EZET 10-K
Franklin Ethereum Trust (EZET)
10-K
2025-06-30
For: 2025-03-31
View Original
Added on
April 10, 2026
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
For the fiscal year ended March 31 , 2025
or
Commission File Number: 001-042169
SPONSORED BY FRANKLIN HOLDINGS, LLC
(Exact name of registrant as specified in its charter)
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| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
(650 ) 312-2000
(Address of principal executive offices, telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
| | | | | |
Securities registered or to be registered pursuant
to
Section 12(g) of the Act: None.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. ☐ Yes ☒ No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required
to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period
that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check
mark whether the registrant is a large
accelerated filer, an accelerated filer,
a non-accelerated filer,
a 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 Exchange
Act.
| Large Accelerated Filer | ☐ | 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 13(a) of the Exchange Act. ☐
Indicate by check mark whether the
registrant has filed a report on and attestation to its management’s assessment
of the effectiveness of its internal control over financial reporting under
Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report. ☐
If securities are registered
pursuant to Section 12(b) of the Act, indicate by check mark whether the financial
statements of the registrant included in the filing reflect the correction of
an error to previously issued financial statements. ☐
Indicate by check mark whether any
of those error corrections are restatements that required a recovery analysis
of incentive-based compensation received by any of the registrant’s executive
officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.). ☐ Yes ☒ No
As of September 30, 2024, the last business day of the registrant’s most
recently completed second fiscal quarter, the aggregate market value of the
registrant’s shares held by non-affiliates of the registrant was $27,592,405 , based upon the last
reported sales price for such date on the Cboe BZX Exchange, Inc.
The registrant had 1,700,000 outstanding shares as of June 3, 2025.
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K includes
statements which relate to future events or future performance. In some cases, you can identify such forward- looking
statements by terminology such as “may,”
“should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or the negative
of these terms or other
comparable terminology. All statements (other
than statements of historical fact) included in this report that address
activities, events or developments that may occur in the future, including
such matters as changes in commodity prices and market conditions (for ether and the Shares),
the Fund’s operations, the Sponsor’s plans
and references to the Fund’s
future success and other similar
matters are forward-looking statements. These statements are only predictions. Actual events or results may differ materially. These statements are based upon certain assumptions and analyses made by the Sponsor on the basis of its perception of historical trends,
current conditions and expected future developments, as well as other factors
it believes are appropriate in the circumstances. Whether or not actual results
and developments will conform to the Sponsor’s
expectations and predictions, however, is subject
to a number of risks and uncertainties, including the special
considerations discussed in this report,
general economic, market
and business conditions, changes in laws or regulations, including those concerning taxes, made by governmental authorities or regulatory bodies,
and other world economic and political developments. All forward-looking statements made in this report are qualified by these cautionary statements, and there can be no assurance
that the actual results or developments the Sponsor anticipates will be realized
or, even if substantially realized,
will result in the expected
consequences to, or have the expected effects
on, the Fund’s operations or the value of the Shares. None of the Trust, the Fund, the Sponsor, or the Trustee
or their respective affiliates is under a duty to update any of the forward-looking statements to conform
such statements to actual results
or to a change in the
Sponsor’s expectations or predictions.
EMERGING GROWTH COMPANY STATUS
The Trust is an “emerging growth
company,” as defined
in the JOBS Act. For as long as the Trust is an emerging
growth company, the Trust may take advantage of certain exemptions from various reporting
requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited
to, not being required to comply with the auditor
attestation requirements of Section 404(b)
of the Sarbanes– Oxley Act of 2002 (the “Sarbanes-Oxley Act”), reduced disclosure obligations regarding executive compensation in the Trust’s periodic
reports and audited
financial statements in its prospectus, exemptions from the requirements of holding advisory
“say-on-pay” votes on executive compensation and shareholder advisory
votes on “golden
parachute” compensation and exemption from any rules
requiring mandatory audit
firm rotation and auditor discussion and analysis and, unless otherwise determined by the SEC, any new audit rules adopted by the Public Company Accounting Oversight Board.
Under the JOBS Act, the Trust will remain an emerging growth company until
the
earliest of:
• the last day of the fiscal year during which the Trust has total annual gross revenues of $1.235 billion
or more;
• the last day of the fiscal year following the fifth anniversary of the completion of its initial public offering;
• the date on which the Trust has, during the previous three-year period, issued more than $1 billion in non-convertible debt; or
• the date on which the Trust is deemed to be a “large-accelerated filer” (i.e., an issuer that (1) has more than $700 million
in outstanding equity held by non-affiliates and (2) has been subject
to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) for at least 12 calendar months and has filed at least one annual report on Form 10-K.)
The JOBS Act also provides that an emerging
growth company can utilize the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933,
as amended (the “Securities Act”) for complying with new or revised
accounting standards.
Franklin Ethereum ETF
Franklin Ethereum Trust
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PART III
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PART I
The Franklin Ethereum Trust
(the “Trust”) was formed as a Delaware statutory trust on February 8, 2024, and
is governed by the provisions of an Amended and Restated Agreement and
Declaration of Trust dated as of May 30, 2024. The Trust currently offers a
single series, the Franklin Ethereum ETF (the “Fund”). The Fund issues common
units of beneficial interest (“Shares”), which represent units of fractional
undivided beneficial interest in and ownership of the Fund. The Shares are
listed on the Cboe BZX Exchange, Inc. (“Cboe BZX Exchange” or the “Exchange”)
under the symbol “EZET.” Shares are not obligations of, and are not guaranteed
by, the Sponsor or any of its subsidiaries or affiliates.
The Fund seeks to reflect generally the performance of the price of ether. The Fund seeks to reflect such performance before payment of the Fund's expenses and liabilities. The Shares have been designed to remove obstacles associated with the complexities and operational burdens involved in a direct investment in ether by providing an investment with a value that reflects the price of the ether owned by the Fund at such time, less the Fund’s expenses. The Fund is not a proxy for a direct investment in ether. Rather, the Shares are intended to provide a cost-effective alternative means of obtaining investment exposure through the securities markets that is similar to an investment in ether.
The Bank of New York Mellon (“BNYM”) serves as the Fund’s Administrator, Marketing Agent, Transfer Agent, and the Cash Custodian. The ether Custodian is Coinbase Custody Trust Company, LLC (“Coinbase Custody”). CSC Delaware Trust Company, a subsidiary of the Corporation Service Company (the “Trustee”), is the sole trustee of the Trust. Coinbase Inc., an affiliate of Coinbase Custody, serves as the prime broker (“Prime Broker”). Franklin Distributors, LLC is the marketing agent of the Fund (the “Marketing Agent”).
The Fund is a passive
investment vehicle and is not a leveraged product. The Sponsor does not
actively manage the ether held by the Fund. This means that the Sponsor does
not sell ether at times when its price is high or acquire ether at low
prices in the
expectation of future price increases. The Fund will not utilize
leverage, derivatives or similar instruments or transactions in seeking to meet
its investment objective. The Fund is not managed like a corporation or an
active investment vehicle. The Trust and the Fund do not have any officers,
directors, or employees. The Trust is not registered as an investment company
under the Investment Company Act of 1940, as amended (the “Investment Company
Act”) and is not required to register under such act. The Fund does not and
will not hold or trade in commodity futures contracts regulated under the
Commodity Exchange Act (“CEA”). The Fund is not a commodity pool for purposes
of the CEA and none of the Sponsor, Trustee or the Marketing Agent is subject
to regulation by the Commodity Futures Trading Commission as a commodity pool
operator or a commodity trading advisor under the CEA in connection with the
shares.
organization
The Trust is organized as a Delaware statutory trust. CSC Delaware Trust Company, a subsidiary of the Corporation Service Company, is the Trustee of the Trust.
The Trust was formed and is operated in a manner such that a series is liable only for obligations attributable to such series. This means that Shareholders of the Fund are not subject to the losses or liabilities of any other series, as may be created from time to time, and shareholders of any such other series are not subject to the losses or liabilities of the Fund. Accordingly, the debts, liabilities, obligations, and expenses (collectively, “Claims”) incurred, contracted for or otherwise existing solely with respect to the Fund are enforceable only against the assets of the Fund and not against any other series as may be established or the Trust generally. This limitation on liability is referred to as the “Inter-Series Limitation on Liability.” The Inter-Series Limitation on Liability is expressly provided for under the Delaware Statutory Trust Act, which provides that if certain conditions are met, then the debts of any series are enforceable only against the assets of such series and not against the assets of any other series or the Trust generally. For the avoidance of doubt, the Inter-Series Limitation on Liability applies to each series of the Trust, including the Fund and any other series that may be established.
The Fund creates and redeems Shares on a continuous basis but only in Creation Units consisting of 50,000 Shares or multiples thereof. Only Authorized Participants, which are registered broker-dealers who have entered into written agreements with the Sponsor and the Administrator, can place orders. The Fund engages in ether transactions for converting cash into ether (in association with purchase orders) and ether into cash (in association with redemption orders). The Fund conducts its ether purchase and sale transactions by, in its sole discretion, choosing to trade directly with third parties (each, a “Ether Trading Counterparty”), who are not registered broker-dealers pursuant to written agreements between such Ether Trading Counterparties and the Fund, or choosing to trade through the Prime Broker acting in an agency capacity with third parties through its Coinbase Prime service pursuant to the Prime Broker Agreement. An Ether Trading Counterparty may be an affiliate of an Authorized Participant.
Each Share represents a fractional undivided beneficial interest in the net assets of the Fund. Upon redemption of the Shares, the applicable Authorized Participant is paid solely out of the funds and property of the Fund. All Shares are transferable, fully paid, and non-assessable. The assets of the Fund consist primarily of ether held by the Ether Custodian on behalf of the Fund and cash. Creation Units are redeemed by the Fund in exchange for an amount of ether or cash equal to the amount of ether represented by the aggregate number of Shares redeemed. The Trust is not a registered investment company under the Investment Company Act and is not required to register under such 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 and the Fund.
The Fund is a passive investment vehicle and is not a leveraged product. The Sponsor does not actively manage the ether held by the Fund. The ether held by the Fund will only be sold (1) on an as-needed basis to pay the Fund’s expenses and to meet redemption requests, (2) in the event the Fund terminates and liquidates its assets, or (3) as otherwise required by law or regulation. The sale of ether by the Fund is a taxable event to Shareholders.
Under the Declaration of Trust, Shareholders have no voting rights except as the Sponsor may consider desirable and so authorize in its sole discretion.
The Sponsor may terminate the Trust or the Fund in its sole discretion. The Sponsor will give written notice of the termination of the Trust or the Fund, specifying the date of termination, to Shareholders of the Trust or the Fund, as applicable, at least 30 days prior to the termination of the Trust or the Fund. The Sponsor will, within a reasonable time after such termination, sell all the Fund’s ether not already distributed to Authorized Participants redeeming Creation Units, if any, in such a manner to effectuate orderly sales. The Sponsor shall not be liable for or responsible in any way for depreciation or loss incurred by reason of any sale or sales made in accordance with the provisions of the Declaration of Trust. The Sponsor may suspend its sales of the Fund’s ether upon the occurrence of unusual or unforeseen circumstances.
Investment Objective
The Fund seeks to reflect generally the performance of the price of ether before payment of the Fund’s expenses. The Shares are intended to offer a convenient means of making an investment similar to an investment in ether relative to acquiring, holding and trading ether directly on a peer-to-peer or other basis or via a digital asset platform. The Shares have been designed to remove obstacles associated with the complexities and operational burdens involved in a direct investment in ether by providing an investment with a value that reflects the price of the ether owned by the Fund at such time, less the Fund’s expenses. The Fund is not a proxy for a direct investment in ether. Rather, the Shares are intended to provide a cost-effective alternative means of obtaining investment exposure through the securities markets that is similar to an investment in ether.
An investment in Shares is:
Backed by ether held by the Ether Custodian on behalf of the Fund.
The Shares are backed by the assets of the Fund. The Ether Custodian keeps custody of all of the Fund’s ether, other than that which is maintained in the Trading Balance with the Prime Broker, in the Vault Balance. The Ether Custodian keeps the private keys associated with the Fund’s ether in the Vault Balance. The hardware, software, systems, and procedures of the Ether Custodian may not be available or cost-effective for many investors to access directly. A portion of the Fund’s ether holdings and cash holdings from time to time may temporarily be held with the Prime Broker, an affiliate of the Ether Custodian, in the Trading Balance, in connection with creations and redemptions of Creation Units and the sale of ether to pay the Sponsor’s fee and Fund expenses not assumed by the Sponsor, to the extent applicable, and in extraordinary circumstances, in connection with the liquidation of the Fund’s ether. These periodic holdings held in the Trading Balance with the Prime Broker represent an omnibus claim on the Prime Broker’s ether held on behalf of clients; these holdings exist across a combination of omnibus hot wallets, omnibus cold wallets or in accounts in the Prime Broker’s name on a trading venue (including third-party venues and the Prime Broker’s own execution venue) where the Prime Broker executes orders to buy and sell ether on behalf of clients.
As convenient and easy to handle as any other investment in shares.
Investors may purchase and sell Shares through traditional securities brokerage accounts and can avoid the complexities of handling ether directly (e.g., managing wallets and public and private keys themselves, or interfacing with a trading platform), which some investors may not prefer or may find unfamiliar.
Exchange listed.
The Shares are listed and traded on the Cboe BZX Exchange under the ticker symbol “EZET.”
calculation of nav; valuation of ether and the cf benchmarks index
The Sponsor has the exclusive authority to determine the Fund’s net asset value (“NAV”). The Sponsor has delegated to the Administrator the responsibility to calculate the NAV of the Fund, based on a pricing source selected by the Sponsor. In determining the Fund’s NAV, the Administrator will value the ether held by the Fund based on the Index, unless the Sponsor in its sole discretion determines that the Index is unreliable. The CF Benchmarks Index shall constitute the Index, unless the CF Benchmarks Index is not available or the Sponsor in its sole discretion determines the CF Benchmarks Index is unreliable as the Index and therefore determines not to use the CF Benchmarks Index as the Index. If the CF Benchmarks Index is not available or the Sponsor determines, in its sole discretion, that the CF Benchmarks Index is unreliable (referred to herein as a “Fair Value Event”), the Fund’s holdings may be fair valued by the Sponsor.
On each Business Day, as soon as practicable after 4:00 PM Eastern Time (“ET”), the Administrator evaluates the ether held by the Fund as reflected by the CF Benchmarks Index and determines the NAV of the Fund. For purposes of making these calculations, a Business Day means any day other than a day when the Cboe BZX Exchange is closed for regular trading.
The CF Benchmarks Index employed by the Fund is calculated on each Business Day by aggregating the notional value of ether trading activity across major ether spot exchanges. The CF Benchmarks Index is designed based on the IOSCO Principles for Financial Benchmarks and is a Registered Benchmark under the UK Benchmark Regulations (“BMR”). The administrator of the CF Benchmarks Index is CF Benchmarks Ltd. (the “Index Administrator”), a UK incorporated company, authorized and regulated by the Financial Conduct Authority (“FCA”) of the UK as a Benchmark Administrator, under UK BMR. The CF Benchmarks Index serves as a once-a-day benchmark rate of the U.S. dollar price of ether (USD/ETH), calculated as of 4:00 p.m. ET. The CF Benchmarks Index aggregates the trade flow of several ether exchange platforms, during an observation window between 3:00 p.m. and 4:00 p.m. ET into the U.S. dollar price of one ether at 4:00 p.m. ET. Specifically, the CF Benchmarks Index is calculated based on the “Relevant Transactions” (as defined below) of all of its constituent ether exchanges, which are currently Bitstamp, Kraken, itBit, Gemini, Coinbase, LMAX Digitial (the “Constituent Platforms”), and Crypto.com and which may change from time to time, as follows:
• All Relevant Transactions are added to a joint list, recording
the time of execution, and trade price for each transaction.
• The list is partitioned by timestamp into 12 equally-sized time
intervals of 5 (five) minute length.
• For each partition separately, the volume-weighted median trade
price is calculated from the trade prices and sizes of all Relevant
Transactions, i.e., across all Constituent Platforms. A volume-weighted median
differs from a standard median in that a weighting factor, in this case trade
size, is factored into the calculation.
• The ETHUSD_RR is then determined by the equally-weighted
average of the volume medians of all partitions.
The CF Benchmarks Index is solely calculated from spot Ether-USD transactions conducted on Constituent Platforms within the observation window of 3:00 p.m. to 4:00 p.m. ET, it does not include any futures prices in its methodology. A “Relevant Transaction” is any cryptocurrency versus U.S. dollar spot trade that occurs during the observation window between 3:00 p.m. and 4:00 p.m. ET on a Constituent Platform in the ETH/USD pair that is reported and disseminated by a Constituent Platform through its publicly available Application Programming Interface (“API”) and observed by the Index Administrator. Although the CF Benchmarks Index is intended to accurately capture the market price of ether, third parties may be able to purchase and sell ether on public or private markets and such transactions may take place at prices materially higher or lower than the CF Benchmarks Index price.
FEES AND EXPENSES OF THE FUND
The Fund’s only ordinary recurring expense is the fee paid to the Sponsor at an annual rate of 0.19% of the daily net asset value of the Fund. In exchange for the Sponsor’s fee, the Sponsor assumes the ordinary fees and expenses incurred by the Fund, including but not limited to the following: the fees charged by the Administrator, Marketing Agent, the Custodians and the Trustee, Cboe BZX Exchange listing fees, typical maintenance and transaction fees of the DTC, SEC registration fees, printing and mailing costs, tax reporting fees, audit fees, license fees and expenses, up to $500,000 per annum in ordinary legal fees and expenses. The Sponsor also pays the costs of the Fund’s organization and the initial offering costs and may not seek reimbursement of such costs.
The Sponsor’s fee is accrued daily at an annualized rate equal to 0.19% of the net asset value of the Fund and is payable at least quarterly in arrears in U.S. dollars or in-kind or any combination thereof. The Sponsor may, at its sole discretion and from time to time, waive all or a portion of the Sponsor’s fee for stated periods of time. The Sponsor is under no obligation to waive any portion of its fees and any such waiver shall create no obligation to waive any such fees during any period not covered by the waiver. The Fund sells ether as needed to pay the Sponsor’s fee. The Fund bears transaction costs, including any Ether network fees or other similar transaction fees, in connection with any sales of ether necessary to pay the Sponsor’s fee, as well as other Fund expenses (if any) that are not assumed by the Sponsor (expenses assumed by the Sponsor are specified above). Any Ether network fees and similar transaction fees incurred in connection with the creation or redemption of Creation Units are borne by the Authorized Participant. For a period from July 23, 2024, to January 31, 2025, the Sponsor waived a portion of the Sponsor’s fee so that the Sponsor’s fee after the fee waiver would be equal to 0.00% of the net asset value of the Fund for the first $10.0 billion of the Fund’s assets. In the future, if the Sponsor decides to waive all or a portion of the Sponsor’s fee, Shareholders will be notified in a prospectus supplement, in the Fund’s periodic reports and/or on the Sponsor’s website for the Fund.
The Sponsor is not required to pay any extraordinary or non-routine expenses. Extraordinary expenses are fees and expenses which are unexpected or unusual in nature, such as legal claims and liabilities and litigation costs or indemnification or other unanticipated expenses. Extraordinary fees and expenses also include material expenses which are not currently anticipated obligations of the Fund. The Fund is responsible for the payment of such expenses to the extent any such expenses are incurred. Routine operational, administrative, and other ordinary expenses are not deemed extraordinary expenses. In addition, the Fund may incur certain other non-recurring expenses that are not assumed by the Sponsor (expenses assumed by the Sponsor are described above), including but not limited to, taxes and governmental charges, any applicable brokerage commissions, Ether network fees and similar transaction fees that qualify as extraordinary or non-routine expenses as described above, financing fees, expenses and costs of any extraordinary services performed by the Sponsor (or any other service provider) on behalf of the Fund to protect the Fund or the interests of Shareholders (including, for example, in connection with any fork of the Ether blockchain, any Incidental Rights and any IR Virtual Currency), any indemnification of the Cash Custodian, Ether Custodian, Prime Broker, Administrator or other agents, service providers or counterparties of the Trust or the Fund and extraordinary legal fees and expenses, including any legal fees and expenses incurred in connection with litigation, regulatory enforcement or investigation matters or legal expenses in excess of $500,000 per year. The Sponsor may determine in its sole discretion to assume legal fees and expenses of the Fund in excess of the $500,000 per annum stipulated in the Sponsor Agreement. To the extent that the Sponsor does not voluntarily assume such fees and expenses, they are the responsibility of the Fund. The Fund’s organizational and offering costs are borne by the Sponsor and, as such, are the sole responsibility of the Sponsor. The Sponsor will not seek reimbursement or otherwise require the Fund, the Trust, the Trustee, or any Shareholder to assume any liability, duty, or obligation in connection with any such organizational and offering costs. Because the Fund does not have any income, it will need to sell ether to cover the Sponsor’s fee and expenses not assumed by the Sponsor, if any. Fund expenses not assumed by the Sponsor shall accrue daily and be payable by the Fund to the Sponsor at least quarterly in arrears. The Fund may also be subject to other liabilities (for example, as a result of litigation) that have also not been assumed by the Sponsor. The only source of funds to cover those liabilities are sales of ether held by the Fund. Even if there are no expenses other than those assumed by the Sponsor, and there are no other liabilities of the Fund, the Fund will still need to sell ether to pay the Sponsor’s fee. The result of these sales is a decrease in the amount of ether represented by each Share.
To cover the Sponsor’s fee and expenses not assumed by the Sponsor, the Sponsor or its delegate will cause the Fund to convert ether into U.S. dollars generally at the price available through the Prime Broker’s Coinbase Prime service (less applicable trading fees) through the Trading Platform which the Sponsor is able to obtain using commercially reasonable efforts. The number of ethers represented by a Share will decline each time the Fund pays the Sponsor’s fee, or any Fund expenses not assumed by the Sponsor by transferring or selling ethers. The quantity of ethers sold to permit payment of the Sponsor’s fee or Fund expenses not assumed by the Sponsor, will vary from time to time depending on the level of the Fund’s expenses and the value of ethers held by the Fund. Assuming that the Fund is a grantor trust for U.S. federal income tax purposes, each delivery or sale of ethers by the Fund for the payment of Fund expenses generally are a taxable event to Fund Shareholders. The Fund expects that any trading commissions associated with block trading, if applicable, are allocated across the Fund, and other client accounts managed by affiliates of the Sponsor (including registered and unregistered funds and separately managed accounts (“Client Accounts”)) on a pro rata basis.
Creation and Redemption of Shares
The Fund creates and redeems Shares on a continuous basis but only in Creation Units consisting of 50,000 Shares or multiples thereof. Only Authorized Participants, which are registered broker-dealers who have entered into written agreements with the Sponsor and the Administrator, can place orders. The Fund will engage in ether transactions for converting cash into ether (in association with purchase orders) and ether into cash (in association with redemption orders). The Fund will conduct its ether purchase and sale transactions by, in its sole discretion, choosing to trade directly with third parties (each, a “Ether Trading Counterparty”), who are not registered broker-dealers pursuant to written agreements between such Ether Trading Counterparties and the Fund, or choosing to trade through the Prime Broker acting in an agency capacity with third parties through its Coinbase Prime service pursuant to the Prime Broker Agreement. An Ether Trading Counterparty may be an affiliate of an Authorized Participant. At inception, in addition to the Prime Broker described above, the Trust on behalf of the Fund had entered into a Master Purchase and Sale Agreement for Digital Assets (the “Master Agreement”) with JSCT, LLC (“Jane Street”) and a Liquidity Provider Agreement with Virtu Financial Singapore Pte., Ltd. (“Virtu”) to allow the Fund to enter into spot purchase or sale transactions in ether on a principal to principal basis. Additional Ether Trading Counterparties may be added from time to time, subject to the discretion of the Sponsor. Virtu is under common control and ownership with Virtu Americas LLC and Jane Street is under common control and ownership with Jane Street Capital, LLC. Both Virtu Americas LLC and Jane Street Capital, LLC serve as an Authorized Participant of the Fund as of the date of this report.
The Authorized Participants deliver only cash to create Shares and receive only cash when redeeming Shares. Further, Authorized Participants do not directly or indirectly purchase, hold, deliver, or receive ether as part of the creation or redemption process or otherwise direct the Fund or a third-party with respect to purchasing, holding, delivering, or receiving ether as part of the creation or redemption process.
The Fund creates Shares by receiving ether from a third-party that is not the Authorized Participant and the Fund—not the Authorized Participant—is responsible for selecting the third-party to deliver the ether. Further, the third-party does not act as an agent of the Authorized Participant with respect to the delivery of the ether to the Fund or at the direction of the Authorized Participant with respect to the delivery of the ether to the Fund. The Fund redeems shares by delivering ether to a third-party that is not the Authorized Participant and the Fund—not the Authorized Participant—is responsible for selecting the third-party to receive the ether. Further, the third-party does not act as an agent of the Authorized Participant with respect to the receipt of the ether from the Fund or at the direction of the Authorized Participant with respect to the receipt of the ether from the Fund. The third-party is unaffiliated with the Fund and the Sponsor.
Creation Procedures
The Fund issues Shares only in Creation Units of 50,000 or multiples thereof, based on the quantity of ether attributable to each Share (net of accrued but unpaid Sponsor’s fee and any accrued but unpaid expenses or liabilities), solely in exchange for cash. On any Business Day, an Authorized Participant may place an order with the Transfer Agent to create one or more Creation Units. Purchase orders must be placed by 2:00 p.m. Eastern time, or the close of regular trading on the Exchange, whichever is earlier. The day on which an order is received by the Transfer Agent is considered the purchase order date.
A creation transaction fee is imposed to offset the transfer and other transaction costs associated with the issuance of Creation Units. The Authorized Participant pays to the Administrator (1) a transaction fee on each purchase order and (2) the transfer, processing and other transaction costs charged by the Ether Custodian in connection with the issuance of Creation Units for such purchase order (including Ether network fees) (“Custody Transaction Costs”). The Administrator reimburses any Custody Transaction Costs to the Ether Custodian according to the amounts invoiced by the Ether Custodian. Any Ether network fees and similar transaction fees incurred in connection with the creation of Creation Units are borne by the Authorized Participant.
The date the order is received will determine the estimated cash amount (the “Creation Unit Deposit Amount”) the Authorized Participant needs to deposit and the ether amount (the “Creation Ether Amount”) the Fund needs to purchase from the Ether Trading Counterparty or through the Prime Broker. The final cash amounts are determined after the net asset value of the Fund is struck and the Fund’s ether transactions have settled. Fractions of an ether smaller than 0.00000001 (known as a 10 “gwei”) are disregarded for purposes of the computation of the Creation Ether Amount. Orders received after the order cutoff time on a Business Day will not be accepted and should be resubmitted on the following Business Day.
If the Sponsor (or its designee) accepts the purchase order, it will transmit to the Authorized Participant, via electronic mail message or other electronic communication, no later than 2:45 p.m. ET on the date such purchase order is received, or deemed received, a copy of the purchase order endorsed “Accepted” by the Sponsor (or its designee) and indicating the Creation Unit Deposit Amount that the Authorized Participant must deliver to the Cash Custodian or Prime Broker in exchange for each Creation Unit. Prior to the Sponsor’s acceptance as specified above, a purchase order will only represent the Authorized Participant’s unilateral offer to deposit cash in exchange for Creation Units and will have no binding effect upon the Fund, the Sponsor, the Transfer Agent, the Ether Custodian or any other party.
The Creation Unit Deposit Amount necessary for the creation of a Creation Unit changes from day to day. On each day that the Exchange is open for regular trading, the Administrator adjusts the cash amount constituting the Creation Unit Deposit Amount and the quantity of ether constituting the Creation Ether Amount as appropriate to reflect sales of ether, any loss of ether that may occur, and accrued expenses. The computation is made by the Administrator as promptly as practicable after 4:00 PM ET. The Administrator determines the Creation Unit Deposit Amount for a given day by multiplying the NAV by the number of Shares in each Creation Unit (50,000) and determine the Creation Ether Amount for a given day by dividing the Creation Unit Deposit Amount for that day by that day’s CF Benchmarks Index. The Creation Unit Deposit Amount and the Creation Ether Amount so determined is made available to all Authorized Participants and Ether Transaction Counterparties, and is made available on the Sponsor’s website for the Shares.
On the date of the purchase order, the Fund chooses, in its sole discretion, to enter into a transaction with a Ether Trading Counterparty or the Prime Broker to buy ether in exchange for the cash proceeds from such purchase order. For settlement of a creation (which is generally expected to be the trade date plus one (T+1) Business Day), the Fund delivers Shares to the Authorized Participant in exchange for cash received from the Authorized Participant. Meanwhile, the Ether Trading Counterparty or Prime Broker, as applicable, delivers the required ether pursuant to its trade with the Fund into the Fund’s Trading Balance with the Prime Broker in exchange for cash. In the event the Fund has not been able to successfully execute and complete settlement of a ether transaction by the settlement date of the purchase order, the settlement date may be delayed. With respect to a purchase order, as between the Fund and the Authorized Participant, the Authorized Participant is responsible for the dollar cost of the difference between the ether price utilized in calculating NAV on the trade date and the price at which the Fund acquires the ether to the extent the price realized in buying the ether is higher than the ether price utilized in the NAV. To the extent the price realized in buying the ether is lower than the price utilized in the NAV, the Authorized Participant shall keep the dollar impact of any such difference.
Whether the purchase of ether was entered into with a Ether Trading Counterparty or via the Prime Broker, such party delivers ether related to such transaction to the Fund’s Trading Balance. This transfer is an “off-chain” transaction that is recorded in the books and records of the Prime Broker.
Because the Fund’s Trading Balance may not be funded with cash on the trade date for the purchase of ether associated with the purchase order, the Fund may borrow Trade Credits in the form of cash from the Trade Credit Lender pursuant to the Trade Financing Agreement or may require the Authorized Participant to deliver the required cash for the purchase order on the trade date. The extension of Trade Credits on the trade date allows the Fund to purchase ether through the Prime Broker on the trade date, with such ether being deposited in the Fund’s Trading Balance. For settlement of a creation, the Fund delivers Shares to the Authorized Participant in exchange for cash received from the Authorized Participant. To the extent Trade Credits were utilized, the Fund uses the cash to repay the Trade Credits borrowed from the Trade Credit Lender. Any financing fee owed to the Trade Credit Lender is deemed part of trade execution costs and embedded in the trade price for each transaction. Any trade financing fees incurred in connection with the creation of Creation Units are borne by the Authorized Participant.
Upon the deposit by the Ether Trading Counterparty or the Prime Broker of the corresponding amount of ether with the Fund’s account at the Prime Broker, and the payment of the applicable transaction fee, Custody Transaction Costs, and of any expenses, taxes or charges (such as stamp taxes or stock transfer taxes or fees), the Transfer Agent will deliver the appropriate number of Creation Units to the DTC account of the depositing Authorized Participant. As of March 31, 2025, Jane Street Capital, LLC, J.P. Morgan Securities LLC, Virtu Americas LLC, Citadel Securities LLC, and Goldman Sachs & Co. LLC have each executed an Authorized Participant Agreement and are the only Authorized Participants. Additional Authorized Participants may be added at any time, subject to the discretion of the Sponsor.
In connection with the paragraph above, when the Fund purchases ether, the deposit of ether will initially be credited to the Fund’s Trading Balance with the Prime Broker before being swept to the Fund’s Vault Balance with the Ether Custodian pursuant to a regular end-of-day sweep process. Transfers of ether into the Fund’s Trading Balance are off-chain transactions and transfers from the Fund’s Trading Balance to the Fund’s Vault Balance are “on-chain” transactions represented on the ether blockchain. Any costs related to transactions and transfers from the Fund’s Trading Balance to the Fund’s Vault Balance are borne by the Authorized Participant (and not the Fund or its Shareholders).
Because the Sponsor assumes what are expected to be most of the Fund’s expenses under the unitary fee arrangement, and the Sponsor’s fee accrues daily at the same rate, in the absence of any extraordinary expenses or liabilities, the amount of ether by which the Creation Ether Amount will decrease each day will be predictable. The Sponsor causes the Administrator to make available on each Business Day an indicative Creation Unit Deposit Amount for the next Business Day. Authorized Participants may use that indicative Creation Unit Deposit Amount as guidance regarding the amount of cash that they may expect to have to deposit with the Administrator in respect of purchase orders placed by them on such next Business Day and accepted by the Sponsor. The agreement entered into with each Authorized Participant provides, however, that once a purchase order has been accepted by the Sponsor, the Authorized Participant are required to deposit with the Administrator the Creation Unit Deposit Amount as determined by the Sponsor on the effective date of the purchase order.
No Shares are issued unless and until the Prime Broker has informed the Sponsor that the corresponding amount of ether has been received in the Fund’s account. Disruption of services at the Prime Broker or Ether Custodian would have the potential to delay settlement of the ether related to Share creations.
Ether transactions that occur on the blockchain are susceptible to delays due to ether network outage, congestion, spikes in transaction fees demanded by validators, or other problems or disruptions. To the extent that ether transfers from the Fund’s Trading Balance to the Fund’s Vault Balance are delayed due to congestion or other issues with the Ether network, such ether will not be held in cold storage in the Vault Balance until such transfers can occur.
The Fund may, and upon the direction of the Sponsor shall, suspend the acceptance of purchase orders or the delivery or registration of transfers of Shares, or may, and upon the direction of the Sponsor shall, refuse a particular purchase order, delivery or registration of Shares (i) during any period when the transfer books of the Transfer Agent are closed or (ii) at any time, if the Sponsor thinks it advisable for any reason.
Ether held in the Fund’s Ether Custodian account is the property of the Fund and is not traded, leased, or loaned under any circumstances.
Rejection of Purchase Orders
The Sponsor or its designee has the absolute right, but does not have any obligation, to reject any purchase order if the Sponsor determines that:
• the purchase order is not in proper form;
• it would not be in the best interest of the Shareholders of the
Fund;
• the acceptance of the purchase order would have adverse tax
consequences to the Fund or its Shareholders;
• the acceptance or receipt of the purchase order would, in the
opinion of counsel to the Sponsor, be unlawful; or
• circumstances outside the control of the Fund, the Sponsor, the
Marketing Agent or the Ether Custodian or Cash Custodian make it, for all
practical purposes, not feasible to process the order (including if the Sponsor
determines that the investments available to the Fund at that time will not
enable it to meet its investment objective).
None of the Sponsor, the Transfer Agent, the Ether Custodian or the Cash Custodian are liable for the rejection of any purchase order. The Fund may reject any purchase order that is not in proper form.
Redemption Procedures
The Fund redeems Creation Units solely in exchange for cash proceeds from selling the amount of ether represented by the aggregate number of Shares redeemed. On any Business Day, an Authorized Participant may place an order with the Transfer Agent to redeem one or more Creation Units. Redemption orders must be placed by 2:00 p.m. Eastern time, or the close of regular trading on the Exchange, whichever is earlier. The day on which an order is received by the Transfer Agent is considered the redemption order date.
A redemption transaction fee is imposed to offset transfer and other transaction costs incurred by the Fund. The Authorized Participant pays to the Administrator (1) a transaction fee on each redemption order and (2) the transfer, processing and other transaction costs charged by the Ether Custodian in connection with the redemption of Creation Units for such redemption order (including Ether network fees) (“Custody Transaction Costs”). The Administrator will reimburse any Custody Transaction Costs to the Ether Custodian according to the amounts invoiced by the Ether Custodian. Any Ether network fees and similar transaction fees incurred in connection with the redemption of Creation Units are borne by the Authorized Participant.
On the date of the redemption order, the Fund may choose, in its sole discretion, to enter into a transaction with a Ether Trading Counterparty or the Prime Broker, to sell ether in exchange for cash. Also, on the date of the redemption order, the Fund instructs the Ether Custodian to prepare to move the associated ether from the Fund’s Vault Balance with the Ether Custodian to the Fund’s Trading Balance with the Prime Broker. For settlement of a redemption (which is generally expected to be the trade date plus one (T+1) Business Day), the Authorized Participant delivers the necessary Shares to the Fund, a Ether Trading Counterparty or the Prime Broker, as applicable, delivers the cash to the Fund associated with the Fund’s sale of ether, ether is delivered to the Ether Trading Counterparty’s account at the Prime Broker or directly to the Prime Broker, as applicable, and the Fund delivers cash to the Authorized Participant. In the event the Fund has not been able to successfully execute and complete settlement of a ether transaction by the settlement date of the redemption order, the settlement date may be delayed. With respect to a redemption order, between the Fund and the Authorized Participant, the Authorized Participant is responsible for the dollar cost of the difference between the ether price utilized in calculating the NAV on the trade date and the price realized in selling the ether to raise the cash needed for the cash redemption order to the extent the price realized in selling the ether is lower than the ether price utilized in the NAV. To the extent the price realized from selling the ether is higher than the price utilized in the NAV, the Authorized Participant shall get to keep the dollar impact of any such difference.
The transfers of ether from the Fund’s Trading Balance to the Ether Trading Counterparty’s account at the Prime Broker or to the Prime Broker is an “off-chain” transaction that is recorded in the books and records of the Prime Broker.
The Fund’s Trading Balance with the Prime Broker may not be funded with ether on the trade date for the sale of ether in connection with the redemption order, when ether remains in the Fund’s Vault Balance with the Ether Custodian at the point of intended execution of a sale of ether. In those circumstances the Fund may borrow Trade Credits in the form of ether from the Trade Credit Lender, which allows the Fund to sell ether through the Prime Broker on the trade date, and the cash proceeds are deposited in the Fund’s Trading Balance with the Prime Broker. For settlement of a redemption where Trade Credits were utilized, the Fund delivers cash to the Authorized Participant in exchange for Shares received from the Authorized Participant. In the event Trade Credits were used, the Fund will use the ether moved from the Fund’s Vault Balance with the Ether Custodian to the Trading Balance with the Prime Broker to repay the Trade Credits borrowed from the Trade Credit Lender. Any trade financing fees incurred in connection with the redemption of Creation Units are borne by the Authorized Participant.
Transfers of ether from the Fund’s Vault Balance to the Fund’s Trading Balance are “on-chain” transactions represented on the ether blockchain.
Ether transactions that occur on the blockchain are susceptible to delays due to ether network outages, congestion, spikes in transaction fees demanded by validators, or other problems or disruptions. To the extent that ether transfers from the Fund’s Vault Balance to the Fund’s Trading Balance are delayed due to congestion or other issues with the ether network or the Fund’s operations, redemptions in the Fund could be delayed.
Disruption of services at the Prime Broker, Ether Custodian, Cash Custodian or the Authorized Participant’s banks would have the potential to delay settlement of the ether related to Share redemptions.
Upon the surrender of such Shares and the payment of the applicable transaction fee, Custody Transaction Costs and of any expenses, taxes or charges (such as stamp taxes or stock transfer taxes or fees) by the redeeming Authorized Participant, and the completion of the sale of ether for cash by the Fund, the Sponsor (or its designee) will instruct the delivery of cash to the Authorized Participant. As noted above, the Authorized Participant is responsible for the dollar cost of the difference between the value of ether calculated by the Administrator for the applicable NAV per Share of the Fund and the price at which the Fund sells ether to raise the cash needed for the cash redemption order to the extent the price realized in selling the ether is lower than the ether price utilized in the NAV. To the extent the price realized from selling the ether is higher than the price utilized in the NAV, the Authorized Participant shall get to keep the dollar impact of any such difference.
The redemption distribution due from the Fund are delivered once the Transfer Agent notifies the Sponsor or its delegate that the Authorized Participant has delivered the Shares represented by the Creation Units to be redeemed to the Fund’s DTC account. If the Fund’s DTC account has not been credited with all of the Shares of the Creation Units requested to be redeemed, the redemption distribution will be delayed until such time as the Transfer Agent confirms receipt of all such Shares. Once the Transfer Agent notifies the Sponsor or its delegate that the Shares have been received in the Fund’s DTC account, the Administrator instructs the Cash Custodian to transfer the cash amount from the Fund’s Cash Custodian account to the Authorized Participant. The redemption distribution due from the Fund will generally be delivered on the next business day following the redemption order date if the Fund’s DTC account has been credited with the Creation Units to be redeemed. Shares can only be surrendered for redemption in Creation Units of 50,000 Shares each.
The date the order is received determines the cash to be received in exchange. Orders received after the order cutoff time on a Business Day will not be accepted and should be resubmitted on the following Business Day.
All taxes incurred in connection with the delivery of cash to the Cash Custodian in exchange for Creation Units (including any applicable value added tax) are the sole responsibility of the Authorized Participant making such delivery.
Ether held in the Fund’s Ether Custodian account is the property of the Trust and is not traded, leased, or loaned under any circumstances. Except for transactions with the Trade Credit Lender, the Fund’s assets may not be loaned, pledged, hypothecated or re-hypothecated by any entity, including the Fund, Sponsor, Prime Broker or Ether Custodian.
Suspension of Creation or Redemption Orders
As described above, the Fund may, and upon the direction of the Sponsor shall, suspend the acceptance of purchase orders or the delivery or registration of transfers of Shares, or may, and upon the direction of the Sponsor shall, refuse a particular purchase order, delivery or registration of Shares (i) during any period when the transfer books of the Transfer Agent are closed or (ii) at any time, if the Sponsor thinks it advisable for any reason.
The Fund may, in its discretion, and will, when directed by the Sponsor, suspend the right of redemption, generally or with respect to a particular redemption order as follows: (1) during any period in which regular trading on the Cboe BZX Exchange is suspended or restricted, or the Exchange is closed (other than scheduled weekend or holiday closings), (2) during any period when the Sponsor determines that delivery, disposal or evaluation of ether is not reasonably practicable (for example, as a result of an interruption in services or availability of the Prime Broker, Ether Custodian, Cash Custodian, Administrator, or other service providers to the Fund, act of God, catastrophe, civil disturbance, government prohibition, war, terrorism, strike or other labor dispute, fire, force majeure, interruption in telecommunications, order entry systems, Internet services, or network provider services, unavailability of Fedwire, SWIFT or banks’ payment processes, significant technical failure, bug, error, disruption or fork of the Ether network, hacking, cybersecurity breach, or power, Internet, or Ether network outage, or similar event), or (3) during such other period as the Sponsor determines to be necessary for the protection of the Shareholders. None of the Fund, the Sponsor or the Administrator will not be liable to any person or liable in any way for any loss or damages that may result from any such rejection, suspension or postponement.
The Fund may reject any redemption order that is not in proper form.
If the Fund suspends creations or redemptions, Shareholders will be notified in a prospectus supplement, in the Fund’s periodic reports, and/or on the Fund’s website.
Service Providers of the Trust
The Sponsor of the Trust and the Fund is Franklin Holdings, LLC. The Sponsor is a Delaware limited liability company and was formed July 21, 2021. Franklin Resources, Inc., a corporation registered under Delaware law, is the ultimate parent company of the Sponsor.
The Sponsor is responsible for establishing the Fund and for the registration of the Shares. The Sponsor generally oversees the performance of the Fund’s principal service providers, but does not exercise day-to-day oversight over such service providers. The Sponsor, with assistance and support from the Administrator, is responsible for preparing and filing periodic reports on behalf of the Fund with the SEC and provides any required certification for such reports. The Sponsor designates the independent registered public accounting firm of the Fund and may from time to time employ legal counsel for the Fund. The Marketing Agent assists the Sponsor in marketing the Shares. The Marketing Agent is an affiliate of the Sponsor.
The Sponsor maintains a public website on behalf of the Fund, containing information about the Fund and the Shares, including the Fund's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Securities Act, which can be accessed free of charge, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The Fund’s website is https://www.franklintempleton.com/investments/options/exchange-traded-funds/products/40521/SINGLCLASS/franklin-ethereum-etf/EZET. The information on the Fund’s website is not, and shall not be deemed to be, part of this report or incorporated into any other filings we make with the SEC. Additional information regarding the Trust may also be found on the SEC’s EDGAR database at www.sec.gov.
Liability of the Sponsor and Indemnification
The Sponsor is not liable to the Trust, Fund, or any series of the Trust, the Trustee or any Shareholder for any action taken or for refraining from taking any action in good faith, or for errors in judgment or for depreciation or loss incurred by reason of the sale of any ether or other assets of the Fund or the Trust. However, the preceding liability exclusion does not protect the Sponsor against any liability resulting from its own gross negligence, bad faith, or willful misconduct.
The Sponsor and each of its shareholders, members, directors, officers, employees, affiliates and subsidiaries are indemnified by the Trust and held harmless against any losses, liabilities or expenses incurred in the performance of its duties under the Declaration of Trust without gross negligence, bad faith, or willful misconduct. The Sponsor may rely in good faith on any paper, order, notice, list, affidavit, receipt, evaluation, opinion, endorsement, assignment, draft or any other document of any kind prima facie properly executed and submitted to it by the Trustee, the Trustee’s counsel or by any other person for any matters arising under the Declaration of Trust. The Sponsor shall in no event be deemed to have assumed or incurred any liability, duty, or obligation to any Shareholder or to the Trustee other than as expressly provided for in the Declaration of Trust. Such indemnity includes payment from the Trust of the costs and expenses incurred in defending against any indemnified claim or liability under the Declaration of Trust.
CSC Delaware Trust Company, a subsidiary of the Corporation Service Company, serves as Trustee of the Trust. The Trustee’s principal offices are located at 251 Little Falls Drive, Wilmington, DE 19808. The structure of the Trust and the number and/or identity of the Trustee may be amended in the future via amendments to the Trust’s Certificate of Trust and the Declaration of Trust.
The Trustee has none of the duties or liabilities of the Sponsor. The duties of the Trustee shall be limited to (i) accepting legal process served on the Trust in the State of Delaware, (ii) 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 Statutory Trust Act, and (iii) any other duties specifically allocated to the Trustee in the Declaration of Trust or agreed in writing with the Sponsor from time to time.
Liability of the trustee and Indemnification
The Trustee is not liable or accountable to the Trust or any other person or under any agreement to which the Trust or any series of the Trust is a party, except for a Trustee’s breach of its obligations pursuant to the Declaration of Trust or its own willful misconduct, bad faith or gross negligence. The Trustee and each of its officers, affiliates, directors, employees, and agents are indemnified by the Trust from and against any losses, claims, taxes, damages, reasonable expenses, and liabilities incurred with respect to the creation, operation or termination of the Trust, the execution, delivery or performance of the Declaration of Trust or the transactions contemplated thereby; provided that the indemnified party acted without willful misconduct, bad faith or gross negligence.
the administrator
The Sponsor entered into a Fund Administration and Accounting Agreement with BNY Mellon Asset Servicing, a division of The Bank of New York Mellon, to provide administration and accounting services to the Trust. Pursuant to the terms of the Agreement and under the supervision and direction of the Sponsor and the Trust, BNY Mellon Asset Servicing keeps the operational records of the Trust and prepares and files certain regulatory filings on behalf of the Trust. BNY Mellon Asset Servicing may also perform other services for the Trust pursuant to the Agreement as mutually agreed upon by the Sponsor, the Trust and BNY Mellon Asset Servicing from time to time. The Administrator’s fees are paid on behalf of the Trust by the Sponsor.
