, the following words have the meanings set forth below:
“Account” or “Accounts” has the meaning set forth in Section 2.2.
“Affiliate” means, with respect to any entity, any other entity that directly or indirectly controls, is controlled by or under common control with such entity.
“Agreement” means, collectively, this Custody Agreement, any Exhibits hereto and any other documents incorporated herein by reference.
“Anti-Money Laundering Laws” means all anti-money laundering and counter-terrorist financing laws, rules, regulations, executive orders and requirements administered by any governmental authority of the United States (including the U.S. Bank Secrecy Act, the U.S.A. PATRIOT Act, and regulations of the U.S. Treasury Department which implement such acts) or any other applicable domestic or foreign authority with jurisdiction over Customer.
“Assets” has the meaning set forth in Section 2.1(a).
“Authorized Person” has the meaning set forth in Section 3.1.
“BNY Mellon” has the meaning set forth in the introductory paragraph.
“Cash” means the money and currency of any jurisdiction which BNY Mellon accepts for deposit in an Account.
“Confidential Information” means all information disclosed under this Agreement by one Party to the other Party regarding the disclosing party’s business and operations.
“Customer” has the meaning set forth in the introductory paragraph.
“Data Terms Website” means http://www.bnymellon.com/products/assetservicing/vendoragreement.pdf or any successor website the address of which is provided by BNY Mellon to Customer.
“Effective Date” has the meaning set forth in the introductory paragraph.
“Electronic Access Services” means such services made available by BNY Mellon or a BNY Mellon Affiliate to Customer to electronically access information relating to the Accounts and/or transmit Instructions.
“Instructions” means, with respect to this Agreement, instructions issued to BNY Mellon by way of (a) one of the following methods (each as and to the extent specified by BNY Mellon as available for use in connection with the services hereunder): (i) the Electronic Access Services; (ii) third-party electronic communication services containing, where applicable, appropriate authorization codes, passwords or authentication keys, or otherwise appearing on their face to have been transmitted by an Authorized Person or (iii) third-party institutional trade matching utilities used to effect transactions in accordance with such utility’s customary procedures or (b) such other method as may be agreed upon by the Parties and that appear on their face to have been transmitted by an Authorized Person.
“Market Data” means pricing, valuations or other commercially sourced data applicable to any security. Market Data also includes security identifiers, bond ratings and classification data.
“Market Data Providers” means vendors and analytics providers and any other Person providing Market Data to BNY Mellon.
“Oral Instructions” means, with respect to this Agreement, spoken instructions issued to BNY Mellon and reasonably believed by BNY Mellon to be from an Authorized Person.
“Party” or “Parties” has the meaning set forth in the introductory paragraph.
“Person” or “Persons” means any entity or individual.
“Sanctions” means all economic sanctions laws, rules, regulations, executive orders and requirements administered by any governmental authority of the United States (including the Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury) or any other applicable domestic or foreign authority with jurisdiction over Customer.
“Series” means the respective portfolios, if any, of Customer listed on Appendix I to this Agreement. If no portfolios are listed on Appendix I to this Agreement then a reference to a Series means Customer.
“Sponsor” means Invesco Capital Management LLC, a Delaware limited liability company.
“Standard of Care” has the meaning set forth in Section 12.1.
2
“Tax Obligations” means taxes, withholding, certification and reporting requirements, claims for exemptions or refund, interest, penalties, additions to tax and other related expenses.
“Third Party Data” has the meaning set forth in Section 7.3(a).
| 2. | APPOINTMENT OF CUSTODIAN; ACCOUNTS |
| 2.1 | Appointment of Custodian |
| (a) | Customer hereby appoints BNY Mellon as custodian of all Cash to be held under, and in accordance with the terms of, this Agreement (collectively, “Assets”), and BNY Mellon hereby accepts such appointment. The Parties acknowledge and agree that BNY Mellon’s duties pursuant to such appointment will be limited solely to those duties expressly undertaken pursuant to this Agreement. |
| (b) | Notwithstanding the foregoing, BNY Mellon has no obligation: |
| (i) | With respect to any Assets until they are actually received in an Account; |
| (ii) | To inquire into, make recommendations, supervise or determine the suitability of any transactions affecting any Account or to question any Instructions; |
| (iii) | To determine the adequacy of title to, or the validity or genuineness of, any Assets received by it or delivered by it pursuant to this Agreement; or |
| (iv) | With respect to any matters related to: the establishment, maintenance operation or termination of Customer; or the offer, sale or distribution of the shares of, or interests in, Customer. |
| (c) | Cash held hereunder may be subject to additional deposit terms and conditions issued by BNY Mellon from time to time, including rates of interest and deposit account access. |
| 2.2 | Establishment of Accounts |
BNY Mellon will establish and maintain a separate account for each Series in which BNY Mellon will hold Assets relating to the relevant Series as provided herein (each, an “Account,” and collectively, the “Accounts”). The Account of each Series established under this Agreement shall be maintained separately from the Account of each other Series.
| 3. | AUTHORIZED PERSONS AND INSTRUCTIONS; ELECTRONIC ACCESS |
| 3.1 | Authorized Persons |
Promptly following the Effective Date, Customer and/or its designee (including any of Customer’s investment managers) will furnish BNY Mellon with one or more written lists or other documentation acceptable to BNY Mellon specifying the names and titles of, or otherwise identifying, all Persons authorized to act on behalf of Customer (with respect to a particular Series, if applicable) with respect to this Agreement (each, an “Authorized Person”). Customer will be responsible for keeping such lists and/or other documentation current, and will update such lists and/or other documentation, as necessary from time to time, pursuant to Instructions.
3
| 3.2 | Instructions |
| (a) | Except as otherwise expressly provided in this Agreement, BNY Mellon will have no obligation to take any action hereunder unless and until it receives Instructions issued in accordance with this Agreement. |
| (b) | Customer will be responsible for ensuring that (i) only Authorized Persons issue Instructions to BNY Mellon and (ii) all Authorized Persons safeguard and treat with extreme care any user and authorization codes, passwords and authentication keys used in connection with the issuance of Instructions. |
| (c) | Where Customer may or is required to issue Instructions, such Instructions will be issued by an Authorized Person. |
| (d) | BNY Mellon will be entitled to deal with any Authorized Person until notified otherwise pursuant to Instructions, and will be entitled to act and rely upon any Instruction received by BNY Mellon. |
| (e) | All Instructions must include all information necessary, and must be delivered using such methods and in such format as BNY Mellon may require and be received within BNY Mellon’s established cut-off times and otherwise in sufficient time, to enable BNY Mellon to act upon such Instructions. |
| (f) | BNY Mellon may in its sole discretion decline to act upon any Instructions that do not comply with requirements set forth in Section 3.2(e) or that conflict with applicable law or regulations or BNY Mellon’s operating policies and practices, in which event BNY Mellon will promptly notify Customer. |
| (g) | Customer acknowledges that while it is not part of BNY Mellon’s normal practices and procedures to accept Oral Instructions, BNY Mellon may in certain limited circumstances accept Oral Instructions. In such event, such Oral Instructions will be deemed to be Instructions for purposes of this Agreement. An Authorized Person issuing such an Oral Instruction will promptly confirm such Oral Instruction to BNY Mellon in writing. Notwithstanding the foregoing, Customer agrees that the fact that such written confirmation is not received by BNY Mellon, or that such written confirmation contradicts the Oral Instruction, will in no way affect (i) BNY Mellon’s reliance on such Oral Instruction or (ii) the validity or enforceability of transactions authorized by such Oral Instruction and effected by BNY Mellon. |
| (h) | Customer acknowledges and agrees that it is fully informed of the protections and risks associated with the various methods of transmitting Instructions to BNY Mellon and that there may be more secure methods of transmitting Instructions than the method selected by the sender. Customer agrees that the security procedures, if any, to be followed by Customer and BNY Mellon with respect to the transmission and authentication of Instructions provide to Customer a commercially reasonable degree of protection in light of its particular needs and circumstances. |
4
| 3.3 | BNY Mellon Actions Without Instructions |
Notwithstanding anything to the contrary set forth in this Agreement, Customer hereby authorizes BNY Mellon, without Instructions, to take any administrative or ministerial actions with respect to the Accounts that it deems reasonably necessary or appropriate to perform its obligations under this Agreement, including the following:
| (a) | Receive income and other payments due to the Accounts; |
| (b) | Endorse for collection checks, drafts or other negotiable instruments received on behalf of the Accounts; and |
| (c) | Execute and deliver, solely in its capacity as custodian, certificates, documents or instruments incidental to BNY Mellon’s performance under this Agreement. |
| 3.4 | Funds Transfers |
With respect to each Instruction for a Cash transfer, when the Instruction is to credit or pay a party by both a name and a unique numeric or alpha-numeric identifier (e.g., IBAN or ABA or account number), BNY Mellon and any other bank participating in the Cash transfer will be entitled to rely solely on such numeric or alpha-numeric identifier, even if it identifies a party different from the party named. Such reliance on an identifier will apply to beneficiaries named in the Instruction, as well as any financial institution that is designated in the Instruction to act as an intermediary in such Cash transfer. To the extent permitted by applicable law, the Parties will be bound by the rules of any transfer system used to effect a Cash transfer under this Agreement.
| 3.5 | Electronic Access |
If Customer elects to use the Electronic Access Services in connection with this Agreement, the use thereof will be subject to any terms and conditions contained in a separate written agreement between the Parties or their Affiliates. If an Authorized Person elects, with BNY Mellon’s prior consent, to transmit Instructions through a third-party electronic communications service, BNY Mellon will not be responsible or liable for the reliability or availability of any such service.
| 4. | AGENTS |
| 4.1 | Use of Agents |
BNY Mellon may appoint agents, including BNY Mellon Affiliates, on such terms and conditions as it deems appropriate to perform its obligations hereunder. Except as otherwise specifically provided herein, no such appointment will discharge BNY Mellon from its obligations hereunder.
5
| 5. | TAX MATTERS |
| 5.1 | Responsibility for Taxes |
Customer will be responsible and liable for all Tax Obligations with respect to any Assets held on behalf of Customer and any transaction related thereto. Customer acknowledges and agrees that BNY Mellon and its Affiliates are not tax advisers and will not under any circumstances provide tax advice to Customer. Customer will obtain its own independent tax advice for any tax-related matters.
| 5.2 | Payments |
Where BNY Mellon receives Instructions to make distributions or transfers out of an Account in order to pay Customer’s third party service providers, Customer acknowledges that in making such payments BNY Mellon is acting in an administrative or ministerial capacity, and not as the payor, for tax information reporting and withholding purposes.
| 6. | CREDITS AND ADVANCES |
| 6.1 | Advances |
If BNY Mellon receives an Instruction that, if processed, would result in an overdraft in an Account, BNY Mellon may, in its sole discretion, advance funds in any currency hereunder.
| 6.2 | Repayment |
If: (a) BNY Mellon has advanced funds to an Account; (b) an overdraft has occurred in an Account (including overdrafts incurred in connection with funds transfers or foreign exchange transactions) or (c) Customer is for any other reason indebted to BNY Mellon, Customer agrees to repay BNY Mellon (on demand or upon becoming aware thereof) the amount of such advance, overdraft or indebtedness, plus accrued interest at a rate then charged by BNY Mellon to its institutional custody clients in the relevant currency.
| 6.3 | Securing Repayment |
In order to secure repayment of Customer’s obligations and liabilities relating to a Series (whether or not matured) to BNY Mellon relating to or arising under this Agreement, and without limiting BNY Mellon’s rights under applicable law or any other agreement, Customer hereby pledges and grants to BNY Mellon, and agrees BNY Mellon will have to the maximum extent permitted by law, a continuing first lien and security interest in: (a) all of Customer’s and such Series’ right, title and interest in and to the Account relating to such Series and the Assets now or hereafter held in such Account (including proceeds thereof) and (b) any other property at any time held by BNY Mellon relating to such Series; provided that Customer does not hereby grant a security interest in any securities issued by an affiliate (as defined in Section 23A of the U.S. Federal Reserve Act) of BNY Mellon. Customer represents, warrants and covenants that it owns the Assets in the Accounts, and such other property at any time held by BNY Mellon relating to Customer, free and clear of all liens, claims and security interests (except as otherwise acknowledged in writing by BNY Mellon), and that the first lien and security interest granted herein with respect to each Series will be subject to no setoffs, counterclaims or other liens prior to or
6
on a parity with it in favor of any third party (other than specific liens granted preferred status by statute). Customer will take any additional steps required to assure BNY Mellon of such priority security interest, including notifying third parties or obtaining their consent. BNY Mellon will be entitled to collect from the relevant Account sufficient Cash for reimbursement. In this regard, BNY Mellon will be entitled to all the rights and remedies of a pledgee, secured creditor and/or securities intermediary under applicable laws, rules and regulations as then in effect as if Customer or the relevant Series is in default.
6.4 Setoff
In addition to the rights of BNY Mellon under applicable law or any other agreement, at any time when Customer has not honored any of its obligations to BNY Mellon, BNY Mellon will have the right to retain or set-off against such obligations any cash BNY Mellon or any BNY Mellon Affiliate may directly or indirectly hold with respect to Customer and any obligations (whether or not matured) that BNY Mellon or any BNY Mellon Affiliate may have with respect to Customer in any currency; provided however, that BNY Mellon provides notice of such action to Customer. Any such cash or obligation relating to Customer may be transferred to BNY Mellon and any BNY Mellon Affiliate in order to effect the above rights.
7. STATEMENTS; BOOKS AND RECORDS; THIRD PARTY DATA
7.1 Statements
BNY Mellon will make available to Customer, through the Electronic Access Services, a monthly statement (or report for such other time period as the Parties may agree upon from time to time) reflecting all transfers to or from the Accounts during such month and all holdings in the Accounts as of the last business day of such month (or as of such other date(s) as the Parties may agree from time to time). Customer will promptly review each such statement and, within ninety (90) days of when such statement is made available by BNY Mellon, notify BNY Mellon of any exception or objection thereto. Notwithstanding the foregoing, Customer may notify BNY Mellon of any such exceptions or objections at any time; provided, however, that BNY Mellon will not be responsible or liable for any losses that could have been mitigated had such notice been provided during such ninety (90) day period.
7.2 Books and Records
The books and records directly pertaining to the Accounts which are in the possession of BNY Mellon will be the property of Customer. BNY Mellon will identify on its books and records the Assets belonging to Customer with respect to each Series. Customer and its authorized representatives will have the right, at Customer’s own expense and with reasonable prior written notice to BNY Mellon, to have reasonable access to those books and records directly pertaining to the Accounts. Any such access will occur during BNY Mellon’s normal business hours and will be subject to BNY Mellon’s applicable security policies and procedures. Upon Customer’s reasonable request, copies of those books and records directly pertaining to the Accounts will be provided by BNY Mellon to Customer or its authorized representative.
7
| 7.3 | Third Party Data |
(a) Customer acknowledges that BNY Mellon will be receiving, utilizing and relying on Market Data and other data provided by Customer and/or by third parties in connection with its performance of the services hereunder (collectively, “Third Party Data”). BNY Mellon is entitled to rely without inquiry on all Third Party Data provided to BNY Mellon hereunder (and all Instructions related to Third Party Data), and BNY Mellon makes no assurances or warranties in relation to the accuracy or completeness of Third Party Data and will not be responsible or liable for any losses or damages incurred as a result of any Third Party Data that is inaccurate or incomplete. BNY Mellon may follow Instructions with respect to Third Party Data, even if such Instructions direct BNY Mellon to override its usual procedures and data sources or if BNY Mellon, in performing services for itself or others (including services similar to those performed for Customer), receives different Third Party Data for the same or similar Assets.
(b) Certain Market Data may be the intellectual property of Market Data Providers, which impose additional terms and conditions upon Customer’s use of such Market Data. Such additional terms and conditions can be found on the Data Terms Website. Customer agrees to those terms and conditions as they are posted on the Data Terms Website from time to time.
| 8. | DISCLOSURES |
| 8.1 | Foreign Exchange Transactions |
In connection with this Agreement, Customer may enter into foreign exchange transactions (including foreign exchange hedging transactions) with BNY Mellon or a BNY Mellon Affiliate acting as a principal or otherwise through customary channels. Customer may issue standing Instructions with respect to any such foreign exchange transactions, subject to any rules or limitations that may apply to any foreign exchange facility made available to Customer. With respect to any such foreign exchange transactions, BNY Mellon or such BNY Mellon Affiliate is acting as a principal counterparty on its own behalf and is not acting as a fiduciary or agent for, or on behalf of, Customer, a Series, an investment manager or any Account.
| 8.2 | Investment of Cash |
In connection with this Agreement, Customer may issue standing Instructions to invest Cash in one or more sweep investment vehicles. Such investment vehicles may be offered by a BNY Mellon Affiliate or by a client of BNY Mellon, and BNY Mellon may receive compensation therefrom. By making investment vehicles available, BNY Mellon and its Affiliates will not be deemed to have recommended, endorsed or guaranteed any such investment vehicle in any way or otherwise to have acted as a fiduciary or agent for, or on behalf of, Customer, its investment manager or any Account. BNY Mellon will have no liability for any loss incurred on any such investments. Customer understands that Cash may be uninvested if it is received or reconciled to an Account after the applicable deadline to be swept into Customer’s selected investment vehicle.
8
| 9. | REGULATORY MATTERS |
| 9.1 | USA PATRIOT Act |
Section 326 of the U.S. Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (including its implementing regulations) requires BNY Mellon to implement a customer identification program pursuant to which BNY Mellon must obtain certain information from Customer in order to verify Customer’s identity prior to establishing an Account. Accordingly, prior to establishing an Account, Customer will be required to provide BNY Mellon with certain information, including Customer’s name, physical address, tax identification number and other pertinent identifying information, to enable BNY Mellon to verify Customer’s identity. Customer acknowledges that BNY Mellon cannot establish an Account unless and until BNY Mellon has successfully performed such verification.
| 9.2 | Sanctions; Anti-Money Laundering |
| (a) | Throughout the term of this Agreement, Customer: (i) will have in place and will implement policies and procedures designed to prevent violations of Sanctions, including measures to accomplish effective and timely scanning of all relevant data with respect to its clients (to the extent the Assets are client assets) and with respect to incoming or outgoing assets or transactions relating to this Agreement; (ii) will ensure that neither Customer nor any of its Affiliates, directors, officers, employees or clients (to the extent the Assets are client assets) is an individual or entity that is, or is owned or controlled by an individual or entity that is: (A) the target of Sanctions or (B) located, organized or resident in a country or territory that is, or whose government is, the target of Sanctions and (iii) will not, directly or indirectly, use the Accounts in any manner that would result in a violation by Customer or BNY Mellon of Sanctions. |
| (b) | Customer acknowledges and agrees that, in connection with the services provided by BNY Mellon under this Agreement, each of Customer’s authorized participants is not a customer or joint customer with BNY Mellon. Customer (and not BNY Mellon) has the responsibility to, and will, fulfill any compliance requirement or obligation with respect to each of its authorized participants under all Anti-Money Laundering Laws. Without limiting any obligation imposed on Customer by Anti-Money Laundering Laws, throughout the term of this Agreement, Customer will maintain a compliance program with respect to its investors that includes the following: (i) a know-your-customer program in order to understand and verify the identity of each authorized participant, in accordance with the requirements of the Bank Secrecy Act and the relevant regulations thereunder, (ii) a transaction surveillance and monitoring program, and (iii) a policy for identifying and reporting any suspicious transactions and/or activities with respect to each authorized participant to the appropriate law enforcement and regulatory authorities and to BNY Mellon where related to the services provided by BNY Mellon hereunder. |
9
| (c) | Customer will promptly provide to BNY Mellon such information as BNY Mellon reasonably requests in connection with the matters referenced in this Section 9.2, including information regarding (i) the Accounts, (ii) the Assets and the source thereof, (iii) the identity of any individual or entity having or claiming an interest therein, and (iv) Customer’s anti-money laundering and Sanctions compliance programs and any related records and/or transaction information, including with respect to any investor, regardless of whether such request is made under USA PATRIOT Act Section 314(b) (where applicable). Customer will cooperate with BNY Mellon and provide assistance reasonably requested by BNY Mellon in connection with any anti-money laundering and terrorist financing or Sanctions inquiries. Prior to delivering to BNY Mellon the assets of any authorized participant, Customer will obtain from each such authorized participant, and will continue to maintain in effect throughout the term of this Agreement, any consents or waivers that may be required under applicable law in order to comply with the foregoing obligations. |
| (d) | BNY Mellon may decline to act or provide services in respect of any Account, and take such other actions as it, in its reasonable discretion, deems necessary or advisable, in connection with the matters referenced in this Section 9.2. If BNY Mellon declines to act or provide services as provided in the preceding sentence, except as otherwise prohibited by applicable law or official request, BNY Mellon will inform Customer as soon as reasonably practicable. |
| 10. | COMPENSATION |
| 10.1 | Fees and Expenses |
In consideration of BNY Mellon’s services provided hereunder, Customer will (a) pay to BNY Mellon the fees set forth in the agreed upon fee schedule (as such fee schedule may be amended by mutual agreement between BNY Mellon and Customer) and (b) reimburse BNY Mellon for any out-of-pocket and incidental expenses incurred by BNY Mellon in connection therewith. Unless otherwise agreed by the Parties, such amounts will be payable to BNY Mellon within thirty (30) days of Customer’s receipt of the relevant invoice. Without limiting BNY Mellon’s other rights set forth in this Agreement, BNY Mellon may charge interest on overdue amounts at a rate then charged by BNY Mellon to its institutional custody clients in the relevant currency.
| 10.2 | Other Compensation |
| (a) | Customer acknowledges that, as part of BNY Mellon’s compensation, BNY Mellon will earn interest on Cash balances held by BNY Mellon (including disbursement balances, balances arising from purchase and sale transactions and when Cash otherwise remains uninvested) as provided in BNY Mellon’s compensation disclosures. |
| (b) | Where a processing error has occurred under this Agreement that results in an unintended gain, provided that Customer is put in the same or equivalent position as it would have been in had such processing error not occurred, any such gain will be solely for the account of BNY Mellon without any duty to report such gain to Customer. |
10
| 11. | REPRESENTATIONS, WARRANTIES AND COVENANTS |
| 11.1 | BNY Mellon |
| (a) | BNY Mellon represents and warrants that: (a) it is duly organized, validly existing and in good standing in its jurisdiction of organization; (b) it has the requisite corporate power and authority to enter into and to carry out the transactions contemplated by this Agreement and (c) the individual executing this Agreement on its behalf has the requisite authority to bind BNY Mellon to this Agreement. |
| (b) | BNY Mellon represents and warrants that it is conducting its business in material compliance with laws applicable to the services hereunder, and has obtained regulatory licenses, approvals and consents necessary to provide the services contemplated herein. |
| (c) | BNY Mellon represents and warrants that the Agreement has been duly authorized, executed and delivered by BNY Mellon and constitutes a valid and legally binding obligation of BNY Mellon, enforceable in accordance with its terms, and there is no statute, regulation, rule, order or judgment binding on it, and no provision of its charter or by-laws, nor of any mortgage, indenture, credit agreement or other contract binding on it or affecting its property, which would prohibit its execution or performance of this Agreement. |
| 11.2 | Customer |
| (a) | Customer represents and warrants that: (i) it is duly organized, validly existing and in good standing in its jurisdiction of organization; (ii) it has the requisite corporate power and authority to enter into and to carry out the transactions contemplated by this Agreement and (iii) the individual executing this Agreement on its behalf has the requisite authority to bind Customer to this Agreement. |
| (b) | Customer represents and warrants that all actions taken, or to be taken, by or on behalf of Customer in connection with establishing, maintaining, operating or terminating Customer (including, any offer, sale or distribution of the shares of, or interest in, Customer) shall be done in compliance with all applicable U.S. state and federal securities laws and regulations and all other applicable laws and regulations of all applicable jurisdictions. |
| (c) | Customer represents and warrants that this Agreement has been duly authorized, executed and delivered by the Customer, constitutes a valid and legally binding obligation of the Customer, enforceable in accordance with its terms, and there is no statute, regulation, rule, order or judgment binding on it, and no provision of its charter or by-laws, nor of any mortgage, indenture, credit agreement or other contract binding on it or affecting its property, which would prohibit its execution or performance of this Agreement |
11
| 12. | LIABILITY |
| 12.1 | Standard of Care |
In performing its duties under this Agreement, BNY Mellon will exercise the standard of care and diligence that a professional custodian would observe in these affairs taking into account the prevailing rules, practices, procedures and circumstances in the relevant market and shall perform its duties without negligence, fraud, bad faith or willful misconduct (the “Standard of Care”). BNY Mellon shall not be absolved of liability for any of its acts or omissions in connection with any services performed pursuant to this Agreement if such actions or omissions failed to satisfy the Standard of Care set forth in the preceding sentence.
| 12.2 | Limitation of Liability |
| (a) | BNY Mellon’s liability arising out of or relating to this Agreement will be limited solely to those direct damages that are caused by BNY Mellon’s failure to perform its obligations under this Agreement in accordance with the Standard of Care. In no event will BNY Mellon or Customer be liable for any indirect, incidental, consequential, exemplary, punitive or special losses or damages, or for any loss of revenues, profits or business opportunity, arising out of or relating to this Agreement (whether or not foreseeable and even if BNY Mellon or Customer has been advised of the possibility of such losses or damages). |
| (b) | Notwithstanding anything to the contrary set forth in this Agreement, in no event will BNY Mellon be liable for any losses or damages arising out of any of the following: |
| (i) | Customer’s or an Authorized Person’s decision to invest in or hold Assets in any particular country, including any losses or damages arising out of or relating to: (A) the financial infrastructure of a country; (B) a country’s prevailing custody and settlement practices; (C) nationalization, expropriation or other governmental actions; (D) a country’s regulation of the banking or securities industry; (E) currency and exchange controls, restrictions, devaluations, redenominations, fluctuations or asset freezes; (F) laws, rules, regulations or orders that at any time prohibit or impose burdens or costs on the transfer of Assets to, by or for the account of Customer or (G) market conditions which affect the orderly execution of securities transactions or affect the value of securities; |
| (ii) | BNY Mellon’s reliance on Instructions; |
| (iii) | For any matter with respect to which BNY Mellon is required to act only upon the receipt of Instructions, (A) BNY Mellon’s failure to act in the absence of such Instructions or (B) Instructions that are late or incomplete or do not otherwise satisfy the requirements of Section 3.2(e), whether or not BNY Mellon acted upon such Instructions; |
12
| (iv) | BNY Mellon receiving or transmitting any data to or from Customer or any Authorized Person via any non-secure method of transmission or communication selected by Customer; |
| (v) | Customer’s or an Authorized Person’s decision to hold Cash in any currency; or |
| (vi) | The insolvency of any Person. |
| (c) | If BNY Mellon is in doubt as to any action it should or should not take, either pursuant to, or in the absence of, Instructions, BNY Mellon may obtain the advice of either reputable counsel of its own choosing at its own expense or counsel to Customer, and BNY Mellon will not be liable for acting in accordance with such advice so long as its actions are consistent with the Standard of Care. |
| 12.3 | Force Majeure |
BNY Mellon will not be responsible or liable for any failure or delay in the performance of its obligations under this Agreement to the extent caused, directly or indirectly, by any event beyond its reasonable control, including acts of God, strikes or other labor disputes, work stoppages, acts of war, terrorism, general civil unrest, governmental or military actions, legal constraint or the interruption, loss or malfunction of utilities or communications or computer systems. BNY Mellon will promptly notify Customer upon the occurrence of any such event and will use commercially reasonable efforts to minimize its effect.
