cane_424b3
Filed Pursuant to Rule
424(b)(3)
Registration No.
333-248545
Teucrium Sugar
Fund
22,825,000
Shares
Teucrium Sugar Fund (the “Fund” or
“Us” or “We” or “CANE”) is
designed to provide investors with a cost-effective means to gain
price exposure to the sugar market for future delivery. The Fund
issues shares (“Shares”) that trade on the NYSE Arca
stock exchange (“NYSE Arca”) under the symbol
“CANE” and that can be purchased and sold by investors
through their broker-dealer. The Fund’s investment objective
is for changes in the Shares’ NAV to reflect the daily
changes of the price of sugar for future delivery, as measured by
the Fund’s Benchmark (as defined below). Under normal market
conditions, the Fund invests in sugar futures contracts and cash
and cash equivalents. The sponsor to the Fund is Teucrium Trading,
LLC (the “Sponsor”), which receives a management fee.
The principal office address and telephone number of both the Fund
and the Sponsor is Three Main Street, Suite 215, Burlington,
Vermont 05401 and (802) 540-0019.
While most investors will purchase and sell
Shares through their broker-dealer, the Fund continuously offers
creation baskets consisting of 25,000 Shares (“Creation
Baskets”) at their net asset value (“NAV”) to
certain parties who have entered into an agreement with the Sponsor
(“Authorized Purchasers”). Authorized Purchasers, in
turn, may sell such Shares, which are listed on NYSE Arca, to the
public at per-Share offering prices that are expected to reflect,
among other factors, the trading price of the Shares on the NYSE
Arca, the NAV of the Fund at the time the Authorized Purchaser
purchased the Creation Baskets and the NAV at the time of the offer
of the Shares to the public, the supply of and demand for Shares at
the time of sale, and the liquidity of the markets for sugar
futures contracts in which the Fund invests. A list of the
Fund’s Authorized Purchasers as of the date of this
Prospectus can be found under “Plan of Distribution –
Distributor and Authorized
Purchasers,” on page 43. The prices of Shares offered
by Authorized Purchasers are expected to fall between the
Fund’s NAV and the trading price of the Shares on the NYSE
Arca at the time of sale. The Fund’s Shares may trade in the
secondary market on the NYSE Arca at prices that are lower or
higher than their NAV per Share.
This is a best efforts offering; the distributor,
Foreside Fund Services, LLC (the “Distributor”), is not
required to sell any specific number or dollar amount of Shares but
will use its best efforts to sell Shares. An Authorized
Purchaser is under no obligation to purchase Shares. This is
intended to be a continuous offering that will terminate on October
2, 2023 unless suspended or terminated at any earlier time for
certain reasons specified in this prospectus or unless extended as
permitted under the rules of the Securities Act of 1933.
See “Prospectus Summary – The Shares” and
“Creation and Redemption of Shares – Rejection of
Purchase Orders” below.
Investing in the
Fund involves significant risks. See “What Are the Risk
Factors Involved with an Investment in the Fund?” beginning
on page 12. The Fund is not a mutual fund registered
under the Investment Company Act of 1940 and is not subject to
regulation under such Act.
NEITHER THE
SECURITIES AND EXCHANGE COMMISSION (“SEC”) NOR ANY
STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE
SECURITIES OFFERED IN THIS PROSPECTUS OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Teucrium Sugar Fund is a commodity pool and
Teucrium Trading, LLC is a commodity pool operator subject to
regulation by the Commodity Futures Trading Commission and the
National Futures Association under the Commodity Exchange Act
(“CEA”).
THE COMMODITY
FUTURES TRADING COMMISSION HAS NOT PASSED UPON THE MERITS OF
PARTICIPATING IN THIS POOL NOR HAS THE COMMISSION PASSED ON THE
ADEQUACY OR ACCURACY OF THIS DISCLOSURE
DOCUMENT.
This prospectus
is in two parts: a disclosure document and a statement of
additional information. These parts are bound together, and both
contain important information.
Thank you for your interest
in the Teucrium Sugar Fund.
The date of this prospectus is May 1,
2021.
COMMODITY FUTURES
TRADING COMMISSION
RISK DISCLOSURE
STATEMENT
YOU SHOULD
CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU TO
PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD
BE AWARE THAT COMMODITY INTEREST TRADING CAN QUICKLY LEAD TO LARGE
LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY
REDUCE THE NET ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE
OF YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS
ON REDEMPTIONS MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR
PARTICIPATION IN THE POOL.
FURTHER,
COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR
MANAGEMENT, AND ADVISORY AND BROKERAGE FEES. IT MAY BE
NECESSARY FOR THOSE POOLS THAT ARE SUBJECT TO THESE CHARGES TO MAKE
SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF
THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A
COMPLETE DESCRIPTION OF EACH EXPENSE TO BE CHARGED THIS POOL AT
PAGE 38 AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK
EVEN, THAT IS, TO RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, AT
PAGE 9.
THIS BRIEF
STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS NECESSARY
TO EVALUATE YOUR PARTICIPATION IN THIS COMMODITY POOL.
THEREFORE, BEFORE YOU DECIDE TO PARTICIPATE IN THIS COMMODITY POOL,
YOU SHOULD CAREFULLY STUDY THIS DISCLOSURE DOCUMENT,
INCLUDING A DESCRIPTION OF THE PRINCIPAL RISK FACTORS OF THIS
INVESTMENT, AT PAGE 7.
YOU SHOULD ALSO
BE AWARE THAT THIS COMMODITY POOL MAY TRADE FOREIGN
FUTURES OR OPTIONS CONTRACTS. TRANSACTIONS ON MARKETS LOCATED
OUTSIDE THE UNITED STATES, INCLUDING MARKETS FORMALLY LINKED TO A
UNITED STATES MARKET, MAY BE SUBJECT TO REGULATIONS WHICH OFFER
DIFFERENT OR DIMINISHED PROTECTION TO THE POOL AND ITS
PARTICIPANTS. FURTHER, UNITED STATES REGULATORY AUTHORITIES
MAY BE UNABLE TO COMPEL THE ENFORCEMENT OF THE RULES OF REGULATORY
AUTHORITIES OR MARKETS IN NON-UNITED STATES JURISDICTIONS WHERE
TRANSACTIONS FOR THE POOL MAY BE
EFFECTED.
SWAPS
TRANSACTIONS, LIKE OTHER FINANCIAL TRANSACTIONS, INVOLVE A VARIETY
OF SIGNIFICANT RISKS. THE SPECIFIC RISKS PRESENTED BY A PARTICULAR
SWAP TRANSACTION NECESSARILY DEPEND UPON THE TERMS OF THE
TRANSACTION AND YOUR CIRCUMSTANCES. IN GENERAL, HOWEVER, ALL SWAPS
TRANSACTIONS INVOLVE SOME COMBINATION OF MARKET RISK, CREDIT RISK,
COUNTERPARTY CREDIT RISK, FUNDING RISK, LIQUIDITY RISK, AND
OPERATIONAL RISK.
HIGHLY CUSTOMIZED
SWAPS TRANSACTIONS IN PARTICULAR MAY INCREASE LIQUIDITY RISK, WHICH
MAY RESULT IN A SUSPENSION OF REDEMPTIONS. HIGHLY LEVERAGED
TRANSACTIONS MAY EXPERIENCE SUBSTANTIAL GAINS OR LOSSES IN VALUE AS
A RESULT OF RELATIVELY SMALL CHANGES IN THE VALUE OR LEVEL OF AN
UNDERLYING OR RELATED MARKET FACTOR.
IN EVALUATING THE
RISKS AND CONTRACTUAL OBLIGATIONS ASSOCIATED WITH A PARTICULAR SWAP
TRANSACTION, IT IS IMPORTANT TO CONSIDER THAT A SWAP TRANSACTION
MAY BE MODIFIED OR TERMINATED ONLY BY MUTUAL CONSENT OF THE
ORIGINAL PARTIES AND SUBJECT TO AGREEMENT ON INDIVIDUALLY
NEGOTIATED TERMS. THEREFORE, IT MAY NOT BE POSSIBLE FOR THE
COMMODITY POOL OPERATOR TO MODIFY, TERMINATE, OR OFFSET THE POOL'S
OBLIGATIONS OR THE POOL'S EXPOSURE TO THE RISKS ASSOCIATED WITH A
TRANSACTION PRIOR TO ITS SCHEDULED TERMINATION
DATE.
