Franklin Ethereum Trust

The Franklin Ethereum Trust operates in the digital asset industry, specifically offering exposure to ether, the native token of the Ethereum blockchain. The filing describes the Ethereum network as a proof-of-stake blockchain that processes an average of 28.14 transactions per second during the second quarter of 2026 ¹. The industry is characterized by extreme price volatility, with ether losing approximately 12.2% of its value in mid-October 2025 during the October 2025 Flash Crash ², which involved liquidations of up to $20 billion in collateral ³. The digital asset market remains in a state of regulatory uncertainty, with the SEC, CFTC, and other agencies examining operations, and the filing notes that as of March 31, 2026, ether was the second largest digital asset by market capitalization of approximately 16,000 alternative digital assets tracked by CoinGecko.com ⁴.

The Fund faces competition from several competitor spot ether exchange-traded products already available in the market, as well as from direct investments in ether, ether futures-based products, and other digital asset investment vehicles. The filing names specific competitors including the Franklin Bitcoin ETF, Franklin Crypto Index ETF, Franklin XRP ETF, and Franklin Solana ETF, all sponsored by affiliates of the Sponsor ⁵. The Fund's competitive advantages include its low expense ratio of 0.19% ⁶ and its structure as a passive investment vehicle that removes obstacles associated with the complexities and operational burdens of direct ether investment. The Fund's ability to attract assets could be impaired to the extent competitors have a lower expense ratio. As of September 30, 2025, the aggregate market value of the registrant's shares held by non-affiliates was $91,611,000 ⁷, based upon the last reported sales price on the Cboe BZX Exchange.

The Fund generates revenue through a unitary fee structure, with the Sponsor's fee accruing daily at an annualized rate of 0.19% (i.e., 0.19%/365 days) of the daily net asset value of the Fund ⁸. In exchange for this fee, the Sponsor assumes ordinary fees and expenses incurred by the Fund, including fees charged by the Administrator, Marketing Agent, Custodians, Trustee, Cboe BZX Exchange listing fees, DTC maintenance and transaction fees, 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 ⁹. The Fund does not have any income and must sell ether to cover the Sponsor's fee and expenses not assumed by the Sponsor. The Fund issues and redeems Shares only in Creation Units of 50,000 Shares ¹⁰ or multiples thereof, and only Authorized Participants may purchase or redeem Creation Units. The Fund accepts only cash for creations and delivers only cash for redemptions, with the Fund selecting third-party Ether Trading Counterparties or the Prime Broker to execute ether transactions.

The Fund's sole investment objective is to reflect generally the performance of the price of ether before payment of the Fund's expenses and liabilities. The Fund holds only ether and cash and does not utilize leverage, derivatives or similar instruments. The ether held by the Fund is custodied by Coinbase Custody Trust Company, LLC in segregated cold storage vault balances, with a portion temporarily held in a Trading Balance with the Prime Broker, Coinbase Inc., for operational purposes related to creations, redemptions, and fee payments. The Fund's ether is valued using the CF Benchmarks Index, which is calculated on each Business Day by aggregating the notional value of ether trading activity across major ether spot exchanges, including Bitstamp, Kraken, itBit, Gemini, Coinbase, LMAX Digital, Crypto.com, and Bullish Exchange as of March 31, 2026 ¹¹. The Fund does not and will not hold or trade in commodity futures contracts regulated under the CEA and is not a commodity pool.

The Fund's only ordinary recurring expense is the Sponsor's fee at 0.19% ¹² of daily net asset value. Fees accrued for the fiscal year ended March 31, 2026 were $108,260 ¹³. The Fund also bears transaction costs, including Ethereum network fees, in connection with sales of ether to pay the Sponsor's fee and other expenses not assumed by the Sponsor. The Sponsor has agreed to pay ordinary legal fees and expenses of the Fund not in excess of $500,000 per annum ¹⁴, with any excess being the responsibility of the Fund. Extraordinary expenses, including legal claims, litigation costs, and expenses related to forks or airdrops, are not assumed by the Sponsor and are borne by the Fund. The Fund's organizational and offering costs are borne entirely by the Sponsor with no reimbursement sought.

