Risk Disclosure

Xapo Bank Wealth: Risk Disclosure Notice

This Risk Disclosure Notice is provided by Xapo Bank Limited (“we”, “us” or “Xapo”) and provides Members with an overall description of the characteristics of the investment services and products available through the Wealth Account and important information about the associated risks. References to “you”, “yours” and “yours” refer to Xapo Members. 

By agreeing to the Xapo Bank Wealth Terms & Conditions you acknowledge that you have read this Risk Disclosure Notice and understand the risks applicable to the investment services. 

Xapo is authorised and regulated by the Gibraltar Financial Services Commission (“GFSC”). Unless otherwise defined herein, capitalised terms have the same meaning as in the Xapo Bank Wealth Terms & Conditions.

1. Introduction

THIS RISK DISCLOSURE NOTICE DOES NOT PURPORT TO DISCLOSE ALL THE RISKS OR OTHER RELEVANT CONSIDERATIONS OF ENTERING INTO TRANSACTIONS. YOU SHOULD REFRAIN FROM ENTERING INTO ANY SUCH TRANSACTIONS UNLESS YOU FULLY UNDERSTAND ALL SUCH RISKS AND HAVE INDEPENDENTLY DETERMINED THAT THE TRANSACTION IS SUITABLE AND APPROPRIATE FOR YOU. IF YOU ARE UNSURE ABOUT THE RISKS, WE STRONGLY SUGGEST THAT YOU SEEK INDEPENDENT PROFESSIONAL ADVICE AND ANY EVALUATION OF THE TRANSACTIONS SHOULD BE MADE ONLY AFTER SEEKING SUCH ADVICE.

Before deciding to transact in any investment services or products, you will need to have assessed the risks inherent in those investment services or products and in any related services and strategies (for the purposes of this Risk Disclosure Notice, referred to as “investments” and/or “products”). 

2. General Risks 

There are risks that apply generally to any investment in any financial instrument. These include but are not limited to the following:

1. No Advice:

Xapo’s investment services are provided on an execution only basis. We do not provide investment regulatory, tax legal or other professional advice in relation to any products. We sometimes provide factual information or research recommendations about a market, information about transaction procedures and information about the potential risks involved and how those risks may be minimised. However, any decision to use our investment products is made by you. You are responsible for managing your tax and legal affairs including making any regulatory filings and payments and complying with applicable laws and regulations. You should seek your own independent professional advice. 

2. No Solicitation:  

In accordance with applicable law, neither your agreement with Xapo, the Website nor the Xapo App should be regarded as a solicitation, promotion or advertisement of the services that we provide under your agreement with Xapo. Xapo only provides services when such services are initiated at the Member’s own exclusive initiative.

3. Capital Risk: 

Investments involve capital risk. The value of your investment may fall as well as rise and you may get back less than your initial investment, and in some cases, you may lose your entire initial investment. Past performance of an instrument is not an indication of its future performance. You should be financially prepared for losses before investing. 

4. Currency Risk: 

Where your instruments are denominated in currencies other than the default currency of your primary Xapo account (e.g., USD), fluctuations in foreign exchange rates may impact your profits and losses connected to your trading in such instruments. Hedging strategies to mitigate currency risk may not always be effective or available. 

5. Volatility Risk, Market Fluctuations and Monitoring your Positions:

We do not provide, nor can we control, the prices for the products you may buy or sell via the Wealth Account. The market price of your investments is influenced by a broad array of factors and can change rapidly and unexpectedly, meaning the value of those investments, and your related profits and losses on your positions, can also change rapidly and unexpectedly. Amongst other things, prices of investments can be subject to gapping (where the price of the Instrument opens significantly above or below the previous day’s closing price) and slippage (where the price an Instrument is executed at is different from the price to that which was quoted at the time the order was submitted), especially in periods of market volatility.

You have the sole responsibility of monitoring the value of the positions you hold, and you should ensure that you can access the Xapo App on an ongoing basis in order to do this.