TEUCRIUM SUGAR
FUND
TABLE OF
CONTENTS
|
Page
|
PART ONE –
DISCLOSURE DOCUMENT
|
3
|
PROSPECTUS
SUMMARY
|
6
|
Principal Offices of
the Fund and the Sponsor
|
6
|
Breakeven
Point
|
6
|
Operation of the
Fund
|
6
|
Principal Investment
Risks of an Investment in the Fund
|
7
|
Determination of
NAV
|
8
|
Defined
Terms
|
8
|
Breakeven
Analysis
|
9
|
The
Offering
|
10
|
WHAT ARE THE RISK
FACTORS INVOLVED WITH AN INVESTMENT IN THE
FUND?
|
12
|
Risks Associated
with Investing Directly or Indirectly in
Sugar
|
12
|
The Fund’s
Operating Risks
|
16
|
Risk of Leverage and
Volatility
|
23
|
Over the counter
Contract Risk
|
24
|
Risk of Trading in
International Markets
|
25
|
Tax
Risk
|
25
|
THE
OFFERING
|
27
|
The Fund in
General
|
27
|
The
Sponsor
|
27
|
Prior Performance of
the Fund
|
30
|
The
Trustee
|
31
|
Operation of the
Fund
|
32
|
Futures
Contracts
|
34
|
Over the counter
Derivatives
|
36
|
The Fund’s
Investments in Cash and Cash Equivalents
|
36
|
Other Trading
Policies of the Fund
|
36
|
Benchmark
Performance
|
37
|
The Sugar
Market
|
38
|
The Fund’s
Service Providers
|
40
|
Form of
Shares
|
42
|
Transfer of
Shares
|
42
|
Inter-Series
Limitation on Liability
|
42
|
Plan of
Distribution
|
43
|
Calculating
NAV
|
44
|
Creation and
Redemption of Shares
|
45
|
Secondary Market
Transactions
|
48
|
Use of
Proceeds
|
48
|
The Trust
Agreement
|
49
|
The Sponsor Has
Conflicts of Interest
|
51
|
Interests of Named
Experts and Counsel
|
52
|
Provisions of
Federal and State Securities Laws
|
52
|
Books and
Records
|
52
|
Statements, Filings,
and Reports to Shareholders
|
52
|
Fiscal
Year
|
52
|
Governing
Law
|
52
|
Security Ownership
of Principal Shareholders and Management
|
53
|
Legal
Matters
|
53
|
Privacy
Policy
|
54
|
U.S. Federal Income
Tax Considerations
|
55
|
Investment by ERISA
Accounts
|
63
|
INCORPORATION BY
REFERENCE OF CERTAIN INFORMATION
|
66
|
INFORMATION YOU
SHOULD KNOW
|
67
|
WHERE YOU CAN FIND
MORE INFORMATION
|
68
|
STATEMENT REGUARDING
FORWARD-LOOKING STATEMENTS
|
69
|
APPENDIX A -
GLOSSARY OF DEFINED TERMS
|
70
|
|
|
PART TWO –
STATEMENT OF ADDITIONAL INFORMATION
|
82
|
This is only a
summary of the prospectus and, while it contains material
information about the Fund and its Shares, it does not contain or
summarize all of the information about the Fund and the Shares
contained in this prospectus that is material and/or which may be
important to you. You should read this entire prospectus, including
“What Are the Risk Factors Involved with an Investment in the
Fund?” beginning on page 12, before making an investment
decision about the Shares. In addition, this prospectus
includes a statement of additional information that follows and is
bound together with the primary disclosure document. Both the
primary disclosure document and the statement of additional
information contain important
information.
Principal Offices of the Fund
and the Sponsor
The Fund is a series of Teucrium Commodity Trust
(the “Trust”). The principal offices of the Sponsor,
the Trust and the Fund are located at Three Main Street, Suite 215,
Burlington, Vermont 05401. The telephone number is (802)
540-0019.
The amount of trading income required for the
redemption value of a Share at the end of one year to equal the
selling price of the Share, assuming a selling price of $6.91 (the
NAV per Share as of January 31, 2021), is $0.13 or 1.88% of
the selling price. For more information, see “Breakeven
Analysis” below.
Operation of the
Fund
The Fund is a commodity pool that issues Shares
that may be purchased and sold on NYSE Arca. The investment
objective of the Fund is to have the daily changes in the
Shares’ NAV reflect the daily changes of the price of sugar
for future delivery, as measured by a benchmark (the
“Benchmark”) as described below. The Benchmark for the
Fund is the Teucrium Sugar Index (“TCANE”). Under
normal market conditions, the Fund invests in sugar futures
contracts and cash and cash equivalents. The Fund is organized as a
series of the Trust, a Delaware statutory trust organized on
September 11, 2009. The Trust and the Fund operate pursuant to the
Trust’s Fifth Amended and Restated Declaration of Trust and
Trust Agreement (the “Trust Agreement”), dated April
26, 2019. The Trust Agreement may be found on the SEC’s EDGAR
filing database at https://www.sec.gov/Archives/edgar/data/1471824/000165495419004852/ex31.htm.
The Fund was formed and is managed and controlled by the Sponsor, a
limited liability company formed in Delaware on July 28, 2009. The
Sponsor is registered as a commodity pool operator
(“CPO”) and a commodity trading adviser
(“CTA”) with the Commodity Futures Trading Commission
(“CFTC”) and is a member of the National Futures
Association (“NFA”).
The investment
objective of the Fund is to have the daily changes in the NAV of
the Fund’s Shares reflect the daily changes in the sugar
market for future delivery as measured by the Benchmark. The
Benchmark is a weighted average of the closing settlement prices
for three futures contracts for No. 11 Sugar (“Sugar Futures
Contracts”) that are traded on the ICE Futures US (“ICE
Futures”). The three Sugar No. 11 Futures Contracts
that at any given time make up the Benchmark are referred to herein
as the “Benchmark Component Futures
Contracts.”
The Fund seeks to achieve its investment
objective by investing in Benchmark Component Futures Contracts.
Under normal market conditions, the Fund expects that 100% of the
Fund’s assets will be invested in Benchmark Component Futures
Contracts and in cash and cash equivalents. The Fund reserves the
right to invest in swap agreements, forward contracts and options,
a brief description of which may be found in “Appendix A
– “Glossary of Defined Terms.”
Consistent with applicable provisions of the
Trust Agreement and Delaware law, the Fund has broad authority to
make changes to the Fund’s operations. Consistent with this
authority, the Fund, in its sole discretion and without shareholder
approval or advance notice, may change its investment objective,
Benchmark, or investment strategies. The Fund has no current
intention to make any such change, and any change is subject to
applicable regulatory requirements, including, but not limited to,
any requirement to amend applicable listing rules of the
NYSE.
The reasons for and circumstances that may
trigger any such changes may vary widely and cannot be predicted.
However, by way of example, the Fund may change the term structure
or underlying components of the Benchmark in furtherance of the
Fund’s investment objective of tracking the price of sugar
for future delivery if, due to market conditions, a potential or
actual imposition of position limits by the CFTC or futures
exchange rules, or the imposition of risk mitigation measures by a
futures commission merchant restricts the ability of the Fund to
invest in the current Benchmark Futures Contracts. The Fund would
file a current report on Form 8-K and a prospectus supplement to
describe any such change and the effective date of the change.
Shareholders may modify their holdings of the Fund’s shares
in response to any change by purchasing or selling Fund shares
through their broker-dealer.
The Fund invests in Benchmark Component Futures
Contracts to the fullest extent possible without being leveraged or
unable to satisfy its expected current or potential margin or
collateral obligations with respect to its investments in Benchmark
Component Futures Contracts. After fulfilling such
margin and collateral requirements, the Fund invests the remainder
of its proceeds from the sale of baskets in short term financial
instruments of the type commonly known as “cash and cash
equivalents.” Cash and cash equivalents may include
short-term Treasury bills, money market funds, demand deposit
accounts, and commercial paper.
The Sponsor employs a “neutral”
investment strategy intended to track the changes in the Benchmark
regardless of whether the Benchmark goes up or goes down. The
Fund’s “neutral” investment strategy is designed
to permit investors generally to purchase and sell the Fund’s
Shares for the purpose of investing indirectly in the sugar market
in a cost-effective manner. The Sponsor endeavors to place the
Fund’s trades in Benchmark Component Futures Contracts and
otherwise manage the Fund’s investments so that the
Fund’s average daily tracking error against the Benchmark
will be less than 10 percent over any period of 30 trading days.
However, the Fund incurs certain expenses in connection with its
operations, which cause imperfect correlation between changes in
the Fund’s NAV and changes in the Benchmark because the
Benchmark does not reflect expenses or income. As a result,
investors may incur a partial or complete loss of their investment
even when the performance of the Benchmark is
positive.
Investors may purchase and sell Shares through
their broker-dealers. However, the Fund creates and redeems Shares
only in blocks called “Creation Baskets” and
“Redemption Baskets”, respectively, and only Authorized
Purchasers may purchase or redeem Creation Baskets or Redemption
Baskets. An Authorized Purchaser is under no obligation to create
or redeem baskets, and an Authorized Purchaser is under no
obligation to offer to the public Shares of any baskets it does
create. Baskets are generally created when there is a demand for
Shares, including, but not limited to, when the market price per
share is at (or perceived to be at) a premium to the NAV per Share.
Similarly, baskets are generally redeemed when the market price per
share is at (or perceived to be at) a discount to the NAV per
Share. Retail investors seeking to purchase or sell Shares on any
day are expected to effect such transactions in the secondary
market, on the NYSE Arca, at the market price per share, rather
than in connection with the creation or redemption of
baskets.
