Franklin Ethereum Trust (EZET) risk factors, FY2026 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 Shares48% rewritten
4. 04The Fund’s fee structure, liquidity, or trading volume and spreads relative to other competitor ether products could have a detrimental effect on the scale and sustainability of the Fund37% rewritten
5. 05Risk Factors Related to the Fund and the Shares57% rewritten
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 Shares35% rewritten
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 assets for U.S. federal, state and local income tax purposes is uncertain95% rewritten
10. 10The 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 networksNew
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 the value of 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 assets34% rewritten
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. 21Unlike some digital assets, which have a limit on outstanding supply, there is no limit on ether supplyNew
22. 22The 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 factors38% rewritten
23. 23the Fund’s own acquisitions or dispositions of ether, since there is no limit on the number of ether that the Fund may acquireNew
24. 24Because 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
25. 25The Index has a limited performance history, the Index price could fail to track the global ether price, a failure of the Index price could adversely affect the value of the Shares, and the Index’s methodology may be subject to change45% rewritten
26. 26The Index price used to calculate the value of the Fund’s ether may be volatile, adversely affecting the value of the Shares
27. 27The Index Administrator could experience system failures or errors
28. 28Competition from central bank digital currencies (“CBDCs”) and emerging payments initiatives involving financial institutions could adversely affect the value of ether and other digital assets
29. 29Prices of ether may be affected due to stablecoins (including Tether and US Dollar Coin (“USDC”)), the activities of stablecoin issuers and their regulatory treatment40% rewritten
30. 30Competition 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
31. 31Competitive pressures may negatively affect the ability of the Fund to maintain substantial assets and achieve long-term commercial success68% rewritten
32. 32Digital asset treasury companies may exacerbate volatility in digital asset marketsNew
33. 33Operational cost may exceed the award for validating transaction, and increased transaction fees may adversely affect the usage of the Ethereum network37% rewritten
34. 34If regulators or public utilities take actions that restrict or otherwise impact validator activities, such actions could result in decreased security of a digital asset network, including the Ethereum network, which could adversely affect the value of the SharesNew
35. 35The 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 Fund20% rewritten
36. 36The 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 borne by the Fund, and as a result, the value of the Shares may decrease over time
37. 37The 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
38. 38An investment in the Shares deviates from a direct investment in ether25% rewritten
39. 39The value of the Shares may be influenced by a variety of factors unrelated to the value of ether
40. 40service 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 operate45% rewritten
41. 41The Fund and the Shares may be negatively affected by Authorized Participant Concentration
42. 42Certain shareholders may from time to time own a substantial amount of the Fund's Shares
43. 43The Fund 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
44. 44exemption 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
45. 45The Fund is subject to certain risks due to its concentration in only etherNew
46. 46The lack of an active trading market for the Shares may result in losses on your investment at the time of disposition of your Shares
47. 47The lack of ability to facilitate in-kind creations and redemptions of Shares could have adverse consequences for the Fund63% rewritten
48. 48Any of these factors could adversely affect the performance of the Fund and the value of the SharesNew
49. 49As an owner of Shares, you will not have the rights normally associated with ownership of other types of shares
50. 50The Sponsor may amend the Declaration of Trust without the consent of the Shareholders
51. 51Shareholders 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
52. 52The 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
53. 53As 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
54. 54Security 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
55. 55The 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
56. 56If 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
57. 57Loss 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
58. 58The 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
59. 59The Sponsor may terminate and liquidate the Fund or Trust for any reason in its sole discretion. See “Termination Events.”
60. 60The Declaration of Trust includes provisions that limit Shareholders’ voting rights and the ability to participate in shareholder derivative actions
61. 61The 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
62. 62Extraordinary expenses resulting from unanticipated events may become payable by the Fund, adversely affecting the value of the Shares
63. 63The 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
64. 64The 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 arrangements83% rewritten
65. 65President 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
66. 66A 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 Fund29% rewritten
67. 67Competing 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
68. 68Regulatory 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
69. 69If 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
70. 70Anonymity and illicit financing risk
71. 71Regulatory changes or interpretations could obligate an Authorized Participant, the Fund, the Trust, or the Sponsor or other Fund service providers to register and comply with new regulations, resulting in potentially extraordinary, nonrecurring expenses to the Fund49% rewritten
72. 72The treatment of the Fund for U.S. federal income tax purposes is uncertain
73. 73The 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 trust37% rewritten
74. 74The treatment of digital currency for U.S. federal income tax purposes is uncertain56% rewritten
75. 75Chief Counsel Memorandum 202316008 clarified that a taxpayer holding a digital asset does not have a realization event solely as the result of a protocol upgradeNew
76. 76Future developments regarding the treatment of digital currency for U.S. federal income tax purposes could adversely affect the value of the Shares
77. 77Future 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
78. 78A U.S. Tax-Exempt Shareholder may recognize “unrelated business taxable income” as a consequence of an investment in Shares
79. 79Shareholders could incur a tax liability without an associated distribution of the Fund
80. 80A hard “fork” of the Ethereum blockchain could result in Shareholders incurring a tax liability
81. 81Potential 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 Shareholders33% rewritten
82. 82Investment 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
83. 83Shareholders 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
84. 84Although 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
85. 85Coinbase 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 Shares32% rewritten
86. 86Shareholders may be adversely affected by the lack of independent advisers representing investors in the Fund
87. 87Shareholders 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
88. 88Risk Factors Related to ERISA