6. Technical Risks:

Whilst we try to make the Xapo App available to you without interruption, we cannot guarantee that the Xapo App will always be available to you. In these circumstances, your orders may not be able to be submitted and you may not be able to monitor your positions via the Xapo App.

7. Tax:

You should be aware that various tax regimes may apply to your investments depending on your personal tax status and the rules and regulations in force from time to time. You have the sole responsibility of determining the relevant tax impact to your investments and you should consult an appropriate professional adviser if you have questions or doubts in this regard. Xapo does not provide tax advice.

8. Financial Resources:

You should ensure that you have appropriate financial resources to engage in the buying and selling of investments, and that you have the ability to bear any losses that may arise from your trading activity. You should not rely on being able to generate profits in order to pay down or pay off any credit or financing you have arranged for the purpose of buying and selling any investments. You should not enter into any borrowing agreements in order to fund your purchase of investments via the Xapo App.

9. Provision of Data:

We may provide financial and market data, news, analyst opinions, research reports, graphs or any other data or information (“Information”) to you via the Xapo App under licence from third party providers. Any Information we display via the Xapo App is for informational purposes without regard to your individual financial circumstances, objectives or particular needs. It is provided solely to enable you to make your own investment decisions and it is not intended to be and does not constitute a personal investment recommendation or personalised advice.

10. Legal and Regulatory Changes:

Changes to current legislation and regulations could give rise to changes in the price of and access to investments, which could impact your profits or losses. The impact of such legal and regulatory changes can be material and unexpected, and may impact certain companies, markets and jurisdictions more than others.

11. Default:

In the event of Xapo suffering an insolvency or financial default and not being able to meet its obligations, Xapo is a member of the Gibraltar Investor Compensation Scheme (“GICS”) which compensates 90% of the investment value up to a maximum of €20,000. GICS protects assets and money linked to investment business, but excludes money held in your Xapo Account, not in the Wealth Account. Whether you are able to claim depends on the type of business and your personal circumstances. 

Retail clients will benefit from the protection under the GICS in most cases. If you are a professional client you are not eligible to claim compensation under GICS. Further detail on GICS can be found on their website, please see here.

You may not be able to make a claim under the GICS in the event of the Third Party Broker’s (defined in Section 4 of this Risk Disclosure Notice)  default or insolvency. Any monies or assets held by the Third Party Broker are addressed by the SIPC Investor Protection Scheme, which provides coverage for claims up to $500,000, including a maximum of $250,000 for cash claims. Further information can be found at www.sipc.org.

3. Product specific risk disclosures 

Different products involve different levels of exposure to risk and, in deciding whether to trade in such products, you should be aware of the following non-exhaustive product specific risks which you may be exposed to in addition to the general risks outlined above. 

a. Shares 

Shares represent a portion of a company’s share capital. The extent of your ownership in a company depends on the number of shares you own in relation to the total number of shares in issue. Shares are bought and sold on exchanges and their values can go down as well as up. Fractional shares may not have the same rights or liquidity as full shares.

Investing in shares may be exposed to certain risks including, but not limited to, the following: 

1. Appropriateness: 

Shares are classified as ‘non-complex’ financial instruments. Consequently, we are not required to assess whether these investments are appropriate for you. This means you will not benefit from the protections provided under the GFSC’s rules regarding the assessment of appropriateness.

2. Insolvency Risk: 

You should be aware that the insolvency of a company may drastically reduce the value of its shares, potentially risking the loss of your entire investment. Typically ordinary shareholders rank lowest in the order of priority of repayment in the event of a company’s insolvency, meaning the company may have exhausted the value of its available assets in paying other creditors by the time it comes to paying its shareholders, increasing the risk that shareholders will not receive any money from the company for their shares.

3. No Guarantee of Rights: 

Whilst shares can often have rights to dividends and, in certain instances, the right to vote on certain matters at general meetings of the issuing company, you should not assume that you will be able to exercise these rights. The payment of dividends by a company is not guaranteed and you may not have the opportunity to exercise any voting rights attached to those shares.