THE Transfer AGENT
The Bank of New York Mellon serves as the Transfer Agent of the Trust pursuant to the terms and provisions of the Transfer Agency and Service Agreement (the “Transfer Agency and Service Agreement”). The Transfer Agent: (1) facilitates the issuance and redemption of Shares of the Trust; (2) responds to correspondence by Trust shareholders and others relating to its duties; (3) maintains shareholder accounts; and (4) makes periodic reports to the Trust.
The Ether Custodian for the Fund’s ether holdings is Coinbase Custody Trust Company, LLC, and the Trust, on behalf of the Fund, has entered the Custodian Agreement with the Ether Custodian. The Sponsor may, in its sole discretion, add or terminate ether custodians at any time. The Sponsor may, in its sole discretion, change the custodian for the Fund’s ether holdings, but it will have no obligation whatsoever to do so or to seek any particular terms for the Fund from other such custodians.
The Ether Custodian keeps custody of all of the Fund’s ether in segregated accounts in the cold (i.e., non-networked) Vault Balance other than the Fund’s ether, which is temporarily maintained in the Trading Balance with the Prime Broker. Fund assets held in the Vault Balance are held in segregated wallets, and are not commingled with the Ether Custodian’s or its affiliates’ assets, or the assets of the Ether Custodian’s other customers. The Vault Balance is held at Ether blockchain addresses at which only the Fund’s assets are held. The percentage of the Fund’s ether that is held in the Cold Vault Balance will vary as dictated by business needs and there is no set percentage. The Ether Custodian keeps all of the private keys associated with the Fund’s ether in cold storage (i.e., on a non-networked computer or electronic or storage device).
Cold storage is a safeguarding method by which the private key(s) corresponding to ether is (are) generated and stored in an offline manner. Private keys are generated in offline computers or devices that are not connected to the internet so that they are more resistant to being hacked. By contrast, in hot storage, the private keys are held online, where they are more accessible, leading to more efficient transfers, though they are potentially more vulnerable to being hacked.
Cold storage of private keys involves keeping such keys on a non-networked computer or electronic device or storing the public key and private keys on a storage device or printed medium and deleting the keys from all computers. The Ether Custodian receives deposits of ether but does not send ether without use of the corresponding private keys. Such private keys are stored in cold storage facilities within the United States and Europe, exact locations of which are not disclosed for security reasons. A limited number of employees at the Ether Custodian are involved in private key management operations, and the Ether Custodian has represented that no single individual has access to full private keys.
The Trust retains audit rights with respect to the verification of the Fund’s ether. Specifically, all copies of records of Coinbase Custody are at all times during its regular business hours open for inspection and use by duly authorized officers, employees or agents of the Trust. In addition, the Ether Custodian provides twice per calendar year the Trust with a copy of its Service Organizational Control (SOC) 1 and 2 reports prepared in accordance with the requirements of AT section 801, Reporting on Controls at a Service Organization or other information necessary to verify that satisfactory internal control systems and procedures are in place. The Ether Custodian’s internal audit team performs periodic internal audits over custody operations, and the Ether Custodian has represented that SOC attestations covering private key management controls are also performed on the Ether Custodian by an external provider.
Coinbase Global, Inc. (“Coinbase Global”) maintains a commercial crime insurance policy which is intended to cover the loss of client assets held by Coinbase Insureds, including from employee collusion or fraud, physical loss including theft, damage of key material, security breach or hack, and fraudulent transfer. The insurance maintained by Coinbase Global is shared among all of the Coinbase Insured’s customers, is not specific to the Fund or to customers holding ether with the Ether Custodian or Prime Broker and may not be available or sufficient to protect the Fund from all possible losses or sources of losses.
In the event of a fork, the Coinbase Entities may temporarily suspend Prime Broker Services (with or without notice to the Fund). The Coinbase Entities may, in their sole discretion, determine whether or not to support (or cease supporting) either branch of the forked protocol entirely. The Coinbase Entities are required to use commercially reasonable efforts to timely select at least one of the forked protocol branches to support and will identify such selection in a notice reasonably in advance of such fork (to the extent practicable) to provide a Fund the opportunity to arrange for the transfer of the relevant digital assets, which the Coinbase Entities shall use commercially reasonable efforts to accomplish in advance of such fork. Neither the Ether Custodian nor the Prime Broker will have any liability, obligation or responsibility whatsoever arising out of or relating to the operation of an unsupported branch of the Ether blockchain in the event of a fork. Neither the Ether Custodian nor the Prime Broker support airdrops, metacoins, colored coins, side chains, or other derivative, enhanced or forked protocols, tokens or coins, which supplement or interact with ether. The Fund holds only ether and cash and may not hold any non-ether crypto asset. The Trust issued a standing instruction regarding airdrops and forks to the Ether Custodian consistent with the foregoing policy.
Under the Custodian Agreement, the Ether Custodian’s liability is limited to the greater of (i) the aggregate amount of fees paid by the Fund to the Ether Custodian in respect of the custodial services in the 12-month period prior to the event giving rise to such liability or (ii) the value of the supported digital assets on deposit in the Fund’s custodial account(s) giving rise to such liability at the time of the event giving rise to such liability; provided, that in no event shall Ether Custodian aggregate liability in respect of each cold storage address exceed $100,000,000. In addition, Coinbase’s defense and indemnity obligations under the Prime Broker Agreement (the Custodian Agreement is part of the Prime Broker Agreement) are limited, in the aggregate, to an amount equal to $2,000,000. Notwithstanding the foregoing, there is no liability limit for losses arising from the Ether Custodian’s fraud or willful misconduct. The Ether Custodian is not liable for delays, suspension of operations, failure in performance, or interruption of service, which result directly or indirectly from a cause or condition beyond the reasonable control of the Ether Custodian. Under the Custodian Agreement, except in the case of its negligence, fraud or willful misconduct, the Ether Custodian shall not have any liability, obligation, or responsibility for any damage or interruptions caused by any computer viruses, spyware, scareware, Trojan horses, worms or other malware that may affect the Fund’s computer or other equipment, or any phishing, spoofing or other attack.
The Ether Custodian Agreement forms a part of the Prime Broker Agreement, and is subject to the termination provisions in the Prime Broker Agreement. If the Ether Custodian closes the Fund’s custodial account or terminates the Fund’s use of the custodial services, the Fund are permitted to withdraw ether associated with the Fund’s custodial account for a period of up to ninety days following the date of deactivation or cancellation to the extent not 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. The Ether Custodian may not, directly or indirectly, lend, pledge, hypothecate or re-hypothecate any Fund assets in the Vault Balance and no Coinbase Entity may sell, transfer, loan, rehypothecate or otherwise alienate the Fund’s assets credited to Fund’s Trading Balance unless instructed by Client. The Vault Balance and Trading Balance are subject to the lien to secure outstanding Trade Credits in favor of the Trade Credit Lender discussed below.
the prime broker
Pursuant to the Prime Broker Agreement, a portion of the Fund’s ether holdings and cash holdings from time to time may be temporarily held with the Prime Broker, an affiliate of the Ether Custodian, in the Trading Balance, for certain limited purposes, in connection with creations and redemptions of Creation Units and the sale of ether to pay the Sponsor’s fee and Fund expenses not assumed by the Sponsor. The Sponsor may, in its sole discretion, add or terminate prime brokers at any time. The Sponsor may, in its sole discretion, change the prime broker for the Fund, but it will have no obligation whatsoever to do so or to seek any particular terms for the Fund from other such prime brokers.
Within the Fund’s Trading Balance, the Prime Broker Agreement provides that the Fund does not have an identifiable claim to any particular ether (and cash). Instead, the Fund’s Trading Balance represents an entitlement to a pro rata share of the ether (and cash) the Prime Broker holds on to behalf of customers who hold similar entitlements against the Prime Broker. In this way, the Fund’s Trading Balance represents an omnibus claim on the Prime Broker’s ether (and cash) held on behalf of the Prime Broker’s customers. The Prime Broker holds the ether associated with customer entitlements across a combination of omnibus cold wallets, omnibus “hot wallets” (meaning wallets whose private keys are generated and stored online, in Internet-connected computers or devices) or in omnibus accounts in the Prime Broker’s name on a trading venue (including third-party venues and the Prime Broker’s own execution venue) where the Prime Broker executes orders to buy and sell ether on behalf of its clients. There are no policies that would limit the amount of ether that can be held temporarily in the Trading Balance maintained by the Prime Broker. However, ether is only moved into the Trading Balance in connection with and to the extent of purchases and sales of ether by the Fund and such ether is swept from the Fund’s Trading Balance to the Fund’s Vault Balance each trading day pursuant to a regular end-of-day sweep process. The Fund’s use of Trade Credits and early order cutoffs are also designed to limit the amount of time that any of the Fund’s ether is held in the Fund’s Trading Balance.
Within such omnibus hot and cold wallets and accounts, the Prime Broker has represented to the Sponsor that it keeps the majority of assets in cold wallets, to promote security, while the balance of assets is kept in hot wallets to facilitate rapid withdrawals. However, the Sponsor has no control over, and for security reasons the Prime Broker does not disclose to the Sponsor, the percentage of ether that the Prime Broker holds for customers holding similar entitlements as the Fund which are kept in omnibus cold wallets, as compared to omnibus hot wallets or omnibus accounts in the Prime Broker’s name on a trading venue. The Prime Broker has represented to the Sponsor that the percentage of assets maintained in cold versus hot storage is determined by ongoing risk analysis and market dynamics, in which the Prime Broker attempts to balance anticipated liquidity needs for its customers as a class against the anticipated greater security of cold storage.
The Prime Broker is not required by the Prime Broker Agreement to hold any of the ether in the Fund’s Trading Balance in cold storage or to hold any such ether in segregation, and neither the Fund nor the Sponsor can control the method by which the Prime Broker holds the ether credited to the Fund’s Trading Balance.
The Prime Broker holds Fund cash credited to the Trading Balance in one of three ways: (i) in one or more omnibus accounts in Prime Broker’s name for the benefit of customers at one or more U.S. insured depository institutions (each, an “FBO account”); (ii) with respect to US dollars, 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 Prime Broker’s omnibus accounts at Connected Trading Venues. The Prime Broker will title the FBO accounts it maintains with U.S. depository institutions and maintain records of Fund’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 Fund cash for the Fund’s benefit on a pass through basis. The Prime Broker does not guarantee that pass-through FDIC deposit insurance will apply to Fund cash, since such insurance is dependent in part on compliance of the depository institutions. The Prime Broker may also title its accounts at some or all Connected Trading Venues and maintain records of Fund 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, and does not apply to the Prime Broker Entity or to any digital asset held by a Prime Broker on Fund’s behalf.
To the extent the Fund sells ether through the Prime Broker, the Fund’s orders will be executed at Connected Trading Venues that have been approved in accordance with the Prime Broker’s due diligence and risk assessment process. The Prime Broker has represented that its due diligence on Connected Trading Venues include reviews conducted by the legal, compliance, security, privacy and finance and credit-risk teams. The Connected Trading Venues, which are subject to change from time to time, as of March 31, 2025 include Bitstamp, LMAX, Kraken, the exchange operated by the Prime Broker, as well as four additional non-bank market makers (“NBMMs”).
The Cash Custodian is The Bank of New York Mellon. The Cash Custodian’s services are governed under the Custody Agreement between The Bank of New York Mellon and the Trust. In performing its duties under the Custody Agreement, BNY Mellon is required to exercise the standard of care and diligence that a professional custodian for exchange-traded funds would observe in these affairs considering the prevailing rules, practices, procedures and circumstances in the relevant market and to perform its duties without negligence, fraud, bad faith, willful misconduct or reckless disregard of its duties under the Custody Agreement. Under the Custody Agreement, BNY Mellon is not liable for any all losses, damages, costs, charges, expenses, or liabilities (including reasonable counsel fees and expenses) (collectively, “Losses”) except to the extent caused by BNY Mellon’s own bad faith, negligence, willful misconduct or reckless disregard of its duties under the Custody Agreement. The Trust, on behalf of the Fund, will indemnify and hold harmless BNY Mellon from and against all Losses, incurred by BNY Mellon arising out of or relating to BNY Mellon’s performance under the Custody Agreement, except to the extent resulting from BNY Mellon’s failure to perform its obligations under the Custody Agreement in accordance with the agreement’s standard of care. The Sponsor may, in its sole discretion, add or terminate cash custodians at any time.
the marketing agent
Franklin Distributors, LLC is the Marketing Agent of the Fund. The Marketing Agent is an affiliate of the Sponsor and has its principal address at One Franklin Parkway, San Mateo, CA 94403-1906.
The Marketing Agent and its affiliates may from time to time purchase or sell Shares for their own account, as agent for their customers and for accounts over which they exercise investment discretion.
The Marketing Agent is responsible for marketing the Fund and the Shares on a continuous basis. Among other things, the Marketing Agent assists the Sponsor in: (1) developing a marketing plan for the Fund on an ongoing basis; (2) preparing marketing materials regarding the Shares, including the content on the Fund’s website; (3) executing the marketing plan for the Fund; (4) conducting public relations activities related to the marketing of Shares; and (5) incorporating ether into its strategic and tactical exchange-traded fund research.
Creation Units are created or redeemed only by Authorized Participants. Each Authorized Participant must be a registered broker-dealer, a participant in DTC, and have entered into an agreement with the Sponsor and Administrator (the “Authorized Participant Agreement”). The Authorized Participant Agreement provides the procedures for the creation and redemption of Creation Units and for the delivery of cash in connection with such creations or redemptions. As of Mar 31, 2025, Jane Street Capital, LLC, J.P. Morgan Securities LLC, Virtu Americas LLC, Citadel Securities LLC, and Goldman Sachs & Co. LLC have each executed an Authorized Participant Agreement and are the only Authorized Participants. Additional Authorized Participants may be added at any time, subject to the discretion of the Sponsor. See “Creations and Redemptions” for more details.
Taxation of the trust
The Sponsor will treat the Fund as a grantor trust for U.S. federal income tax purposes. Assuming that the Trust is a grantor trust, the Trust will not be subject to U.S. federal income tax. Rather, if the Trust is a grantor trust, each beneficial owner of Shares is treated as directly owning its pro rata share of the Trust’s assets and a pro rata portion of the Trust’s income, gain, losses and deductions will “flow through” to each beneficial owner of Shares.
Risk Factors Related to Digital Assets
●
The trading prices of many digital assets, including ether, have experienced extreme volatility in recent periods and may continue to do so. 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 value of the Shares is subject to a number of factors relating to the fundamental investment characteristics of ether as a digital asset, including the fact that digital assets are bearer instruments and loss, theft, destruction, or compromise of the associated private keys could result in permanent loss of the asset, and the capabilities and development of blockchain technologies such as the Ethereum blockchain.
●
Digital assets represent a new and rapidly evolving industry, and the value of the Shares depends on the acceptance of ether.
●
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.
●
Changes in the governance of a digital asset network may not receive sufficient support from users and validators, which may negatively affect that digital asset network’s ability to grow and respond to challenges.
●
A temporary or permanent “fork” could adversely affect the value of the Shares.
●
Competition from the emergence or growth of alternative digital assets and smart contracts platforms, such as Bitcoin, Solana, Avalanche or Cardano, could have a negative impact on the demand for, and price of, ether and thereby adversely affect the value of the Shares.
Risk
Factors Related to the Digital Asset Markets
●
The value of the Shares relates directly to the value of ether, the value of which may be highly volatile and subject to fluctuations due to a number of factors.
●
The Fund’s timing in reaching the market and fee structure relative to other competitor ether products could have a detrimental effect on the scale and sustainability of the Fund.
●
The Index (as defined below) has a limited performance history, and could experience calculation or other errors, in which case the Index price could fail to track the global ether price, and a failure of the Index price could adversely affect the value of the Shares.
●
The Index price used to calculate the value of the Fund’s ether may be volatile, adversely affecting the value of the Shares.
Risk
Factors Related to the Fund and the Shares
●
If the process of creation and redemption of Creation Units encounters any unanticipated difficulties, the possibility for arbitrage transactions by Authorized Participants intended to keep the price of the Shares closely linked to the price of ether may not exist and, as a result, the price of the Shares may fall or otherwise diverge from NAV.
●
The liquidity of the Shares may also be affected by the withdrawal from participation of Authorized Participants or Ether Trading Counterparties.
●
Security threats to the Fund’s account at the Ether Custodian could disrupt or halt Fund operations and result in the loss of Fund assets or damage to the reputation of the Fund, each of which could result in a reduction in the value of the Shares.
●
Ether transactions are irrevocable and stolen or incorrectly transferred ether may be irretrievable. As a result, any incorrectly executed ether transactions could adversely affect the value of the Shares.
●
If the Custodian Agreement, Prime Broker Agreement, an Authorized Participant Agreement or Ether Trading Counterparty agreement (as defined below) is terminated or the Ether Custodian, Prime Broker, an Authorized Participant or an Ether Trading Counterparty fails to provide services as required, the Sponsor may need to find and appoint a replacement custodian, prime broker, authorized participant or ether trading counterparty, which could pose a challenge to the safekeeping of the Fund’s ether, and the Fund’s ability to create and redeem Shares and continue to operate may be adversely affected.
●
Loss of a critical banking relationship for, or the failure of a bank used by, the Prime Broker could adversely impact the Fund’s ability to create or redeem Creation Units, or could cause losses to the Fund.
Risk
Factors Related to the Regulation of the Fund and the Shares
●
Digital asset markets in the U.S. exist in a state of regulatory uncertainty, and adverse legislative or regulatory developments could significantly harm the value of ether or the Shares, such as by banning, restricting or imposing onerous conditions or prohibitions on the use of ether, validation activity, digital wallets, the provision of services related to trading and custodying ether, the operation of the Ethereum network, or the digital asset markets generally.
●
If regulators subject the Fund, or the Sponsor, to regulation as a money services business (“MSB”) or money transmitter, this could result in extraordinary expenses to the Fund or the Sponsor and also result in decreased liquidity for the Shares.
●
Regulatory changes or interpretations could obligate an Authorized Participant, the Fund, the Trust, the Sponsor or other Fund service providers to register and comply with new regulations, resulting in potentially extraordinary or nonrecurring expenses to the Fund.
●
The treatment of digital currency for U.S. federal, state and local income tax purposes is uncertain.
The following risks, some of which have occurred and any of which may occur in the future, can have a material adverse effect on our business or financial performance, which in turn can affect the price of the Shares. These are not the only risks we face. There may be other risks we are not currently aware of or that we currently deem not to be material but may become material in the future.
Risk Factors Related to Digital Assets
The Fund will not directly or indirectly participate in any staking program, and accordingly the Shareholders will not receive any staking rewards or other income.
Neither the Trust or the Fund, nor the Sponsor, nor the Ether Custodian, nor any other person associated with the Trust or Fund will, directly or indirectly, engage in any action whereby any portion of the Fund’s ether is staked. Foregoing potential returns from staking activities could cause an investment in the Shares to deviate from that which would have been obtained by purchasing and holding ether directly by virtue of giving up staking as a source of return when an investor holds the Shares.
The trading prices of many digital assets, including ether, have experienced extreme volatility in recent periods and may continue to do so. 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 trading prices of many digital assets, including ether, have experienced extreme volatility in recent periods and may continue to do so. For instance, there were steep increases in the value of certain digital assets, including ether, over the course of 2021, and multiple market observers assert that digital assets were experiencing a “bubble.” These increases were followed by steep drawdowns throughout 2022 in digital asset trading prices, including for ether. These episodes of rapid price appreciation followed by steep drawdowns have occurred multiple times throughout ether’s history, including in 2021-2023. As of the end of the reporting period covered herein, digital asset prices continued to fluctuate.
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 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. 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 (collectively, the ‟2022 Events”), the digital asset markets 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 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 increased in response to these events, and could further increase in response to similar events in the future, including from federal as well as state regulators and authorities.
The price of some digital assets, including bitcoin, has risen following the election of Donald Trump as president of the United States. Industry participants generally expect the administration to continue to take a constructive approach toward the digital assets industry. Through his executive orders, President Trump has indicated that the administration will work toward providing greater regulatory clarity and certainty for emerging technologies, including blockchain technology and digital assets, thereby fostering their development. Similarly, the digital assets industry expects favorable legislation from the new U.S. Congress as certain members have expressed interest in advancing digital asset specific legislation. To the extent market expectations about future activity by the administration or Congress lead digital asset prices and valuations to increase, there can be no assurance such expectations will be fulfilled, or that digital asset prices will rise or maintain their current levels. Some commentators have referred to the digital asset market post-President Trump's election as a bubble. There can be no assurance that such a bubble does not exist. The failure of the administration and Congress to provide greater regulatory clarity and certainty for blockchain technology and digital assets, such as through promulgating a regulatory framework governing the issuance and operation of digital assets that meets industry expectations, could lead to a decline in digital assets prices, including ether. Such a decline could cause a decline in the value of the Shares and cause Shareholders to suffer losses. Moreover, there can be no assurance that political sentiments toward the digital asset industry, or market perceptions of those sentiments, will not shift over time.
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. Furthermore, negative perception and a lack of stability and standardized regulation in the digital asset economy may reduce confidence in the digital asset economy and may result in greater volatility in the price of ether and other digital assets, including a depreciation in value. The Fund 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 Shares is subject to a number of factors relating to the fundamental investment characteristics of ether as a digital asset, including the fact that digital assets are bearer instruments and loss, theft, or compromise of the associated private keys could result in permanent loss of the asset, and the capabilities and development of blockchain technologies such as the Ethereum blockchain.
Digital assets such as ether were only introduced within the past decade, and the medium-to-long term value of the Shares is subject to a number of factors relating to the capabilities and development of blockchain technologies, such as the recentness of their development, their dependence on the internet and other technologies, their dependence on the role played by users, developers and validators and the potential for malicious activity. For example, the realization of one or more of the following risks could materially adversely affect the value of the Shares:
● Digital asset networks, including the
Ethereum peer-to-peer network and associated blockchain ledger (such
blockchain, the “Ethereum blockchain” and together with the peer-to-peer
network, the “Ethereum network” or “Layer 1 Ethereum network”), and the software
used to operate them are in the early stages of development. Given the
recentness of the development of digital asset networks, digital assets may not
function as intended and parties may be unwilling to use digital assets, which
would dampen the growth, if any, of digital asset networks. Because ether is a
digital asset, the value of the Shares is subject to a number of factors
relating to the fundamental investment characteristics of digital assets,
including the fact that digital assets are bearer instruments and loss, theft,
compromise, or destruction of the associated private keys could result in
permanent loss of the asset.
● Digital assets, including ether, are
controllable only by the possessor of both the unique public key and private
key or keys relating to the ether network address, or “wallet,” at which the
digital asset is held. Private keys must be safeguarded and kept private in
order to prevent a third party from accessing the digital asset held in such
wallet. The loss, theft, compromise or destruction of a private key required to
access a digital asset may be irreversible. If a private key is lost, stolen,
destroyed or otherwise compromised and no backup of the private key is
accessible, the owner would be unable to access the digital asset corresponding
to that private key and the private key will not be capable of being restored
by the digital asset network resulting in the total loss of the value of the
digital asset linked to the private key.
● Digital asset networks are dependent
upon the internet. A disruption of the internet or a digital asset network,
such as the Ethereum network, would affect the ability to transfer digital
assets, including ether, and, consequently, their value.
● The acceptance of software patches or
upgrades by some, but not all, nodes, users and validators in a digital asset
network, such as the Ethereum network, could result in a “fork” in such
network’s blockchain, including the Ethereum blockchain, resulting in the
operation of multiple separate networks.
● Governance of the Ethereum network is
by voluntary consensus and open competition. As a result, there may be a lack
of consensus or clarity on the governance of the Ethereum network, which may
stymie the Ethereum network’s utility and ability to grow and face challenges.
In particular, it may be difficult to find solutions or martial sufficient
effort to overcome any future problems on the Ethereum network, especially
long-term problems.
● The foregoing notwithstanding, the
Ethereum network’s protocol is informally overseen by a collective of core
developers who, along with members of the Ethereum community, can introduce
proposals, known as Ethereum Improvement Proposals (“EIPs”), for updating the
Ethereum network. The core developers evolve over time, largely based on
self-determined participation. 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
that has downloaded the Ethereum Client and is connected to other computers
also running the Ethereum Client software, together forming the Ethereum
network. To the extent that node operators update their individual Ethereum
Client to new specifications, the Ethereum network could be subject to changes
that may adversely affect the value of ether. In addition, if a digital asset
network has high-profile contributors, a perception that such contributors will
no longer contribute to the network could have an adverse effect on the market
price of the related digital asset.
● Over the past several years, digital
asset validator operations have evolved from individual users to
“professionalized” validating operations using proprietary hardware or
sophisticated machines. If the profit margins of digital asset validating
operations are not sufficiently high, including due to a decrease in
transaction fees, validators are more likely to immediately sell tokens earned
by validating, resulting in an increase in liquid supply of that digital asset,
which would generally tend to reduce that digital asset’s market price.
● To the extent that any validators
cease to record transactions that do not include the payment of a transaction
fee in solved blocks or do not record a transaction because the transaction fee
is too low, such transactions will not be recorded on the Ethereum blockchain
until a block is validated by a validator who does not require the payment of
transaction fees or is willing to accept a lower fee. Any widespread delays in
the recording of transactions could result in a loss of confidence in a digital
asset network.
● Many digital asset networks,
including the Ethereum network, face significant scaling challenges and may
periodically be upgraded with various features designed to increase the speed
of digital asset transactions and the number of transactions that can processed
in a given period (known as “throughput”). These attempts to increase the
volume of transactions may not be effective or may result in unforeseen
problems or issues, and such upgrades may fail, resulting in potentially
irreparable damage to the Ethereum network and the value of ether.
● Moreover, in the past, bugs, defects,
and flaws in the source code for digital assets have been exposed and
exploited, including flaws that disrupted normal Ethereum network, Ethereum
Client or DApp and smart contract operations or disabled related functionality
for users, exposed users’ personal information and/or resulted in the theft of
users’ digital assets. For example, in May 2023, the main Ethereum network
itself reportedly suffered outages or bugs that for a short time prevented
transactions from finalizing and being recorded in blocks twice in two days.
Major Ethereum Clients which nodes use to access the Ethereum network, such as
Geth, Besu and Nethermind, have in the past suffered outages or disruptions due
to bugs. For more on an unplanned for involving Geth clients, see “-A temporary
or permanent “fork” could adversely affect the value of the Shares.” The
cryptography underlying the Ethereum network or ether as an asset 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 compromise the security
of the Ethereum network or take the Fund’s ether, which would adversely affect
the value of the Shares. Moreover, normal operations and functionality of the
Ethereum network may be negatively affected. Such losses of functionality could
lead to the Ethereum network losing attractiveness to users, nodes, validators,
or other stakeholders, thereby dampening demand for ether. 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.
● The Ethereum network has been in the
process of implementing a series of software upgrades and other changes to its
protocol, which were previously referred to collectively as “Ethereum 2.0” and
some of which were implemented during 2022, such as the Bellatrix and Paris
planned forks (defined below) that transitioned the Ethereum network from a
proof-of-work consensus mechanism to a proof-of-stake consensus mechanism (the
“Merge”). These upgrades have resulted in, and are expected to continue to
result in, changes to the Ethereum network. Many of the contemplated upgrades
to the Ethereum network will include updates to material aspects of its source
code. Although some of these upgrades have been successfully implemented, such
as “the Merge,” which was completed in September 2022, there is no guarantee
that there are not undiscovered flaws that will emerge in the future even in
upgrades previously considered successful, and previously successful upgrades
do not guarantee that future upgrades will be successful. Any such undiscovered
flaws, or the failure to properly implement future changes, could have a
material adverse effect on the value of ether and the value of the Shares. One
completed upgrade is known as the “Shanghai” upgrade, which allows users to unstake
their ether and remove it from the relevant smart contract. As a result of this
or future upgrades, it is possible that significant volumes of currently locked
and illiquid ether becomes unlocked and sold, which could increase volatility
in ether prices or have a material adverse effect on the value of ether and the
value of the Shares. Upgrades currently being considered to increase throughput
and promote scaling, such as “sharding” the Layer 1 Ethereum network or greater
reliance so-called “Layer 2” solutions, could have effects which are difficult
to anticipate at this time, but could - if unsuccessfully implemented, or if
they contain undiscovered flaws - materially adversely impact or even
effectively eliminate the value of ether, and therefore impact the price of the
Shares. In addition, the acceptance of software patches or upgrades by some,
but not all, nodes, users and validators in a digital asset network could
result in a “fork” in such network’s blockchain, resulting in the operation of
multiple separate networks. See “-A temporary or permanent “fork” could
adversely affect the value of the Shares” for additional information.
● The Ethereum network is still in the
process of developing and making significant decisions that will affect
policies that govern the supply and issuance of ether as well as other Ethereum
network protocols. For example, the Ethereum network has on three occasions
reduced the quantity of ether rewarded per block and may make additional
changes in the future, see “Overview of the Ethereum Industry-Creation of New
Ether” for additional information. The open-source nature of many digital asset
network protocols, such as the protocol for the Ethereum network, means that
developers and other contributors are generally not directly compensated for
their contributions in maintaining and developing such protocols. As a result,
the developers and other contributors of a particular digital asset may lack a
financial incentive to maintain or develop the network, or may lack the
resources to adequately address emerging issues. Alternatively, some developers
may be funded by companies whose interests are at odds with other participants
in a particular digital asset network. If the Ethereum network does not
successfully develop its policies on supply and issuance and other major design
decisions, or does so in a manner that is not attractive to network
participants, it could lead to a decline in adoption of the Ethereum network
and price of ether.
● Decentralized application and smart
contract developers depend on being able to obtain ether to be able to run
their programs and operate their businesses. In particular, decentralized
applications and smart contracts require ether in order to pay the gas fees
needed to power such applications and smart contracts and execute transactions.
As such, they represent a significant source of demand for ether. Ether’s price
volatility (particularly where ether prices increase), or the Ethereum
network’s wider inability to meet the demands of decentralized applications and
smart contracts in terms of inexpensive, reliable, and prompt transaction
execution (including during congested periods), or to solve its scaling
challenges or increase its throughput, may discourage such decentralized
application and smart contract developers from using the Ethereum network as
the foundational infrastructure layer for building their applications and smart
contracts. If decentralized application and smart contract developers abandon
the Ethereum blockchain for other blockchain or digital asset networks or
protocols for whatever reason, the value of ether could be negatively affected.
Moreover, because digital assets, including ether, have been in existence for a short period of time and are continuing to develop, there may be additional risks in the future that are impossible to predict as of the date of this prospectus.
Digital assets represent a new and rapidly evolving industry, and the value of the Shares depends on the acceptance of ether.
The first digital asset, bitcoin, was launched in 2009. The Ethereum network launched in 2015 (though some ether was sold in a pre-mine in 2014). Ether, along with bitcoin, was one of the first cryptographic digital assets to gain global adoption and critical mass. In general, digital asset networks, including the Ethereum network and other cryptographic and algorithmic protocols governing the issuance of digital assets represent a new and rapidly evolving industry that is subject to a variety of factors that are difficult to evaluate. For example, the realization of one or more of the following risks could materially adversely affect the value of the Shares:
● Ether is only selectively accepted as
a means of payment by retail and commercial outlets, and use of ether by
consumers to pay such retail and commercial outlets remains limited. Banks and
other established financial institutions may refuse to process funds for ether
transactions; process wire transfers to or from digital asset platforms,
ether-related companies or service providers; or maintain accounts for persons
or entities transacting in ether. As a result, the prices of ether may be
influenced to a significant extent by speculators, thus contributing to price
volatility that makes retailers less likely to accept ether in the future.
● Banks may not provide banking
services, or may cut off banking services, to businesses that provide digital
asset-related services or that accept digital assets as payment, which could
dampen liquidity in the market and damage the public perception of digital
assets generally or any one digital asset in particular, such as ether, and
their or its utility as a payment system, which could decrease the price of
digital assets generally or individually. Further, the lack of availability of
banking services could prevent the Fund from being able to complete creations
and redemptions of Creation Units, the timely liquidation of ether and
withdrawal of assets from the Ether Custodian even if the Sponsor determined
that such liquidation was appropriate or suitable, or otherwise disrupt the
Fund’s operations.
● Certain privacy-preserving features
have been or are expected to be introduced to digital asset networks, including
the Ethereum network. For example, some prominent contributors to the Ethereum
network have proposed the concept of “privacy pools,” zero-knowledge proofs,
and other privacy-preserving features. If any such features are introduced to
the Ethereum network, any platforms or businesses that facilitate transactions
in ether may be at an increased risk of criminal or civil lawsuits, or of having
banking services cut off if there is a concern that these features interfere
with the performance of anti-money laundering duties and economic sanctions
checks or facilitate illicit financing or crime.
● Users, protocol and application
developers and validators may otherwise switch to or adopt certain digital
assets at the expense of their engagement with other digital asset networks,
which may negatively impact those networks, including the Ethereum network.
The Fund is not actively managed and will not have any formal strategy relating to the development of the Ethereum network.
Changes in the governance of a digital asset network may not receive sufficient support from users and validators, which may negatively affect that digital asset network’s ability to grow and respond to challenges.
The governance of decentralized networks, such as the Ethereum network, is by voluntary consensus and open competition. As a result, there may be a lack of consensus or clarity on the governance of any particular decentralized digital asset network, which may stymie such network’s utility and ability to grow and face challenges. The foregoing notwithstanding, the protocols for some decentralized networks, such as the Ethereum network, are informally managed by a group of core developers that propose amendments to the relevant network’s source code. Core developers’ roles evolve over time, largely based on self‑determined participation. If a significant majority of nodes, users and validators adopt amendments to a decentralized network based on the proposals of such core developers, such network will be subject to new protocols that may adversely affect the value of the relevant digital asset.
As a result of the foregoing, it may be difficult to find solutions or marshal sufficient effort to overcome any future problems, especially long-term problems, on digital asset networks.
Potential amendments to the Ethereum network’s protocols and software could, if accepted and authorized by the Ethereum network community, adversely affect an investment in the Fund.
The Ethereum network uses cryptographic protocols to govern the interactions within the Ethereum network. A loose community known as the core developers has evolved to informally manage the source code for the protocol. Membership in the community of core developers evolve over time, largely based on self-determined participation in the resource section dedicated to Ethereum on Github.com. The core developers can propose amendments to the Ethereum network’s source code that, if accepted by nodes, validators and users, could alter the protocols and software of the Ethereum network and the properties of ether. These alterations would occur through software upgrades, and could potentially include changes to the irreversibility of transactions and limitations on the issuance of new ether or changes to the ether supply, which could undermine the appeal and market value of ether. Alternatively, software upgrades and other changes to the protocols of the Ethereum network could fail to work as intended or could introduce bugs, coding defects or flaws, security risks, or otherwise adversely affect, the speed, security, usability, or value of the Ethereum network or ether. As a result, the Ethereum network could be subject to changes to its protocols and software in the future that may adversely affect an investment in the Fund.
The open-source structure of the Ethereum network protocol means that the core developers and other contributors are generally not 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 and an investment in the Fund.
The Ethereum network operates based on an open-source protocol maintained by the core developers and other contributors, largely on the GitHub resource section dedicated to Ethereum network development. As new ether are rewarded solely for validator activity (other than the 2014 pre-mine) and are not sold on an ongoing basis to generate revenue to support development activity, and the Ethereum network protocol itself is made available for free rather than sold or made available subject to licensing or subscription fees and its use does not generate revenues for its development team, the core developers are generally not compensated for maintaining and updating the source code for the Ethereum network protocol. Consequently, there is a lack of financial incentive for developers to maintain or develop the Ethereum network and the core developers may lack the resources to adequately address emerging issues with the Ethereum network protocol. Although the Ethereum network is currently supported by the core developers, there can be no guarantee that such support will continue or be sufficient in the future. For example, there have been recent reports that the number of core developers who have the authority to make amendments to the Ethereum network’s source code in the GitHub repository is relatively small, although there are believed to be a larger number of developers who contribute to the overall development of the source code of the Ethereum network. The perception that high-profile contributors may no longer contribute to the network may have an adverse effect on the market price of any related digital assets. For example, in June 2017, an unfounded rumor circulated that Ethereum core developer Vitalik Buterin had died. Following the rumor, the price of ether decreased approximately 20% before recovering after Buterin himself dispelled the rumor. Some have speculated that the rumor led to the decrease in the price of ether. In the event a high-profile contributor to the Ethereum network, such as Vitalik Buterin, is perceived as no longer able to contribute to the Ethereum network due to death, retirement, withdrawal, incapacity, or otherwise, whether or not such perception is valid, it could negatively affect the price of ether, which could adversely impact the value of the Shares.
Alternatively, some developers may be funded by entities whose interests are at odds with other participants in the Ethereum network. In addition, a bad actor could also attempt to interfere with the operation of the Ethereum network by attempting to exercise a malign influence over a core developer. To the extent that material issues arise with the Ethereum network protocol and the core developers and open-source contributors are unable to address the issues adequately or in a timely manner, the Ethereum network and an investment in the Fund may be adversely affected.
Digital asset networks face significant scaling challenges and efforts to increase the volume and speed of transactions may not be successful.
Many digital asset networks, including the Ethereum network, face 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. In practice, this typically means that every single validator on a given digital asset network is responsible for securing the system by processing every transaction and every single full node is responsible for maintaining a copy of the entire state of the network. As a result, a digital asset network may be limited in the number of transactions it can process by the fact that all validators participate in validating in each block and the capabilities of each single fully participating node.
As of March 31, 2025, the Ethereum network could handle approximately 15 transactions per second. In an effort to increase the volume of transactions that can be processed on a given digital asset network, many digital asset networks are being upgraded with various features to increase the speed and throughput of digital asset transactions. As corresponding increases in throughput lag behind growth in the use of digital asset networks, average fees and settlement times may increase considerably. For example, the Ethereum network has been, at times, at capacity, which has led to increased transaction fees. In December 2017, the popularity of the blockchain-based game Cryptokitties led to significant network congestion on the Ethereum network. The game, which allows players to trade and create virtual kitties, represented by non-fungible tokens (“NFTs”), was reported by some sources to have accounted for more than 10% of the entire Ethereum network traffic at the time causing increases in transaction fees and delays in transaction processing times, and driving Ethereum network traffic to a reported then-all time high. From April 30, 2023, ether transaction fees decreased from $9.52 per ether transaction, on average, to a high of $3.83 per transaction, on average, on April 30, 2024. As of March 31, 2025, ether transaction fees were $0.46 per transaction, on average. Increased fees and decreased settlement speeds could preclude certain uses for ether (e.g., micropayments), and could reduce demand for, and the price of, ether, which could adversely impact the value of the Shares.
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 a process known as 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). Instead, under proof-of-stake, a single validator is randomly selected to solve the cryptographic puzzle needed to validate a block, which it proposes to a committee of other validators, who vote for whether to include the block (or not), which reduces the computational work performed - and energy expended - to validate each block compared to proof-of-work. See “Overview of the Ethereum Industry-Creation of New Ether” and “-Modifications to the Ethereum Protocol” for additional information.
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 is to increase scalability of the Layer 1 Ethereum network 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 applications built on the Ethereum network (consistent with common usage, all such applications are referred to as “decentralized applications” or “DApps,” whether or not decentralized in fact) 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 Ethereum network and then post the data, typically in batches, back to the Layer 1 Ethereum network 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) that is recorded on the Layer 1 Ethereum network. 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 network (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 network runs in parallel with the existing Layer 1 Ethereum network 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.
There is no guarantee that any of the mechanisms in place or being explored for increasing the speed and throughput of settlement of Ethereum network transactions will be effective, or how long these mechanisms will take to become effective, which could cause the Ethereum network to not adequately resolve scaling challenges and adversely impact the adoption of ether and the Ethereum network and the value of the Shares. There is no guarantee that any potential scaling solution, whether a change to the Layer 1 Ethereum network like sharding or the introduction of a Layer 2 solution like rollups, state channels or side chains, will achieve widespread adoption. It is possible that proposed changes to the Layer 1 Ethereum network could divide the community, potentially even causing a hard fork, or that the decentralized governance of the Ethereum network causes network participants to fail to coalesce overwhelmingly around any particular solution, causing the Ethereum network to suffer reduced adoption or causing nodes, users or validators to migrate to other blockchain networks. It is also possible that scaling solutions could fail to work as intended or could introduce bugs, coding defects or flaws, security risks, or other problems that could cause them to suffer operational disruptions. For example, in April 2024, Starknet, a Layer 2 built on the Layer 1 Ethereum network, suffered an outage reportedly caused by a rounding error bug that halted production of new blocks on Starknet’s Layer 2 blockchain network. Similar outages, bugs, defects, or other problems could affect Layer 2s in the future. Similarly, in multiple instances throughout 2022 and 2023, the Arbitrum Layer 2 network experienced outages due to failures in its primary node responsible for submitting transactions to the Layer 1 Ethereum network. Although the Layer 1 Ethereum network is believed not to have been affected by those outages, problems on Layer 2s in the future could conceivably affect or cause issues for the Layer 1 Ethereum network. Alternatively, if a widely-used Layer 2 network were to fail, it could reduce demand for ether because it would eliminate a source of demand for using ether to record transactions from the Layer 2 onto the Layer 1 Ethereum network. Any of the foregoing could adversely affect the price of ether or the value of the Shares of the Fund.
Digital assets may have concentrated ownership and large sales or distributions by holders of such digital assets could have an adverse effect on the market price of such digital assets.
The largest ether wallets are believed to hold, in aggregate, a significant percentage of the ether in circulation. Moreover, it is possible that other persons or entities control multiple wallets that collectively hold a significant number of ether, even if they individually only hold a small amount, and it is possible that some of these wallets are controlled by the same person or entity. As a result of this concentration of ownership, large sales or distributions by such holders could have an adverse effect on the market price of ether.
If the digital asset award or transaction fees for recording transactions on the Ethereum network are not sufficiently high to incentivize validators, or if certain jurisdictions continue to limit or otherwise regulate validating activities, validators may cease expanding validating power or demand high transaction fees, which could negatively impact the value of ether and the value of the Shares.
In 2021, the Ethereum network implemented the EIP-1559 upgrade. EIP-1559 changed the methodology used to calculate transaction fees paid to ether validators in such a manner that reduced the total net issuance of ether fees paid to validators. If the digital asset awards for validating blocks or the transaction fees for recording transactions on the Ethereum network are not sufficiently high to incentivize validators, or if certain jurisdictions continue to limit or otherwise regulate validating activities, validators may cease expending validating power to validate blocks and confirmations of transactions on the Ethereum blockchain could be slowed. For example, the realization of one or more of the following risks could materially adversely affect the value of the Shares:
● A reduction in the processing power
expended by validators on the Ethereum network could increase the likelihood of
a malicious actor or botnet (a volunteer or hacked collection of computers
controlled by networked software coordinating the actions of the computers)
obtaining control. See “-If a malicious actor or botnet obtains control of more
than 50% of the validating power on the Ethereum network, or otherwise obtains
control over the Ethereum network through its influence over core developers or
otherwise, such actor or botnet could manipulate the Ethereum blockchain to
adversely affect the value of the Shares or the ability of the Fund to
operate.”
● Validators have historically accepted
relatively low transaction confirmation fees on most digital asset networks. If
validators demand higher transaction fees for recording transactions in the
Ethereum blockchain or a software upgrade automatically charges fees for all
transactions on the Ethereum network, the cost of using ether may increase and
the marketplace may be reluctant to accept ether as a means of payment.
Alternatively, validators could collude in an anti-competitive manner to reject
low transaction fees on the Ethereum network and force users to pay higher
fees, thus reducing the attractiveness of the Ethereum network. Higher
transaction confirmation fees resulting through collusion or otherwise may
adversely affect the attractiveness of the Ethereum network, the value of ether
and the value of the Shares.
● To the extent that any validators
cease to record transactions that do not include the payment of a transaction
fee in blocks or do not record a transaction because the transaction fee is too
low, such transactions will not be recorded on the Ethereum blockchain until a
block is validated by a validator who does not require the payment of
transaction fees or is willing to accept a lower fee. Any widespread delays or
disruptions in the recording of transactions could result in a loss of
confidence in the Ethereum network and could prevent the Administrator from
completing transactions associated with the day-to-day operations of the Fund,
including creations and redemptions with Authorized Participants.
● During the course of the block
validation processes, validators exercise the discretion to select which
transactions to include within a block and in what order to include these
transactions. Beyond the standard block reward and transaction fees, validators
have the ability to extract what is known as Maximal Extractable Value (“MEV”)
by strategically choosing, reordering, or excluding certain transactions during
block production in return for increased transaction fees or other forms of
profit for such validators. In blockchain networks that facilitate DeFi
protocols in particular, such as the Ethereum network, users may attempt to
gain an advantage over other users by offering additional fees to validators
for effecting the order or inclusions of transactions within a block. Certain
software solutions, such as MEV Boost by Flashbots, have been developed which
facilitate validators and other parties in the ecosystem in capturing MEV. The
presence of MEV may incentivize associated practices such as sandwich attacks
or front running that can have negative repercussions on DeFi users. A
“sandwich attack” is executed by placing two transactions around a large,
detected transaction to capitalize on the expected price impact. For instance,
a market participant might identify a sizable transaction within the publicly
visible so-called memory pool (“mempool”) of pending but unexecuted
transactions awaiting validation that will significantly alter an asset’s price
on a decentralized exchange. The participant could then for example orchestrate
a transaction bundle: one transaction to acquire the asset prior to the
detected transaction, followed by the large transaction itself, and a final
transaction to sell the asset after the market price has increased due to the
large transaction’s execution. Such transaction bundles can be submitted to
validators through mechanisms like MEV-Boost, with validators receiving a share
of the profits as an incentive to include the specific transaction bundle in
the block. In the context of MEV, “front running” is said to occur when a user
spots a transaction in the mempool and then pays a high transaction fee to a
validator to have their transaction executed on a priority basis in a manner
designed to profit from the pending but unexecuted transaction that is still in
the mempool. MEV may also compromise the predictability of transaction
execution, which may deter usage of the network as a whole. Although based on
widely available information given that transactions in the mempool are publicly
visible, any potential perception of MEV as unfair manipulation may also
discourage users and other stakeholders from engaging with DeFi protocols or
the Ethereum network in general. In addition, it is possible regulators or
legislators could enact rules which restrict practices associated with MEV,
which could diminish the popularity of the Ethereum network among users and
validators. Any of these or other outcomes related to MEV may adversely affect
the value of ether and the value of the Shares.