The Fund commenced operations and issued Shares on a continuous basis during the fiscal year. As of March 31, 2026, the Fund had five Authorized Participants: Jane Street Capital, LLC, J.P. Morgan Securities LLC, Virtu Americas LLC, Citadel Securities LLC, and Goldman Sachs & Co. LLC ¹⁵. The Fund had entered into a Master Purchase and Sale Agreement for Digital Assets with JSCT, LLC (Jane Street) and a Liquidity Provider Agreement with Virtu Financial Singapore Pte., Ltd. to serve as Ether Trading Counterparties ¹⁶. The Fund also established a Trade Financing Agreement to borrow Trade Credits in the form of cash or ether from a Trade Credit Lender on a short-term basis to facilitate same-day settlement of ether transactions. The Fund 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 to secure repayment of Trade Credits ¹⁷. The Fund's ether custodian, Coinbase Custody Trust Company, LLC, maintains a commercial crime insurance policy through its parent Coinbase Global, Inc., with the Ether Custodian's liability limited to the greater of fees paid in the prior 12-month period or the value of supported digital assets on deposit, but in no event exceeding $100,000,000 per cold storage address ¹⁸. The Prime Broker's defense and indemnity obligations are limited to $2,000,000 in the aggregate ¹⁹.

For the fiscal year ended March 31, 2026, the Fund's financial performance was directly tied to the price of ether and the operational expenses of the Fund. The Fund's net asset value per Share fluctuated with the price of ether as measured by the CF Benchmarks Index. The Fund's only source of revenue is the appreciation of its ether holdings, and its expenses consist primarily of the Sponsor's fee of 0.19% ²⁰ of daily net asset value, which totaled $108,260 ²¹ for the fiscal year. The Fund's ether holdings decreased over time due to sales of ether to pay the Sponsor's fee and other expenses, resulting in a decline in the amount of ether represented by each Share. The Fund's cash position is maintained with The Bank of New York Mellon as Cash Custodian and temporarily with the Prime Broker in connection with creations and redemptions. The Fund's financial statements are prepared in accordance with GAAP, utilizing an exchange-traded price from the principal market for ether as of the measurement date, which may differ from the Index price used for daily NAV calculations.

The Fund's primary growth vector is the continued adoption of ether as an asset class and the increasing acceptance of exchange-traded products as a convenient means of gaining exposure to digital assets. The filing notes that the SEC has approved generic listing standards for commodity-based trust shares holding digital assets, and the Fund competes with several other spot ether exchange-traded products. The Fund seeks to attract assets by offering a low expense ratio of 0.19% ²² and by removing obstacles associated with direct ether investment, such as managing wallets and private keys. The Fund's ability to grow assets under management depends on its ability to maintain a competitive fee structure, adequate liquidity, and tight tracking of the ether price. The filing also notes that 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 to enhance the Fund's competitive positioning.

The Fund's growth is also tied to the ongoing development and adoption of the Ethereum network and its Layer 2 scaling solutions. The filing discusses the Dencun planned fork implemented on March 13, 2024, which introduced EIP 4844 to improve the economics of Layer 2s by reducing transaction fees ²³. The Pectra upgrade went live on May 7, 2025, increasing the maximum amount of ether that a validator can stake from 32 to 2,048 ²⁴, introducing account abstraction, and reducing security risks. The Fund's ability to attract and retain investors depends on the Ethereum network's ability to solve scaling challenges, maintain security, and remain competitive against alternative smart contract platforms such as Solana, Avalanche, Tron, BNB Coin, Polkadot, and Cardano ²⁵. The filing notes that as of May 6, 2026, ether transaction fees averaged $0.35 per transaction during the second quarter of 2026 ²⁶, down from $9.52 per transaction on April 30, 2023 ²⁷.

The Fund's margin and cost outlook is primarily determined by the fixed Sponsor's fee of 0.19% ²⁸ of daily net asset value. The Sponsor assumes most ordinary operating expenses, including Administrator fees, Custodian fees, Trustee fees, listing fees, SEC registration fees, audit fees, and up to $500,000 per annum in ordinary legal fees and expenses ²⁹. The Fund's cost structure is therefore largely predictable, with the primary variable being the net asset value of the Fund itself. Extraordinary expenses, such as litigation costs, legal fees in excess of $500,000 per year ³⁰, taxes, and expenses related to forks or airdrops, are not assumed by the Sponsor and would be borne by the Fund, potentially increasing the expense ratio. The Sponsor may also voluntarily assume legal fees and expenses in excess of the $500,000 per annum stipulation ³¹.

The Fund's operational outlook depends on the continued availability and performance of its key service providers. The Fund relies on Coinbase Custody Trust Company, LLC as Ether Custodian and Coinbase Inc. as Prime Broker for the safekeeping of ether and execution of ether transactions. The filing notes that the Prime Broker routes orders through Connected Trading Venues, which as of March 31, 2026 included Bitstamp, LMAX, Kraken, the exchange operated by the Prime Broker, and four non-bank market makers ³². The Fund also relies on The Bank of New York Mellon as Administrator, Transfer Agent, and Cash Custodian. The Sponsor maintains a Global Corporate Continuity Program overseen by the Business Recovery Governance Committee, which includes regular business impact analysis, development and testing of a Business Continuity Plan, and annual testing. The Sponsor has adopted the NIST cybersecurity framework and employs third-party firms for penetration testing and forensic analysis.