4. Liquidity Risk:

All shares made available via the Xapo App are all admitted to trading on a regulated market, and in the event that you wish to sell your shares, a corresponding buyer of those shares must be found in the underlying market. Whilst certain shares can be very liquid, you should be aware that others, such as the shares of smaller companies or of companies located in other geographies or territories, can be less liquid and it is not guaranteed that there will be a buyer for your shares. Therefore, you may not be able to realise your investment or realise it at its actual market value. In some circumstances, such as instances of market volatility or where trading in a particular shares or on a particular underlying market has been suspended or otherwise restricted, it may not be possible to find a buyer for your shares, meaning you will not be able to liquidate your positions.

Shares, which are fractional shares, cannot be traded on regulated markets (such as public exchanges) and as such may be subject to greater liquidity risk than full shares.

If you close your Wealth Account, all positions in shares will need to be sold via the Xapo App to or through the Third Party Broker, potentially resulting in commission charges. Positions in fractional shares may not be able to be transferred to another broker (except in the event of the Third Party Broker’s insolvency) and may need to be sold via the Third Party Broker.

b. Funds

Funds are collective investment vehicles which pool the funds of investors in order to make investments in accordance with the investment objectives of the fund. Investors can make an investment in funds by purchasing a unit, share or interest in the fund (collectively “units”). Funds can be either open-ended or closed-ended. Open-ended funds are valued on the basis of the value of the assets held. Closed-ended funds are valued on the basis of what investors are prepared to pay/sell. There are many different types of funds available and they may be onshore or off-shore, regulated or unregulated. 

Dealing in any type of fund involves risks. Some fund structures are more exposed to risk than others due to, amongst other things, the markets they invest in, the nature of their assets and the extent of their leverage (if any). Investors and potential investors should read the risks disclosed in the relevant fund’s prospectus or offering memoranda and/or in the case of retail clients in the relevant key investor information document (KIID).

Investing in funds may expose you to certain risks including, but not limited to, the following: 

1. Market Risk: 

The value of a unit in a fund depends on the value of the assets it holds. If general market conditions deteriorate, it is likely that the value of the investment in the fund will also deteriorate. 

2. Liquidity Risk: 

Open-ended funds may not be able to liquidate their assets and return funds to investors in the event that there is poor liquidity in the market generally or in the specific sector in which the fund invests. Ongoing costs to service those investments could lead to increased losses or reduced products for investors in the fund. 

Closed-ended funds can be subject to risks of low trading and therefore provide limited liquidity, making it difficult for an investor to realise its investment. 

3. Interest Rate Risk:

A leveraged fund will be exposed to interest rate rises. This could reduce the returns that investors receive, or even lead to losses. 

4. Country Risk: 

The value of a foreign investment may decline because of political changes or instability in the country where the foreign investment was issued.

5. Counterparty and Service Provider Risk: 

The insolvency of any institution providing services to the fund, such as safekeeping of assets or acting as counterparty to the fund, may expose the fund to financial loss. 

6. Derivatives Risk: 

A fund may utilise instruments in the form of warrants, futures, options, forward contracts and swaps to seek to enhance investment returns. While this can potentially have the effect of enhancing the fund’s performance, it can also be detrimental if there are losses on the derivatives. 

7. Operational Risk: 

An investment in a fund can involve operational risks arising from a wide range of possible operational errors, including system breakdowns, human errors or external events and errors caused by service providers such as the investment manager, which may affect the value of the fund and (if applicable) its ability to pay redemptions within the scheduled timeframe. 

8. Limited Diversification Risk:

Unless the fund is subject to investment restrictions and diversification requirements, the number and diversity of investments held by a fund may be limited.

9. Restrictions on Subscription and/or Redemptions: 

An investor in a fund’s units may be prevented from subscribing and redeeming such units, either at the official net asset value (for example, as a result of the imposition of any charges by the fund) or at all, or at the prescribed notice period, timing cut-offs and minimum/maximum amount in respect of subscriptions and redemptions for the fund’s units may be changed. 