If a malicious actor or botnet obtains control of more than 33% of the validating stake on the Ethereum network, or otherwise obtains control over the Ethereum network through its influence over core developers or otherwise, such actor or botnet could delay or manipulate the Ethereum blockchain, which could adversely affect the value of the Shares or the ability of the Fund to operate.
All networked systems are vulnerable to various types of attacks. As with any computer network, the Ethereum network contains certain flaws. For example, the Ethereum networks is currently vulnerable to several types of attacks, including:
● “>33% attack” where, if a
validator or group of validators were to gain control of more than 33% of the
staked ether, a malicious actor could cause a temporary fork in the blockchain.
This is believed to be temporary, as the Ethereum network’s inactivity leak
would be expected to eventually penalize the attacker enough for the chain to
finalize again (i.e., the honest majority would be expected to reclaim 2/3rd
stake as the attacker’s stake is penalized). However, it is not believed that
with 33% control, a malicious actor could engage in double-spending or
fraudulent block propagation.
● “>50% 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 blockchain, potentially
for an extended period or even permanently. In theory, the minority
non-attackers might reach social consensus to reject blocks proposed by the
malicious majority attacker, reducing the attacker’s ability to engage in
malicious activity, but there can be no assurance this would happen or that
non-attackers would be able to coordinate effectively.
● “>66% attack” where, if a
validator or group of validators acting in concert were to gain control of more
than 66% of the staked ether, a malicious actor could permanently and
irreversibly manipulate the blockchain, including censorship, double-spending
and fraudulent block propagation. The attacker could finalize their preferred
chain without any consideration for the votes of other stakers and could also
revert finalized blocks.
If a malicious actor or botnet (a volunteer or hacked collection of computers controlled by networked software coordinating the actions of the computers) obtains a majority (over 50%) of the validating power on the Ethereum network, it may be able to alter the Ethereum blockchain on which transactions in ether rely by constructing fraudulent blocks or preventing certain transactions from completing in a timely manner, or at all. The malicious actor or botnet could also control, exclude or modify the ordering of transactions. Although the malicious actor or botnet would not be able to generate new tokens or transactions using such control, it could “double-spend” its own tokens (i.e., spend the same tokens in more than one transaction) and prevent the confirmation of other users’ transactions for so long as it maintained control (over 50%). To the extent that such malicious actor or botnet did not yield its control of the validating power on the Ethereum network or the Ethereum community did not reject the fraudulent blocks as malicious, reversing any changes made to the Ethereum blockchain may not be possible. If the malicious actor were to gain control of more than 33% of the total staked ether on the Ethereum network, they could temporarily impede or delay block confirmation or even cause a temporary fork in the blockchain, but it is not believed that they could in double-spending or fraudulent block propagation. Even without a 33% control, a malicious actor or botnet could create a flood of transactions in order to slow down the Ethereum network (similar to a denial of service attack).
For example, 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.
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. Although the two attacks described above took place on proof-of-work-based networks, it is possible that a similar attack may occur on the proof-of-stake Ethereum network, which could negatively impact the value of ether and the value of the Shares.
Although there are no known reports of malicious activity on, or control of, the Ethereum network, it is possible that certain groups of coordinating or connected ether holders may together have more than 50% of outstanding ether, which if staked and if the users run validators, would permit them to exert authority over the validation of ether transactions. This risk is heightened if over 50% of the processing power on the network falls within the jurisdiction of a single governmental authority. If network participants, including the core developers and the administrators of validating pools, do not act to ensure greater decentralization of ether, the feasibility of a malicious actor obtaining control of the validating power on the Ethereum network will increase, which may adversely affect the value of the Shares. See also “Liquid staking applications pose centralization concerns” below.
A malicious actor may also obtain control over the Ethereum network through its influence over core developers by gaining direct control over a core developer or an otherwise influential programmer. To the extent that nodes, users and validators accept amendments to the source code proposed by the controlled core developer, other core developers do not counter such amendments, and such amendments enable the malicious exploitation of the Ethereum network, the risk that a malicious actor may be able to obtain control of the Ethereum network in this manner exists. Moreover, it is possible that a group of ether holders that together control more than 50% of outstanding ether are in fact part of the initial or current core developer group, or are otherwise influential members of the Ethereum community. To the extent that the initial or current core developer groups also control more than 50% of outstanding ether, as some believe, the risk of and arising from this particular group of users obtaining control of the validating power on the Ethereum network will be even greater, and should this materialize, it may adversely affect the value of the Shares.
Liquid staking applications pose centralization concerns.
Validators must deposit 32 ether to activate a unique validator key pair that is used to sign block proposals and attestations on behalf of its stake (i.e., vote on its view of the chain). For every 32 ether deposit that is staked, a unique validator key pair is generated. An application built on the Ethereum network, or a single node operator, can manage many validator key pairs. For example, Lido, an application that provides a so-called “liquid staking” solution which permits holders of ether to deposit them with Lido, which stakes the ether while issuing the holder a transferrable token, is reported by some sources to have or have had up to 275,000 validator key pairs (each representing 32 staked ether) divided across over 30 node operators. At times, Lido has reportedly controlled around or in excess of 33% of the total staked ether on the Ethereum network. While it is widely believed that Lido has little incentive to attempt to interfere with transaction finality or block confirmations using its reported 33% stake, since doing so would likely cause its entire stake to be slashed and thus lost (assuming good actors unaffiliated with Lido controlled the remainder), and also because Lido is believed to not control most of the third party node operators where its ether is staked, and finally since the occurrence of such manipulation of the Ethereum network’s consensus process by Lido or any other actor would likely cause ether to lose substantial value (which would obviously hurt Lido economically), it nevertheless poses centralization concerns. If Lido, or a bad actor with a similar sized stake, were to attempt to interfere with transaction finality or block confirmations, it could negatively affect the use and adoption of the Ethereum network, the value of ether, and thus the value of the Shares.
A temporary or permanent “fork” could adversely affect the value of the Shares.
The Ethereum network operates using open-source protocols, meaning that any user can become a node by downloading the Ethereum Client, and participating in the Ethereum network, and no permission of a central authority or body is needed to do so. In addition, anyone can propose a modification to the Ethereum network’s source code and then propose that the Ethereum network community support the modification. These proposed modifications to the Ethereum network’s source code, if adopted, can lead to forks (referred to as “planned forks” because they take place through a formal process).
In the case of planned forks, the core developers, including those associated with or funded by the Ethereum Foundation, are able to access and alter the Ethereum network source code and, as a result, they are typically responsible for proposing quasi-official or widely publicized releases of updates and other changes to the Ethereum network’s source code called EIPS. Any user can propose an idea for modifying the Ethereum network’s source code, and the core developers are responsible for mering the proposed idea into the EIP repository GitHub, where it formally becomes an EIP. However, the release of proposed updates to the Ethereum network’s source code by core developers does not guarantee that the updates will be adopted. The developers of each Ethereum Client must agree to implement the EIP’s changes to the Ethereum network in the source code for their respective client software, nodes must accept the changes made available by the developers of the Ethereum Client software they use by choosing to individually download the modified Ethereum Client software, and ultimately a critical mass of validators and users - such as DApp and smart contract developers, as well as end 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.
Typically in the case of a planned fork, once the EIPs are formally introduced by being merged into the EIP repository on GitHub, a robust debate within the Ethereum community as to the advisability of the proposed change ordinary follows. Assuming the core developers at the protocol level and the developers of individual Ethereum Clients reach a broad consensus among themselves in favor of introducing the change into the respective source code they are responsible for developing and maintaining, the source code modification will be introduced and made available to download. 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. Typically, after a modification is introduced and if a sufficiently broad critical mass of users and validators support the modification and nodes download the modification into their individual Ethereum Clients, the change is implemented and the Ethereum network continues to operate uninterrupted, assuming there are no software issues (e.g., bugs, outages, etc.). However, if less than a sufficiently broad critical mass (in practice, amounting to a substantial majority) of users and validators support the proposed modification and nodes refuse to download the modification to their Ethereum Clients, and the modification is not backwards compatible with the Ethereum blockchain or network or the Ethereum Clients of nodes prior to their modification, the consequence would be what is known as a “hard fork” of the Ethereum network, with one group of nodes running the pre-modified software, with users and validators continuing to use the pre-modified software, while the other group would adopt and run the modified software. The effect of such a hard fork would be the existence of two versions of the Ethereum network running in parallel on separate networks using separate blockchain ledgers, yet lacking interchangeability. In practice, in a hard fork, the two networks would compete with each other for developers, node operators, users, validators, and adoption, potentially to their mutual detriment (for example, if the number of validators on each network is too small leading to security concerns, as discussed below, or if the number of users on each is reduced compared to the number of users of the single pre-fork blockchain network). Debates relating to hard forks can be contentious and hard fought among network participants, and can lead to ill will. Another possible result of a hard fork is an inherent decrease in the level of security due to significant amounts of validating power remaining on one network or migrating instead to the new forked network. After a hard fork, it may become easier for an individual validator or validating pool’s validating power to exceed 50% of the total on either network, thereby making them both more susceptible to attack.
A future fork in the Ethereum network could adversely affect the value of the Shares or the ability of the Fund to operate. A fork could also adversely affect the price of ether at the time of announcement or adoption or subsequently. The announcement of a hard fork could lead to increased demand for the pre-fork digital asset, in anticipation that ownership of the pre-fork digital asset would entitle holders to a new digital asset following the fork. The increased demand for the pre-fork digital asset may cause the price of the digital asset to rise. After the hard fork, it is possible the aggregate price of the two versions of the digital asset running in parallel would be less than the price of the digital asset immediately prior to the fork. Alternatively, as with any change to software code, software upgrades and other changes to the source code or protocols of the Ethereum network could fail to work as intended or could introduce bugs, coding defects, unanticipated or undiscovered problems, flaws, or security risks, create problematic economic incentives which incentivize behavior which has a negative effect on the Ethereum network’s users, validators, or the Ethereum network as a whole, or otherwise adversely affect, the speed, security, usability, or value of the Ethereum network or ether. If a fork caused operational problems for either post-fork network or blockchain, the digital assets associated with the affected network could lose some or all of their value. Furthermore, while the Sponsor will, as permitted by the terms of the Declaration of Trust, determine which network is generally accepted as the Ethereum network and should therefore be considered the appropriate network for the Fund’s purposes, and there is no guarantee that the Sponsor will choose the network and the associated digital asset that is ultimately the most valuable fork. Any of these events could therefore adversely impact the value of the Shares.
On March 13, 2024, the Ethereum network underwent a planned fork called “Dencun” implementing a series of EIPs. EIP 4844, which some commentators perceive to be the most significant EIP within the Dencun series, is intended to improve the economics of Layer 2s by reducing transaction fees for Layer 2s who batch transactions executed on the Layer 2s and upload them as a batch (or as a single proof) onto the main Layer 1 Ethereum network. Among other objectives, the Dencun software upgrade was designed to provide Layer 2 scaling solutions a designated storage space on the Layer 1 Ethereum network, called Binary Large Objects (“blobs"), which attach large data chunks to transactions on the Layer 1 Ethereum network and are recorded on its blockchain. The data in blobs become inaccessible on the Layer 1 Ethereum network after a temporary period of time (three weeks), unlike the previous method of storing batched data from Layer 2s on the Layer 1 Ethereum network, which was stored permanently. The cost of accessing the temporary storage in blobs is expected by proponents of the Dencun upgrade to be substantially lower than the cost of storing the data on the Ethereum Layer 1 network permanently, making Layer 2s more cost-efficient to operate and, some commentators hope, making them more attractive as a scaling solution. Immediately following the upgrade, some Layer 2s reportedly experienced reduced transaction fees when batching transactions to the main Layer 1 Ethereum network, which in turn lowered the transaction costs for executing transactions on such Layer 2s, but this also is believed to have resulted in ether prices (ether being the native asset of the Layer 1 Ethereum network) dropping as well due, in part, to the reduced demand for ether to pay the transaction costs of recording data on the Layer 1 Ethereum network. Decreased ether prices could have an adverse effect on the value of the Shares. Additionally, some Layer 2s, such as Blast, reportedly experienced outages and other disruptions in the aftermath of the Dencun upgrade, which in the case of Blast halted block production on the Blast Layer 2 blockchain for a period of time, though it was reportedly restored afterward. As with any change to software code, planned forks such as Dencun could introduce bugs, coding defects, unanticipated or undiscovered problems, flaws, security risks, problematic incentive structures, or otherwise fail to work as intended or achieve the expected benefits that proponents hope for in the short term or the long term, which could also have an adverse effect on adoption of the Ethereum network and the value of ether, and therefore the Shares.
In September 2022, the Ethereum network transitioned to a proof-of-stake consensus model, in an upgrade referred to as the “Merge.” Following the Merge, a hard fork of the Ethereum network occurred, as a small number of Ethereum validators and network participants planned to maintain the proof-of-work consensus mechanism that was removed as part of the Merge. This version of the network, which is not backwards-compatible with the Ethereum Lay 1 blockchain, is considered a forked branch and was rebranded as “Ethereum Proof-of-Work.” To the extent significant developer talent, users or validators abandon the Ethereum Layer 1 network and adopt the Ethereum Proof-of-Work blockchain instead, the value of the Shares could be adversely affected.
As illustrated by Dencun and the Merge, the Ethereum network regularly implements planned forks in an effort to achieve its development roadmap, advance the scalability process, and to improve the network generally. For example, in connection with the Ethereum development roadmap, the Ethereum network executed planned forks to transition from the initial Frontier development stage into the Homestead development stage in 2016; to transition from the Homestead development stage to the first sub-stage, Byzantium, of the Metropolis development stage in 2017; to transition from the Byzantium sub-stage to the St. Petersburg sub-stage in early 2019; and to transition from the St. Petersburg sub-stage to the Istanbul sub-phase, in late 2019. In April 2021, the Ethereum network underwent the Berlin and Altair planned forks, among others. In 2022, Ethereum underwent the Bellatrix and Paris planned forks in connection with the Merge. In 2023, Ethereum underwent the Capella and Shanghai planned forks (collectively, “Shapella”), which enabled withdrawals of staked assets to the Ethereum Layer 1 blockchain mainnet for the first time (they had previously been locked on the Beacon Chain testnet following the Merge). Any of these or future planned forks could fail to work as intended or could introduce bugs, coding defects, unanticipated or undiscovered problems, flaws, or security risks, create problematic economic incentives which incentivize behavior which has a negative effect on the Ethereum network’s nodes, users, validators, or the Ethereum network as a whole, or otherwise adversely affect, the speed, security, usability, or value of the Ethereum network or ether. Alternatively, such hard forks could be contentious, leading to a split and fracture in the Ethereum community to its collective detriment, as discussed above. Any such outcomes could adversely affect the value of the Shares.
Forks may also occur as a digital asset network community’s response to a significant security breach. For example, in July 2016, Ethereum underwent a hard fork between the Layer 1 Ethereum network and a new digital asset running on a “forked” branch of the work, Ethereum Classic, as a result of the Ethereum network community’s response to a significant security breach. In June 2016, an anonymous hacker exploited a smart contract running on the Ethereum network to syphon approximately $60 million of ether held by The DAO, a distributed autonomous organization, into a segregated account. In response to the hack, and after a contentious debate, most participants in the Ethereum community elected to adopt a “hard fork” that effectively reversed the hack, and this network constitutes the Layer 1 Ethereum network. However, a minority of users continued to develop the original blockchain, now referred to as “Ethereum Classic,” which is not backwards-compatible with the Layer 1 Ethereum network and is considered a forked branch, with the native digital asset on that blockchain now referred to as Ethereum Classic, or ETC. ETC now trades on several digital asset platforms. Following the July 2016 hard fork between the Ethereum and Ethereum Classic networks, new security concerns surfaced. Replay attacks, in which transactions from one network were rebroadcast to nefarious effect on the other network, plagued Ethereum platforms through at least October 2016. An Ethereum platform announced in July 2016 that it had lost 40,000 Ethereum Classic, worth about $100,000 at that time, as a result of replay attacks. Similar replay attack concerns occurred in connection with the Bitcoin Cash and Bitcoin Satoshi’s Vision networks split in November 2018, and security concerns could similarly surface in connection with future hard forks.
An unplanned fork may also occur as a result of an unintentional or unanticipated software flaw in the various versions of Ethereum Client software that nodes run and use to access the Ethereum network. For example, such an unplanned fork reportedly occurred in the Go-Ethereum (“Geth”) client, which is a popular Ethereum Client that many nodes use to access the Ethereum network and whose developers are financially supported by the Ethereum Foundation. In November 2020, a bug was discovered in Geth (but not the other Ethereum Clients at the time, such as Besu, OpenEthereum, and Nethermind), and a patch was released that all nodes using the Geth client were supposed to download and apply simultaneously. However, not all nodes using Geth did so, resulting with the non-patched Geth nodes temporarily running a different version of the Ethereum blockchain than the patched Geth nodes and nodes using other Ethereum Clients. This temporarily created two conflicting versions of the Ethereum blockchain, causing the nodes using the non-patched Geth version to be unable to reach consensus with the rest of the nodes on the Ethereum blockchain, interrupting the non-patch Geth nodes' access to the Ethereum network. For example, Infura, which is a node operator that provides services to major Ethereum smart contracts, wallet software providers like MetaMask, ether trading platforms, and other market participants, reportedly ran numerous nodes using the Geth client. Infura's Geth client-running nodes reportedly used the outdated, non-patched Geth version initially, which is said to have caused those nodes to be on the minority blockchain, impacting transaction execution, validation, and recording on the main Layer 1 Ethereum network for Infura's customers - such as Ethereum-based smart contracts, wallet providers like MetaMask, ether trading platforms, etc. - until Infura was able to apply the software update released by the Geth client developers to Infura's nodes that use Geth as their Ethereum Client. Ultimately, the problem was reportedly fixed by releasing a new upgraded version of Geth that all nodes using the Geth client were to promptly download. This reportedly harmonized the conflicting versions and restored synchronization among Geth nodes, fixing the problem and restoring access to the Ethereum network, including for Infura and its customers.
In the future, if an accidental or unintentional fork similar to what happened within the Geth client in November 2020 were to reoccur within Geth (or any other major Ethereum Client), or were to happen to the Ethereum network as a whole (instead of being limited to a single Ethereum Client, in this case Geth), such a fork could lead to nodes, users and validators losing confidence in the Ethereum network and abandoning it in favor of other blockchain protocols. Furthermore, it is possible that, in a future unplanned fork, a substantial number of nodes, users and validators could adopt an incompatible version of the digital asset while resisting community-led efforts to merge the two chains, resulting in a permanent fork. Moreover, following the Merge, nodes on the Ethereum network must run two Ethereum Clients, i.e., an Execution Client and a Consensus Client paired together, with the implementations selected at the discretion of the node operator. There are multiple groups independently developing and implementing their respective Execution Clients and Consensus Clients; while some individual Execution Clients or Consensus Clients are more popular or widely adopted than others, there remains heterogeneity among Ethereum Clients. Each Execution Client and Consensus Client needs to interoperate effectively with each other Execution Client and Consensus Client. Although this diversity of Ethereum Clients is perceived by some to promote decentralization of the Ethereum network, it comes at a potential cost: if there are any unanticipated or undiscovered flaws, bugs, software defects, or interoperability failures causing any individual Execution Client to fail to interoperate effectively with any other individual Execution Client or any Consensus Client, the Ethereum network as a whole could suffer an unplanned fork, major disruption, catastrophic outage, system failure, loss of confidence or adoption among users or validators, or a variety of other problems. Any of these events could cause ether to decline in value, adversely affecting the price of Shares.
Protocols may also be cloned. Unlike a fork, which modifies an existing blockchain, and results in two competing networks, each with the same genesis block, a “clone” is a copy of a protocol’s codebase, but results in an entirely new blockchain and new genesis block. Tokens are created solely from the new “clone” network and, in contrast to forks, holders of tokens of the existing network that was cloned do not receive any tokens of the new network. A “clone” results in a competing network that has characteristics substantially similar to the network it was based on, subject to any changes as determined by the developer(s) that initiated the clone. A clone may also adversely affect the price of ether at the time of announcement or adoption or subsequently. For example, on November 6, 2016, Rhett Creighton, a Zcash developer, cloned the Zcash Network to launch Zclassic, a substantially identical version of the Zcash Network that eliminated the Founders’ Reward. For the days following the date the first Zclassic block was mined, the price of ZEC fell from $504.57 on November 5, 2016 to $236.01 on November 7, 2016 in the midst of a broader sell off of ZEC beginning immediately after the Zcash Network launch on October 28, 2016.
Shareholders will not receive the benefits of any Incidental Rights and any IR Virtual Currency, including any forked or airdropped assets.
In addition to forks, a digital asset may become subject to a similar occurrence known as an “airdrop.” In an airdrop, the promotors of a new digital asset announce to holders of another digital asset that such holders will be entitled to claim a certain amount of the new digital asset for free, based on the fact that they hold such other digital asset. For example, in March 2017 the promoters of Stellar Lumens announced that anyone that owned bitcoin 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 Fund, the Sponsor, the Ether Custodian, Authorized Participants, or other entities.
The Fund will not hold any crypto asset other than ether. Accordingly, Shareholders may not receive the benefits of any forks, the Fund 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. We refer to the right to receive any such benefit as an “Incidental Right” and any such virtual currency acquired through an Incidental Right as “IR Virtual Currency.” The Sponsor has the right, in the Sponsor’s sole discretion, to determine: (i) with respect to any fork, airdrop or similar event, what action the Fund shall take, and (ii) what action to take in connection with the Fund’s entitlement to or ownership of Incidental Rights or any IR Virtual Currency. The Sponsor intends to evaluate each fork, airdrop or similar occurrence on a case-by-case basis in consultation with the Fund’s legal advisors, tax consultants, the Administrator, and the Ether Custodian. The Sponsor is under no obligation to realize any economic benefit from any Incidental Rights or IR Virtual Currency on behalf of the Fund.
Notwithstanding the foregoing, with respect to any airdrop of any non-ether crypto asset, including Incidental Rights and/or IR Virtual Currency, or in the event of a fork where it has been determined, in the discretion of the Sponsor, that the crypto asset received by the Fund is not ether, or any similar event, the Sponsor will cause the Fund to irrevocably abandon such non-ether crypto asset and, in the event that the Fund seeks to change this position, an application would need to be filed with the SEC by Cboe BZX Exchange, Inc., the listing exchange, seeking approval to amend its listing rules. Furthermore, neither the Trust or the Fund, nor the Sponsor, nor the Ether Custodian, nor any other person associated with the Trust or Fund will, directly or indirectly, engage in action where any portion of the Fund’s ether becomes subject to the Ethereum proof-of-stake validation or is used to earn additional ether or generate income or other earnings. Foregoing potential returns from staking activities could cause an investment in the Shares to deviate from that which would have been obtained by purchasing and holding ether directly by virtue of giving up staking as a source of return when an investor holds the Shares. The Fund will not acquire and will disclaim any Incidental Right or Incidental Right asset received, for example as a result of forks or airdrops, and such assets will not be taken into account for purposes of determining NAV. For the avoidance of doubt, the only crypto asset to be held by the Fund will be ether; the Fund does not have the ability or intention to hold any other crypto asset, and specific regulatory approval would be required in order to do so.
There are likely to be operational, tax, securities law, regulatory, legal and practical issues that significantly limit, or prevent entirely, Shareholders’ ability to realize a benefit, through their Shares in the Fund, from any airdrop, fork or similar event. Additionally, as noted above the Fund may only hold ether and cash.
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. In the event of a hard fork of the Ethereum network, the Sponsor will use its discretion to determine which network should be considered the appropriate network for the Fund’s purposes, and in doing so may adversely affect the value of the Shares.
In the event of a hard fork of the Ethereum network, the Sponsor will, if permitted by the terms of the Declaration of Trust, use its discretion to determine which network should be considered the appropriate network for the Fund’s purposes, and in doing so may adversely affect the value of the Shares.
In the event of a hard fork of the Ethereum network, the Sponsor will, as permitted by the terms of the Declaration of Trust, use its sole discretion to determine, in good faith, which peer-to-peer network, among a group of incompatible forks of the Ethereum network, is generally accepted as the Ethereum network and should therefore be considered the appropriate network for the Fund’s purposes. The Sponsor will base its determination on whatever factors it deems relevant, including, but not limited to, the Sponsor’s beliefs regarding expectations of the core developers of ether, users, services, businesses, validators and other constituencies, as well as the actual continued acceptance of, validating power on, and community engagement with, the Ethereum network, or whatever other factors it deems relevant. There is no guarantee that the Sponsor will choose the digital asset that is ultimately the most valuable fork, and the Sponsor’s decision may adversely affect the value of the Shares as a result. The Sponsor may also disagree with Shareholders, the Ether Custodian, other service providers, the Index Administrator, cryptocurrency platforms, or other market participants on what is generally accepted as ether and should therefore be considered “ether” for the Fund’s purposes, which may also adversely affect the value of the Shares as a result.
Any name change and any associated rebranding initiative by the core developers, users or validators of ether or the Ethereum network may not be favorably received by the digital asset community, which could negatively impact the value of ether and the value of the Shares.
From time to time, digital assets may undergo name changes and associated rebranding initiatives. For example, Bitcoin Cash may sometimes be referred to as Bitcoin ABC in an effort to differentiate itself from any Bitcoin Cash hard forks, such as Bitcoin Satoshi’s Vision, and in the third quarter of 2018, the team behind ZEN rebranded and changed the name of ZenCash to “Horizen.” The Sponsor cannot predict the impact of any name change and any associated rebranding initiative on ether. After a name change and an associated rebranding initiative, a digital asset may not be able to achieve or maintain brand name recognition or status that is comparable to the recognition and status previously enjoyed by such digital asset. The failure of any name change and any associated rebranding initiative by a digital asset may result in such digital asset not realizing some or all of the anticipated benefits contemplated by the name change and associated rebranding initiative, and could negatively impact the value of ether and the value of the Shares.
Smart contracts, including those relating to 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.
Smart contracts are programs that run on the Ethereum blockchain that execute automatically when certain conditions are met. Since smart contracts typically cannot be stopped or reversed, vulnerabilities in their programming can have damaging effects. For example, in June 2016, a vulnerability in the smart contracts underlying The DAO allowed an attack by a hacker to syphon approximately $60 million worth of ether from The DAO’s accounts into a segregated account. In the aftermath of the theft, certain core developers and contributors pursued a “hard fork” of the Ethereum network in order to erase any record of the theft. Despite these efforts, the price of ether reportedly dropped approximately 35% in the aftermath of the attack and subsequent hard fork. In addition, in July 2017, a vulnerability in a smart contract for a multi-signature wallet software developed by Parity led to a reportedly $30 million theft of ether, and in November 2017, a new vulnerability in Parity’s wallet software reportedly led to roughly $160 million worth of ether being indefinitely frozen in an account. Furthermore, in April 2018, a batch overflow bug was found in many Ethereum-based ERC20-compatible smart contract tokens that allows hackers to create a large number of smart contract tokens, causing multiple crypto asset platforms worldwide to shut down ERC20-compatible token trading. Similarly, in March 2020, a design flaw in the MakerDAO smart contract caused forced liquidations of crypto assets at significantly discounted prices, resulting in millions of dollars of losses to users who had deposited crypto assets into the smart contract. Other smart contracts, such as bridges between blockchain networks and DeFi protocols have also been manipulated, exploited or used in ways that were not intended or envisioned by their creators such that attackers syphoned over $3.8 billion worth of digital assets from smart contracts in 2022. 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 or transmits ether or other digital assets, and make other changes to the smart contract. Furthermore, in some cases inadequate public information may be available about certain smart contracts or applications, and information asymmetries may exist, even with respect to open-source smart contracts or applications; certain participants may have hidden informational or technological advantages, making for an uneven playing field. There may be opportunities for bad actors to perpetrate fraudulent schemes and engage in illicit activities and other misconduct, such as exit scams and rug pulls (orchestrated by developers and/or influencers who promote a smart contract or application and, ultimately, escape with the money at an agreed time), or Ponzi or similar fraud schemes.
Many DeFi applications are currently deployed on the Ethereum network, and smart contracts relating to DeFi applications currently represent a significant source of demand for ether. DeFi applications may achieve their investment purposes through self-executing smart contracts that may allow users, for example, to invest digital assets in a pool from which other users can borrow without requiring an intermediate party to facilitate these transactions. These investments may earn interest to the investor based on the rates at which borrowers repay the loan, and can generally be withdrawn by the investor. 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. If an attacker is able to access or obtain the super user privileges of a smart contract, or if a smart contract’s super users or core community members take actions that adversely affect the smart contract, users who transact with the smart contract may experience decreased functionality of the smart contract or may suffer a partial or total loss of any digital assets they have used to transact with the smart contract. 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, such sources of demand could diminish, and the value of ether could decrease. Similar risks apply to any smart contract or decentralized application, not just DeFi applications.
Validators may suffer losses due to staking, or staking may prove unattractive to validators, which could make the Ethereum network less attractive.
Validation on the Ethereum network requires ether to be transferred into smart contracts on the underlying blockchain networks not under the Trust’s or anyone else’s control. If the Ethereum network source code or protocol fail to behave as expected, suffer cybersecurity attacks or hacks, experience security issues, or encounter other problems, such assets may be irretrievably lost. The Ethereum network imposes three types of sanctions for validator misbehavior or inactivity, which would result in a portion of their staked ether being destroyed or “burned”: penalties, slashing and inactivity leaks. A validator may face penalties if it fails to take certain actions, such as providing a timely attestation to a block proposed by another validator. Under this scenario, a validator’s staked ether could be burned in an amount equal to the reward to which it would have been entitled for performing the actions. A more severe sanction (i.e., “slashing”) is imposed if a validator commits malicious acts related to the proposal or attestation of blocks with invalid transactions. Slashing can result in the validator having a portion of its staked ether immediately confiscated, withdrawn, or burned by the network, resulting in losses to them. After this initial slashing, the validator is queued for forceful removal from the Ethereum network’s validator “pool,” and more of the validator’s stake is burned over a period of approximately 36 days with the exact amount of ether burned and time period determined by the network regardless of whether the validator makes any further slashable errors, at which point the validator is automatically removed from the validator pool. Staked ether may also be burned through a process known as an “inactivity leak,” which is triggered if the Ethereum network has gone too long without finalizing a new block. For a new block to be successfully added to the blockchain, validators that account for at least two-thirds of all staked ether must agree on the validity of a proposed block. This means that if validators representing more than one-third of the total staked ether are offline, no new blocks can be finalized. To prevent this, an inactivity leak causes the ether staked by the inactive validators to gradually “bleed away” until these inactive validators represent less than one-third of the total stake, thereby allowing the remaining active validators to finalize proposed blocks. This provides a further incentive for validators to remain online and continue performing validation activities. Within the post-Merge Ethereum network, as part of the “activating” and “exiting” processes of staking, staked ether will be inaccessible for a variable period of time determined by a range of factors, including network congestion, resulting in potential inaccessibility during those periods. “Activation” is the funding of a validator to be included in the active set, thereby allowing the validator to participate in the Ethereum network’s proof-of-stake consensus protocol. “Exit” is the request to exit from the active set and no longer participate in the Ethereum network’s proof-of-stake consensus protocol. As part of these “activating” and “exiting” processes of staking on the Ethereum network, any staked ether will be inaccessible for a period of time. The duration of activating and exiting periods are dependent on a range of factors, including network conditions. However, depending on demand, un-staking can take between hours, days or weeks to complete. Furthermore, the Ethereum network requires the payment of base fees and the practice of paying tips is common, and such fees can become significant as the amount and complexity of the transaction grows, depending on the degree of network congestion and the price of ether. Any cybersecurity attacks, security issues, hacks, penalties, slashing events, or other problems could damage validators’ willingness to participate in validation, discourage existing and future validators from serving as such, and adversely impact the Ethereum network’s adoption or the price of ether. Any disruption of validation on the Ethereum network could interfere with network operations and cause the Ethereum network to be less attractive to users and application developers than competing blockchain networks, which could cause the price of ether to decrease. The limited liquidity during the “activation” or “exiting” processes could dissuade potential validators from participating, which could interfere with network operations or security and cause the Ethereum network to be less attractive to users and application developers than competing blockchain networks, which could cause the price of ether to decrease.
Additionally, the Ethereum Blockchain implements “bonding” and “unbonding” buffer periods moderating when stakers can unstake and withdraw their stake. “Bonding” is the process of telling the network a token holder wants to stake tokens, and “unbonding” is the action of telling the network the token holder want to unlock tokens. As part of these “bonding” and “unbonding” processes of Ethereum staking, any staked ether tokens will be inaccessible for a period of time. This prevents malicious actors from performing an attack and running away before their funds are slashed. The duration of bonding and unbonding periods are dependent on a range of factors, including network conditions. However, depending on demand, unstaking can take between hours, weeks or months to complete.
Proof-of-stake blockchains are a relatively recent innovation, and have not been subject to as widespread use or adoption over as long of a period of time as traditional proof-of-work blockchains.
Certain digital assets, such as bitcoin, use a “proof-of-work” consensus algorithm. The genesis block on the Bitcoin blockchain was mined in 2009, and Bitcoin’s blockchain has been in operation since then. Many newer blockchains enabling smart contract functionality, including the current Ethereum network following the completion of the Merge in 2022, use a newer consensus algorithm known as “proof-of-stake.” While their proponents believe that they may have certain advantages, the “proof-of-stake” consensus mechanisms and governance systems underlying many newer blockchain protocols, including the Ethereum network following the Merge, and their associated digital assets - including the ether held by the Fund - have not been tested at scale over as long of a period of time or subject to as widespread use or adoption as, for example, Bitcoin’s proof-of-work consensus mechanism has. This could lead to these blockchains, and their associated digital assets, having undetected vulnerabilities, structural design flaws, suboptimal incentive structures for network participants (e.g., validators), technical disruptions, or a wide variety of other problems, any of which could cause these blockchains not to function as intended, lead to outright failure to function entirely causing a total outage or disruption of network activity, or to suffer other operational problems or reputational damage, leading to a loss of users or adoption or a loss in value of the associated digital assets, including the Fund’s assets. Over the long term, there can be no assurance that the proof-of-stake blockchain on which the Fund’s assets rely will achieve widespread scale or adoption or perform successfully; any failure to do so could negatively impact the value of the Fund’s assets.
Risk Factors Related to the Digital Asset Markets
The value of the Shares relates directly to the value of ether which has been in the past, and may continue to be, highly volatile and subject to fluctuations due to a number of factors.
The value of the Shares relates directly to the value of the ether held by the Fund and fluctuations in the price of ether could adversely affect the value of the Shares. The market price of ether may be highly volatile, and fluctuate in value due to a number of factors, including:
● an increase in the global ether
supply or a decrease in global ether demand;
● general market sentiment towards or
unfavorable conditions or developments within, the digital asset markets and/or
blockchain technology industry;
● trading activity on digital asset
platforms, which, in many cases, are largely unregulated or may be subject to
manipulation;
● the adoption of ether as a medium of
exchange, store-of-value or other consumptive asset and the maintenance and
development of the open-source software protocol of the Ethereum network, and
their ability to meet user demands;
● manipulative trading activity on
digital asset platforms, which, in many cases, are largely unregulated;
● forks in the Ethereum network;
● investors’ expectations with respect
to interest rates, the rates of inflation of fiat currencies or ether, and
digital asset exchange rates;
● consumer preferences and perceptions
of ether specifically and digital assets generally;
● negative events, publicity, and
social media coverage relating to the digital assets and blockchain technology
industry;
● fiat currency withdrawal and deposit
policies on digital asset platforms;
● the liquidity of digital asset
markets and any increase or decrease in trading volume or market making on
digital asset markets;
● business failures, bankruptcies,
hacking, fraud, crime, government investigations, or other negative
developments affecting digital asset businesses, including digital asset
platforms, or banks or other financial institutions and service providers which
provide services to the digital assets industry;
● the use of leverage in digital asset
markets, including the unwinding of positions, “margin calls,” collateral
liquidations and similar events;
● investment and trading activities of
large or active consumer and institutional users, speculators, validators, and
investors;
● a “short squeeze” resulting from
speculation on the price of ether, if aggregate short exposure exceeds the
number of Shares available for purchase;
● an active derivatives market for
ether or for digital assets generally;
● monetary policies of governments,
legislation or regulation, trade restrictions, currency devaluations and
revaluations and regulatory measures or enforcement actions, if any, that
restrict the use of ether as a form of payment or the purchase of ether on the
digital asset markets;
● global or regional political,
economic or financial conditions, events and situations, or major public issues
such as the novel coronavirus (“COVID-19”) outbreak;
● fees associated with processing an
ether transaction and the speed at which ether transactions are settled;
● the maintenance, troubleshooting, and
development of the Ethereum network including by validators and developers
worldwide;
● the ability for the Ethereum network
to attract and retain validators to secure and confirm transactions accurately
and efficiently;
● ongoing technological viability and
security of the Ethereum network and ether transactions, including
vulnerabilities against hacks and scalability;
● governmental or regulatory actions
by, or investigations or litigation in, countries around the world targeting
well-known decentralized applications or smart contracts that are built on the
Ethereum network, or other developments or problems, and associated publicity,
involving or affecting such decentralized applications or smart contracts;
● financial strength of market
participants;
● the availability and cost of funding
and capital;
● the liquidity and credit risk of
digital asset platforms;
● interruptions in service from or
closures or failures of major digital asset platforms or their banking
partners, or outages or system failures affecting the Ethereum network;
● decreased confidence in digital
assets and digital assets platforms;
● poor risk management or fraud by
entities in the digital assets ecosystem;
● increased competition from other
forms of digital assets or networks, including other blockchain networks
combining smart contracts, programmable scripting languages, and an associated
runtime environment, with blockchain-based recordkeeping, particularly where
such other blockchain networks are able to offer users access to a larger
consumer user base, greater efficiency, reliability, or processing speed, or
more economical transaction processing fees than the Ethereum network; and
● the Fund’s own acquisitions or
dispositions of ether, since there is no limit on the number of ether that the
Fund may acquire.
Although returns from investing in ether have at times diverged from those associated with other asset classes to a greater or lesser extent, there can be no assurance that there will be any such divergence in the future, either generally or with respect to any particular asset class, or that price movements will not be correlated. In addition, there is no assurance that ether will maintain its value in the long, intermediate, short or any other term. In the event that the price of ether declines, the Sponsor expects the value of the Shares to decline proportionately.
The value of ether as represented by the Index or other pricing source used by the Fund may also be subject to momentum pricing due to speculation regarding future appreciation in value, leading to greater volatility that could adversely affect the value of the Shares. Momentum pricing typically is associated with growth stocks and other assets whose valuation, as determined by the investing public, accounts for future appreciation in value, if any. The Sponsor believes that momentum pricing of ether has resulted, and may continue to result, in speculation regarding future appreciation in the value of ether, inflating and making the Index more volatile. As a result, ether may be more likely to fluctuate in value due to changing investor confidence, which could impact future appreciation or depreciation in the Index or other pricing source used by the Fund and could adversely affect the value of the Shares.
Because the Fund holds only ether and cash, an investment in the Fund may be more volatile than an investment in a more broadly diversified portfolio.
The Fund holds only ether and cash. As a result, the Fund’s holdings are not diversified. Accordingly, the Fund’s net asset value may be more volatile than another investment vehicle with a more broadly diversified portfolio and may fluctuate substantially over short or long periods of time. Fluctuations in the price of ether are expected to have a direct impact on the value of the Shares.
An investment in the Fund may be deemed speculative and is not intended as a complete investment program. An investment in Shares should be considered only by persons financially able to maintain their investment and who can bear the risk of total loss associated with an investment in the Fund. Investors should review closely the objective and costs of the Fund, as discussed herein, and familiarize themselves with the risks associated with an investment in the Fund.
Due to the relative unregulated nature and lack of transparency surrounding the operations of digital asset platforms, which may experience fraud, manipulation, security failures or operational problems, as well as the wider ether market, the value of ether and, consequently, the value of the Shares may be adversely affected, causing losses to Shareholders.
Risk of loss of market confidence due to lack of established regulatory framework. Digital asset platforms are relatively new and, in some cases, may be unregulated or subject to regulation by a relevant jurisdiction but potentially non-compliant with such regulations. Many operate outside the United States. Furthermore, while many prominent digital asset platforms provide the public with significant information regarding their ownership structure, management teams, corporate practices and regulatory compliance, many digital asset platforms do not provide this information. Digital asset platforms may not be subject to, or may not comply with, regulation in a similar manner as other regulated trading platforms, such as national securities exchanges or designated contract markets. As a result, the marketplace may lose confidence in digital asset platforms, including prominent platforms that handle a significant volume of ether trading.
Risk of manipulative activity (e.g., wash trading, front running or other fraudulent practices). Many digital asset platforms are unlicensed, may be unregulated or subject to regulation by a relevant jurisdiction but potentially non-compliant with such regulations, operate without extensive supervision by governmental authorities, and do not provide the public with significant information regarding their ownership structure, management team, corporate practices, cybersecurity, and regulatory compliance. In particular, those located outside the United States may be subject to significantly less stringent regulatory and compliance requirements in their local jurisdictions, 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. As a result, trading activity on or reported by these digital asset platforms is generally significantly less regulated than trading in regulated U.S. securities and commodities markets, and may reflect behavior that would be prohibited in regulated U.S. trading venues. For example, in 2019 there were reports claiming that 80.95% of bitcoin trading volume on digital asset platforms was false or noneconomic in nature, with specific focus on unregulated platforms located outside of the United States. Such reports alleged that certain overseas platforms have displayed suspicious trading activity suggestive of a variety of manipulative or fraudulent practices, such as fake or artificial trading volume or trading volume based on non-economic “wash trading” (where offsetting trades are entered into for other than bona fide reasons, such as the desire to inflate reported trading volumes), and attributed such manipulative or fraudulent behavior to motives like the incentive to attract listing fees from token issuers who seek the most liquid and high-volume platforms on which to list their coins.
Other academics and market observers have put forth evidence to support claims that manipulative trading activity has occurred on certain digital asset 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. Although bitcoin and ether are different assets, there can be no assurance that ether prices may not at times be subject to similar activity. Even in the United States, there have been allegations of wash trading even on regulated venues. Any actual or perceived false trading in the digital asset platform market, and any other fraudulent or manipulative acts and practices, could adversely affect the value of digital assets and/or negatively affect the market perception of digital assets.
The ether market globally and in the United States is not subject to comparable regulatory guardrails as exist in regulated securities markets. Furthermore, many ether trading venues 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 venues 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 platforms, or may not exist at all. The SEC has identified possible sources of fraud and manipulation in the digital asset markets generally, including, among others (1) “wash trading”; (2) persons with a dominant position in a digital asset manipulating the digital asset’s pricing; (3) hacking of the digital asset’s peer-to-peer network, protocols and trading platforms; (4) malicious control of the digital asset network; (5) trading based on material, non-public information (for example, plans of market participants to significantly increase or decrease their holdings in the digital asset, new sources of demand for the digital asset, etc.) 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”); and (7) fraud and manipulation at digital asset 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 the digital asset markets and/or cause distortions in price, which could adversely affect the Fund or cause losses to Shareholders.
Risks related to exchange bankruptcy, failure or closure, including as a result of criminal fraud, cyber attacks or other security breaches. In addition, over the past several years, some digital asset platforms have been closed, including due to fraud and manipulative activity, business failure or security breaches. In many of these instances, the customers of such digital asset platforms were not compensated or made whole for the partial or complete losses of their account balances in such digital asset platforms. While, generally speaking, smaller digital asset platforms are less likely to have the infrastructure and capitalization that make larger digital asset platforms more stable, larger digital asset platforms are more likely to be appealing targets for hackers and malware and their shortcomings or ultimate failures are more likely to have contagion effects on the digital asset ecosystem, and therefore may be more likely to be targets of regulatory enforcement action. For example, the collapse of Mt. Gox, which filed for bankruptcy protection in Japan in late February 2014, demonstrated that even the largest digital asset platforms could be subject to abrupt failure with consequences for both users of digital asset platforms and the digital asset industry as a whole. In particular, in the two weeks that followed the February 7, 2014 halt of bitcoin withdrawals from Mt. Gox, the value of one bitcoin fell on other platforms from around $795 on February 6, 2014 to $578 on February 20, 2014. Additionally, in January 2015, Bitstamp announced that approximately 19,000 bitcoins had been stolen from its operational or “hot” wallets. Further, in August 2016, it was reported that almost 120,000 bitcoins worth around $78 million were stolen from Bitfinex, a large digital asset platform. The value of bitcoin and other digital assets immediately decreased over 10% following reports of the theft at Bitfinex. Regulatory enforcement actions have followed, such as in July 2017, when FinCEN assessed a $110 million fine against BTC-E, a now defunct digital asset platform, for facilitating crimes such as drug sales and ransomware attacks. In addition, in December 2017, Yapian, the operator of Seoul-based digital asset 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 exchange accounts, with any potential further distributions to be made following Yapian’s pending bankruptcy proceedings. In addition, in January 2018, the Japanese digital asset platform, Coincheck, was hacked, resulting in losses of approximately $535 million, and in February 2018, the Italian digital asset platform Bitgrail, was hacked, resulting in approximately $170 million in losses. In May 2019, one of the world’s largest digital asset platforms, Binance, was hacked, resulting in losses of approximately $40 million. In November 2022, FTX Trading Ltd. (“FTX”), one of the largest digital asset 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.
Reputational harm and related industry contagion effects may exacerbate negative events in the digital asset markets or digital platforms. Negative perception, a lack of stability and standardized regulation in the digital asset markets and the closure or temporary shutdown of digital asset platforms due to fraud, business failure, security breaches or government mandated regulation, and associated losses by customers, may reduce confidence in the Ethereum network and result in greater volatility or decreases in the prices of ether. Furthermore, the closure or temporary shutdown of a digital asset platform used in calculating the Index may result in a loss of confidence in the Fund’s ability to determine its NAV on a daily basis. The potential consequences of a digital asset platform’s failure could adversely affect the value of the Shares and may cause the Fund to lose substantial value.
The Index has a limited performance history, the Index price could fail to track the global ether price, and a failure of the Index price could adversely affect the value of the Shares.