| 12.4 | Indemnification |
Subject to the limitations set forth in Section 15.14, Customer will indemnify and hold harmless BNY Mellon from and against all losses, costs, expenses, damages and liabilities (including reasonable counsel fees and expenses) incurred by BNY Mellon arising out of or relating to BNY Mellon’s performance under this Agreement, except to the extent resulting from BNY Mellon’s failure to perform its obligations under this Agreement in accordance with the Standard of Care. The Parties agree that the foregoing will include reasonable counsel fees and expenses incurred by BNY Mellon in its successful defense of claims that are asserted by Customer against BNY Mellon arising out of or relating to BNY Mellon’s performance under this Agreement. Any obligations of Customer under this Section 12.4 with respect to a particular Series will not be satisfied out of the assets of another Series.
| 13. | CONFIDENTIALITY |
| 13.1 | Confidentiality Obligations |
Each Party agrees to use the Confidential Information of the other Party solely to accomplish the purposes of this Agreement and, except in connection with such purposes or as otherwise permitted herein, not to disclose such information to any other Person without the prior written consent of the other Party. Notwithstanding the foregoing, BNY Mellon may: (a) use Customer’s Confidential Information in connection with certain functions performed on a centralized basis by BNY Mellon, its Affiliates and joint ventures
13
and their service providers (including audit, accounting, risk, legal, compliance, sales, administration, product communication, relationship management, compilation and analysis of customer-related data and storage); (b) disclose such information to its Affiliates and joint ventures and to its and their service providers who are subject to confidentiality obligations and need to know such information in connection with the performance of BNY Mellon’s duties under this Agreement and (c) store the names and business contact information of Customer’s employees and representatives relating to this Agreement on the systems or in the records of its Affiliates and joint ventures and its and their service providers. In addition, BNY Mellon may aggregate information regarding Customer and the Accounts on an anonymized basis with other similar client data for BNY Mellon’s and its Affiliates’ reporting, research, product development and distribution, and marketing purposes.
| 13.2 | Exceptions |
The Parties’ respective obligations under Section 13.1 will not apply to any such information: (a) that is, as of the time of its disclosure or thereafter becomes, part of the public domain through a source other than the receiving Party; (b) that was known to the receiving Party as of the time of its disclosure and was not otherwise subject to confidentiality obligations; (c) that is independently developed by the receiving Party without reference to such information; (d) that is subsequently learned from a third party not known to be under a confidentiality obligation to the disclosing Party or (e) that is required to be disclosed pursuant to applicable law, rule, regulation, requirement of any law enforcement agency, court order or other legal process or at the request of a regulatory authority, provided, however, that the Party making disclosure pursuant to a court order, legal process or at the request of a regulatory authority shall first notify the other Party (to the extent permissible).
| 14. | TERM AND TERMINATION |
| 14.1 | Term |
The term of this Agreement will commence on the Effective Date and will continue in effect until terminated in accordance with the provisions herein.
| 14.2 | Termination |
| (a) | Each Party may terminate this Agreement by giving to the counter-Party a notice in writing specifying the date of such termination, which will be not less than ninety (90) days after the date of such notice. |
| (b) | Either Party hereto may terminate this Agreement immediately by sending notice thereof to the other Party upon the happening of any of the following: (i) a Party commences as debtor any case or proceeding under any bankruptcy, insolvency or similar law, or there is commenced against such Party any such case or proceeding; (ii) a Party commences as debtor any case or proceeding seeking the appointment of a receiver, conservator, trustee, custodian or similar official for such Party or any substantial part of its property or there is commenced against the Party any such case or proceeding; or (iii) a Party makes a general assignment for the benefit of creditors. |
14
| 14.3 | Effect of Termination |
Upon termination hereof, Customer will pay to BNY Mellon such compensation as may be due to BNY Mellon, and will reimburse BNY Mellon for other amounts payable or reimbursable to BNY Mellon hereunder, through the date of termination. BNY Mellon will follow such reasonable Instructions as Customer issues concerning the transfer of custody of records, Assets and other items; provided that (a) BNY Mellon will have no responsibility or liability for shipping and insurance costs associated therewith and (b) full payment has been made to BNY Mellon of its compensation, costs, expenses and other amounts to which it is entitled hereunder. If any Assets remain in any Account after termination, BNY Mellon may deliver to Customer such Assets.
| 14.4 | Survival |
Any and all provisions of this Agreement which by their nature or effect are required or intended to be observed, kept or performed after the expiration or termination of this Agreement will survive the expiration or any termination of this Agreement and remain binding upon and for the Parties’ benefit, including Section 11 (Representations, Warranties and Covenants); Section 12 (Liability); Section 13 (Confidentiality); Section 14.3 (Effect of Termination); Section 14.4 (Survival) and Section 15.3 (Governing Law/Forum).
| 15. | GENERAL |
| 15.1 | Assignment |
Neither Party may, without the other Party’s prior written consent, assign any of its rights or delegate any of its duties under this Agreement (whether by change of control, operation of law or otherwise); provided, however that BNY Mellon may, without the prior written consent of Customer, assign this Agreement or any of its rights, or delegate any of its duties hereunder: (a) to any BNY Mellon Affiliate; (b) to any successor to the business of BNY Mellon to which this Agreement relates, in which event BNY Mellon agrees to provide notice of such successor to Customer or (c) as otherwise permitted in this Agreement; provided further that any entity to which this Agreement is assigned by BNY Mellon without the prior written consent of Customer pursuant to a foregoing item (a), (b) or (c) will satisfy the requirements for serving as a custodian for a registered investment company. Any purported assignment or delegation by a Party in violation of this provision will be voidable at the option of the other Party. This Agreement will be binding upon, and inure to the benefit of, the Parties and their respective permitted successors and assigns.
| 15.2 | Amendment |
This Agreement may be amended or modified only in a written agreement signed by an authorized representative of each Party. For purposes of the foregoing, email exchanges between the Parties will not be deemed to constitute a written agreement.
15
| 15.3 | Governing Law/Forum |
| (a) | The substantive laws of the state of New York (without regard to its conflicts of law provisions) will govern all matters arising out of or relating to this Agreement, including the establishment and maintenance of the Accounts and for purposes of the Uniform Commercial Code and all issues specified in Article 2(1) of the Hague Securities Convention. |
| (b) | Each Party irrevocably agrees that all legal actions or proceedings brought by it against the other Party arising out of or relating to this Agreement will be brought solely and exclusively before the state or federal courts situated in New York City, New York. Each Party irrevocably submits to personal jurisdiction in such courts and waives any objection which it may now or hereafter have based on improper venue or forum non conveniens. The Parties hereby unconditionally waive, to the fullest extent permitted by applicable law, any right to a jury trial with respect to any such actions or proceedings. |
| 15.4 | Business Continuity/Disaster Recovery |
BNY Mellon will implement and agrees to maintain for the term of the Agreement business continuity and disaster recovery plans designed to minimize interruptions of service and ensure recovery of systems and applications used to provide the services under this Agreement. Such plans will cover the facilities, systems, applications and employees that are critical to the provision of the services hereunder, and will be tested at least annually to validate whether the recovery strategies, requirements, and protocols are viable and sustainable.
| 15.5 | Non-Fiduciary Status |
Customer hereby acknowledges and agrees that BNY Mellon is not a fiduciary by virtue of accepting and carrying out its obligations under this Agreement and has not accepted any fiduciary duties, responsibilities or liabilities with respect to its services hereunder, including with respect to the management, investment advisory or sub-advisory functions of Customer.
| 15.6 | Notices |
Other than routine communications in the ordinary course of providing or receiving services hereunder (including Instructions), notices given hereunder will be: (a) addressed to BNY Mellon or Customer at the address set forth on the signature page (or such other address as either Party may designate in writing to the other Party) and (b) sent by hand delivery, by certified mail, return receipt requested, or by overnight delivery service, in each case with postage or charges prepaid. All notices given in accordance with this Section will be effective upon receipt.
| 15.7 | Entire Agreement |
This Agreement constitutes the sole and entire agreement among the Parties with respect to the matters dealt with herein, and merges, integrates and supersedes all prior and contemporaneous discussions, agreements and understandings between the Parties, whether oral or written, with respect to such matters.
16
| 15.8 | No Third Party Beneficiaries |
This Agreement is entered into solely between, and may be enforced only by, the Parties. Each Party intends that this Agreement will not, and no provision of this Agreement will be interpreted to, benefit, or create any right or cause of action in or on behalf of, any party or entity other than the Parties.
| 15.9 | Counterparts/Facsimile |
This Agreement may be executed in any number of counterparts, each of which will be deemed an original, and said counterparts when taken together will constitute one and the same instrument and may be sufficiently evidenced by one set of counterparts. This Agreement may also be executed and delivered by facsimile or email with confirmation of delivery and/or receipt.
| 15.10 | Interpretation |
The terms and conditions of this Agreement are the result of negotiations between the Parties. The Parties intend that this Agreement will not be construed in favor of or against a Party by reason of the extent to which such Party or its professional advisors participated in the preparation or drafting of this Agreement.
| 15.11 | No Waiver |
No failure or delay by a Party to exercise any right, remedy or power it has under this Agreement will impair or be construed as a waiver of such right, remedy or power. A waiver by a Party of any provision or any breach of any provision will not be construed to be a waiver by such Party of such provision in any other instance or any succeeding breach of such provision or a breach of any other provision. All waivers will be in writing and signed by an authorized representative of the waiving Party.
| 15.12 | Headings |
All section and subsection headings in this Agreement are included for convenience of reference only and will not be considered in the interpretation of the scope or intent of any provision of this Agreement.
| 15.13 | Severability |
If a court of competent jurisdiction determines that any provision of this Agreement is illegal or invalid for any reason, such illegality or invalidity will not affect the validity of the remainder of this Agreement. In such case, the Parties will negotiate in good faith to replace each illegal or invalid provision with a valid, legal and enforceable provision that fulfills as closely as possible the original intent of the Parties.
| 15.14 | Limitations of Liability of the Shareholders |
17
It is expressly acknowledged and agreed that the obligations of the Customer hereunder shall not be binding upon any shareholder, Sponsor, officer, employee or agent of the Customer personally, but shall bind only the trust property of the Customer as provided in its Agreement and Declaration of Trust and By-Laws. This Agreement has been duly authorized, executed and delivered by the Customer and neither such authorization nor such execution and delivery shall be deemed to have been made by any of them individually or to impose any liability on any of them personally, but shall bind only the trust property of the Customer as provided in its Agreement and Declaration of Trust and By-Laws.
| 15.15 | Limitations of Liability of Sponsor |
It is expressly understood and agreed by the Parties that the to the extent that the Agreement has been executed by Sponsor on behalf of Customer that (a) this Agreement is executed and delivered on behalf of Customer by Sponsor, not individually or personally, but solely as Customer’s Sponsor in the exercise of the powers and authority conferred and vested in it; (b) the representations, covenants, undertakings and agreements herein made by Customer are made and intended not as personal representations, undertakings and agreements by Sponsor but are made and intended for the purpose of binding only Customer; (c) nothing herein contained shall be construed as creating any liability on Sponsor, individually or personally, to perform any covenant of Customer either expressed or implied contained herein, all such liability, if any, being expressly waived by the Parties hereto and by any person claiming by, through or under the parties hereto; and (d) under no circumstances shall Sponsor be personally liable for the payment of any of Customer’s indebtedness or expenses or be liable for the breach or failure of any obligation, duty, representation, warranty or covenant made or undertaken by Customer under this Agreement or any other related document.
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the Effective Date.
| THE BANK OF NEW YORK MELLON | INVESCO GALAXY ETHEREUM ETF | |||||||
| By: |
|
By: |
| |||||
| Name: |
|
Name: | Kelli Gallegos | |||||
| Title: |
|
Title: | Principal Financial and Accounting Officer – Investment Pools | |||||
| Date: |
|
Date: | ________________ | |||||
18
| Address for Notice: | Address for Notice: | |
| THE BANK OF NEW YORK MELLON 240 Greenwich Street New York, New York 10286 Attention: ETF Operations |
INVESCO GALAXY ETHEREUM ETF 3500 Lacey Road, Suite 700 Downers Grove, IL 60515 Attention: Head of Legal, US ETFs | |
19
APPENDIX I
20
Exhibit 10.6
FORM OF FUND ADMINISTRATION AND ACCOUNTING AGREEMENT
THIS AGREEMENT is made as of May 24, 2024 by and between Invesco Galaxy Ethereum ETF Trust (hereinafter the “Trust”), a Delaware statutory trust, having its principal office and place of business at 3500 Lacey Road, Suite 700, Downers Grove, IL 60515, The Bank of New York Mellon, a New York corporation authorized to do a banking business (“BNY Mellon”) , and solely with respect to Sections 6, 8, 12 and 19 hereof, Invesco Capital Management LLC, a Delaware limited liability company having its principal office and place of business at 3500 Lacey Road, Suite 700, Downers Grove, Illinois 60515 (the “Sponsor”).
W I T N E S S E T H :
WHEREAS, the Trust desires to retain BNY Mellon to provide the services described herein, and BNY Mellon is willing to provide such services, all as more fully set forth below;
NOW, THEREFORE, in consideration of the mutual promises and agreements contained herein, the parties hereby agree as follows:
1. Definitions.
Whenever used in this Agreement, unless the context otherwise requires, the following words shall have the meanings set forth below:
“1933 Act” means the Securities Act of 1933, as amended.
“1934 Act” means the Securities Exchange Act of 1934, as amended.
“Anti-Money Laundering Laws” means all anti-money laundering and counter-terrorist financing laws, rules, regulations, executive orders and requirements administered by any governmental authority of the United States (including the U.S. Bank Secrecy Act, the U.S.A. PATRIOT Act, and regulations of the U.S. Treasury Department which implement such acts) or any other applicable domestic or foreign authority over the Trust.
“Authorized Person” shall mean each person, whether or not an officer or an employee of the Trust, duly authorized to execute this Agreement and to give Instructions on behalf of the Trust as set forth in Exhibit A hereto and each Authorized Person’s scope of authority may be limited by setting forth such limitation in a written document signed by both parties hereto. From time to time the Trust may deliver a new Exhibit A to add or delete any person and BNY Mellon shall be entitled to rely on the last Exhibit A actually received by BNY Mellon.
“BNY Mellon Affiliate” shall mean any office, branch, or subsidiary of The Bank of New York Mellon Corporation.
“Confidential Information” shall have the meaning given in Section 18 of this Agreement.
“Documents” shall mean such other documents, including but not limited to, resolutions of the Sponsor authorizing the execution, delivery and performance of this Agreement by the Trust, and opinions of outside counsel, as BNY Mellon may reasonably request from time to time, in connection with its provision of services under this Agreement.
“Instructions” shall mean Oral Instructions or written communications actually received by BNY Mellon by S.W.I.F.T., tested telex, letter, facsimile transmission, or other method or system specified by BNY Mellon as available for use in connection with the services hereunder, from an Authorized Person or person believed in good faith to be an Authorized Person.
“Net Asset Value” shall mean the per share value of the Trust, calculated in the manner described in the Trust’s Offering Materials.
“Offering Materials” shall mean the Trust’s currently effective prospectus and most recently filed registration statement with the SEC, as applicable, relating to shares of the Trust.
“Organizational Documents” shall mean certified copies of the Trust’s articles of incorporation, certificate of incorporation, certificate of formation or organization, declaration of trust, bylaws, limited partnership agreement, memorandum of association, limited liability company agreement, operating agreement, confidential offering memorandum, material contracts, Offering Materials, all SEC exemptive orders issued to the Trust, required filings or similar documents of formation or organization, as applicable, delivered to and received by BNY Mellon.
“Oral Instructions” shall mean oral instructions received by BNY Mellon under permissible circumstances specified by BNY Mellon, in its sole discretion, as being from an Authorized Person or person believed in good faith by BNY Mellon to be an Authorized Person.
- 2 -
“Sanctions” means all economic sanctions laws, rules, regulations, executive orders and requirements administered by any governmental authority of the United States (including the Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury) or any other applicable domestic or foreign authority with jurisdiction over the Trust.
“SEC” means the United States Securities and Exchange Commission.
“Securities Laws” means the 1933 Act and the 1934 Act.
“Shares” means the shares of beneficial interest of any series or class of the Trust.
“Sponsor” shall mean the entity identified by the Trust to BNY Mellon as the entity having investment responsibility with respect to the Trust.
2. Appointment.
The Trust hereby appoints BNY Mellon as its agent for the term of this Agreement to perform the services described herein and in any related service level agreement as agreed between the parties for the Trust. BNY Mellon hereby accepts such appointment and agrees to perform the duties hereinafter set forth.
3. Representations and Warranties.
(a) The Trust hereby represents and warrants to BNY Mellon, which representations and warranties shall be deemed to be continuing, that:
(i) It is duly organized and existing under the laws of the jurisdiction of its organization, with full power to carry on its business as now conducted, to enter into this Agreement and to perform its obligations hereunder;
(ii) This Agreement has been duly authorized, executed and delivered by the Trust in accordance with all requisite action and constitutes a valid and legally binding obligation of the Trust, enforceable in accordance with its terms;
(iii) The Trust is in good standing and qualified to do business in each jurisdiction in which the nature or conduct of its business requires such qualification.
- 3 -
(iv) It is conducting its business in compliance with all applicable laws and regulations, both state and federal, has made and will continue to make all necessary filings including tax filings and has obtained all regulatory licenses, approvals and consents necessary to carry on its business as now conducted; there is no statute, regulation, rule, order or judgment binding on it and no provision of its Organizational Documents, nor of any mortgage, indenture, credit agreement or other contract binding on it or affecting its property which would prohibit its execution or performance of this Agreement;
(v) The Trust will maintain policies and procedures reasonably designed to ensure that all investments for the Trust are conducted in compliance with anti-corruption laws, Anti-Money Laundering Laws, and Sanctions applicable to the Trust. The Trust shall cooperate with BNY Mellon and provide assistance reasonably requested by BNY Mellon in connection with any anti-money laundering, terrorist financing or sanctions-related inquiries.
(vi) The method of valuation of the assets of the Trust and the method of computing the Net Asset Value shall be as set forth in the Offering Materials of the Trust. To the extent the performance of any services described in Schedule I attached hereto by BNY Mellon in accordance with the then effective Offering Materials for the Trust would violate any applicable laws or regulations, the Trust shall, shall, to the extent it is aware of such violation(s), immediately so notify BNY Mellon in writing and thereafter shall either furnish BNY Mellon with the appropriate values of Trust assets, net asset value or other computation, as the case may be, or, instruct BNY Mellon in writing to value Trust assets and/or compute Net Asset Value or other computations in a manner the Trust specifies in writing, and either the furnishing of such values or the giving of such instructions shall constitute a representation by the Trust that the same is consistent with all applicable laws and regulations and with its Offering Materials, all subject to confirmation by BNY Mellon as to its capacity to act in accordance with the foregoing;
(vii) Each person named on Exhibit A hereto is duly authorized by the Trust to be an Authorized Person hereunder;
(viii) It has implemented, and is acting in accordance with, procedures reasonably designed to ensure that it will disseminate to all market participants, other than Authorized Participants (as defined in its Offering Materials), each calculation of net asset value provided by BNY hereunder to Authorized Participants at the time BNY Mellon provides such calculation to Authorized Participants;
- 4 -
(ix) Without limiting the provisions of Section 18 herein, the Trust shall treat as confidential the terms and conditons of this Agreement and shall not disclose nor authorize disclosure thereof to any other person, except (i) to its employees, regulators, examiners, internal and external accountants, auditors, and counsel, (ii) as disclosed as part of the Trust’s registration statement or in the Offering Materials of the Trust with the prior approval of BNY Mellon, (iii) to any other person when required by a court order or legal process, or (iv) whenever advised by its counsel that it would be liable for a failure to make such disclosure. The Trust shall instruct its employees, regulators, examiners, internal and external accountants, auditors, and counsel who may be afforded access to such information of the Trust’s obligations of confidentiality hereunder; and
(x) To the extent that it is material to any party’s performance under this Agreement, the Trust shall promptly notify BNY Mellon in writing of any and all legal proceedings or securities investigations filed or commenced against any Fund, the Sponsor or the Board.
(b) BNY Mellon hereby represents and warrants to the Trust, which representations and warranties shall be deemed to be continuing, that:
(i) It is organized and existing under the laws of the jurisdiction of its organization, with full power to carry on its business as now conducted, to enter into this Agreement and to perform its obligations hereunder;
(ii) This Agreement has been duly authorized, executed and delivered by BNY Mellon and constitutes a valid and legally binding obligation of BNY Mellon, enforceable in accordance with its terms;
(iii) BNY Mellon is in good standing and qualified to do business in each jurisdiction in which the nature or conduct of its business requires such qualification;
- 5 -
(iv) BNY Mellon is conducting its business in compliance with, and shall comply with, laws and regulations, whether state, federal or by any other regulatory body having jurisdiction over BNY Mellon applicable to the provision of the services hereunder, has made and will continue to make all necessary filings including tax filings and has obtained all regulatory licenses, approvals and consents that BNY Mellon believes are necessary to provide the services hereunder. BNY Mellon has compliance policies and procedures reasonably designed to prevent violations by BNY Mellon of federal securities laws, and it will reasonably cooperate with, including making its personnel available, and provide such information as may reasonably be requested to the Trust or the Trust’s Chief Compliance Officer (“CCO”). In addition, as reasonably requested by the CCO, BNY Mellon will provide summary procedures and updates, as applicable, to the CCO and the Trust concerning its compliance with applicable laws and regulations;
(v) As of the Effective Date and thereafter during the term of this Agreement, that (i) in connection with the services provided under this Agreement, neither BNY Mellon nor any BNY Mellon Affiliate, nor any officer or employee of BNY Mellon, has taken or shall take any action or make any payment in violation of, or which may cause BNY Mellon, any BNY Mellon Affiliate, the Trust, or the Sponsor, to be in violation of any applicable anti-corruption laws in any jurisdictions where it conducts business, including without limitation the provisions of the U.S. Foreign Corrupt Practices Act of 1977, as amended, and of the U.K. Bribery Act (collectively, “FCPA”); (ii) no part of any monies or consideration paid hereunder shall accrue for the benefit of any official of the government of any country or any agency thereof; (iii) BNY Mellon’s global compliance program for FCPA includes a written global policy supplemented by companywide and business specific internal guidance and procedures, a designated anti-corruption compliance officer, anticorruption risk assessments and internal controls, as well as internal training and a regular auditing/monitoring program; (iv) BNY Mellon’s global FCPA policy and related gifts and entertainment policies require that no employee or anyone else acting on behalf of BNY Mellon offers, promises, gives, solicits or accepts any payment or other thing of value, directly or indirectly, to or from any government official, or any other party in a commercial transaction, with the purpose of obtaining or retaining business, to receive any business advantage or to direct business to any person; and (v) the compliance program BNY Mellon has in place is designed to adequately address the FCPA risks in its global operations. At the Trust’s request, not more than once annually, BNY Mellon shall certify in writing that, to the best of its knowledge, it has complied in all material respects with this Section 3(b)(iv). BNY Mellon does not undertake any responsibility or liability with respect to FCPA compliance measures that the Trust may be required to undertake under applicable law; and
- 6 -
(vi) BNY Mellon will notify and consult with the Trust if it decides to materially change its accounting platform, downstream connectivity to such accounting platform, client service delivery teams or locations of such teams, data format and/or data delivery format, or any other material aspect of the way that BNY Mellon provides services to the Trust under this Agreement prior to making such change, and will provide sufficient notice to the Trust to evaluate and consider such changes.
4. Delivery of Documents.
The Trust shall promptly provide, deliver, or cause to be delivered from time to time, to BNY Mellon the Trust’s Organizational Documents, a copy of any and all SEC exemptive orders issued to the Trust, and Documents and other materials used in the distribution of Shares and all amendments thereto as may be necessary for BNY Mellon to perform its duties hereunder. BNY Mellon shall not be deemed to have notice of any information (other than information supplied by BNY Mellon) contained in such Organizational Documents, Documents or other materials until they are actually received by BNY Mellon.
5. Duties and Obligations of BNY Mellon.
(a) Subject to the direction of the Sponsor and the provisions of this Agreement, BNY Mellon shall provide to the Trust the administrative services and the valuation and computation services listed on Schedule I attached hereto.
(b) In performing hereunder, BNY Mellon shall provide, at its expense, office space, facilities, equipment and personnel.
(c) BNY Mellon shall not provide any services relating to the management, investment advisory or sub-advisory functions of the Trust, distribution of shares of the Trust, maintenance of the Trust’s financial records, other than those listed in Schedule I attached hereto, or other services normally performed by the Trust’s counsel or independent auditors and the services provided by BNY Mellon do not constitute, nor shall they be construed as constituting, legal advice or the provision of legal services for or on behalf of the Trust or any other person, and the Trust acknowledges that BNY Mellon does not provide public accounting or auditing services
- 7 -
or advice and will not be making any tax filings, or doing any tax reporting on its behalf, other than those specifically agreed to hereunder. The scope of services provided by BNY Mellon under this Agreement shall not be increased as a result of new or revised regulatory or other requirements that may become applicable with respect to the Trust, unless the parties hereto expressly agree in writing to any such increase in the scope of services.
(d) The Trust shall cause its officers, advisors, Sponsor, legal counsel, independent accountants, current administrator (if any), transfer agent, and any other service provider to cooperate with BNY Mellon and to provide BNY Mellon, upon request, with such information, documents and advice relating to the Trust as is within the possession or knowledge of such persons, and which in the opinion of BNY Mellon, is necessary in order to enable BNY Mellon to perform its duties hereunder. In connection with its duties hereunder, BNY Mellon shall not be responsible for, under any duty to inquire into, or be deemed to make any assurances with respect to the accuracy, validity or propriety of any information, documents or advice provided to BNY Mellon by any of the aforementioned persons. BNY Mellon shall not be liable for any loss, damage or expense resulting from or arising out of the failure of the Trust to cause any information, documents or advice to be provided to BNY Mellon as provided herein and shall be held harmless by the Trust when acting in reasonable reliance upon such information, documents or advice relating to the Trust, as long as BNY Mellon either utilized such information or documents provided by the Trust as contemplated by this Agreement or was instructed otherwise by an Authorized Person. All fees or costs charged by such persons shall be borne by the Sponsor. Further, in the event that any services performed by BNY Mellon hereunder rely, in whole or in part, upon information obtained from a third party service utilized or subscribed to by BNY Mellon which BNY Mellon in its reasonable judgment deems reliable, BNY Mellon shall not have any responsibility or liability for, under any duty to inquire into, or deemed to make any assurances with respect to, the accuracy or completeness of such information, as long as BNY Mellon either utilized such third-party information as contemplated by this Agreement or was instructed otherwise by an Authorized Person.