The Sponsor believes that by investing in
Benchmark Component Futures Contracts, the Fund’s net asset
value (“NAV”) will closely track the Benchmark. The
Sponsor also believes that because of market arbitrage
opportunities, the market price at which investors will purchase
and sell Shares through their broker-dealer will closely track the
Fund’s NAV. The Sponsor believes that the net effect of these
relationships is that the Fund’s market price on the NYSE
Arca at which investors purchase and sell Shares will closely track
the sugar market for future delivery, as measured by the
Benchmark.
The Sponsor maintains a public website on behalf
of the Fund, www.teucrium.com, which
contains information about the Trust, the Fund, and the
Shares.
Note to Secondary
Market Investors: Except
when aggregated in Redemption Baskets, Shares are not individually
redeemable. Shares can be directly purchased from the Fund only in
Creation Baskets, and only by Authorized Purchasers. Each Creation
Basket consists of 25,000 Shares and therefore requires a
significant financial commitment to purchase. Accordingly,
investors who do not have such resources or who are not Authorized
Purchasers should be aware that some of the information contained
in this prospectus, including information about purchases and
redemptions of Shares directly with the Fund, is only relevant to
Authorized Purchasers. There is no guarantee that Shares will trade
at prices that are at or near the per-Share NAV. When buying or
selling Shares on the secondary market through a broker, most
investors incur customary brokerage commissions and
charges.
As noted, the
Fund invests in Sugar Futures Contracts, including those traded on
the ICE Futures. The Fund expressly disclaims any association
with the ICE Futures or endorsement of the Fund by such exchange
and acknowledges that “ICE Futures” and “ICE
Futures US” are registered trademarks of such
exchanges.
Principal
Investment Risks of an Investment in the
Fund
An investment in the Fund involves a degree of
risk and you could incur a partial or total loss of your investment
in the Fund. Some of the risks you may face are summarized
below. A more extensive discussion of these risks appears beginning
on page 12.
●
Unlike mutual
funds, commodity pools and other investment pools that manage their
investments so as to realize income and gains for distribution to
their investors, the Fund generally does not distribute dividends
to holders of Fund Shares (“Shareholders”). You should
not invest in the Fund if you will need cash distributions from the
Fund to pay taxes on your share of income and gains of the Fund, if
any, or for other purposes.
●
Investors may
choose to use the Fund as a means of investing indirectly in sugar,
and there are risks involved in this investment strategy. The risks
and hazards that are inherent in sugar production may cause the
price of sugar to fluctuate widely.
●
Only an
Authorized Purchaser may engage in creation or redemption
transactions with the Fund. The Fund has a limited number of
institutions that act as Authorized Purchasers. To the extent that
these institutions exit the business or are unable or unwilling to
proceed with creation and/or redemption orders with respect to the
Fund, Fund Shares may, particularly in times of market stress,
trade at a discount to the NAV per Share and possibly face trading
halts and/or delisting.
●
The price
relationship between the near month Sugar Futures Contract to
expire and the Benchmark Component Futures Contracts will vary and
may impact both the Fund’s total return over time and the
degree to which such total return tracks the total return of sugar
price indices. In some cases, the near month contract’s price
is lower than later expiring contracts’ prices (a situation
known as “contango” in the futures markets). In the
event of a prolonged period of contango, and absent the impact of
rising or falling sugar prices, this could have a significant
negative impact on the Fund’s NAV and total return, and you
could incur a partial or total loss of your investment in the
Fund.
●
You will have
no rights to participate in the management of the Fund and will
have to rely on the duties and judgment of the Sponsor to manage
the Fund.
●
The Fund pays
fees and expenses that are incurred regardless of whether it is
profitable.
●
The Fund seeks
to have the changes in its Shares’ NAV track changes in the
Benchmark, rather than profit from speculative trading of Sugar
Futures Contracts or from the use of leverage (i.e., the Sponsor
manages the Fund so that the aggregate value of the Fund’s
exposure to losses from its investments in Benchmark Component
Futures Contracts at any time will not exceed the value of the
Fund’s assets). There is no assurance that the Sponsor will
successfully implement this investment strategy, and if the Fund
becomes leveraged, you could lose all or substantially all of your
investment if the Fund’s trading positions suddenly turn
unprofitable.
●
In addition to
Benchmark Component Futures Contracts, the Fund reserves the right
to invest in other sugar interests. To the extent that these other
sugar interests are contracts individually negotiated between their
parties, they may not be as liquid as Benchmark Component Futures
Contracts and will expose the Fund to credit risk that its
counterparty may not be able to satisfy its obligations to the
Fund.
●
The regulation
of commodity interest transactions in the United States has
historically been comprehensive and is a rapidly changing area of
law and is subject to ongoing modification by governmental and
judicial action. Future U.S. or foreign regulatory changes may
alter the nature of an investment in the Fund, or the ability of
the Fund to continue to implement its investment
strategy.
●
Failures or
breaches of the electronic systems of the Fund, the Sponsor, or
third parties or other events such as the recent COVID-19 pandemic
have the ability to cause disruptions and negatively impact the
Fund’s business operations, potentially resulting in
financial losses to the Fund and its
shareholders.
For additional risks, see “What Are the
Risk Factors Involved with an Investment in the
Fund?”
Determination of
NAV
The Fund’s NAV is determined as of the
earlier of the close of the New York Stock Exchange or 4:00 p.m.
(EST) on each day that the NYSE Arca is open for
trading.
For a glossary of defined terms, see Appendix
A.
Breakeven
Analysis
The breakeven analysis set forth below is a
hypothetical illustration of the approximate dollar returns and
percentage returns for the redemption value of a single share to
equal the amount invested twelve months after the investment is
made. For purposes of this breakeven analysis, an initial selling
price of $6.91 per share, which equals the NAV per share at the
close of trading January 31, 2021, is assumed. The breakeven
analysis is an approximation only and assumes a constant month-end
Net Asset Value. In order for a hypothetical investment in shares
to breakeven over the next 12 months, assuming a selling price of
$6.91 per share, the investment would have to generate a 1.88% or
$0.13 return.
|
|
|
|
Assumed initial selling price per share
(1)
|
$6.91
|
Management Fee (1.00%) (2)
|
$0.07
|
Estimated Brokerage Commissions (3)
|
$0.01
|
Other Fund Fees and Expenses (4)
(5)
|
$0.07
|
Interest and Other Income (0.25%)
(6)
|
$(0.02)
|
Amount of trading income (loss) required for
the redemption value at the end of one year to equal the selling
price of the share
|
$0.13
|
Percentage of initial selling price per
share (7)
|
1.88%
|
(1) In order to show
how a hypothetical investment in shares would break even over the
next 12 months, this breakeven analysis uses an assumed initial
selling price of $6.91 per share,
which is based on the NAV per share of CANE at the close of trading
on January 31, 2021. Investors should note that, because
CANE’S NAV changes on a daily basis, the breakeven amount on
any given day could be higher or lower than the amount reflected
here.
(2) The Fund is
obligated to pay the Sponsor a management fee at the annual rate of
1.00% of the Fund’s average daily net assets, payable
monthly. The Sponsor can elect to waive the payment of the fee in
any amount at its sole discretion, at any time and from time to
time, in order to reduce the Fund’s expenses or for any other
purpose.
(3) Reflects estimated
brokerage commissions and fees for Sugar Futures Contract
purchase or sale and reflected on a per trade basis. The estimated
fee is based on the actual brokerage commissions and trading fees
paid for the year ending December 31, 2020.
(4) In connection with
orders to create or redeem baskets, Authorized Purchasers will pay
a transaction fee in the amount of $250 per order. Because these
transaction fees are de minimis in amount, are paid to the
Fund’s custodian, U.S. Bank, N.A. (the
“Custodian”) and charged on a
transaction-by-transaction basis (and not on a Basket by Basket
basis), and are borne by the Authorized Participants, they have not
been included in the Breakeven Table. See “Creation and Redemption Transaction
Fees,” page 47.
(5) Other Fund Fees
and Expenses are an estimate based on an allocation to the Fund of
the total estimated expenses anticipated to be incurred by the
Trust on behalf of the Fund, net of any expenses or management fee
waived by the Sponsor, and include: Professional fees (primarily
legal, auditing and tax-preparation related costs); Custodian and
Administrator fees and expenses, Distribution and Marketing fees
(primarily fees paid to the Distributor, costs related to
regulatory compliance activities and other costs related to the
trading activities of the Fund); Business Permits and Licenses;
General and Administrative expenses (primarily insurance and
printing), and Other Expenses. The expenses presented are based on
estimated expenses for the current fiscal year, and do not
represent the maximum amounts payable under the contracts with
third-party service providers, as discussed below in the section of
this disclosure document entitled “Contractual Fees and
Compensation Arrangements with the Sponsor and Third-Party Service
Providers.” The cost of these fixed or estimated fees has
been calculated assuming that the Fund has $14.1 million in assets,
which was the approximate amount of assets as of January 31, 2021.