The CF Benchmarks Index was developed by the Index Administrator and has a limited performance history. Although the Index is based on materially the same methodology (except calculation time) as the Index Administrator’s Ether Reference Rate (“ETHUSD_RR”) which was first introduced in May 2018, the Index itself has only been in operation since February 2022. The Index price is a composite CF Benchmarks Index calculated using volume-weighted trading price data from various Constituent Platforms. The Index has only featured its current list of Constituent Platforms since May 2022. 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 Index’s performance. The Constituent Platforms chosen by the Index Administrator could also change over time. The Index Administrator may remove or add Constituent Platforms to the CF Benchmarks Index in the future at its discretion. For more information on the inclusion criteria for Constituent Platforms in the CF Benchmarks Index, see “Business of the Fund-Valuation of Ether; The CF Benchmarks Index.”
Although the Index is intended to accurately capture the market price of ether, third parties may be able to purchase and sell ether on public or private markets not included among the Constituent Platforms, and such transactions may take place at prices materially higher or lower than the Index price. Moreover, there may be variances in the prices of ether on the various Constituent Platforms, including as a result of differences in fee structures or administrative procedures on different Constituent Platforms. While the Index provides a U.S. dollar-denominated composite CF Benchmarks Index for the price of ether based on, in the case of the CF Benchmarks Index, the volume-weighted price of ether on certain Constituent Platforms, at any given time, the prices on each such Constituent Platform or pricing source may not be equal to the value of an ether as represented by the Index. It is possible that the price of ether on the Constituent Platforms could be materially higher or lower than the Index price. To the extent the Index price differs materially from the actual prices available on a Constituent Platform, or the global 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 Fund by reducing investors’ confidence in the Shares’ ability to track the market price of ether. To the extent such prices differ materially from the Index price, investors may lose confidence in the Shares’ ability to track the market price of ether, which could adversely affect the value of the Shares.
If the Index is not available, the Fund’s holdings may be fair valued by the Sponsor. To the extent the valuation determined 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 Fund 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.
Additionally, under certain circumstances as described herein under "Net Asset Value—Business of the Fund," the Sponsor may utilize the Secondary Index (defined below) as a secondary pricing source. The Secondary Index incepted on March 15, 2022 and has a limited performance history. A longer history of performance through various economic and market conditions would provide greater and more reliable information regarding the performance of the Secondary Index over time. Accordingly, the Secondary Index is subject generally to the same risks as described above and may not accurately capture the price of ether.
The Index price used to calculate the value of the Fund’s ether may be volatile, adversely affecting the value of the Shares.
The price of ether on public digital asset platforms has a limited history, and during this history, ether prices on the digital asset markets more generally, and on digital asset platforms individually, have been volatile and subject to influence by many factors, including operational interruptions. While the Index is designed to limit exposure to the interruption of individual digital asset platforms, the Index price, and the price of ether generally, remains subject to volatility experienced by digital asset platforms, and such volatility could adversely affect the value of the Shares.
Furthermore, because the number of liquid and credible digital asset platforms is limited, the Index will necessarily be composed of a limited number of digital asset platforms. If a digital asset platform were subjected to regulatory, volatility or other pricing issues, in the case of the CF Benchmarks Index, the Index Administrator would have limited ability to remove such digital asset platform from the Index, which could skew the price of Ether as represented by the Index. Trading on a limited number of digital asset platforms may result in less favorable prices and decreased liquidity of ether and, therefore, could have an adverse effect on the value of the Shares.
The Index Administrator could experience system failures or errors.
If the computers or other facilities of the Index Administrator, data providers and/or relevant constituent ether platforms malfunction for any reason, calculation and dissemination of the CF Benchmarks Index may be delayed. Errors in the CF Benchmarks Index data, the CF Benchmarks Index 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 Fund and the Shareholders. Any of the foregoing may lead to the errors in the CF Benchmarks Index, which may lead to a different investment outcome for the Fund and the Shareholders than would have been the case had such events not occurred.
The CF Benchmarks Index is used to determine the net asset value of the Fund and the NAV. Consequently, losses or costs associated with the CF Benchmarks Index’s errors or other risks described above will generally be borne by the Fund and the Shareholders and neither the Sponsor nor its affiliates or agents make any representations or warranties regarding the foregoing. If the CF Benchmarks Index is not available or the Sponsor in its sole discretion determines the CF Benchmarks Index is unreliable as the Index and therefore determines not to use the CF Benchmarks Index the Fund’s holdings may be fair valued by the Sponsor. See “Business of the Fund-Net Asset Value.” To the extent the valuation determined 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 price of ether, which could adversely affect an investment in the Fund and the value of Shares by reducing investors’ confidence in the Shares’ ability to track the price of ether.
The Index price being used to determine the net asset value of the Fund may not be consistent with GAAP. To the extent that the Fund’s financial statements are determined using a different pricing source that is consistent with GAAP, the net asset value reported in the Fund’s periodic financial statements may differ, in some cases significantly, from the Fund’s net asset value determined using the Index pricing.
The Fund will determine the net asset value of the Fund on each Business Day based on the value of ether as reflected by the Index. The methodology used to calculate the Index price to value ether in determining the net asset value of the Fund may not be deemed consistent with GAAP. To the extent the methodology used to calculate the Index is deemed inconsistent with GAAP, the Fund will utilize an alternative GAAP-consistent pricing source for purposes of the Fund’s periodic financial statements. Creation and redemption of Creation Units, the Sponsor’s Fee and other expenses borne by the Fund will be determined using the Fund’s net asset value determined daily based on the Index. Such net asset value of the Fund determined using the Index Price may differ, in some cases significantly, from the net asset value reported in the Fund’s periodic financial statements.
Competition from central bank digital currencies (“CBDCs”) and emerging payments initiatives involving financial institutions could adversely affect the value of ether and other digital assets.
Central banks in various countries have introduced digital forms of legal tender (CBDCs). Whether or not they incorporate blockchain or similar technology, CBDCs, as legal tender in the issuing jurisdiction, could have an advantage in competing with, or replace, ether and other cryptocurrencies as a medium of exchange or store of value. Central banks and other governmental entities have also announced cooperative initiatives and consortia with private sector entities, with the goal of leveraging blockchain and other technology to reduce friction in cross-border and interbank payments and settlement, and commercial banks and other financial institutions have also recently announced a number of initiatives of their own to incorporate new technologies, including blockchain and similar technologies, into their payments and settlement activities, which could compete with, or reduce the demand for, ether. As a result of any of the foregoing factors, the value of ether could decrease, which could adversely affect an investment in the Fund.
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.
While the Fund does not invest in stablecoins, it may nonetheless be exposed to risks that stablecoins pose for the ether market and other digital asset markets. 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, at a certain value. Although the prices of stablecoins are intended to be stable, their market value may fluctuate. 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, when the stablecoin is used to pay for bitcoin, could cause artificial rather than genuine demand for bitcoin, artificially inflating the price of bitcoin, and if true, there is no assurance similar dynamics would not be at work in the market for ether. There have been reports that those associated with certain stablecoins may be involved in laundering money. On February 17, 2021, the New York Attorney General entered into an agreement with Tether’s operators, including Bitfinex, 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, Tether Holdings Limited, Tether Operations Limited, Tether Limited, and Tether International Limited, 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. Bitfinex also agreed to pay the CFTC a $1.5 billion fine to settle charges that Bitfinex offered off-exchange leveraged, margined, or financed transactions involving cryptocurrencies, including ether, with U.S. customers who were not eligible contract participants and accepted funds (including in the form of Tether stablecoins) and orders in connection with such illegal off-exchange transactions, triggering an obligation to register with the CFTC, which the CFTC order asserts it violated. The CFTC previously fined Bitfinex in 2016 on similar charges. In addition, a large amount of Tether is issued as ERC-20 tokens on the Ethereum network. If Tether were to no longer be issued or operating on the Ethereum network, there would be no need to use ether to pay the gas fees needed to record ERC-20 Tether transactions on the Ethereum blockchain, and a substantial source of demand for ether could be eliminated, which could cause the price of ether to decrease, affecting the value of the Shares.
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. 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 U.S. treasuries, and the failure of either to function normally could impede the function of stablecoins, and therefore could adversely affect the value of the Shares. Similar to Tether, a large amount of USDC is issued as ERC-20 tokens on the Ethereum network. If USDC were to no longer be issued or operating on the Ethereum network, there would be no need to use ether to pay the gas fees needed to record ERC-20 USDC transactions on the Ethereum blockchain, and a substantial source of demand for ether could be eliminated, which could cause the price of ether to decrease, affecting the value of the Shares.
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 platforms, that support stablecoins, or the removal or migration of prominent stablecoins away from the Ethereum network, could impact individuals’ willingness to trade on trading venues 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.
Competition from the emergence or growth of other digital assets or methods of investing in Ether could have a negative impact on the price of Ether and adversely affect the value of the Shares.
As of March 31, 2025, ether was the second largest digital asset by market capitalization of the more than approximately 14,000 alternative digital assets as tracked by CoinGecko.com. In addition, many consortiums and financial institutions are also researching and investing resources into private or permissioned smart contract platforms rather than open platforms like the Ethereum network. Competition from the emergence or growth of alternative digital assets and smart contract platforms, such as Solana, Avalanche, Polkadot, or Cardano, could have a negative impact on the demand for, and price of, ether and thereby adversely affect the value of the Shares.
In addition, some digital asset networks, including the Ethereum network, may be the target of ill will from users of other digital asset networks. For example, in July 2016, the Ethereum network underwent a contentious hard fork that resulted in the creation of a new digital asset network called Ethereum Classic. As a result, some users of the Ethereum Classic network may harbor ill will toward the Ethereum network. These users may attempt to negatively impact the use or adoption of the Ethereum network. For additional information on the hard fork that resulted in the creation of Ethereum Classic, see “Overview of the Ethereum Industry - History of Ethereum -The DAO and Ethereum Classic.”
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 Fund, 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 Fund 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 Index, the Fund’s ether holdings, the price of the Shares and the net asset value of the Fund.
Competitive pressures may negatively affect the ability of the Fund to garner substantial assets and achieve commercial success.
The Fund and the Sponsor face significant competition with respect to the development and launch of competing investment products that could have a detrimental effect on the Fund’s ability to achieve scale. In July 2024, the SEC approved several spot ether exchange-traded products and many or all of such products, including the Fund, could fail to retain acquired assets due to competition and/or market conditions. The Fund's ability to attract assets could be impaired to the extent the Fund's competitors have a lower expense ratio than the Fund.
In addition, the Fund competes 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 Fund’s control, may make it more attractive to invest directly or in other vehicles, which could adversely affect the performance of the Fund.
Operational cost may exceed the award for validating transaction, and increased transaction fees may adversely affect the usage of the Ethereum network.
If transaction confirmation fees become too high, the marketplace may be reluctant to use ether. This may result in decreased usage and limit expansion of the Ethereum network in the retail, commercial and payments space, adversely impacting investment in the Fund. Conversely, if the reward for validators or the value of the transaction fees is insufficient to motivate validators, they may cease to validate transactions. Ultimately, if the awards of new ether costs of validating transactions grow disproportionately, validators may operate at a loss, transition to other networks, or cease operations altogether. Each of these outcomes could, in turn, slow transaction validation and usage, which could have a negative impact on the Ethereum network and could adversely affect the value of the ether held by the Fund.
As a result of Ethereum’s fee burning mechanism, the incentives for validators to validate transactions with higher gas fees are reduced, since those validators would not receive those gas fees. An acute cessation of validator operations would reduce the collective processing power on the Ethereum network, which would adversely affect the transaction verification process by temporarily decreasing the speed at which blocks are added to the blockchain and make the blockchain more vulnerable to a malicious actor obtaining control in excess of 50% of the processing power on the blockchain. Reductions in processing power could result in material, though temporary, delays in transaction confirmation time. Any reduction in confidence in the transaction verification process or may adversely impact the value of Shares of the Fund or the ability of the Sponsor to operate.
Risk Factors Related to the Fund and the Shares
The Fund may be negatively impacted by the effects of the spread of illnesses or other public health emergencies on the global economy and the markets and service providers relevant to the performance of the Fund.
A public health emergency, such as the COVID-19 pandemic, could adversely affect the economics of many nations and could have serious negative effects on social, economic and financial systems, including significant uncertainty and volatility in the digital asset markets. For example, digital asset prices, including ether decreased significantly in the first quarter of 2020 amidst broader market declines as a result of the COVID‑19 outbreak.
Future public health emergencies could result in an increase of the costs of the Fund and affect liquidity in the digital asset market, as well as the correlation between the price of the Shares and the net asset value of the Fund, any of which could adversely affect the value of the Shares. In addition, future public health emergencies could impair the information technology and other operational systems upon which the Fund’s service providers, including the Sponsor, the Trustee, Administrator, Prime Broker and the Custodians, rely, and could otherwise disrupt the ability of employees of the Fund’s service providers to perform essential tasks on behalf of the Fund. Governmental and quasi-governmental authorities and regulators throughout the world have at times responded to major economic disruptions with a variety of fiscal and monetary policy changes, including, but not limited to, direct capital infusions into companies and other issuers, new monetary tools and lower interest rates. An unexpected or sudden reversal of these policies, or the ineffectiveness of these policies, is likely to increase volatility in the digital asset markets, which could adversely affect the value of ether and the price of the Shares.
The Fund will rely on the information and technology systems of the Custodians, Administrator, Trustee, Sponsor, Authorized Participants, Ether Trading Counterparties, listing exchange, and the Fund’s other service providers and counterparties (referred to herein as the “Service Providers”), each of which could be directly or indirectly adversely affected by information systems interruptions, cybersecurity incidents or other disruptions, which in turn could have a material adverse effect on the Fund.
The Fund and the Service Providers are susceptible to operational, information security and related cybersecurity risks both directly and through their own service providers. Cyber incidents can result from deliberate attacks or unintentional events. They include, but are not limited to, gaining unauthorized access to systems, corrupting or destroying data, and causing operational disruption. Geopolitical tensions may increase the scale and sophistication of deliberate attacks, particularly those from nation-states or from entities with nation-state backing.
Cybersecurity incidents may cause disruptions and impact business operations. They may result in any of the following: financial losses (including loss or theft of Fund assets), interference with the Fund’s ability to calculate its NAV, disclosure of confidential information, impediments to trading, submission of erroneous trades or erroneous creation or redemption orders or other price movements, the inability of the Fund or the Service Providers to transact business, violations of applicable privacy and other laws, regulatory fines, penalties, reputational damage, reimbursement or other compensation costs, and other legal and compliance costs. In addition, cyber incidents may render records of Fund assets and transactions, Shareholder ownership of the Shares, and other data integral to the functioning of the Fund inaccessible, inaccurate or incomplete. The Fund may incur substantial costs in order to resolve or prevent cyber incidents.
The amount of the Fund’s assets represented by each Share will decline over time as the Fund pays the Sponsor’s Fee and additional expenses born by the Fund, and as a result, the value of the Shares may decrease over time.
The amount of ether represented by each Share will decrease over the life of the Fund due to the sales of ether necessary to pay the Sponsor’s Fee and other Fund expenses. Without increases in the price of ether sufficient to compensate for that decrease, the price of the Shares will also decline and you will lose money on your investment in Shares.
Although the Sponsor has agreed to assume all organizational and certain ordinary administrative and marketing expenses incurred by the Fund, not all Fund expenses have been assumed by the Sponsor. For example, any taxes and other governmental charges that may be imposed on the Fund’s property will not be paid by the Sponsor. As part of its agreement to assume some of the Fund’s ordinary administrative expenses, the Sponsor has agreed to pay ordinary legal fees and expenses of the Fund not in excess of $500,000 per annum. Any legal fees and expenses in excess of the amount required under the Sponsor Agreement will be the responsibility of the Fund.
Because the Fund does not have any income, it needs to sell ether to cover the Sponsor’s Fee and expenses not assumed by the Sponsor. The Fund may also be subject to other liabilities (for example, as a result of litigation) that have also not been assumed by the Sponsor. The only source of funds to cover those liabilities will be sales of ether held by the Fund. Even if there are no expenses other than those assumed by the Sponsor, and there are no other liabilities of the Fund, the Sponsor will still need to sell ether to pay the Sponsor’s Fee. The result of these sales is a decrease in the amount of ether represented by each Share. Creation orders for shares of the Fund do not reverse this trend.
A decrease in the amount of ether represented by each Share results in a decrease in its price even if the price of ether has not changed. To retain the Share’s original price, the price of ether has to increase. Without that increase, the lesser amount of ether represented by the Share will have a correspondingly lower price. If these increases do not occur, or are not sufficient to counter the lesser amount of ether represented by each Share, you will sustain losses on your investment in Shares.
An increase in the Fund expenses not assumed by the Sponsor, or the existence of unexpected liabilities affecting the Fund, will force the Sponsor to sell larger amounts of ether, and will result in a more rapid decrease of the amount of ether represented by each Share and a corresponding decrease in its value.
The Fund is a passive investment vehicle that does not seek to generate returns beyond tracking the price of ether. The Fund is not actively managed, does not seek to generate excess returns beyond tracking the price of ether and will be adversely affected by a general decline in the price of ether.
The Fund is a passive investment vehicle that does not seek to generate returns beyond the price of ether. The Sponsor does not actively manage the ether held by the Fund. This means that the Sponsor does not speculatively sell ether at times when its price is high, or speculatively acquire ether at low prices in the expectation of future price increases. The Fund will not utilize leverage, derivatives or any similar instruments or transactions in seeking to meet its investment objective. Any losses sustained by the Fund will adversely affect the value of your Shares.
An investment in the Shares deviates from a direct investment in ether.
The market value of the Shares may not have a direct relationship with the prevailing price of ether, and changes in the prevailing price of ether similarly will not necessarily result in a comparable change in the market value of the Shares. The performance of the Fund will not reflect the specific return an investor would realize if the investor actually held or purchased ether directly. The differences in performance may be due to factors such as fees, transaction costs, operating hours of Cboe BZX Exchange. Investors will also forgo certain rights conferred by owning ether directly, such as the right to claim airdrops, or to participate in staking activities.
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 and the digital asset platforms
included in the Index that may have an adverse effect on the value of the
Shares. These factors include the following factors:
●
unanticipated problems or issues with respect to the mechanics of the Fund’s operations and the trading of the Shares may arise, including due to the complexity of the mechanisms and processes governing the offering, creation and redemptions of the Shares and storage of ether;
●
the Fund 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 Fund could experience unforeseen issues relating to the performance and effectiveness of the security procedures used to protect the Fund’s account with the Ether Custodian, or the security procedures may not protect against all errors, software flaws or other vulnerabilities in the Fund’s technical infrastructure, which could result in theft, loss or damage of its assets; or
●
service providers may default on or fail to perform their obligations or deliver services under their contractual agreements with the Fund, or decide to terminate their relationships with the Fund, for a variety of reasons, which could affect the Fund’s ability to operate.
●
if the Ethereum network introduces privacy enhancing features in the future, service providers may decide to terminate their relationships with the Fund 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 Fund’s
assets.
The liquidity of the Shares may also be
affected by the withdrawal from participation of Authorized Participants or
Ether Trading Counterparties.
In the event that one or more Authorized
Participants or Ether Trading Counterparties withdraw from or cease
participation in creation and redemption activity for any reason, the liquidity
of the Shares will likely decrease, which could adversely affect the market
price of the Shares and result in your incurring a loss on your investment in
Shares.
The Fund and the Shares may be negatively
affected by Authorized Participant Concentration.
Only Authorized Participants may engage in
creation or redemption transactions directly with the Fund. The Fund has a
limited number of institutions that act as Authorized Participants and the
Fund's Authorized Participants serve in the same capacity for various
competitor products. Authorized Participants are not obligated to make a market
in the Fund's Shares or submit purchase and redemption orders for Creation
Units. Authorized Participants that act in the same capacity for several
competing products may be incentivized to prioritize making a market in a
competing product's shares over the Fund's Shares, which may reduce liquidity
in the Fund's Shares or otherwise negatively affect the Fund. In addition, the Fund 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 Fund failure to reflect the performance
of the price of ether. To the extent that these institutions exit the business
or are unable to proceed with creation and/or redemption orders with respect to
the Fund and no other Authorized Participant is able or willing to step forward
to create or redeem Creation Units, the Fund's Shares may trade at a discount
to NAV and face trading halts and/or delisting. This risk may be more
pronounced in volatile market conditions. In addition, due to the novelty of the
Fund's product structure and volatility in the ether markets, risks relating to
a limited number of Authorized Participants are heightened.
Certain shareholders may from time to time
own a substantial amount of the Fund's Shares.
In addition, a third-party investor, the
Sponsor (or an affiliate of the Sponsor), an Authorized Participant, a lead
market maker or another entity may invest in the Fund and hold its investment
solely to facilitate commencement of the Fund's operations or to facilitate the
Fund's achieving a specified size or scale. There can be no assurance that the size of the
Fund would be maintained at such levels. Redemptions by large shareholders
could have a significant negative impact on the Fund. In addition, transactions
by large shareholders may account for a large percentage of the trading volume
on the Cboe BZX Exchange and may, therefore, have a material upward or downward
effect on the market price of the Shares.
The Trust is an “emerging growth company”
and it cannot be certain if the reduced disclosure requirements applicable to
emerging growth companies will make the Shares less attractive to investors.
The Trust is an “emerging growth company”
as defined in the JOBS Act. For as long as the Trust continues to be an
emerging growth company it may choose to take advantage of certain exemptions
from various reporting requirements applicable to other public companies but
not to emerging public companies, which include, among other things:
●
exemption from the auditor attestation requirements under Section 404(b) of the Sarbanes-Oxley Act;
●
reduced disclosure obligations regarding executive compensation in the Fund’s periodic reports and audited financial statements in this report;
●
exemptions from the requirements of holding advisory “say-on-pay” votes on executive compensation and shareholder advisory votes on “golden parachute” compensation; and
●
exemption from any rules requiring mandatory audit firm rotation and auditor discussion and analysis and, unless otherwise determined by the SEC, any new audit rules adopted by the Public Company Accounting Oversight Board.
The Trust could be an emerging growth
company until the last day of the fiscal year following the fifth anniversary
after its initial public offering, or until the earliest of (1) the last day of
the fiscal year in which it has annual gross revenue of $1.235 billion or more,
(2) the date on which it has, during the previous three year period, issued
more than $1 billion in non-convertible debt or (3) the date on which it is
deemed to be a large accelerated filer under the federal securities laws. The
Trust will qualify as a large accelerated filer as of the first day of the
first fiscal year after it has (A) more than $700 million in outstanding equity
held by nonaffiliates, (B) been public for at least 12 months and (C) filed at
least one annual report on Form 10-K.
Under the JOBS Act, emerging growth
companies are also permitted to elect to delay adoption of new or revised
accounting standards until companies that are not subject to periodic reporting
obligations are required to comply, if such accounting standards apply to
non-reporting companies.
The
Fund cannot predict if investors will find an investment in the Fund less
attractive if it relies on these exemptions.
The lack of an active trading market for
the Shares may result in losses on your investment at the time of disposition
of your Shares.
Although Shares will be listed for trading
on the Cboe BZX Exchange, you should not assume that an active trading market
for the Shares will be maintained. If you need to sell your Shares at a time
when no active market for them exists, such lack of an active market will most
likely adversely affect the price you receive for your Shares (assuming you are
able to sell them).
The lack of ability to facilitate in-kind
creations and redemptions of Shares could have adverse consequences for the
Fund.
The Fund is currently only able to accept
cash purchase orders and redemption orders, which means that an Authorized
Participant will deliver only cash to create Shares and will receive only cash
when redeeming Shares and the Fund will choose, in its sole discretion, to
enter into a transaction with an Ether Trading Counterparty or the Prime Broker
to buy or sell ether in exchange for cash. However, and in common with other
spot ether exchange-traded products, the Fund is not at this time able to
create and redeem Shares via in-kind transactions with Authorized Participants
in exchange for ether.
Authorized Participants must be registered
broker-dealers. Registered broker-dealers are subject to various requirements
of the federal securities laws and rules, including financial responsibility
rules such as the customer protection rule, the net capital rule and
recordkeeping requirements. Until further regulatory
clarity emerges regarding whether registered broker-dealers can hold and deal
in ether under such rules, there is a risk that registered broker-dealers
participating in the in-kind creation or redemption of Shares for ether may be
unable to demonstrate compliance with such requirements. While compliance with
these requirements would be the broker-dealer’s responsibility, a national
securities exchange is required to enforce compliance by its member
broker-dealers with applicable federal securities law and rules. Cboe BZX Exchange is seeking In-Kind
Regulatory Approval, to amend its listing rules to permit the Fund to create
and redeem Shares through in-kind creations and redemptions, in which
Authorized Participants or their designees would deposit ether directly with
the Fund or receive ether directly from the Fund. However, there can be no
assurance as to when Cboe BZX
Exchange will obtain this approval, if at all.
To the knowledge of the Sponsor,
exchange-traded products for all spot-market commodities other than digital
assets, such as gold and silver, employ in-kind creations and redemptions with
the underlying asset. The Sponsor believes that it is generally more efficient,
and therefore less costly, for spot commodity exchange-traded products to
utilize in-kind orders rather than cash orders, because there are fewer steps
in the process and therefore there is less operational risk involved when an
authorized participant can manage the buying and selling of the underlying
asset itself, rather than depend on an unaffiliated party such as the issuer or
sponsor of the exchange-traded product. As such, a spot commodity
exchange-traded product that only employs cash creations and redemptions and
does not permit in-kind creations and redemptions is a relatively novel
product, and could be impacted by any resulting operational inefficiencies.
In particular, the Fund’s inability to
facilitate in-kind creations and redemptions could result in the
exchange-traded product arbitrage mechanism failing to function as efficiently
as it otherwise would, leading to the potential for the Shares to trade at
premiums or discounts to the NAV, and such premiums or discounts could be
substantial. See “-The Fund’s use of cash creations and redemptions, in
contrast to other types of exchange-traded products that transact in-kind, 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.”
Furthermore, if cash creations or redemptions are unavailable, either due to
the Sponsor’s decision to reject or suspend such orders, the unavailability of
Ether Trading Counterparties or the Prime Broker’s services, or otherwise, it
will not be possible for Authorized Participants to redeem or create Shares, in
which case the arbitrage mechanism would be unavailable. This could result in
impaired liquidity for the Shares, wider bid/ask spreads in secondary trading
of the Shares and greater costs to investors and other market participants. In
addition, the Fund’s inability to facilitate in-kind creations and redemptions,
and resulting reliance on cash creations and redemptions, could cause the
Sponsor to halt or suspend the creation or redemption of Shares during times of
market volatility or turmoil, among other consequences.
Even if In-Kind Regulatory Approval were
obtained, there can be no assurance that in-kind creations or redemptions of
the Shares will be available in the future, or that broker-dealers would be
willing to serve as Authorized Participants with respect to the in-kind
creation and redemption of Shares. Any of these factors could adversely affect
the performance of the Fund and the value of the Shares.
If the process of creation and redemption
of Creation Units encounters any unanticipated difficulties, the possibility
for arbitrage transactions by Authorized Participants intended to keep the
price of the Shares closely linked to the price of ether may not exist and, as
a result, the price of the Shares may fall or otherwise diverge from NAV.
If the processes of creation and redemption
of Shares (which depend on timely transfers of ether to and by the Ether
Custodian) encounter any unanticipated difficulties due to, for example, the
price volatility of ether, the insolvency, business failure or interruption,
default, failure to perform, security breach, or other problems affecting the
Prime Broker or Ether Custodian, the change from the originally contemplated
in-kind creations and redemptions to cash creations and redemptions, the
closing of ether trading platforms due to fraud, failures, security breaches or
otherwise, or network outages or congestion, spikes in transaction fees
demanded by validators, or other problems or disruptions affecting the Ethereum
network, then potential market participants, such as the Authorized
Participants and their customers, who would otherwise be willing to purchase or
redeem Creation Units to take advantage of any arbitrage opportunity arising
from discrepancies between the price of the Shares and the price of the
underlying ether may not take the risk that, as a result of those difficulties,
they may not be able to realize the profit they expect. In certain such cases,
as further described in “Creations and Redemptions," the Sponsor may,
suspend the process of creation and redemption of Creation Units. During such
times, trading spreads, and the resulting premium or discount, on Shares may
widen. Alternatively, in the case of a network outage or other problems
affecting the Ethereum network, the processing of transactions on the Ethereum
network may be disrupted, which in turn may impede processing of ether
transactions on behalf of the Fund by the Prime Broker or other executing
broker/agent, which in turn could affect the creation or redemption of Creation
Units. If this is the case, the liquidity of the Shares may decline and the
price of the Shares may fluctuate independently of the price of ether and may
fall or otherwise diverge from NAV. Furthermore, in the event that the market
for ether should become relatively illiquid and thereby materially restrict
opportunities for arbitraging, the price of Shares may diverge from the value
of ether.
The Fund’s use of cash creations and
redemptions, in contrast to other types of exchange-traded products that
transact in-kind, 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, or the potential unavailability or exhaustion of the Trade
Credits, which the Fund would not be able to use with in-kind creations and redemptions.
Such delays could cause the execution price associated with such trades to
materially deviate from the Index 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 Fund, or such potential risks and costs could lead to
Authorized Participants, who would otherwise be willing to purchase or redeem
Creation Units to take advantage of any arbitrage opportunity arising from
discrepancies between the price of the Shares and the price of the Fund’s
underlying ether, to elect to not participate in the Fund’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
and/or cause bid-ask spreads to widen. 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
Fund or sell Shares at a price lower than the value of the underlying ether
held by the Fund, causing Shareholders to suffer losses.
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 certain matters
regarding the issuer of your Shares or to take other actions normally
associated with the ownership of shares. You will only have the limited rights
described under “Description of the Shares and the Trust.”
The Sponsor may amend the Declaration of
Trust without the consent of the Shareholders.
The Sponsor may, in its sole discretion,
determine to amend the Declaration of Trust, including to increase the
Sponsor’s Fee, and may do so without Shareholder consent. The Sponsor shall
determine the contents and manner of delivery of any notice of an amendment to
the Declaration of Trust. If an amendment imposes new fees and charges or
increases existing fees or charges, including the Sponsor’s Fee (except for
taxes and other governmental charges, registration fees or other such
expenses), or prejudices a substantial right of Shareholders, advance notice of
the change will be provided in accordance with applicable provisions of the
Declaration of Trust, and will be disclosed via a prospectus supplement.
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 agree to the
amendment and to be bound by the Declaration of Trust as amended without
specific agreement to such increase (other than through the “negative consent”
procedure described above). Shareholders will be notified in a prospectus
supplement, in the Fund’s periodic reports, and/ or on the Sponsor’s website
for the Fund of a material amendment to the Declaration of Trust.
Shareholders do not have the protections
associated with ownership of shares in an investment company registered under
the Investment Company Act or the protections afforded by the CEA.
The Investment Company Act is designed to
protect investors by preventing insiders from managing investment companies to
their benefit and to the detriment of public investors, such as: the issuance
of securities having inequitable or discriminatory provisions; the management
of investment companies by irresponsible persons; the use of unsound or
misleading methods of computing earnings and asset value; changes in the
character of investment companies without the consent of investors; and
investment companies from engaging in excessive leveraging. To accomplish these
ends, the Investment Company Act requires the safekeeping and proper valuation
of fund assets, restricts greatly transactions with affiliates, limits
leveraging, and imposes governance requirements as a check on fund management.
The Trust is not a registered investment
company under the Investment Company Act, and the Sponsor believes that the
Trust is not required to register under such act. Consequently, Shareholders do
not have the regulatory protections provided to investors in investment
companies.
The Fund will not hold or trade in
commodity interests regulated by the CEA, as administered by the CFTC.
Furthermore, the Sponsor believes that the Fund 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
adviser in connection with the operation of the Fund. Consequently,
Shareholders will not have the regulatory protections provided to investors in
CEA-regulated instruments or commodity pools.
As the Sponsor and its management have
limited history of operating investment vehicles like the Fund, their
experience may be inadequate or unsuitable to manage the affairs of the Fund.
The Sponsor has a limited track record in
operating passive investment vehicles such as the Fund that hold cryptoassets.
This limited experience poses several potential risks to the effective
management and operation of the Fund. Cryptoassets, 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, which could adversely affect the operations of the Fund.
The past performance of other investment
vehicles sponsored by the Sponsor or managed by its affiliates are no
indication of the Sponsor’s ability to successfully manage an investment
vehicle such as the Fund. The unique
nature of cryptoassets makes past performance an unreliable indicator of future
success in this area. The cryptoasset 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 cryptoasset
transactions and custody.
Should the Sponsor’s experience prove
inadequate or unsuitable for managing a cryptoasset-based investment vehicle
like the Fund, it could result in suboptimal decision-making, increased
operational risks, and potential legal or regulatory non-compliance. These
factors could adversely affect the Fund’s operations, leading to potential
losses for investors or a decrease in the Fund’s overall value.
Furthermore, the Sponsor is 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 Sponsor or its
reputation, it could have an adverse impact on the Sponsor’s ability to
continue to serve as Sponsor for the Fund.
Security threats to the Fund’s account at the Ether Custodian
could result in the halting of Fund operations and a loss of Fund assets or
damage to the reputation of the Fund, each of which could result in a reduction
in the value of the Shares.
Security breaches, computer malware and
computer hacking attacks have been a prevalent concern in relation to digital
assets. The Sponsor believes that the Fund’s ether held in the Fund’s account
at the Ether Custodian or Trading Balance held with the Prime Broker will be an
appealing target to hackers or malware distributors seeking to destroy, damage
or steal the Fund’s ether and will only become more appealing as the Fund’s
assets grow. To the extent that the Fund, the Sponsor or the Ether Custodian or
Prime Broker is unable to identify and mitigate or stop new security threats or
otherwise adapt to technological changes in the digital asset industry, the
Fund’s ether may be subject to theft, loss, destruction or other attack.
The Sponsor believes that the security
procedures in place for the Fund, including but not limited to, offline
storage, or cold storage, multiple encrypted private key “shards”, and other
measures, are reasonably designed to safeguard the Fund’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 Fund
and the security procedures may not protect against all errors, software flaws
or other vulnerabilities in the Fund’s technical infrastructure, which could
result in theft, loss or damage of its assets. The Sponsor does not control the
Ether Custodian’s or Prime Broker’s operations or their implementation of such
security procedures and there can be no assurance that such security procedures
will actually work as designed or prove to be successful in safeguarding the
Fund’s assets against all possible sources of theft, loss or damage. Assets not
held in cold storage, such as assets held in a trading account, may be more
vulnerable to security breach, hacking or loss than assets held in cold
storage. Furthermore, assets held in a trading account, including the Fund’s
Trading Balance (as defined below) at the Prime Broker, are held on an omnibus,
rather than segregated basis, which creates greater risk of loss. Even though
ether is only moved into the Trading Balance in connection with and to the
extent of purchases and sales of ether by the Fund and such ether is swept from
the Fund’s Trading Balance to the Fund’s Vault Balance daily pursuant to a
regular end-of-day sweep process, there are no policies that would limit the
amount of ether that can be held temporarily in the Trading Balance maintained
by the Prime Broker. This could create greater risk of loss of the Fund’s
ether, which would cause Shareholders to suffer losses.
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 Ether Custodian, or otherwise,
and, as a result, an unauthorized party may obtain access to the Fund’s account
at the Ether Custodian, the relevant private keys (and therefore ether) or
other data or property of the Fund. Additionally, outside parties may attempt
to fraudulently induce employees of the Sponsor or the Ether Custodian to disclose
sensitive information in order to gain access to the Fund’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 Ether Custodian may be unable to anticipate these
techniques or implement adequate preventative measures.
An actual or perceived breach of the Fund’s
account at the Ether Custodian could harm the Fund’s operations, result in
partial or total loss of the Fund’s assets, resulting in a reduction in the
value of the Shares. The Fund may also cease operations, the occurrence of
which could similarly result in a reduction in the value of the Shares.
Ether transactions are irrevocable and
stolen or incorrectly transferred ether may be irretrievable. As a result, any
incorrectly executed ether transactions could adversely affect the value of the
Shares.
Ether transactions are typically not
reversible without the consent and active participation of the recipient of the
transaction. Once a transaction has been verified and recorded in a block that
is added to the Ethereum blockchain, an incorrect transfer or theft of ether
generally will not be reversible and the Fund may not be capable of seeking
compensation for any such transfer or theft. Although the Fund’s transfers of
ether will regularly be made to or from the Fund’s account at the Ether
Custodian, it is possible that, through computer or human error, or through
theft or criminal action, the Fund’s ether could be transferred from the Fund’s
account at the Ether Custodian in incorrect amounts or to unauthorized third
parties, or to uncontrolled accounts.
Such events have occurred in connection
with digital assets in the past. For example, in September 2014, the Chinese
digital asset platform Huobi announced that it had sent approximately 900
bitcoins and 8,000 Litecoins (worth approximately $400,000 at the prevailing
market prices at the time) to the wrong customers. To the extent that the Fund
is unable to seek a corrective transaction with such third party or is
incapable of identifying the third party which has received the Fund’s ether
through error or theft, the Fund will be unable to revert or otherwise recover
incorrectly transferred ether. The Fund will also be unable to convert or
recover its ether transferred to uncontrolled accounts. To the extent that the
Fund is unable to seek redress for such error or theft, such loss could
adversely affect the value of the Shares.
If the Custodian Agreement, Prime Broker
Agreement, an Authorized Participant Agreement or Ether Trading Counterparty is
terminated or the Ether Custodian, Prime Broker, an Authorized Participant or
an Ether Trading Counterparty fails to provide services as required, the
Sponsor may need to find and appoint a replacement custodian, prime broker,
authorized participant or ether trading counterparty, which could pose a
challenge to the safekeeping of the Fund’s ether, the Fund’s ability to create and redeem shares
and the Fund’s ability to continue to operate may be adversely
affected.
The Fund is dependent on the Ether
Custodian, which is Coinbase Custody, and the Prime Broker, Coinbase Inc. to
operate. Coinbase Custody performs essential functions in terms of safekeeping
the Fund’s ether in the Vault Balance, and its affiliate, Coinbase Inc., in its
capacity as Prime Broker, facilitates the buying and selling or settlement of
ether by the Fund in connection with cash creations and redemptions between the
Fund and the Authorized Participants, the selling of ether, including to pay the
Sponsor’s Fee and any other Fund expenses, to the extent applicable, and in
extraordinary circumstances, to liquidate the Fund’s ether. If Coinbase Custody
or Coinbase Inc. fails to perform the functions they perform for the Fund, the
Fund may be unable to operate or create or redeem Creation Units, which could
force the Fund to liquidate or adversely affect the price of the Shares.
Similarly, if an Authorized Participant or
an Ether Trading Counterparty suffers insolvency, business failure or
interruption, default, failure to perform, security breach, or in certain
circumstances a force majeure event or if an Authorized Participant or an Ether
Trading Counterparty chooses not to participate in the creation and redemption
process of the Fund, and the Fund is unable to engage replacement Authorized
Participants or Ether Trading Counterparties or access alternative services on
commercially acceptable terms or at all, then the creation and redemption
process of the Fund, the arbitrage mechanism used to keep the Shares in line
with the NAV and the Fund’s operations generally could be negatively affected.
On March 22, 2023, the Prime Broker and its
parent (such parent, “Coinbase Global” and together with Coinbase Inc., 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 Exchange Act and
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 Inc. 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 Inc. 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 Inc.’s
violations of the Exchange Act to the same extent as Coinbase Inc. On February 27, 2025, the SEC announced that it had filed a joint stipulation with Coinbase Inc. and Coinbase Global Inc. to dismiss the ongoing civil enforcement action against the two entities. The SEC’s
complaint against the Relevant Coinbase Entities does not allege that ether is
a security nor does it allege that Coinbase Inc.’s activities involving ether
caused the alleged registration violations, and the Ether Custodian was not
named as a defendant. In the event of any future SEC or other governmental, regulatory or other enforcement action or litigation, Coinbase Inc., as Prime
Broker, 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 services to the Fund could be affected. If the
Prime Broker were to be required or choose, as a result of a regulatory action
or litigation to restrict or
curtail the services it offers, it could negatively affect the Fund’s ability
to operate or process creations or redemptions of Creation Units, which could
force the Fund to liquidate or adversely affect the price of the Shares. While
the Ether Custodian was not named in the complaint, if Coinbase Global, as the
parent of the Ether Custodian, is required, as a result of a judicial
determination, or could choose, to restrict or curtail the services its
subsidiaries provide to the Fund, or its financial condition is negatively
affected, it could negatively affect the Fund’s ability to operate.
Alternatively, the Sponsor could decide to
replace Coinbase Custody as the Ether Custodian with custody of the Fund’s
ether, and Coinbase Inc. as Prime Broker. Similarly, Coinbase Custody or
Coinbase Inc. could terminate services under the Custodian Agreement or the
Prime Broker Agreement respectively upon providing the applicable notice to the
Fund for any reason, or immediately for Cause (a “Termination for Cause” is
defined in the Prime Broker Agreement as (i) the Fund materially breaches any provision of the
Prime Broker Agreement; (ii) the Fund takes any action to dissolve or
liquidate, in whole or part; (iii) the Fund becomes insolvent, makes an
assignment for the benefit of creditors, becomes subject to direct control of a
trustee, receiver or similar authority; (iv) the Fund becomes subject to any
bankruptcy or insolvency proceeding under any applicable laws, rules and
regulations, such termination being effective immediately upon any declaration
of bankruptcy; (v) the Prime Broker becomes aware of any facts or circumstances
with respect to the Fund’s financial, legal, regulatory or reputational
position which may affect Fund’s ability to comply with its obligations under
the Prime Broker Agreement; (vi) termination is required pursuant to a facially
valid subpoena, court order or binding order of a government authority; (vii)
the Fund’s Prime Broker Account is subject to any pending litigation,
investigation or government proceeding and/or Prime Broker reasonably perceives
a heightened risk of legal regulatory non-compliance associated with Fund’s use
of Prime Broker services; or (viii) the Prime Broker reasonably suspects Fund
of attempting to circumvent Prime Broker’s controls or uses the Prime Broker
Services in a manner Prime Broker otherwise deems inappropriate or potentially
harmful to itself or third parties. Transferring maintenance responsibilities
of the Fund’s account at the at the Prime Broker or at the Ether Custodian to
another prime broker or custodian will likely be complex and could subject the
Fund’s ether to the risk of loss during the transfer, which could have a
negative impact on the performance of the Shares or result in loss of the
Fund’s assets. As Prime Broker, Coinbase Inc. does not guarantee uninterrupted
access to the Trading Platform or the services it provides to the Fund as Prime
Broker. Under certain circumstances, Coinbase Inc. is permitted to halt or
suspend trading on its trading platform, or impose limits on the amount or size
of, or reject, the Fund’s orders, including in the event of, among others,
delays, suspension of operations, failure in performance, or interruption of
service that are directly due to a cause or condition beyond the reasonable
control of Coinbase Inc., or the acceptance of the Fund’s order would cause the
amount of Trade Credits extended to exceed the maximum amount of Trade Credit
(as defined below) that the Fund’s agreement with the Trade Credit Lender
permits to be outstanding at any one time. Also, if Coinbase Custody or
Coinbase Inc. become insolvent, suffer business failure, cease business
operations, default on or fail to perform their obligations under their
contractual agreements with the Fund, or abruptly discontinue the services they
provide to the Fund for any reason, the Fund’s operations would be adversely
affected.
The Sponsor may not be able to find a party
willing to serve as the custodian of the Fund’s ether or as the Fund’s prime
broker under the same terms as the current Custodian Agreement or Prime Broker
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 Fund and liquidate the Fund’s ether. In addition, to
the extent that the Sponsor finds a suitable party but must enter into a modified
Custodian Agreement or Prime Broker Agreement that is less favorable for the
Fund or Sponsor, the value of the Shares could be adversely affected. If the
Fund is unable to find a replacement prime broker, its operations could be
adversely affected.
The lack of full insurance and Shareholders’ limited rights of legal recourse
against the Fund, Trustee, Sponsor, Administrator, Cash Custodian, Prime Broker
and Ether Custodian expose the Fund and its Shareholders to the risk of loss of
the Fund’s ether for which no person or entity is liable.
The Fund is not a banking institution or
otherwise a member of the FDIC or Securities Investor Protection Corporation
(“SIPC”) and, therefore, deposits held with or assets held by the Fund are not
subject to the protections enjoyed by depositors with FDIC or SIPC member
institutions. In addition, neither the Fund nor the Sponsor insure the Fund’s
ether. The Ether Custodian’s parent, Coinbase Global, Inc. (“Coinbase Global”)
maintains a commercial crime insurance policy, which is intended to cover the
loss of client assets held by Coinbase Global and all of its subsidiaries,
including the Ether Custodian and the Prime Broker (collectively, Coinbase
Global and its subsidiaries are referred to as the “Coinbase Insureds”),
including from employee collusion or fraud, physical loss including theft,
damage of key material, security breach or hack, and fraudulent transfer. The
insurance maintained by the Coinbase Global is shared among all of Coinbase’s
customers, is not specific to the Fund or to customers holding ether with the
Ether Custodian or Prime Broker and may not be available or sufficient to
protect the Fund from all possible losses or sources of losses. Coinbase
Global’s insurance may not cover the type of losses experienced by the Fund.
Alternatively, the Fund may be forced to share such insurance proceeds with
other clients or customers of the Coinbase Insureds, which could reduce the
amount of such proceeds that are available to the Fund. In addition, the
digital asset insurance market is limited, and the level of insurance
maintained by Coinbase Global may be substantially lower than the assets of the
Fund. While the Ether Custodian maintains certain capital reserve requirements
depending on the assets under custody, and such capital reserves may provide
additional means to cover client asset losses, the Fund cannot be assured that
the Ether Custodian will maintain capital reserves sufficient to cover actual
or potential losses with respect to the Fund’s digital assets.
Furthermore, under the Custodian Agreement,
the Ether Custodian’s liability is limited to the greater of (i) the aggregate
amount of fees paid by the Fund to the Ether Custodian in respect of the
custodial services in the 12-month period prior to the event giving rise to
such liability or (ii) the value of the supported digital assets on deposit in
the Fund’s custodial account(s) giving rise to such liability at the time of
the event giving rise to such liability; provided, that in no event shall Ether
Custodian aggregate liability in respect of each cold storage address exceed
$100,000,000. In addition, the Prime
Broker’s defense and indemnity obligations under the Prime Broker Agreement
(the Custodian Agreement is part of the Prime Broker Agreement) will be
limited, in the aggregate, to an amount equal to $2,000,000. Notwithstanding the foregoing, there is no
liability limit for losses arising from the Ether Custodian’s fraud or willful
misconduct. With regard to any
incidental, indirect, special, punitive, consequential or similar losses, the
Ether Custodian is not liable, even if the Ether Custodian has been advised of
or knew or should have known of the possibility thereof. The Ether 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 Ether Custodian. In the event of
potential losses incurred by the Fund as a result of the Ether Custodian losing
control of the Fund’s ether or failing to properly execute instructions on
behalf of the Fund, the Ether Custodian’s liability with respect to the Fund
will be subject to certain limitations which may allow it to avoid liability
for potential losses or may be insufficient to cover the value of such
potential losses, even if the Ether Custodian directly caused such losses.