(e) Nothing in this Agreement shall limit or restrict BNY Mellon, any BNY Mellon Affiliate or any officer or employee thereof from acting for or with any third parties, and providing services similar or identical to some or all of the services provided hereunder.
- 8 -
(f) The Trust shall furnish BNY Mellon with any and all instructions, explanations, information, specifications and documentation deemed necessary by BNY Mellon in the performance of its duties hereunder, including, without limitation, the amounts or written formula for calculating the amounts and times of accrual of Trust liabilities and expenses. BNY Mellon shall not be required to include as Trust liabilities and expenses, nor as a reduction of net asset value, any accrual for any federal, state, or foreign income taxes unless the Trust shall have specified to BNY Mellon in Instructions the precise amount of the same to be included in liabilities and expenses or used to reduce net asset value. The Trust shall also furnish BNY Mellon with valuations for assets of the Trust if BNY Mellon notifies the Trust that same are not available to BNY Mellon from a pricing service utilized, or subscribed to, by BNY Mellon which the Trust directs BNY Mellon to utilize, and which BNY Mellon in its judgment deems reliable at the time such information is required for calculations hereunder. At any time and from time to time, the Trust also may furnish BNY Mellon with valuations for assets of the Trust and instruct BNY Mellon in Instructions to use such information in its calculations hereunder. BNY Mellon shall at no time be required or obligated to commence or maintain any utilization of, or subscriptions to, any pricing service. In no event shall BNY Mellon be required to determine, or have any obligations with respect to, whether a market price represents any fair or true value, nor to adjust any price to reflect any events or announcements, including, without limitation, those with respect to the issuer thereof, it being agreed that all such determinations and considerations shall be solely for the Trust.
(g) BNY Mellon may apply to an Authorized Person of the Trust for Instructions with respect to any matter arising in connection with BNY Mellon’s performance hereunder, and, in the absence of gross negligence, BNY Mellon shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with such Instructions Such application for Instructions may, at the option of BNY Mellon, set forth in writing any action proposed to be taken or omitted to be taken by BNY Mellon with respect to its duties or obligations under this Agreement and the date on and/or after which such action shall be taken. In the absence of gross negligence, BNY Mellon shall not be liable for any action taken or omitted to be taken in good faith and in accordance with a proposal included in any such application on or after the date specified therein unless, prior to taking or omitting to take any such action, BNY Mellon has received Instructions from an Authorized Person in response to such application specifying the action to be taken or omitted.
- 9 -
(h) BNY Mellon may consult with counsel to the Trust and shall be fully protected with respect to anything done or omitted by it provided that BNY Mellon acts in good faith without negligence, fraud, bad faith or willful misconduct in accordance with the advice or opinion of such counsel and has consulted with an Authorized Person and received authorization from such Authorized Person regarding BNY Mellon’s proposed course of action or non-action specific to the Trust.
(i) Notwithstanding any other provision contained in this Agreement or Schedule I attached hereto, BNY Mellon shall have no duty or obligation with respect to, including, without limitation, any duty or obligation to determine, or advise or notify the Trust of: (i) the taxable nature of any distribution or amount received or deemed received by, or payable to, the Trust, (ii) the taxable nature or effect on the Trust or its shareholders of any corporate actions, class actions, tax reclaims, tax refunds or similar events, (iii) the taxable nature or taxable amount of any distribution or dividend paid, payable or deemed paid, by the Trust to its shareholders; or (iv) the effect under any federal, state, or foreign income tax laws of the Trust making or not making any distribution or dividend payment, or any election with respect thereto.
(j) BNY Mellon shall have no duties or responsibilities whatsoever except such duties and responsibilities as are specifically set forth in this Agreement and Schedule I attached hereto, any service level document agreed to with respect to the services to be provided to the Trust, and in any applicable laws, rules and regulations applicable to the provision of services described therein, and no covenant or obligation shall be implied against BNY Mellon in connection with this Agreement.
(k) BNY Mellon, in performing the services required of it under the terms of this Agreement, shall be entitled to rely fully on the accuracy and validity of any and all Instructions, explanations, information, specifications, Documents and documentation furnished to it by the Trust, and shall have no duty or obligation to review the accuracy, validity or propriety of such Instructions, explanations, information, specifications, Documents or documentation, including, without limitation, evaluations of assets; the amounts or formula for calculating the amounts and times of accrual of the Trust’s liabilities and expenses; the amounts receivable and
- 10 -
the amounts payable on the sale or purchase of Trust assets; and amounts receivable or amounts payable for the sale or redemption of Trust Shares effected by or on behalf of the Trust. BNY Mellon’s computations hereunder will rely upon information, including, without limitation, bid, offer or market values of securities or other assets of the Trust, or accruals of interest or earnings thereon, from a pricing or similar service utilized, or subscribed to, by BNY Mellon which the Trust directs BNY Mellon to utilize. BNY Mellon shall not be responsible for, under any duty to inquire into, or deemed to make any assurances with respect to, the accuracy or completeness of such information. Without limiting the generality of the foregoing, BNY Mellon shall not be required to inquire into any valuation of any Trust assets by the Trust or any third party described in this sub-section (k) even though BNY Mellon in performing services similar to the services provided pursuant to this Agreement for others may receive different valuations of Trust assets.
(l) BNY Mellon, in performing the services required of it under the terms of this Agreement, shall not be responsible for determining whether any interest accruable to the Trust is or will be actually paid, but will accrue such interest until otherwise instructed by the Trust.
(m) Subject to its duties under this Agreement to maintain and implement DR Plans (as defined below in Section 23), BNY Mellon shall not be responsible for damages (including without limitation damages caused by delays, failure, errors, interruption or loss of data) which occurring directly or indirectly by reason of circumstances beyond its reasonable control in the performance of its duties under this Agreement (a “Force Majeure Event”), including, without limitation, labor difficulties within or without BNY Mellon, mechanical breakdowns, flood or catastrophe, acts of God, failures of transportation, interruptions, loss, or malfunctions of utilities, action or inaction of civil or military authority, national emergencies, public enemy, war, terrorism, riot, sabotage, non-performance by a third party, failure of the mails, communications, computer (hardware or software) services, or functions or malfunctions of the internet, firewalls, encryption systems or security devices caused by any of the above; provided, however, that in the event of a failure to perform, BNY Mellon shall use its commercially reasonable efforts to resume performance and to mitigate the effects of any such failure to perform or to mitigate the damages contemplated by this section 5(m) where it is reasonably able to do so and further provided that BNY Mellon shall be liable for any losses to a Fund to the extent that BNY Mellon fails to maintain a DR Plan as contemplated in Section 23 of this Agreement and such failure to maintain a plan
- 11 -
caused a loss to a Fund. If BNY Mellon is prevented from carrying out its obligations under this Agreement as a result of a Force Majeure Event for a period of 30 days, the Trust may terminate this Agreement by giving BNY Mellon not less than 30 days’ notice, without prejudice to any of the rights of any party accrued prior to the date of termination; provided, however, that if the Force Majeure Event is a regional wide or market wide event that has similarly affected substantially all other providers of services to funds substantially similar to the services provided hereunder in such region or market, the Trust’s termination right shall only arise at such time that two (2) or more of such providers are reasonably able and have begun to recommence the provision of such services. If BNY Mellon recommences the provision of the affected services in all material respects prior to the exercise by the Trust of its termination right, such termination right shall lapse if BNY Mellon gives notice to the Trust that it has done so (and it has in fact so recommenced the provision of services) and the Trust has not already provided notice of termination prior to such notice by BNY Mellon that it has recommenced the services in all material respects. BNY Mellon shall not be responsible for delays or failures to supply the information or services specified in this Agreement where such delays or failures are caused by the failure of any person(s) other than BNY Mellon to supply any instructions, explanations, information, specifications or documentation deemed necessary by BNY Mellon in the performance of its duties under this Agreement.
(n) It is understood and agreed by the parties hereto that under no circumstances will the services performed by BNY Mellon pursuant to this Agreement include any service, function or activity that would constitute a “virtual currency business activity” for purposes of the regulations issued by the Superintendent of the New York State Department of Financial Services (23 N.Y.C.R.R. Part 200).
(o) BNY Mellon shall provide internally, or shall enter into and shall maintain in effect with appropriate parties one or more agreements making reasonable provisions for emergency use of electronic data processing equipment to the extent appropriate equipment is available. In the event of equipment failures, BNY Mellon shall, at no additional expense to the Trust, take reasonable steps to minimize service interruptions. Provided BNY Mellon has acted with the reasonable care and due diligence of persons acting in a similar capacity and maintains the DR Plans contemplated in Section 23 of this Agreement and further provided such loss of data or service interruption caused by equipment failure is not directly caused by BNY Mellon’s failure to meet the Standard of Care set forth in Section 7 of this Agreement in the performance of its duties under this Agreement, BNY Mellon shall have no liability with respect to the loss of data or service interruptions caused by equipment failure.
- 12 -
(p) BNY Mellon shall use commercially reasonable efforts to develop modifications to the method of delivery of services provided hereunder and to the systems utilized in connection therewith to keep pace with prevailing industry practices for its fund accounting clients generally. Subject to Section 25 below, in the event that BNY Mellon proposes a change to or an increase in the scope of the services provided to its fund accounting clients generally, including a change to keep pace with prevailing market practices, BNY Mellon shall provide a commercially reasonable proposal to the Trust in writing setting forth the terms applicable to such change or increase in scope, and BNY Mellon and the Trust shall negotiate in good faith with respect to each such change or increase. BNY Mellon shall not be obligated to provide any new service or increase in the scope of services hereunder unless and until the parties have agreed to the terms applicable to such new service or increase in scope, which may include additional fees related thereto.
6. Allocation of Expenses.
Except as otherwise provided herein, all costs and expenses arising or incurred in connection with the performance of this Agreement shall be paid by the Sponsor, including but not limited to, organizational costs and costs of maintaining corporate existence, taxes, interest, brokerage fees and commissions, insurance premiums, compensation and expenses of the Trust, officers or employees, legal, accounting and audit expenses, management, advisory, sub-advisory, administration and shareholder servicing fees, charges of custodians, transfer and dividend disbursing agents, expenses (including clerical expenses) incident to the issuance, redemption or repurchase of Trust shares or membership interests, as applicable, fees and expenses incident to the registration or qualification under the Securities Laws, state or other applicable securities laws of the Trust or its shares or membership interests, as applicable, costs (including printing and mailing costs) of preparing and distributing Offering Materials, reports, notices and proxy material to the Trust’s shareholders or members, as applicable, all expenses incidental to holding meetings of the Trust’s shareholders, and extraordinary expenses as may arise, including litigation affecting the Trust and legal obligations relating thereto for which the Trust may have to indemnify its officers, managers, and/or members, as may be applicable.
- 13 -
7. Standard of Care; Indemnification.
(a) In performing its duties under this Agreement, BNY Mellon shall exercise the standard of care, skill and diligence that a professional provider of fund administration and accounting services to exchange-traded products registered with the SEC under the 1933 Act and 1934 Act would observe in these affairs and shall perform its duties without negligence, fraud, bad faith or willful misconduct (the “Standard of Care”). Except as otherwise provided herein, BNY Mellon and any BNY Mellon Affiliate shall not be liable for any costs, expenses, damages, liabilities or claims (including attorneys’ and accountants’ fees) incurred by the Trust, except those costs, expenses, damages, liabilities or claims directly arising out of BNY Mellon’s own failure to satisfy the Standard of Care. In no event shall BNY Mellon or any BNY Mellon Affiliate be liable to the Trust or any third party for any special, indirect or consequential damages, or lost profits or loss of business, arising under or in connection with this Agreement, even if previously informed of the possibility of such damages and regardless of the form of action. BNY Mellon shall not be absolved of liability for any of its acts or omissions in connection with any services performed pursuant to this Agreement if such actions or omissions failed to satisfy the Standard of Care set forth in this Section 7. Subject to the other provisions of this Section 7, BNY Mellon agrees to be liable to the Trust to the extent it is the responsible party for such loss, damage or expense either (i) in accordance with the terms of its Net Asset Value (“NAV”) Error Policy as such is provided to BNY Mellon by the Trust or (ii) as may be mutually agreed upon between BNY Mellon and the Trust.
(b) The Trust shall indemnify and hold harmless BNY Mellon and any BNY Mellon Affiliate from and against any and all costs, expenses, damages, liabilities and claims (including claims asserted by the Trust), and reasonable attorneys’ and accountants’ fees relating thereto, which are sustained or incurred or which may be asserted against BNY Mellon or any BNY Mellon Affiliate, by reason of or as a result of any action taken or omitted to be taken by BNY Mellon or any BNY Mellon Affiliate without bad faith, gross negligence, or willful misconduct, or in reliance upon (i) any law, act, regulation or interpretation of the same even though the same may thereafter have been altered, changed, amended or repealed, (ii) the Trust’s
- 14 -
Offering Materials or Documents (excluding information provided by BNY Mellon), (iii) any Instructions, or (iv) any opinion of legal counsel for the Trust, or arising out of transactions or other activities of the Trust which occurred prior to the commencement of this Agreement; provided, that the Trust shall not indemnify BNY Mellon nor any BNY Mellon Affiliate for costs, expenses, damages, liabilities or claims for which BNY Mellon or any BNY Mellon Affiliate is liable under the preceding sub-section 7(a). This indemnity shall be a continuing obligation of the Trust, its successors and assigns, notwithstanding the termination of this Agreement. In no event shall the Trust be liable to BNY Mellon or any BNY Mellon Affiliate or any third party for any special, indirect or consequential damages, or lost profits or loss of business, arising under or in connection with this Agreement, even if previously informed of the possibility of such damages and regardless of the form of action. Without limiting the generality of the foregoing, the Trust shall indemnify BNY Mellon and any BNY Mellon Affiliate against and save BNY Mellon and any BNY Mellon Affiliate harmless from any loss, damage or expense, including counsel fees and other costs and expenses of a defense against any claim or liability, arising from any one or more of the following:
(i) Errors in records or instructions, explanations, information, specifications or documentation of any kind, as the case may be, supplied to BNY Mellon by any third party described above or by or on behalf of the Trust;
(ii) Action or inaction taken or omitted to be taken by BNY Mellon or any BNY Mellon Affiliate pursuant to Instructions of the Trust or otherwise without bad faith, fraud, negligence or willful misconduct;
(iii) Any action taken or omitted to be taken by BNY Mellon in good faith in accordance with the advice or opinion of counsel for the Trust;
(iv) Any improper use by the Trust or its agents or Sponsor of any valuations or computations supplied by BNY Mellon pursuant to this Agreement;
(v) The method of valuation and the method of computing the Trust’s net asset value; or
(vi) Any valuations or net asset value provided by the Trust.
- 15 -
(c) Subject to the limitations of liability in Section 7(a) hereof, BNY Mellon shall indemnify and hold harmless a Trust from and against all losses, including reasonable counsel fees and expenses in third party suits and in a successful defense of claims asserted by BNY Mellon, directly caused by BNY Mellon’s failure to satisfy its Standard of Care, except to the extent resulting from the Trust’s negligence or willful misconduct.
(d) Actions taken or omitted in reliance on Instructions or upon any information, order, indenture, stock certificate, membership certificate, power of attorney, assignment, affidavit or other instrument believed by BNY Mellon in good faith to be from an Authorized Person, or upon the opinion of legal counsel for the Trust, shall be conclusively presumed to have been taken or omitted in good faith, which presumption maybe rebutted by evidence.
(e) To the extent that the Trust directs BNY Mellon to use the products or services of a third party service provider engaged by the Trust, BNY Mellon shall not be liable for, and is relieved of all responsibility for, errors or issues in the provision of the services hereunder or the inability of BNY Mellon to perform its obligations under this Agreement (including without limitation the meeting of service levels) to the extent arising out of the use of or reliance upon the Trust’s third party service provider. The Trust retains the sole obligation, and BNY Mellon does not assume any obligation or responsibility, to manage the relationship with the Trust’s third party service provider. The Trust shall indemnify BNY Mellon from and against any and all costs, expenses, damages, liabilities and claims (including claims asserted by a Trust), and reasonable attorneys’ and accountants’ fees relating thereto, which are sustained or incurred or which may be asserted against BNY Mellon or any BNY Mellon Affiliate arising out of the use of or reliance upon the Trust’s third party service provider, except to the extent any the forgoing are caused by BNY Mellon’s failure to satisfy its Standard of Care under this Agreement in the use of such third party service provider’s product or service. A Trust acknowledges, however, that BNY Mellon’s and any BNY Mellon Affiliate’s reliance upon and use of any such third party service provider’s product or service satisfies the Standard of Care in the absence of BNY Mellon’s negligence, fraud, bad faith or willful misconduct. Without limiting the foregoing, each Trust agrees that any audit, disaster recovery, business continuity and information security standards or obligations in this Agreement shall not apply to the products or services of the Trust’s third party service providers. The Trust, or its officers or the Sponsor, shall work with its third party service providers to: (i)
- 16 -
cooperate with BNY Mellon’s reasonable requests for access to, and use of, the third party provider’s system to provide the services under this Agreement, for information regarding information security or otherwise related to the use or reliance upon of such third party service provider’s product or services by BNY Mellon, and (ii) comply with BNY Mellon’s reasonable requirements for the protection of its own systems associated with any use or reliance on the third party service provider.
8. Compensation.
For the services provided hereunder, the Sponsor agrees on behalf of the Trust to pay BNY Mellon such compensation as is mutually agreed to in writing by the Trust, the Sponsor and BNY Mellon from time to time and such out-of-pocket expenses (e.g., telecommunication charges, postage and delivery charges, costs of independent compliance reviews, record retention costs, reproduction charges and transportation and lodging costs) as are incurred by BNY Mellon in performing its duties hereunder. Except as hereinafter set forth, compensation shall be calculated and accrued daily and paid monthly. Upon termination of this Agreement before the end of any month, the compensation for such part of a month shall be prorated according to the proportion which such period bears to the full monthly period and shall be payable upon the effective date of termination of this Agreement. For the purpose of determining compensation payable to BNY Mellon, the Trust’s net asset value shall be computed at the times and in the manner specified in the Trust’s Offering Materials.
9. Records; Visits.
(a) BNY Mellon will maintain accurate books and records associated with the services, including without limitation, transactional reports, work specifications, invoices from third party service providers, and receipts. The books and records pertaining to the Trust which are in the possession or under the control of BNY Mellon shall be the property of the Trust. Subject to BNY Mellon’s confidentiality obligations, the Trust and Authorized Persons shall, at no additional cost, have access to such books and records during BNY Mellon’s normal business hours. Upon the reasonable request of the Trust, copies of any such books and records shall be provided by BNY Mellon to the Trust or to an Authorized Person, at the Trust’s expense.
- 17 -
(b) BNY Mellon shall keep all books and records with respect to the services to be performed by BNY Mellon hereunder in the form and manner required by Section 31 of the Investment Company Act of 1940 and the rules thereunder, as if the Trust was subject to such requirements.
(c) In the event the Trust learns of pending or imminent litigation or reasonably anticipates litigation and sends a legal hold notice to BNY Mellon or in connection with such litigation the Trust requires documents or other information to be produced, BNY Mellon agrees to cooperate with the Trust (i) to determine what if any relevant documents and information BNY Mellon has that may be subject to the hold and to take reasonable steps to preserve that information, and (ii) to develop and implement a joint litigation response plan, at the request of the Trust and the reasonable cost of such steps incurred by BNY Mellon shall be assumed by the Trust unless the subject matter of the litigation implicates BNY Mellon in a breach of its obligations under this Agreement, in which case BNY Mellon shall be responsible for its own reasonable costs related to such legal holds, document production or other litigation responses.
(d) BNY Mellon agrees that it will store all records on media designed to protect the usability, reliability, authenticity and preservation of such records for as long as they are needed for the Trust to meet its recordkeeping obligations under this Agreement BNY Mellon shall have documented policies, standards and guidelines for converting or migrating data from one record system to another. BNY Mellon agrees that systems for electronic records must be designed so that records will remain accessible, authentic, reliable and useable through any kind of system changes, for the entire period of a Trust’s recordkeeping obligations under this Agreement, which includes, but is not limited to, migration to different software, re-presentation in emulation formats or any other future ways of representing records.
(e) Provide reasonable assistance to the Trust in the handling of routine regulatory examinations and in response to any non-routine regulatory matters.
- 18 -
10. Term of Agreement.
(a) This Agreement shall be effective commencing upon regulatory approval by the U.S. Securities and Exchange Commission permitting shares of the Trust to be offered for sale, and, unless terminated pursuant to its terms, shall continue until 11:59 PM on the date which is the third anniversary of such date (the “Initial Term”), at which time this Agreement shall terminate, unless renewed in accordance with the terms hereof. For the avoidance of doubt, no services shall be provided to the Trust hereunder until such regulatory approval is obtained by the Trust.
(b) This Agreement shall automatically renew for successive terms of one (1) year each (each, a “Renewal Term”), unless the Trust or BNY Mellon gives written notice to the other party of its intent not to renew and such notice is received by the other party not less than ninety (90) days prior to the expiration of the Initial Term or the then-current Renewal Term (a “Non-Renewal Notice”). In the event a party provides a Non-Renewal Notice, this Agreement shall terminate at 11:59 PM on the last day of the Initial Term or Renewal Term, as applicable.
(c) If a party materially breaches this Agreement (a “Defaulting Party”) the other party (the “Non-Defaulting Party”) may give written notice thereof to the Defaulting Party (“Breach Notice”), and if such material breach shall not have been remedied within thirty (30) days after the Breach Notice is given, then the Non- Defaulting Party may terminate this Agreement by giving written notice of termination to the Defaulting Party (“Breach Termination Notice”), in which case this Agreement shall terminate as of 11:59 PM on the 30th day following the date the Breach Termination Notice is given, or such later date as may be specified in the Breach Termination Notice (but not later than the last day of the Initial Term or then-current Renewal Term, as appropriate). In all cases, termination by the Non-Defaulting Party shall not constitute a waiver by the Non-Defaulting Party of any other rights it might have under this Agreement or otherwise against the Defaulting Party.
- 19 -
(d) Notwithstanding any other provision of this Agreement, BNY Mellon may in its sole discretion terminate this Agreement immediately by sending notice thereof to the Trust upon the happening of any of the following: (i) the Trust commences as debtor any case or proceeding under any bankruptcy, insolvency or similar law, or there is commenced against the Trust any such case or proceeding; (ii) the Trust commences as debtor any case or proceeding seeking the appointment of a receiver, conservator, trustee, custodian or similar official for the Trust or any substantial part of its property or there is commenced against the Trust any such case or proceeding; (iii) the Trust makes a general assignment for the benefit of creditors; or (iv) the Trust admits in any recorded medium, written, electronic or otherwise, its inability to pay its debts as they come due. BNY Mellon may exercise its termination right under this Section 10(d) at any time after the occurrence of any of the foregoing events notwithstanding that such event may cease to be continuing prior to such exercise, and any delay in exercising this right shall not be construed as a waiver or other extinguishment of that right. Any exercise by BNY Mellon of its termination right under this Section 10(d) shall be without any prejudice to any other remedies or rights available to BNY Mellon and shall not be subject to any fee or penalty, whether monetary or equitable. Notwithstanding the provisions of Section 18, notice of termination under this Section 10(d) shall be considered given and effective when given, not when received.
(e) The Trust may terminate this Agreement at any time upon ninety (90) days’ prior written notice in the event that the Sponsor determines to liquidate the Trust. BNY Mellon may terminate this Agreement at any time upon ninety (90) days’ written notice for any reason and upon thirty (30) days’ written notice in the event of a breach of the Trust’s representations contained in Section 3(i)(e) hereof.
(f) The parties recognize that the continuity of the provision of fund administration and accounting services to the Trust under this Agreement is essential, even though notice of termination of this Agreement may have been given, or this Agreement may have terminated. Despite any dispute between the parties, BNY Mellon undertakes that for a reasonable period not exceeding 180 days after termination BNY Mellon will continue to provide to the Trust the services under the terms of this Agreement, as requested by the Trust, and shall be compensated for such assistance pursuant to the currently effective fee schedule. BNY Mellon will, in addition, provide commercially reasonable support for orderly transition, including the transfer of the books and records of the Trust, in accordance with a transition plan (as set forth below) at such rates as are negotiated in good faith and mutually agreed to by the parties. Any provision of services after the 180-day period following the date of termination shall be under terms and at such rates as are negotiated in good faith and mutually agreed to by the parties. BNY Mellon will provide
- 20 -
commercially reasonable cooperation with any successor fund administrator/accountant in connection with the transition. The Trust shall reimburse BNY Mellon for additional costs (to be mutually agreed upon by the parties) that are reasonably incurred by BNY Mellon in the transition. In connection with any termination of the Agreement for any reason whatsoever, the parties shall also reasonably cooperate with respect to the development of a transition plan setting forth a reasonable timetable for the transition and describing the parties’ respective responsibilities for transitioning the services back to the Trust or any successor fund administrator/accountant in an orderly and uninterrupted fashion. This Section 10(f) shall survive the termination of this Agreement.
11. Amendment.
This Agreement may not be amended, changed or modified in any manner except by a written agreement executed by BNY Mellon and the Trust to be bound thereby.
12. Assignment; Subcontracting.
(a) This Agreement shall extend to and shall be binding upon the parties hereto, and their respective successors and assigns; provided, however, that this Agreement shall not be assignable or delegable by the Trust without the written consent of BNY Mellon, or by BNY Mellon without the written consent of the Trust.
(b) Notwithstanding the foregoing: (i) BNY Mellon may assign or transfer this Agreement to any BNY Mellon Affiliate or transfer this Agreement in connection with a sale of a majority or more of its assets, equity interests or voting control, provided that BNY Mellon gives the Trust thirty (30) days’ prior written notice of such assignment or transfer and such assignment or transfer does not impair the provision of services under this Agreement in any material respect, and the assignee or transferee agrees to be bound by all terms of this Agreement in place of BNY Mellon; (ii) BNY Mellon may subcontract with, hire, engage or otherwise outsource to any BNY Mellon Affiliate with respect to the performance of any one or more of the functions, services, duties or obligations of BNY Mellon under this Agreement but any such subcontracting, hiring, engaging or outsourcing shall not relieve BNY Mellon of any of its liabilities hereunder; (iii) BNY Mellon may subcontract with, hire, engage or otherwise outsource to an unaffiliated third party with respect to the performance of any one or more of the functions, services, duties or obligations
- 21 -
of BNY Mellon under this Agreement but any such subcontracting, hiring, engaging or outsourcing shall not require the prior written consent of the Trust and shall not relieve BNY Mellon of its responsibilities hereunder; and (iv) BNY Mellon, in the course of providing certain additional services requested by the Trust, including but not limited to, Typesetting or eBoard Book services (“Vendor Eligible Services”) as further described in Schedule I, may in its sole discretion, enter into an agreement or agreements with a financial printer, or electronic services provider (“Vendor”) to provide BNY Mellon with the ability to generate certain reports or provide certain functionality. BNY Mellon shall not be obligated to perform any of the Vendor Eligible Services unless an agreement between BNY Mellon and the Vendor for the provision of such services is then-currently in effect, and shall only be liable for the failure to reasonably select the Vendor. Upon request, BNY Mellon will disclose the identity of the Vendor and the status of the contractual relationship, and the Trust is free to attempt to contract directly with the Vendor for the provision of the Vendor Eligible Services.
