The cryptocurrency sector continues to evolve rapidly, attracting institutional interest and retail enthusiasm alike. Yet, for fund managers launching a crypto-focused investment vehicle, especially via private placement under Regulation D, proper risk disclosure isn’t just best practice — it’s a legal and fiduciary imperative.
A well-crafted Private Placement Memorandum (PPM) for a crypto fund must include a robust and specific Risk Factors section that outlines the various material risks investors may face. These disclosures protect the issuer from liability and give investors a clear-eyed understanding of what they’re getting into.
Here are the key categories of risk that a crypto fund should disclose:
 1. Regulatory Uncertainty
Crypto remains a legal grey zone in many jurisdictions.
- The SEC, CFTC, IRS, and global regulators may classify tokens differently (e.g., securities, commodities, or property).
- Potential changes in laws or enforcement priorities could impact fund operations, asset liquidity, or tax treatment.
- Disclosure should note the risk of assets being retroactively deemed securities, triggering registration or enforcement actions.
Example: “Certain digital assets held by the Fund may be deemed securities by regulatory authorities in the future, which could result in legal and financial liabilities.”
 2. Custody and Security Risks
Cryptographic keys must be securely stored. Even with third-party custodians, operational risk remains.
- Risk of theft, hacking, or loss of private keys
- Smart contract vulnerabilities (in DeFi assets)
- Lack of FDIC/SIPC protection
Example: “Loss of private keys could result in the permanent loss of digital assets with no recourse.”\
3. Extreme Volatility
Crypto assets are notorious for high price swings.
- Sudden and severe fluctuations in market value
- Illiquidity during periods of high volatility
- Impact on NAV calculation and redemptions
Example: “A sudden 50% drop in the value of a single digital asset could materially affect the Fund’s performance.”
 4. Counterparty Risk
Many crypto funds interact with exchanges, OTC desks, or DeFi protocols.
- Insolvency of centralized exchanges or custodians
- Operational failures or fraud at counterparties
- Protocol failures or “rug pulls” in DeFi positions
Example: “The Fund may incur substantial losses if a centralized exchange becomes insolvent or suspends withdrawals.”
5. Jurisdictional and Tax Risks
Cross-border holdings introduce complications.
- Different tax regimes for digital assets across jurisdictions
- Uncertain treatment of staking, airdrops, or forks
- Exposure to foreign regulatory enforcement
Example: “Changes in foreign tax policy could retroactively impact returns on staking income.”
6. Technological and Network Risks
The underlying blockchains themselves may have vulnerabilities.
- Software bugs, forks, or protocol upgrades
- Miner or validator centralization
- Chain reorganization or 51% attacks
Example: “A successful 51% attack on a network could compromise the integrity and value of assets held by the Fund.”
 7. Valuation and Accounting Uncertainty
Determining fair market value can be subjective.
- Lack of consistent pricing across exchanges
- Potential manipulation in thinly traded tokens
- No established GAAP or IFRS guidance for crypto assets
Example: “Due to fragmented markets, the reported NAV may not reflect the price at which assets could be realized.”
 8. AML/KYC and Illicit Use Risks
Crypto’s pseudonymity introduces compliance risks.
- Risk of unknowingly holding tainted assets
- Increased scrutiny from banking partners or regulators
- Reputational harm from association with illicit activity
Example: “The Fund may be exposed to enforcement risks if assets are later found to have been linked to unlawful activity.”
 9. Conflicts of Interest
These must be disclosed transparently.
- Dual roles of fund managers (e.g., managing multiple funds)
- Interests in projects the fund invests in
- Preferential terms for certain investors
Final Thoughts
The Risk Factors section of a crypto fund’s PPM must be tailored, specific, and not boilerplate. Courts and regulators scrutinize these disclosures for omissions and material misstatements. A proactive, transparent approach to risk disclosure not only ensures compliance — it builds trust with investors in a notoriously opaque market.
Need help drafting your PPM? we offer tailored solutions that meet your fund’s strategy and regulatory exposure.