Furthermore, the insurance maintained by the Ether Custodian may be
insufficient to cover its liabilities to the Fund.
Similarly, under the Prime Broker
Agreement, the Prime Broker’s liability is limited to the greater of (a) the
aggregate amount of fees paid by a Fund to the Prime Broker in respect of the
prime broker services in the 12-month period prior to the event giving rise to
such liability or (b) the value of the supported digital assets giving rise to
such liability; In addition, the Prime
Broker’s defense and indemnity obligations under the Prime Broker Agreement
will be limited, in the aggregate, to an amount equal to $2,000,000. Notwithstanding the foregoing, there is no
liability limit for losses arising from the Prime Broker’s fraud or willful
misconduct. With regard to any
incidental, indirect, special, punitive, consequential or similar losses, the
Prime Broker is not liable, even if the Prime Broker has been advised of or
knew or should have known of the possibility thereof. The Prime Broker 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 Prime Broker. These and the
other limitations on the Prime Broker’s liability may allow it to avoid
liability for potential losses or may be insufficient to cover the value of
such potential losses, even if the Prime Broker directly caused such losses.
Both the Fund and the Prime Broker and its affiliates (including the Ether
Custodian) are required to indemnify each other under certain circumstances.
Moreover, in the event of an insolvency or
bankruptcy of the Prime Broker (in the case of the Trading Balance) or the
Ether Custodian (in the case of the Vault Balance) in the future, given that
the contractual protections and legal rights of customers with respect to
digital assets held on their behalf by third parties are relatively untested in
a bankruptcy of an entity such as the Ether Custodian or Prime Broker in the
virtual currency industry, there is a risk that customers’ assets – including
the Fund’s assets – may be considered the property of the bankruptcy estate of
the Prime Broker (in the case of the Trading Balance) or the Ether Custodian
(in the case of the Vault Balance), and customers – including the Fund – may be
at risk of being treated as general unsecured creditors of such entities and
subject to the risk of total loss or markdowns on value of such assets.
The Prime Broker Agreement contains an
agreement by the parties to treat the ether credited to the Fund’s Trade
Balance and Vault Balance as financial assets under Article 8 of the New York
Uniform Commercial Code (“Article 8”). In addition, the Custodian Agreement
states that the Ether Custodian will serve as fiduciary and custodian on the
Fund’s behalf. The Ether Custodian’s parent, Coinbase Global Inc., has stated
in its most recent public securities filings that in light of the inclusion in
its agreements of provisions relating to Article 8 it believes that a court
would not treat custodied digital assets as part of its general estate in the
event the Custodian were to experience insolvency. However, due to the novelty
of digital asset custodial arrangements courts have not yet considered this
type of treatment for custodied digital assets and it is not possible to
predict with certainty how they would rule in such a scenario. If the Ether
Custodian became subject to insolvency proceedings and a court were to rule
that the custodied ether were part of the Ether Custodian’s general estate and
not the property of the Fund, then the Fund would be treated as a general
unsecured creditor in the Ether Custodian’s insolvency proceedings and the Fund
could be subject to the loss of all or a significant portion of its assets.
Moreover, in the event of the bankruptcy of the Ether Custodian, an automatic
stay could go into effect and protracted litigation could be required in order
to recover the assets held with the Ether Custodian, all of which could
significantly and negatively impact the Fund’s operations and the value of the
Shares.
With respect to the Prime Broker Agreement,
there is a risk that the Trading Balance, in which the Fund’s ether and cash is
held in omnibus accounts by the Prime Broker (in the latter case, as described
below in “—Loss of a critical banking relationship for, or the failure of a
bank used by, the Prime Broker could adversely impact the Fund’s ability to
create or redeem Creation Units, or could cause losses to the Fund”), could be
considered part of the Prime Broker’s bankruptcy estate in the event of the Prime
Broker’s bankruptcy. The Prime Broker Agreement contains an Article 8 opt-in
clause with respect to the Fund’s assets held in the Trading Balance. The Prime
Broker is not required to hold any of the ether or cash in the Fund’s Trading
Balance in segregation. Within the Trading Balance, the Prime Broker Agreement
provides that the Fund does not have an identifiable claim to any particular
ether (and cash). Instead, the Fund’s Trading Balance represents an entitlement
to a pro rata share of the ether (and cash) the Prime Broker has allocated to
the omnibus wallets the Prime Broker holds, as well as the accounts in the
Prime Broker’s name that the Prime Broker maintains at Connected Trading Venues
(the “Connected Trading Venue”) (which are typically held on an omnibus, rather
than segregated, basis). If the Prime Broker suffers an insolvency event, there
is a risk that the Fund’s assets held in the Trading Balance could be
considered part of the Prime Broker’s bankruptcy estate and the Fund could be
treated as a general unsecured creditor of the Prime Broker, which could result
in losses for the Fund and Shareholders. Moreover, in the event of the
bankruptcy of the Prime Broker, an automatic stay could go into effect and
protracted litigation could be required in order to recover the assets held
with the Prime Broker, all of which could significantly and negatively impact
the Fund’s operations and the value of the Shares. There are no policies that
would limit the amount of ether that can be held temporarily in the Trading
Balance maintained by the Prime Broker.
Under the Declaration of Trust, the Trustee
and the Sponsor will not be liable for any liability or expense incurred,
including, without limitation, as a result of any loss of ether by the Ether
Custodian or Prime Broker, absent gross negligence, bad faith or willful
misconduct on the part of the Trustee or the Sponsor. As a result, the recourse
of the Fund or the Shareholders to the Trustee or the Sponsor, including in the
event of a loss of ether by the Ether Custodian or Prime Broker, is limited.
The Shareholders’ recourse against the
Sponsor, the Trustee, and the Fund’s other service providers for the services
they provide to the Fund, including, without limitation, those relating to the
holding of ether or the provision of instructions relating to the movement of
ether, is limited. For the avoidance of doubt, neither the Sponsor, the
Trustee, nor any of their affiliates, nor any other party has guaranteed the
assets or liabilities, or otherwise assumed the liabilities, of the Fund, or
the obligations or liabilities of any service provider to the Fund, including,
without limitation, the Ether Custodian and Prime Broker. The Prime Broker
Agreement provides that none of the Coinbase Entities have recourse, whether by
set-off or otherwise, with respect to any amounts owed or liabilities incurred
by the Fund, to or against any assets of the Sponsor or any affiliate of such Sponsor.
Consequently, a loss may be suffered with respect to the Fund’s ether that is
not covered by the Ether Custodian’s insurance and for which no person is
liable in damages. As a result, the recourse of the Fund or the Shareholders,
under applicable law, is limited.
If the Trade Credits are not available or
become exhausted, the Fund may face delays in buying or selling ether that may adversely
impact Shareholders; if the Fund does not repay the Trade Credits on time, its
assets may be liquidated by the Trade Credit Lender and its affiliates.
To avoid having to pre-fund purchases or
sales of ether in connection with cash creations and redemptions and sales of
ether to pay the Sponsor’s Fee and any other Fund expenses not assumed by the
Sponsor, to the extent applicable, the Fund may borrow ether or cash as Trade
Credit from the Trade Credit Lender on a short-term basis pursuant to the Trade
Financing Agreement. The Trade Credit Lender is only required to extend Trade
Credits to the Fund to the extent such ether or cash is actually available to the
Trade Credit Lender. To the extent that Trade Credits are not available or
become exhausted, (1) there may be delays in the buying and selling of ether
related to cash creations and redemptions or the selling of ether related to
paying the Sponsor’s Fee and, to the extent applicable, (2) Fund assets may be
in held the Trading Balance for a longer duration than if Trade Credits were
available, and (3) the execution price associated with such trades may deviate
significantly from the Index price used to determine the Fund’s NAV. To the
extent that the execution price for purchases and sales of ether related to
creations and redemptions and sales of ether in connection with paying the
Sponsor’s Fee and any other Fund expenses deviate significantly from the Index
price used to determine the NAV of the Fund, the Shareholders may be negatively
impacted because the added costs of such price deviations, which would be borne
by the Authorized Participants, may be passed onto the Shareholders in the
secondary market. The magnitude of this risk factor relating to the
unavailability or exhaustion of the Trade Credits is heightened as a result of
the fact that the Fund will effectuate creations and redemptions exclusively
for cash rather than in-kind. The Fund generally must repay Trade Credits by
6:00 p.m. ET (the “Settlement Deadline”) on the calendar day immediately
following the day the Trade Credit was extended by the Trade Credit Lender to
the Fund (or, if such day is not a business day, on the next business day). Pursuant
to the Trade Financing Agreement, the Fund has granted a security interest,
lien on, and right of set off against all of the Fund’s right, title and
interest, in the Fund’s Trading Balance and Vault Balance established pursuant
to the Prime Broker Agreement and Custodian Agreement, in order to secure the
repayment by the Fund of the Trade Credits and financing fees to the Trade
Credit Lender. Upon a failure by the Fund to pay and settle in full its
obligations to the Trade Credit Lender in respect of the financing it provides
to the Fund in the form of Trade Credits, the Ether Custodian and the Prime
Broker have agreed to comply with instructions from the Trade Credit Lender
with respect to the disposition of the assets in the Fund’s Vault Balance and
Trading Balance respectively without further consent by the Fund. If the Fund
fails to repay the Trade Credits to the Trade Credit Lender on time and in
full, the Trade Credit Lender can take control of the Fund’s assets and
liquidate them to repay the Trade Credit debt owed by the Fund to the Trade
Credit Lender.
Loss of a critical banking relationship
for, or the failure of a bank used by, the Prime Broker could adversely impact
the Fund’s
ability to create or redeem Creation Units, or could cause losses to the Fund.
The Prime Broker facilitates the buying and
selling or settlement of ether by the Fund in connection with cash creations
and redemptions between the Fund and the Authorized Participants, and the sale
of ether, including to pay the Sponsor’s Fee, any other Fund expenses, to the
extent applicable, in connection with redemption transactions, and in
extraordinary circumstances, to effect the liquidation of the Fund’s ether. The
Prime Broker relies on bank accounts to provide its trading platform services
and including temporarily holding any cash related to a customer’s purchase or
sale of ether. In particular, the Prime Broker has disclosed that customer cash
held by the Prime Broker, including the cash associated with the Fund’s Trading
Balance, is held (i) in one or more omnibus accounts in the Prime Broker’s name
for the benefit of customers at one or more U.S. insured depository
institutions (each, an “FBO account”); (ii) with respect to US dollars, liquid
investments, which may include but are not limited to U.S. treasuries and money
market funds operating in compliance with Rule 2a-7 under the Investment
Company Act and rated “AAA” by S&P (or the equivalent from any eligible
rating service) (“Money Market Funds”), in accordance with state money transmitter
laws and (iii) in the Prime Broker’s omnibus accounts at Connected Trading
Venues. The Prime Broker represents that it will title the FBO accounts it
maintains with U.S. depository institutions and maintain records of the Fund’s
interest in a manner designed to enable receipt of FDIC deposit insurance,
where applicable and up to the deposit insurance limits applicable under FDIC
regulations and guidance, on Fund cash for the Fund’s benefit on a pass-through
basis. The Prime Broker, however, does not guarantee that pass-through FDIC
deposit insurance will apply to Fund cash, since such insurance is dependent in
part on compliance of the depository institutions. The Prime Broker may also
title its accounts at some or all Connected Trading Venues and maintain records
of Fund 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, and does not apply to the Prime
Broker any ether held by the Prime Broker on Fund’s behalf. The Sponsor has not independently verified the
Prime Broker’s representations. To the extent that the Prime Broker faces
difficulty establishing or maintaining banking relationships, the loss of the
Prime Broker’s banking partners or the imposition of operational restrictions
by these banking partners and the inability for the Prime Broker to utilize other
financial institutions may result in a disruption of creation and redemption
activity of the Fund, or cause other operational disruptions or adverse effects
for the Fund. In the future, it is possible that the Prime Broker could be
unable to establish accounts at new banking partners or establish new banking
relationships, or that the banks with which the Prime Broker is able to
establish relationships may not be as large or well-capitalized or subject to
the same degree of prudential supervision as the existing providers.
The Fund could also suffer losses in the
event that a bank in which the Prime Broker holds customer cash, including the
cash associated with the Fund’s Trading Balance (which is used by the Prime
Broker to move cash flows associated with the Fund’s orders to sell ether,
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. Recently, some banks have
experienced financial distress. For example, on March 8, 2023, the California
Department of Financial Protection and Innovation (“DFPI”) announced that
Silvergate Bank had entered voluntary liquidation, and on March 10, 2023,
Silicon Valley Bank, (“SVB”), was closed by the DFPI, which appointed the FDIC,
as receiver. Similarly, on March 12, 2023, the New York Department of Financial
Services took possession of Signature Bank and appointed the FDIC as receiver.
A joint statement by the Department of the Treasury, the Federal Reserve and
the FDIC on March 12, 2023, stated that depositors in Signature and SVB will
have access to all of their funds, including funds held in deposit accounts, in
excess of the insured amount. On May 1, 2023, First Republic Bank was closed by
the California Department of Financial Protection and Innovation, which
appointed the FDIC as receiver. Following a bidding process, the FDIC entered
into a purchase and assumption agreement with JPMorgan Chase Bank, National
Association, to acquire the substantial majority of the assets and assume
certain liabilities of First Republic Bank from the FDIC.
The Prime Broker has historically
maintained banking relationships with Silvergate Bank and Signature Bank. While
the Sponsor does not believe there is a direct risk to the Fund’s assets from
the failures of Silvergate Bank or Signature Bank, in the future, changing
circumstances and market conditions, some of which may be beyond the Fund’s or
the Sponsor’s control, could impair the Fund’s ability to access the Fund’s
cash held with the Prime Broker in the Fund’s Trading Balance or associated
with the Fund’s orders to sell ether, including in connection with payment of
the Sponsor’s Fee, and to the extent applicable, other Fund expenses and/or
redemption transactions. If the Prime Broker were to experience financial
distress or its financial condition is otherwise affected by the failure of its
banking partners, the Prime Broker’s ability to provide services to the Fund
could be affected. Moreover, the future failure of a bank at which the Prime
Broker maintains customer cash, in the Fund’s Trading Balance associated with
the Fund’s orders to sell ether in connection with payment of the Sponsor’s
Fee, and to the extent applicable, other Fund expenses, could result in losses
to the Fund, to the extent the balances are not subject to deposit insurance,
notwithstanding the regulatory requirements to which the Prime Broker is
subject or other potential protections. Although the Prime Broker has made
certain representations to the Sponsor regarding the Prime Broker’s maintenance
of records in a manner reasonably designed to qualify for FDIC insurance on a
pass-through basis in connection with the accounts in which the Prime Broker
maintains cash on behalf of its customers (including the Fund), there can be no
assurance that such pass-through insurance will ultimately be made available.
In addition, the Fund may maintain cash balances with the Prime Broker that are
not insured or are in excess of the FDIC’s insurance limits, or which are
maintained by the Prime Broker at money market funds and subject to the attendant
risks (e.g., “breaking the buck”). As a result, the Fund could suffer losses.
The Prime Broker routes orders through
Connected Trading Venues in connection with trading services under the Prime
Broker Agreement. The loss or failure of any such Connected Trading Venues may
adversely affect the Prime Broker’s business and cause losses for the Fund.
In connection with trading services under
the Prime Broker Agreement, the Prime Broker routinely routes customer orders
to Connected Trading Venues, which are third-party platforms or other trading
venues (including the trading venue operated by the Prime Broker). In
connection with these activities, the Prime Broker may hold ether with such
Connected Trading Venues in order to effect customer orders, including the
Fund’s orders. Cash may also be held in the Prime Broker’s omnibus account at
the Connected Trading Venues. If the Prime Broker were to experience a
disruption in the Prime Broker’s access to these Connected Trading Venues, the
Prime Broker’s trading services under the Prime Broker Agreement could be
adversely affected to the extent that the Prime Broker is limited in its
ability to execute order flow for its customers, including the Fund. In
addition, while the Prime Broker has policies and procedures to help mitigate
the Prime Broker’s risks related to routing orders through third-party trading
venues, if any of these third-party trading 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 Prime Broker might not be able to fully recover the
customer’s ether or cash that the Prime Broker has deposited with these third
parties. As a result, the Prime Broker’s business, operating results and
financial condition could be adversely affected, potentially resulting in its
failure to provide services to the Fund or perform its obligations under the
Prime Broker Agreement, and the Fund could suffer resulting losses or
disruptions to its operations. The failure of a Connected Trading Venue at
which the Prime Broker maintains customer ether or cash, including ether or
cash associated with the Fund, could result in losses to the Fund,
notwithstanding the regulatory requirements to which the Prime Broker is
subject or other potential protections.
The Fund may be terminated and liquidated
at a time that is disadvantageous to Shareholders.
The Sponsor may terminate and liquidate the
Fund or Trust for any reason in its sole discretion. See “Termination Events.”
If the Sponsor determines that it is
appropriate to terminate and liquidate the Fund, such termination and
liquidation could occur at a time that is disadvantageous to Shareholders, such
as when the actual exchange rate of ether at such time is lower than the Index
was at the time when Shareholders purchased their Shares. In such a case, when
the Fund’s ether are sold as part of its liquidation, the resulting proceeds
distributed to Shareholders will be less than if the actual exchange rate at
such time were higher at the time of sale.
The Declaration of Trust includes
provisions that limit Shareholders’ voting rights and the ability to participate in
shareholder derivative actions.
Under the Declaration of Trust,
Shareholders generally have no voting rights and the Fund will not have regular
Shareholder meetings. Shareholders take no part in the management or control of
the Fund. Accordingly, Shareholders do not have the right to authorize actions,
appoint service providers or take other actions as may be taken by shareholders
of other trusts or companies where shares carry such rights. The shareholders’
limited voting rights give almost all control under the Declaration of Trust to
the Sponsor and the Trustee. The Sponsor may take actions in the operation of
the Fund that may be adverse to the interests of Shareholders and may adversely
affect the value of the Shares.
Moreover, pursuant to the terms of the
Declaration of Trust, Shareholders’ statutory right under Delaware law to bring
a derivative action (i.e., to initiate a lawsuit in the name of the Trust in
order to assert a claim belonging to the Trust against a fiduciary of the Trust
or against a third-party when the Trust’s management has refused to do so) is
restricted. Under Delaware law, a shareholder may bring a derivative action if
the shareholder is a shareholder at the time the action is brought and either (i)
was a shareholder at the time of the transaction at issue or (ii) acquired the
status of shareholder by operation of law or the Trust’s governing instrument
from a person who was a shareholder at the time of the transaction at issue.
Additionally, Section 3816(e) of the Delaware Statutory Trust Act specifically
provides that a “beneficial owner’s right to bring a derivative action may be
subject to such additional standards and restrictions, if any, as are set forth
in the governing instrument of the statutory trust, including, without
limitation, the requirement that beneficial owners owning a specified
beneficial interest in the statutory trust join in the bringing of the
derivative action.” In addition to the requirements of applicable law and in
accordance with Section 3816(e), the Declaration of Trust includes conditions
that require (1) a Shareholder or Shareholders to 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 (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 (2) Shareholders
eligible to bring a derivative action under the Delaware Statutory Trust Act
who hold at least 10% of the outstanding Shares of the Trust, or 10% of the
outstanding Shares of the Series or Class to which such action relates, must
join in a request for the Sponsor to commence such action. This provision applies to any derivative
actions brought in the name of the Trust other than claims under the federal
securities laws and the rules and regulations thereunder.
Due to these requirements, a Shareholder
attempting to bring or maintain a derivative action in the name of the Trust
will be required to have sufficient Shares to meet the 10% threshold based on
the number of Shares outstanding on the date the claim is brought and
thereafter throughout the duration of the action, suit or proceeding. This may
be difficult and may result in increased costs to a Shareholder attempting to
seek redress in the name of the Trust in court. Moreover, if Shareholders
bringing a derivative action, suit or proceeding pursuant to this provision of
the Declaration of Trust do not hold 10% of the outstanding Shares on the date
such an action, suit or proceeding is brought, or such Shareholders are unable
to maintain Share ownership meeting the 10% threshold throughout the duration
of the action, suit or proceeding, such Shareholders’ derivative action may be
subject to dismissal. As a result, the Declaration of trust limits the
likelihood that a Shareholder will be able to successfully assert a derivative
action in the name of the Trust, even if such Shareholder believes that he or
she has a valid derivative action, suit or other proceeding to bring on behalf
of the Trust.
The non-exclusive jurisdiction for certain
types of actions and proceedings and waiver of trial by jury clauses set forth
in the Declaration of Trust 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 Declaration of Trust provides that the
courts of the state of Delaware and any federal courts located in Wilmington,
Delaware will be the non-exclusive jurisdiction for any claims, suits, actions
or proceedings, provided that 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 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 the Securities Act, or the
rules and regulations promulgated thereunder. By purchasing Shares in the
Trust, Shareholders waive certain claims that the courts of the state of
Delaware and any federal courts located in Wilmington, 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 Declaration of Trust also waives the
right to trial by jury in any such claim, suit, action or proceeding, including
any claim under the U.S. federal securities laws, to the fullest extent
permitted by applicable law. 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 Declaration of Trust. 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.
The Sponsor is solely responsible for
determining the value of the net asset value of the Fund, and any errors,
discontinuance or changes in such valuation calculations may have an adverse
effect on the value of the Shares.
The Sponsor has the exclusive authority to
determine the net asset value of the Fund. The Sponsor has delegated to the Administrator
the responsibility to calculate the net asset value of the Fund, based on a
pricing source selected by the Sponsor. The Administrator determines the net
asset value of the Fund as of 4:00 p.m. ET, on each Business Day, as soon as
practicable after that time. The Administrator’s determination is made
utilizing data from the operations of the Fund and the Index, calculated at 4:00
p.m. ET, on such day. If the Sponsor determines in good faith that the Index
does not reflect an accurate ether price, then the Sponsor will instruct the
Administrator to employ an alternative method to determine the fair value of
the Fund’s assets. There are no predefined criteria to make a good faith
assessment as to which of the rules the Sponsor will apply and the Sponsor may
make this determination in its sole discretion. The Administrator may calculate
the Index in a manner that ultimately inaccurately reflects the price of ether.
To the extent that the net asset value of the Fund, the Index, or the
Administrator’s or the Sponsor’s other valuation methodology are incorrectly
calculated, neither the Sponsor nor the Administrator may be liable for any
error and such misreporting of valuation data could adversely affect the value
of the Shares and investors could suffer a substantial loss on their investment
in the Fund. Moreover, the terms of the Declaration of Trust and the Sponsor
Agreement do not prohibit the Sponsor from changing the Index or other
valuation method used to calculate the net asset value of the Fund. Any such
change in the Index or other valuation method could affect the value of the
Shares and investors could suffer a substantial loss on their investment in the
Fund.
To the extent the methodology used to
calculate the Index is deemed not to be consistent with GAAP, the Fund’s
periodic financial statements may not utilize the Fund’s net asset value. The
Fund’s periodic financial statements will be prepared in accordance with GAAP,
including ASC Topic 820, and utilize an exchange-traded price from the
principal market for ether as of the Fund’s financial statement measurement
date. The Sponsor will determine in its sole discretion the valuation sources
and policies used to prepare the Fund’s financial statements. To the extent
that such valuation sources and policies used to prepare the Fund’s financial
statements result in an inaccurate price, the value of the Shares could be
adversely affected and investors could suffer a substantial loss on their
investment in the Fund. Moreover, the terms of the Declaration of Trust and the
Sponsor Agreement do not prohibit the Sponsor from changing the valuation
method used to calculate the net asset value to be reported in the Fund’s financial
statements. Any such change in such valuation method could affect the value of
the Shares and investors could suffer a substantial loss on their investment in
the Fund.
Extraordinary expenses resulting from
unanticipated events may become payable by the Fund, adversely affecting the
value of the Shares.
In consideration for the Sponsor’s Fee, the
Sponsor has contractually assumed ordinary course operational and periodic
expenses of the Fund, with the exception of those described in “Business of the
Fund—Fund Expenses”. Expenses incurred by the Fund but not assumed by the
Sponsor, such as, among others, taxes and governmental charges; expenses and
costs of any extraordinary services performed by the Sponsor (or any other
service provider) on behalf of the Fund to protect the Fund or the interests of
Shareholders (including, for example, in connection with any fork of the
Ethereum blockchain, any Incidental Rights and any IR Virtual Currency); or
extraordinary legal fees and expenses are not assumed by the Sponsor and are
borne by the Fund. The Sponsor will cause the Fund to either (i) sell ether
held by the Fund or (ii) deliver ether in‑kind to the Sponsor to pay Fund
expenses not assumed by the Sponsor on an as-needed basis. Accordingly, the
Fund may be required to sell or otherwise dispose of ether, at a time when the
trading prices are depressed. The sale or other disposition of assets of the
Fund in order to pay extraordinary expenses could have a negative impact on the
value of the Shares for several reasons. These include the following factors:
● The Fund is not actively managed and
no attempt will be made to protect against or to take advantage of fluctuations
in the price of ether. Consequently, if the Fund incurs expenses in U.S.
dollars, the Fund’s ether may be sold at a time when the values of the disposed
assets are low, resulting in a negative impact on the value of the Shares.
● Because the Fund does not generate any
income, every time that the Fund pays expenses, it will deliver ether to the
Sponsor or sell ether. Any sales of the Fund’s ether in connection with the
payment of expenses will decrease the amount of the Fund’s assets represented
by each Share each time its ether are sold or transferred to the Sponsor.
The Fund’s delivery or sale of ether to pay
expenses or otherwise in connection with operations of the Fund could result in
Shareholders incurring tax liability without an associated distribution from
the Fund.
Assuming that the Fund is treated as a
grantor trust for U.S. federal income tax purposes, each delivery of ether by
the Fund to pay the Sponsor’s Fee or other expenses and each sale of ether by
the Fund to pay Fund expenses not assumed by the Sponsor will be a taxable
event to beneficial owners of Shares. Thus, the Fund’s payment of expenses
could result in beneficial owners of Shares incurring tax liability without an
associated distribution from the Fund. Any such tax liability could adversely
affect an investment in the Shares.
The value of the Shares will be adversely
affected if the Fund is required to indemnify the Sponsor, the Trustee, the
Administrator, the Ether Custodian or the Cash Custodian pursuant to its
contractual arrangements.
Under the Declaration of Trust and the
applicable agreements with various Fund service providers, each of the Sponsor,
the Trustee, the Administrator and the Custodians has a right to be indemnified
by the Fund for certain liabilities or expenses that it incurs without,
depending on the applicable arrangement, negligence or gross negligence, bad
faith or willful misconduct on its part. Therefore, the Sponsor, Trustee, the
Administrator, or the Custodians may require that the assets of the Fund be
sold in order to cover losses or liability suffered by it. Any sale of that
kind would reduce the Fund’s ether holdings and the value of the Shares.
Intellectual property rights claims may
adversely affect the Fund and the value of the Shares.
The Sponsor is not aware of any
intellectual property rights claims that may prevent the Fund from operating
and holding ether, or, receiving, on a temporary basis pending a determination
by the Sponsor as to whether the Fund has received a non-ether crypto asset,
Incidental Rights or IR Virtual Currency. However, third parties may assert
intellectual property rights claims relating to the operation of the Fund and
the mechanics instituted for the investment in, holding of and transfer of
ether, or in connection with the receipt (on a temporary basis) of Incidental
Rights or IR Virtual Currency. Regardless of the merit of an intellectual
property or other legal action, any legal expenses to defend or payments to
settle such claims would be extraordinary expenses that would be borne by the
Fund through the sale or transfer of its ether, or disposition of Incidental
Rights or IR Virtual Currency including in connection with disclaiming or
irrevocably abandoning non-ether crypto assets as determined by the Sponsor.
Additionally, a meritorious intellectual property rights claim could prevent
the Fund from operating and force the Sponsor to terminate the Fund and
liquidate its ether. As a result, an intellectual property rights claim against
the Fund could adversely affect the value of the Shares.
Risk Factors Related to the Regulation of
the Fund and the Shares
Digital asset markets in the U.S. exist in
a state of regulatory uncertainty, and adverse legislative or regulatory
developments could significantly harm the value of ether or the Shares, such as
by banning, restricting or imposing onerous conditions or prohibitions on the
use of ether, validator activity, digital wallets, the provision of services
related to trading and custodying ether, the operation of the Ethereum network,
or the digital asset markets generally.
There is a lack of consensus regarding the
regulation of digital assets, including ether, and their markets. As a result
of the growth in the size of the digital asset market, as well as the 2022
Events, the U.S. Congress and a number of U.S. federal and state agencies
(including FinCEN, SEC, OCC, CFTC, the Financial Industry Regulatory Authority
(“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 markets. Many of these state and federal agencies
have brought enforcement actions or issued consumer advisories regarding the
risks posed by digital assets to investors. Ongoing and future regulatory
actions with respect to digital assets generally or ether in particular may
alter, perhaps to a materially adverse extent, the nature of an investment in
the Shares or the ability of the Fund to continue to operate.
The 2022 Events, 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 platforms, 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 platforms and custodians.
US federal and state regulators have issued
reports and releases concerning crypto assets, including Ether 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. We cannot
predict how these and other related events will affect us or the crypto asset
business.
President Trump has issued executive orders
addressing the administration's intention to establish a comprehensive digital
assets regulatory framework. 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, CFTC, or other regulators, what the nature of such additional
authorities might be, how additional legislation and/or regulatory oversight
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 Fund specifically. The
consequences of increased federal regulation of digital assets and digital
asset activities could have a material adverse effect on the Fund 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. Entities which fail to comply with such regulations are
subject to fines, may be required to cease operations, and could have potential
criminal liability. For example, in 2015, FinCEN assessed a $700,000 fine
against a sponsor of a digital asset for violating several requirements of the
U.S. Bank Secrecy Act by acting as an MSB 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 platform, for similar violations.
The requirement that exchangers 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.
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, including addresses on the
Ethereum network, 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 ether that has been
associated with such addresses in the past can be easily sold. This “tainted”
ether may trade at a substantial discount to untainted ether. Reduced
fungibility in the ether markets may reduce the liquidity of ether and
therefore adversely affect their price.
In February 2020, then-U.S. Treasury
Secretary Steven Mnuchin stated that 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 (“NYDFS”), 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 NYDFS 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 certain digital asset business activities. 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.
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.
Law enforcement agencies have often relied
on the transparency of blockchains to facilitate investigations. However,
certain privacy-enhancing features have been, or are expected to be, introduced
to a number of digital asset networks. If the Ethereum network was to adopt any
of these privacy-enhancing features, these features may provide law enforcement
agencies with less visibility into transaction-level data. For example,
“privacy pools,” zero knowledge proofs, and other technologies that could enhance
privacy have been discussed by participants in the Ethereum network. Europol,
the European Union’s law enforcement agency, released a report in October 2017
noting the increased use of privacy-enhancing digital assets like Zcash and
Monero in criminal activity on the internet. In August 2022, OFAC banned all
U.S. citizens from using Tornado Cash, a digital asset protocol designed to
obfuscate blockchain transactions, by adding certain Ethereum wallet addresses
associated with the protocol to its Specially Designated Nationals list. On
October 19, 2023, FinCEN published a proposed rulemaking to apply the
authorities in Section 311 of the USA PATRIOT Act to impose requirements on
financial institutions that engage in convertible virtual currency (“CVC”)
transactions with CVC mixers. The proposed rule, if adopted, would require
covered financial institutions to report to FinCEN any CVC transactions they
process that involves CVC mixing within or involving a jurisdiction outside the
United States. The term “CVC mixing” covers more than just transactions that
involve CVC mixers like Tornado Cash, and seemingly could cover a broader range
of conduct involving technologies, services, or methods that have the effect of
obfuscating the source, destination, or amount of a CVC transaction, whether or
not the obfuscation was intentional. If the rule were to be adopted as proposed
and if the Ethereum network were to be deemed to or were to adopt features
which come within the rule’s ambit, it could cause covered financial institutions
- such as many virtual currency exchanges, or the Fund’s service providers,
such as the Prime Broker or Cash Custodian - to reduce support for or cease
offering services for ether or to the Fund, which could impair the utility of
ether, the value of the Shares and the Fund’s ability to operate in compliance
with new laws and regulations.
A determination that ether or any other
digital asset is a “security”
may adversely affect the value of Ether and the value of the Shares, and result
in potentially extraordinary, nonrecurring expenses to, or termination of, the
Fund.
Depending on its characteristics, a digital
asset may be considered a “security” under the federal securities laws. The
test for determining whether a particular digital asset is a “security” is
complex and difficult to apply, and the outcome is difficult to predict.
Public, though non-binding, statements made in the past by senior officials at
the SEC and endorsed by its previous Chairman in a letter to a member of
Congress appeared to indicate that the SEC did not consider ether to be a
security, at least currently, and the staff has reportedly provided informal
assurances to a handful of promoters that their digital assets are not
securities. However, a recent federal court decision ruled that the SEC has not
to date issued a definitive statement of its position on whether ether is a
security for purposes of federal law. HODL Law, PLLC v. Securities and Exchange
Commission, Case No. 22-cv-1832-L-JLB, 2023 WL 4852322 (Jul. 28, 2023), at *6.
On the other hand, the SEC has brought enforcement actions against the issuers
and promoters of several other digital assets on the basis that the digital
assets in question are securities. The CFTC has for years considered ether to
be a commodity subject to its regulatory jurisdiction, and ether futures have
been listed for years on CFTC-regulated exchanges while cleared ether swaps
have been listed for trading on CFTC-regulated swap execution facilities not
registered with the SEC without being deemed "mixed swaps" subject to
joint CFTC and SEC jurisdiction to the Sponsor's knowledge.
Whether a digital asset is a security under
the federal securities laws depends on whether it is included in the lists of
instruments making up the definition of “security” in the Securities Act, the
Exchange Act and the Investment Company Act. Digital assets as such do not
appear in any of these lists, although each list includes the terms “investment
contract” and “note,” and the SEC has typically analyzed whether a particular
digital asset is a security by reference to whether it meets the tests developed
by the federal courts interpreting these terms, known as the Howey and Reve
tests, respectively. For many digital assets, whether or not the Howey or
Reves tests are met is difficult to resolve definitively, and
substantial legal arguments can often be made both in favor of and against a
particular digital asset qualifying as a security under one or both of the Howey
and Reves tests. Adding to the complexity, the SEC staff has indicated
that the security status of a particular digital asset can change over time as
the relevant facts evolve.
As part of determining whether ether is a
security for purposes of the federal securities laws, the Sponsor takes into
account a number of factors, including the various definitions of “security”
under the federal securities laws and federal court decisions interpreting
elements of these definitions, such as the U.S. Supreme Court’s decisions in
the Howey and Reves cases, as well as reports, orders, press
releases, public statements and speeches by the SEC and its staff providing
guidance on when a digital asset may be a security for purposes of the federal
securities laws, and other materials relevant to the status of ether as a
security (or not). Finally, the Sponsor discusses the security status of ether
with its external securities lawyers. Through this process the Sponsor believes
that it is applying the proper legal standards in determining that ether is not
a security light of the uncertainties inherent in the Howey and Reves
tests. In light of these uncertainties and the fact-based nature of the analysis,
the Sponsor acknowledges that ether may in the future be found by the SEC or a
federal court to be a security notwithstanding the Sponsor’s prior conclusion;
and the Sponsor’s prior conclusion, even if reasonable under the circumstances
and made in good faith, would not preclude legal or regulatory action based on
the presence of a security.
The Sponsor may terminate and liquidate the
Fund if the Sponsor determines ether is a security under the federal securities
laws, whether that determination is initially made by the Sponsor itself, or
because the SEC or a federal court subsequently makes that determination.
Because the legal tests for determining whether a digital asset is or is not a
security often leave room for interpretation, and because the SEC has not taken
a definitive position, for so long as the Sponsor believes there to be good faith
grounds to conclude that the Fund’s ether is not a security, the Sponsor does
not intend to dissolve the Fund on the basis that ether could at some future
point be determined to be a security.
Any enforcement action by the SEC or a
state securities regulator asserting that ether is a security, or a court
decision to that effect would be expected to have an immediate material adverse
impact on the trading value of ether, as well as the Shares. This is because
the business models behind most digital assets are incompatible with
regulations applying to transactions in securities. If a digital asset is
determined or asserted to be a security, it is likely to become difficult or
impossible for the digital asset to be traded, cleared or custodied in the
United States through the same channels used by non-security digital assets,
which in addition to materially and adversely affecting the trading value of
the digital asset is likely to significantly impact its liquidity and market
participants’ ability to convert the digital asset into U.S. dollars. The New
York Attorney General alleged in a lawsuit filed in March 2023 that ether was a
security under New York and federal securities law and that a cryptocurrency
exchange that deals in ether, unlawfully failed to register as a securities
dealer under New York state law. However, the New York Attorney General alleged
in the alternative in the same case that ether was a commodity under both New
York state and federal law.
For example, in 2020 the SEC filed a
complaint against the issuer of XRP, Ripple Labs, Inc., and two of its
executives, alleging that they raised more than $1.3 billion through XRP sales
that should have been registered under the federal securities laws, but were
not. In the years prior to the SEC’s action, XRP’s market capitalization at
times reached over $100 billion. However, in the weeks following the SEC’s
complaint, XRP’s market capitalization fell to less than $10 billion, which was
less than half of its market capitalization in the days prior to the complaint.
The SEC’s action against XRP’s issuer underscores the continuing uncertainty
around which digital assets are securities, and demonstrates that such factors
as how long a digital asset has been in existence, how widely held it is, how
large its market capitalization is and that it has actual usefulness in
commercial transactions, ultimately may have no bearing on whether the SEC or a
court will find it to be a security. Recent filings indicate the parties have
agreed to settlement terms with respect to the enforcement proceeding.
In addition, if ether were determined to be a
security, the Fund could be considered an unregistered “investment company”
under SEC rules, which could necessitate the Fund’s liquidation. In this case,
the Fund and the Sponsor may be deemed to have participated in an illegal
offering of securities and there is no guarantee that the Sponsor will be able
to register the Fund under the Investment Company Act at such time or take such
other actions as may be necessary to ensure the Fund’s activities comply with applicable
law, which could force the Sponsor to liquidate the Fund.
Moreover, whether or not the Sponsor or the
Fund were subject to additional regulatory requirements as a result of any SEC
or federal court determination that its assets include securities, the Sponsor
may nevertheless decide to terminate the Fund, in order, if possible, to
liquidate the Fund’s assets while a liquid market still exists. For example, in
response to the SEC’s action against the issuer of XRP, certain significant
market participants announced they would no longer support XRP and announced measures,
including the delisting of XRP from major digital asset trading platforms. The
sponsor of the Grayscale XRP Trust subsequently dissolved this trust and
liquidated its assets. If the SEC or a federal court were to determine that
ether is a security, it is likely that the value of the Shares of the Fund
would decline significantly, and that the Fund itself may be terminated and, if
practical, its assets liquidated.
Competing industries may have more
influence with policymakers than the digital asset industry, which could lead
to the adoption of laws and regulations that are harmful to the digital asset
industry.
The digital asset industry is relatively
new and may not have the same access to policymakers and lobbying
organizations in many jurisdictions compared to industries with which digital
assets may be seen to compete, such as banking, payments and consumer finance.
Competitors from other, more established industries may have greater access to
and influence with governmental officials and regulators and may be successful
in persuading these policymakers that digital assets require heightened levels
of regulation compared to the regulation of traditional financial services. As
a result, new laws and regulations may be proposed and adopted in the United
States and elsewhere, or existing laws and regulations may be interpreted in
new ways, that disfavor or impose compliance burdens on the digital asset
industry or crypto asset platforms, which could adversely impact the value of
ether and therefore the value of the Shares.
Regulatory changes or actions in foreign
jurisdictions may affect the value of the Shares or restrict the use of one or
more digital assets, validating activity or the operation of their networks or
the digital asset platform market in a manner that adversely affects the value
of the Shares.
Various foreign jurisdictions have, and may
continue to adopt laws, regulations or directives that affect digital asset
networks (including the Ethereum network), the digital asset markets (including
the ether market), and their users, particularly digital asset platforms and
service providers that fall within such jurisdictions’ regulatory scope. For example,
if China or other foreign jurisdictions were to ban or otherwise restrict
validating activity, including by regulating or limiting manufacturers’ ability
to produce or sell semiconductors or hard drives in connection with validating,
it would have a material adverse effect on digital asset networks (including
the Ethereum network), the digital asset market, and as a result, impact the
value of the Shares.
A number of foreign jurisdictions have
recently taken regulatory action aimed at digital asset activities. China has
made transacting in cryptocurrencies illegal for Chinese citizens in mainland
China, and additional restrictions may follow. Both China and South Korea have
banned initial coin offerings entirely and regulators in other jurisdictions,
including Canada, Singapore and Hong Kong, have opined that initial coin
offerings may constitute securities offerings subject to local securities
regulations. 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”), became law in
2023. The FSMB brings digital asset activities within the scope of
existing laws governing financial institutions, markets and assets. In
addition, the European Council of the European Union approved the text of
Markets in Crypto-Assets (“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 passed
the European Parliament in 2023 and applies from 2024.
Foreign laws, regulations or directives may
conflict with those of the United States and may negatively impact the
acceptance of one or more digital assets by users, merchants and service
providers outside the United States and may therefore impede the growth or
sustainability of the digital asset economy in the European Union, China,
Japan, Russia and the United States and globally, or otherwise negatively
affect the value of 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 future regulatory change or other events on the Fund or ether
is impossible to predict, but such change could be substantial and adverse to
the Fund and the value of the Shares.
If regulators subject the Fund or the
Sponsor to regulation as a money services business or money transmitter, this
could result in extraordinary expenses to the Fund or the Sponsor and also
result in decreased liquidity for the Shares.
To the extent that the activities of the
Fund or the Sponsor cause it to be deemed an MSB under the regulations
promulgated by FinCEN, the Fund or the Sponsor may be required to comply with
FinCEN regulations, make certain reports to FinCEN and maintain certain
records. Similarly, the activities of the Fund or the Sponsor may require it to
be licensed as a money transmitter or as a digital asset business, such as
under the New York State Department of Financial Services’ BitLicense
regulation.
Such additional regulatory obligations may
cause the Fund or the Sponsor to incur extraordinary expenses. If the Fund or
the Sponsor decided to seek the required licenses, there is no guarantee that
they will timely receive them. The Sponsor may decide to discontinue and wind
up the Fund. A dissolution of the Fund in response to the changed regulatory
circumstances may be at a time that is disadvantageous to the Shareholders.
Additionally, to the extent the Fund 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
would harm the reputation of the Fund or the Sponsor, and have a material
adverse effect on the price of the Shares.
Anonymity and illicit financing risk.
Although transaction details of
peer-to-peer transactions are recorded on the Ethereum blockchain, a buyer or
seller of digital assets on a peer-to-peer basis directly on the Ethereum
network may never know to whom the public key belongs or the true identity of
the party with whom it is transacting. Public key addresses are randomized
sequences of alphanumeric characters that, standing alone, do not provide
sufficient information to identify users. In addition, certain technologies may
obscure the origin or chain of custody of digital assets. On October 19, 2023, FinCEN published a proposed rulemaking
under authorities in Section 311 of the USA PATRIOT Act that would impose
requirements on financial institutions that engage in CVC transactions that
involve CVC mixing within or involving a jurisdiction outside the United
States. FinCEN’s rulemaking states that CVC mixing transactions can play a
central role in facilitating the laundering of CVC derived from a variety of
illicit activity, and are frequently used by criminals and state actors to
facilitate a range of illicit activity, including, but not limited to, money
laundering, sanctions evasion and weapons of mass destruction proliferation.
Given that the Ethereum network is global and anyone can program DApps or smart
contracts that will operate and record transactions on the Ethereum Blockchain,
and the fact that their creators or programmers sometimes remain anonymous, it
is not inconceivable that bad actors, such as those subject to sanctions, could
seek to do so.
The opaque nature of the market poses asset
verification challenges for market participants, regulators and auditors and
gives rise to an increased risk of manipulation and fraud, including the
potential for Ponzi schemes, bucket shops and pump and dump schemes. Digital
assets have in the past been used to facilitate illicit activities. If a
digital asset was used to facilitate illicit activities, or a digital asset, or
prominent DApp or smart contract were associated with bad actors or illicit
activity, businesses that facilitate transactions in such digital assets could
be at increased risk of potential criminal or civil liability or lawsuits, or
of having banking or other services cut off, and such digital asset could be
removed from digital asset platforms. Any of the aforementioned or similar
occurrences could adversely affect the price of the relevant digital asset, the
attractiveness of the respective blockchain network and an investment in the
Shares. If the Fund, the Sponsor or another Fund service provider were to
transact with a sanctioned entity, the Fund, the Sponsor or service provider
would be at risk of potential criminal or civil lawsuits or liability.
The Fund takes measures with the objective
of reducing illicit financing risks in connection with the Fund's activities.
However, illicit financing risks are present in the digital asset markets,
including markets for ether. There can be no assurance that the measures
employed by the Fund will prove successful in reducing illicit financing risks,
and the Fund is subject to the complex illicit financing risks and
vulnerabilities present in the digital asset markets. If such risks
materialize, the Fund, the Sponsor or other key service providers and/or their
affiliates could face civil or criminal liability, fines, penalties, or other
punishments, be subject to investigation, have their assets frozen, lose access
to banking services or services provided by other service providers, or suffer
disruptions to their operations, any of which could negatively affect the
Fund’s ability to operate or cause losses in value of the Shares.
In accordance with applicable regulation,
affiliates of the Sponsor have adopted and implemented policies and procedures
that are designed to comply with applicable anti-money laundering laws and
sanctions laws and regulations, including applicable know your customer (“KYC”)
laws and regulations. The Sponsor and the Fund will only interact with known
third-party service providers with respect to whom the Sponsor or its
affiliates have engaged in a thorough due diligence process and or a thorough
KYC process, such as the Authorized Participants, the Prime Broker and Ether
Custodian. Each Authorized Participant must undergo onboarding by the Sponsor
prior to placing creation or redemption orders with respect to the Fund. As a
result, the Sponsor has in place processes and controls designed to ensure that
a situation would not arise where the Fund would engage in transactions with a
counterparty whose identity the Sponsor and the Fund did not know.
Furthermore, Authorized Participants, as
broker-dealers, and the Prime Broker and Ether Custodian, as an entity licensed
to conduct virtual currency business activity by the New York Department of
Financial Services and a limited purpose trust company subject to New York
Banking Law, respectively, are “financial institutions” subject to the U.S.