(c) Notwithstanding the foregoing, (i) the Trust may assign this Agreement to, and the Agreement may be assumed by, a successor or survivor of a merger, consolidation, conversion, reorganization, redomestication, or acquisition of substantially all of the assets of the Trust, upon such succession or transaction and without any appointment or other action by the Trust or BNY Mellon and (ii) the Trust may assign or transfer this Agreement to any Invesco affiliate, provided that the Trust gives BNY Mellon thirty (30) days’ prior written notice of such assignment or transfer and the assignee or transferee agrees to be bound by all terms of this Agreement in place of the Trust, and in either case of (i) and (ii) subject to the reasonable new customer due diligence requirements of BNY Mellon.
(d) As compensation for the Vendor Eligible Services rendered by BNY Mellon pursuant to this Agreement, the Sponsor will pay to BNY Mellon such fees as may be agreed to in writing by the Sponsor and BNY Mellon. In turn, BNY Mellon will be responsible for paying the Vendor’s fees. For the avoidance of doubt, BNY Mellon anticipates that the fees it charges hereunder will be more than the fees charged to it by the Vendor, and BNY Mellon will retain the difference between the amount paid to BNY Mellon hereunder and the fees BNY Mellon pays to the Vendor as compensation for the additional services provided by BNY Mellon in the course of making the Vendor Eligible Services available to the Trust.
- 22 -
13. Governing Law; Consent to Jurisdiction.
This Agreement shall be construed in accordance with the laws of the State of New York, without regard to conflict of laws principles thereof. The Trust hereby consents to the jurisdiction of a state or federal court situated in New York City, New York in connection with any dispute arising hereunder. To the extent that in any jurisdiction the Trust may now or hereafter be entitled to claim, for itself or its assets, immunity from suit, execution, attachment (before or after judgment) or other legal process, the Trust irrevocably agrees not to claim, and it hereby waives, such immunity.
14. Severability.
In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations shall not in any way be affected or impaired thereby, and if any provision is inapplicable to any person or circumstances, it shall nevertheless remain applicable to all other persons and circumstances.
15. No Waiver.
Each and every right granted to any party hereunder or under any other document delivered hereunder or in connection herewith, or allowed it by law or equity, shall be cumulative and may be exercised from time to time. No failure on the part of a party to exercise, and no delay in exercising, any right will operate as a waiver thereof, nor will any single or partial exercise by such party of any right preclude any other or future exercise thereof or the exercise of any other right.
16. Notices.
- 23 -
All notices, requests, consents and other communications pursuant to this Agreement in writing shall be sent as follows:
if to the Trust, at
Invesco Capital Management LLC
3500 Lacey Road, Suite 700
Downers Grove, IL 60515
Attention: Legal Department and Fund Treasurer
with a copy to:
11 Greenway Plaza, Suite 1000
Houston, TX 77046
Attention: General Counsel
if to BNY Mellon, at
BNY Mellon
240 Greenwich Street
New York, New York 10286
Attention: ETF Operations
with a copy to:
The Bank of New York Mellon
240 Greenwich Street
New York, New York 10286
Attention: Legal Dept. – Asset Servicing
or at such other place as may from time to time be designated in writing. Notices hereunder shall be effective upon receipt.
17. Counterparts.
This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original; but such counterparts together shall constitute only one instrument.
- 24 -
18. Confidentiality.
(a) Each party shall keep confidential any information relating to the other party’s business (“Confidential Information”). Confidential Information shall include (a) any data or information that is competitively sensitive material, and not generally known to the public, including, but not limited to, information about product plans, marketing strategies, finances, operations, customer relationships, customer profiles, customer lists, sales estimates, business plans, and internal performance results relating to the past, present or future business activities of the Trust or BNY Mellon and their respective subsidiaries and affiliated companies; (b) any scientific or technical information, design, process, procedure, formula, or improvement that is commercially valuable and secret in the sense that its confidentiality affords the Trust or BNY Mellon a competitive advantage over its competitors; (c) all confidential or proprietary concepts, documentation, reports, data, specifications, computer software, source code, object code, flow charts, databases, inventions, know-how, and trade secrets, whether or not patentable or copyrightable; and (d) anything designated as confidential. Notwithstanding the foregoing, information shall not be Confidential Information and shall not be subject to such confidentiality obligations if it: (a) is already known to the receiving party at the time it is obtained; (b) is or becomes publicly known or available through no wrongful act of the receiving party; (c) is rightfully received from a third party who, to the best of the receiving party’s knowledge, is not under a duty of confidentiality; (d) is released by the protected party to a third party without restriction; (e) is requested or required to be disclosed by the receiving party pursuant to a court order, subpoena, governmental or regulatory agency request or law; (f) is relevant to the defense of any claim or cause of action asserted against the receiving party; (g) is Trust information provided by BNY Mellon in connection with an independent third party compliance or other review; (h) is released in connection with the provision of services under this Agreement; or (i) has been or is independently developed or obtained by the receiving party. The provisions of this Section 20 shall survive termination of this Agreement for a period of one (1) year after such termination.
(b) The Bank of New York Mellon Corporation is a global financial organization that provides services to clients through its affiliates and subsidiaries in multiple jurisdictions (the “BNY Mellon Group”). The BNY Mellon Group may centralize functions including audit, accounting, risk, legal, compliance, sales, administration, product communication, relationship management, storage, compilation and analysis of customer-related data, and other functions (the “Centralized Functions”) in one or more affiliates, subsidiaries and third-party service providers. Solely in connection with the Centralized Functions and solely for the use of such information in providing services, improving the services or developing future services under this Agreement, (i) the Trust consents to the disclosure of and authorizes BNY Mellon to disclose
- 25 -
information regarding the Trust (“Customer-Related Data”) to the BNY Mellon Group and to its third-party service providers who are subject to confidentiality obligations with respect to such information; provided, however, that unless such Customer-Related Data is aggregated and anonymized, no such consent is provided for disclosure of Customer-Related Data to affiliates and subsidiaries of the BNY Mellon Group operating as a registered investment manager or adviser to funds, other collective investment vehicles, separate accounts or other investment management products and (ii) BNY Mellon may store the names and business contact information of the Trust’s employees and representatives on the systems or in the records of the BNY Mellon Group or its service providers. The BNY Mellon Group may aggregate Customer-Related Data with other data collected and/or calculated by the BNY Mellon Group, and notwithstanding anything in this Agreement to the contrary the BNY Mellon Group will own all such aggregated data, provided that the BNY Mellon Group shall not distribute the aggregated data in a format that identifies Customer-Related Data with a particular customer. The Trust confirms that it is authorized to consent to the foregoing.
19. Limitation of Liability of the Trustees and Shareholders.
It is expressly acknowledged and agreed that the obligations of the Trust hereunder shall not be binding upon any of the shareholders, trustees, officers, employees or agents of the Trust, personally, but shall bind only the trust property of the Trust, as provided in its Declaration of Trust. The execution and delivery of this Agreement have been authorized by the Sponsor of Trust and signed by an officer of the Trust, acting as such, and neither such authorization by the Sponsor nor such execution and delivery by such officer shall be deemed to have been made by any of them individually or to impose any liability on any of them personally, but shall bind only the trust property of a Trust as provided in its Declaration of Trust.
20. Customer Right of Access.
BNY Mellon shall, upon the Trust’s request, provide the Trust with a summary of the results of its latest SOC 1 or equivalent control audit prepared by BNY Mellon’s external auditors. In addition and no more than annually, BNY Mellon will participate in a Trust’s reasonable information security questionnaire processes. Upon reasonable request, BNY Mellon will arrange for its relevant subject matter experts to meet with the relevant subject matter experts of the Trust
- 26 -
once annually to review BNY Mellon’s controls and any deficiencies identified in the SOC 1 audit report. The Trust may view BNY Mellon’s information security-related policies and procedures in a clean room subject to BNY Mellon’s confidentiality requirements, however, no documentation may be copied, shared, transmitted or removed from BNY Mellon premises, except as mutually agreed. The parties shall mutually agree upon a convenient time and place for such meeting. Not more than once each year, and subject to BNY Mellon’s reasonable security requirements and availability of personnel, BNY Mellon will at the Trust’s request arrange a tour of BNY Mellon’s data processing facilities for the Trust’s subject matter experts. BNY Mellon will also, subject to its reasonable security requirements, permit site visits of its data processing facilities by governmental agencies with regulatory authority over the Trust. In the event that the Trust, identifies any control deficiencies, BNY Mellon will discuss such findings with the Trust and if appropriate the parties shall work together to develop a mutually agreeable remediation plan. All nonpublic documentation and information disclosed to the Trust in accordance with this Section shall be deemed proprietary and confidential information of BNY Mellon. The Trust shall not disclose such documentation or information to any third party or use it for any purpose other than evaluating BNY Mellon’s security controls, except that the Trust may disclose BNY Mellon’s SOC 1 summary to the Trust’s external auditors, provided that such external auditors are required to maintain the confidentiality of the summary and any related information. The Trust shall reimburse BNY Mellon for any costs and expenses incurred in connection with any review of BNY Mellon’s security controls.
21. Information Security.
BNY Mellon has implemented, and agrees to maintain, information security policies and programs consistent with industry guidelines and all applicable statutes, rules or regulations, that include commercially reasonable administrative, physical and technical safeguards designed to (i) protect the privacy, confidentiality, integrity and availability, against any reasonably foreseeable threats or hazards to the Trust’s Confidential Information and (ii) reasonably protect against accidental, unlawful or unauthorized access, copying, damage, destruction, disclosure, distribution, loss, manipulation, modification, processing, use, reuse, interception, or transmission of such Confidential Information.
- 27 -
(a) Administrative Safeguards. BNY Mellon has implemented, and agrees to maintain, commercially reasonable administrative safeguards that include, but are not limited to, (i) security awareness training designed to ensure understanding of responsibilities in guarding against security events and unauthorized use or access to Confidential Information, (ii) logging procedures to proactively monitor user and system activity, (iii) due diligence processes for any approved subcontractors processing Confidential Information, (iv) access termination procedures for timely revocation of access, (v) periodic user entitlement review processes, (vi) software development and change management processes, and (vii) security incident management policies and procedures for the detection, investigation, notification, evidence preservation and remediation.
(b) Physical Safeguards. BNY Mellon has implemented, and agrees to maintain, commercially reasonable physical safeguards that include, but are not limited to, (i) access controls at facilities processing Confidential Information, (ii) secured transport and appropriate disposal of physical media and paper waste containing Confidential Information, and (iii) controls designed to protect against environmental hazards (e.g., water or fire damage).
(c) Technical Safeguards. BNY Mellon has implemented, and agrees to maintain, commercially reasonable technical safeguards that include, but are not limited to, (i) logical separation of Confidential Information on information systems, (ii) access controls to maintain appropriate segregation of duties and limit access to information resources on a need-to-know and least privileged basis, (iii) complex passwords at least seven characters in length, changed on a regular basis, and stored and transmitted in a secure manner, (iv) device and software management controls to guard against viruses and other malicious or unauthorized software, (v) information system and software patching consistent with manufacturer recommendations, (vi) intrusion detection and prevention systems to guard against unauthorized information system access, (vii) encryption of Confidential Information transmitted across unsecure or public networks including enforcement of Transport Layer Security1 for e-mail exchanged between BNY Mellon and the Funds, (viii) encryption of Confidential Information stored on mobile media and mobile electronic devices and (ix) audit logging that records user and system activities.
| 1 | Transport Layer Security (or TLS) is a cryptographic protocol that provides secure (encrypted) communication for e-mail exchanged over the Internet between two organizations. |
- 28 -
(d) Assessment & Remediation. The Trust, acting through an authorized representative reasonably acceptable to BNY Mellon, at no additional expense and with reasonable notice, may no more than once per year inspect documentation concerning BNY Mellon’s information security practices and safeguards and may visit facilities relevant to the services provided to a Fund, provided, however, that no such documentation may be copied or removed from BNY Mellon’s premises. BNY Mellon, as its sole expense, shall commission an independent penetration test of externally facing information systems that process Confidential Information on at least an annual basis, remediate any material findings within a commercially reasonable timeframe, and provide the Trust with copies of any relevant independent SOC 1 audits.
(e) Security Incident Management & Breach Notification. BNY Mellon will notify the Trust as promptly as reasonably possible under the circumstances, upon learning of a Security Incident (as defined below) involving the Trust’s Confidential Information. Security Incidents are defined as (1) the actual unauthorized access to or use of the Trust’s Confidential Information, or (2) the unauthorized disclosure, loss, theft or manipulation of the Trust’s Confidential Information that has the potential to cause harm to the Fund’s systems, employees, customers, information or brand name. Notification shall take the form of a phone call to the Trust’s designated contact(s) and shall include at a minimum, (a) problem statement or description, (b) expected resolution time (if known), and (c) the name and phone number of the BNY Mellon representative that the Trust may contact to obtain updates. BNY Mellon agrees to keep the Trust informed of progress and actions taken to resolve the incident and cooperate with the Fund in any litigation or investigation arising from said incident. Unless such disclosure is mandated by law, the trust in its sole discretion will determine whether to provide explicit notification to the Trust’s shareholders, customers or employees concerning incidents involving the Trust’s personally identifiable information relating to such persons.
- 29 -
22. Audit Rights.
Upon thirty (30) days’ written notice and not more frequently than once in any twelve month period, the Trusts or their designee may, subject to BNY Mellon’s reasonable security and confidentiality requirements, inspect and/or conduct site visits to (i) review and assess relevant independent SOC 1 audits provided by BNY Mellon evaluating BNY Mellon’s processes and controls for procedures relevant to the services, (ii) review and assess summaries of BNY Mellon’s or a BNY Mellon Affiliate’s disaster recovery and business continuity plans, and (iii) review and assess BNY Mellon’s or a BNY Mellon Affiliate’s compliance with this Agreement including, without limitation, the assessment of fees and possible overpricing and overcharging and the allocation of income and proceeds to the Funds. BNY Mellon agrees to cooperate with the Trust’s audit and provide reasonable assistance and access to information. Any such audit shall not unreasonably disrupt BNY Mellon’s ability to provide services to other clients in the course of its normal business.
Costs of any audits conducted under the authority of this right to audit and not addressed elsewhere will be borne by the Trust unless certain exemption criteria are met. Any adjustments and/or payments that must be made as a result of any such audit or inspection of BNY Mellon’s invoices and/or records, including for any overpricing or overcharging by BNY Mellon, shall be made within a reasonable amount of time (not to exceed 90 days) from presentation of the Fund’s findings to BNY Mellon. BNY Mellon shall not be entitled to reimbursement or repayment by a Trust, a Fund or its affiliate for any costs or expenses incurred as a result of their efforts to comply with obligations under this Section 22.
BNY Mellon shall not be required to provide access to any systems or data or records that are not directly related to the provision of services to the Funds and in no event shall such reviews include any systems, data or other information relating to other clients of BNY Mellon or any proprietary or confidential information of BNY Mellon or require BNY Mellon to disclose any information that would or might result in the waiver of any attorney-client privilege or other confidentiality privilege. Any such review shall not unreasonably disrupt the BNY Mellon’s ability to provide services to other clients in the course of its normal business. The Funds and their internal and external professional advisors shall be required to comply with BNY Mellon’s reasonable security requirements. Upon BNY Mellon’s reasonable request, prior to access to BNY Mellon’s personnel, agents, consultants, contractors, subcontractors, data, facilities and systems, each such person shall be required to sign a confidentiality agreement with BNY Mellon that requires such person to meet the reasonable confidentiality requirements of BNY Mellon.
- 30 -
23. Business Continuity Plan.
Summaries of BNY Mellon’s disaster recovery and business resiliency/continuity plans (“DR Plans”) pertinent to the services provided hereunder, which shall address BNY Mellon’s ability to render services under this Agreement during and after a significant business disruption, including the availability to BNY Mellon of back-up services and redundancies will be provided to the Trust. BNY Mellon reserves the right to edit or update its DR Plans as needed from time to time, without notice, so long as the changes do not materially compromise BNY Mellon’s ability to maintain services in accordance with this Agreement.
Upon written request of the Trust, BNY Mellon agrees to report to the Trust on its business continuity policy which may include an annual presentation on its business continuity procedures. BNY Mellon’s DR Plans shall be tested no less than annually with the ability of the Trust to participate in the testing unless impracticable. BNY Mellon shall provide the Trust with summary results of such testing on an annual basis and, where unsuccessful tests or significant issues related to the services provided hereunder arise, provide sufficient evidence of remediation or resolution. BNY Mellon agrees to maintain a log of all business continuity events and report material business continuity events affecting the services hereunder to the Trust or its designee upon BNY Mellon becoming aware of any such event, as well as steps proposed in order to minimize any interruption to its services hereunder. In the event of a material business disruption associated with the services outlined in this Agreement, BNY Mellon agrees to cooperate with the Trust or its designee in responding to, resolving, and/or recovering from the disruption. The occurrence of a Force Majeure Event will not relieve BNY Mellon of its obligation to implement the DR Plans and to provide the disaster recovery services contained therein. In the event of a service disruption, once normal service has been restored, BNY Mellon will promptly complete a root cause analysis report and email it to the Trusts or their designee. The report will include the cause of disruption, details of how the disruption was resolved, and follow-up actions BNY Mellon will implement to ensure the disruption does not re-occur.
- 31 -
24. Anti-Money Laundering.
BNY Mellon represents and warrants that it is in compliance, in all material respects, with, and will continue to comply with, anti-money laundering laws and regulations applicable to it; BNY Mellon is a financial institution subject to the USA PATRIOT Act of 2001, as amended, (the “Patriot Act”) and that it has established policies and procedures designed to prevent and detect money laundering, including the processes to meet the anti-money laundering requirements of the Patriot Act and the rules and regulations promulgated thereunder. Additionally, neither BNY Mellon nor any person or entity controlling, controlled by, or under common control with BNY Mellon or for whom the BNY Mellon is acting as agent or nominee is a country, territory, organization, person or entity named on the Office of Foreign Assets Control (“OFAC”) list maintained by the U.S. Treasury Department.
25. Mandatory Changes.
The parties agree that any new costs, fees and/or expenses to be charged to the Trust that are related to any changes to the services required by any new applicable law, rule or regulation shall be agreed upon in advance and represent, where appropriate, a reasonable allocation of fees in relation to those charged by BNY Mellon to its other clients.
26. Data Ownership.
The parties agree that any and all proprietary data provided by the Trust and including nonpublic account data generated by BNY Mellon pursuant to the provision of services under this Agreement (but excluding BNY Mellon’s proprietary data and third party data governed by a license agreement or similar written agreement) shall be owned exclusively by the Trust.
27. Insurance.
BNY Mellon has and will maintain, at all times during the term of this Agreement, insurance of the types and in the amounts as are commercially reasonable, taking into account the nature of its business, the associated risks and the cost and availability of insurance having commercially viable terms and conditions. BNY Mellon agrees to provide to the Trust certificates of its applicable insurance coverage, and shall provide an update at the Trust’s written request, but no more frequently than annually.
28. Service Level Agreements. BNY Mellon and the Trust may from time to time agree to document the manner in which they expect to deliver and receive the services contemplated by this Agreement. In such event, each party will perform its obligations in accordance with any service levels that may be agreed upon by the parties in writing from time to time, subject to the terms of this Agreement.
- 32 -
29. Step In Rights.
In the event that the Trust reasonably believes that a Force Majeure Event will substantially prevent, hinder or delay performance of the services contemplated by this Agreement for more than five (5) consecutive business days, the Trust may take commercially reasonable actions to mitigate the impact of such services not being provided, including, but not limited to, contracting with another service provider to provide such services during such period and/or engaging the Sponsor or an affiliate of the Sponsor to perform such services in-house during such period; provided, that the Trust shall consult with BNY Mellon in good faith in connection with any such mitigation and BNY Mellon shall provide the Trust reasonable assistance in good faith in connection therewith; provided, further, that BNY Mellon shall resume providing, and the Trust shall pay for, such services when BNY Mellon resumes providing, unless the Trust has terminated this Agreement pursuant to the terms of Section 10. Notwithstanding anything set forth in this Section 31, (i) in no event shall the Sponsor be obligated to pay any fees under this Agreement to BNY Mellon with respect to any services not actually provided during any such Force Majeure Event and (ii) the Sponsor shall have no responsibility to pay BNY Mellon for services temporarily performed by the Investment Advisor or a third party service provider.
30. Headings. All headings in this Agreement are for reference purposes only and not intended to affect in any way the interpretation or meaning of this Agreement.
[Signature page follows.]
- 33 -
IN WITNESS WHEREOF, the parties hereto have caused the foregoing instrument to be executed by their duly authorized officers and their seals to be hereunto affixed, all as of the latest date set forth below.
| INVESCO GALAXY ETHEREUM ETF | ||
| By: |
| |
| Name: | Kelli Gallegos | |
| Title: | Principal Financial and Accounting Officer – Investment Pools | |
| Date: __________ | ||
| THE BANK OF NEW YORK MELLON | ||
| By: |
| |
| Name: |
| |
| Title: |
| |
| Date: | ||
- 34 -
EXHIBIT A
I, Kelli Gallegos, on behalf of Invesco Galaxy Ethereum ETF, a Delaware statutory trust (the “Trust”), do hereby certify that:
The following individuals serve in the following positions and each has been qualified therefor pursuant to delegated authority in conformity with the Trust’s Organizational Documents, and the signatures set forth opposite their respective names are their true and correct signatures. Each such person is designated as an Authorized Person under the Fund Administration and Accounting Agreement dated as of December 1, 2023, between the Trust and The Bank of New York Mellon.
| Name |
Position |
Signature | ||
| Adrien Deberghes | Head of Fund Governance & Administration | |||
| Kelli Gallegos | NA Head of OFCFO & Fund Treasury | |||
| Lori Anello | Director – NA OFCFO | |||
| Patricia Jones | Director – NA Fund Reporting | |||
| April Montemayor | Director – NA Fund Regulatory Reporting | |||
| Matt Greer | Global Head of Valuation | |||
| Andrew Muncey | Global Head of Fund Accounting & Tax | |||
| Ryan Casey | NA Head of Fund Accounting & Assurance | |||
| Tanya Loden | NA Head of Tax Assurance | |||
| Donna LaMagna | NA Head of Tax Product & Research | |||
| Rudolf Reitmann | Global Director – Passive & UIT Operations Products Development | |||
| Steven Foy | Senior Manager – ETF Operations | |||
| Signed By: |
| |
| Name: | Kelli Gallegos | |
| Title: | Principal Financial and Accounting Officer – Investment Pools |
SCHEDULE I
Schedule of Services
All services provided in this Schedule of Services are subject to the review and approval of the appropriate Trust officers, Trust counsel and accountants of the Trust, as may be applicable. The services included on this Schedule of Services may be provided by BNY Mellon or a BNY Mellon Affiliate, collectively referred to herein as “BNY Mellon”.