The Sponsor can elect to pay (or waive reimbursement for) certain
fees or expenses that would generally be paid by the Fund, although
it has no contractual obligation to do so. Any election to pay or
waive reimbursement for fees and expenses that would generally be
paid by the Fund can be changed at the discretion of the
Sponsor.
(6) The Fund
seeks to earn interest and other income in high credit quality,
short-duration instruments or deposits associated with the
pool’s cash management strategy that may be used to offset
expenses. These investments may include, but are not limited to,
short-term Treasury Securities, demand deposits, money market funds
and investments in commercial paper. Management estimates that the
blended interest rate will be 0.25% based on the current interest
rate environment and outlook as of February 28, 2021. The actual
rate may vary and not all assets of the Fund will earn
interest.
(7) This represents
the estimated approximate percentage for the redemption value of a
hypothetical initial investment in a single share to equal the
amount invested twelve months after the investment was made. The
estimated approximate percentage of selling price before waived
expenses is 2.46% or $0.17 per share, based on the Fund assets, net
asset value per share and shares outstanding as of January 31,
2021. The fees waived by the Sponsor is an estimate, can be applied
to any expense related to the Fund, and may be terminated at any
time at the discretion of the Sponsor.
Offering
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The Fund’s Shares are listed on the
NYSE Arca and investors may purchase and sell Shares through their
broker-dealer. The Fund only offers Creation Baskets consisting of
25,000 Shares through the Distributor to Authorized
Purchasers. Authorized Purchasers may purchase Creation
Baskets consisting of 25,000 Shares at the Fund’s
NAV.
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Use of Proceeds
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The Sponsor
applies substantially all of the Fund’s assets toward
investing in Benchmark Component Futures
Contracts, cash, and cash equivalents.
The Sponsor deposits a portion of the Fund’s net assets with
its futures commission merchant (“FCM”) or other
financial institutions to be used to meet its current or potential
margin or collateral requirements in connection with its investment
in Benchmark Component Futures Contracts. The Fund uses only cash and cash equivalents to
satisfy these requirements. The Sponsor expects that all entities
that will hold or trade the Fund’s assets will be based in
the United States and will be subject to United States regulations.
The Sponsor believes that approximately 4-6% of the Fund’s
assets will normally be committed as margin for Benchmark
Component Futures Contracts. However,
from time to time, the percentage of assets committed as
margin/collateral may be substantially more, or less, than such
range. The remaining portion of the Fund’s assets is held in
cash or cash equivalents. All interest or other income earned on
these investments is retained for the Fund’s
benefit.
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Creation and Redemption
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Authorized Purchasers pay a $250 fee per
order to create Creation Baskets, and a $250 fee per order for
Redemption Baskets, which is paid to the Custodian. Authorized
Purchasers are not required to sell any specific number or dollar
amount of Shares. The per share price of Shares offered in
Creation Baskets is the total NAV of the Fund calculated as of the
close of the NYSE Arca on that day divided by the number of issued
and outstanding Shares.
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Inter-Series Limitation on
Liability
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While the Fund is currently one of five
separate series of the Trust, additional series may be created in
the future. The Trust has been formed and will be operated
with the goal that the Fund and any other series of the Trust will
be liable only for obligations of such series, and a series will
not be responsible for or affected by any liabilities or losses of
or claims against any other series. If any creditor or
shareholder in any particular series (such as the Fund) were to
successfully assert against a series a claim with respect to its
indebtedness or Shares, the creditor or shareholder could recover
only from that particular series and its assets. Accordingly,
the debts and other obligations incurred, contracted for or
otherwise existing solely with respect to a particular series will
be enforceable only against the assets of that series, and not
against any other series or the Trust generally or any of their
respective assets. The assets of the Fund and any other
series will include only those funds and other assets that are paid
to, held by or distributed to the series on account of and for the
benefit of that series, including, without limitation, amounts
delivered to the Trust for the purchase of Shares in a
series.
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Registration Clearance and
Settlement
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Individual certificates are not issued for
the Shares. Instead, Shares will be represented by one or more
global certificates, which are deposited by the transfer agent with
the Depository Trust Company (“DTC”) and registered in
the name of Cede & Co., as nominee for DTC. The global
certificates evidence all of the Shares outstanding at any time.
Beneficial interests in Shares are held through DTC’s
book-entry system, which means that Shareholders are limited to:
(1) participants in DTC such as banks, brokers, dealers and trust
companies (“DTC Participants”), (2) those who maintain,
either directly or indirectly, a custodial relationship with a DTC
Participant (“Indirect Participants”), and (3) those
who hold interests in the Shares through DTC Participants or
Indirect Participants, in each case who satisfy the requirements
for transfers of Shares. DTC Participants acting on behalf of
investors holding Shares through such DTC Participants’
accounts in DTC will follow the delivery practice applicable to
securities eligible for DTC’s Same-Day Funds Settlement
System. Shares are credited to DTC Participants’ securities
accounts following confirmation of receipt of
payment.
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Net Asset Value
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The NAV is
calculated by taking the current market value of the Fund’s
total assets and subtracting any liabilities and dividing the
balance by the number of Shares. Under the Fund’s current
operational procedures, U.S. Bancorp Fund Services, LLC,
doing business as U.S. Bank Global Fund Services (“Global
Fund Services”), the Fund’s “Administrator”
calculates the NAV of the Fund’s
Shares as of the earlier of 4:00 p.m. (EST) or the close of the New
York Stock Exchange each day. ICE Data Indices, LLC calculates an
approximate net asset value every 15 seconds throughout each day
that the Fund’s Shares are traded on the NYSE Arca for as
long as the ICE Futures’ main pricing mechanism is
open.
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Fund Expenses
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The Fund pays the Sponsor a management fee
at an annual rate of 1.00% of the Fund’s average daily net
assets. The Fund is also responsible for other ongoing
fees, costs and expenses of its operations, including (i) brokerage
and other fees and commissions incurred in connection with the
trading activities of the Fund; (ii) expenses incurred in
connection with registering additional Shares of the Fund or
offering Shares of the Fund; (iii) the routine expenses associated
with the preparation and, if required, the printing and mailing of
monthly, quarterly, annual and other reports required by applicable
U.S. federal and state regulatory authorities, Trust meetings and
preparing, printing and mailing proxy statements to Shareholders;
(iv) the payment of any distributions related to redemption of
Shares; (v) payment for routine services of the Trustee, legal
counsel and independent accountants; (vi) payment for routine
accounting, bookkeeping, custody and transfer agency services,
whether performed by an outside service provider or by Affiliates
of the Sponsor; (vii) postage and insurance; (viii) costs and
expenses associated with investor relations and services; (ix)
costs of preparation of all federal, state, local and foreign tax
returns and any taxes payable on the income, assets or operations
of the Fund; (x) payment for marketing services; and (xi)
extraordinary expenses (including, but not limited to, legal claims
and liabilities and litigation costs and any indemnification
related thereto). The estimated amount of fees and expenses that
are anticipated to be incurred in a single Share during the first
twelve (12) months of ownership is $0.13 or 1.88% of the selling
price. The total estimated fees and expenses are expressed as a
percentage of the net asset value as of January 31, 2021. These
fees and expenses are net of any expenses or management fees waived
by the Sponsor. The Sponsor may, in its discretion, pay or
reimburse the Fund for, or waive a portion of its management fee to
offset, expenses that would otherwise be borne by the
Fund.
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General expenses of the Trust will be
allocated among the existing Teucrium Funds and any future series
of the Trust as determined by the Sponsor in its discretion.
The Trust may be required to indemnify the Sponsor, and the Trust
and/or the Sponsor may be required to indemnify the Trustee,
Distributor or Administrator, under certain
circumstances.
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Termination Events
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The Trust and the Fund shall continue in
existence from the date of their formation in perpetuity, unless
the Trust or the Fund, as the case may be, is sooner terminated
upon the occurrence of certain events specified in the Trust
Agreement, including the following: (1) the filing of a certificate
of dissolution or cancellation of the Sponsor or revocation of the
Sponsor’s charter or the withdrawal of the Sponsor, unless
shareholders holding a majority of the outstanding shares of the
Trust, voting together as a single class, elect within ninety (90)
days after such event to continue the business of the Trust and
appoint a successor Sponsor; (2) the occurrence of any event which
would make the existence of the Trust or the Fund unlawful; (3) the
suspension, revocation, or termination of the Sponsor’s
registration as a CPO with the CFTC or membership with the NFA; (4)
the insolvency or bankruptcy of the Trust or the Fund; (5) a vote
by the shareholders holding at least seventy-five percent (75%) of
the outstanding shares of the Trust, voting together as a single
class, to dissolve the Trust subject to certain conditions; (6) the
determination by the Sponsor to dissolve the Trust or the Fund,
subject to certain conditions.; (7) the Trust is required to be
registered as an investment company under the Investment Company
Act of 1940, and (8) DTC is unable or unwilling to continue to
perform its functions and a comparable replacement is unavailable.