Bank Secrecy Act, as amended (“BSA”), and U.S. economic sanctions laws. The
Fund will only accept creation and redemption requests from Authorized
Participants and trade with ether counterparties who have each represented to
the Fund that they have implemented compliance programs that are designed to
ensure compliance with applicable sanctions and anti-money laundering laws. The
Fund will not hold any ether except those that have been purchased on behalf of
the Fund via the Prime Broker or other executing agent/broker in connection
with creations and redemptions. Moreover, the Prime Broker has represented to
the Fund that it has implemented and will maintain and follow compliance
programs that are designed to comply with applicable sanctions and anti-money
laundering laws and that it performs both initial and ongoing due diligence on
each of its customers as well as ongoing transaction monitoring that is
designed to identify and report suspicious activity conducted through customer
accounts, including those opened by the Authorized Participants or their
agents/partners for purposes of facilitating ether deposits to, and withdrawals
from, the Fund’s Trading Balance, as required by law.
The Prime Broker and Ether Custodian have
adopted and implemented anti-money laundering and sanctions compliance
programs, which provides additional protections to ensure that the Sponsor and
the Fund do not transact with a sanctioned party. The Prime Broker performs
screening using blockchain analytics to identify, detect, and mitigate the risk
of transacting with a sanctioned or other unlawful actor. Pursuant to the Prime
Broker’s blockchain analytics screening program, any ether that is delivered to
the Fund’s account will undergo screening designed to assess whether the
origins of that ether are illicit.
The Prime Broker conducts screening on
transactions by an Authorized Participant to determine whether transactions are
in violation of certain applicable sanctions laws. The Prime Broker and its
affiliates, including the Ether Custodian, will (a) block or reject the deposit
into the Fund’s Trading Account, where required by applicable sanctions laws,
and (b) agree to promptly inform the Fund of its actions, so long as permitted
by applicable law. However, there is no guarantee that such procedures will always
be effective or that the Prime Broker and its affiliates will always perform
their obligations. Such screening may also result in a transaction identified
by such screening being blocked or frozen by the Prime Broker, and thus made
unavailable to the Fund. Moreover, the Custodian Agreement requires the Fund to
withdraw and deposit assets to public blockchain addresses and accounts for
which the Fund has conducted the necessary “know your customer” and anti-money
laundering due diligence. Although the Fund arranges for such diligence to be
performed, including by the Fund’s service providers, there is no guarantee
such diligence will prove effective in identifying all possible sources of
illicit financing risks. If the Authorized Participants have inadequate
policies, procedures and controls for complying with applicable anti-money
laundering and applicable sanctions laws or the Fund’s procedures or diligence
prove to be ineffective, violations of such laws could result, which could
result in regulatory liability for the Fund, the Sponsor or other Fund service
providers or their respective affiliates under such laws, including
governmental fines, penalties, and other punishments, as well as potential
liability to or cessation of services by the Prime Broker and its affiliates,
including the Ether Custodian, under the Prime Broker Agreement and Custodian
Agreement. Any of the foregoing could result in losses to the Shareholders or
negatively affect the Fund’s ability to operate
Regulatory changes or interpretations
could obligate the Fund or the Sponsor to register and comply with new
regulations, resulting in potentially extraordinary, nonrecurring expenses to
the Fund.
Current and future federal or state
legislation, CFTC and SEC rulemaking and other regulatory developments may
impact the manner in which Ether are treated. In particular, ether may be
classified by the CFTC as a “commodity interest” under the CEA or may be
classified by the SEC as a “security” under U.S. federal securities laws. The
Sponsor and the Fund cannot be certain as to how future regulatory developments
will impact the treatment of ether under the law. In the face of such
developments, the required registrations and compliance steps may result in
extraordinary, nonrecurring expenses to the Fund. If the Sponsor decides to terminate
the Fund in response to the changed regulatory circumstances, the Fund may be
terminated or liquidated at a time that is disadvantageous to Shareholders.
To the extent that ether is deemed to fall
within the definition of a “commodity interest” under the CEA, the Fund and the
Sponsor may be subject to additional regulation under the CEA and CFTC
regulations. The Sponsor may be required to register as a commodity pool
operator or commodity trading adviser with the CFTC and become a member of the
National Futures Association (“NFA”) and may be subject to additional
regulatory requirements with respect to the Fund, including disclosure and
reporting requirements. These additional requirements may result in
extraordinary, recurring and/or nonrecurring expenses of the Fund, thereby
materially and adversely impacting the Shares. If the Sponsor determines it is
not feasible or desirable to comply with such additional regulatory and
registration requirements, the Sponsor will likely terminate the Fund. Any such
termination could result in the liquidation of the Fund’s ether at a time that
is disadvantageous to Shareholders.
To the extent that ether is deemed to fall
within the definition of a security under U.S. federal securities laws, the
Fund, the Trustee and the Sponsor may be subject to additional requirements
under the Investment Company Act and the Sponsor may be required to register as
an investment adviser under the Investment Advisers Act. Such additional
registration may result in extraordinary, recurring and/or non‑recurring
expenses of the Fund, thereby materially and adversely impacting the Shares. If
the Sponsor determines it is not feasible or desirable to comply with such
additional regulatory and registration requirements, the Sponsor will likely
terminate the Fund. Any such termination could result in the liquidation of the
Fund’s ether at a time that is disadvantageous to Shareholders.
The SEC has taken steps to interpret its
existing authorities as covering various digital asset activities. For example,
the SEC has previously proposed amendments to the custody rules under Rule 206(4)-2
of the Investment Advisers Act. The proposed rule changes would amend the
definition of a “qualified custodian” under Rule 206(4)-2(d)(6) and expand the
current custody rule in 206(4)-2 to cover all digital assets, including ether,
and related advisory activities. If enacted as proposed, these rules would likely
impose additional regulatory requirements with respect to the custody and
storage of digital assets, including ether. The Sponsor is studying the impact
that such amendments may have on the Fund and its arrangements with the Ether
Custodian and Prime Broker. It is possible that such amendments, if adopted,
could prevent the Ether Custodian and Prime Broker from serving as service
providers to the Fund, or require potentially significant modifications to
existing arrangements under the Custody Agreement and Prime Broker Agreement,
which could cause the Fund to bear potentially significant increased costs. If
the Sponsor is unable to make such modifications or appoint successor service
providers to fill the roles that the Ether Custodian and Prime Broker currently
play, the Fund’s operations (including in relation to creations and redemptions
of Creation Units and the holding of ether) could be negatively affected, the
Fund could be terminated (including at a time that is potentially
disadvantageous to Shareholders), and the value of the Shares or an investment
in the Fund could be affected. It is also possible that a new Administration
and Congress in the United States propose new laws and regulations related to
digital assets.
Further, the proposed amendments could
have a severe negative impact on the price of ether and therefore the value of
the Shares if enacted, by, among other things, making it more difficult for
investors to gain access to ether, or causing certain holders of ether to sell
their holdings.
The treatment of the Fund for U.S. federal
income tax purposes is uncertain.
The Sponsor will treat the Fund as a
grantor trust for U.S. federal income tax purposes. Although not free from
doubt due to the lack of directly governing authority, if the Fund operates as
expected, the Fund should be classified as a “grantor trust” for U.S. federal
income tax purposes (and the following discussion assumes such classification).
Assuming that the Fund is a grantor trust, the Fund will not be subject to U.S.
federal income tax. Instead, each beneficial owner of Shares will be treated as
directly owning its pro rata share of the Fund's assets and a pro rata portion
of the Fund's income, gain, losses and deductions will “flow through” to each
beneficial owner of Shares.
The Fund may take certain positions with
respect to the tax consequences of Incidental Rights and its receipt of IR
Virtual Currency. If the IRS were to disagree with, and successfully challenge
any of these positions the Fund might not qualify as a grantor trust.
Because of the evolving nature of digital
currencies, it is not possible to predict potential future developments that
may arise with respect to digital currencies, including forks, airdrops and
other similar occurrences. Assuming that the Fund is currently a grantor trust
for U.S. federal income tax purposes, certain future developments could render
it impossible, or impracticable, for the Fund to continue to be treated as a
grantor trust for such purposes.
If the Fund is not properly classified as
a grantor trust, the Fund might be classified as a partnership for U.S. federal
income tax purposes. However, due to the uncertain treatment of digital
currency (including ether) for U.S. federal income tax purposes, there can be
no assurance in this regard. If the Fund were classified as a partnership and
not a publicly traded partnership taxable as a corporation for U.S. federal
income tax purposes, the tax consequences of owning Shares generally would not
be materially different from the tax consequences described herein, although
there might be certain differences, including with respect to timing of the
recognition of taxable income or loss and (in certain circumstances)
withholding taxes. In addition, tax information reports provided to beneficial
owners of Shares would be made in a different form. If the Fund were not
classified as either a grantor trust or a partnership for U.S. federal income
tax purposes, it generally would be classified as a corporation for such
purposes (including if the Fund were considered a publicly traded partnership
taxable as a corporation for U.S. federal income tax purposes). If it were
treated as a corporation, the Fund would be subject to entity-level U.S.
federal income tax (currently at the rate of 21%), plus possible state and/or
local taxes, on its net taxable income, and certain distributions made by the
Fund to Shareholders would be treated as taxable dividends to the extent of the
Fund’s current and accumulated earnings and profits. Any such dividend
distributed to a beneficial owner of Shares that is a non-U.S. person for U.S.
federal income tax purposes generally would be subject to U.S. federal
withholding tax at a rate of 30% (or such lower rate as may be provided in an
applicable tax treaty).
The treatment of digital currency for U.S.
federal income tax purposes is uncertain.
Assuming that the Fund is properly treated
as a grantor trust for U.S. federal income tax purposes, each beneficial owner
of Shares will be treated for U.S. federal income tax purposes as the owner of
an undivided interest in the ether (and, if applicable, any Incidental Rights
and/or IR Virtual Currency) held in the Fund. Due to the new and evolving
nature of digital currencies and the absence of comprehensive guidance with
respect to digital currencies, many significant aspects of the U.S. federal income
tax treatment of digital currency are uncertain.
In 2014, the Internal Revenue Service
(“IRS”) released a notice (the “Notice”) discussing certain aspects of
“convertible virtual currency” (that is, digital currency that has an
equivalent value in fiat currency or that acts as a substitute for fiat currency)
for U.S. federal income tax purposes and, in particular, stating that such
digital currency (i) is “property” (ii) is not “currency” for purposes of the
rules relating to foreign currency gain or loss and (iii) may be held as a
capital asset. In 2019, the IRS released a revenue ruling and a set of
“Frequently Asked Questions” (the “Ruling & FAQs”) that provide some
additional guidance, including guidance to the effect that, under certain
circumstances, hard forks of digital currencies are taxable events giving rise
to ordinary income and guidance with respect to the determination of the tax
basis of digital currency. However, the Notice and the Ruling & FAQs do not
address other significant aspects of the U.S. federal income tax treatment of
digital currencies. Moreover, although the Ruling & FAQs address the
treatment of hard forks, there continues to be uncertainty with respect to the
timing and amount of the income inclusions.
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. For
example, the Notice addresses only digital currency that is “convertible
virtual currency,” and it is conceivable that, as a result of a fork, airdrop
or similar occurrence, the Fund will hold certain types of digital currency
that are not within the scope of the Notice.
As noted above, with respect to any
airdrop of any non-ether crypto asset, including Incidental Rights and/or IR
Virtual Currency, or in the event of a fork where it has been determined, in
the discretion of the Sponsor, that the crypto asset received by the Fund is
not ether, or any similar event, the Sponsor will cause the Fund to irrevocably
abandon such non-ether crypto asset and, in the event that the Fund seeks to
change this position, an application would need to be filed with the SEC by
Cboe BZX Exchange, the listing exchange, seeking approval to amend its listing
rules. For the avoidance of doubt, the
only crypto asset to be held by the Fund will be ether; the Fund does not have
the ability or intention to hold any other crypto asset, and specific
regulatory approval would be required in order to do so.
There can be no assurance that the IRS
will not alter its position with respect to digital currencies in the future or
that a court would uphold the treatment set forth in the Notice and the Ruling
& FAQs. It is also unclear what additional guidance on the treatment of
digital currencies for U.S. federal income tax purposes may be issued in the
future. Any future guidance on the treatment of digital currencies for U.S.
federal income tax purposes could increase the expenses of the Fund and could
have an adverse effect on the prices of digital currencies, including on the
price of ether in the digital asset markets. As a result, any such future
guidance could have an adverse effect on the value of the Shares.
Shareholders are urged to consult their
tax advisers regarding the tax consequences of owning and disposing of Shares
and digital currencies in general.
Future developments regarding the
treatment of digital currency for U.S. federal income tax purposes could
adversely affect the value of the Shares.
As discussed above, many significant
aspects of the U.S. federal income tax treatment of digital currency, such as
ether, are uncertain, and it is unclear what guidance on the treatment of
digital currency for U.S. federal income tax purposes may be issued in the
future. It is possible that any such guidance would have an adverse effect on
the prices of digital currency, including on the price of ether in digital
asset platforms, and therefore may have an adverse effect on the value of the
Shares.
Because of the evolving nature of digital
currencies, it is not possible to predict potential future developments that
may arise with respect to digital currencies, including forks, airdrops and
similar occurrences. Such developments may increase the uncertainty with
respect to the treatment of digital currencies for U.S. federal income tax
purposes. Moreover, certain future developments could render it impossible, or
impracticable, for the Fund to continue to be treated as a grantor trust for
U.S. federal income tax purposes.
Future developments in the treatment of
digital currency for tax purposes other than U.S. federal income tax purposes
could adversely affect the value of the Shares.
The taxing authorities of certain states,
including New York and New Jersey, (i) have announced that they will follow the
Notice with respect to the treatment of digital currencies for state income tax
purposes and/or (ii) have issued guidance exempting the purchase and/or sale of
digital currencies for fiat currency from state sales tax. Other states have
not issued any guidance on these points, and could take different positions
(e.g., imposing sales taxes on purchases and sales of digital currencies for fiat
currency), and states that have issued guidance on their tax treatment of
digital currencies could update or change their tax treatment of digital
currencies. It is unclear what further guidance on the treatment of digital
currencies for state or local tax purposes may be issued in the future. A state
or local government authority’s treatment of ether may have negative
consequences, including the imposition of a greater tax burden on investors in
ether or the imposition of a greater cost on the acquisition and disposition of
ether generally.
The treatment of digital currencies for
tax purposes by non‑U.S. jurisdictions may differ from the treatment of digital
currencies for U.S. federal, state or local tax purposes. It is possible, for
example, that a non‑U.S. jurisdiction would impose sales tax or value-added tax
on purchases and sales of digital currencies for fiat currency. If a foreign
jurisdiction with a significant share of the market of ether users imposes
onerous tax burdens on digital currency users, or imposes sales or value-added
tax on purchases and sales of digital currency for fiat currency, such actions
could result in decreased demand for ether in such jurisdiction.
Any future guidance on the treatment of
digital currencies for state, local or non‑U.S. tax purposes could increase the
expenses of the Fund and could have an adverse effect on the prices of digital
currencies, including on the price of ether in digital asset platforms. As a
result, any such future guidance could have an adverse effect on the value of
the Shares.
A U.S. Tax-Exempt Shareholder may
recognize “unrelated
business taxable income” a consequence of an investment in
Shares.
Under the guidance provided in the Ruling
& FAQs, hard forks, airdrops and similar occurrences with respect to
digital currencies 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”). Tax-exempt
Shareholders should consult their tax advisers regarding whether such
Shareholder may recognize UBTI as a consequence of an investment in Shares.
Shareholders could incur a tax liability
without an associated distribution of the Fund.
In the normal course of business, it is
possible that the Fund could incur a taxable gain in connection with the sale
of ether (such as sales of ether, including to obtain fiat currency with which
to pay the Sponsor’s Fee or Fund expenses, as well as deemed sales of ether as
a result of the Fund using ether to pay the Sponsor’s Fee or its expenses) that
is otherwise not associated with a distribution to Shareholders. Shareholders
may be subject to tax due to the grantor trust status of the Fund even though there
is not a corresponding distribution from the Fund.
A hard “fork” of the Ethereum
blockchain could result in Shareholders incurring a tax liability.
If a hard fork occurs in the Ethereum
blockchain, the Fund could temporarily hold both the original ether and the
alternative new ether. The IRS has held that a hard fork resulting in the
creation of new units of cryptocurrency is a taxable event giving rise to
ordinary income. Moreover, if such an event occurs, the Declaration of Trust
provides that the Sponsor shall have the discretion to determine whether the
original or the alternative asset shall constitute ether. The Fund shall treat
whichever asset the Sponsor determines is not ether as Incidental Rights or IR
Virtual Currency.
The Ruling & FAQs do not address
whether income recognized by a non-U.S. person as a result of a fork, airdrop
or similar occurrence could be subject to the 30% withholding tax imposed on
U.S.-source “fixed or determinable annual or periodical” income. Non-U.S.
Shareholders (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 Incidental Rights
or IR Virtual Currency.
The receipt, distribution and/or sale of
the alternative ether 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.
Risk Factors Related to Potential
Conflicts of Interest
Potential conflicts of interest may arise
among the Sponsor or its affiliates and the Fund. The Sponsor and its
affiliates have no fiduciary duties to the Fund or its Shareholders, which may
permit them to favor their own interests to the detriment of the Fund and its
Shareholders.
The Sponsor will manage the affairs of the
Fund. Conflicts of interest may arise among the Sponsor and its affiliates, on
the one hand, and the Fund and its Shareholders, on the other hand. As a result
of these conflicts, the Sponsor may favor its own interests and the interests
of its affiliates over the Fund and its Shareholders. These potential conflicts
include, among others, the following:
●
the Sponsor has no fiduciary duties to, and is allowed to take into account the interests of parties other than, the Fund and its Shareholders in resolving conflicts of interest, provided the Sponsor does not act in bad faith;
●
the Trust, on behalf of the Fund, has agreed to indemnify the officers, affiliates, directors, employees or agents of the Trustee and the shareholders, members, directors, officers, employees, affiliates and subsidiaries of the Sponsor pursuant to the Declaration of Trust;
●
the Sponsor is responsible for allocating its own limited resources among different clients and potential future business ventures, to each of which it may owe fiduciary duties;
●
the Sponsor and its staff also service affiliates of the Sponsor, and may also service other digital asset investment vehicles, and their respective clients and cannot devote all of its, or their, respective time or resources to the management of the affairs of the Fund;
●
the Sponsor, its affiliates and their officers and employees are not prohibited from engaging in other businesses or activities, including those that might be in direct competition with the Fund;
●
affiliates of the Sponsor may have substantial direct investments in ether, stablecoins (such as USDC), or other digital assets or companies in the digital assets ecosystem that they are permitted to manage taking into account their own interests without regard to the interests of the Fund or its Shareholders, and any increases, decreases or other changes in such investments could affect the Index price and, in turn, the value of the Shares;
●
the Sponsor decides whether to retain separate counsel, accountants or others to perform services for the Fund, including vendors with respect to valuation of the Fund’s assets; and
●
the Sponsor may appoint an agent to act on behalf of the Shareholders, which may be the Sponsor or an affiliate of the Sponsor.
By purchasing the Shares, Shareholders
agree and consent to the provisions set forth in the Declaration of Trust.
Investment vehicles advised or managed by
affiliates of the Sponsor may, from time to time, hold an interest in Coinbase
Global, the parent of Coinbase Inc., which serves as the Fund's Prime Broker
and operates one of the digital asset platforms included in the Index price and
is the parent of the Ether Custodian.
Investment vehicles advised or managed by
affiliates of the Sponsor own shares in many public companies listed in the
United States, and may take positions in Coinbase Global, the publicly traded
parent of Coinbase Inc. which operates the Coinbase platform and serves as the
Fund's Prime Broker. The Fund values its digital assets by reference to the
Index price. Coinbase is one of the digital asset platforms included in the
Index. The Sponsor values its digital assets by reference to the Index price.
Coinbase is one of the digital asset platforms included in the Index.
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 Fund 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 Fund’s Shares less attractive to investors than the
shares of similar vehicles that do not present these concerns, adversely affect
investor sentiment about the Fund and negatively affect Share trading prices.
Coinbase Global is also the parent company
of the Ether Custodian, Coinbase Custody Trust Company, LLC. The Ether
Custodian serves as a fiduciary and custodian on the Fund’s behalf, and is
responsible for safeguarding digital assets held by the Fund, and holding the
private keys that provide access to the Fund’s digital wallets and vaults. The
positions of investment vehicles managed by affiliates of the Sponsor in the
parent company of the Ether Custodian may present risks to Shareholders to the
extent affiliates of the Sponsor cause the Sponsor to favor the Ether
Custodian’s interests over the interests of the Fund or its Shareholders with
respect to, for example, fees charged, and the quality of service provided by
the Ether 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 Fund but that could harm the Ether Custodian.
This could make the Fund’s Shares less attractive to investors than the shares
of similar vehicles that do not present these concerns, adversely affect
investor sentiment about the Fund and negatively affect Share trading prices.
Shareholders cannot be assured of the
Sponsor’s
continued services, the discontinuance of which may be detrimental to the Fund.
Shareholders cannot be assured that the
Sponsor will be willing or able to continue to serve as sponsor to the Fund for
any length of time. If the Sponsor discontinues its activities on behalf of the
Fund and a substitute sponsor is not appointed, the Fund will terminate and
liquidate its ether.
Appointment of a substitute sponsor will
not guarantee the Fund’s continued operation, successful or otherwise. Because
a substitute sponsor may have no experience managing a digital asset financial
vehicle, a substitute sponsor may not have the experience, knowledge or
expertise required to ensure that the Fund will operate successfully or
continue to operate at all. Therefore, the appointment of a substitute sponsor
may not necessarily be beneficial to the Fund and the Fund may terminate.
Although the Ether Custodian is a
fiduciary with respect to the Fund’s assets, it could resign or be removed by the Sponsor,
which may trigger early dissolution of the Fund.
The Ether Custodian has represented that
it is 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 Advisers Act and is
licensed to custody the Fund’s ether in trust on the Fund’s behalf. However,
the Ether Custodian may terminate the Custodian Agreement for cause at any
time, and the Ether Custodian can terminate the Custodian Agreement for any
reason upon providing the applicable notice provided under the Custodian
Agreement. If the Ether Custodian resigns, is removed, or is prohibited by
applicable law or regulation to act as custodian, and no successor custodian
has been employed, the Sponsor may terminate the Fund in accordance with the
terms of the Declaration of Trust.
Coinbase serves as the Ether Custodian and
prime execution agent for several competing exchange-traded ether products,
which could adversely affect the Fund’s operations and ultimately the value of
the Shares.
The Prime Broker and Ether Custodian are
both affiliates of Coinbase Global. As of the date hereof, Coinbase Global is
the largest publicly traded cryptoasset company in the world by market
capitalization and is also the largest cryptoasset custodian in the world by
assets under custody. By virtue of its leading market position and
capabilities, and the relatively limited number of institutionally-capable
providers of cryptoasset brokerage and custody services, Coinbase serves as the
Ether Custodian and prime execution agent for several competing exchange-traded
ether products. Therefore, Coinbase has a critical role in supporting the U.S.
spot ether exchange-traded product ecosystem, and its size and market share
creates the risk that Coinbase may fail to properly resource its operations to
adequately support all such products that use its services that could harm the
Fund, the Shareholders and the value of the Shares.
If Coinbase were to favor the interests of
certain products over others, it could result in inadequate attention or
comparatively unfavorable commercial terms to less favored products, which
could adversely affect the Fund’s operations and ultimately the value of the
Shares.
Shareholders may be adversely affected by
the lack of independent advisers representing investors in the Fund.
The Sponsor has consulted with counsel,
accountants and other advisers regarding the formation and operation of the
Fund. No counsel was appointed to represent investors in connection with the
formation of the Fund or the establishment of the terms of the Declaration of
Trust and the Shares. Moreover, no counsel has been appointed to represent an
investor in connection with the offering of the Shares. Accordingly, an
investor should consult his, her or its own legal, tax and financial advisers
regarding the desirability of the value of the Shares. Lack of such
consultation may lead to an undesirable investment decision with respect to
investment in the Shares.
Shareholders and Authorized Participants
lack the right under the Custodian Agreement to assert claims directly against
the Ether Custodian, which significantly limits their options for recourse.
Neither the Shareholders nor any
Authorized Participant have a right under the Custodian Agreement to assert a
claim against the Ether Custodian. Claims under the Custodian Agreement may
only be asserted by the Sponsor on behalf of the Fund.
Risk Factors Related to ERISA
It is possible that the underlying assets
of the Fund will be deemed to include “plan assets” for the purposes of Title I
of ERISA or Section 4975 of the Code. If the assets of the Fund were deemed to
be “plan assets,” this could result in, among other things, (i) the application
of the prudence and other fiduciary standards of ERISA to investments made by
the Fund and (ii) the possibility that certain transactions in which the Fund
might otherwise seek to engage in the ordinary course of its business and
operation could constitute non-exempt “prohibited transactions” under Section
406 of ERISA and/or Section 4975 of the Code, which could restrict the Fund
from entering into an otherwise desirable investment or from entering into an
otherwise favorable transaction. In addition, fiduciaries who decide to invest
in the Fund could, under certain circumstances, be liable for “prohibited
transactions” or other violations as a result of their investment in the Fund
or as co-fiduciaries for actions taken by or on behalf of the Fund or the
Sponsor. There may be other federal, state, local, non-U.S. law or regulation
that contains one or more provisions that are similar to the foregoing
provisions of ERISA and the Code that may also apply to an investment in the
Fund.
The application of ERISA (including the
corresponding provisions of the Code and other relevant laws) may be complex
and dependent upon the particular facts and circumstances of the Fund and of
each Plan, and it is the responsibility of the appropriate fiduciary of each
investing Plan to ensure that any investment in the Fund by such Plan is
consistent with all applicable requirements. Each Shareholder, whether or not
subject to Title I of ERISA or Section 4975 of the Code, should consult its own
legal and other advisors regarding the considerations discussed above and all
other relevant ERISA and other considerations before purchasing the Shares.
Not applicable.
Cybersecurity Risk
Management Strategy and Governance Overview
The Trust and the Fund do
not have any officers, directors or employees. The Sponsor is responsible for
the oversight and overall management of the Trust and the Fund. The Sponsor is
a wholly owned subsidiary of Franklin Resources, Inc. (“FRI”). FRI maintains
global, firm-wide policies and procedures governing matters relating to crisis
management, corporate continuity, business continuity planning and disaster
recovery, enterprise business resilience, and corresponding risk mitigation
processes and systems in these areas (collectively referred to as the “Global
Corporate Continuity Program”).
FRI
has adopted the National Institute of Standards and Technology’s (“NIST”)
cybersecurity framework as its security outline. The program is reviewed
annually. Using the NIST framework as a guide, FRI’s cybersecurity program is
organized around the following program domains:
• Identify
critical assets, data, systems and capabilities, cybersecurity strategy and
governing elements, threats and cybersecurity risks
• Protect
assets (data, systems, networks, personnel, etc.) from external or internal
malicious actors and failed practices
• Detect
anomalies and security events through environments monitoring, analysis,
remediation, and reporting. Engage outside vendors to periodically test the
network infrastructure and software applications against known vulnerabilities
and to ensure the use of a best practice security program
• Respond to
incidents regardless of source or causality
• Recover through planning, improvements and
communications (external and internal)
• Conduct
after-action evaluation to identify what went well, what did not go well and
improve FRI’s systems after an issue
Assessment of
Cybersecurity Risks
None.
From time to time, the Trust and/or the Fund may be a
party to certain legal proceedings in the ordinary course of business. As of June
27, 2025, the Trust and the Fund are not subject to any material legal
proceedings, nor, to our knowledge, are any material legal proceeding
threatened against the Trust or Fund.
Not applicable.
Item 5. Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
a) Franklin Ethereum ETF Shares are listed on the Cboe BZX
Exchange under the symbol “EZET” and have been listed since July 23, 2024. As
of March 31, 2025, there were approximately 49 DTC participating shareholders of record of
the Trust. Because most of the Trust's Shares are held by brokers and other
institutions on behalf of shareholders, we are unable to estimate the total
number of shareholders represented by these record holders.
b) Not applicable.
c) The Trust does not purchase Shares
directly from its Shareholders. In connection with its redemption of Creation Units held by Authorized Participants, the Fund redeemed
2 Creation Unit (comprising 100,000
Shares) during the quarter ended March 31, 2025. The following table summarizes the redemptions by Authorized Participants during the period:
|
Period
|
Total Shares Redeemed
|
Average
Price Per Share
| ||||
|
January 1, 2025 – January
31, 2025
|
- | $ | - | |||
|
February 1, 2025 – February
28, 2025
|
- | - | ||||
|
March 1, 2025 – March
31, 2025
|
100,000 | 14.25 |
The following discussion should be read in conjunction
with the financial statements and the notes thereto of the Trust and
the Fund, included elsewhere in this annual report on Form 10-K.
Forward-Looking Information
This annual report on
Form 10-K, including this “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” contains “forward-looking statements”
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended, and such
forward-looking statements involve risks and uncertainties. All statements
(other than statements of historical fact) included in this Form 10-K that
address activities, events or developments that may occur in the future, the
Trust’s and the Fund’s operations, the Sponsor’s plans and references to the
Trust’s and the Fund’s future success and other similar matters are
forward-looking statements. Words such as “could,” “would,” “may,” “expect,”
“intend,” “estimate,” “predict,” and variations on such words or negatives
thereof, and similar expressions that reflect our current views with respect to
future events and Trust and Fund performance, are intended to identify such
forward-looking statements. These forward-looking statements are only
predictions, subject to risks and uncertainties that are difficult to predict
and many of which are outside of our control, and actual results could differ
materially from those discussed. Forward-looking statements involve risks and
uncertainties that could cause actual results or outcomes to differ materially
from those expressed therein. We express our estimates, expectations, beliefs,
and projections in good faith and believe them to have a reasonable basis.
However, we make no assurances that management’s estimates, expectations,
beliefs, or projections will be achieved or accomplished. These forward-looking
statements are based on assumptions about many important factors that could
cause actual results to differ materially from those in the forward-looking
statements. Such factors are discussed in: Part II, Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations of
this Form 10-K; Part I, Item 1A. Risk Factors of this Form 10-K, and other
parts of this Form 10-K. We do not intend to update any forward-looking
statements even if new information becomes available or other events occur in
the future, except as required by the federal securities laws.
Organization and Trust Overview
The Franklin
Ethereum Trust (the “Trust”) was formed as a Delaware
statutory trust on February 8, 2024, and is governed
by the provisions of an Amended and Restated Agreement
and Declaration of Trust dated
as of May 30, 2024.
The Trust is not registered as an investment company under the Investment Company
Act of 1940, as amended
(the “Investment Company
Act”) and is not a commodity pool for purposes
of the Commodity Exchange Act (“CEA”). The Trust currently
offers a single series, the Franklin Ethereum
ETF (the “Fund”),
which is the sole series of the Trust. The Sponsor of the Trust and the Fund (the “Sponsor”) is Franklin Holdings,
LLC. The Sponsor
is not subject to regulation by the Commodity
Futures Trading Commission (“CFTC”) as a commodity pool operator with respect to the Fund, or a commodity trading
advisor with respect
to the Fund. The Fund issues shares (the “Shares”), which represent units of fractional undivided beneficial interest
in the Fund. The Shares of the Fund are listed on the Cboe BZX Exchange,
Inc. (“Cboe BZX Exchange” or the “Exchange”).
On May 21, 2024, Franklin Resources
Inc. (the “Seed Capital Investor”), an affiliate of the Sponsor,
subject to conditions, purchased 4,000 Shares at a per-Share price equal to $25.00 (the “Initial Seed Shares”). Delivery
of the Initial Seed Shares was made on May 21, 2024. Total proceeds
to the Fund from the sale of the Initial
Seed Shares were $100,000. On June 27, 2024, the Initial Seed Shares were redeemed for $100,000 and the Seed Capital Investor
purchased two creation
units in a cash transaction comprised of a total of 100,000 Shares
at a per-Share price based
on 380 ether per Creation
Unit (or 0.0076 ether per Share), for a total of 760 ether (the “Seed Creation
Units”). The cash proceeds to the Fund from the sale of the Seed Creation Units were used by the Fund to purchase 760 ether at the price
of $3,446.37 per ether on June 27, 2024 (exclusive of transaction and other costs
incurred in connection with the conversion of the cash proceeds to ether, which were paid by the Seed Capital
Investor). Thus, the ultimate total
proceeds to the Fund from the sale of the Seed Creation
Units were $2,619,241.20 (an amount representing 760 ether). As noted above, the transaction and other costs incurred in connection with the Seed Creation Units were paid by the Seed Capital
Investor and not borne by the Fund.
The Fund seeks to reflect generally the performance of the price of ether before payment of the Fund's expenses. The Shares are intended to offer a convenient means of making an investment similar to an investment in ether relative to acquiring, holding and trading ether directly on a peer-to-peer or other basis or via a digital asset platform. The Shares have been designed to remove obstacles associated with the complexities and operational burdens involved in a direct investment in ether by providing an investment with a value that reflects the price of the ether owned by the Fund at such time, less the Fund's expenses. The Fund is not a proxy for a direct investment in ether. Rather, the Shares are intended to provide a cost-effective alternative means of obtaining investment exposure through the securities markets that is similar to an investment in ether. The Fund is a passive
investment vehicle and is not a leveraged
product. The Sponsor
does not actively
manage the ether held by the Fund.
The Fund issues Shares
only to eligible
financial institutions called
Authorized Participants and only in one or more blocks
of 50,000 Shares
(“Creation Units”). Creation
Units are redeemable only by Authorized Participants. Creation Units are issued and redeemed
in exchange for cash. The Shares are listed and traded on the Exchange
under the ticker symbol “EZET.”
The market price of the Shares may be different
than the Fund’s NAV per Share. The Fund issues Shares in Creation Units on a continuous basis at the applicable NAV per Share on the creation order date.
The Fund’s only ordinary
recurring expense is the Sponsor’s
fee. In exchange for the Sponsor’s fee, the Sponsor
has agreed to assume the ordinary fees and expenses
incurred by the Fund, including
but not limited
to the following: fees charged
by the Administrator, the Marketing Agent, the Custodians and the Trustee,
Cboe BZX Exchange
listing fees, typical
maintenance and transaction fees of the DTC, SEC registration fees, printing and mailing costs, tax reporting
fees, audit fees, license fees and expenses,
and up to $500,000 per annum in ordinary legal fees and expenses. The Sponsor will also pay the costs
of the Fund’s organization and the initial
offering costs, and may not seek reimbursement of such costs.
The Sponsor’s
fee is accrued daily at an annualized rate equal to 0.19% of the net asset value of the Fund and is payable
at least quarterly
in arrears in U.S. dollars
or in-kind or any combination thereof. The Sponsor
may, at its sole discretion and from time to time,
waive all or a portion
of the Sponsor’s fee for stated periods
of time. The Sponsor is under no obligation to waive any portion of its fees and any such waiver
shall create no obligation to waive any such fees during any period not covered by the waiver.
The Fund will sell Ethereum
as needed to pay the Sponsor’s fee. The Fund bears transaction costs, including any Ethereum network
fees or other similar transaction fees, in connection with any sales of ether necessary to pay the Sponsor’s fee, as well as other Fund expenses
(if any) that are not assumed by the Sponsor
(expenses assumed by the Sponsor
are specified above).
Any ether network
fees and similar
transaction fees incurred
in connection with the creation
or redemption of Creation Units are borne by the Authorized Participant. For a period from July 23, 2024 (the day the Shares were initially
listed on the Exchange) to January 31, 2025, the Sponsor agreed to waive the entire Sponsor’s Fee on the first $10.0 billion of the Fund’s assets. In the future,
if the Sponsor decides to waive all or a portion of the Sponsor’s
Fee, Shareholders will be notified
in a prospectus supplement, in the Fund’s
periodic reports, and/or
on the Fund’s website.
The Fund is an “emerging growth
company” as that term is used in the Securities Act of 1933, as amended
(the “Securities Act”),
and, as such, the Fund may elect to comply with certain
reduced public company
reporting requirements.
The NAV of the Trust is used by the Trust in its day-to-day operations to measure the net value of the Trust’s assets.
The NAV is calculated on each business
day and is equal to the aggregate
value of the Trust’s assets less its liabilities based on the Index price. In determining the NAV of the Trust on any business day, the Administrator will calculate the price of the ether held by the Trust as of 4:00 p.m. ET on such day. The Administrator will also calculate
the “NAV per Share” of the Trust,
which equals the NAV of the Trust
divided by the number of outstanding Shares.
For purposes of making these
calculations, a business
day means any day other
than a day when the Exchange is closed for regular trading.
The Administrator will rely on the Index as the index price to be used when determining NAV. However, determining the value of the Trust’s
ether using the Index is not in accordance with GAAP, and therefore is not used in the Trust’s financial statements. The Trust’s
ether is carried,
for financial statement
purposes, at fair value, as required by GAAP. The Trust determines the fair value of ether based on the price
provided by the ether market
that the Trust
considers its “principal market” as of 11:59:59 p.m.,
ET on the valuation date.
The net asset
value of the Trust determined on a GAAP basis is referred to as the “Principal Market NAV” and the net asset value of the Trust per Share determined on a GAAP basis is referred to as the “Principal Market NAV per Share.”
NAV and NAV per Share are not measures calculated
in
accordance with GAAP and are not intended
as
substitute for Principal Market
and
Principal Market NAV per Share, respectively.
Critical Accounting Policies
The Trust’s
and the Fund’s
financial statements and accompanying notes
are prepared in accordance with accounting principles generally accepted in the United
States of America.
The preparation of these financial statements relies on estimates and assumptions that impact the Fund’s as well as the Trust’s
financial position and results of operations. These
estimates and assumptions affect the Fund’s as well as the Trust’s application of accounting policies.
Please refer to Note 2 to the financial statements included in this report for further discussion of the Trust’s
and the Fund’s accounting policies.
Discussion of Operations
(Financing Activities)
On May 21, 2024, Franklin Resources
Inc. (the “Seed Capital Investor”), an affiliate of the Sponsor,
subject to conditions, purchased 4,000 Shares at a per-Share price equal to $25.00 (the “Initial Seed Shares”). Delivery
of the Initial Seed Shares was made on May 21, 2024. Total proceeds
to the Fund from the sale of the Initial
Seed Shares were $100,000. On June 27, 2024, the Initial Seed Shares were redeemed for $100,000 and the Seed Capital Investor
purchased two creation
units in a cash transaction comprised of a total of 100,000 Shares
at a per-Share price based
on 380 ether per Creation
Unit (or 0.0076 ether per Share), for a total of 760 ether (the “Seed Creation
Units”). The cash proceeds to the Fund from the sale of the Seed Creation Units were used by the Fund to purchase 760 ether at the price
of $3,446.37 per ether on June 27, 2024 (exclusive of transaction and other costs
incurred in connection with the conversion of the cash proceeds to ether, which were paid by the Seed Capital
Investor). Thus, the ultimate total
proceeds to the Fund from the sale of the Seed Creation
Units were $2,619,241.20 (an amount representing 760 ether). Further,
the transaction and other costs
incurred in connection with the Seed Creation Units
were paid by the Seed Capital Investor
and not borne
by the Fund. The Seed Capital Investor
will act as a statutory underwriter with respect
to the Seed Creation Units.
Shares of the Fund were first listed
and began trading
on July 23, 2024.
Results of Operations for
the period July 23,
2024 (Date of commencement
of operations) to March 31,
2025*
At March 31, 2025,
the Custodian held 11,780.2062 ether on behalf of the Fund, with a market value
of $21,614,322(cost: $37,851,948) based on the Principal Market Price at year
end.
For
the period from July 23, 2024 (Date of Commencement of operations) to March 31,
2025, 1,750,000 Shares were issued in exchange for 13,300.0000 ether and
300,000 Shares were redeemed in exchange for 2,279.7938 ether. The Fund’s
NAV per Share began the period at $26.21 and ended the period at $13.94. The
46.81% decrease in the Fund's NAV from $26.21 as of July 23,
2024 (Date of Commencement of operations) to $13.94 at March 31, 2025 is
primarily related to the 46.80% decrease in the price of ether.
Net
realized and unrealized loss on investment in ether for the period ended
March 31, 2025, was approximately $17,233,952 which includes a net realized
loss on investment in ether of $995,550 and net change in unrealized
depreciation on investment in ether of approximately
$16,238,402. Net realized and unrealized loss on investment in ether
for the period was driven by ether price depreciation from $3,448.77 per ether
for the period from July 23, 2024 (Date of Commencement of operations) to
$1,834.80 per ether as of March 31, 2025. Net decrease in net assets
resulting from operations was approximately $17,242,876 for the period ended
March 31, 2025, which consisted of the net realized and unrealized loss
on investment in ether of $17,233,952 and net Sponsor Fee of $8,924. Net
assets increased to approximately $21,605,398 on March 31, 2025. The increase
in net assets primarily resulted from the aforementioned ether price movement
and net capital share transactions of approximately $36,227,209.
* No comparative period presented as the Fund’s
operations commenced on July 23, 2024.
Liquidity and Capital Resources
The Fund is not aware of any trends,
demands, commitments, events,
or uncertainties that are reasonably likely to result
in material changes
to its liquidity needs.
The Fund’s only ordinary
recurring expense is the Sponsor’s
fee. In exchange for the Sponsor’s fee, the Sponsor
has agreed to assume the ordinary fees and expenses
incurred by the Fund, including
but not limited
to the following: fees charged
by the Administrator, the Marketing Agent, the Custodians and the Trustee,
Cboe BZX Exchange
listing fees, typical
maintenance and transaction fees of the DTC, SEC registration fees, printing and mailing costs, tax reporting
fees, audit fees, license fees and expenses,
and up to $500,000 per annum in ordinary legal fees and expenses. The Sponsor will also pay the costs
of the Fund’s organization and the initial
offering costs, and may not seek reimbursement of such costs.
The Sponsor is not required
to pay any extraordinary or
non-routine expenses.
The Sponsor’s
fee is accrued daily at an annualized rate equal to 0.19% of the net asset value of the Fund and is payable
at least quarterly
in arrears in U.S. dollars
or in-kind or any combination thereof. The Sponsor
may, at its sole discretion and from time to time, waive all or a portion of the Sponsor’s
fee for stated periods of time. The Sponsor is under no obligation to waive any portion of its fees and any such waiver shall create no obligation to waive any such fees during any period not covered by the waiver.
The Fund will sell ether as needed to pay the Sponsor’s
fee. For a period from July 23, 2024 (the day the Shares were initially listed
on the Exchange) to January
31, 2025, the Sponsor agreed
to waive the entire Sponsor’s Fee on the first $10.0
billion of the Fund’s assets.
In the future, if the Sponsor decides
to waive all or a portion of the Sponsor’s
Fee, Shareholders will be notified
in a prospectus supplement or on the Sponsor’s website
for the Fund.
The Fund bears transaction costs, including any Ethereum network
fees or other
similar transaction fees,
in connection with any sales
of ether necessary to pay the Sponsor’s fee, as well as other Fund expenses
(if any) that are not assumed by the Sponsor
(expenses assumed by the Sponsor
are specified above).
Any Ethereum network
fees and similar
transaction fees incurred
in connection with the creation
or redemption of Creation Units
are borne by the Authorized Participant.
Off-Balance Sheet Arrangements
At March 31, 2025, the Fund as well as the Trust do not have any off-balance sheet arrangements.
Analysis of Movements in the Price of Ether
As
movements in the price of Ether are expected to directly affect the price of
the Fund’s shares, it is important for investors to understand and follow
movements in the price of Ether. Past movements in the Ether price are
not indicators of future movements.
The
following chart shows movements in the price of Ether based on the CME CF
Ether-Dollar Reference Rate - New York Variant for the Ether – U.S. Dollar
trading pair (the “CF Benchmarks Index”) in U.S. dollars per unit over the
period from July 23, 2024 to March 31, 2025.
The
average, high, low and end-of-period Ether prices based on the CME CF
Ether-Dollar Reference Rate - New York Variant are as below:
|
Period
|
Average
|
High
|
Date
|
Low
|
Date
|
End of period(1)
|
Last business day
|
|
July 23, 2024
to March 31, 2025
|
2,804.56
|
4,074.58
|
December 6, 2024
|
1,836.58
|
March 31, 2025
|
1,836.58
|
March 31, 2025
|
(1) The end of period Ethereum price is the CME CF
Ether-Dollar Reference Rate - New York Variant on the last business day of the
period.
The Fund is a
passive investment vehicle and is not a leveraged product. The Sponsor does not
actively manage the ether held by the Fund. This means that the Sponsor does
not sell ether at times when its price is high or acquire ether at low prices
in the expectation of future price increases. The Fund will not utilize
leverage, derivatives or similar instruments or transactions in seeking to meet
its investment objective.
The following summarized
(unaudited) quarterly financial information presents the results of operations
and other data for the period July 23, 2024 (Date of commencement of
operations) through March 31, 2025:
|
For the period July 23,
2024 (Date of
commencement of
operations) through
September 30, 2024*
|
Three Months ended
December 31, 2024
|
Three Months ended
March 31, 2025
|
For the period July 23,
2024 (Date of
commencement of
operations) through
March 31, 2025*
| |||||||||
|
Net investment income (loss)
|
$ | - | $ | - | $ | (8,924 | ) | $ | (8,924 | ) | ||
|
Net realized and change in unrealized gain (loss)
|
(6,971,976 | ) | 8,501,878 | (18,763,854 | ) | (17,233,952 | ) | |||||
|
Net increase (decrease) in net assets resulting from
operations
|
(6,971,976 | ) | 8,501,878 | (18,772,778 | ) | (17,242,876 | ) | |||||
|
Net increase (decrease) in Principal Market NAV^
|
(4.89 | ) | 5.07 | (11.03 | ) | (10.85 | ) |
* On May 21, 2024, Franklin Resources
Inc. (the “Seed Capital Investor”), an affiliate of the Sponsor, subject to
conditions, purchased 4,000 Shares at per-Share price equal to $25.00 (the
“Initial Seed Shares”). Delivery of the Initial Seed Shares was made on May 21,
2024. Total proceeds to the Fund from the sale of the Initial Seed Shares were
$100,000. On June 27, 2024, the Initial Seed Shares were redeemed for $100,000
and the Seed Capital Investor purchased two creation units in a cash
transaction comprised of a total of 100,000 Shares at a per-Share price based
on 380 ether per Creation Unit (or 0.0076 ether per Share), for a total of 760
ether (the “Seed Creation Units”). The cash proceeds to the Fund from the sale
of the Seed Creation Units were used by the Fund to purchase 760 ether at the
price of $3,446.37 per ether on June 27, 2024 (exclusive of transaction and
other costs incurred in connection with the conversion of the cash proceeds to
ether, which were paid by the Seed Capital Investor). Thus, the ultimate total
proceeds to the Fund from the sale of the Seed Creation Units were
$2,619,241.20 (an amount representing 760 ether). Further, the transaction and
other costs incurred in connection with the Seed Creation Units were paid by
the Seed Capital Investor and not borne by the Fund.