FUND ADMINISTRATION SERVICES
BNY Mellon shall provide the following fund administration services for the Trust:
| • | Prepare for the review by designated representatives of the Trust annual (or more frequently, as agreed upon between the parties) fund expense budgets, perform accrual analyses and roll-forward calculations and recommend changes to fund expense accruals on a periodic basis, arrange for payment of a Trust’s expenses along with any review calculations of fees paid to the Trust’s Sponsor, custodian(s), fund accountant, distributor and obtain authorization of accrual changes and expense payments; |
| • | Prepare and calculate income projections as mutually agreed for periodic and/or annual distributions to be made by the Trust; |
| • | Oversee and review calculation of fees paid to the Sponsor, custodian(s), transfer agent and other Trust service providers; |
| • | Respond to, or refer to the Sponsor or the distributor or the transfer agent of the Trust, shareholder inquiries relating to the Trust; |
| • | Provide periodic testing of portfolios to assist the Sponsor in complying with Internal Revenue Code mandatory qualification requirements, the requirements of the 1933 Act, 1934 Act, and Trust prospectus and statement of additional information limitations as may be mutually agreed upon; |
| • | Review and provide assistance on shareholder communications; |
| • | Assist counsel and the Trust in the handling of routine regulatory examinations and provide reasonable assistance to the Trust’s legal counsel in response to any non-routine regulatory matters; |
| • | Provide policies and procedures related to services provided by BNY Mellon and, if mutually agreed, certain of the BNY Mellon Affiliates; summary procedures thereof; and periodic certification and sub-certification letters; |
| • | Provide supporting schedules to be utilized for the preparation of TD F 90-22.1 by the Trust; |
| • | Assist with the SEC Rule 424(i) calculations and notices. |
VALUATION AND COMPUTATION ACCOUNTING SERVICES
BNY Mellon shall provide the following valuation and computation accounting services for the Trust:
| 1. | Calculate Net Asset Value in the manner specified in the Offering Materials (which, for the service described herein, shall include the Net Asset Value error policy, where applicable). |
| 2. | Obtain security and digital asset quotes from pricing services as directed and approved by the Sponsor, or if such quotes are unavailable, then obtain such prices from the Sponsor, and in either case, calculate the market value of the Trust’s assets in accordance with the Trust’s valuation policies or guidelines; provided, however, that BNY Mellon shall not under any circumstances be under a duty to independently price or value any of the Trust’s assets itself or to confirm or validate any information or valuation provided by the Sponsor or any other pricing source, nor shall BNY Mellon have any liability relating to inaccuracies or otherwise with respect to such information or valuations as long as BNY Mellon’s actions or omissions regarding such information or valuation satisfies the Standard of Care provided in this Agreement; |
| 3. | BNY Mellon shall maintain the following records on a daily basis for each Fund. |
| i. | Report of priced portfolio securities |
| ii. | Statement of net asset value per share |
| 4. | BNY Mellon shall prepare and maintain on behalf of the Trust all books and records of the, as well as any other documents necessary or advisable for compliance with applicable regulation as may be mutually agreed to between the Trust and BNY Mellon. Without limiting the generality of the foregoing, BNY Mellon will prepare and maintain the following records upon receipt of information in proper form from the Trust, the Sponsor or authorized agents of a Trust: |
| • | General Ledger |
| • | General Journal |
| • | Cash Receipts Journal |
| • | Cash Disbursements Journal |
| • | Subscriptions Journal |
| • | Redemptions Journal |
| • | Accounts Receivable Reports |
| • | Accounts Payable Reports |
| • | Open Subscriptions/Redemption Reports |
| • | Transaction (Securities) Journal |
| • | Broker Net Trades Reports |
| • | Reconciliations |
| 5. | BNY Mellon shall prepare a Holdings Ledger on a quarterly basis, and a Buy-Sell Ledger (Broker’s Ledger) on a semiannual basis for the Trust. BNY Mellon shall produce Schedule D on an annual basis the Trust. |
- 3 -
The above reports may be prepared according to any other required frequency to meet the requirements of the Internal Revenue Service, the SEC, and the Trust’s Auditors.
| 6. | For internal control purposes, BNY Mellon uses the Account Journals produced by The Bank of New York Mellon Custody System to record daily settlements of the following for each Fund: |
| i. | Securities bought |
| ii. | Securities sold |
| iii. | Commodity futures contracts bought |
| iv. | Commodity futures contracts sold |
| v. | Interest received |
| vi. | Dividends received |
| vii. | Capital stock sold |
| viii. | Capital stock redeemed |
| ix. | Other income and expenses |
| • | All portfolio purchases for the Trust are recorded to reflect expected maturity value and total cost including any prepaid interest, as applicable. |
FINANCIAL REPORTING
BNY Mellon shall provide the following financial reporting services for the Trust:
| 1. | Prepare, for review and approval by the Sponsor, Trust counsel and independent accountants, financial information for the Trust’s quarterly and annual reports, proxy statements and other communications required or otherwise to be sent to Trust shareholders including but not limited to financial statements for the Trust and schedules of investments; |
| 2. | Prepare the Trust’s periodic shareholder reports, including certain information furnished by the Trust to BNY Mellon, as required pursuant to the Securities and Exchange Act of 1934; |
| 3. | Prepare for review and approval by the Sponsor, Trust counsel and independent accountants current reports (including monthly financial statements) with the appropriate regulatory agencies; review text of letters to shareholders “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (which shall also be subject to review by the Trust’s legal counsel); |
| 4. | Provide policies and procedures related to services provided by BNY Mellon and, if mutually agreed, certain of the BNY Mellon Affiliates; summary procedures thereof; and periodic certification and sub-certification letters; and |
| 5. | Prepare, circulate and maintain the Trust’s financial reporting production calendar; |
- 4 -
TAX SERVICES
BNY Mellon shall provide the following tax services for the Trust:
| 1. | Prepare annual grantor trust tax reporting statements for client review and approval. |
ETF SERVICES
| 1. | Create and disseminate basket files based on trade date information. |
| 2. | Create and deliver in-kind files for outsourced custody, accounting, sponsor and APs. |
| 3. | Maintain an ETF Order Desk which includes the processing of create/redeem order, maintaining authorized users for each Authorized Participant and reconciliation of shares outstanding to DTC. |
| 4. | Maintain API connectivity with digital custodians for settlement confirmations. |
IRS CIRCULAR 230 DISCLOSURE:
To ensure compliance with requirements imposed by the Internal Revenue Service, BNY Mellon informs the Trust that any U.S. tax advice contained in any communication from BNY Mellon to the Trust (including any future communications) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein or therein.
- 5 -
Exhibit 10.7
FORM OF TRANSFER AGENCY AND SERVICE AGREEMENT
THIS AGREEMENT is made as of May 24, 2024, by and among INVESCO GALAXY ETHEREUM ETF TRUST (hereinafter the “Trust”), a Delaware statutory trust, having its principal office and place of business at 3500 Lacy Road, Suite 700, Downers Grove, IL 60515, THE BANK OF NEW YORK MELLON, a New York corporation authorized to do a banking business having its principal office and place of business at 240 Greenwich Street, New York, New York 10286 (the “Bank”), and solely with respect to Section 2 hereof, INVESCO CAPITAL MANAGEMENT LLC, a Delaware limited liability company having its principal office and place of business at 3500 Lacey Road, Suite 700, Downers Grove, Illinois 60515 (the “Sponsor”).
WHEREAS, the Trust will ordinarily issue for purchase and redeem shares of the Trust (the “Shares) only in aggregations of Shares known as “Creation Units” (currently 5,000 shares) (each a “Creation Unit”) principally in kind;
WHEREAS, The Depository Trust Company, a limited purpose trust company organized under the laws of the State of New York (“DTC”), or its nominee (Cede & Co.), will be the registered owner (the “Shareholder”) of all Shares; and
WHEREAS, the Trust desires to appoint the Bank as its transfer agent, dividend disbursing agent, and agent in connection with certain other activities, and the Bank desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto agree as follows:
1. Terms of Appointment; Duties of the Bank
1.1 Subject to the terms and conditions set forth in this Agreement, the Trust hereby employs and appoints the Bank to act as, and the Bank agrees to act as, its transfer agent for the authorized and issued Shares, and as the Trust’s dividend disbursing agent.
1.2 Pursuant to such appointment, the Bank agrees that it will perform the following services:
(a) In accordance with the terms and conditions of this Agreement and the Authorized Participant Agreements prepared by the Sponsor, a copy of which is attached hereto as Exhibit A, the Bank shall:
(i) Perform and facilitate the performance of purchases and redemption of Creation Units;
(ii) Prepare and transmit by means of DTC’s book-entry system payments for dividends and distributions on or with respect to the Shares, if any, declared by the Trust;
(iii) Maintain the record of the name and address of the Shareholder and the number of Shares issued by the Trust and held by the Shareholder;
(iv) Record the issuance of Shares of the Trust and maintain a record of the total number of Shares of the Trust which are outstanding and authorized, based upon data provided to it by the Trust. The Bank shall have no obligation, when recording the issuance of Shares, to monitor the issuance of such Shares or to take cognizance of any laws relating to the issue or sale of such Shares, which functions shall be the sole responsibility of the Trust.
EXECUTION VERSION
(v) Prepare and transmit to the Trust and the Trust’s administrator and to any applicable securities exchange (as specified to the Bank by the Trust or its administrator) information with respect to purchases and redemptions of Shares;
(vi) On days that the Trust may accept orders for purchases or redemptions, calculate and transmit to the Sponsor and the Trust’s administrator the number of outstanding Shares;
(vii) On days that the Trust may accept orders for purchases or redemptions (pursuant to the Authorized Participant Agreement), transmit to the Trust’s administrator, the Trust and DTC the amount of Shares purchased on such day;
(viii) Confirm to DTC the number of Shares issued to the Shareholder, as DTC may reasonably request;
(ix) Prepare and deliver other reports, information and documents to DTC as DTC may reasonably request;
(x) Extend the voting rights to the Shareholder for extension by DTC to DTC participants and the beneficial owners of Shares in accordance with policies and procedures of DTC for book-entry only securities;
(xi) Distribute or maintain, as directed by the Trust, amounts related to purchases and redemptions of Creation Units, dividends and distributions, variation margin on derivative securities and collateral;
(xii) Maintain those books and records of the Trust specified by the Trust in Schedule A attached hereto;
(xiii) Prepare a monthly report of all purchases and redemptions of Shares during such month on a gross transaction basis, and identify on a daily basis the net number of Shares either redeemed or purchased on such Business Day and with respect to each Authorized Participant (as defined in each Authorized Participant Agreement) purchasing or redeeming Shares, the amount of Shares purchased or redeemed;
(xiv) Receive from the Sponsor (as defined in the Authorized Participant Agreement) or from its agent purchase orders from Authorized Participants for Creation Unit Aggregations of Shares received in good form and accepted by or on behalf of the Trust by the Sponsor, transmit appropriate trade instructions to the National Securities Clearance Corporation, if applicable, and pursuant to such orders issue the appropriate number of Shares of the Trust and hold such Shares in the account of the Shareholder of the Trust;
(xv) Receive from the Authorized Participants redemption requests, deliver the appropriate documentation thereof to the Trust’s sponsor with respect to redemptions for cash and for redemptions in-kind, generate and transmit or cause to be generated and transmitted confirmation of receipt of such redemption requests to the Authorized Participants submitting the same; transmit appropriate trade instructions to the National Securities Clearance Corporation, if applicable, and redeem the appropriate number of Creation Unit Aggregations of Shares held in the account of the Shareholder; and
2
EXECUTION VERSION
(xvi) Confirm the name, U.S taxpayer identification number and principal place of business of each Authorized Participant.
(xvii) The Bank may execute transactions directly with Authorized Participants to the extent necessary or appropriate to enable the Bank to carry out any of the duties set forth in items (i) through (xvi) above. The Trust will be responsible for confirming the receipt of assets in connection with creation activity and the withdrawal of assets in connection with redemption activity prior to the creation or redemption of Creation Units by the Bank. The Bank has no responsibility to independently verify the accuracy of such information provided to it by the Trust.
(xviii) Except as otherwise instructed by the Trust, the Bank shall process all transactions for the Trust in accordance with the policies and procedures mutually agreed upon between the Trust and the Bank with respect to the proper net asset value to be applied to purchases received in good order by the Bank or from an Authorized Participant before any cut-offs established by the Trust, and such other matters set forth in items (i) through (xvi) above as these policies and procedures are intended to address.
(xix) Provide reasonable assistance to the Trust in routine regulatory examinations and in response to any non-routine regulatory matters.
(b) The Bank may maintain and manage, as agent for the Trust, such accounts as the Bank shall deem necessary for the performance of its duties under this Agreement, including, but not limited to, the processing of Creation Unit purchases and redemptions; and the payment of dividends and distributions. The Bank may maintain such accounts at financial institutions deemed appropriate by the Bank in accordance with applicable law.
(c) In addition to the services set forth in the above sub-section 1.2(a), the Bank shall: perform the customary services of a transfer agent and dividend disbursing agent including, but not limited to, maintaining the account of the Shareholder, maintaining the items set forth on Schedule A attached hereto, and performing such services identified in each Participant Agreement.
(d) The following shall be delivered to DTC participants as identified by DTC as the Shareholder for book-entry only securities:
(i) Annual and semi-annual reports of the Trust;
(ii) Trust proxies, proxy statements and other proxy soliciting materials;
(iii) Trust prospectus and amendments and supplements thereto, including stickers; and
(iv) Other communications as the Trust may from time to time identify as required by law or as the Trust may reasonably request
(v) The Bank shall provide additional services, if any, as may be agreed upon in writing by the Trust and the Bank.
(e) The Bank shall keep records relating to the services to be performed hereunder, in the form and manner to the extent required by Section 31 of the Investment Company Act of 1940 and the rules thereunder (the “Rules”) as if the Trust was subject to such Rules, all such books and records shall be the property of the Trust, will be preserved, maintained and made available in accordance with such Section and Rules, and will be surrendered promptly to the Trust on and in accordance with its request.
3
EXECUTION VERSION
(f) It is understood and agreed by the parties hereto that under no circumstances will the services performed by the Bank pursuant to this Agreement include any service, function or activity that would constitute a “virtual currency business activity” for purposes of the regulations issued by the Superintendent of the New York State Department of Financial Services (23 N.Y.C.R.R. Part 200).
2. Fees and Expenses
2.1 The Bank shall receive from the Sponsor such compensation for its services provided pursuant to this Agreement as may be agreed to from time to time in a written fee schedule approved by the parties. The fees are accrued daily and billed monthly and shall be due and payable upon receipt of the invoice. Upon the termination of this Agreement before the end of any month, the fee for the part of the month before such termination shall be prorated according to the proportion which such part bears to the full monthly period and shall be payable upon the date of termination of this Agreement.
2.2 In addition to the fee paid under Section 2.1 above, the Sponsor agrees to reimburse the Bank for reasonable out-of-pocket expenses, including but not limited to confirmation production, postage, forms, telephone, microfilm, microfiche, tabulating proxies, records storage, or advances incurred by the Bank for the items set out in the fee schedule or relating to dividend distributions and reports (whereas all expenses related to creations and redemptions of Trust securities shall be borne by the relevant Authorized Participant in such creations and redemptions). In addition, any other expenses incurred by the Bank at the request or with the consent of the Sponsor, will be reimbursed by the Sponsor.
2.3 The Sponsor agrees to pay all fees and reimbursable expenses within ten business days following the receipt of the respective billing notice accompanied by supporting documentation, as appropriate. Postage for mailing of dividends, proxies, Trust reports and other mailings to all shareholder accounts shall be advanced to the Bank by the Trust at least seven (7) days prior to the mailing date of such materials.
2.4 The Trust hereby represents and warrants to the Bank that (i) the terms of this Agreement, (ii) the fees and expenses associated with this Agreement, and (iii) any benefits accruing to the Bank or to the Sponsor in connection with this Agreement, including, but not limited to, any fee waivers, reimbursements, or payments made, or to be made, by the Bank to Sponsor or to any affiliate of the Sponsor relating to this Agreement have been fully disclosed to the Trust or the Sponsor and that, if required by applicable law, the Trust or the Sponsor has approved or will approve the terms of this Agreement, and any such fees, expenses, and benefits.
3. Representations and Warranties of the Bank
The Bank represents and warrants to the Trust that:
It is a banking company duly organized and existing and in good standing under the laws of the State of New York.
It is duly qualified to carry on its business in the State of New York.
It is empowered under applicable laws and by its Charter and By-Laws to act as transfer agent and dividend disbursing agent and to enter into, and perform its obligations under, this Agreement.
4
EXECUTION VERSION
It is duly registered as a transfer agent under Section 17A(c)(2) of the Securities Exchange Act of 1934, as amended (the “1934 Act”), it will remain so registered for the duration of this Agreement, and it will promptly notify the Trust in the event of any material change in its status as a registered transfer agent.
All requisite corporate proceedings have been taken to authorize it to enter into and perform this Agreement.
It has and will continue to have access to the necessary facilities, equipment and personnel to perform its duties and obligations under this Agreement.
4. Representations and Warranties of the Trust
The Trust represents and warrants to the Bank that:
It is duly organized and existing and in good standing under the laws of Delaware.
It is empowered under applicable laws and by its Declaration of Trust and Trust Agreement to enter into and perform this Agreement.
A registration statement under the Securities Act of 1933, as amended, on behalf of the Trust has become effective, will remain effective, and appropriate state securities law filings have been made and will continue to be made, with respect to all Shares of the Trust being offered for sale.
5. Indemnification
5.1 The Bank shall not be responsible for, and the Trust shall indemnify and hold the Bank and its directors, officers, employees and agents harmless from and against, any and all losses, damages, costs, charges, counsel fees, including, without limitation, those incurred by the Bank in a successful defense of any claims by the Trust, payments, expenses and liability (“Losses”) which may be sustained or incurred by or which may be asserted against the Bank in connection with or relating to this Agreement or the Bank’s actions or omissions with respect to this Agreement, or as a result of acting upon any instructions reasonably believed by the Bank to have been duly authorized by the Trust or upon reasonable reliance of information or records given or made by the Trust; except for any Losses arising out of or resulting from the Bank’s negligence or willful misconduct.
6. Standard of Care and Limitation of Liability
The Bank shall have no responsibility and shall not be liable for any Losses, except that the Bank shall be liable to the Trust for direct money damages caused by its own negligence or willful misconduct or that of its employees. The parties agree that any encoding or payment processing errors shall be governed by this standard of care, and not Section 4-209 of the Uniform Commercial Code which shall be superseded by this Article. In no event shall the Bank be liable for special, indirect or consequential damages, regardless of the form of action and even if the same were foreseeable. For purposes of this Agreement, none of the following shall be or be deemed a breach of the Bank’s standard or care:
(a) The conclusive reliance on or use by the Bank or its agents or subcontractors of information, records, documents or services which (i) are received by the Bank or its agents or subcontractors, and (ii) have been prepared, maintained or performed by the Trust or any other person or firm on behalf of the Trust including but not limited to any previous transfer agent or registrar.
5
EXECUTION VERSION
(b) The conclusive reliance on, or the carrying out by the Bank or its agents or subcontractors of, any instructions or requests of the Trust or instructions or requests on behalf of the Trust.
(c) The offer or sale of Shares by or for the Trust in violation of any requirement under the federal securities laws or regulations, or the securities laws or regulations of any state that such Shares be registered in such state, or any violation of any stop order or other determination or ruling by any federal agency, or by any state with respect to the offer or sale of Shares in such state.
7. Concerning the Bank
7.1
(a) The Bank may employ agents or attorneys-in-fact which are not affiliates of the Bank with the prior written consent of the Trust (which consent shall not be unreasonably withheld); provided, however, that the Bank shall remain liable to the Trust for the acts and omissions of any agents or attorney-in-fact under this Section as it is for its own acts and omissions under this Agreement. The Bank shall provide a list of unaffiliated agents and attorneys-in-fact, if any, retained by it to provide services to the Trust hereunder upon the reasonable written request of the Trust.
(b) The Bank may, without the prior consent of the Trust, enter into subcontracts, agreements and understandings with any Bank affiliate, whenever and on such terms and conditions as it deems necessary or appropriate to perform its services hereunder. No such subcontract, agreement or understanding shall discharge Bank from its obligations hereunder.
7.2 The Bank shall be entitled to conclusively rely in good faith upon any written or oral instruction actually received by the Bank and reasonably believed by the Bank to be duly authorized and delivered. The Trust agrees to forward to the Bank written instructions confirming oral instructions by the close of business of the same day that such oral instructions are given to the Bank. The Trust agrees that the fact that such confirming written instructions are not received or that contrary written instructions are received by the Bank shall in no way affect the validity or enforceability of transactions authorized by such oral instructions and effected by the Bank.
7.3 The Bank shall establish and maintain a disaster recovery plan and back-up system at all times satisfying the requirements of its regulators (the “Disaster Recovery Plan and Back-Up System”). The Bank shall not be responsible or liable for any failure or delay in the performance of its obligations under this Agreement arising out of or caused, directly or indirectly, by circumstances beyond its control which are not a result of its gross negligence, including without limitation, acts of God; earthquakes; fires; floods; wars; civil or military disturbances; sabotage; epidemics; riots; interruption, loss or malfunctions of transportation, computer (hardware or software) or communication services; labor disputes; acts of civil or military authority; governmental actions; or inability to obtain labor, material, equipment or transportation, provided that the Bank has established and is maintaining the Disaster Recovery Plan and Back-Up System, or if not, that such delay or failure would have occurred even if the Bank had established and was maintaining the Disaster Recovery Plan and Back-Up System. Upon the occurrence of any such delay or failure the Bank shall use commercially reasonable best efforts to resume performance as soon as practicable under the circumstances.
6
EXECUTION VERSION
7.4 The Bank shall have no duties or responsibilities whatsoever except such duties and responsibilities as are specifically set forth in this Agreement and the Participation Agreement, and no covenant or obligation shall be implied against the Bank in connection with this Agreement, except as set forth in this Agreement and the Participation Agreement.
7.5 At any time the Bank may apply to an officer of the Trust for written instructions with respect to any matter arising in connection with the Bank’s duties and obligations under this Agreement, and the Bank, its agents, and subcontractors shall not be liable for any action taken or omitted to be taken in good faith in accordance with such instructions. Such application by the Bank for instructions from an officer of the Trust may, at the option of the Bank, set forth in writing any action proposed to be taken or omitted to be taken by the Bank with respect to its duties or obligations under this Agreement and the date on and/or after which such action shall be taken, and the Bank shall not be liable for any action taken or omitted to be taken in accordance with a proposal included in any such application on or after the date specified therein unless, prior to taking or omitting to take any such action, the Bank has received written or oral instructions in response to such application specifying the action to be taken or omitted. In connection with the foregoing, the Bank may consult with legal counsel of its own choosing at its own expense, and advise the Trust if any instructions provided by the Trust at the request of the Bank pursuant to this Article or otherwise would, to the Bank’s knowledge, cause the Bank to take any action or omit to take any action contrary to any law, rule, regulation or commercially reasonable practice for similarly situated service providers. In the event a situation or circumstance arises whereby the Bank adopts a course of conduct in reliance upon written legal advice it has received (which need not be a formal opinion of counsel) and the course of conduct is not identical to the course of conduct contained in the instructions received from the Trust, the Bank may reply upon and follow the written legal advice without liability hereunder provided it otherwise acts in compliance with this Agreement and consults with the Trust regarding its determination.
7.6 The Bank, its agents and subcontractors may act upon any paper or document, reasonably believed to be genuine and to have been signed by the proper person or persons, or upon any instruction, information, data, records or documents provided to the Bank or its agents or subcontractors by or on behalf of the Trust by machine readable input, telex, CRT data entry or other similar means authorized by the Trust, and shall not be held to have notice of any change of authority of any person, until receipt of written notice thereof from the Trust.
7.7 The Bank shall retain title to and ownership of any and all data bases, computer programs, screen formats, report formats, interactive design techniques, derivative works, inventions, discoveries, patentable or copyrightable matters, concepts, expertise, patents, copyrights, trade secrets, and other related legal rights utilized by the Bank in connection with the services provided by the Bank hereunder. Notwithstanding the foregoing, the parties hereto acknowledge that the Trust shall retain all ownership rights in Trust data residing on the Bank’s electronic system.
7.8 Notwithstanding any provisions of this Agreement to the contrary, the Bank shall be under no duty or obligation to inquire into, and shall not be liable for:
(a) The legality of the issue, sale or transfer of any Shares, the sufficiency of the amount to be received in connection therewith, or the authority of the Trust to request such issuance, sale or transfer;
(b) The legality of the purchase of any Shares, the sufficiency of the amount to be paid in connection therewith, or the authority of the Trust to request such purchase;
(c) The legality of the declaration of any dividend by the Trust, or the legality of the issue of any Shares in payment of any stock dividend; or
(d) The legality of any recapitalization or readjustment of the Shares.
7
EXECUTION VERSION
8. Providing of Documents by the Trust and Transfers of Shares
8.1 The Trust shall promptly furnish to the Bank with a copy of its Declaration of Trust and Trust Agreement and all amendments thereto.
8.2 In the event that DTC ceases to be the Shareholder, the Bank shall re-register the Shares in the name of the successor to DTC as Shareholder upon receipt by the Bank of such documentation and assurances as it may reasonably require.
8.3 The Bank shall have no responsibility whatsoever with respect to of any beneficial interest in any of the Shares owned by the Shareholder.
8.4 The Trust shall deliver to the Bank the following documents on or before the effective date of any increase, decrease or other change in the total number of Shares authorized to be issued:
(a) A certified copy of the amendment to the Trust’s Declaration of Trust and Trust Agreement with respect to such increase, decrease or change; and
(b) An opinion of counsel for the Trust, in a form satisfactory to the Bank, with respect to (i) the validity of the Shares, the obtaining of all necessary governmental consents, whether such Shares are fully paid and non-assessable and the status of such Shares under the Securities Act of 1933, as amended, and any other applicable federal law or regulations (i.e., if subject to registration, that they have been registered and that the Registration Statement has become effective or, if exempt, the specific grounds therefore), and (ii) the due and proper listing of the Shares on all applicable securities exchanges.
8.5 Prior to the issuance of any additional Shares pursuant to stock dividends, stock splits or otherwise, and prior to any reduction in the number of Shares outstanding, the Trust shall deliver to the Bank:
(a) A certified copy of the order or consent of each governmental or regulatory authority required by law as a prerequisite to the issuance or reduction of such Shares, as the case may be, and an opinion of counsel for the Trust that no other order or consent is required; and
(b) An opinion of counsel for the Trust, in a form satisfactory to the Bank, with respect to (i) the validity of the Shares, the obtaining of all necessary governmental consents, whether such Shares are fully paid and non-assessable and the status of such Shares under the Securities Act of 1933, as amended, and any other applicable federal law or regulations (i.e., if subject to registration, that they have been registered and that the Registration Statement has become effective or, if exempt, the specific grounds therefore), and (ii) the due and proper listing of the Shares on all applicable securities exchanges.
8.6 The Bank and the Trust agree that all books, records, confidential, non-public, or proprietary information and data pertaining to the business of the other party which are exchanged or received pursuant to the negotiation or the carrying out of this Agreement (“Confidential Information”) shall remain confidential, and shall not be voluntarily disclosed to any person other than its auditors, accountants, regulators, employees, agents, attorneys-in-fact or counsel, except as may be, or may become required by law, by administrative or judicial order or by rule. The foregoing confidentiality obligation shall not apply to any information to the extent: (i) it is already known to the receiving party at the time it is obtained; (ii) it is or becomes publicly known or available through no wrongful act of the receiving party: (iii) it is rightfully received from a third party who, to the receiving party’s knowledge, is not under a duty of confidentiality; (iv) it is released by the protected party to a third party without restriction; or (v) it has been or is independently developed or obtained by the receiving party without reference to the information provided by the protected party.
8
EXECUTION VERSION
8.7 In case of any requests or demands for the inspection of the Shareholder records of the Trust, the Bank will promptly employ reasonable commercial efforts to notify the Trust and secure instructions from an authorized officer of the Trust as to such inspection. The Bank reserves the right, however, to exhibit the Shareholder records to any person whenever it is reasonably advised by its counsel that it may be held liable for the failure to exhibit the Shareholder records to such person.
9. Information Security
9.1 The Bank has implemented, and agrees to maintain, information security policies and programs consistent with industry guidelines and all applicable statutes, rules or regulations, that include commercially reasonable administrative, physical and technical safeguards designed to (i) protect the privacy, confidentiality, integrity and availability, against any reasonably foreseeable threats or hazards to the Trust’s Confidential Information and (ii) reasonably protect against accidental, unlawful or unauthorized access, copying, damage, destruction, disclosure, distribution, loss, manipulation, modification, processing, use, reuse, interception, or transmission of such Confidential Information. This Article 9 shall survive the termination of this Agreement for so long as the Bank is in possession of the Trust’s Confidential Information.
10. Customer Right of Access.
The Bank shall, upon the Trust’s request, provide the Trust with a summary of the results of its latest SOC 1 or equivalent control audit prepared by the Bank’s external auditors. In addition and no more than annually, the Bank will participate in a Trust’s reasonable information security questionnaire processes. Upon reasonable request, the Bank will arrange for its relevant subject matter experts to meet with the relevant subject matter experts of the Trust once annually to review the Bank’s security controls and any deficiencies identified in the SOC 1 audit report. The Trust may view the Bank’s security-related policies and procedures, however, no documentation may be copied, shared, transmitted or removed from the Bank’s premises, except as mutually agreed. The parties shall mutually agree upon a convenient time and place for such meeting. Not more than once each year, and subject to the Bank’s reasonable security requirements and availability of personnel, the Bank will at the Trust’s request arrange a tour of the Bank’s data processing facilities for the Trust’s subject matter experts. The Bank will also, subject to its reasonable security requirements, permit site visits of its data processing facilities by governmental agencies with regulatory authority over the Trust. In the event that the Trust identifies any control deficiencies, the Bank will discuss such findings with the Trust and if appropriate the parties shall work together to develop a mutually agreeable remediation plan. All nonpublic documentation and information disclosed to the Trust in accordance with this Section shall be deemed proprietary and confidential information of the Bank. The Trust shall not disclose such documentation or information to any third party or use it for any purpose other than evaluating the Bank’s security controls, except that the Trust may disclose the Bank’s SOC 1 summary to the Trust’s external auditors, provided that such external auditors are required to maintain the confidentiality of the summary and any related information. The Trust shall reimburse the Bank for any costs and expenses incurred in connection with any review of the Bank’s security controls.