Upon termination of the Fund, the affairs of the Fund shall be
wound up and all of its debts and liabilities discharged or
otherwise provided for in the order of priority as provided by law.
The fair market value of the remaining assets of the Fund shall
then be determined by the Sponsor. Thereupon, the assets of the
Fund shall be distributed pro rata to the Shareholders in
accordance with their Shares.
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Authorized Purchasers
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A list of the Fund’s Authorized
Purchasers as of the date of this Prospectus can be found under
“Plan of Distribution – Distributor and Authorized
Purchasers,” on page 43. Authorized Purchasers
must be (1) registered broker-dealers or other securities market
participants, such as banks and other financial institutions, that
are not required to register as broker-dealers to engage in
securities transactions, and (2) DTC Participants. To become
an Authorized Purchaser, a person must enter into an Authorized
Purchaser Agreement with the Sponsor.
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WHAT ARE THE
RISK FACTORS INVOLVED WITH AN INVESTMENT IN THE
FUND?
You should
consider carefully the risks described below before making an
investment decision. You should also refer to the other information
included in this prospectus, and the Fund’s and the
Trust’s financial statements and the related notes
incorporated by reference herein. See “Incorporation by
Reference of Certain Information.”
Risks Associated
with Investing Directly or Indirectly in
Sugar
Investing in Benchmark
Component Futures Contracts subjects the Fund to the risks of the
world sugar market, and this could result in substantial
fluctuations in the price of the Fund’s
Shares.
The Fund is subject to the risks and hazards
of the world sugar market because it invests in Benchmark Component
Futures Contracts. The two primary sources for the production of
sugar are sugarcane and sugar beets, both of which are grown in
various countries around the world. The risks and hazards
that are inherent in the world sugar market may cause the price of
sugar and the Fund’s Shares to fluctuate widely and you could
incur a partial or total loss of your investment in the
Fund.
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The global price and availability of sugar
is influenced by economic and industry conditions, including but
not limited to supply and demand factors such as: crop disease;
weed control; water availability; various planting, growing, or
harvesting problems; severe weather conditions such as drought,
floods, or frost that are difficult to anticipate and which cannot
be controlled; uncontrolled fires, including arson; challenges in
doing business with foreign companies; legal and regulatory
restrictions; fluctuation of shipping rates; currency exchange rate
fluctuations; and political and economic instability. Global
demand for sugar to produce ethanol has also been a
significant factor affecting the price of sugar.
Additionally, demand for sugar is affected by changes in consumer
tastes, national, regional and local economic conditions, and
demographic trends. The spread of consumerism and the rising
affluence of emerging nations such as China and India have created
demand for sugar. An influx of people in developing countries
moving from rural to urban areas may create more disposable income
to be spent on sugar products and might also reduce sugar
production in rural areas on account of worker shortages, all of
which would result in upward pressure on sugar prices. On the
other hand, public health concerns regarding obesity, heart disease
and diabetes, particularly in developed countries, may reduce
demand for sugar. In light of the time it takes to grow
sugarcane and sugar beets and the cost of new facilities for
processing these crops, it may not be possible to increase supply
quickly or in a cost-effective manner in response to an increase in
demand for sugar.
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Sugar production is subject to United States
and foreign policies and regulations that materially affect
operations. Governmental policies affecting the agricultural
industry, such as taxes, tariffs, duties, subsidies, incentives,
acreage control, and import and export restrictions on agricultural
commodities and commodity products, can influence the planting of
certain crops, the location and size of crop production, the volume
and types of imports and exports, and industry profitability.
Many foreign countries subsidize sugar production, resulting in
lower prices, but this has led other countries, including the
United States, to impose tariffs and import restrictions on sugar
imports. Sugar producers also may need to comply with various
environmental laws and regulations, such as those regulating the
use of certain pesticides.
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Seasonal fluctuations in the price of sugar
may cause risk to an investor because of the possibility that Share
prices will be depressed because of the sugar harvest cycle.
In the futures market, contracts expiring during the harvest season
are typically priced lower than contracts expiring in the winter
and spring. While the sugar harvest seasons varies from
country to country, prices of Sugar Futures Contracts tend to be
lowest in the late spring and early summer, reflecting the harvest
season in Brazil, the world’s leading producer of
sugarcane. Thus, seasonal fluctuations could result in an
investor incurring losses upon the sale of Fund Shares,
particularly if the investor needs to sell Shares when the
Benchmark Component Futures Contracts are, in whole or part, Sugar
Futures Contracts expiring in the late spring or early
summer.
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An investment in the Fund
is subject to correlation risk. Your return on an investment in the
Fund may differ from the return of the Benchmark, changes in the
Fund’s NAV and the spot price of
sugar.
There is a risk that changes in the price of
Shares on the NYSE Arca will not correlate with changes in the
Fund’s NAV; that changes in the NAV will not correlate with
changes in the price of the Benchmark; and/or changes in the price
of the Benchmark will not correlate with changes in the spot price
of sugar. Depending on certain factors associated with each of
these correlations which are discussed in more detail below, you
could incur a partial or total loss of your investment in the
Fund.
The Benchmark is not
designed to correlate with the spot price of sugar, and this could
cause the changes in the price of the Shares to substantially vary
from the changes in the spot price of sugar. Therefore, you
may not be able to effectively use the Fund to hedge against sugar
related losses or to indirectly invest in
sugar.
The Benchmark Component Futures Contracts
reflect the price of sugar for future delivery, not the current
spot price of sugar, so at best the correlation between changes in
such Sugar Futures Contracts and the spot price of sugar will be
only approximate. Weak correlation between the Benchmark and
the spot price of sugar may result from the typical seasonal
fluctuations in sugar prices discussed above. Imperfect
correlation may also result from speculation in Benchmark Component
Futures Contracts, technical factors in the trading of Benchmark
Component Futures Contracts, and expected inflation in the economy
as a whole. If there is a weak correlation between the
Benchmark and the spot price of sugar, then the price of Shares may
not accurately track the spot price of sugar and you may not be
able to effectively use the Fund as a way to hedge the risk of
losses in your sugar related transactions or as a way to indirectly
invest in sugar.
Changes in the Fund’s
NAV may not correlate well with changes in the price of the
Benchmark. If this were to occur, you may not be able to
effectively use the Fund as a way to hedge against sugar related
losses or as a way to indirectly invest in
sugar.
The Sponsor endeavors to invest the
Fund’s assets as fully as possible in Benchmark Component
Futures Contracts so that the changes in the NAV closely correlate
with the changes in the Benchmark. However, changes in the
Fund’s NAV may not correlate with the changes in the
Benchmark for various reasons, including those set forth
below.
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The Fund incurs certain expenses in
connection with its operations and holds most of its assets in
income producing, short-term financial instruments for margin and
other liquidity purposes and to meet redemptions that may be
necessary on an ongoing basis. These expenses and income
cause imperfect correlation between changes in the Fund’s NAV
and changes in the Benchmark.
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The Sponsor may not be able to invest the
Fund’s assets in Benchmark Component Futures Contracts having
an aggregate notional amount exactly equal to the Fund’s
NAV. As a standardized contract, a single Sugar Futures
Contract is for a specified amount of sugar, and the Fund’s
NAV and the proceeds from the sale of a Creation Basket is unlikely
to be an exact multiple of that amount. In such case, the
Fund could not invest the entire proceeds from the purchase of the
Creation Basket in such futures contracts. (For example,
assuming the Fund receives $350,000 for the sale of a Creation
Basket and that the value (i.e., the notional amount) of a Sugar
Futures Contract is $17,920, the Fund could only enter into 19
Sugar Futures Contracts with an aggregate value of $340,480).
While the Fund may be better able to achieve the exact amount of
exposure to the sugar market through the use of over the counter
other sugar interests, there is no assurance that the Sponsor will
be able to continually adjust the Fund’s exposure to such
other sugar interests to maintain such exact exposure. Any
amounts not invested in Benchmark Component Futures Contracts are
held in cash and cash equivalents.
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As Fund assets increase, there may be more
or less correlation. On the one hand, as the Fund grows it
should be able to invest in Benchmark Component Futures Contracts
with a notional amount that is closer on a percentage basis to the
Fund’s NAV. For example, if the Fund’s NAV is
equal to 4.9 times the value of a single futures contract, it can
purchase only four futures contracts, which would cause only 81.6%
of the Fund’s assets to be exposed to the sugar market.
On the other hand, if the Fund’s NAV is equal to 100.9 times
the value of a single Sugar Futures Contract, it can purchase 100
such contracts, resulting in 99.1% exposure. However, at
certain asset levels the Fund may be limited in its ability to
purchase Sugar Futures Contracts due to position limits or
accountability levels imposed by the CFTC or the relevant
exchanges. In these
instances, the Fund would likely invest to a greater extent in
sugar interests not subject to these position limits or
accountability levels. To the extent that the Fund invests in
other sugar interests, the correlation between the Fund’s NAV
and the Benchmark may be lower. In certain circumstances,
position limits or accountability levels could limit the number of
Creation Baskets that will be sold.
