Franklin Ethereum Trust (EZET) risk factors, FY2025 10-K

Other

1. 01Risk Factors Related to Digital Assets
2. 02Digital assets represent a new and rapidly evolving industry, and the value of the Shares depends on the acceptance of ether
3. 03A temporary or permanent “fork” could adversely affect the value of the Shares
4. 04The 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
5. 05Risk Factors Related to the Fund and the Shares
6. 06Ether 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
7. 07Risk Factors Related to the Regulation of the Fund and the Shares
8. 08If 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
9. 09The treatment of digital currency for U.S. federal, state and local income tax purposes is uncertain
10. 10The Fund will not directly or indirectly participate in any staking program, and accordingly the Shareholders will not receive any staking rewards or other income
11. 11Changes 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
12. 12Potential 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
13. 13Digital asset networks face significant scaling challenges and efforts to increase the volume and speed of transactions may not be successful
14. 14Digital 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
15. 15Liquid staking applications pose centralization concerns
16. 16Shareholders will not receive the benefits of any Incidental Rights and any IR Virtual Currency, including any forked or airdropped assets
17. 17In 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
18. 18Any 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
19. 19Validators may suffer losses due to staking, or staking may prove unattractive to validators, which could make the Ethereum network less attractive
20. 20Proof-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
21. 21The 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
22. 22Because 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
23. 23The 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
24. 24The Index price used to calculate the value of the Fund’s ether may be volatile, adversely affecting the value of the Shares
25. 25The Index Administrator could experience system failures or errors
26. 26Competition from central bank digital currencies (“CBDCs”) and emerging payments initiatives involving financial institutions could adversely affect the value of ether and other digital assets
27. 27Prices of ether may be affected due to stablecoins (including Tether and US Dollar Coin (“USDC”)), the activities of stablecoin issuers and their regulatory treatment
28. 28Competition 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
29. 29Competitive pressures may negatively affect the ability of the Fund to garner substantial assets and achieve commercial success
30. 30Operational cost may exceed the award for validating transaction, and increased transaction fees may adversely affect the usage of the Ethereum network
31. 31The 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
32. 32The 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
33. 33The 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
34. 34An investment in the Shares deviates from a direct investment in ether
35. 35The value of the Shares may be influenced by a variety of factors unrelated to the value of ether
36. 36service 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
37. 37The Fund and the Shares may be negatively affected by Authorized Participant Concentration
38. 38Certain shareholders may from time to time own a substantial amount of the Fund's Shares
39. 39The 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
40. 40exemption 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
41. 41The lack of an active trading market for the Shares may result in losses on your investment at the time of disposition of your Shares
42. 42The lack of ability to facilitate in-kind creations and redemptions of Shares could have adverse consequences for the Fund
43. 43As an owner of Shares, you will not have the rights normally associated with ownership of other types of shares
44. 44The Sponsor may amend the Declaration of Trust without the consent of the Shareholders
45. 45Shareholders 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
46. 46The 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
47. 47As 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
48. 48Security 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
49. 49The 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
50. 50If 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
51. 51Loss 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
52. 52The 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
53. 53The Sponsor may terminate and liquidate the Fund or Trust for any reason in its sole discretion. See “Termination Events.”
54. 54The Declaration of Trust includes provisions that limit Shareholders’ voting rights and the ability to participate in shareholder derivative actions
55. 55The 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
56. 56Extraordinary expenses resulting from unanticipated events may become payable by the Fund, adversely affecting the value of the Shares
57. 57The 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
58. 58The 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
59. 59Intellectual property rights claims may adversely affect the Fund and the value of the Shares
60. 60President 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
61. 61A 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
62. 62Competing 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
63. 63Regulatory 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
64. 64If 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
65. 65Anonymity and illicit financing risk
66. 66Regulatory 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
67. 67The treatment of the Fund for U.S. federal income tax purposes is uncertain
68. 68The 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
69. 69The treatment of digital currency for U.S. federal income tax purposes is uncertain
70. 70Future developments regarding the treatment of digital currency for U.S. federal income tax purposes could adversely affect the value of the Shares
71. 71Future 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
72. 72A U.S. Tax-Exempt Shareholder may recognize “unrelated business taxable income” a consequence of an investment in Shares
73. 73Shareholders could incur a tax liability without an associated distribution of the Fund
74. 74A hard “fork” of the Ethereum blockchain could result in Shareholders incurring a tax liability
75. 75Potential 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
76. 76Investment 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
77. 77Shareholders 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
78. 78Although 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
79. 79Coinbase 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
80. 80Shareholders may be adversely affected by the lack of independent advisers representing investors in the Fund
81. 81Shareholders 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
82. 82Risk Factors Related to ERISA