9
EXECUTION VERSION
11. Termination of Agreement
11.1 The term of this Agreement shall be three years commencing upon regulatory approval by the U.S. Securities and Exchange Commission permitting shares of the Trust to be offered for sale (the “Initial Term”) and shall automatically renew for additional one-year terms (each a “Subsequent Term”) unless either party provides written notice of termination at least ninety (90) days prior to the end of the Initial Term or any Subsequent Term or, unless earlier terminated as provided below:
(a) Either party hereto may terminate this Agreement prior to the expiration of the Initial Term in the event the other party breaches any material provision of this Agreement, including, without limitation in the case of the Trust, its obligations under Section 2.1, provided that the non-breaching party gives written notice of such breach to the breaching party and the breaching party does not cure such violation within 90 days of receipt of such notice.
(b) Either party hereto may terminate this Agreement immediately by sending notice thereof to the other party upon the happening of any of the following: (i) a party commences as debtor any case or proceeding under any bankruptcy, insolvency or similar law, or there is commenced against such party any such case or proceeding; (ii) a party commences as debtor any case or proceeding seeking the appointment of a receiver, conservator, trustee, custodian or similar official for such party or any substantial part of its property or there is commenced against the party any such case or proceeding; (iii) a party makes a general assignment for the benefit of creditors; or (iv) a party states in any medium, written, electronic or otherwise, any public communication or in any other public manner its inability to pay debts as they come due. Either party hereto may exercise its termination right under this Section 9.1(b) at any time after the occurrence of any of the foregoing events notwithstanding that such event may cease to be continuing prior to such exercise, and any delay in exercising this right shall not be construed as a waiver or other extinguishment of that right.
(c) The Trust may terminate this Agreement at any time upon ninety (90) days’ prior written notice in the event that the Trust’s sponsor determines to liquidate the Trust. The Bank may terminate this Agreement at any time upon ninety (90) days’ written notice for any reason. Should the Agreement be terminated by the Trust or the Bank for any reason and if requested by the Trust, the Bank agrees to continue performing the services contemplated in this Agreement pursuant to the terms and conditions of this Agreement at the rates set forth in the then current fee schedule and for a reasonable period of time to be agreed upon by the parties in good faith, in order to provide for the orderly transition of services to an alternative service provider designated by the Trust so that, to the extent feasible, the services are maintained without interruption. The Trust shall reimburse (or cause the Sponsor to reimburse) the Bank for additional costs (to be mutually agreed upon by the parties) which are reasonably incurred by the Bank in the transition.
11.2 Should the Trust exercise its right to terminate, all out-of-pocket expenses associated with the movement of records and material will be borne by the Trust.
11.3 The terms of Article 2 (with respect to fees and expenses incurred prior to termination), Article 5 and Article 6 shall survive any termination of this Agreement.
12. Assignment
12.1 Neither this Agreement nor any rights or obligations hereunder may be assigned by either party without the written consent of the other party; provided, however, either party may assign this Agreement to a party controlling, controlled by or under common control with it.
12.2 This Agreement shall inure to the benefit of and be binding upon the parties and their respective permitted successors and assigns.
10
EXECUTION VERSION
13. Severability and Beneficiaries
13.1 In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, the legality and enforceability of the remaining provisions shall not in any way be affected thereby provided obligation of the Trust to pay is conditioned upon provision of services.
12.2 This Agreement is solely for the benefit of the Bank and the Trust, and none of any Authorized Participant (as defined in the Authorized Participant Agreement), the Sponsor, any Shareholder or beneficial owner of any Shares shall be or be deemed a third party beneficiary of this Agreement.
14. Amendment
This Agreement may be amended or modified by a written agreement executed by both parties.
15. New York Law to Apply
This Agreement shall be construed in accordance with the substantive laws of the State of New York, without regard to conflicts of laws principles thereof. The Trust and the Bank hereby consent to the jurisdiction of a state or federal court situated in New York City, New York in connection with any dispute arising hereunder. The Trust hereby irrevocably waives, to the fullest extent permitted by applicable law, any objection which it may now or hereafter have to the laying of venue of any such proceeding brought in such a court and any claim that such proceeding brought in such a court has been brought in an inconvenient forum. The Trust and the Bank each hereby irrevocably waives any and all rights to trial by jury in any legal proceeding arising out of or relating to this Agreement.
16. Merger of Agreement
This Agreement constitutes the entire agreement between the parties hereto and supersedes any prior agreement with respect to the subject matter hereof whether oral or written.
17. Notices
All notices and other communications as required or permitted hereunder shall be in writing and sent by first class mail, postage prepaid, addressed as follows or to such other address or addresses of which the respective party shall have notified the other.
If to the Bank:
The Bank of New York Mellon
240 Greenwich Street
New York, New York 10286
Attention: ETF Operations
with a copy to:
The Bank of New York Mellon
240 Greenwich Street
New York, New York 10286
Attention: Legal Dept. – Asset Servicing
11
EXECUTION VERSION
If to the Trust:
Invesco Capital Management LLC
3500 Lacey Road, Suite 700
Downers Grove, IL 60515
Attention: Legal Department and Fund Treasurer
with a copy to:
11 Greenway Plaza, Suite 1000
Houston, TX 77046
Attention: General Counsel
18. Information Sharing
The Bank of New York Mellon Corporation is a global financial organization that provides services to clients through its affiliates and subsidiaries in multiple jurisdictions (the “BNY Mellon Group”). The BNY Mellon Group may centralize functions including audit, accounting, risk, legal, compliance, sales, administration, product communication, relationship management, storage, compilation and analysis of customer-related data, and other functions (the “Centralized Functions”) in one or more affiliates, subsidiaries and third-party service providers. Solely in connection with the Centralized Functions, (i) the Trust consents to the disclosure of and authorizes the Bank to disclose information regarding the Trust (“Customer-Related Data”) to the BNY Mellon Group and to its third-party service providers who are subject to confidentiality obligations with respect to such information and (ii) the Bank may store the names and business contact information of the Trust’s employees and representatives on the systems or in the records of the BNY Mellon Group or its service providers. The BNY Mellon Group may aggregate Customer-Related Data with other data collected and/or calculated by the BNY Mellon Group, and notwithstanding anything in this Agreement to the contrary the BNY Mellon Group will own all such aggregated data, provided that the BNY Mellon Group shall not distribute the aggregated data in a format that identifies Customer-Related Data with a particular customer. The Trust confirms that it is authorized to consent to the foregoing.
19. Counterparts
This Agreement may be executed by the parties hereto in any number of counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument.
[Signature page follows.]
12
EXECUTION VERSION
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in their names and on their behalf by and through their duly authorized officers, as of the latest date set forth below.
| INVESCO GALAXY ETHEREUM TRUST | ||||
| By: |
| |||
| Name: | Kelli Gallegos | |||
| Title: | Principal Financial and Accounting Officer – Investment Pools | |||
| Date: | ||||
| THE BANK OF NEW YORK MELLON | ||||
| By: |
| |||
| Name: | ||||
| Title: | ||||
| Date: | ||||
13
EXECUTION VERSION
SCHEDULE A
Books And Records To Be Maintained By The Bank
Source Documents requesting Creations and Redemptions (including dates and times of orders)
Correspondence/AP Inquiries
Reconciliations, bank statements, copies of canceled checks, cash proofs
Daily/Monthly reconciliation of outstanding Shares between the Trust and DTC
Dividend Records
Year-end Statements and Tax Forms
14
EXECUTION VERSION
EXHIBIT A
Form of Authorized Participant Agreement
15
Exhibit 10.8
Form Of Lukka Calculation Services Subscription Agreement
This Lukka Calculation Services Subscription Agreement (this “Subscription”) is entered into as of [ ] (the “Subscription Effective Date”) by and between Lukka Calculation Services, LLC (“Lukka Calculations”) and Invesco Ltd. (“Customer”).
Capitalized terms used and not specifically defined herein shall have the meanings set forth in that certain Master Services Agreement dated as of February 1, 2022 among the parties hereto and Lukka, Inc. (the “MSA”). The terms and conditions of the MSA are hereby incorporated herein by reference and shall in all aspects govern this Subscription. To the extent that any of the provisions of the MSA conflict with, or are inconsistent with, any of the provisions of this Subscription, the provisions of this Subscription will take precedence, unless specifically set forth to the contrary in this Subscription. By its execution of this Subscription, Lukka Calculations is hereby joined as a party to the MSA and shall be bound by, and hereby agrees to, all representations, warranties, covenants, terms, conditions, duties and waivers applicable to “Lukka” under the MSA.
1. Calculation Services Subscription. Lukka Calculations shall provide Customer with (i) the value of a particular calculation as further described in the table immediately below (each, a “Calculation”) at a mutually agreed upon periodicity, (ii) updates to the Calculation at rebalance based on constituent selections and weightings determined by Customer and (iii) dissemination of the values of the Calculation to Customer and those other identified parties (each a “Data Distribution Partner”) as may be mutually agreed upon by the parties (collectively, the “Services”), subject to the terms and conditions set forth herein. Any reports or other deliverables to be prepared and delivered by Lukka Calculations as part of the Services (collectively, the “Deliverables”) will be distributed to Customer and any Data Distribution Partners in a format and within a time frame to be determined by Lukka Calculations and Customer. All such Deliverables will be considered finalized upon receipt by Customer.
| Group | Product |
Quantity |
Comments | |||||
| Implementation | Standard Maintenance | 1 | $[ ] / year | |||||
| Custom Pricing Methodology Build | — | N/A | ||||||
| Fungible | Single Asset | Real Time | 1 | $[ ] /year / product | ||||
| Spot Asset | Maximum of 5 products allowed | |||||||
| Calculations | Minutely | — | ||||||
| Intraday | — | |||||||
| End of Day (EOD) | — | |||||||
| Multi-Asset | Real Time | — | ||||||
| Minutely | — | |||||||
| Intraday | — | |||||||
| End of Day (EOD) | — | |||||||
| Other Asset | Single Asset | Real Time | — | |||||
| Calculations | Minutely | — | ||||||
| Intraday | — | |||||||
| End of Day (EOD) | — | |||||||
| Multi-Asset | Real Time | — | ||||||
| Minutely | — | |||||||
| Intraday | — | |||||||
| End of Day (EOD) | — | |||||||
| Other | Custom Build | — | ||||||
| 2. | Customer Acknowledgements. With respect to, and as a condition to, Lukka Calculations’ provision of the Services, Customer hereby acknowledges and agrees, in addition to and not in replacement of, any acknowledgements or representations set forth in the MSA, that: |
| a. | Customer Data. Customer is solely responsible for providing Lukka Calculations with all Customer Data reasonably necessary to allow Lukka Calculations to perform the Services. Lukka Calculations will rely on any and all such Customer Data provided by Customer and will not independently verify the accuracy or completeness of any such Customer Data. Accordingly, Lukka Calculations shall not be responsible for any inaccuracy or omissions in any such Customer Data. Customer agrees to provide Lukka Calculations with the Customer Data in Lukka Calculations’ standard format and mechanisms (when needed). |
| b. | No Guarantee of Coverage. Lukka Calculations is not required to use any information provided to it by any third parties, including Customer, and Lukka Calculations may select the sources of such third party data at its sole discretion. While Lukka Calculations will use commercially reasonable efforts to include the greatest coverage possible within an instrument type, due to the nature and availability of third party data, Lukka Calculations makes no guarantee that any particular instrument or asset will be covered within the Services. |
| c. | NO RELIANCE. NEITHER LUKKA CALCULATIONS NOR ANY OTHER PARTY MAKES ANY WARRANTY, EXPRESS OR IMPLIED, REGARDING THE SERVICES OR THE RESULTS TO BE OBTAINED BY CUSTOMER OR ANY OTHER PERSON FROM THE USE OF THE SERVICES. CUSTOMER IS SOLELY RESPONSIBLE FOR ANY RESULTS, INCLUDING ANY RESULTS REFLECTED IN A REGULATORY OR OTHER FILING, OBTAINED FROM THE SERVICES, INCLUDING, WITHOUT LIMITATION, THE QUALITY, USEFULNESS, COMPLETENESS, SUITABILITY, ACCURACY OR CONTENT OF SUCH RESULTS. ACCORDINGLY, THE SERVICES, INCLUDING ANY DATA INCLUDED THEREIN OR RELATING THERETO AND ANY DELIVERABLES DELIVERED THEREWITH, ARE PROVIDED “AS IS” WITHOUT WARRANTY, EXPRESS OR IMPLIED, OF ANY KIND, TO CUSTOMER OR ANY THIRD PARTY, AND LUKKA CALCULATIONS HEREBY DISCLAIMS ANY REPRESENTATION OR WARRANTY AS TO (I) THE ACCURACY, FITNESS, UTILITY, COMPLETENESS OR APPLICATION OF THE SERVICES (INCLUDING ANY DELIVERABLES DELIVERED THEREWITH) FOR ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, PRICING, TRADING, HEDGING, RISK MANAGEMENT OR ACCOUNTING DECISIONS AND (II) THE RESULTS TO BE OBTAINED BY CUSTOMER OR ANY THIRD PARTY IN CONNECTION WITH THE USE OF THE SERVICES (INCLUDING ANY DELIVERABLES DELIVERED THEREWITH). CUSTOMER UNDERSTANDS AND AGREES THAT ALL DECISIONS CONCERNING PRICING, TRADING, HEDGING, RISK MANAGEMENT AND ACCOUNTING DECISIONS ARE CUSTOMER’S SOLE RESPONSIBILITY, TO BE MADE USING CUSTOMER’S OWN JUDGMENT. |
| d. | Dissemination and Publication. Customer may distribute the Services, including any Deliverables, to any third party (including any Data Distribution Partner) and any third party (including any Data Distribution Partner) may make use of the Services, including any Deliverables, in connection with any regulatory, investor or other communication or filing by or on behalf of Customer, so long as, in each instance, Customer (i) attributes the Services to Lukka Calculations and (ii) agrees to indemnify any such third party recipient of the Services from and against any losses incurred by such recipient as a result of or in connection with the Services. Customer hereby agrees to indemnify, defend and hold harmless Lukka Calculations and its affiliates and its and their directors, officers, agents, employees, successors and assigns and all providers of third party data, and each of their affiliates, directors, officers, agents, employees, members, partners, successors and assigns (the “Indemnitees”) from and against any and all losses, liabilities, damages, costs (including reasonable attorneys’ fees) and expenses arising as a result of any claims, suits or proceedings brought by any third party against any of the Indemnitees arising from or in connection with such third party’s use of the Services. |
| e. | Public Appearance. Lukka Calculations shall not be required to give testimony as a witness or otherwise appear in any capacity in any legal or administrative hearing or procedure, or to have any continued service responsibility unless compensated in advance by Customer. |
| f. | No Duty to Update. Any calculations provided as part of the Services reflect the prevailing circumstances at the original date of delivery of the Services by Lukka Calculations, and unless otherwise agreed between Customer and Lukka Calculations in writing, Lukka Calculations expressly disclaims any obligation to update, revise or correct any such calculations to reflect the occurrence of future events, even in the event that any or all of the information underlying such calculations is shown to be in error. |
| g. | Services Not Professional Advice. In no event shall the Services be construed as the rendering by Lukka Calculations of professional advice or services. Before making any decision or taking any action regarding its instruments or the tax treatment thereof, Customer shall consult with an appropriate, licensed tax, accounting, or other professional. For the avoidance of doubt, Lukka Calculations’ personnel are not investment advisors or investment professionals. Such expertise is not covered in the Services and the Customer agrees that, if such expertise is required, it shall be provided by others at the direction and discretion of the Customer. |
| h. | No Personal Liability. Lukka Calculations is a limited liability company and therefore any claim made by the Customer arising out of any act or omission of any director, officer, agent, or employee of Lukka Calculations, in the execution or performance of its contractual or professional responsibilities shall be made solely against Lukka Calculations and not against any such director, officer, agent, or employee. |
| 3. | Description of Fees. The Base Fees described below are based on the Services subscribed for by Customer from time to time pursuant to this Subscription (collectively, the “Service Fees”). |
| Description of Base Fees | Fees | |||
| Implementation Fees |
$ | [ | ] /year | |
| One-Time Implementation Discount |
$ | [ | ] | |
| Calculation Fees |
$ | [ | ] /year | |
| One-Time Early Signing Discount (Applicable if this Subscription is executed by Customer prior to [ ], 5pm EST) |
$ | [ | ] | |
| First Year Minimum Fees |
$ | [ | ] | |
| 4. | Reimbursable Expenses. Any travel or other expenses required in connection with or related to Lukka Calculations’ responsibilities or services under this Subscription will be approved by Customer in advance, and Customer will promptly reimburse Lukka Calculations for any so approved expenses. |
| 5. | Billing. |
| a. | All one-time Service Fees will be billed on the Subscription Effective Date. |
| b. | All recurring Service Fees will be billed annually in advance beginning on the Subscription Effective Date. |
| c. | All Service Fees are non-refundable, no refunds or credits for partial months of this Subscription, downgrades, or refunds for unused Services are permitted. |
| 6. | Subscription Period. One (1) year initial term commencing on the Subscription Effective Date. Thereafter this Subscription will automatically renew for successive Subscription Periods as further described in Section 13.1 of the MSA. |
| 7. | Early Termination Fee. If Lukka Calculations terminates this Subscription for Customer’s nonpayment or if this Subscription is otherwise abandoned or disregarded by Customer before the end of the then current Subscription Period other than for reason of Lukka Calculations’s material breach of the terms hereof or the MSA, Customer shall pay to Lukka Calculations, by wire transfer of immediately available funds, in accordance with the billing terms in the MSA, an early termination fee equal to $[ ], which such amount shall compensate Lukka Calculations for the considerable time, effort and expense undertaken by Lukka Calculations to service and prepare for Customer, including, for example, contracting, scoping, and/or onboarding Customer. This early termination fee shall be reduced by the Service Fees (if any) already paid by Customer pursuant to this Subscription and, once received by Lukka Calculations, the early termination fee shall be deemed to be liquidated damages and Lukka Calculations shall not seek to recover any other money damages or obtain any equitable relief from Customer with respect to such termination. |
| 8. | Subscription Additions. |
| a. | Customer may at any time request (via email) to add up to four (4) additional Fungible Spot Asset Indices—Single Asset—Real Time that were not included as of the Subscription Effective Date (each, a “Subscription Addition”), in each case for the applicable increase to the fees set forth in Section 3 above. |
| b. | Any Subscription Additions agreed to and accepted by Lukka (email being sufficient for such purpose) will begin promptly, but no later than the first day of the next calendar month, and billing for any Subscription Additions will begin on the first day of the next calendar month. (By way of example, a Subscription Addition requested by Customer on February 5th may potentially begin in February, but will be billable to Customer as of March 1st). |
| c. | With respect to any Subscription Addition that is renewable, the initial bill for such Subscription Addition will include all fees due by Customer for such Subscription Addition from the start date of such Subscription Addition through Customer’s next regular recurring billing date. Thereafter, such Subscription Additions will be billed as part of Customer’s regular recurring Services until canceled per the MSA. (By way of example, if Customer’s recurring fees are billed annually on January 1st and Customer then adds a recurring Subscription Addition that begins on February 5th, on March 1st, Customer will receive an initial invoice which bills Customer for the initial ten months of the Subscription Addition (March 1 through December 31); and thereafter, the recurring Subscription Addition will be billed annually on January 1st just like Customer’s other recurring fees). |
| d. | For the avoidance of doubt, no Services may be removed or downgraded (whether by e-mail request or otherwise) during a Subscription Period. |
[Signature Page Follows]
In Witness Whereof, the parties authorized representatives have executed this Lukka Calculation Services Subscription as of the Subscription Effective Date set forth above.
| CUSTOMER INVESCO LTD | LUKKA CALCULATION SERVICES, LLC | |||||
| By: Lukka, Inc., its Sole Member | ||||||
| Signature: |
|
Signature: |
| |||
| By: | Andy Stokes | By: | Robert Materazzi | |||
| Title: | Strategic Sourcing Manager | Title: | Chief Executive Officer | |||
| Date: | Date: | |||||
| Address: | Perpetual Park Drive, Henley-on- Thames, Oxfordshire RG9 1HH UK | Address: | 800 Laurel Oak Drive, Unit 300 | |||
|
|
Naples, FL 34108 | |||||
| Billing Contact: | ||
| Billing Email: | ||
Exhibit 10.9
EXECUTION AGENT AGREEMENT
This Execution Agent Agreement is entered into as of December 22, 2023 (the “Effective Date”), by and between Invesco Capital Management LLC (“Invesco”) and Galaxy Digital Funds LLC (“Galaxy”). Invesco and Galaxy may each be referred to herein individually as a “Party” and collectively as the “Parties.”
WHEREAS the Parties have entered into an agreement to collaborate to design, develop and co-market United States ETFs that invest in Digital Assets (the “Strategic Alliance Agreement”);
WHEREAS the Strategic Alliance Agreement provides that Galaxy will provide certain execution agent services to Invesco; and
WHEREAS the Parties have entered into this Execution Agent Agreement (the “Agreement”) to detail the execution agent services to be provided by Galaxy;
NOW THEREFOR, in consideration of the mutual promises and covenants set forth below and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties hereby agree as follows:
1.1. Usage. Capitalized terms used in this Agreement and not otherwise defined herein shall have the meanings ascribed to such terms in the Strategic Alliance Agreement.
2.1. Execution Agent Services. For each Digital Asset ETF, Invesco hereby appoints Galaxy as Execution Agent and Galaxy shall, in such capacity, provide the services set out on Exhibit A (the “Execution Agent Services”). Invesco represents, warrants and agrees that it will have, at all times necessary to permit Galaxy to perform the Execution Agent Services for a Digital Asset ETF, full power and authority on behalf of such Digital Asset ETF to so appoint Galaxy and to authorize Galaxy to act as agent on behalf of such Digital Asset ETF in the manner contemplated hereby. Galaxy will be fully responsible for providing the Execution Agent Services (a) in accordance with all applicable Laws, codes, ordinances, orders, rules and regulations of local, state, and federal governments and agencies and instrumentalities, including, without limitation, all standards and regulations of appropriate regulatory commissions and similar agencies, as each of the foregoing may be updated from time to time; (b) in accordance with the Proper Instructions (defined below), as well as the terms and subject to the conditions set forth on Exhibit A, the related Product Specification, and this Agreement; (c) using personnel of required skill, experience, and qualifications; (d) in a timely, workmanlike, and professional manner; and (e) in accordance with industry standards in Galaxy’s field ((a) – (e), the “Performance Standards”). Prior to the date on which the Execution Agent Services are to begin, Galaxy will obtain, and at all times during the Term of this Agreement maintain, all necessary up-to-date licenses, registrations, qualifications and consents required by or applicable to the provision of the Execution Agent Services. Galaxy’s personnel and representatives will comply with all policies and procedures communicated by Invesco, including, without limitation, Invesco’s security and data protection policies. For the sake of clarity, nothing in this Agreement will be construed to prevent Invesco, in its sole discretion, from itself (or through its Affiliates) performing services that are similar to or identical to the Execution Agent Services, in which case Galaxy, upon instruction from Invesco, shall cease to perform such Execution Agent Services for some or all of the Digital Asset ETFs, as applicable. Invesco acknowledges that Galaxy’s provision of the Execution Agent Services is not exclusive to the Digital Asset ETFs, and that, subject to the terms of this Agreement, Galaxy is free to provide such services to other persons other than in connection with a Future Digital Asset ETF, or the sponsor/issuer thereof in connection with a Future Digital Asset ETF (it being understood that Galaxy may provide such services in connection with a New Product described in a New Product Proposal that has been rejected by Invesco pursuant to Section 2.11 of the Strategic Alliance Agreement).
2.2. Proper Instructions
2.2.1 Subject to the other provisions of this Agreement and Exhibit A hereof, with respect to the Execution Agent Services, Galaxy shall act on instructions it reasonably believes to be from Invesco upon receipt of any written or faxed authorization or instruction including any instructions it reasonably believes to have been transmitted by electronic communication by Invesco or a Third Party designee as previously communicated to Galaxy, or by such other means as may from time to time be agreed between Invesco and Galaxy (“Proper Instructions”). Proper Instructions may be in the form of standing instructions.
2.2.2 Galaxy is under no obligation to review the propriety or legality of any Proper Instructions received by it.
2.2.3 Galaxy shall act on Proper Instructions unless it believes, acting in good faith, that they are manifestly fraudulent, unlawful or constitute a suspicious transaction for the purposes of applicable money laundering regulations, have been given in error, are inadequate, are unclear, do not make fully apparent the intention of Invesco with respect to the applicable Digital Asset ETF or a transaction in which it is involved, or are not communicated to Galaxy prior to any dealing deadlines agreed between Invesco and Galaxy from time to time. Galaxy shall promptly inform Invesco where it is not willing to act on any Proper Instructions for any of the reasons provided in this Section 2.2.3, provided that Galaxy shall be under no obligation to inform Invesco in such circumstances where to do so may contravene applicable Law.
2.2.4 Unless otherwise provided in the Agreement, a Proper Instruction continues in full force and effect until specifically cancelled or superseded by a subsequent Proper Instruction. Galaxy will use its reasonable efforts to take account of any Proper Instruction being specifically cancelled or superseded by a subsequent Proper Instruction, but shall not be liable for acting upon any Proper Instruction that has been so cancelled or superseded if it has not had adequate time acting diligently to take account of such Proper Instruction being so cancelled or superseded.
2.2.5 For avoidance of doubt, subject to the conditions of this Section 2.2, the failure of Galaxy to act upon, or in accordance with, a Proper Instruction shall be deemed a material breach of this agreement.
2.3. Galaxy’s Authority. Galaxy’s duties and authority to act as Execution Agent hereunder, as well as other rights and obligations contained herein, are limited to the duties and authority expressly provided for in this Agreement and any other duties that Invesco and Galaxy agree in writing in accordance with Section 11.15 of the Strategic Alliance Agreement shall be performed by Galaxy from time to time and no implied duties or obligations shall be read into this Agreement or the Strategic Alliance Agreement. Galaxy shall not, and shall not be deemed to, assume the obligations or duties of Invesco with respect to any Digital Asset ETF unless such duties and obligations are expressly provided to be performed by Galaxy pursuant to this Agreement or the Parties agree in writing in accordance with Section 11.15 of the Strategic Alliance Agreement that Galaxy shall perform such duties.
2.4. Exclusivity. The exclusivity provisions set forth in Section 2.10 of the Strategic Alliance Agreement shall govern this Agreement.