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If changes in the Fund’s NAV do not
correlate with changes in the Benchmark, then investing in the Fund
may not be an effective way to hedge against sugar related losses
or indirectly invest in sugar.
Changes in the price of the
Fund’s Shares on the NYSE Arca may not correlate perfectly
with changes in the NAV of the Fund’s Shares. If this
variation occurs, then you may not be able to effectively use the
Fund to hedge against sugar related losses or to indirectly invest
in sugar.
While it is expected that the trading prices
of the Shares will fluctuate in accordance with the changes in the
Fund’s NAV, the prices of Shares may also be influenced by
other factors, including the supply of and demand for the Shares,
whether for the short term or the longer term. There is no
guarantee that the Shares will not trade at appreciable discounts
from, and/or premiums to, the Fund’s NAV. This could
cause the changes in the price of the Shares to substantially vary
from the changes in the spot price of sugar, even if the
Fund’s NAV was closely tracking movements in the spot price
of sugar. If this occurs, you may not be able to effectively
use the Fund to hedge the risk of losses in your sugar related
transactions or to indirectly invest in sugar.
The Fund may experience a
loss if it is required to sell cash equivalents at a price lower
than the price at which they were
acquired.
If the Fund is required to sell its cash
equivalents at a price lower than the price at which they were
acquired, the Fund will experience a loss. This loss may
adversely impact the price of the Shares and may decrease the
correlation between the price of the Shares, the Benchmark, and the
spot price of sugar. The value of cash equivalents held
by the Fund generally moves inversely with movements in interest
rates. The prices of longer maturity securities are
subject to greater market fluctuations as a result of changes in
interest rates. While the short-term nature of the
Fund’s investments in cash equivalents should minimize the
interest rate risk to which the Fund is subject, it is possible
that the cash equivalents held by the Fund will decline in
value.
Certain of the Fund’s
investments could be illiquid, which could cause large losses to
investors at any time or from time to
time.
The Fund may not always be able to liquidate
its positions in its investments at the desired price for reasons
including, among others, insufficient trading volume, limits
imposed by exchanges or other regulatory organizations, or lack of
liquidity. As to futures contracts, it may be difficult to execute
a trade at a specific price when there is a relatively small volume
of buy and sell orders in a market. Limits imposed by futures
exchanges or other regulatory organizations, such as accountability
levels, position limits and price fluctuation limits, may
contribute to a lack of liquidity with respect to some
exchange-traded sugar interests. In addition, over the
counter contracts may be illiquid because they are contracts
between two parties and generally may not be transferred by one
party to a third party without the counterparty’s
consent. Conversely, a counterparty may give its consent, but
the Fund still may not be able to transfer an over the counter
sugar interest to a third party due to concerns regarding the
counterparty’s credit risk.
A market disruption, such as a foreign
government taking political actions that disrupt the market in its
currency, its sugar production or exports, or in another major
export, can also make it difficult to liquidate a position.
Unexpected market illiquidity may cause major losses to investors
at any time or from time to time. In addition, the Fund does
not intend at this time to establish a credit facility, which would
provide an additional source of liquidity, but instead will rely
only on the cash and cash equivalents that it holds to meet its
liquidity needs. The anticipated value of the positions in
Benchmark Component Futures Contracts that the Sponsor will acquire
or enter into for the Fund increases the risk of illiquidity.
Because Benchmark Component Futures Contracts may be illiquid, the
Fund’s holdings may be more difficult to liquidate at
favorable prices in periods of illiquid markets and losses may be
incurred during the period in which positions are being
liquidated.
If the nature of the
participants in the futures market shifts such that sugar
purchasers are the predominant hedgers in the market, the Fund
might have to reinvest at higher futures prices or choose other
sugar interests.
The changing nature of the participants in
the sugar market will influence whether futures prices are above or
below the expected future spot price. Sugar producers will
typically seek to hedge against falling sugar prices by selling
Sugar Futures Contracts. Therefore, if sugar producers become
the predominant hedgers in the futures market, prices of Sugar
Futures Contracts will typically be below expected future spot
prices. Conversely, if the predominant hedgers in the futures
market are the purchasers of the sugar who purchase Sugar Futures
Contracts to hedge against a rise in prices, prices of Sugar
Futures Contracts will likely be higher than expected future spot
prices. This can have significant implications for the Fund
when it is time to sell a Sugar Futures Contract that is no longer
a Benchmark Component Futures Contract and purchase a new Sugar
Futures Contract or to sell a Sugar Futures Contract to meet
redemption requests.
Storage costs could impact
the value of the Benchmark Component Futures
Contracts.
Storage costs associated with purchasing
sugar could result in costs and other liabilities that could impact
the value of Sugar Futures Contracts or certain other sugar
interests. Storage costs include the time value of money
invested in sugar as a physical commodity plus the actual costs of
storing the sugar less any benefits from ownership of sugar that
are not obtained by the holder of a futures contract. In
general, Sugar Futures Contracts have a one-month delay for
contract delivery and the pricing of back month contracts (the back
month is any future delivery month other than the spot month)
include storage costs. To the extent that these storage costs
change for sugar while the Fund holds Sugar Interests, the value of
the Benchmark Component Futures Contracts, and therefore the
Fund’s NAV, may change as well.
The price relationship
between the Benchmark Component Futures Contracts at any point in
time and the Sugar Futures Contracts that will become Benchmark
Component Futures Contracts on the next roll date will vary and may
impact both the Fund’s total return and the degree to which
its total return tracks that of sugar price
indices.
The design of the Fund’s Benchmark is
such that the Benchmark Component Futures Contracts change four
times per year, and the Fund’s investments must be rolled
periodically to reflect the changing composition of the
Benchmark. For example, when the second to expire Sugar
Futures Contract becomes the first to expire contract, such
contract will no longer be a Benchmark Component Futures Contract
and the Fund’s position in it will no longer be consistent
with tracking the Benchmark. In the event of a sugar futures
market where near to expire contracts trade at a higher price than
longer to expire contracts, a situation referred to as
“backwardation,” then absent the impact of the overall
movement in sugar prices the value of the Benchmark Component
Futures Contracts would tend to rise as they approach
expiration. As a result, the Fund may benefit because it
would be selling more expensive contracts and buying less expensive
ones on an ongoing basis. Conversely, in the event of a sugar
futures market where near to expire contracts trade at a lower
price than longer to expire contracts, a situation referred to as
“contango,” then absent the impact of the overall
movement in sugar prices the value of the Benchmark Component
Futures Contracts would tend to decline as they approach
expiration. As a result, the Fund’s total return may be lower
than might otherwise be the case because it would be selling less
expensive contracts and buying more expensive ones. The
impact of backwardation and contango may lead the total return of
the Fund to vary significantly from the total return of other price
references, such as the spot price of sugar. In the event of
a prolonged period of contango, and absent the impact of rising or
falling sugar prices, this could have a significant negative impact
on the Fund’s NAV and total return, and you could incur a
partial or total loss of your investment in the
Fund.
Regulation of the commodity
interests and commodity markets is extensive and constantly
changing; future regulatory developments are impossible to predict
but may significantly and adversely affect the
Fund.
The regulation of futures markets, futures
contracts and futures exchanges has historically been
comprehensive. The CFTC and the exchanges are authorized to take
extraordinary actions in the event of a market emergency including,
for example, the retroactive implementation of speculative position
limits, increased margin requirements, the establishment of daily
price limits and the suspension of trading on an exchange or
trading facility.
The regulation of commodity interest
transactions in the United States is a rapidly changing area of law
and is subject to ongoing modification by governmental and judicial
action. Congress enacted the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the “Dodd-Frank Act”) in 2010.
As the Dodd-Frank Act continues to be implemented by the CFTC and
the SEC, there is a possibility of future regulatory changes within
the United States altering, perhaps to a material extent, the
nature of an investment in the Fund, or the ability for the Fund to
continue to implement its investment strategy. In addition, various
national governments outside of the United States have expressed
concern regarding the disruptive effects of speculative trading in
the commodities markets and the need to regulate the derivatives
markets in general. The effect of any future regulatory change on
the Fund is impossible to predict but could be substantial and
adverse.
If you are investing in the
Fund for purposes of hedging, you might be subject to several risks
unique to the Fund, and the Fund may not be appropriate for hedging
purposes. The Fund was not designed for hedging purposes; those
using the Fund as a hedge of any kind do so exclusively at their
own risk.
An investment in the Fund
may provide you little or no diversification benefits. Thus, in a
declining market, the Fund may have no gains to offset your losses
from other investments, and you may suffer losses on your
investment in the Fund at the same time you incur losses with
respect to other asset
classes.