10. Compulsory Redemption Risk: 

The fund may compulsorily redeem the units upon the occurrence of certain events (for example, if, following the insolvency of the investment manager, the fund becomes unable to fulfil its investment objectives). 

11. Performance Risk:

No assurance can be given relating to the present or future performance of a fund and any underlying asset or instrument in which the fund may invest, that any analytical model used by the fund will provide to be correct or that any assessments of the short-term or long-term prospects, volatility and correlation of the types of investments in which a fund has or may invest will prove accurate. 

12. Changes to Portfolio:

The composition of the fund’s portfolio of investments may change from time to time. Such changes may have an impact on the value of the fund.

13. Sub-funds Segregation:

The sub-funds of a fund may be segregated as a matter of the law of the fund’s home jurisdiction and, as such, the assets of one sub-fund will not be available to satisfy the liabilities of another sub-fund. However, the fund may operate or have assets held on its behalf or be subject to claims in other jurisdictions other than its home jurisdiction which may not necessarily recognise such segregation. There can be no guarantee that the courts of any jurisdiction outside its home jurisdiction will respect the above limitations on liability. 

14. Cyber Security Risk: 

Where a custodian or other counterparty, in which a fund may invest or custody its assets, is exposed to cyber security breaches, this could result in material adverse consequences for the counterparty, potentially causing the fund’s investment to lose value. 

15. Regulation Risk:

Some funds may not be regulated in the jurisdiction of their establishment, or elsewhere, meaning that certain investor protections or restrictions on activity applicable, in a given jurisdiction, to a regulated fund may not apply to such funds.

16. Management Risk:

The operation and performance of a fund will be dependent upon the performance of the fund's investment manager. Generally a fund will rely upon the investment manager to make investment decisions consistent with the fund's investment objectives and the investment manager, in turn, will be dependent upon its key personnel carrying out their roles with due care and skill. The investment manager and its affiliates (if any) may be in a position to provide services to other clients which conflict directly or indirectly with the activities of the fund and could prejudice investment opportunities available to, and investment returns achievable by, the fund. If the agreement between the fund and the investment manager is terminated, the fund may not be able to find a suitable replacement for the investment manager, potentially leading to losses for the fund and periods of fund underperformance.

17. Rights of Participation:

Investors in funds, generally, have very limited rights of participation in respect of their units and the power to make all decisions, with the consent of investors, is usually delegated to the investment manager of the fund.

18. Strategy:

Some funds specialise in particular asset classes or geographical sectors, meaning risk may be concentrated in the relevant asset classes or geographical sectors. Some funds choose strategies which the market would regard as high risk. The investment strategy of a fund may be such that the fund faces strong competition for the purchase of assets from other investors, thereby reducing the investment opportunities available to the fund.

19. Fees:

Some funds charge an annual management fee. Usually this will be taken from the income generated. If insufficient income is generated by the fund to cover the management fee, the balance may be deducted directly from the capital of the fund which will reduce capital growth.

20. Crypto Asset Referenced Funds: 

“Crypto Assets” is a broad term and can cover different products including well-known digital tokens such as, but not limited to, Bitcoin and Ether. Crypto Assets are not issued or backed by a central bank or other authority and may be unregulated in one or more jurisdictions. Funds that are linked to the performance of Crypto Assets, including, without limitation, ETFs and AIFs (“Linked Products”) can be complex and non-standardised, meaning the exact nature of their risk will be subject to the particular terms of the documentation governing them. As this is a relatively new market, changes in policy and regulations may affect prices and valuations of Linked Products significantly. Linked Products are subject to extreme volatility, are high-risk and speculative investments and are subject to inherent difficulties in reliable valuation of the underlying Crypto Assets which may result in losses. 

You should make inquiries about the risks referred to in the Linked Product offering documentation including any prospectus or similar offering memoranda, and not purchase such Linked Product before being certain that you fully understand all risks. 