3.1. Confidentiality Obligations. The Party receiving Confidential Information (the “Receiving Party”) of the other Party (the “Disclosing Party”) shall keep confidential, and shall exercise at least the same degree of care (and in no event less than a reasonable degree of care) with respect to, the Disclosing Party’s Confidential Information that the Receiving Party exercises to protect its own Confidential Information and, at a minimum, the receiving Party shall adopt, maintain and follow security practices and procedures that are sufficient to safeguard the Disclosing Party’s Confidential Information from any (a) unauthorized disclosure, access, use or modification, and (b) misappropriation, theft, destruction, or loss. Without limiting the generality of the foregoing, the Receiving Party shall only use or reproduce the Disclosing Party’s Confidential Information to the extent necessary to enable the Receiving Party to fulfill its obligations or exercise its rights under this Agreement.
3.2. Authorized Disclosure. The obligations of confidentiality under the Agreement shall not apply to the extent that disclosure is reasonably necessary to:
3.2.1 Prosecute or defend litigation;
3.2.2 comply with applicable Laws, including the rules and regulations promulgated by the United States Securities and Exchange Commission;
provided, that in each case, such Party shall reasonably consider the other Party’s comments regarding confidential treatment sought for such disclosure.
3.3. Without limiting either Party’s obligations under Section 3.1 or exceptions in 3.2, each Party (a) shall maintain and comply with internal policies, procedures and controls reasonably designed to prevent information related to the Digital Asset ETFs, and the Execution Agent Services being performed for the Digital Asset ETFs, from being disclosed to, shared with or used by any Third Party or, with respect to Galaxy, any Affiliate whose primary or principal business is trading Digital Assets or that may use such information to the detriment of the Digital Asset ETF, and (b) shall not disclose, or allow to be disclosed, such information to such Persons.
4.1. Compliance with Law—General. In connection with its participation in the Strategic Alliance, and in carrying out its obligations and services under this Agreement, each Party shall comply with all applicable Laws, maintain all required regulatory registrations and licenses, shall not misappropriate, infringe or otherwise violate any proprietary interest (including intellectual property rights), and shall not materially breach any contractual agreement or any civil duty imposed by law, such as tort duties, insofar as such contractual agreements or civil duties relate to such Party’s ability to perform its obligations under this Agreement. During the Term of this Agreement, the Parties acknowledge and agree that each Party has an affirmative obligation to promptly report to the other Party any concerns about, or indications of, actual or possible violations of applicable Laws of which they become aware that would reasonably be expected to have a material effect on either Party’s ability to perform its obligations under this Agreement. If any change in applicable Law requires either Party to adopt specific standards related to Execution Agent Services performed under this Agreement, or to a Digital Asset ETF, then the Parties agree to make modifications to the Execution Agent Services or Digital Asset ETFs as are required to enable the Parties to comply with any changes in applicable Law. Each Party shall make all required changes at no charge to the other Party, it being understood that Invesco shall have sole discretion over any modifications to the Digital Asset ETFs. Galaxy shall cooperate with Invesco in connection with any investigation of Invesco or any Digital Asset ETF by the Securities and Exchange Commission or any other Governmental Authority; provided that any reasonable costs and expenses incurred by Galaxy in connection with any such investigation shall be reimbursed by Invesco.
4.2. Export Controls. Unless authorized by a United States regulation or export license, neither Party shall, in connection with the activities contemplated by this Agreement, export or re-export, directly or indirectly any product (or any part of a product), process, or service to: (i) any country (or nationals of a country) in Country Group E of the Export Administration Regulations of the United States (“EAR”) or any other country subject to sanctions administered by the Office of Foreign Assets Control, or (ii) any non-civil (i.e. military) end users or for any non-civil end uses in any country in Country Group D:1 of the EAR, as these lists may be modified from time-to-time. Each Party represents, warrants and covenants that it is not currently debarred, suspended or otherwise prohibited or restricted from exporting, re-exporting, receiving, purchasing, processing or otherwise obtaining any item, product, article, commodity, software or technology regulated by any agency of the United States, and that it shall immediately notify the other Party in the event that any of the foregoing occurs. The Parties agree to comply with any import or other restrictions and to use commercially reasonable efforts to cooperate with and assist the other Party in connection therewith and in connection with the EAR restrictions.
4.3. Anti-Money Laundering and Know-Your-Customer. Each Party shall maintain policies and implement procedures and controls, including, without limitation, policies and procedures for sanctions screening, reasonably designed to ensure compliance with all applicable Laws pertaining to anti-money laundering, anti-terrorism and sanctions, including Section 326 of the USA PATRIOT Act (31 U.S.C. § 531.8(I)), and shall comply with all such applicable Laws.
4.4. Cyber Security. Both Parties shall comply with applicable privacy and cyber security Laws. The Parties shall use all reasonable legal, organizational, physical, administrative and technical measures, and security procedures to safeguard and ensure the security of their respective systems and any data provided by the other Party or relating to a Digital Asset ETF against unauthorized access, disclosure, duplication, use, modification or loss.
4.5. Diversity, Equity and Inclusion. The Parties shall comply with all anti-discrimination and equal opportunities laws and regulations applicable to each of its personnel, including the Americans with Disabilities Act 1964, the Telecommunications Act 1996 and other similar laws.
5.1. Indemnification. The indemnification provisions set forth in Section 7 of the Strategic Alliance Agreement shall apply to this Agreement.
6.1. Limitation of Liability. The limitation of liability provisions set forth in Section 8 of the Strategic Alliance Agreement shall apply to this Agreement.
7.1. Representations and Warranties of Each Party. Each of the Parties makes the following representations, warranties and covenants:
7.1.1 Authority. As of the Effective Date, it has the full right, power and authority to enter into this Agreement. This Agreement has been duly executed by such Party and constitutes a legal, valid and binding obligation of such Party, enforceable in accordance with its terms, except as such enforceability may be limited by considerations of public policy, the effects of bankruptcy, insolvency or other applicable Laws affecting the enforcement of creditors’ rights generally and judicial principles affecting the availability of specific performance and general principles of equity, whether considered in a proceeding at law or in equity.
7.1.2 No Conflicts. The execution, delivery and performance of this Agreement by such Party does not conflict with or materially breach any agreement, instrument or understanding, oral or written, to which it is a party or by which it is bound, nor violate any applicable Laws of any Governmental Authority having jurisdiction over it.
7.1.3 Data Privacy and Security. It has been and is compliant with applicable privacy and cyber security Laws, and it has and uses reasonable legal, organizational, physical, administrative and technical measures, and security procedures to safeguard and ensure the security of its systems and data against unauthorized access, disclosure, duplication, use, modification or loss. It has policies, procedures and controls in place that are reasonably designed to prevent information related to the Digital Asset ETFs, and, in the case of Galaxy, the Execution Agent Services being performed for the Digital Asset ETFs, from being disclosed to, shared with or used by any Third Party, and any Affiliate whose primary or principal business is trading Digital Assets or that may use such information to the detriment of the Digital Asset ETF.
7.2. Additional Representations and Warranties of Galaxy. Galaxy represents, warrants and covenants as of the Effective Date that its performance of the Execution Agent Services on behalf of the Digital Asset ETFs will not in any way result in any payment, commission or other form of compensation to Galaxy or any Affiliate of Galaxy, other than the fees contemplated by this Agreement.
7.3. Disclaimer of Warranties. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, NONE OF THE PARTIES OR THEIR AFFILIATES MAKES ANY REPRESENTATION OR EXTENDS ANY WARRANTY OR CONDITION OF ANY KIND, EITHER EXPRESS OR IMPLIED, WITH RESPECT TO THE PRODUCT SPECIFICATIONS, DIGITAL ASSET ETFS OR ANY RELATED INTELLECTUAL PROPERTY, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. EACH PARTY UNDERSTANDS AND AGREES THAT NEITHER PARTY CAN ASSURE THE SUCCESSFUL REGISTRATION, LAUNCH, PROFIT OR COMMERCIAL VIABILITY OF ANY DIGITAL ASSET ETF.
8.1 Term and Termination. The term and termination provisions set forth in Section 10 of the Strategic Alliance Agreement shall apply to this Agreement.
9.1. Dispute Resolution. The Parties shall resolve any dispute, claim or controversy between the Parties arising under this Agreement (any such dispute, claim or controversy, an “Agreement Dispute”) pursuant to the terms of this Section 9.1.
9.1.1 In the event of an Agreement Dispute, the Parties shall discuss and negotiate in good faith a solution acceptable to the Parties and in the spirit of this Agreement. If, after negotiating in good faith pursuant to the foregoing sentence, the Parties fail to reach agreement within thirty (30) days (or such longer period as agreed in writing by the Parties), then the Agreement Dispute may be referred to the executive officers of each Party for resolution at the request of either Party.
9.1.2 If, after negotiating in good faith, the Parties’ executive officers fail to reach agreement within ten (10) days of submission to such executive officers (or such longer period as agreed in writing by the Parties), then either Party may submit the Agreement Dispute to any mutually agreed to mediation service for mediation by providing to the mediation service a joint, written request for mediation, setting forth the subject of the dispute and the relief requested. The Parties shall cooperate with one another in selecting a mediation service, and shall cooperate with the mediation service and with one another in selecting a neutral mediator and in scheduling the mediation proceedings. The Parties shall use commercially reasonable efforts in participating in the mediation. The mediator’s fees and expenses and the costs incidental to the mediation shall be shared equally between the Parties. The Parties further agree
that all offers, promises, conduct, and statements, whether oral or written, made in the course of the mediation by any of the parties, their agents, employees, experts, and attorneys, and by the mediator and any employees of the mediation service, are confidential, privileged, and inadmissible for any purpose, including impeachment, in any litigation, arbitration or other proceeding involving the parties, provided that evidence that is otherwise admissible or discoverable shall not be rendered inadmissible or non-discoverable as a result of its use in the mediation.
9.1.3 If mediation pursuant to Section 9.1.2 fails to reach agreement within ninety (90) days of submission to mediation, then the Agreement Dispute may be resolved and settled by arbitration administered by the American Arbitration Association in accordance with its Commercial Arbitration Rules. A reasoned written award shall be required and shall be made within nine (9) months of the filing of the notice to arbitrate and the arbitrator(s) shall agree to comply with this schedule before accepting appointment. The arbitrator(s) shall have authority to award damages to either Party, and to award the payment of attorney fees and costs to the prevailing Party. Judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. The arbitration shall be conducted in English language in accordance with the United States Arbitration Act.
9.1.4 If the Parties cannot resolve any Agreement Dispute pursuant to the other provisions of this Section 9.1, then either Party may file suit in a court of competent jurisdiction in accordance with the provisions of Section 9.6.
9.2. Equitable Relief. Notwithstanding anything in this Agreement to the contrary, a Party may seek a temporary restraining order or a preliminary injunction from any court of competent jurisdiction in order to prevent immediate and irreparable injury, loss, or damage on a provisional basis, pending the decision of the arbitrator(s) on the ultimate merits of any dispute. Each Party acknowledges that a breach by a Party of Section 3 (Confidentiality) may cause the non-breaching Party irreparable damages, for which an award of damages would not be adequate compensation and agrees that, in the event of such breach or threatened breach, the non-breaching Party shall be entitled to seek equitable relief, including a restraining order, injunctive relief, specific performance and any other relief that may be available from any court, in addition to any other remedy to which the non-breaching Party may be entitled at law or in equity. Such remedies shall not be deemed to be exclusive but shall be in addition to all other remedies available at law or in equity.
9.3. Independent Contractors. Nothing in this Agreement shall create or imply an association, partnership or joint venture between the Parties hereto, it being agreed and understood that the Parties are independent contractors; and neither Party, with respect to a third party, shall have the power or authority to bind or obligate the other Party in any way.
9.4. Notices. All notices, requests, consents, claims, demands, waivers, and other communications hereunder shall be in writing addressed to the other Party at its address as set forth below or at such different address of which written notice has been given in accordance with this paragraph:
If to Invesco:
Invesco Capital Management LLC
Attn: Adam Henkel
3500 Lacey Road, Suite 700
Downers Grove, Illinois
Email: Adam.Henkel@Invesco.com
Phone: 630-684-6724
If to Galaxy:
Galaxy Digital Funds LLC
Attn: Andrew Siegel
107 Grand Street, 8th Floor
New York, NY 10013
Email: Andrew.Siegel@galaxydigital.io
Phone: 212-390-9216
Notices sent in accordance with this Section shall be deemed effectively given: (a) when received, if delivered by hand (with written confirmation of receipt); (b) when received, if sent by a nationally recognized overnight courier (receipt requested); (c) on the date sent by e-mail (so long as the recipient acknowledges receipt), if sent during normal business hours of the recipient, and on the next business day if sent after normal business hours of the recipient; or (d) on the third (3rd) business day after the date mailed, by certified or registered mail, return receipt requested, postage prepaid.
9.5. Further Assurances and Cooperation. Each Party agrees that it shall execute and deliver, or cause the execution and delivery of, such further documents and instruments as may be reasonably necessary or proper to fully effectuate this Agreement and the transactions contemplated hereby.
9.6. Governing Law. This Agreement, and the construction, performance and validity of this Agreement, shall be governed by and construed in accordance with the laws of the State of New York without regard to the conflicts of law principles of the State of New York.
9.7. Force Majeure. Neither party shall be liable or responsible to the other party, nor be deemed to have defaulted under or breached this Agreement, for any failure or delay in fulfilling or performing any term of this Agreement when and to the extent such failure or delay is caused by: (a) acts of God, (b) flood, fire, or explosion, (c) war, terrorism, invasion, riot, or other civil unrest, (d) embargoes or blockades in effect on or after the Effective Date, (e) pandemic, or (f) national or regional emergency (each of the foregoing, a “Force Majeure Event”), in each case ((a) – (f)) provided that (i) such event is outside the reasonable control of the affected Party, (ii) the affected Party provides prompt notice to the other Party, stating the period of time the occurrence is expected to continue, and (iii) the affected Party uses diligent efforts to end the failure or delay and minimize the effects of such Force Majeure Event. A Party may terminate this Agreement pursuant to Section 10.2.1 of the Strategic Alliance Agreement if a Force Majeure Event affecting the other Party continues substantially uninterrupted for a period of thirty (30) days or more.
9.8. Assignment; Binding Effect.
9.8.1 Assignment to Affiliates. Galaxy and Invesco may assign this Agreement or otherwise transfer their rights and obligations hereunder to an Affiliate by providing (a) ninety (90) days’ prior written notice to the other Party, and (b) any such other information about the assignment or assignee as reasonably requested by the other Party.
9.8.2 Assignment to Non-Competing Parties. Subject to and except as provided by Section 9.8.3, neither this Agreement nor any rights or obligations of a Party hereunder may be assigned or otherwise transferred to a Third Party without the prior written consent of the other Party, provided, however, that such written consent shall not be unreasonably withheld in instances in which the Third Party is not a Competing Third Party (as defined in Section 9.8.3) of the other Party. For purposes of the preceding sentence, and without limiting its generality, any merger, consolidation, or external reorganization involving a Party (regardless of whether that Party is a surviving or disappearing entity) and a Third Party shall be deemed to be a transfer of rights, obligations, or performance under this Agreement for which the other Party’s prior written consent is required, but, provided that the Third Party is not a Competing Third Party of the other Party, shall not be unreasonably withheld by the other Party.
9.8.3 Assignment to Competing Third Parties. Notwithstanding anything to the contrary in this Section 9.8, neither this Agreement nor any rights or obligations of a Party hereunder may be assigned or otherwise transferred to a Third Party that, as part of its business operations prior to such attempted assignment or transfer offered, developed, marketed, sold or otherwise commercialized products or services that, in the non-assigning Party’s reasonable belief, involved capabilities and functions duplicative of, or similar in nature to, that of the non-assigning Party (such Third Party being a “Competing Third Party” of the non-assigning Party), without the consent of the non-assigning Party, which may be withheld for any reason. For purposes of the preceding sentence, and without limiting its generality, any merger, consolidation, or external reorganization involving a Party (regardless of whether that Party is a surviving or disappearing entity) and a Competing Third Party of the other Party shall be deemed to be a transfer of rights, obligations, or performance under this Agreement for which the other Party’s prior written consent is required and may be withheld for any reason.
9.8.4 Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Parties hereto and their respective heirs, successors and permitted assigns. Any purported assignment, delegation, or transfer in violation of this Section 9.8 is void.
9.9. No Third-Party Beneficiaries. This Agreement is entered into by Invesco and Galaxy as a principal contracting party and not as agent for any other person. Except to the extent expressly stated in this Agreement, nothing contained in this Agreement shall be interpreted as creating any rights in any third parties or any contractual obligations on the part of the Parties, to any person or persons other than the Parties, including either arising out of, in connection with or relating to the Contracts (Rights of Third Parties) Act 1999 or otherwise. Except to the extent expressly stated in this Agreement, the Parties do not intend that any term of this Agreement shall be enforceable, by virtue of any statutory authority or otherwise, by any person who is not a party to this Agreement.
9.10. Performance By Affiliates. Obligations and tasks of a Party may be performed or managed by such Party’s Affiliates, provided, with respect to Galaxy, that such Affiliate’s primary or principal business is not trading Digital Assets. Each Party hereby guarantees the performance by its Affiliates of such Party’s obligations under this Agreement, shall remain jointly and severally liable for its Affiliates’ performance, and shall cause its Affiliates to comply with the provisions of this Agreement in connection with such performance. Any breach by a Party’s Affiliate of any of such Party’s obligations under this Agreement shall be deemed a breach by such Party, and the other Party may proceed directly against such Party without any obligation to first proceed against such Party’s Affiliate.
9.11. Counterparts; Facsimile Signatures. This Agreement may be executed in counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original, and both of which counterparts, taken together, shall constitute one and the same instrument even if both Parties have not executed the same counterpart. Signatures provided by any photocopy and transmitted by facsimile, pdf file or other electronic means shall be deemed to be original signatures.
10.1 Fees; Payment Terms. The execution agent fee, payment and related terms set forth in Section 3 of the Strategic Alliance Agreement shall apply to this Agreement.
11.1 Intellectual Property. The intellectual property provisions set forth in Section 4 of the Strategic Alliance Agreement shall apply to this Agreement.
12.1 Conflicts Rule. In case of any inconsistency, with respect to the subject matter hereof, between the provisions of this Agreement and the Strategic Alliance Agreement, the provisions of this Agreement shall control.
{Signature page follows}
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed as of the Effective Date.
| INVESCO CAPITAL MANAGEMENT LLC | GALAXY DIGITAL FUNDS LLC | |||||||
| By: | /s/ Brian Hartigan |
By: | /s/ William Burt | |||||
| Name: | Brian Hartigan | Name: | William Burt | |||||
| Title: | Chief Executive Officer | Title: | Chief Operating Officer | |||||
| Date: | 12/22/2023 | Date: | 12/22/2023 | |||||
EXHIBIT A
EXECUTION AGENT SERVICES
1. PURCHASES AND SALES OF DIGITAL ASSETS
1.1. In accordance with the receipt of Proper Instructions, Galaxy agrees to use its reasonable efforts to buy the Digital Assets (as applicable for the relevant Digital Asset ETF) or sell the Digital Assets (as applicable for the relevant Digital Asset ETF) in exchange for cash in the form of United States Dollars (“USD Cash”) in accordance with a Proper Instruction, and seek to buy or sell the Digital Asset at the same or similar price for such Digital Asset as valued by the Digital Asset ETF’s stated valuation methodology (the “Reference Price”).
1.2. Notwithstanding Section 1.1 of this Exhibit A, if a Proper Instruction specifies a specific price, or a maximum or minimum price, to buy or sell relevant Digital Assets, Galaxy shall only buy or sell (as applicable) Digital Assets at a price that complies with that Proper Instruction.
1.3. Galaxy understands and agrees that it may receive Proper Instructions for transacting in Digital Assets for the purpose of (i) purchasing Digital Assets with the USD Cash proceeds of a creation order received by a Digital Asset ETF; (ii) generating USD Cash to enable a Digital Asset ETF to satisfy a USD Cash redemption order received by a Digital Asset ETF; (iii) generating USD Cash to enable Invesco to pay applicable fees and expenses of the relevant Digital Asset ETF; (iv) to enable the Digital Asset ETF to redeem shares for USD Cash as necessary in response to a hard fork or other protocol event; and/or (v) in any other circumstances where the Digital Asset ETF is permitted or is required to purchase or sell Digital Assets in accordance with the Digital Assets ETF’s prospectus, offering documents, or other controlling documents (the “Controlling Documents”).
1.4. Subject to any specifications within the Proper Instructions, Galaxy shall select a method, counterparty and venue (if any) for the execution of each transaction in its discretion but in all cases it shall use reasonable efforts to achieve “best execution” for such transaction, where “best execution” means taking reasonable steps to obtain the best overall result reasonably possible for the Digital Asset ETF taking into account price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of the relevant transaction, giving priority to obtaining a price that is the same or similar to the Reference Price. Galaxy shall not transmit any orders received pursuant to a Proper Instruction to any other person or to any other intermediary for execution, except for the avoidance of doubt, as a counterparty to the transaction.
1.5. Galaxy shall designate, validate and maintain the applicable Digital Asset wallets in accordance with any Proper Instructions received from Invesco. Galaxy shall cooperate with the applicable Digital Asset ETF administrator(s) and custodian(s) as necessary and in accordance with agreed upon procedures and the Controlling Documents.
1.6. Galaxy will direct the proceeds of all purchases and sales to the applicable Digital Asset ETF wallet or account, as designated by Invesco, or as otherwise directed by Invesco by way of Proper Instruction, promptly upon settlement of the relevant transaction.
1.7. Galaxy shall, in a manner consistent with its duty of best execution, ensure that Digital Asset or USD Cash proceeds (as applicable) of a transaction are confirmed in the applicable Digital Asset ETF wallet or account by no later than any deadline as instructed by Invesco by way of Proper Instruction.
1.8. Proper Instructions may be cancelled by Invesco only if Galaxy has not acted upon those instructions and subject in all cases to Section 2.2.4 of the Agreement.
1.9. Galaxy shall confirm to Invesco as soon as practicable, and in any event within one business day of completion of the transaction, that it has purchased or sold the relevant Digital Assets. Such confirmations shall be in writing and shall detail: (i) the time of execution; (ii) the price at which the relevant Digital Asset was purchased or sold; (iii) the volume of the relevant Digital Asset that was purchased or sold; and (iv) the venue on which, or the counterparty to the transaction in which (as the case may be), the relevant Digital Asset was purchased or sold.
2. DUTY OF CARE
2.1. In addition to the duty of care provisions contained in the Agreement, Galaxy is expressly prohibited from using any information that it has gained about any Digital Asset ETF’s trading activities in a Digital Asset pursuant to Proper Instructions to inform (in whole or in part) any decision to purchase or sell Digital Assets that it makes either for its own account or on behalf of any other person. Except as contemplated by Section 2.2 below, Galaxy shall not execute any purchases or sales in the relevant Digital Assets for its own account until it has concluded the execution of all outstanding purchases and sales on behalf of the applicable Digital Asset ETF.
2.2. Galaxy shall not aggregate any purchases or sales of Digital Assets it makes on behalf of a Digital Asset ETF with any purchases or sales of Digital Assets it makes either for its own account or on behalf of any other person unless it does so in a manner that is not reasonably expected to operate to the disadvantage of the Digital Asset ETF. Without limiting the other provisions of this Exhibit A, Invesco acknowledges that Galaxy executes transactions in Digital Assets for other clients and that it seeks to allocate opportunities to purchase and sell Digital Assets among its clients, including a Digital Asset ETF, fairly and equitably over time, but that no assurances can be given that any specific opportunity will be allocated to a Digital Asset ETF.
2.3. Notwithstanding any provision of the Agreement or this Exhibit A thereto, Invesco reserves the right to, in its sole discretion, perform (or have its Affiliate perform) any of the Execution Agent Services described herein (and Galaxy agrees to cease performing any such Execution Agent Services upon notice from Invesco) for any Digital Asset ETF.
Exhibit 10.10
LUKKA OFFERINGS MASTER SERVICES AGREEMENT
This Lukka Offerings Master Services Agreement (this “Agreement”), is made and entered into as of February 1, 2022 (the “Effective Date”) by and between Lukka, Inc. (“Lukka”) and Invesco Ltd. (“Customer”). In consideration of the mutual covenants contained in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:
1.1 Lukka Offerings; Scope. Lukka will provide Customer with the services (the “Services”) and proprietary data products (the “Licensed Data” and together with the Services, the “Lukka Offerings”), in each case, as are indicated and described in each Subscription Agreement agreed upon by the parties in writing (each, a “Subscription Agreement”) for the period of time set forth in such Subscription Agreement (the “Subscription Period”), and subject to the terms and conditions set forth in this Agreement. Each Subscription Agreement will incorporate and be governed by the terms and conditions of this Agreement. To the extent that any of the provisions of this Agreement conflict with, or are inconsistent with, any of the provisions of any Subscription Agreement, the provisions of such Subscription Agreement will take precedence, unless specifically set forth to the contrary in such Subscription Agreement.
1.2 License. In connection with the foregoing, Lukka grants to Customer a limited, non-transferable, non-exclusive, non- sublicensable revocable right, during the Subscription Period, to access and use the Lukka Offerings. Customer, together with its employees, consultants, agents and advisors (collectively, “Authorized Persons”), will be the only party permitted to use the Lukka Offerings hereunder and such usage will be solely in the ordinary course of Customer’s business. For purposes of this Agreement, any acts or omissions by an Authorized Person shall be considered that of Customer, and the term “Customer” shall include all Authorized Persons.
1.3 Modifications to the Lukka Offerings. Customer acknowledges that (i) the scope of the Lukka Offerings in any Subscription Agreement includes only those of Lukka’s product and service offerings described in such Subscription Agreement; and (ii) Lukka may thereafter, in its sole and absolute discretion, periodically upgrade, improve or otherwise modify the Lukka Offerings. In addition, notwithstanding anything contained herein, Customer acknowledges and agrees that Lukka may, in its sole discretion, from time to time discontinue disseminating or otherwise change, replace or eliminate any portion of the data included within the Lukka Offerings, provided any such modification does not materially reduce the value or the intended purpose of Customer’s subscription.
2. Restrictions. Except as expressly authorized by this Agreement, Customer may not (and may not attempt to): (a) use the Lukka Offerings for any illegal or unauthorized purpose or engage in, encourage or promote any illegal activity, or any activity that violates this Agreement; (b) modify or adapt the Lukka Offerings; (c) infringe upon or violate the rights of Lukka pursuant to this Agreement; (d) license, sublicense, resell, distribute, lease, rent, lend, transfer, assign or otherwise dispose of the Lukka Offerings (or any components thereof); (e) use the Lukka Offerings to transmit, send, upload, create, store or otherwise publish any material that contains viruses, software routines or other harmful code, files or data designed to permit unauthorized access, to disable, erase or otherwise harm software, hardware or data, or to perform any other harmful actions; (f) copy, frame or mirror any part or content of the Lukka Offerings; (g) access the Lukka Offerings in order to build a competitive product or service; (h) interfere with or disrupt the integrity or performance of the Lukka Offerings; (i) attempt to gain unauthorized access to the Lukka Offerings or their related systems or networks; (j) attempt to use or access another user’s account without authorization or create a user account under false or fraudulent pretenses; or (k) use the Lukka Offerings to engage in any activities that may interfere with the ability of others to access or use the Lukka Offerings.