The Fund's capital allocation is limited to holding ether and cash. The Fund does not engage in R&D spending, capital expenditure, or share repurchase programs. The Sponsor's fee is the primary cost, and the Fund sells ether as needed to pay this fee and any expenses not assumed by the Sponsor. The Fund does not pay dividends, and the only distributions to Shareholders occur upon redemption of Creation Units or liquidation of the Fund. The Sponsor may, in its sole discretion, waive all or a portion of the Sponsor's fee for stated periods, but is under no obligation to do so. The Fund's only source of funds to cover liabilities is the sale of ether held by the Fund.

The filing identifies several structural headwinds that could constrain the Fund's growth and performance. The extreme volatility of ether prices is a primary risk, with the filing noting that ether lost approximately 12.2% of its value in mid-October 2025 during the October 2025 Flash Crash ³³, which involved liquidations of up to $20 billion in collateral ³⁴. The digital asset market remains subject to regulatory uncertainty, with the SEC, CFTC, and state regulators examining digital asset activities. The filing notes that on February 21, 2025, Bybit announced that more than $1.4 billion in ether had been stolen from its platform ³⁵, highlighting security risks in the ecosystem. The Fund also faces headwinds from the lack of a hard cap on ether supply, competition from alternative digital assets and smart contract platforms, and the potential for forks in the Ethereum network that could adversely affect the value of the Shares.

The filing identifies significant execution risks related to the Fund's operational model. The Fund's reliance on cash creations and redemptions, rather than in-kind transactions, introduces operational complexity and execution risk. The Fund depends on the availability of Trade Credits from the Trade Credit Lender to facilitate same-day settlement; if Trade Credits become unavailable or exhausted, there could be delays in buying or selling ether, and the execution price could deviate significantly from the Index price used to determine NAV. The Fund also faces concentration risk from its reliance on a limited number of Authorized Participants and Ether Trading Counterparties, with only five Authorized Participants as of March 31, 2026 ³⁶. The filing notes that the Fund's inability to facilitate in-kind creations and redemptions could result in the arbitrage mechanism failing to function efficiently, leading to premiums or discounts to NAV.

The Fund's value is directly tied to the price of ether, which has experienced extreme volatility, including a 12.2% decline in mid-October 2025 during the October 2025 Flash Crash that involved liquidations of up to $20 billion in collateral ³⁷. The Fund faces significant regulatory uncertainty, as a determination that ether is a security could force the Fund to liquidate at a disadvantageous time; the SEC has brought enforcement actions against digital asset platforms alleging unregistered securities exchanges, and the New York Attorney General has alleged ether is a security. The Fund relies on a limited number of service providers, with Coinbase Custody Trust Company, LLC serving as Ether Custodian and Coinbase Inc. as Prime Broker; the Ether Custodian's liability is capped at $100,000,000 per cold storage address ³⁸ and the Prime Broker's indemnity obligations are limited to $2,000,000 ³⁹, which may be insufficient to cover losses. The Fund's use of cash creations and redemptions, combined with reliance on Trade Credits, introduces operational risk; if Trade Credits become unavailable, delays in ether transactions could cause the Share price to diverge from NAV. The Fund also faces concentration risk from having only five Authorized Participants as of March 31, 2026 ⁴⁰, and the Ethereum network's proof-of-stake consensus mechanism remains relatively untested at scale, with the risk that a malicious actor controlling more than 33% of staked ether could temporarily impede block finality ⁴¹.

The Sponsor's message to Shareholders, as conveyed through the filing, emphasizes the Fund's role as a passive investment vehicle designed to provide convenient and cost-effective exposure to ether. The Sponsor highlights the Fund's low expense ratio of 0.19% ⁴² and the removal of operational burdens associated with direct ether investment, such as managing wallets and private keys. The Sponsor's strategic priorities for the period ahead include maintaining the Fund's competitive fee structure, ensuring the operational integrity of the creation and redemption process, and navigating the evolving regulatory landscape for digital assets. The Sponsor acknowledges the extreme volatility in digital asset prices and the regulatory uncertainty surrounding ether, but expresses confidence in the Fund's structure as a grantor trust that is not registered as an investment company under the Investment Company Act. The Sponsor also emphasizes its commitment to cybersecurity, noting the adoption of the NIST cybersecurity framework and the Global Corporate Continuity Program.