The risks associated with investments in Linked Products, include, but are not limited to: 

1. Market Risk: Various market factors may cause the Linked Products and the Crypto Assets to underperform (compared to other investments or strategies) including global, or regional political or financial events, regulatory events or statements, and the trading activities of a wide range of market participants. Such factors may result in reduced liquidity, demand form, and supply of the Crypto Assets which may result in losses in the Linked Products. 

2. Operational Risk: Crypto Assets and Linked Products are subject to risks associated with the use and technical operation of digital networks, the operation of which may be affected by a variety of factors including technological refinements, disruptions to infrastructure, flaws in the underlying protocols or cryptography, cyber-attacks and network congestion. Such factors may result in reduced liquidity, demand for, and supply of the Crypto Assets which may result in losses. 

3. Fraud Risk: If there is a fraud in relation to the underlying Crypto Assets, you may be at risk of losing your investment. 

4. Credit Risk: Investment in a Linked Product is likely to be impacted by the creditworthiness of the Crypto Asset issuing entity and carries the risk that the issuing entity may not be able to meet its obligations as contracted by the transaction. As such, any reduction of the creditworthiness of that entity is likely to result in a reduction of the value of Crypto Assets issued by it. 

5. Exchange Risk: Crypto Assets are exposed to risks similar to currency risk in that the value of the Crypto Assets being exchanged for fiat currency will depend on market supply and demand and can have a particularly significant effect on the volatility and the market value of the Linked Products. Your returns could be reduced, or losses incurred, due to such fluctuations. 

6. Changes in Law Risk: The value of Linked Products and Crypto Assets may be affected by political and economic factors, including government action. A change in law could negatively affect the underlying Crypto Asset (including the ability to recover in respect of arrears/defaults), investors, the issuer, and/or the respective business and operations of the other parties in any Linked Products or the Crypto Assets structure. Crypto Assets are also expressly prohibited in certain jurisdictions by their competent regulatory authority.

c. Exchange Traded Funds

Exchange traded funds (“ETFs”) are funds that trade during market hours like a share on the secondary market (i.e. through an exchange). Each ETF seeks to track a benchmark and holdings are not altered in rising or falling markets, so when the benchmark falls in value, the ETF will too. ETFs can be physical (where the fund invests directly in the underlying assets that comprise the index) or synthetic (where the fund gains exposure to the index by entering into a swap agreement with a counterparty).

The risks of each ETF are dependent on the benchmark the ETF seeks to track (i.e. what the ETF itself is invested in). For example, ETFs which invest in emerging markets are often subject to higher levels of volatility than those invested in more established markets and the price of ETFs which invest in bonds will likely change if interest rates do. ETFs that focus on a specific country or sector may display greater volatility than those tracking the wider market and so should be considered as higher risk than more diversified ETFs. However, there are no guarantees that an ETF will have the same characteristics as the benchmark index and the returns will vary from that of the benchmark index. 

In addition to those risks outlined above in the “Funds” section, investments in ETFs may expose you to certain risks, including, but not limited to, the risks set out below: 

1. Appropriateness: 

ETFs that are made available by us are classified as ‘non-complex’ financial instruments. Consequently, we are not required to assess whether these investments are appropriate for you. This means you will not benefit from any protections resulting from the assessment of appropriateness.

2. Market Risk: 

Typically, an ETF will seek to replicate a stock market index, market sector, commodity or other basket of assets. Accordingly, the investor is exposed to the market risk of the underlying assets. 

3. Performance Risk: 

Investors in an ETF may rely on the manager to track the performance of the underlying indices or assets, or the ETF may track the underlying assets passively (i.e. without the active involvement of the manager). In practice, the ETF’s performance will differ from the performance of those indices or assets. More specifically, this may be the result of an ETF tracking error (being the difference between the returns of the ETF and its reference index or asset) may occur owing to a number of factors including rebalancing, restrictions/limitations (e.g. emerging market accessibility), method of replication and the costs/expense ratio (higher costs may lead to a greater tracking error) Therefore, an investor may receive lower returns than it would have had if it invested directly in those underlying. 