3. Data Rights.
3.1 Customer Data. All content, data or other materials provided, directly or indirectly, by Customer to Lukka (collectively, “Customer Data”) shall remain the sole property of the Customer. Customer hereby grants Lukka a non-exclusive, royalty-free license and right to host, use, process, display, reproduce, modify, transmit and store any Customer Data solely to the extent necessary to provide the Lukka Offerings to Customer. Customer has sole responsibility for the accuracy, quality, integrity, legality, reliability, and appropriateness of Customer Data, and for obtaining all rights related to Customer Data required by Lukka in order to provide the Lukka Offerings hereunder.
3.2 Service Data. Customer acknowledges and agrees that Lukka may collect and store any derived data resulting from Customer’s use of the Lukka Offerings (excluding Customer Data) hereunder (collectively, “Service Data”). Lukka may aggregate such Service Data with similar data obtained from other Lukka customers and Lukka may use such aggregated and anonymized data in order to improve the Lukka Offerings. All such Service Data shall be solely owned by Lukka.
3.3 Third-Party Data. Lukka may make available or otherwise integrate or interoperate certain third-party information with the Lukka Offerings (“Third-Party Data”), which such Third Party Data is governed by its own terms and conditions outside the scope of this Agreement. To the extent permitted by law, Lukka disclaims all liabilities (including direct, indirect, incidental, punitive or consequential damages) with respect to the performance or non-performance of such Third-Party Data, including, without limitation, any inaccuracy, incompleteness, failure, delay or outage of such Third-Party Data. Lukka has no obligation to monitor such Third-Party Data and does not control or endorse the information found in such Third-Party Data. EXCEPT AS EXPRESSLY WARRANTED IN THIS AGREEMENT, ALL SUCH THIRD-PARTY DATA IS PROVIDED “AS IS” AND LUKKA HEREBY DISCLAIMS ALL REPRESENTATIONS, WARRANTIES AND OTHER TERMS AND CONDITIONS WITH REGARD TO SUCH THIRD-PARTY DATA, WHETHER EXPRESS, IMPLIED OR STATUTORY, INCLUDING ALL WARRANTIES AND CONDITIONS OF SATISFACTORY QUALITY, MECHANTIBILITY, FITNESS FOR A PARTICULAR PURPOSE, TITLE AND NON-INFRINGEMENT.
4. Ownership and Reservation of Rights.
4.1 Lukka Offerings. Customer acknowledges and agrees that Lukka has exclusive and valuable property rights in and to the Lukka Offerings, that such Lukka Offerings constitutes valuable confidential information, trade secrets and/or proprietary rights of Lukka, not within the public domain, that such Lukka Offerings shall remain valuable confidential information, trade secrets and/or proprietary rights of Lukka and that, but for this Agreement and the Subscription Agreements attached hereto, Customer would have no rights or access to such Lukka Offerings. Without limiting the generality of the foregoing, Lukka does not grant to Customer any ownership rights in or to the Lukka Offerings, the related names and trademarks or associated components, including, without limitation, the content and proprietary systems used by Lukka in connection with the Lukka Offerings.
4.2 Customer. Notwithstanding any terms to the contrary in this Agreement, as between the parties, Customer owns all right, title and interest in and to the Customer Data and any and all Intellectual Property Rights (as defined below) embodied in the foregoing.
4.3 Reservation of Rights. Each party reserves all rights not expressly granted in this Agreement, and no licenses are granted by a party to the other party under this Agreement, whether by implication, estoppel or otherwise, except as expressly set forth in this Agreement. For the purpose of this Agreement, “Intellectual Property Rights” means all patents, copyrights, moral rights, trademarks, trade secrets and any other form of intellectual property rights recognized in any jurisdiction, including applications and registrations for any of the foregoing.
5. Fees and Payment Terms.
5.1 Fees. The fees for the Lukka Offerings are based on the applicable Subscription Period and are set forth in the applicable Subscription Agreement (“Subscription Fees”). Unless otherwise expressly specified in such Subscription Agreement, Customer will pay the Subscription Fees, in advance, prior to the commencement of each Subscription Period. Lukka agrees to submit an invoice to Customer for the Subscription Fees, and Customer will pay all invoiced amounts within 30 days of the date of each such invoice in U.S. Dollars by check, by ACH from a customer-owned ACH payment platform or by wire transfer of immediately available funds to an account designated in writing by Lukka. Lukka may, notwithstanding any terms to the contrary in this Agreement, modify or increase the Subscription Fees, at its sole discretion. In the event that Lukka elects to modify the Subscription Fees, Lukka will provide 120 days’ advance written notice to Customer, and such change will not become effective until the next Subscription Period.
5.2 Taxes and Additional Terms. Customer will be responsible for, and will pay all sales and similar taxes, all license fees and similar fees levied upon the provision of the Lukka Offerings provided under this Agreement excluding only taxes based solely on Lukka’s net income or status as an employer. In the event that Customer fails to meet its obligations pursuant to Section 5.1, Lukka may, at its option, take all or some of the following courses of action: (i) subject such unpaid amount to an interest charge equal to the lesser of one and one-half (11/2%) percent of the unpaid balance per month or the maximum rate allowed under applicable state law and/or (ii) immediately suspend the Lukka Offerings, in each case, until Customer has paid all amounts due and payable pursuant to this Agreement.
5.3 Continued Use After Expiration. In the event that Lukka, with the agreement of Customer, provides any Lukka Offerings to Customer after the expiration of the term of the Subscription Agreement covering such Lukka Offerings and the parties do not enter into a new Subscription Agreement governing such Lukka Offerings, the fees set out in the expired Subscription Agreement (and all other relevant terms and conditions of the expired Subscription Agreement) shall remain in effect and Customer shall be responsible for paying Lukka all such fees, provided that Lukka shall have the right to modify the fees upon advance written notice to Customer.
6. Representations and Warranties.
6.1 Mutual Representations. Each party represents and warrants to the other party that (a) it is validly existing and in good standing under the laws of the place of its incorporation or formation, (b) it has full power and authority to execute, deliver and perform its obligations under this Agreement and any Subscription Agreement executed hereunder, (c) the person signing this Agreement and any Subscription Agreement executed hereunder on its behalf has been duly authorized and empowered to enter into such agreement; (d) this Agreement and any Subscription Agreement executed hereunder is valid, binding and enforceable against it in accordance with its terms; and (e) neither the execution of this Agreement or any Subscription Agreement executed hereunder nor the performance of its obligations hereunder or thereunder will conflict with or result in a breach of, or constitute a default under, any provision of the articles of incorporation, business license, by-laws or articles of association (or other such charter documents) of such party, or any contract or agreement to which it is a party or is subject.
6.2 Lukka Representations. Lukka represents and warrants to the Customer that the Lukka Offerings as provided by Lukka (i) do not infringe upon the Intellectual Property Rights of any third party and (ii) will comply with all applicable laws and regulations.
6.3 Customer Representations. Customer represents and warrants to Lukka that (i) it has all requisite rights to use the Customer Data with the Lukka Offerings as contemplated by this Agreement, (ii) none of the Customer Data infringes, violates or misappropriates any Intellectual Property Rights, rights of privacy, rights of publicity or any other rights of any third party, (iii) the Customer Data does not contain any material or information that is illegal, libelous or slanderous, and (iv) its use of the Lukka Offerings will comply with all applicable laws and regulations.
7. Covenants and Acknowledgements Regarding Use of the Lukka Offerings. Customer hereby covenants and agrees that Customer shall adopt, implement and maintain adequate internal control procedures regarding the use of the Lukka Offerings reasonably designed to ensure that Customer’s use of the Lukka Offerings complies with this Agreement. Further, Customer acknowledges and agrees that Lukka does not handle, advise or otherwise manage Customer’s (or other customer) tax services and in no event do the Lukka Offerings include, nor is Lukka providing, nor intending to provide, legal, tax, accounting or compliance advice. Any regulatory compliance of Customer is solely the responsibility of Customer and is subject to the Customer’s own diligence and actions.
8. Non-Solicitation. Customer agrees that during the term of this Agreement and for a period of six (6) months thereafter, Customer will not, directly or indirectly, (x) induce any of the employees or consultants of Lukka with whom Customer has had contact or who were identified to Customer in connection with this Agreement to leave their employment or engagement with Lukka, as the case may be, or (y) solicit for employment or hire, employ or otherwise contract for the services of any such employee or consultant of Lukka; provided, that this Section 8 shall not preclude Customer from hiring any employee or consultant of Lukka who responds to a general solicitation through a public medium (including, but not limited to, through use of an employment agency or recruiting firm) not directly or indirectly targeted at employees or consultants of Lukka. The provisions of this Section 8 shall survive any termination of this Agreement.
9. Disclaimer. CUSTOMER EXPRESSLY ACKNOWLEDGES THAT EXCEPT AS SET FORTH IN SECTION 6 HEREOF, LUKKA DOES NOT MAKE ANY WARRANTIES, EXPRESS OR IMPLIED, TO CUSTOMER OR ANY THIRD PARTY WITH RESPECT TO THIS AGREEMENT, THE SUBSCRIPTION AGREEMENTS AND THE LUKKA OFFERINGS, INCLUDING, WITHOUT LIMITATION: (i) ANY WARRANTIES WITH RESPECT TO THE TIMELINESS, SEQUENCE, ACCURACY, COMPLETENESS, CURRENTNESS, MERCHANTABILITY, QUALITY OR FITNESS FOR A PARTICULAR PURPOSE OF THE LUKKA OFFERINGS OR (ii) ANY WARRANTIES AS TO THE RESULTS TO BE OBTAINED BY CUSTOMER OR ANY THIRD PARTY IN CONNECTION WITH THE USE OF THE LUKKA OFFERINGS. THE LUKKA OFFERINGS ARE PROVIDED, AND CUSTOMER AGREES THAT THE LUKKA OFFERINGS ARE PROVIDED, ON AN “AS IS,” “AS AVAILABLE” BASIS WITHOUT WARRANTIES OF ANY KIND.
10. Indemnity.
10.1 Mutual Indemnity. Each party (the “Indemnifying Party”) shall indemnify and defend the other party and its and their officers, directors, employees, agents and licensors and, in the case of Lukka, any affiliates providing software or Lukka Offerings under this Agreement (collectively the “Indemnified Parties”), against all losses, claims, actions, demands, suits, judgments, losses, expenses, damages and costs, including reasonable attorneys’ fees and settlement expenses (collectively “Losses”) that may arise directly or indirectly from the fraud, gross negligence, breach of this Agreement or willful misconduct by the Indemnifying Party or its officers, directors, employees or agents. The Indemnifying Party, in defending any such claim, action or proceeding, except with the written consent of the Indemnified Parties, shall not consent to entry of any judgment or enter into any settlement which (i) does not include, as an unconditional term, the grant by the claimant to the Indemnified Parties of a release of all liabilities in respect to such claim, action, or proceeding; or (ii) otherwise adversely affects the rights of the Indemnified Parties.
10.2 Lukka Indemnity. Lukka shall indemnify and defend Customer, its affiliates, and its and their officers, directors, employees, agents and licensors (collectively, the “Customer Indemnified Parties”), against all Losses that may arise directly or indirectly in connection with or related to any third party claim to the extent that such third party claim is based upon a claim that the Lukka Offerings or any portion thereof infringes or violates such third party’s Intellectual Property Rights, provided, however, that if any third party asserts an infringement claim contemplated in this Section, Lukka may, at its sole discretion, (i) defend against such claim; (ii) modify the Lukka Offerings, or any portion thereof in a manner that reasonably provide functionality that is substantially similar and fully enables Customer to operate its business as needed to the Lukka Offerings prior to the infringement claim; (iii) obtain a license from such third party to permit Customer to continue to use the Lukka Offerings; or (iv) terminate this Agreement. Lukka, in defending any such claim, action or proceeding, except with the written consent of the Customer Indemnified Parties, shall not consent to entry of any judgment or enter into any settlement which (i) does not include, as an unconditional term, the grant by the claimant to the Customer Indemnified Parties of a release of all liabilities in respect to such claim, action, or proceeding; or (ii) otherwise adversely affects the rights of the Customer Indemnified Parties. Notwithstanding the foregoing, Lukka shall have no obligation under this Section 10.2 for or with respect to any claims, actions, or demands alleging infringement that arise as a result of any modification or revision made to the Lukka Offerings by Customer or Customer’s use of the Lukka Offerings combined with any items not supplied by Lukka.
11. Limitation of Liability. TO THE MAXIMUM EXTENT PERMITTED BY LAW, EXCEPT WITH RESPECT TO DAMAGES RESULTING FROM BREACHES OF SECTIONS 4 OR 12 OR EACH PARTY’S INDEMNIFICATION OBLIGATIONS, IN NO EVENT WILL: (A) EITHER PARTY BE LIABLE TO THE OTHER PARTY OR ANY THIRD PARTY FOR ANY LOSS OF PROFITS, LOSS OF USE, LOSS OF REVENUE, LOSS OF GOODWILL, ANY INTERRUPTION OF BUSINESS OR FOR ANY INDIRECT, SPECIAL, INCIDENTAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OF ANY KIND ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT, WHETHER IN CONTRACT, TORT, STRICT LIABILITY OR OTHERWISE, EVEN IF SUCH PARTY HAS BEEN ADVISED OR IS OTHERWISE AWARE OF THE POSSIBILITY OF SUCH DAMAGES; AND (B) EITHER PARTY’S TOTAL LIABILITY ARISING OUT OF OR RELATED TO THIS AGREEMENT EXCEED THE SUBSCRIPTION FEES ACTUALLY PAID BY CUSTOMER WITH RESPECT TO THE APPLICABLE SUBSCRIPTION PERIOD WITHIN WHICH THE DAMAGES AROSE. THIS LIMITATION OF EACH PARTY’S LIABILITY IS CUMULATIVE, WITH ALL PAYMENTS FOR CLAIMS OR DAMAGES IN CONNECTION WITH THIS AGREEMENT BEING AGGREGATED TO DETERMINE SATISFACTION OF THE LIMIT. THE EXISTENCE OF ONE OR MORE CLAIMS WILL NOT ENLARGE THE LIMIT. THIS SECTION WILL BE GIVEN FULL EFFECT EVEN IF
ANY REMEDY SPECIFIED IN THIS AGREEMENT IS DEEMED TO HAVE FAILED OF ITS ESSENTIAL PURPOSE. FURTHER, NOTWITHSTANDING ANY TERMS TO THE CONTRARY IN THIS AGREEMENT, LUKKA WILL NOT BE LIABLE FOR ANY BREACH OF ITS SERVERS OR SYSTEMS, ANY HACKING OR ANY UNAUTHORIZED DISCLOSURE, UNAUTHORIZED USE OR ANY UNAUTHORIZED ACCESS TO ANY INFORMATION OR DATA (INCLUDING, BUT NOT LIMITED TO, CUSTOMER DATA) IN ANY MEDIUM.
12. Confidentiality and Non-Disclosure; Publicity.
12.1 Disclosure Restrictions. Any and all proprietary or confidential information, data, or documents provided by or on behalf of a party (the “Disclosing Party”) to the other party (the “Receiving Party”), whether disclosed in writing, electronically, orally, by inspection of tangible objects, or otherwise, whether or not authorized (collectively, “Confidential Information”), shall be held in strict confidence by the Receiving Party, and the Receiving Party shall take all steps reasonably necessary to preserve the confidentiality thereof using the same care it uses to protect its own confidential information of like importance, but not less than reasonable care. Without limiting the generality of the foregoing, Confidential Information of Lukka shall include the Lukka Offerings and the Service Data and Confidential Information of the Customer shall include the Customer Data. The terms of this Agreement, including any Subscription Agreement executed hereunder, shall also be deemed Confidential Information of both parties hereunder. A party’s Confidential Information shall not be used or disclosed by the other party for any purpose except as necessary to implement or perform this Agreement. The Receiving Party shall limit its use of and access to the Disclosing Party’s Confidential Information to only those of its employees, advisors or agents whose responsibilities require such use or access. The Receiving Party shall be liable for any breach of this Agreement by any of its employees, advisors, agents or any other Person who obtains access to or possession of any of the Disclosing Party’s Confidential Information from or through the Receiving Party. Customer acknowledges and agrees to notify Lukka immediately if Customer has reason to believe that unauthorized persons have obtained access to the Lukka Offerings, including, without limitation, Customer’s user identification numbers, passwords, etc.
12.2 Return of Information. At the written request of the Disclosing Party, the Receiving Party shall promptly destroy or return at Receiving Party’s sole discretion, all tangible and, to the extent practicable, intangible material in its possession or control embodying the Disclosing Party’s Confidential Information; provided, that where Receiving Party is required by judicial, legislative, governmental, regulatory or self-regulatory authority or by internal corporate document retention to maintain materials and documents containing Disclosing Party’s Confidential Information, Receiving Party shall not be required to return or destroy the materials and documents containing such Confidential Information. Notwithstanding termination of this Agreement, the Receiving Party shall continue to be bound by the provisions of this Section 12 so long as such party maintains such Confidential Information.
12.3 Limitations to Confidential Information. For purposes of this Section 12, Confidential Information shall not include information that: (i) at the time of use or disclosure by the Receiving Party is in the public domain through no fault of, action or failure to act by the Receiving Party; (ii) becomes legally known to the Receiving Party from a third-party source whom the Receiving Party does not know to be subject to any obligation to a Disclosing Party of confidentiality; (iii) was known by the Receiving Party prior to disclosure of such information by the Disclosing Party to the Receiving Party; or (iv) was independently developed by the Receiving Party without any use of Confidential Information.
12.4 Restrictions Reasonable. Each party acknowledges that the restrictions in this Section 12 are reasonable and necessary to protect the other’s legitimate business interest. Each party acknowledges that any breach of any of the provisions of this Section 12 may result in irreparable injury to the other for which money damages may not adequately compensate. If there is a breach, then the injured party shall be entitled, in addition to all other rights and remedies which it may have at law or in equity, to have a decree to seek specific performance or an injunction issued by any competent court, requiring the breach to be cured or enjoining all persons involved from continuing the breach.
12.5 Publicity. Neither party shall use the other party’s name, trade name, trademark or logo in connection with any press release or other announcements to the public, the media or the industry, including, without limitation, referencing the other party by name, tradename, trademark or logo on the party’s website or social media accounts, without, in each instance, obtaining the prior written approval of such other party.
13. Term and Termination
13.1 Term. Except as otherwise set forth herein or in any Subscription Agreement, the term of this Agreement shall commence as of the Effective Date and shall continue thereafter in full force and effect until the termination of Customer’s last outstanding Subscription Agreement. Unless otherwise specified in the Subscription Agreement, after the initial Subscription Period, each Subscription Agreement will then automatically renew for successive twelve (12) month Subscription Periods until either party provides the other party with a written notice to terminate that Subscription Agreement no less than 90 days prior to the close of the then-current Subscription Period.
13.2 Termination For Cause. Either party may terminate this Agreement for cause, if the other party is in material breach of this Agreement or a Subscription Agreement (including, without limitation, payment of fees or expenses) and does not remedy or cure such breach (i) within thirty (30) days after its receipt of written notice of such breach or (ii) in the case of any payment default, within five (5) days after receipt of written notice of the same; provided, however, that the parties agree that a breach by Customer of Section 2 hereof shall not be subject to cure. In addition, Lukka may terminate this Agreement and the license granted hereunder and any Subscription Agreement entered into herewith, at any time, without prior notice, if Customer has violated any applicable law or regulation in connection with its use of the Lukka Offering in any material way that cannot be cured. Termination of this Agreement for cause hereunder shall be deemed to automatically terminate all then outstanding Subscription Agreements.
13.3 Effect of Termination. Upon any expiration or termination of this Agreement: (a) all rights and licenses granted to Customer under this Agreement and the Subscription Agreements will immediately cease, (b) Customer will immediately pay all Subscription Fees then due and payable under any Subscription Agreement; and (c) the parties shall comply with Section 12.2 hereof. Notwithstanding the foregoing, those provisions of this Agreement or any Subscription Agreement that by their nature are intended to survive termination or expiration of this Agreement or Subscription Agreement shall so survive.
14. General Provisions.
14.1 Entire Agreement and Conflicts. This Agreement, together with each Subscription Agreement attached hereto, sets forth the entire agreement and understanding of the parties relating to the subject matter hereof, and supersedes all prior or contemporaneous agreements, proposals, negotiations, conversations, discussions and understandings, written or oral, with respect to such subject matter and all past dealing or industry custom.
14.2 Amendments and Waivers. No modification, addition or deletion or waiver of any rights under this Agreement will be binding on a party unless made in a writing clearly understood by the parties to be a modification or waiver and signed by a duly authorized representative of each party. No failure or delay (in whole or in part) on the part of a party to exercise any right or remedy hereunder will operate as a waiver thereof or effect any other right or remedy. All rights and remedies hereunder are cumulative and are not exclusive of any other rights or remedies provided hereunder or by law. The waiver of one breach or default or any delay in exercising any rights will not constitute a waiver of any subsequent breach or default.
14.3 Independent Contractors. Neither party will, for any purpose, be deemed to be an agent, franchisor, franchisee, employee, representative, owner or partner of the other party, and the relationship between the parties will only be that of independent contractors. Neither party will have any right or authority to assume or create any obligations or to make any representations or warranties on behalf of any other party, whether express or implied, or to bind the other party in any respect whatsoever.
14.4 Governing Law. This Agreement and the Subscription Agreements will be governed by and construed in accordance with the laws of the State of New York applicable to agreements made and to be entirely performed within the State of New York, without resort to its conflict of law provisions.
14.5 Severability. If any provision of this Agreement or any Subscription Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other provisions of this Agreement or such Subscription Agreement will nonetheless remain in full force and effect so long as the economic and legal substance of the transactions contemplated by this Agreement or such Subscription Agreement is not affected in any manner adverse to any party. Upon such determination that any provision is invalid, illegal or incapable of being enforced, the parties will negotiate in good faith to modify this Agreement or such Subscription Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled.
14.6 Counterparts. This Agreement and the Subscription Agreements may be executed: (a) in two or more counterparts, each of which will be deemed an original and all of which will together constitute the same instrument; and (b) by the parties by exchange of signature pages by mail or email (if email, signatures in Adobe PDF or similar format).
14.7 Force Majeure. Except for payments due under this Agreement, including, under any Subscription Agreement, neither party will be responsible for any failure to perform or delay attributable in whole or in part to any cause beyond its reasonable control, including but not limited to acts of God (fire, storm, floods, earthquakes, etc.), civil disturbances, disruption of telecommunications, disruption of power or other essential services, interruption or termination of service by any service providers being used by Lukka to link its servers to the Internet, labor disturbances, vandalism, cable cut, or any malicious or unlawful acts of any third party.
14.8 Notice. All notices, consents and other communications under or regarding this Agreement and any Subscription Agreement shall be in writing and shall be deemed to have been received on the earlier of the date of actual receipt, the third business day after being mailed by first class certified air mail, or the first business day after being sent by a reputable overnight delivery service. Any notice may be given by facsimile or email. Each party’s address for notices is set forth on the signature pages hereto. Either party may change its address for notices by giving written notice of the new address to the other party in accordance with this Section.
14.9 Assignment. This Agreement, including any Subscription Agreement attached hereto, shall bind, benefit and be enforceable by and against Lukka and Customer and, to extent permitted hereby, their respective successors and assigns. Neither party shall assign this Agreement, the Subscription Agreements or any of its rights hereunder or thereunder, nor delegate any of its obligations hereunder or thereunder, without the other party’s prior written consent. Any change of control of a party, and any assignment by merger or otherwise by operation of law, shall not constitute an assignment of this Agreement or the Subscription Agreements by a party for purposes of the consent required by this Section.
14.10 Jurisdiction and Process. Any controversy, claim or dispute arising out of or relating to this Agreement, including any Subscription Agreement attached hereto, or the breach thereof shall be settled solely and exclusively by binding arbitration in New York, New York administered by JAMS. Such arbitration shall be conducted in accordance with the then prevailing JAMS Streamlined Arbitration Rules & Procedures, with the following exceptions to such rules if in conflict: (a) one arbitrator shall be chosen by JAMS; (b) each party to the arbitration will pay an equal share of the expenses and fees of the arbitrator, together with other expenses of the arbitration incurred or approved by the arbitrator; and (c) arbitration may proceed in the absence of any party if written notice (pursuant to the JAMS’ rules and regulations) of the proceedings has been given to such party. Each party shall bear its own attorneys’ fees and expenses. The parties agree to abide by all decisions and awards rendered in such proceedings. Such decisions and awards rendered by the arbitrator shall be final and conclusive. All such controversies, claims or disputes shall be settled in this manner in lieu of any action at law or equity. IF FOR ANY REASON THIS ARBITRATION CLAUSE BECOMES NOT APPLICABLE THEN EACH PARTY, (i) TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY AS TO ANY ISSUE RELATING HERETO IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER MATTER INVOLVING THE PARTIES, AND (ii) SUBMITS TO THE EXCLUSIVE JURISDICTION AND VENUE OF THE FEDERAL OR STATE COURTS LOCATED IN NEW YORK COUNTY, NEW YORK AND EACH PARTY AGREES NOT TO INSTITUTE ANY SUCH ACTION OR PROCEEDING IN ANY OTHER COURT IN ANY OTHER JURISDICTION. Each party irrevocably and unconditionally waives any objection that it may now or hereafter have to the laying of venue of any action or proceeding arising out of or relating to this Agreement, including any Subscription Agreement attached hereto, in the courts referred to in this Section.
[Signature Page Follows]
In Witness Whereof, the parties authorized representatives have executed this Lukka Offerings Master Services Agreement as of the Effective Date set forth above.
| CUSTOMER | LUKKA, INC. | |||||||
| Signature: | /s/ Mark D. Jensen |
Signature: | /s/ Robert Materazzi | |||||
| By: | Mark D. Jensen | By: | Robert Materazzi | |||||
| Title: | Director, Global Procurement | Title: | Chief Executive Officer | |||||
| Date: | 02/04/2022 | Date: | 02/04/2022 | |||||
| Address: | 1555 Peachtree Street, NE | Address: | 130 5th Avenue, 5th Floor | |||||
| Atlanta, GA 30309 | New York, NY 10017 | |||||||
| Email: | global.procurement@invesco.com |
| ||||||
| Billing Contact: | Invesco AP | |||||||
| Billing Email: | NL-APP-MVQNPO@invesco.com | |||||||