^ The Fund’s financial statements are
prepared in accordance GAAP for financial information. Ether is priced based on
the Principal Market Price at 11:59:59PM ET. The net asset values calculated for
transactions with Authorized Participants would differ from the net asset
values reported here.
None.
Conclusion
Regarding the Effectiveness of Disclosure Controls and Procedures
The Trust maintains
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in its Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms, and that such information is accumulated and communicated to the
Principal Executive Officer and Principal Financial Officer of the Sponsor, who
performs functions similar to those a principal executive officer and principal
financial officer of the Trust would perform if the Trust had officers, to
allow timely decisions regarding required disclosure.
Under the supervision
and with the participation of the Principal Executive Officer and Principal
Financial Officer of the Sponsor, the Sponsor conducted an evaluation of the
Trust’s disclosure controls and procedures, as defined under Exchange Act Rule 13a-15(e)
as of March 31, 2025 and concluded that the disclosure controls and procedures
operated effectively at reasonable levels of assurance.
The Trust, on behalf of
the Fund, maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Trust’s Exchange Act
reports with respect to the Fund is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms, and that such
information is accumulated and communicated to the Principal Executive Officer
and Principal Financial Officer of the Sponsor, who performs functions similar
to those a principal executive officer and principal financial officer of the
Trust would perform if the Trust had officers, to allow timely decisions
regarding required disclosure.
Under the supervision
and with the participation of the Principal Executive Officer and Principal
Financial Officer of the Sponsor, the Sponsor conducted an evaluation of the
Trust’s disclosure controls and procedures with respect to the Fund, as defined
under Exchange Act Rule 13a-15(e) as of March 31, 2025 and concluded that the
disclosure controls and procedures operated effectively at reasonable levels of
assurance.
There
are inherent limitations to the effectiveness of any system of disclosure
controls and procedures, including the possibility of human error and the
circumvention or overriding of the controls and procedures.
Change in Internal
Control Over Financial Reporting
There were no changes in the
Trust’s and the Fund’s internal control over financial reporting that occurred
during the fourth fiscal quarter covered by this report that have materially affected,
or are reasonably likely to materially affect, the Trust’s and the Fund’s
internal control over financial reporting.
Management’s Report on
Internal Control over Financial Reporting
This annual report does not
include a report of management’s assessment regarding internal control over
financial reporting or an attestation report of the company’s registered public
accounting firm due to a transition period established by rules of the SEC for
newly public companies.
Each of the
Sarbanes-Oxley certifications included as exhibits to this filing apply with
respect to both the operations of both the Fund, as the sole series of the
Trust, and the Trust as registrant.
No officers or directors of
the Sponsor have adopted terminated
Not applicable.
PART III
The Trust does not have any
directors, officers, or employees. The following persons, in their respective
capacities as directors or executive officers of the Sponsor, a Delaware
limited liability company, perform certain functions with respect to the Trust
that, if the Trust had directors or executive officers, would typically be
performed by them.
David Mann – President
and Chief Executive Officer
Matthew Hinkle – Chief
Financial Officer
Vivek Pai – Chief
Accounting Officer and Treasurer
Todd Mathias – Vice
President
Julie Patel – Vice
President and Secretary
Navid Tofigh – Vice
President and Assistant Secretary
Lindsey Hicks –
Assistant Treasurer
Ajay Narayan – Assistant
Treasurer
Jeff White – Assistant
Treasurer
The Trust does not have
a code of ethics as it does not have any directors, officers, or employees.
The Sponsor has a code
of ethics (the “Code of Ethics”) that applies to its executive officers,
including its Principal Executive Officer, Principal Financial Officer and
Treasurer, who perform certain functions with respect to the Trust that, if the
Trust had executive officers would typically be performed by them. The Code of
Ethics is available at
https://www.franklinresources.com/governance/corporate-governance-documents.
The Sponsor’s Code of Ethics is intended to be a codification of the business and
ethical principles that guide the Sponsor, and to deter wrongdoing, to promote
(1) honest and ethical conduct (including the ethical handling of actual or
apparent conflicts of interest), (2) full, fair, accurate, timely and
understandable disclosure in public reports, documents and communications, (3) compliance
with applicable laws and governmental rules and regulations, (4) the prompt
internal reporting of violations of the Code of Ethics and (5) accountability
for adherence to the Code of Ethics.
The Trust does not have any
directors or executive officers. The only ordinary expense paid by the Fund is
the Sponsor’s fee.
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters
Securities Authorized for
Issuance under Equity Compensation Plans: Not applicable.
Security
Ownership of Certain Beneficial Owners and Management:
a.) Not applicable.
b.) Not applicable.
Not applicable.
Fees for services
performed by PricewaterhouseCoopers LLP (“PwC”), as paid by the Sponsor from
the Sponsor fee, for the period ended March 31, 2025, were:
|
2025*
| |||
|
Audit fees
|
$ | 120,000 | |
|
Audit-related fees
|
— | ||
|
Tax fees
|
— | ||
|
All other fees
|
— | ||
|
Total
|
$ | 120,000 |
* For the period from July 23, 2024
(Commencement of Operations) to March 31, 2025.
In the table above, in
accordance with the SEC’s definitions and rules, Audit Fees are fees paid to
PwC for professional services for the audit of the Trust’s and the Fund’s
financial statements included in the Form 10-K and review of financial
statements included in the Forms 10-Q, and for services that are normally
provided by the accountants in connection with regulatory filings or
engagements. Audit Related Fees are fees for assurance and related services
that are reasonably related to the performance of the audit or review of the
Trust’s and the Fund’s financial statements.
PART IV
Financial Statements
See Index to Financial Statements on Page F-1 for a
list of the financial statements being filed herein.
Exhibit Index
Listed below are the
exhibits which are filed or furnished as part of this annual report on Form
10-K (according to the number assigned to them in Item 601 of Regulation S-K):
|
Exhibit
No.
|
Description of Document
|
|
Certification of Principal Executive Officer
Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
|
|
|
Certification of Principal Financial Officer
Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
|
|
|
Certification
of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (18
U. S. C. 1350)
|
|
|
Certification
of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (18
U. S. C. 1350)
|
|
|
Compensation
Recovery Policy
|
|
|
101.INS
|
XBRL
Instance Document
|
|
101.SCH
|
XBRL
Taxonomy Extension Schema
|
|
101.CAL
|
XBRL
Taxonomy Extension Calculation Linkbase
|
|
101.DEF
|
XBRL
Taxonomy Extension Definition Linkbase
|
|
101.LAB
|
XBRL
Taxonomy Extension Label Linkbase
|
|
101.PRE
|
XBRL
Taxonomy Extension Presentation Linkbase
|
(1) Filed herewith.
None.
GLOSSARY OF DEFINED TERMS
In this Annual Report, each
of the following quoted terms has the meanings set forth after such term:
“Administration Agreement” — The Fund
Administration and Accounting Agreement between the Administrator and the Fund.
“Administrator” — The Bank of New York
Mellon.
“Affiliate” — Any affiliates of the Sponsor
and the Marketing Agent (including Franklin Resources, Inc., each of its
affiliates, directors, partners, trustees, managing members, officers and
employees).
“airdrop” — An occurrence where holders of
a particular digital asset may be entitled to claim a certain amount of a new
digital asset for free, based on the fact that they hold such particular
digital asset.
“API” - Application Programming Interface.
“Article 8” — Article 8 of the New York
Uniform Commercial Code.
“ASC Topic 820” - The Financial Accounting
Standards Board Accounting Standards Codification Topic 820, “Fair Value
Measurements and Disclosures.”
“Authorized Participant” — A person who,
at the time of submitting an order to create or redeem one or more Creation
Units (i) is a registered broker-dealer, (ii) is a DTC Participant or an
Indirect Participant, and (iii) has in effect a valid Authorized Participant
Agreement.
“Authorized Participant Agreement” — An
agreement entered into by an Authorized Participant, the Sponsor and the
Administrator that provides the procedures for the creation and redemption of
Creation Units.
“BitLicense” — A business license under 23
New York Codes, Rules and Regulations (NYCRR) Part 200.
“BMR” —The UK Benchmarks Regulation.
“BNYM” — The Bank of New York Mellon.
“Business Day” — Any day other than: (1) a
Saturday or a Sunday, or (2) a day on which the Cboe BZX Exchange is closed for
regular trading.
“BSA” - U.S. Bank Secrecy Act, as amended.
“Cash Custodian” — The Bank of New York Mellon.
“Cboe BZX Exchange” — Cboe BZX Exchange,
Inc.
“CBDCs” — Digital forms of legal tender,
called central bank digital currencies, introduced by central banks in various
countries.
“CB Return Cure” - the failure of any
Coinbase Entity to sell or withdraw or transfer the Fund’s ether in accordance
with the Fund’s instructions within the time periods set forth in the Prime
Broker Agreement and such failure is not cured within two (2) business days
following the Fund providing written notice to the relevant Coinbase Entity.
“CF Benchmarks Index” — The CME CF
Ether-Dollar Reference Rate - New York Variant for Ether - U.S. Dollar Trading
pair.
“CFPB” — The Consumer Financial Protection
Bureau.
“CFTC” — The U.S. Commodity Futures
Trading Commission.
“Client Account” — Other accounts for
clients, such as registered and unregistered funds and owners of separately
managed accounts that various divisions and units within Franklin Templeton
manage or advise.
“CME” – Chicago Mercantile Exchange.
“Code” — The United States Internal
Revenue Code of 1986, as amended.
“Code of Ethics” — The codification of the
Sponsor's business and ethical principles that applies to its executive
officers.
“Coinbase Entities” — The Prime Broker,
Ether Custodian and Trade Credit Lender.
“Commodity Exchange Act” or “CEA” — The
United States Commodity Exchange Act of 1936, as amended.
“Connected Trading Venue” — A venue
(including third-party venues and the Prime Broker’s own execution venue) where
the Prime Broker executes orders to buy and sell ether on behalf of the Fund.
“Consensus Client” – A consensus-layer
client software program.
“Constituent Platforms” — The constituent
digital asset platforms of the CF Benchmarks Index, which are chosen by the
Index Administrator and could change over time.
“Creation Ether Amount” - The amount of
ether to be purchased by the Fund which the Sponsor will adjust as determined
on each Business Day as promptly as practicable after 4:00 p.m. ET, by
multiplying the NAV by the number of Shares in each Creation Unit (50,000) and
dividing the resulting product by that day’s CF Benchmarks Index.
“Creation Unit” — A block of 50,000
Shares.
“Creation Unit Deposit Amount” — The
amount of cash to be delivered in a creation which BNYM will adjust as
determined on each Business Day as promptly as practicable after 4:00 p.m. ET,
by multiplying the NAV by the number of Shares in each Creation Unit (50,000).
“CTA” - The Consolidated Tape Association.
“Custodian Agreement” — The agreement,
governed by New York law, between the Fund and the Ether Custodian regarding
the custody of the Fund’s ether.
“Custodians” —The Cash Custodian and Ether
Custodian, collectively.
“Custodians’ Fee" — The fees payable
to the Custodians.
“CVC” - Convertible currency.
“DAOs” - Decentralized autonomous
organizations.
“DApps” - Short for decentralized
applications, which consistent with common usage, refers to all applications
which are built on the Ethereum network or other blockchains, whether or not
decentralized in fact.
“Declaration of Trust” — The Agreement and
Declaration of Trust dated as of May 30, 2024, among the Sponsor, the Trust and
the Trustee.
“DeFi” - Decentralized finance.
“DFPI” — The California Department of
Financial Protection and Innovation.
“DOL” — The U.S. Department of Labor.
“DSTA” — The Delaware Statutory Trust Act.
“DTC” — The Depository Trust Company.
“DTC Participant” — An entity that has an
account with DTC.
“ECI” — Income that is treated as
“effectively connected” with the conduct of a trade or business in the United
States.
“EDRTI” — CME CF Ether-Dollar Real Time
Index.
“ERISA” — The Employee Retirement Income
Security Act of 1974, as amended.
“ETHUSD_RR” – CME CF Ether-Dollar
Reference Rate.
“ET” — Eastern Time Zone.
“ETH” - The currency code for ether.
“Ethereum blockchain” - The blockchain
ledger for ether.
“Ethereum Classic” or “ETC” — The original
blockchain, now referred to as “Ethereum Classic” with the digital asset on
that blockchain now referred to as Ethereum Classic, or ETC.
“Ethereum Client” - software application
that implements the Ethereum network specification, communicates with the
Ethereum network and allows them to act as a node in the network to the new specification.
“Ether Custodian” or “Coinbase Custody” –
Coinbase Custody Trust Company, LLC.
“Ethereum
Foundation” - A Swiss non-profit organization, was set up to oversee the
protocol’s development.
“Ethereum network” - Ethereum blockchain
and any digital asset network, including the Ethereum peer-to-peer network.
“Ether Trading Counterparty” — Designated
third parties who are not registered broker-dealers and transact in ether
pursuant to written agreements with the Fund.
“EthSuisse” - Ethereum Switzerland GmbH.
“Exchange Act” — The United States
Securities Exchange Act of 1934, as amended.
“Execution Client” - An execution-layer
client software program.
“Fair Value Event” - An event which occurs
if the CF Benchmarks Index is not available or the Sponsor determines, in its
sole discretion, that the CF Benchmarks Index is unreliable.
“FBO” — For the benefit of.
“FBO Account” – An omnibus account in the
Prime Broker’s name FBO its customers at each of multiple FDIC-insured banks.
“FCA” — The Financial Conduct Authority of
the United Kingdom.
“FDAP” — A Non-U.S. Shareholder’s
allocable share of U.S. source dividend, interest, rental and other “fixed or
determinable annual or periodical gains, profits and income.”
“FDIC” — The Federal Deposit Insurance
Corporation.
“FinCen” — The U.S. Department of the
Treasury Financial Crimes Enforcement Network.
“FINRA” — The Financial Industry
Regulatory Authority.
“Fork” — A non-backward compatible change
to the original Ethereum blockchain and the source code of the original
Ethereum network which results in the original Ethereum network and the
original Ethereum blockchain existing side-by-side, but incompatible, with a
new network and a new blockchain, and leads to the creation of a new asset
running on the new blockchain.
“FTX” — FTX Trading Ltd.
“GAAP” — The U.S. generally accepted
accounting principles.
“Genesis” — Genesis Global Capital, LLC
and its affiliates.
“gwei” - Fractions of an ether smaller
than .0000000001.
“Hard fork” — A permanent split in a
network’s blockchain that separates an existing blockchain network into two
networks, each with its own digital asset, blockchain and source code, which
are not backwards compatible.
“IIV”
- Intraday indicative value per share.
“Incidental Rights” — Any virtual currency
(for avoidance of doubt, other than ether) or other asset or right that the
Fund may be entitled to or come into possession of rights to acquire, or
otherwise establish dominion and control over, any virtual currency or other
asset or right, which rights are incident to the Fund’s ownership of ether and
arise without any action of the Fund, or of the Sponsor, Administrator or other
service provider on behalf of the Fund.
“Index” — The CF Benchmarks Index shall
constitute the Index, unless the CF Benchmarks Index is not available or the
Sponsor in its sole discretion determines not to use the CF Benchmarks Index as
the Index.
“Index Administrator” —CF Benchmarks Ltd.
“Indirect Participant” — An entity that
has access to the DTC clearing system by clearing securities through, or
maintaining a custodial relationship with, a DTC Participant.
“Initial Seed Shares” —$100,000 in Shares,
comprising 4,000 Shares at a per-Share price equal to $25.00, delivered on May
21, 2024 to the Seed Capital Investor.
“In-Kind Regulatory Approval” - The
necessary regulatory approval to permit the Fund to create and redeem Shares
in-kind for ether.
“Investment Company Act” — The United
States Investment Company Act of 1940, as amended.
“IR Virtual Currency” — A virtual currency
acquired through Incidental Rights.
“IRA” — Individual retirement account.
“IRS” — The United States Internal Revenue
Service.
“JOBS Act”— The Jumpstart Our Business
Startups Act.
“KYC” - Know your customer.
“Money Market Fund” - A money market fund
that is in compliance with Rule 2a-7 under the Investment Company Act of 1940
and rated “AAA” by S&P (or the equivalent from any eligible rating
service).
“MSB” — A U.S.-based platform registered
as a money services business with FinCen.
“MEV”
- Maximal Extractable Value.
“MiCA” - Markets in Crypto-Assets.
“NAV” — Net asset value per Share.
“NBMM” – Non-bank market maker.
“NFA” — National Futures Association.
“NFTs” - Non-Fungible tokens.
“Non-U.S. Shareholder” — A Shareholder
that is (or is treated as), for U.S. federal income tax purposes: (1) a
nonresident alien individual, (2) a foreign corporation or (3) an estate or
trust whose income is not subject to U.S. federal income tax on a net income
basis.
“Notice” — The 2014 notice released by the
IRS.
“NYDFS” — The New York State Department of
Financial Services.
“OCC” — The Office of the Comptroller of
the Currency.
“OFAC” — The Office of Foreign Assets
Control.
“Order Book” - A list of buy and sell
orders with associated limit prices and sizes that have not yet been matched.
“OTC” – Over the counter.
“Oversight Committee” - The Oversight
Committee of the Index Administrator.
“Person” - Any natural person or any
limited liability company, corporation, partnership, joint venture,
association, joint stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
“Plan Assets Regulation” — Regulation 29 C.F.R.
§ 2510.3-101, as modified by Section 3(42) of ERISA.
“Plans” — Any (a) employee benefit plan and
certain other plans and arrangements, including individual retirement accounts
and annuities, (b) 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.
“Prime Broker Agreement” — The agreement
between the Sponsor, Trustee and the Prime Broker.
“Prime Broker” — Coinbase Inc., an
affiliate of the Ether Custodian.
“Relevant Coinbase Entities” — The Prime
Broker and its parent.
“Relevant Pair” - The relevant
cryptocurrency base asset against the corresponding quote asset, including
markets where the quote asset is made fungible with accepted assets.
“Relevant Transaction” — Any
cryptocurrency versus U.S. dollar spot trade that occurs during the observation
window between 3:00 p.m. and 4:00 p.m. ET on a Constituent Platform in the
ETH/USD pair that is reported and disseminated by a Constituent Platform
through its publicly available API and observed by the Index Administrator.
“Ruling & FAQs” — The revenue ruling
and set of “Frequently Asked Questions” released by the IRS in 2019.
“Sarbanes-Oxley Act” — The Sarbanes–Oxley
Act of 2002.
“SEC” — The Securities and Exchange
Commission of the United States, or any successor governmental agency in the
United States.
“Secondary Index” – Lukka Digital Asset
Reference Rate—Ethereum.
“Securities Act” — The United States
Securities Act of 1933, as amended.
“Seed Capital Investor” — Franklin
Resources, Inc.
“Seed Creation Units” — 100,000 Shares
delivered to the Seed Capital Investor on June 27, 2024 in exchange for cash
which the Fund used to purchase 760 ether at the price of $3,446.37 per ether
on June 27, 2024, (exclusive of transaction and other costs incurred in
connection with the conversion of the cash proceeds to ether, which were paid
by the Seed Capital Investor) all at a per-Share price based on 380 ether per
Creation Unit (or 0.0076 ether per Share). Thus, the ultimate total proceeds to
the Fund from the sale of the Seed Creation Units were $2,619,241.20 (an amount
representing 760 ether).
“Settlement Deadline” — 6:00 p.m. ET of
the calendar day immediately following the day the Trade Credit was extended by
the Trade Credit Lender to the Fund or, if such day is not a business day, on
the next business day.
“Shareholders” — Owners of beneficial
interests in the Shares.
“Shares” — Units of fractional undivided
beneficial interest in the net assets of the Fund.
"SIPC" — The Securities Investor
Protection Corporation.
“Sponsor” — Franklin Holdings, LLC, an
indirect subsidiary of Franklin Resources, Inc.
“Sponsor’s Fee” — The fees of the Sponsor
accrues daily at an annualized rate equal to 0.19% of the net asset value of
the Fund and is payable at least quarterly in arrears in U.S. dollars or
in-kind or any combination thereof. The Sponsor may, at its discretion and from
time to time, waive all or a portion of the Sponsor’s Fee for stated periods of
time. The Sponsor is under no obligation to waive any portion of its fees and
any such waiver shall create no obligation to waive any such fees during any period
not covered by the waiver. For a six-month period commencing on the day the
Shares are initially listed on the Exchange to January 31, 2025, the Sponsor
waived the entire Sponsor's Fee on the first $10.0 billion of the Fund's
assets. In the future, if the Sponsor decides to waive all or a portion of the
Sponsor’s Fee, Shareholders will be notified in a prospectus supplement, in the
Fund’s periodic reports, and/or on the Sponsor’s website for the Fund.
“SVB” — Silicon Valley Bank.
“Trade Credit Lender” — Coinbase Credit,
Inc.
“Trade Credit” — The Fund may borrow ether
or cash as a credit on a short-term basis from the Trade Credit Lender pursuant
to the Trade Financing Agreement.
“Trade Financing Agreement” — The Coinbase
Credit Post-Trade Financing Agreement.
“Trading Balance” — A trading account at
which, pursuant to the Prime Broker Agreement, a portion of the Fund’s ether
holdings and cash holdings from time to time may be held with the Prime Broker,
including in connection with the sale of ether to pay the Sponsor’s Fee and
Fund expenses not assumed by the Sponsor.
“Trading Platform” — The Prime Broker's
execution platform where the Sponsor may place an order.
“Transaction Parties” — The Sponsor, the
Trustee, the Custodians and any of their respective affiliates.
“Transfer Agency and Service Agreement”
The agreement between the Fund and BNYM to perform transfer agency services.
“Transfer Agent” — The Bank of New York
Mellon.
“Treasury Regulations” — Tax regulations
issued by the IRS.
“Trust” — Franklin Ethereum Trust, a
Delaware statutory trust formed pursuant to the Agreement and Declaration of
Trust.
“Trustee” — CSC Delaware Trust Company, a
subsidiary of Corporation Service Company.
“UBTI” — Unrelated business taxable
income.
“USD” - The currency code the US Dollar.
“USDC” — US Dollar Coin.
“U.S. Shareholder” — A Shareholder that is
(1) an individual who is treated as a citizen or resident of the United States
for U.S. federal income tax purposes; (2) a corporation (or an entity treated
as a corporation for U.S. federal income tax purposes) created or organized in
or under the laws of the United States, any state thereof or the District of
Columbia; (3) an estate, the income of which is includible in gross income for
U.S. federal income tax purposes regardless of its source; or (4) a trust, if a
court within the United States 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.
“Vault Balance” — Accounts storing the
Fund’s ether that are required to be segregated from the assets held by the
Ether Custodian as principal and the assets of its other customers.
“VWAP” - Volume Weight Average Prices.
“VWMP” - Volume Weight Median Prices.
Franklin Ethereum ETF
Franklin Ethereum Trust
index to financial statements
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| F-20 |
To the Sponsor of Franklin Ethereum Trust
Opinion on the Financial Statements
We have audited the accompanying combined statement of assets and liabilities, including the combined schedule of investments, of Franklin Ethereum Trust and Franklin Ethereum ETF (the “Trust”), as of March 31, 2025 and the related combined statements of operations, cash flows, and changes in net assets for the period July 23, 2024 (date of commencement of operations) through March 31, 2025, including the related notes (collectively referred to as the “combined financial statements”). In our opinion, the combined financial statements present fairly, in all material respects, the financial position of the Trust as of March 31, 2025, and the results of its operations, its cash flows and changes in its net assets for the period July 23, 2024 (date of commencement of operations) through March 31, 2025 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These combined financial statements are the responsibility of the Sponsor’s management. Our responsibility is to express an opinion on the Trust’s combined financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Trust in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of these combined financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risks of material misstatement of the combined financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the combined financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the combined financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
June 27, 2025
We have served as the Trust’s auditor since 2024.
FRANKLIN ETHEREUM TRUST
|
March 31, 2025*
| |||
|
Assets
|
|||
|
Investment in ether, at fair value(a)
|
$ | ||
|
Total assets
|
|||
|
Liabilities
|
|||
|
Sponsor's fee payable
|
|||
|
Total Liabilities
|
|||
|
Commitments and contingencies (Note 7)
|
|||
|
Net assets
|
$ | ||
|
Shares issued and outstanding(b)
|
|||
|
Net asset value per Share
|
$ |
* No comparative period presented as the Fund’s
operations commenced on July 23, 2024.
(a) Cost of investment in ether: $37,851,948
(b) No
See accompanying notes to the combined financial statements.
FRANKLIN ETHEREUM TRUST
|
March 31,
2025*
|
|||||||||||||||
|
Quantity
of ether
|
Cost
|
Fair Value
|
Fair Value
as a %
of Net Assets | ||||||||||||
|
Investment in ether
|
$ | $ | % | ||||||||||||
|
Total investments
|
$ | $ | % | ||||||||||||
|
Less liabilities
|
( | ) | ( | % | |||||||||||
|
Net assets
|
% |
* No comparative period presented as the Fund’s
operations commenced on July 23, 2024.
See accompanying notes to the combined financial statements.
FRANKLIN ETHEREUM TRUST
| For the period July 23, 2024 (Date of commencement of operations) through March 31, 2025* | |||
|
Expenses
|
|||
|
Sponsor's fee
|
$ | ||
|
Less waiver
|
( | ) | |
|
Total expenses
|
|||
|
Net
investment loss
|
( | ) | |
|
Net
realized and change in unrealized gain (loss) on investment in ether
|
|||
|
Net realized gain (loss) on investment in ether
|
( | ) | |
|
Net change in unrealized appreciation (depreciation)
on investment in ether
|
( | ) | |
|
Net
realized and change in unrealized gain (loss) on investment in ether
|
( | ) | |
|
Net increase (decrease) in net assets resulting from
operations
|
( | ) | |
|
Net increase (decrease) in net assets per
Share(a)(b)
|
$ | ( | ) |
* No comparative period presented as the Fund’s
operations commenced on July 23, 2024.
(a) Net increase
(decrease) in net assets per Share based on average
shares outstanding during
the period.
(b) The amount shown for a share outstanding may not agree with the change in the aggregate
gains and losses on investment for the period because of the timing of transactions in the Fund’s shares in relation to fluctuating market
values for the Fund’s underlying investment.
See accompanying notes to the combined financial statements.
FRANKLIN ETHEREUM TRUST
|
For the period July 23, 2024
(Date of commencement of operations) through
March 31, 2025*
| |||
| Cash Flows from Operating Activities: | |||
| Net increase (decrease) in net assets resulting from operations | $ | ( | ) |
| Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities: | |||
| Purchases of ether | ( | ) | |
| Sales of ether | |||
| Net realized (gain) loss on investment in ether | |||
| Net change in unrealized (appreciation) depreciation on investment in ether | |||
| Change in operating assets and liabilities: | |||
| Sponsor’s fee payable | |||
| Net cash provided by (used in) operating activities | $ | ( | ) |
| Cash Flows from Financing Activities: | |||
| Proceeds from issuance of Shares | $ | ||
| Payments on Shares redeemed | ( | ) | |
| Net cash provided by (used in) financing activities | $ | ||
| Cash | |||
| Net increase in cash | $ | ||
| Cash, beginning of period | |||
| Cash, end of period | $ |
* No comparative period presented as the Fund’s
operations commenced on July 23, 2024.
See accompanying notes to the combined financial statements.
FRANKLIN ETHEREUM TRUST
|
For the period July
23, 2024 (Date of commencement of operations) through
March 31, 2025*^
| |||
|
Net assets, beginning of period
|
$ | ||
|
Net investment loss
|
( | ) | |
|
Net realized gain (loss) on investment in ether
|
( | ) | |
|
Net change in unrealized appreciation (depreciation) on investment in ether
|
( | ) | |
|
Net increase (decrease) in net assets resulting from operations
|
( | ) | |
|
Increase (decrease) in net assets from capital share transactions:
|
|||
|
Contributions for Shares issued
|
|||
|
Distributions for Shares redeemed
|
( | ) | |
|
Net increase (decrease) in net assets resulting from capital share transactions
|
|||
|
Net assets, end of period
|
$ |
* No comparative period presented as the Fund’s
operations commenced on July 23, 2024.
^ On May 21, 2024,
Franklin Resources Inc. (the “Seed
Capital Investor”), an affiliate of the Sponsor,
subject to conditions, purchased 4,000 25.00 two 380 0.0076 760 ether (the “Seed Creation
Units”). The cash proceeds to the Fund from the sale of the Seed Creation Units were used by the Fund to purchase 760 ether at the price
of $3,446.37
See accompanying notes to the combined financial statements.
FRANKLIN ETHEREUM TRUST
1. ORGANIZATION
The Franklin Ethereum Trust (the “Trust”) was formed as a Delaware statutory trust on February 8, , and is governed by the provisions of an Amended and Restated Agreement and Declaration of Trust dated as of May 30, 2024 (the “Declaration of Trust”). The Trust is not registered as an investment company under the Investment Company Act of 1940, as amended (the “Investment Company Act”) and is not a commodity pool for purposes of the Commodity Exchange Act (“CEA”). The accompanying financial statements relate to the Trust, as registrant, and the one series that it currently offers, the Franklin Ethereum ETF (the “Fund”) presented on a combined basis. Separate, series-level financial statements are provided for the Fund in another section of this report. The Trust had no operations prior to the Fund’s launch, other than matters relating to its organization and the registration of the Fund under the Securities Act of 1933, as amended (the “Securities Act”). The Sponsor of the Trust and the Fund (the “Sponsor”) is Franklin Holdings, LLC. The Sponsor is a Delaware limited liability company formed on July 21, 2021. The Sponsor is not subject to regulation by the Commodity Futures Trading Commission (“CFTC”) as a commodity pool operator with respect to the Fund, or a commodity trading advisor with respect to the Fund. The Fund issues shares (the “Shares”), which represent units of fractional undivided beneficial interest in the Fund. The Shares of the Fund are listed on the Cboe BZX Exchange, Inc. (“Cboe BZX Exchange” or the “Exchange”).
The Fund seeks to reflect generally the performance of the price of ether before payment of the Fund's expenses. The Shares are intended to offer a convenient means of making an investment similar to an investment in ether relative to acquiring, holding and trading ether directly on a peer-to-peer or other basis or via a digital asset platform. The Shares have been designed to remove obstacles associated with the complexities and operational burdens involved in a direct investment in ether by providing an investment with a value that reflects the price of the ether owned by the Fund at such time, less the Fund's expenses. The Fund is not a proxy for a direct investment in ether. Rather, the Shares are intended to provide a cost-effective alternative means of obtaining investment exposure through the securities markets that is similar to an investment in ether. The Fund is a passive investment vehicle and is not a leveraged product. The Sponsor does not actively manage the ether held by the fund.
BNY Mellon Asset Servicing, a
division of The Bank of New York Mellon, or “BNYM,” is the Fund’s Administrator
(the “Administrator”) and Transfer Agent (the “Transfer Agent”). BNYM also
serves as the custodian of the Fund’s cash (the “Cash Custodian”). The
Administrator is generally responsible for the day-to-day administration of the
Fund, including the calculation of the Fund’s net asset value (“NAV”) per
Share. The Ether Custodian is responsible for safekeeping the ether owned by
the Fund. The Ether Custodian is Coinbase Custody Trust Company, LLC (“Coinbase
Custody”). Coinbase Inc., an affiliate of the Ether Custodian, is the Fund’s
Prime Broker. CSC Delaware Trust Company, a subsidiary of the Corporation
Service Company (the “Trustee”), is the sole trustee of the Trust. Franklin
Distributors, LLC is the marketing agent of the Fund (the “Marketing Agent”).
The Fund issues Shares only to certain eligible financial institutions called Authorized Participants and only in one or more blocks of 50,000 Shares (“Creation Units”). Creation Units are directly redeemable only by Authorized Participants. Creation Units are issued and redeemed in exchange for cash. The Shares are listed and traded on the Exchange under the ticker symbol “EZET.” The market price of the Shares may be different than the Fund’s NAV per Share. The Fund issues Shares in Creation Units on a continuous basis at the applicable NAV per Share on the creation order date. Except when aggregated in Creation Units, the Shares are not redeemable securities.
The Trust is an “emerging growth company” as that term is used in the Securities Act, and, as such, the Trust may elect to comply with certain reduced public company reporting requirements.
On May 21, 2024, Franklin Resources Inc. (the “Seed Capital Investor”), an affiliate of the Sponsor, subject to conditions, purchased 4,000 Shares at a per-Share price equal to $25.00 (the “Initial Seed Shares”). Delivery of the Initial Seed Shares was made on May 21, 2024. Total proceeds to the Fund from the sale of the Initial Seed Shares were $100,000 . On June 27, 2024, the Initial Seed Shares were redeemed for $100,000 and the Seed Capital Investor purchased two creation units in a cash transaction comprised of a total of 100,000 Shares at a per-Share price based on 380 ether per Creation Unit (or 0.0076 ether per Share), for a total of 760 ether (the “Seed Creation Units”). The cash proceeds to the Fund from the sale of the Seed Creation Units were used by the Fund to purchase 760 ether at the price of $3,446.37 per ether on June 27, 2024 (exclusive of transaction and other costs incurred in connection with the conversion of the cash proceeds to ether, which were paid by the Seed Capital Investor). Thus, the ultimate total proceeds to the Fund from the sale of the Seed Creation Units were $2,619,241.20 (an amount representing 760 ether). As noted above, the transaction and other costs incurred in connection with the Seed Creation Units were paid by the Seed Capital Investor and not borne by the Fund.
The accompanying combined financial statements have been prepared on behalf of the Trust, as registrant, combined with its one currently offered series, the Fund, and for the Fund separately (included below in a separate section of this report).
The fiscal year of the Trust and the Fund is March 31st.
2. SIGNIFICANT ACCOUNTING
POLICIES
In preparing financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”), management of the Sponsor makes estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amount of revenue and expenses reported during the period. Actual results could differ from these estimates.
The accompanying audited financial statements were prepared in accordance with GAAP for and with the instructions for Form 10-K and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”).
The following is a summary of significant accounting policies followed by the Trust and the Fund.
2.1. Basis of Presentation
The Sponsor has determined that the Trust falls within the scope of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 946, Financial Services— Investment Companies, and has concluded that solely for accounting purposes, the Trust is classified as an Investment Company as defined in ASC 946.
The financial statements are presented for the Trust, as the registrant, combined with the Fund. Financial statements for the Fund presented at the series- level are provided separately in this report. For the periods presented, there were no balances or activity for the Trust except for the Fund’s operations, as its sole series. These notes to the financial statements relate to the Trust, as the registrant, combined with the Fund. The debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to the Fund are enforceable only against the assets of the Fund and not against the assets of the Trust generally or any other series that the Trust may establish. Individual, series-level financial statements for the Fund are presented separately within this report.
2.2. Calculation of NAV and NAV per Share
The Sponsor has the exclusive authority to determine the Fund’s net asset value (“NAV”). The Sponsor has delegated to the Administrator the responsibility to calculate the NAV of the Fund, based on a pricing source selected by the Sponsor. In determining the Fund’s NAV, the Administrator generally will value the ether held by the Fund based on the Index, unless the Sponsor in its sole discretion determines that the index is unreliable. The CME CF Ether-Dollar Reference Rate – New York Variant for the Ether – U.S. Dollar trading pair (the “CF Benchmarks Index”) shall constitute the Index, unless the CF Benchmarks Index is not available or the Sponsor in its sole discretion determines the CF Benchmarks Index is unreliable as the Index and therefore determines not to use the CF Benchmarks Index as the Index. If the CF Benchmarks Index is not available or the Sponsor determines, in its sole discretion, that the CF Benchmarks Index is unreliable (referred to herein as a “Fair Value Event”), the Fund’s holdings may be fair valued by the Sponsor.
On each Business Day, as soon as practicable after 4:00 p.m. Eastern Time (“ET”), the Administrator evaluates the ether held by the Fund as reflected by the CF Benchmarks Index and determines the NAV of the Fund. For purposes of making these calculations, a Business Day means any day other than a day when the Cboe BZX Exchange is closed for regular trading. The Trust’s periodic financial statements may not utilize this net asset value of the Trust to the extent the methodology used to calculate the Index is deemed not to be consistent with GAAP.
2.3.
Valuation of Ether
The Fund’s financial statements are prepared in accordance GAAP for annual financial information. Ether is priced at 11:59:59PM ET. With respect to the Fund’s ether holdings, the Trust follows the provisions of the Financial Accounting Standards Board Accounting Standards Codification Topic 820, “Fair Value Measurements and Disclosures” (“ASC Topic 820”) and utilizes an exchange-traded price from the Fund’s principal market (or in the absence of a principal market, the most advantageous market) for ether as of the Fund’s financial statement measurement date.
ASC 820 established a hierarchy that prioritized inputs to valuation techniques used to measure fair value. The three levels of inputs are:
Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly or indirectly, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not considered to be active, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived principally from or corroborated by observable market data by correlation or other means; and
Level 3: Inputs that are unobservable for the asset or liability, including the Fund’s assumptions used in determining the fair value of investments.
On March 31, 2025, the value of the ether held by the Fund was categorized as Level 1.
The cost basis of the investment in ether recorded by the Trust on behalf of the Fund for financial reporting purposes is the fair value of ether at the time of purchase.
2.4.
Fees, Expenses, and Realized Gains (Losses)
The Fund’s only ordinary recurring expense is the Sponsor’s fee. In exchange for the Sponsor’s fee, the Sponsor has agreed to assume the ordinary fees and expenses incurred by the Fund, including but not limited to the following: fees charged by the Administrator, the Marketing Agent, the Custodians (the Cash Custodian and Ether Custodian, collectively) and the Trustee, Cboe BZX Exchange listing fees, typical maintenance and transaction fees of the DTC, SEC registration fees, printing and mailing costs, tax reporting fees, audit fees, license fees and expenses, and up to $500,000 per annum in ordinary legal fees and expenses. The Sponsor paid the costs of the Fund’s organization and the initial offering costs and will not seek reimbursement of such costs. Ether transactions are accounted for on a trade date basis. Realized gains or losses from the sale or disposition of ether are determined on a specific identification basis and recognized in the Combined Statements of Operations in the period in which the sale or disposition occurs, respectively.
The Sponsor’s fee is accrued daily at an annualized rate equal to 0.19 % of the net asset value of the Fund and is payable at least quarterly in arrears in U.S. dollars or in-kind or any combination thereof. The Sponsor may, at its sole discretion and from time to time, waive all or a portion of the Sponsor’s fee for stated periods of time. The Sponsor is under no obligation to waive any portion of its fees and any such waiver shall create no obligation to waive any such fees during any period not covered by the waiver. The Fund will sell ether as needed to pay the Sponsor’s fee. The Fund bears transaction costs, including any Ethereum network fees or other similar transaction fees, in connection with any sales of ether necessary to pay the Sponsor’s fee, as well as other Fund expenses (if any) that are not assumed by the Sponsor (expenses assumed by the Sponsor are specified above). Any Ethereum network fees and similar transaction fees incurred in connection with the creation or redemption of Creation Units are borne by the Authorized Participant.
For the period from July 23, 2024 (the day the Shares were initially listed on the Exchange) to January 31, 2025, the Sponsor agreed to waive the entire Sponsor’s Fee on the first $10.0 billion of the Fund’s assets. For the period July 23, 2024 to March 31, 2025, the Fund accrued the Sponsor’s Fee of $(44,677 ) less waiver of $35,753 . The net Sponsor’s Fee payable for the period post waiver was $(8,924 ).
The Sponsor is not required to pay any extraordinary or non-routine expenses. Extraordinary expenses are fees and expenses which are unexpected or unusual in nature, such as legal claims and liabilities and litigation costs or indemnification or other unanticipated expenses. Extraordinary fees and expenses also include material expenses which are not currently anticipated obligations of the Fund. The Fund will be responsible for the payment of such expenses to the extent any such expenses are incurred. Routine operational, administrative and other ordinary expenses are not deemed extraordinary expenses. In addition, the Fund may incur certain other non-recurring expenses that are not assumed by the Sponsor (expenses assumed by the Sponsor are described above), including but not limited to, taxes and governmental charges, any applicable brokerage commissions, Ethereum network fees and similar transaction fees that qualify as extraordinary or non- routine expenses as described above, financing fees, expenses and costs of any extraordinary services performed by the Sponsor (or any other service provider) on behalf of the Fund to protect the Fund or the interests of Shareholders (including, for example, in connection with any fork of the Ethereum blockchain, any Incidental Rights and any IR Virtual Currency), any indemnification of the Cash Custodian, Ether Custodian, Prime Broker, Administrator or other agents, service providers or counterparties of the Trust or the Fund and extraordinary legal fees and expenses, including any legal fees and expenses incurred in connection with litigation, regulatory enforcement or investigation matters or legal expenses in excess of $500,000 per year. The Sponsor may determine in its sole discretion to assume legal fees and expenses of the Fund in excess of the $500,000 per annum stipulated in the Sponsor Agreement. To the extent that the Sponsor does not voluntarily assume such fees and expenses, they will be the responsibility of the Fund. The Fund’s organizational and offering costs are borne by the Sponsor and, as such, are the sole responsibility of the Sponsor. The Sponsor will not seek reimbursement or otherwise require the Fund, the Trust, the Trustee, or any Shareholder to assume any liability, duty or obligation in connection with any such organizational and offering costs. Because the Fund does not have any income, it will need to sell ether to cover the Sponsor’s fee and expenses not assumed by the Sponsor, if any. Fund expenses not assumed by the Sponsor shall accrue daily and be payable by the Fund to the Sponsor at least quarterly in arrears. The Fund may also be subject to other liabilities (for example, as a result of litigation) that have also not been assumed by the Sponsor. The only source of funds to cover those liabilities will be sales of ether held by the Fund. Even if there are no expenses other than those assumed by the Sponsor, and there are no other liabilities of the Fund, the Fund will still need to sell ether to pay the Sponsor’s fee. The result of these sales is a decrease in the amount of ether represented by each Share.
There have been no extraordinary or non-routine expenses during the periods presented.
2.5.
Organizational and Offering Costs
The Trust’s and the Fund’s organizational and offering costs are borne by the Sponsor and, as such, are the sole responsibility of the Sponsor. The Sponsor will not seek reimbursement or otherwise require the Fund, the Trust, the Trustee or any Shareholder to assume any liability, duty or obligation in connection with any such organizational and offering costs.
2.6.
Income Taxes
The Fund is classified as a “grantor trust” for United States federal income tax purposes. As a result, the Trust and the Fund are not subject to United States federal income tax. Instead, the Fund’s income, gain, losses, and expenses will “flow through” to the Shareholders, and the Administrator reports these to the Internal Revenue Service on that basis.
The Sponsor has analyzed applicable tax laws and regulations and their application to the Trust and the Fund as of March 31, 2025, and does not believe that there are any uncertain tax positions that require recognition of a tax liability.
2.7.
Creation and Redemption of Shares
The Fund issues and redeems Creation Units on a continuous basis. Creation Units are issued or redeemed in exchange for an amount of cash as determined by the Administrator on each day that Cboe BZX Exchange is open for regular trading.
For creation transactions, the amount of cash required to be delivered to the Fund will equal the amount of cash needed to purchase the amount of ether represented by the Creation Unit(s) being created, as calculated by the Administrator, plus applicable fees, costs and adjustments. For redemption transactions, the Sponsor will arrange for the ether represented by the Creation Unit(s) being redeemed to be sold and the cash proceeds, after applicable fees, costs and adjustments, distributed. No Shares are issued until the corresponding amount of ether has been received in the Fund’s Trading Balance. Creation Units may be created or redeemed only by Authorized Participants, who pay (1) a transaction fee for each order to create or redeem Creation Units; (2) transfer, processing and other transaction costs charged by the Ether Custodian in connection with the issuance or redemption of Creation Units for such order; and (3) any other expenses, taxes, charges or adjustments.
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 Fund or a third-party with respect to purchasing, holding, delivering, or receiving ether as part of the creation or redemption process.
The Fund will create Shares by receiving ether from a third-party that is not the Authorized Participant and the Fund—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 Fund or acting at the direction of the Authorized Participant with respect to the delivery of the ether to the Fund. The Fund will redeem shares by delivering ether to a third-party that is not the Authorized Participant and the Fund—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 Fund or acting at the direction of the Authorized Participant with respect to the receipt of the ether from the Fund. The third-party will be unaffiliated with the Fund and the Sponsor.
Creation Units will be sold at a per-Share offering price that will vary depending on, among other things, the price of ether and the trading price of the Shares on the Cboe BXZ Exchange Inc. at the time of the offer. Shares offered at different times may have different offering prices. Prior to the commencement of the Fund’s investment operations on July 23, 2024, there was no public market for the Shares.
Changes in the Shares for the period from July 23, 2024 (Date of Commencement of operations) to March 31, 2025* are as follows:
|
Shares
|
Amount#
| ||||||
|
Balance at July 23, 2024 (Date of Commencement of operations)
|
$ | ^ | |||||
|
Creation of Shares
|
|||||||
|
Redemption of Shares
|
( | ) | ( | ) | |||
|
Balance at March 31, 2025
|
$ |
# Dollar amount of balance
represents the cumulative fair value of creation of shares less the redemption of shares, at the time of the specific creation
or redemption.
* No comparative period presented as the Fund’s
operations commenced on July 23, 2024.
^ On May 21, 2024,
Franklin Resources Inc. (the “Seed
Capital Investor”), an affiliate of the Sponsor,
subject to conditions, purchased 4,000 Shares
at a per-Share price equal
to $25.00 (the “Initial Seed Shares”). Delivery
of the Initial Seed Shares was made on May 21, 2024. Total proceeds
to the Fund from the sale of the Initial
Seed Shares were $100,000 . On June 27, 2024, the Initial Seed Shares were redeemed for $100,000 and the Seed Capital Investor
purchased two creation
units in a cash transaction comprised of a total of 100,000 Shares
at a per-Share price based on 380 ether per Creation Unit (or 0.0076 ether per Share), for a total of 760 ether (the “Seed Creation
Units”). The cash proceeds to the Fund from the sale of the Seed Creation Units were used by the Fund to purchase 760 ether at the price
of $3,446.37 per ether on June 27, 2024 (exclusive of transaction and other costs
incurred in connection with the conversion of the cash proceeds to ether, which
were paid by the Seed Capital Investor). Thus, the ultimate
total proceeds to the Fund from the sale of the Seed Creation Units
were $2,619,241.20 (an amount representing 760 ether). Further,
the transaction and other costs
incurred in connection with the Seed Creation Units
were paid by the Seed Capital Investor
and not borne
by the Fund. The Seed Capital Investor
will act as a statutory underwriter with respect
to the Seed Creation Units.