4. Authorised Participant (“AP”) Concentration Risk:  

In the ETF market, only an authorised participant is permitted to engage in the creation/redemption of transactions directly with the ETF. Since the ETF may only permit for a limited number of institutions to act as an AP, there is a risk that, where an AP exits the business, or is otherwise unable to proceed with the creation/redemption transactions, it was instructed to carry out, and no other AP is able to step in to give effect to such creation/redemption transactions, the ETF units may be more likely to trade at a premium price or a discount to the net asset value of the index or assets it seeks to replicate, and as a result the ETF may be subject to trading halts and/or delisting. 

5. Index-linked Risk: 

ETFs tracking an index aim to replicate its performance, but index administrators (public or private entities) control the index and may modify its components, methodology, or suspend calculations, which can negatively impact the ETF's value. These changes may not consider investor interests.

Additionally, index administrators or other entities may trade index components or use them for hedging, influencing prices and the index level. Errors in index calculation or lack of observable prices for assets can lead to discrepancies between the published and true index value, potentially causing significant losses.

An index may not fully represent the market it tracks, and flaws in its construction or methodology could affect returns. As the index is a notional portfolio, returns from an ETF may differ from those of directly investing in the underlying assets. Investors have no direct claim on the assets that comprise the index.

6. Suspension of Trading: 

ETFs may be suspended from trading at any time in accordance with applicable rules and regulations of the relevant stock exchange(s). This may result in reduced liquidity or a reduction in the value of the ETF. It is also possible that potential market disruptions (e.g. exchange disruptions/trading suspension/early closure) could also result in a suspension of trading. 

7. Liquidity Risk:

In the event that you wish to sell your ETFs, a corresponding buyer of those ETFs must be found in the underlying market. Whilst certain ETFs can be very liquid, you should be aware that others can be less liquid and it is not guaranteed that there will be a buyer for your ETFs. Therefore, you may not be able to realise your investment or realise it at its actual market value. In some circumstances, such as instances of market volatility or where trading in a particular ETFs or on a particular underlying market has been suspended or otherwise restricted, it may not be possible to find a buyer for your ETFs, meaning you will not be able to liquidate your positions.

If you close your Wealth Account, all positions in ETFs will need to be sold via the Xapo App to or through the Third Party Broker, potentially resulting in commission charges. 

d. Alternative Investment Funds 

Alternative Investment Funds (“AIFs”) are vehicles that pool capital from investors and invest it in a wide range of asset classes, including, but not limited to, private equity, hedge funds, venture capital, real estate and structured credit. Unlike Undertakings for Collective Investment in Transferable Securities, which are subject to strict regulatory constraints, AIFs have a great flexibility in their investment strategies and asset selection (UCITS). 

In addition to those risks outlined above in the “Funds” section, investments in an AIF may be expose you to certain risks, including, but not limited to, the following:

1. Appropriateness: 

AIFs are classified as ‘complex’ financial instruments. Consequently, if you are categorised as a retail client, where we make AIFs available to you we are required to make an assessment of whether AIFs are appropriate for you, and to warn you if, on the basis of information you provide to us, that they are not appropriate. We will do this before you are able to invest in an AIF. Any decision to invest in an AIF remains yours. 

As part of this assessment we will ask you for information about your financial assets, earnings and experience. We do not monitor on your behalf whether the amount of funds you have sent to us or your profits or losses are consistent with that information, nor do we independently verify your experience beyond the statements you make to us. It is up to you to assess whether your financial resources are adequate for your financial activity with us and your risk appetite in the products and services you use.

If you are categorised as a professional client, we are allowed to assume that you have the necessary level of experience and knowledge to transact in AIFs. You are responsible for informing us if you no longer meet the criteria to be considered a professional client.

2. Asset Allocation: 

AIFs can invest in a very wide range of investments. Some AIFs will invest in highly speculative or very illiquid assets; this may increase the risk of losing some or all of the investment in the AIF or making it difficult to realise the value of the investment.