It cannot be predicted to what extent the
performance of Benchmark Component Futures Contracts will or will
not correlate to the performance of other broader asset classes
such as stocks and bonds. If the Fund’s performance
were to move more directly with the financial markets, you will
obtain little or no diversification benefits from an investment in
the Shares. In such a case, the Fund may have no gains to
offset your losses from other investments, and you may suffer
losses on your investment in the Fund at the same time you incur
losses with respect to other investments.
Variables such as drought, floods, weather,
embargoes, market disruptions, tariffs and other political events
may have a larger impact on sugar and sugar interest prices than on
traditional securities and broader financial markets. These
additional variables may create additional investment risks that
subject the Fund’s investments to greater volatility than
investments in traditional securities.
Lower correlation should not be confused
with negative correlation, where the performance of two asset
classes would be opposite of each other. There is no historic
evidence that the spot price of sugar and prices of other financial
assets, such as stocks and bonds, are negatively correlated.
In the absence of negative correlation, the Fund cannot be expected
to be automatically profitable during unfavorable periods for the
stock market, or vice versa.
The Fund’s
Operating Risks
The Fund may change its
investment objective, Benchmark or investment strategies at any
time without shareholder approval or advance
notice.
Consistent with its authority under the
Trust Agreement and Delaware law, the Fund, in its sole discretion
and without shareholder approval or advance notice, may change the
Fund’s investment objective, Benchmark or investment
strategies, subject to applicable regulatory requirements,
including, but not limited to, any requirement to amend applicable
listing rules of the NYSE. The reasons for and circumstances that
may trigger any such changes may vary widely and cannot be
predicted. By way of example, the Fund may change the term
structure or underlying components of the Benchmark in furtherance
of the Fund’s investment objective of tracking the price of
sugar for future delivery if, due to market conditions, a potential
or actual imposition of position limits by the CFTC or futures
exchange rules, or the imposition of risk mitigation measures by a
futures commission merchant restricts the ability of the Fund to
invest in the current Benchmark Futures Contracts. Shareholders may
experience losses on their investments in the Fund as a result of
such changes.
The Fund is not a
registered investment company, so you do not have the protections
of the Investment Company Act of 1940.
The Fund is not an investment company
subject to the Investment Company Act of 1940. Accordingly,
you do not have the protections afforded by that statute, which,
for example, requires investment companies to have a board of
directors with a majority of disinterested directors and regulates
the relationship between the investment company and its investment
manager.
The Sponsor is leanly
staffed and relies heavily on key personnel to manage trading
activities.
In managing and directing the day to day
activities and affairs of the Fund, the Sponsor relies almost
entirely on a small number of individuals, including Mr. Sal
Gilbertie, Mr. Steve Kahler and Ms. Cory Mullen-Rusin. If Mr.
Gilbertie, Mr. Kahler or Ms. Mullen-Rusin were to leave or be
unable to carry out their present responsibilities, it may have an
adverse effect on the management of the Fund. To the extent
that the Sponsor establishes additional commodity pools, even
greater demands will be placed on these
individuals.
The Sponsor has limited
capital and may be unable to continue to manage the Fund if it
sustains continued losses.
The Sponsor was formed for the purpose of
managing the Trust, including the Fund, the other Teucrium Funds,
and any other series of the Trust that may be formed in the future,
and has been provided with capital primarily by its principals and
a small number of outside investors. If the Sponsor operates
at a loss for an extended period, its capital will be depleted, and
it may be unable to obtain additional financing necessary to
continue its operations. If the Sponsor were unable to
continue to provide services to the Fund, the Fund would be
terminated if a replacement sponsor could not be found. Any
expenses related to the operation of the Fund would need to be paid
by the Fund at the time of termination.
Position limits,
accountability levels and daily price fluctuation limits set by the
CFTC and the exchanges have the potential to cause tracking error,
which could cause the price of Shares to substantially vary from
the Benchmark and prevent you from being able to effectively use
the Fund as a way to hedge against sugar related losses or as a way
to indirectly invest in sugar.
The CFTC and U.S. designated contract
markets, such as the ICE Futures have established position limits
and accountability levels on the maximum net long or net short
Sugar Futures Contracts that any person or group of persons under
common trading control may hold, own or control. For example,
the current ICE Futures established position limit level for
investments in Sugar No. 11 Futures Contracts for the spot month,
which is defined as on and after the second business day following
the expiration of the regular option contract traded on the
expiring futures contract, is 5,000, the accountability level for
investments in ICE Sugar No. 11 Futures Contracts for any one month
is 10,000, and the accountability level for all combined months is
15,000. While accountability levels are not fixed ceilings,
they are thresholds above which the exchange may exercise greater
scrutiny and control over an investor, including limiting an
investor to holding no more Sugar No. 11 Futures Contracts than the
amount established by the accountability level. The Fund does
not intend to invest in Sugar Futures Contracts in excess of any
applicable accountability levels.
Accountability levels differ from position
limits in that they do not represent a fixed ceiling, but rather a
threshold above which a futures exchange may exercise greater
scrutiny and control over an investor’s positions. If a Fund
were to exceed an applicable accountability level for investments
in futures contracts, the exchange will monitor the Fund’s
exposure and may ask for further information on its activities,
including the total size of all positions, investment and trading
strategy, and the extent of liquidity resources of the Fund. If
deemed necessary by the exchange, the Fund could be ordered to
reduce its aggregate net position back
to the accountability level
In addition to position limits and
accountability levels, the exchanges set daily price fluctuation
limits on futures contracts. The daily price fluctuation
limit establishes the maximum amount that the price of futures
contracts may vary either up or down from the previous day’s
settlement price. Once the daily price fluctuation limit has
been reached in a particular futures contract, no trades may be
made at a price beyond that limit. Currently, ICE Futures
has not imposed maximum
daily price fluctuation limits on Sugar Futures
Contracts.
On December 16, 2016, as mandated by the
Dodd-Frank Act, the CFTC adopted a final rule that aggregate all
positions, for purposes of position limits; such positions include
futures contracts, futures-equivalent positions, over the counter
swaps and options (i.e., contracts that are not traded on
exchanges). These aggregation requirements became effective on
February 14, 2017 and could limit the Fund’s ability to
establish positions in commodity over the counter instruments if
the assets of the Fund were to grow
substantially.
As published in the January 14, 2021 Federal
Register, the Commodity Futures Trading Commission (CFTC) voted to
approve a final rule (Final Rule) regarding position limits for
certain futures contracts and economically equivalent
swaps. The Final Rule ends a decade of rulemaking activity in
which the CFTC proposed, amended, and re-proposed its position
limit rules and aggregation standards for speculative positions due
to certain amendments to the Commodity Exchange Act (CEA) by the
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
(Dodd-Frank Act). In the Final Rule, the CFTC confirmed that
federal speculative position limits are necessary for 25 core
referenced futures contracts and for any futures contracts and
options on futures contracts that are linked to those
contracts. The 25 core referenced futures contracts include
the nine “legacy” agricultural contracts that are
currently subject to federal position limits and 16 additional
non-legacy contracts. The Final Rule became effective on March 15,
2021, but a number of the requirements in the Final Rule have a
general compliance date of January 1, 2022, and later compliance
date of January 1, 2023 with respect to swaps-related requirements
and the elimination of previously granted risk management
exemptions. The Final Rule became effective on March 15, 2021, but
a number of the requirements in the Final Rule have a general
compliance date of January 1, 2022, and later compliance date of
January 1, 2023 with respect to swaps-related requirements and the
elimination of previously granted risk management
exemptions.
There are
technical and fundamental risks inherent in the trading system the
Sponsor intends to employ.
The Sponsor’s trading system is
quantitative in nature and it is possible that the Sponsor may make
errors. Any errors or imperfections in the Sponsor’s trading
system’s quantitative models, or in the data on which they
are based, could adversely affect the Sponsor’s effective use
of such trading systems. It is not possible or practicable for the
Sponsor’s trading system to factor all relevant, available
data into quantitative systems and/or trading decision. There is no
guarantee that the Sponsor will use any specific data or type of
data in making trading decisions on behalf of the Fund, nor is
there any guarantee that the data actually utilized in making
trading decisions on behalf of the Fund will be the most accurate
data or free from errors. In addition, it is possible that a
computer or software program may malfunction and cause an error in
computation.
The Fund and the Sponsor
may have conflicts of interest, which may cause them to favor their
own interests to your detriment.
The Fund and the Sponsor may have inherent
conflicts to the extent the Sponsor attempts to maintain the
Fund’s asset size in order to preserve its fee income and
this may not always be consistent with the Fund’s objective
of having the value of its Shares’ NAV track changes in the
Benchmark. The Sponsor’s officers and employees do not
devote their time exclusively to the Fund. These persons may
be directors, officers or employees of other entities. They
could have a conflict between their responsibilities to the Fund
and to those other entities.
In addition, the Sponsor’s principals,
officers or employees may trade securities and futures and related
contracts for their own accounts. A conflict of interest may
exist if their trades are in the same markets and occur at the same
time as the Fund trades using the clearing broker to be used by the
Fund. A potential conflict also may occur if the
Sponsor’s principals, officers or employees trade their
accounts more aggressively or take positions in their accounts that
are opposite, or ahead of, the positions taken by the
Fund.