2.8.
Recently Issued Accounting Pronouncements
In December 2023, the FASB issued ASU 2023-08, Intangibles—Goodwill and Other—Crypto Assets (Subtopic 350-60): Accounting for and Disclosure of Crypto Assets (“ASU 2023-08”). ASU 2023-08 is intended to improve the accounting for certain crypto assets by requiring an entity to measure those crypto assets at fair value each reporting period with changes in fair value recognized in net income. The amendments also improve the information provided to investors about an entity’s crypto asset holdings by requiring disclosure about significant holdings, contractual sale restrictions, and changes during the reporting period. ASU 2023-08 is effective for annual and interim reporting periods beginning after December 15, 2024. Early adoption is permitted for both interim and annual financial statements that have not yet been issued. The Trust and the Fund have adopted this new guidance with no material impact on its financial statements and disclosures as the Trust uses fair value as its method of accounting for ether in accordance with its classification as an investment company for accounting purposes.
3.
INVESTMENT IN ETHER
The following represents the changes in quantity of ether held and the respective fair value during the period from July 23, 2024 (Date of Commencement of operations) to March 31, 2025*:
|
Quantity of ether
|
Amount in US$
| ||||||
|
Balance at July 23, 2024 (Date of Commencement of operations)
|
$ | ^ | |||||
|
Ether purchased for the creation of Shares
|
|||||||
|
Ether sold for the redemption of Shares
|
( | ) | ( | ) | |||
|
Principal on ether sales to pay expenses
|
|||||||
|
Net realized gain (loss) from ether sold for the redemption of shares
|
- | ( | ) | ||||
|
Net change in unrealized appreciation (depreciation) on investment in ether
|
- | ( | ) | ||||
|
Balance at March 31, 2025
|
$ |
* No comparative period presented as the Fund’s
operations commenced on July 23, 2024.
^ On May 21, 2024,
Franklin Resources Inc. (the “Seed
Capital Investor”), an affiliate of the Sponsor,
subject to conditions, purchased 4,000 Shares
at a per-Share price equal
to $25.00 (the “Initial Seed Shares”). Delivery
of the Initial Seed Shares was made on May 21, 2024. Total proceeds
to the Fund from the sale of the Initial
Seed Shares were $100,000 . On June 27, 2024, the Initial Seed Shares were redeemed for $100,000 and the Seed Capital Investor
purchased two creation
units in a cash transaction comprised of a total of 100,000 Shares
at a per-Share price based on 380 ether per Creation Unit (or 0.0076 ether per Share), for a total of 760 ether (the “Seed Creation
Units”). The cash proceeds to the Fund from the sale of the Seed Creation Units were used by the Fund to purchase 760 ether at the price
of $3,446.37 per ether on June 27, 2024 (exclusive of transaction and other costs
incurred in connection with the conversion of the cash proceeds to ether, which
were paid by the Seed Capital Investor). Thus, the ultimate
total proceeds to the Fund from the sale of the Seed Creation Units
were $2,619,241.20 (an amount representing 760 ether). Further,
the transaction and other costs
incurred in connection with the Seed Creation Units
were paid by the Seed Capital Investor
and not borne
by the Fund. The Seed Capital Investor
will act as a statutory underwriter with respect
to the Seed Creation Units.
4.
RELATED PARTIES
The Sponsor of the Trust is Franklin Holdings, LLC. The Sponsor is responsible for establishing the Trust and for the registration of the Shares. The Sponsor generally oversees the performance of the Fund’s principal service providers but does not exercise day-to-day oversight over such service providers. The Sponsor, with assistance and support from the Administrator, is responsible for preparing and filing periodic reports on behalf of the Fund with the SEC and will provide any required certification for such reports. The Sponsor has designated the independent registered public accounting firm of the Trust on behalf of the Fund and may from time to time employ legal counsel for the Fund.
Franklin Distributors, LLC serves as the Marketing Agent of the Fund. The Sponsor and the Marketing Agent are affiliates, and each is considered to be a related party to the Trust and the Fund. Franklin Resources, Inc. (“FRI”) is the ultimate parent company of the Sponsor and the Marketing Agent. FRI is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments.
The Sponsor is a related party of the Trust and the Fund. The Fund pays the Sponsor a unitary fee for services performed pursuant to the Sponsor Agreement. The Marketing Agent is an affiliate of the Sponsor. Expenses payable to the Marketing Agent, if any, are paid through the Sponsor’s fee.
The Trust also considers Franklin Resources, Inc., the ultimate parent company of the Sponsor, to be a related party of the Trust and the Fund. As of March 31, 2025, no shares of the Fund were held by a related party.
5.
CONCENTRATION OF RISK
The Fund holds only ether and cash, which creates a concentration risk associated with fluctuations in the price of ether. Accordingly, a decline in the price of ether will have an adverse effect on the value of the Shares of the Fund. The trading prices of ether have experienced extreme volatility in recent periods and may continue to fluctuate significantly. Extreme volatility in the future, including substantial, sustained, or rapid 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. Factors adversely impacting the value of ether and the Shares may include an increase in the global ether supply or a decrease in global ether demand; market conditions of, and overall sentiment towards, the digital assets and blockchain technology industry; trading activity on digital asset platforms, which, in many cases, may be unregulated or subject to regulation by a relevant jurisdiction but potentially non-compliant with such regulations or may be subject to manipulation; the adoption of ether as a medium of exchange, store-of-value or other consumptive asset and the maintenance and development of the open-source software protocol of the Ethereum network, and their ability to meet user demands; manipulative trading activity on digital asset platforms; and forks in the Ethereum network, among other things.
6.
FINANCIAL HIGHLIGHTS
|
For the period
July 23, 2024 (Date of
commencement of operations) through March 31, 2025*
| |||
|
Net asset
value per Share, beginning of year
|
$ | (a) | |
|
Net investment loss(b)
|
$ | ( | ) |
|
Net realized and unrealized gain (loss) on
investment in ether
|
( | ) | |
|
Net change in net assets from operations(c)
|
( | ) | |
|
Net asset
value per Share, end of year
|
$ | ||
|
Total
return, at net asset value(d)(e)
|
( | )% | |
|
Ratio to
average net assets(f)
|
|||
|
Net investment loss
|
( | )% | |
|
Gross expenses
|
% | ||
|
Net expenses
|
% |
*
No comparative period presented as the Fund’s operations commenced on July 23, 2024.
(a)
(b)
(c)
(d)
(e)
(f)
7.
COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Trust, on behalf of the Fund, may enter into contracts with service providers that contain general indemnification clauses. The Fund’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred.
8.
INDEMNIFICATION
Under the Trust’s organizational documents, the Sponsor and its shareholders, members, directors, affiliates, officers, employees and subsidiaries are indemnified by the Trust against certain liabilities. The Fund has also agreed to indemnify certain of its other service providers, including the Administrator, the Marketing Agent, the Custodians and the Trustee (including its officers, affiliates, directors, employees, and agents), for certain liabilities incurred by such parties in connection with their respective agreements to provide services for the Fund.
The Sponsor will not be liable to the Trust, the Trustee or any Shareholder for any action taken or for refraining from taking any action in good faith, or for errors in judgment or for depreciation or loss incurred by reason of the sale of any ether or other assets of the Fund or the Trust. However, the preceding liability exclusion will not protect the Sponsor against any liability resulting from its own gross negligence, bad faith, or willful misconduct.
The Sponsor and each of its shareholders, members, directors, officers, employees, affiliates and subsidiaries will be indemnified by the Trust and held harmless against any losses, liabilities or expenses incurred in the performance of its duties under the Declaration of Trust without gross negligence, bad faith, or willful misconduct. The Sponsor may rely in good faith on any paper, order, notice, list, affidavit, receipt, evaluation, opinion, endorsement, assignment, draft or any other document of any kind prima facie properly executed and submitted to it by the Trustee, the Trustee’s counsel or by any other person for any matters arising under the Declaration of Trust. The Sponsor shall in no event be deemed to have assumed or incurred any liability, duty, or obligation to any Shareholder or to the Trustee other than as expressly provided for in the Declaration of Trust. Such indemnity includes payment from the Trust of the costs and expenses incurred in defending against any indemnified claim or liability under the Declaration of Trust.
The Trustee will not be liable or accountable to the Trust or any other person or under any agreement to which the Trust or any series of the Trust is a party, except for the Trustee’s breach of its obligations pursuant to the Declaration of Trust or its own willful misconduct, bad faith or gross negligence. The Trustee and each of the Trustee’s officers, affiliates, directors, employees, and agents will be indemnified by the Trust from and against any losses, claims, taxes, damages, reasonable expenses, and liabilities incurred with respect to the creation, operation or termination of the Trust, the execution, delivery or performance of the Declaration of Trust or the transactions contemplated thereby; provided that the indemnified party acted without willful misconduct, bad faith or gross negligence.
9.
OPERATING SEGMENTS
The Trust and the Fund have adopted the Financial Accounting Standards Board (FASB`) Accounting Standards Update (ASU) 2023-07, Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures. The update is limited to disclosure requirements and does not impact the Trust or the Fund's financial position or results of operations.
The Fund, which is the sole series of the Trust, and the Trust operate as a operating segment, which is an investment portfolio. Executive officers of the Fund’s Sponsor perform the functions of the Chief Operating Decision Maker (CODM), evaluating fund-wide results and performance under a unified investment strategy. The CODM uses these measures to assess fund performance and allocate resources effectively. Internal reporting provided to the CODM aligns with the accounting policies and measurement principles used in the financial statements.
For information regarding segment assets, segment profit or loss, and significant expenses, refer to the Combined Statement of Assets and Liabilities and the Combined Statement of Operations, along with the related Combined Notes to Financial Statements. The Combined Schedule of Investments provide details of the Fund’s investments that generate returns such as realized and unrealized gains or losses. Performance metrics and expense ratios are disclosed in the Financial Highlights.
10.
SUBSEQUENT EVENTS
The Trust and the Fund have evaluated subsequent events through the issuance of the financial statements and determined that no such events have occurred that require disclosure.
To the Sponsor of Franklin Ethereum Trust and Shareholders of Franklin Ethereum ETF
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Franklin Ethereum ETF (the “Fund”), as of March 31, 2025 and the related statements of operations, cash flows and changes in net assets for the period July 23, 2024 (date of commencement of operations) through March 31, 2025, including the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of March 31, 2025, and the results of its operations, its cash flows and changes in its net assets for the period July 23, 2024 (date of commencement of operations) through March 31, 2025 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Sponsor’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
June 27, 2025
We have served as the Fund’s auditor since 2024.
FRANKLIN ETHEREUM ETF
A SERIES OF FRANKLIN ETHEREUM TRUST
|
March 31, 2025*
| |||
|
Assets
|
|||
|
Investment in ether, at fair value(a)
|
$ | ||
|
Total assets
|
|||
|
Liabilities
|
|||
|
Sponsor's fee payable
|
|||
|
Total Liabilities
|
|||
|
Commitments and contingencies (Note 7)
|
|||
|
Net assets
|
$ | ||
|
Shares issued and outstanding(b)
|
|||
|
Net asset value per Share
|
$ |
*
No comparative period presented as the Fund’s operations commenced on July 23, 2024.
(a)
Cost of investment in ether: $37,851,948 at March 31, 2025.
(b)
No par value, unlimited amount authorized.
See accompanying notes to the financial statements.
FRANKLIN ETHEREUM ETF
A SERIES OF FRANKLIN ETHEREUM TRUST
|
March 31, 2025*
|
|||||||||||||||
|
Quantity
of ether
|
Cost
|
Fair Value
|
Fair Value
as a %
of Net Assets | ||||||||||||
|
Investment in ether
|
$ | $ | % | ||||||||||||
|
Total investments
|
$ | $ | % | ||||||||||||
|
Less liabilities
|
( | ) | ( | )% | |||||||||||
|
Net assets
|
$ | % |
* No comparative period presented as the Fund’s
operations commenced on July 23, 2024.
See accompanying notes to the financial statements.
FRANKLIN ETHEREUM ETF
A SERIES OF FRANKLIN ETHEREUM TRUST
| For the period July 23, 2024 (Date of commencement of operations) through March 31, 2025* | |||
|
Expenses
|
|||
|
Sponsor's fee
|
$ | ||
|
Less waiver
|
( | ) | |
|
Total expenses
|
|||
|
Net
investment loss
|
( | ) | |
|
Net
realized and change in unrealized gain (loss) on investment in ether
|
|||
|
Net realized gain (loss) on investment in ether
|
( | ) | |
|
Net change in unrealized appreciation (depreciation)
on investment in ether
|
( | ) | |
|
Net
realized and change in unrealized gain (loss) on investment in ether
|
( | ) | |
|
Net increase (decrease) in net assets resulting from
operations
|
( | ) | |
|
Net increase (decrease) in net assets per
Share(a)(b)
|
$ | ( | ) |
* No comparative period presented as the Fund’s
operations commenced on July 23, 2024.
(a) Net increase
(decrease) in net assets per Share based on average
shares outstanding during
the period.
(b) The amount shown for a share outstanding may not agree with the change in the aggregate
gains and losses on investment for the period because of the timing of transactions in the Fund’s shares in relation to fluctuating market
values for the Fund’s underlying investment.
See accompanying notes to the financial statements.
A SERIES OF FRANKLIN ETHEREUM TRUST
STATEMENT OF CASH FLOWS
|
For the period July 23,
2024
(Date of commencement of operations) through March 31, 2025*
| |||
|
Cash Flows
from Operating Activities:
|
|||
|
Net increase (decrease) in net assets resulting from
operations
|
$ | ( | ) |
|
Adjustments to reconcile net increase (decrease) in
net assets resulting from operations to net cash provided by (used in)
operating activities:
|
|||
|
Purchases of ether
|
( | ) | |
|
Sales of ether
|
|||
|
Net realized (gain) loss on investment in ether
|
|||
|
Net change in unrealized (appreciation) depreciation
on investment in ether
|
|||
|
Change in operating assets and liabilities:
|
|||
|
Sponsor’s fee payable
|
|||
|
Net cash provided by (used in) operating activities
|
$ | ( | ) |
|
Cash Flows
from Financing Activities:
|
|||
|
Proceeds from issuance of Shares
|
$ | ||
|
Payments on Shares redeemed
|
( | ) | |
|
Net cash
provided by (used in) financing activities
|
$ | ||
|
Cash
|
|||
|
Net increase in cash
|
$ | ||
|
Cash, beginning of period
|
|||
|
Cash, end of period
|
$ |
* No comparative period presented as the Fund’s
operations commenced on July 23, 2024.
See accompanying notes to the financial statements.
FRANKLIN ETHEREUM ETF
A SERIES OF FRANKLIN ETHEREUM TRUST
|
For the period July
23, 2024 (Date of commencement of operations) through
March 31, 2025*^
| |||
|
Net assets, beginning of period
|
$ | ||
|
Net investment loss
|
( | ) | |
|
Net realized gain (loss) on investment in ether
|
( | ) | |
|
Net change in unrealized appreciation (depreciation) on investment in ether
|
( | ) | |
|
Net increase (decrease) in net assets resulting from operations
|
( | ) | |
|
Increase (decrease) in net assets from capital share transactions:
|
|||
|
Contributions for Shares issued
|
|||
|
Distributions for Shares redeemed
|
( | ) | |
|
Net increase (decrease) in net assets resulting from capital share transactions
|
|||
|
Net assets, end of period
|
$ |
* No comparative period presented as the Fund’s
operations commenced on July 23, 2024.
^ On May 21, 2024,
Franklin Resources Inc. (the “Seed
Capital Investor”), an affiliate of the Sponsor,
subject to conditions, purchased 4,000 Shares
at per-Share price
equal to $25.00
(the “Initial Seed Shares”). Delivery
of the Initial Seed Shares was made on May 21, 2024. Total proceeds
to the Fund from the sale of the Initial
Seed Shares were $100,000. On June 27, 2024, the Initial Seed Shares were redeemed for $100,000 and the Seed Capital Investor
purchased two creation
units in a cash transaction comprised of a total of 100,000 Shares
at a per-Share price based on 380 ether per Creation Unit (or 0.0076 ether per Share), for a total of 760 ether (the “Seed Creation
Units”). The cash proceeds to the Fund from the sale of the Seed Creation Units were used by the Fund to purchase 760 ether at the price
of $3,446.37 per ether on June 27, 2024 (exclusive of transaction and other costs
incurred in connection with the conversion of the cash proceeds to ether, which
were paid by the Seed Capital Investor). Thus, the ultimate
total proceeds to the Fund from the sale of the Seed Creation Units
were $2,619,241.20 (an amount representing 760 ether). Further,
the transaction and other costs
incurred in connection with the Seed Creation Units
were paid by the Seed Capital Investor
and not borne
by the Fund.
See accompanying notes to the financial statements.
FRANKLIN ETHEREUM ETF
A SERIES OF FRANKLIN ETHEREUM TRUST
1.
ORGANIZATION
The Franklin Ethereum Trust (the “Trust”) was formed as a Delaware statutory trust on February 8, , and is governed by the provisions of an Amended and Restated Agreement and Declaration of Trust dated as of May 30, 2024 (the “Declaration of Trust”). The Trust is not registered as an investment company under the Investment Company Act of 1940, as amended (the “Investment Company Act”) and is not a commodity pool for purposes of the Commodity Exchange Act (“CEA”). The accompanying financial statements relate to the one series that the Trust currently offers, the Franklin Ethereum ETF (the “Fund”). The Trust had no operations prior to the Fund’s launch, other than matters relating to its organization and the registration of the Fund under the Securities Act of 1933, as amended (the “Securities Act”). The Sponsor of the Trust and the Fund (the “Sponsor”) is Franklin Holdings, LLC. The Sponsor is a Delaware limited liability company formed on July 21, 2021. The Sponsor is not subject to regulation by the Commodity Futures Trading Commission (“CFTC”) as a commodity pool operator with respect to the Fund, or a commodity trading advisor with respect to the Fund. The Fund issues shares (the “Shares”), which represent units of fractional undivided beneficial interest in the Fund. The Shares of the Fund are listed on the Cboe BZX Exchange, Inc. (“Cboe BZX Exchange” or the “Exchange”).
The Fund seeks to reflect generally the performance of the price of ether before payment of the Fund's expenses. The Shares are intended to offer a convenient means of making an investment similar to an investment in ether relative to acquiring, holding and trading ether directly on a peer-to-peer or other basis or via a digital asset platform. The Shares have been designed to remove obstacles associated with the complexities and operational burdens involved in a direct investment in ether by providing an investment with a value that reflects the price of the ether owned by the Fund at such time, less the Fund's expenses. The Fund is not a proxy for a direct investment in ether. Rather, the Shares are intended to provide a cost-effective alternative means of obtaining investment exposure through the securities markets that is similar to an investment in ether. The Fund is a passive investment vehicle and is not a leveraged product. The Sponsor does not actively manage the ether held by the Fund.
BNY Mellon Asset Servicing, a
division of The Bank of New York Mellon, or “BNYM,” is the Fund’s Administrator
(the “Administrator”) and Transfer Agent (the “Transfer Agent”). BNYM also
serves as the custodian of the Fund’s cash (the “Cash Custodian”). The
Administrator is generally responsible for the day-to-day administration of the
Fund, including the calculation of the Fund’s net asset value (“NAV”) per
Share. The Ether Custodian is responsible for safekeeping the ether owned by
the Fund. The Ether Custodian is Coinbase Custody Trust Company, LLC (“Coinbase
Custody”). Coinbase Inc., an affiliate of the Ether Custodian, is the Fund’s
Prime Broker. CSC Delaware Trust Company, a subsidiary of the Corporation
Service Company (the “Trustee”), is the sole trustee of the Trust. Franklin
Distributors, LLC is the marketing agent of the Fund (the “Marketing Agent”).
The Fund issues Shares only to certain eligible financial institutions called Authorized Participants and only in one or more blocks of 50,000 Shares (“Creation Units”). Creation Units are directly redeemable only by Authorized Participants. Creation Units are issued and redeemed in exchange for cash. The Shares are listed and traded on the Exchange under the ticker symbol “EZET.” The market price of the Shares may be different than the Fund’s NAV per Share. The Fund issues Shares in Creation Units on a continuous basis at the applicable NAV per Share on the creation order date. Except when aggregated in Creation Units, the Shares are not redeemable securities.
The Fund is an “emerging growth company” as that term is used in the Securities Act, and, as such, the Fund may elect to comply with certain reduced public company reporting requirements.
On May 21, 2024, Franklin Resources Inc. (the “Seed Capital Investor”), an affiliate of the Sponsor, subject to conditions, purchased 4,000 Shares at a per-Share price equal to $25.00 (the “Initial Seed Shares”). Delivery of the Initial Seed Shares was made on May 21, 2024. Total proceeds to the Fund from the sale of the Initial Seed Shares were $100,000 . On June 27, 2024, the Initial Seed Shares were redeemed for $100,000 and the Seed Capital Investor purchased two creation units in a cash transaction comprised of a total of 100,000 Shares at a per-Share price based on 380 ether per Creation Unit (or 0.0076 ether per Share), for a total of 760 ether (the “Seed Creation Units”). The cash proceeds to the Fund from the sale of the Seed Creation Units were used by the Fund to purchase 760 ether at the price of $3,446.37 per ether on June 27, 2024 (exclusive of transaction and other costs incurred in connection with the conversion of the cash proceeds to ether, which were paid by the Seed Capital Investor). Thus, the ultimate total proceeds to the Fund from the sale of the Seed Creation Units were $2,619,241.20 (an amount representing 760 ether). As noted above, the transaction and other costs incurred in connection with the Seed Creation Units were paid by the Seed Capital Investor and not borne by the Fund.
The fiscal year of the Trust and the Fund is March 31st.
2.
SIGNIFICANT ACCOUNTING POLICIES
In preparing financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”), management of the Sponsor makes estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amount of revenue and expenses reported during the period. Actual results could differ from these estimates.
The accompanying audited financial statements were prepared in accordance with GAAP and with the instructions for Form 10-K and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”).
The following is a summary of significant accounting policies followed by the Trust and the Fund.
2.1.
Basis of Presentation
The Sponsor has determined that the Trust falls within the scope of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 946, Financial Services— Investment Companies, and has concluded that solely for accounting purposes, the Trust is classified as an Investment Company as defined in ASC 946.
2.2.
Calculation of NAV and NAV per Share
The Sponsor has the exclusive authority to determine the Fund’s net asset value (“NAV”). The Sponsor has delegated to the Administrator the responsibility to calculate the NAV of the Fund, based on a pricing source selected by the Sponsor. In determining the Fund’s NAV, the Administrator generally will value the ether held by the Fund based on the Index, unless the Sponsor in its sole discretion determines that the index is unreliable. The CME CF Ether-Dollar Reference Rate—New York Variant for the Ether—U.S. Dollar trading pair (the “CF Benchmarks Index”) shall constitute the Index, unless the CF Benchmarks Index is not available or the Sponsor in its sole discretion determines the CF Benchmarks Index is unreliable as the Index and therefore determines not to use the CF Benchmarks Index as the Index. If the CF Benchmarks Index is not available or the Sponsor determines, in its sole discretion, that the CF Benchmarks Index is unreliable (referred to herein as a “Fair Value Event”), the Fund’s holdings may be fair valued by the Sponsor.
On each Business Day, as soon as practicable after 4:00 p.m. Eastern Time (“ET”), the Administrator evaluates the ether held by the Fund as reflected by the CF Benchmarks Index and determines the NAV of the Fund. For purposes of making these calculations, a Business Day means any day other than a day when the Cboe BZX Exchange is closed for regular trading. The Fund’s periodic financial statements may not utilize this net asset value of the Fund to the extent the methodology used to calculate the Index is deemed not to be consistent with GAAP.
2.3.
Valuation of Ether
The Fund’s financial statements are prepared in accordance GAAP for annual financial information. Ether is priced at 11:59:59PM ET. With respect to the Fund’s ether holdings, the Trust follows the provisions of the Financial Accounting Standards Board Accounting Standards Codification Topic 820, “Fair Value Measurements and Disclosures” (“ASC Topic 820”) and utilizes an exchange-traded price from the Fund’s principal market (or in the absence of a principal market, the most advantageous market) for ether as of the Fund’s financial statement measurement date.
ASC 820 established a hierarchy that prioritized inputs to valuation techniques used to measure fair value. The three levels of inputs are:
Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly or indirectly, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not considered to be active, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived principally from or corroborated by observable market data by correlation or other means; and
Level 3: Inputs that are unobservable for the asset or liability, including the Fund’s assumptions used in determining the fair value of investments.
On March 31, 2025, the value of the ether held by the Fund was categorized as Level 1.
The cost basis of the investment in ether recorded by the Trust on behalf of the Fund for financial reporting purposes is the fair value of ether at the time of purchase.
2.4.
Fees, Expenses, and Realized Gains (Losses)
The Fund’s only ordinary recurring expense is the Sponsor’s fee. In exchange for the Sponsor’s fee, the Sponsor has agreed to assume the ordinary fees and expenses incurred by the Fund, including but not limited to the following: fees charged by the Administrator, the Marketing Agent, the Custodians (the Cash Custodian and Ether Custodian, collectively) and the Trustee, Cboe BZX Exchange listing fees, typical maintenance and transaction fees of the DTC, SEC registration fees, printing and mailing costs, tax reporting fees, audit fees, license fees and expenses, and up to $500,000 per annum in ordinary legal fees and expenses. The Sponsor paid the costs of the Fund’s organization and the initial offering costs and will not seek reimbursement of such costs. Ether transactions are accounted for on a trade date basis. Realized gains or losses from the sale or disposition of ether are determined on a specific identification basis and recognized in the Statements of Operations in the period in which the sale or disposition occurs, respectively.
The Sponsor’s fee is accrued daily at an annualized rate equal to 0.19 % of the net asset value of the Fund and is payable at least quarterly in arrears in U.S. dollars or in-kind or any combination thereof. The Sponsor may, at its sole discretion and from time to time, waive all or a portion of the Sponsor’s fee for stated periods of time. The Sponsor is under no obligation to waive any portion of its fees and any such waiver shall create no obligation to waive any such fees during any period not covered by the waiver. The Fund will sell ether as needed to pay the Sponsor’s fee. The Fund bears transaction costs, including any Ethereum network fees or other similar transaction fees, in connection with any sales of ether necessary to pay the Sponsor’s fee, as well as other Fund expenses (if any) that are not assumed by the Sponsor (expenses assumed by the Sponsor are specified above). Any Ethereum network fees and similar transaction fees incurred in connection with the creation or redemption of Creation Units are borne by the Authorized Participant.
For the period from July 23, 2024 (the day the Shares were initially listed on the Exchange) to January 31, 2025, the Sponsor agreed to waive the entire Sponsor’s Fee on the first $10.0 billion of the Fund’s assets. For the period July 23, 2024 to March 31, 2025, the Fund accrued the Sponsor’s Fee of $(44,677 ) less waiver of $35,753 . The net Sponsor’s Fee payable for the period post waiver was $(8,924 ).
The Sponsor is not required to pay any extraordinary or non-routine expenses. The Fund will be responsible for the payment of such expenses to the extent any such expenses are incurred. Extraordinary expenses are fees and expenses which are unexpected or unusual in nature, such as legal claims and liabilities and litigation costs or indemnification or other unanticipated expenses. Extraordinary fees and expenses also include material expenses which are not currently anticipated obligations of the Fund. The Fund will be responsible for the payment of such expenses to the extent any such expenses are incurred. Routine operational, administrative and other ordinary expenses are not deemed extraordinary expenses. In addition, the Fund may incur certain other non- recurring expenses that are not assumed by the Sponsor (expenses assumed by the Sponsor are described above), including but not limited to, taxes and governmental charges, any applicable brokerage commissions, Ethereum network fees and similar transaction fees that qualify as extraordinary or non-routine expenses as described above, financing fees, expenses and costs of any extraordinary services performed by the Sponsor (or any other service provider) on behalf of the Fund to protect the Fund or the interests of Shareholders (including, for example, in connection with any fork of the Ethereum blockchain, any Incidental Rights and any IR Virtual Currency), any indemnification of the Cash Custodian, Ether Custodian, Prime Broker, Administrator or other agents, service providers or counterparties of the Trust or the Fund and extraordinary legal fees and expenses, including any legal fees and expenses incurred in connection with litigation, regulatory enforcement or investigation matters or legal expenses in excess of $500,000 per year. The Sponsor may determine in its sole discretion to assume legal fees and expenses of the Fund in excess of the $500,000 per annum stipulated in the Sponsor Agreement. To the extent that the Sponsor does not voluntarily assume such fees and expenses, they will be the responsibility of the Fund. The Fund’s organizational and offering costs are borne by the Sponsor and, as such, are the sole responsibility of the Sponsor. The Sponsor will not seek reimbursement or otherwise require the Fund, the Trust, the Trustee, or any Shareholder to assume any liability, duty or obligation in connection with any such organizational and offering costs. Because the Fund does not have any income, it will need to sell ether to cover the Sponsor’s fee and expenses not assumed by the Sponsor, if any. Fund expenses not assumed by the Sponsor shall accrue daily and be payable by the Fund to the Sponsor at least quarterly in arrears. The Fund may also be subject to other liabilities (for example, as a result of litigation) that have also not been assumed by the Sponsor. The only source of funds to cover those liabilities will be sales of ether held by the Fund. Even if there are no expenses other than those assumed by the Sponsor, and there are no other liabilities of the Fund, the Fund will still need to sell ether to pay the Sponsor’s fee. The result of these sales is a decrease in the amount of ether represented by each Share.
There have been no extraordinary or non-routine expenses during the periods presented.
2.5.
Organizational and Offering Costs
The Trust’s and the Fund’s organizational and offering costs are borne by the Sponsor and, as such, are the sole responsibility of the Sponsor. The Sponsor will not seek reimbursement or otherwise require the Fund, the Trust, the Trustee or any Shareholder to assume any liability, duty or obligation in connection with any such organizational and offering costs.
2.6.
Income Taxes
The Fund is classified as a “grantor trust” for United States federal income tax purposes. As a result, the Trust and the Fund are not subject to United States federal income tax. Instead, the Fund’s income, gain, losses, and expenses will “flow through” to the Shareholders, and the Administrator reports these to the Internal Revenue Service on that basis.
The Sponsor has analyzed applicable tax laws and regulations and their application to the Trust and the Fund as of March 31, 2025, and does not believe that there are any uncertain tax positions that require recognition of a tax liability.
2.7.
Creation and Redemption of Shares
The Fund issues and redeems Creation Units on a continuous basis. Creation Units are issued or redeemed in exchange for an amount of cash as determined by the Administrator on each day that Cboe BZX Exchange is open for regular trading.
For creation transactions, the amount of cash required to be delivered to the Fund will equal the amount of cash needed to purchase the amount of ether represented by the Creation Unit(s) being created, as calculated by the Administrator, plus applicable fees, costs and adjustments. For redemption transactions, the Sponsor will arrange for the ether represented by the Creation Unit(s) being redeemed to be sold and the cash proceeds, after applicable fees, costs and adjustments, distributed. No Shares are issued until the corresponding amount of ether has been received in the Fund’s Trading Balance. Creation Units may be created or redeemed only by Authorized Participants, who pay (1) a transaction fee for each order to create or redeem Creation Units; (2) transfer, processing and other transaction costs charged by the Ether Custodian in connection with the issuance or redemption of Creation Units for such order; and (3) any other expenses, taxes, charges or adjustments.
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 Fund or a third-party with respect to purchasing, holding, delivering, or receiving ether as part of the creation or redemption process.
The Fund will create Shares by receiving ether from a third-party that is not the Authorized Participant and the Fund—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 Fund or acting at the direction of the Authorized Participant with respect to the delivery of the ether to the Fund. The Fund will redeem shares by delivering ether to a third-party that is not the Authorized Participant and the Fund—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 Fund or acting at the direction of the Authorized Participant with respect to the receipt of the ether from the Fund. The third-party will be unaffiliated with the Fund and the Sponsor.
Creation Units will be sold at a per-Share offering price that will vary depending on, among other things, the price of ether and the trading price of the Shares on the Cboe BXZ Exchange Inc. at the time of the offer. Shares offered at different times may have different offering prices. Prior to the commencement of the Fund’s investment operations on July 23, 2024, there was no public market for the Shares.
Changes in the Shares for the period from July 23, 2024 (Date of Commencement of operations) to March 31, 2025* are as follows:
|
Shares
|
Amount#
| ||||||
|
Balance at July 23, 2024 (Date of Commencement of operations)
|
$ | ^ | |||||
|
Creation of Shares
|
|||||||
|
Redemption of Shares
|
( | ) | ( | ) | |||
|
Balance at March 31, 2025
|
$ |
# Dollar amount of balance
represents the cumulative fair value of creation of shares less the redemption of shares, at the time of the specific creation
or redemption.
* No comparative period presented as the Fund’s
operations commenced on July 23, 2024.
^ On May 21, 2024,
Franklin Resources Inc. (the “Seed
Capital Investor”), an affiliate of the Sponsor,
subject to conditions, purchased 4,000 Shares
at a per-Share price equal
to $25.00 (the “Initial Seed Shares”). Delivery
of the Initial Seed Shares was made on May 21, 2024. Total proceeds
to the Fund from the sale of the Initial
Seed Shares were $100,000 . On June 27, 2024, the Initial Seed Shares were redeemed for $100,000 and the Seed Capital Investor
purchased two creation
units in a cash transaction comprised of a total of 100,000 Shares
at a per-Share price based on 380 ether per Creation Unit (or 0.0076 ether per Share), for a total of 760 ether (the “Seed Creation
Units”). The cash proceeds to the Fund from the sale of the Seed Creation Units were used by the Fund to purchase 760 ether at the price
of $3,446.37 per ether on June 27, 2024 (exclusive of transaction and other costs
incurred in connection with the conversion of the cash proceeds to ether, which
were paid by the Seed Capital Investor). Thus, the ultimate
total proceeds to the Fund from the sale of the Seed Creation Units
were $2,619,241.20 (an amount representing 760 ether). Further,
the transaction and other costs
incurred in connection with the Seed Creation Units
were paid by the Seed Capital Investor
and not borne
by the Fund. The Seed Capital Investor
will act as a statutory underwriter with respect
to the Seed Creation Units.
2.8.
Recently Issued Accounting Pronouncements
In December 2023, the FASB issued ASU 2023-08, Intangibles—Goodwill and Other—Crypto Assets (Subtopic 350-60): Accounting for and Disclosure of Crypto Assets (“ASU 2023-08”). ASU 2023-08 is intended to improve the accounting for certain crypto assets by requiring an entity to measure those crypto assets at fair value each reporting period with changes in fair value recognized in net income. The amendments also improve the information provided to investors about an entity’s crypto asset holdings by requiring disclosure about significant holdings, contractual sale restrictions, and changes during the reporting period. ASU 2023-08 is effective for annual and interim reporting periods beginning after December 15, 2024. Early adoption is permitted for both interim and annual financial statements that have not yet been issued. The Trust and the Fund have adopted this new guidance with no material impact on its financial statements and disclosures as the Trust uses fair value as its method of accounting for ether in accordance with its classification as an investment company for accounting purposes.
3.
INVESTMENT IN ETHER
The following represents the changes in quantity of ether held and the respective fair value during the period from July 23, 2024 (Date of Commencement of operations) to March 31, 2025*:
|
Quantity of ether
|
Amount in US$
| ||||||
|
Balance at July 23, 2024 (Date of Commencement of operations)
|
$ | ^ | |||||
|
Ether purchased for the creation of Shares
|
|||||||
|
Ether sold for the redemption of Shares
|
( | ) | ( | ) | |||
|
Principal on ether sales to pay expenses
|
|||||||
|
Net realized gain (loss) from ether sold for the redemption of shares
|
- | ( | ) | ||||
|
Net change in unrealized appreciation (depreciation) on investment in ether
|
- | ( | ) | ||||
|
Balance at March 31, 2025
|
$ |
* No comparative period presented as the Fund’s
operations commenced on July 23, 2024.
^ On May 21, 2024,
Franklin Resources Inc. (the “Seed
Capital Investor”), an affiliate of the Sponsor,
subject to conditions, purchased 4,000 Shares
at a per-Share price equal
to $25.00 (the “Initial Seed Shares”). Delivery
of the Initial Seed Shares was made on May 21, 2024. Total proceeds
to the Fund from the sale of the Initial
Seed Shares were $100,000 . On June 27, 2024, the Initial Seed Shares were redeemed for $100,000 and the Seed Capital Investor
purchased two creation
units in a cash transaction comprised of a total of 100,000 Shares
at a per-Share price based on 380 ether per Creation Unit (or 0.0076 ether per Share), for a total of 760 ether (the “Seed Creation
Units”). The cash proceeds to the Fund from the sale of the Seed Creation Units were used by the Fund to purchase 760 ether at the price
of $3,446.37 per ether on June 27, 2024 (exclusive of transaction and other costs
incurred in connection with the conversion of the cash proceeds to ether, which
were paid by the Seed Capital Investor). Thus, the ultimate
total proceeds to the Fund from the sale of the Seed Creation Units
were $2,619,241.20 (an amount representing 760 ether). Further,
the transaction and other costs
incurred in connection with the Seed Creation Units
were paid by the Seed Capital Investor
and not borne
by the Fund. The Seed Capital Investor
will act as a statutory underwriter with respect
to the Seed Creation Units.
4.
RELATED PARTIES
The Sponsor of the Trust is Franklin Holdings, LLC. The Sponsor is responsible for establishing the Trust and for the registration of the Shares. The Sponsor generally oversees the performance of the Fund’s principal service providers but does not exercise day-to-day oversight over such service providers. The Sponsor, with assistance and support from the Administrator, is responsible for preparing and filing periodic reports on behalf of the Fund with the SEC and will provide any required certification for such reports. The Sponsor has designated the independent registered public accounting firm of the Trust on behalf of the Fund and may from time to time employ legal counsel for the Fund.
Franklin Distributors, LLC serves as the Marketing Agent of the Fund. The Sponsor and the Marketing Agent are affiliates, and each is considered to be a related party to the Trust and the Fund. Franklin Resources, Inc. (“FRI”) is the ultimate parent company of the Sponsor and the Marketing Agent. FRI is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments.
The Sponsor is a related party of the Trust and the Fund. The Fund pays the Sponsor a unitary fee for services performed pursuant to the Sponsor Agreement. The Marketing Agent is an affiliate of the Sponsor. Expenses payable to the Marketing Agent, if any, are paid through the Sponsor’s fee.
The Trust also considers Franklin Resources, Inc., the ultimate parent company of the Sponsor, to be a related party of the Trust and the Fund. As of March 31, 2025, no shares of the Fund were held by a related party.
5.
CONCENTRATION OF RISK
The Fund holds only ether and cash, which creates a concentration risk associated with fluctuations in the price of ether. Accordingly, a decline in the price of ether will have an adverse effect on the value of the Shares of the Fund. The trading prices of ether have experienced extreme volatility in recent periods and may continue to fluctuate significantly. Extreme volatility in the future, including substantial, sustained, or rapid 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. Factors adversely impacting the value of ether and the Shares may include an increase in the global ether supply or a decrease in global ether demand; market conditions of, and overall sentiment towards, the digital assets and blockchain technology industry; trading activity on digital asset platforms, which, in many cases, may be unregulated or subject to regulation by a relevant jurisdiction but potentially non-compliant with such regulations or may be subject to manipulation; the adoption of ether as a medium of exchange, store-of-value or other consumptive asset and the maintenance and development of the open-source software protocol of the Ethereum network, and their ability to meet user demands; manipulative trading activity on digital asset platforms; and forks in the Ethereum network, among other things.
6.
FINANCIAL HIGHLIGHTS
|
For the period
July 23, 2024 (Date of
commencement of operations) through March 31, 2025*
| |||
|
Net asset
value per Share, beginning of year
|
$ | (a) | |
|
Net investment loss(b)
|
$ | ( | ) |
|
Net realized and unrealized gain (loss) on
investment in ether
|
( | ) | |
|
Net change in net assets from operations(c)
|
( | ) | |
|
Net asset
value per Share, end of year
|
$ | ||
|
Total
return, at net asset value(d)(e)
|
( | )% | |
|
Ratio to
average net assets(f)
|
|||
|
Net investment loss
|
( | )% | |
|
Gross expenses
|
% | ||
|
Net expenses
|
% |
* No comparative period presented as the Fund’s
operations commenced on July 23, 2024.
(a) The amount shown
represents the NAV per share
at commencement of the Fund’s
investment operations. This amount includes
proceeds to the Fund from the initial
ether seed creation
transaction conducted on June 27, 2024. Prior
to June 27, 2024, 4,000
shares were acquired
on May 21, 2024 at per share
value of $25 . Total proceeds
to the Fund from the sale of the Initial
Seed Shares were $100,000 . On June 27, 2024, the Initial Seed Shares were redeemed for $100,000 and the Seed Capital Investor
purchased two creation
units in a cash transaction comprised of a total of 100,000 Shares
at a per-Share price based
on 380 ether per Creation
Unit (or 0.0076
ether per Share),
for a total of 760 ether (the “Seed Creation
Units”). The cash proceeds to the Fund from the sale of the Seed Creation Units were used by the Fund to purchase 760 ether at the price of $3,446.37
per ether on June 27, 2024 (exclusive of transaction and other costs incurred in connection with the conversion of the cash proceeds to ether, which were paid by the Seed Capital
Investor). Thus, the ultimate total proceeds to the Fund from the sale of the Seed Creation
Units were $2,619,241.20 (an amount representing 760 ether).
(b) Calculated using average Shares outstanding.
(c) The amount shown for a share outstanding may not agree with the change in the aggregate
gains and losses on investment for the period because of the timing of transactions in the Fund’s shares in relation to fluctuating market
values for the Fund’s underlying investment.
(d) Percentage is not annualized.
(e) Total Return at NAV is calculated assuming
an initial investment made at the NAV at the beginning of the period,
and redemption of Shares at NAV on the last day of the period.
Total Return at NAV as shown above
includes adjustments in accordance with U.S. GAAP.
(f) Annualized.
7.
COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Trust, on behalf of the Fund, may enter into contracts with service providers that contain general indemnification clauses. The Fund’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred.
8.
INDEMNIFICATION
Under the Trust’s organizational documents, the Sponsor and its shareholders, members, directors, affiliates, officers, employees and subsidiaries are indemnified by the Trust against certain liabilities. The Fund has also agreed to indemnify certain of its other service providers, including the Administrator, the Marketing Agent, the Custodians and the Trustee (including its officers, affiliates, directors, employees, and agents), for certain liabilities incurred by such parties in connection with their respective agreements to provide services for the Fund.
The Sponsor will not be liable to the Trust, the Trustee or any Shareholder for any action taken or for refraining from taking any action in good faith, or for errors in judgment or for depreciation or loss incurred by reason of the sale of any ether or other assets of the Fund or the Trust. However, the preceding liability exclusion will not protect the Sponsor against any liability resulting from its own gross negligence, bad faith, or willful misconduct.
The Sponsor and each of its shareholders, members, directors, officers, employees, affiliates and subsidiaries will be indemnified by the Trust and held harmless against any losses, liabilities or expenses incurred in the performance of its duties under the Declaration of Trust without gross negligence, bad faith, or willful misconduct. The Sponsor may rely in good faith on any paper, order, notice, list, affidavit, receipt, evaluation, opinion, endorsement, assignment, draft or any other document of any kind prima facie properly executed and submitted to it by the Trustee, the Trustee’s counsel or by any other person for any matters arising under the Declaration of Trust. The Sponsor shall in no event be deemed to have assumed or incurred any liability, duty, or obligation to any Shareholder or to the Trustee other than as expressly provided for in the Declaration of Trust. Such indemnity includes payment from the Trust of the costs and expenses incurred in defending against any indemnified claim or liability under the Declaration of Trust.
The Trustee will not be liable or accountable to the Trust or any other person or under any agreement to which the Trust or any series of the Trust is a party, except for the Trustee’s breach of its obligations pursuant to the Declaration of Trust or its own willful misconduct, bad faith or gross negligence. The Trustee and each of the Trustee’s officers, affiliates, directors, employees, and agents will be indemnified by the Trust from and against any losses, claims, taxes, damages, reasonable expenses, and liabilities incurred with respect to the creation, operation or termination of the Trust, the execution, delivery or performance of the Declaration of Trust or the transactions contemplated thereby; provided that the indemnified party acted without willful misconduct, bad faith or gross negligence.
9.
OPERATING SEGMENTS
The Trust and the Fund have adopted the Financial Accounting Standards Board (FASB`) Accounting Standards Update (ASU) 2023-07, Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures. The update is limited to disclosure requirements and does not impact the Trust or the Fund's financial position or results of operations.
The Fund, which is the sole series of the Trust, and the Trust operate as a operating segment, which is an investment portfolio. Executive officers of the Fund’s Sponsor perform the functions of the Chief Operating Decision Maker (CODM), evaluating fund-wide results and performance under a unified investment strategy. The CODM uses these measures to assess fund performance and allocate resources effectively. Internal reporting provided to the CODM aligns with the accounting policies and measurement principles used in the financial statements.
For information regarding segment assets, segment profit or loss, and significant expenses, refer to the Statement of Assets and Liabilities and the Statement of Operations, along with the related Notes to Financial Statements. The Schedule of Investments provide details of the Fund’s investments that generate returns such as realized and unrealized gains or losses. Performance metrics and expense ratios are disclosed in the Financial Highlights.
10.
SUBSEQUENT EVENTS
The Trust and the Fund have evaluated subsequent events through the issuance of the financial statements and determined that no such events have occurred that require disclosure.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned in the capacities* indicated thereunto duly authorized.
Franklin Holdings, LLC
Sponsor of Franklin Ethereum Trust (Registrant)
|
By:
|
/s/ David Mann
|
|
|
|
David Mann*
|
|
|
|
President and Chief Executive Officer
|
|
|
|
(serving in the capacity of principal executive officer)
|
|
|
|
|
|
|
By:
|
/s/ Matthew Hinkle
|
|
|
|
Matthew Hinkle*
|
|
|
|
Chief Financial Officer
|
|
|
|
(serving in the capacity of principal financial officer)
|
|
Date: June 27, 2025
*
The registrant is a trust and the person is signing in his capacity as an officer of Franklin Holdings, LLC, the Sponsor of the registrant.