3. Fees: 

The fees charged by AIFs can be higher than other types of funds because the fees may include a performance fee or allocation based on a significant percentage of the AIFs net appreciation. Because of the existence of a performance fee, AIF managers may be motivated to make riskier investments that have the potential for significant growth in value.  

4. Leverage Risk: 

AIFs can be highly leveraged. This means that small decreases in the value of the investments they hold can have a significant impact on the value of the fund.

5. Liquidity Risk: 

Some AIFs have lock-up periods or may otherwise be illiquid, so investors may have difficulties realising their investment. 

6. Limited Diversification Risk: 

AIFs may not be subject to investment restrictions and diversification requirements, and therefore they may have limited diversification meaning that an investor may be highly exposed to poor market conditions in the relevant sector. 

7. Transferability and Withdrawal:

Units in AIFs may not be readily redeemable or transferable or there may not be a market for such units. In such cases, an investor may have to hold his units until such time as the fund is wound up or a secondary market develops for those units and this may involve the investor holding his units for a substantial period of time. If the fund is an open ended fund, restrictions may apply to the redemption of the units that may result in an investor being unable to liquidate his investment in the fund at the time of his choosing. There may also be fees payable on redemption of units. The units in some funds may be listed on a stock market. As a result, the price will fluctuate in accordance with supply and demand and may not reflect the underlying net asset value of the units.

In certain circumstances, such as but not limited to adverse market conditions or at the discretion of the AIF manager, subscriptions or redemptions may be suspended or subject to limits (commonly known as “redemption gates”). This could delay the execution of your order or result in your order being processed at a later date.

8. Leverage:

Some AIFs may borrow funds under credit facilities in order to satisfy redemption requests, pay certain organisational expenses and finance the acquisition of investments. As such, leverage exposes the fund to capital risk and interest costs that may reduce the value of an investor's investment in the AIF.

9. Audit Holdbacks 

Some AIFs may apply audit holdbacks which refers to the temporary retention of a portion (often between 5%-10%) of an investor’s redemption proceeds by a fund. This retained amount is used to cover potential liabilities, adjustments, or discrepancies that may arise during the audit process. The holdback is typically released to investors after the audit is completed and all financial matters are settled. 

Audit holdbacks pose a liquidity risk to investors, as a portion of investors’ redemption proceeds may be temporarily withheld by the fund. This can delay the receipt of full proceeds, affecting investors’ ability to meet financial obligations or reinvest those funds. Additionally, the amount withheld may vary and remain uncertain until the audit is complete, prolonging financial uncertainty and settlement timelines.

10. Performance History: 

AIFs may have little or no operating history or performance and may use hypothetical or pro forma performance which may not reflect actual trading done by the manager or advisor. Therefore, such history or performance should be reviewed carefully. Investors should not place undue reliance on pro forma or hypothetical performance. AIFs and their managers/advisors may rely on the trading expertise and experience of third-party managers or advisors; the identity of which may not be disclosed to investors.

11. Safekeeping: 

As part of the services we provide, we may register your AIF units in our name, in the name of a nominee company owned or controlled by us or in the name of a third-party sub-custodian where necessary. Where required under applicable laws and regulations, your units will be segregated from our own assets and will be held in a manner designed to protect your beneficial ownership rights in the event of the insolvency of the firm, nominee or sub-custodian. 

If the firm, nominee or sub-custodian becomes insolvent, you may face delays or difficulties in recovering your units. While we take steps to mitigate this risk, including the selection of reputable service providers, it cannot be entirely eliminated. 

Units registered in the name of the firm, nominee or sub-custodian may be commingled with units of other clients. While records are maintained to distinguish your assets, there is a risk that you may not receive the full value of your units if there is a shortfall in the pool of assets held by the firm, nominee or sub-custodian. 

Holding units through the firm, nominee or sub-custodian includes operational dependencies. Errors, delays, or losses arising from operational failures, fraud or negligence may adversely affect the safekeeping of your units. 

12. Uncertainty of Pricing at the Time of Order:

When you place an order to subscribe or redeem units in an AIF, the exact price at which your order will be executed may not be available or clear at the time of placing the order. This is because the subscription or redemption price of units is typically based on the AIFs net asset value (NAV), which is calculated in accordance with the AIF’s valuation policies and procedures. The NAV is usually determined at the close of the relevant subscription or redemption day, after all underlying asset valuations are finalised. Your order will be executed based on the NAV determined on the applicable subscription or redemption day. As the NAV is calculated after the order is placed, you will not know the exact price at which your transaction will be executed when submitting your order. The NAV may be influenced by fluctuations in the value of the underlying assets of the AIF, market conditions, and other factors, leading to potential differences between the price you have anticipated and the actual execution price potentially resulting in financial outcomes that are unfavourable to you.

13. Subscription and Redemption Timeframes:

Subscription and redemption orders for units in an AIF must be submitted in accordance with the requirements and timeframes specified in the AIF’s offering documents, such as prospectus or offering memorandum. These timeframes define cut-off dates and times by which orders must be received for processing on the next subscription or redemption day. If an order does not comply with the requirements set by the AIF or is not received by the specified cut-off time the order may be cancelled requiring you to submit a new order in line with the applicable timeframes or alternatively the order may be automatically rolled over for processing on the subsequent subscription or redemption day, depending on the AIF’s policies. Orders received after the cut-off time will not be backdated to the missed subscription or redemption day and any subsequent order execution will be based on the NAV applicable to the future processing date meaning that the NAV at which the order is executed may differ significantly from the NAV you anticipated, due to market movements or changes in the value of the AIF’s underlying assets.

4. Third Party Broker 

We have partnered with a third-party – DriveWealth LLC (the “Third Party Broker”) – in order to make shares and ETFs available to you. The Third Party Broker is registered with the U.S. Securities and Exchange Commission as a broker-dealer and is registered with the Financial Industry Regulatory Authority in the United States. You should review the Third Party Broker’s risk disclosures carefully. These disclosures are essentially for understanding the protections (or lack thereof) under U.S. regulations.

Xapo Bank transmits all orders to buy and sell shares and ETFs to the Third Party Broker in order to carry out the execution of the same in accordance with Xapo’s Member Order Transmission Policy.  

The Third Party Broker will arrange for the clearing and settlement of transactions entered into by you relating to shares and ETFs. The Third Party Broker will also custody the shares and ETFs on your behalf. 

The provision of shares and ETFs is dependent on the Third Party Broker and you will need to enter various contractual agreements with the Third Party Broker directly in order to enter into any transactions relating to shares and ETFs (the “Third Party Broker Contracts”). We have no control over the content of the Third Party Broker Contracts or the actions that the Third Party Broker may take under the Third Party Broker Contracts and the taking of such actions by the Third Party Broker may impact your ability to access and use their services and/or the functionality available to you relating to the shares and ETFs services.

The Third Party Broker has made available to you a number of risk disclosures that relate to a variety of matters connected to shares and ETFs. We have not repeated the content of those risk disclosures here and you will need to read the disclosures made by the Third Party Broker carefully prior to placing any order to buy or sell shares and ETFs. If you are in any doubt about the risks detailed in the disclosures made by the Third Party Broker, you should seek professional advice.

The instruments that the Third Party Broker holds for you will be held in accordance with local regulatory requirements applicable to the Third Party Broker and that service will be governed by the Third Party Broker Contracts. The Third Party Broker will not hold your instruments in accordance with GFSC rules so will not directly offer you any protections afforded by such GFSC rules.

In the event of an insolvency of the Third Party Broker or any other brokers involved in executing your orders, this may result in your positions being liquidated without your consent or transferred to another broker. In such circumstances, we will seek to provide you with as much additional information as we can relating to the treatment of your existing positions as and when we obtain it, but please be aware, you could lose the value of your investment.

In the event of the Third Party Broker’s insolvency, any process for the recovery of any instruments held by the Third Party Broker on your behalf may not be governed by Gibraltar law and this may impact the speed and manner with which your instruments will be returned to you and whether you are able to receive your assets back or otherwise accept any available payments in cash.