The Sponsor has sole current authority to
manage the investments and operations of the Fund, and this may
allow it to act in a way that furthers its own interests and in
conflict with your best interests, including the authority of the
Sponsor to allocate expenses to and between the Funds.
Shareholders have very limited voting rights, which will limit the
ability to influence matters such as amendment of the Trust
Agreement, changes in the Fund’s basic investment policies,
dissolution of the Fund, or the sale or distribution of the
Fund’s assets.
Shareholders have only very
limited voting rights and generally will not have the power to
replace the Sponsor. Shareholders will not participate in the
management of the Fund and do not control the Sponsor so they will
not have influence over basic matters that affect the
Fund.
Shareholders will have very limited voting
rights with respect to the Fund’s affairs. Shareholders may
elect a replacement sponsor only if the current Sponsor resigns
voluntarily or loses its corporate charter. Shareholders will not
be permitted to participate in the management or control of the
Fund or the conduct of its business. Furthermore, any voting rights
on shares held by the Fund will be exercised by the Sponsor,
generally without seeking advice or voting instructions from Fund
Shareholders. Shareholders must therefore rely upon the duties and
judgment of the Sponsor to manage the Fund’s
affairs.
The Sponsor may manage a
large amount of assets and this could affect the Fund’s
ability to trade profitably.
Increases in assets under management may
affect trading decisions. While the Fund’s assets are
currently at manageable levels, the Sponsor does not intend to
limit the amount of Fund assets. The more assets the Sponsor
manages, the more difficult it may be for it to trade profitably
because of the difficulty of trading larger positions without
adversely affecting prices and performance and of managing risk
associated with larger positions.
The liability of the
Sponsor and the Trustee are limited, and the value of the Shares
will be adversely affected if the Fund is required to indemnify the
Trustee or the Sponsor.
Under the Trust Agreement, the Trustee and
the Sponsor are not liable, and have the right to be indemnified,
for any liability or expense incurred absent gross negligence or
willful misconduct on the part of the Trustee or Sponsor, as the
case may be. That means the Sponsor may require the assets of
the Fund to be sold in order to cover losses or liability suffered
by the Sponsor or by the Trustee. Any sale of that kind would
reduce the NAV of the Fund and the value of its
Shares.
Although the Shares of the
Fund are limited liability investments, certain circumstances such
as bankruptcy could increase a Shareholder’s
liability.
The Shares of the Fund are limited liability
investments; Shareholders may not lose more than the amount that
they invest plus any profits recognized on their investment.
However, Shareholders could be required, as a matter of bankruptcy
law, to return to the estate of the Fund any distribution they
received at a time when the Fund was in fact insolvent or that was
made in violation of its Trust Agreement.
You cannot be assured of
the Sponsor’s continued services, and discontinuance may be
detrimental to the Fund.
You cannot be assured that the Sponsor will
be willing or able to continue to service the Fund for any length
of time. The Sponsor was formed for the purpose of sponsoring
the Fund and other commodity pools and has limited financial
resources and no significant source of income apart from its
management fees from such commodity pools to support its continued
service for the Fund. If the Sponsor discontinues its
activities on behalf of the Fund or another series of the Trust,
the Fund may be adversely affected. If the Sponsor’s
registrations with the CFTC or memberships in the NFA were revoked
or suspended, the Sponsor would no longer be able to provide
services to the Fund.
The Fund could terminate at
any time and cause the liquidation and potential loss of your
investment and could upset the overall maturity and timing of your
investment portfolio.
The Fund may terminate at any time,
regardless of whether the Fund has incurred losses, subject to the
terms of the Trust Agreement. For example, the dissolution or
resignation of the Sponsor would cause the Trust to terminate
unless shareholders holding a majority of the outstanding shares of
the Trust, voting together as a single class, elect within 90 days
of the event to continue the Trust and appoint a successor
Sponsor. In addition, the Sponsor may terminate the Fund if
it determines that the Fund’s aggregate net assets in
relation to its operating expenses make the continued operation of
the Fund unreasonable or imprudent. As of the date of this
prospectus, the Fund pays the fees, costs, and expenses of its
operations. If the Sponsor and the Fund are unable to raise
sufficient funds so that the Fund’s expenses are reasonable
in relation to its NAV, the Fund may be forced to terminate, and
investors may lose all or part of their investment. Any expenses
related to the operation of the Fund would need to be paid by the
Fund at the time of termination.
However, no level of losses will require the
Sponsor to terminate the Fund. The Fund’s termination
would result in the liquidation of its investments and the
distribution of its remaining assets to the Shareholders on a pro
rata basis in accordance with their Shares, and the Fund could
incur losses in liquidating its investments in connection with a
termination. Termination could also negatively affect the
overall maturity and timing of your investment
portfolio.
As a Shareholder, you will
not have the rights enjoyed by investors in certain other types of
entities.
As interests in separate series of a
Delaware statutory trust, the Shares do not involve the rights
normally associated with the ownership of shares of a corporation
(including, for example, the right to bring shareholder oppression
and derivative actions). In addition, the Shares have limited
voting and distribution rights (for example, Shareholders do not
have the right to elect directors, as the Trust does not have a
board of directors, and generally will not receive regular
distributions of the net income and capital gains earned by the
Fund). The Fund is also not subject to certain investor
protection provisions of the Sarbanes Oxley Act of 2002 and the
NYSE Arca governance rules (for example, audit committee
requirements).
A court could potentially
conclude that the assets and liabilities of the Fund are not
segregated from those of another series of the Trust, thereby
potentially exposing assets in the Fund to the liabilities of
another series.
The Fund is a series of a Delaware statutory
trust and not itself a legal entity separate from the other
Teucrium Funds. The Delaware Statutory Trust Act provides
that if certain provisions are included in the formation and
governing documents of a statutory trust organized in series and if
separate and distinct records are maintained for any series and the
assets associated with that series are held in separate and
distinct records and are accounted for in such separate and
distinct records separately from the other assets of the statutory
trust, or any series thereof, then the debts, liabilities,
obligations and expenses incurred by a particular series are
enforceable against the assets of such series only, and not against
the assets of the statutory trust generally or any other series
thereof. Conversely, none of the debts, liabilities,
obligations and expenses incurred with respect to any other series
thereof is enforceable against the assets of such series. The
Sponsor is not aware of any court case that has interpreted this
inter-series limitation on liability or provided any guidance as to
what is required for compliance. The Sponsor intends to
maintain separate and distinct records for the Fund and account for
the Fund separately from any other Trust series, but it is possible
a court could conclude that the methods used do not satisfy the
Delaware Statutory Trust Act, which would potentially expose assets
in the Fund to the liabilities of one or more of the Teucrium Funds
and/or any other Trust series created in the
future.
The Sponsor and the Trustee
are not obligated to prosecute any action, suit or other proceeding
in respect of any Fund property.
Neither the Sponsor nor the Trustee is
obligated to, although each may in its respective discretion,
prosecute any action, suit or other proceeding in respect of any
Fund property. The Trust Agreement does not confer upon
Shareholders the right to prosecute any such action, suit or other
proceeding.
The Fund does not expect to
make cash distributions.
The Sponsor intends to re-invest any income
and realized gains of the Fund in additional Benchmark Component
Futures Contracts or cash and cash equivalents rather than
distributing cash to Shareholders. Therefore, unlike mutual
funds, commodity pools or other investment pools that generally
distribute income and gains to their investors, the Fund generally
will not distribute cash to Shareholders. You should not
invest in the Fund if you will need cash distributions from the
Fund to pay taxes on your share of income and gains of the Fund, if
any, or for any other reason. Although the Fund does not
intend to make cash distributions, it reserves the right to do so
in the Sponsor’s sole discretion, in certain situations,
including for example, if the income earned from its investments
held directly or posted as margin may reach levels that merit
distribution, e.g., at levels where such income is not necessary to
support its underlying investments in Benchmark Component Futures
Contracts and investors adversely react to being taxed on such
income without receiving distributions that could be used to pay
such tax. Cash distributions may be made in these and similar
instances.
There is a risk that the
Fund will not have sufficient total net assets to compensate for
the fees and expenses that it must pay and as such the expense
ratio of the Fund may be higher than that filed in this
document.
The Fund pays management fees at an annual
rate of 1.00% of its average net assets, brokerage commissions and
various other expenses from its ongoing operations (e.g., fees of
the Administrator, Trustee and Distributor), resulting in a total
estimated expense ratio of approximately 2.46% of net assets. These
fees and expenses must be paid in all events, regardless of the
Fund’s total net assets.
The Fund may incur higher
fees and expenses upon renewing existing or entering into new
contractual relationships.
The arrangements between clearing brokers
and counterparties on the one hand and the Fund on the other
generally are terminable by the clearing brokers or counterparty
upon notice to the Fund. In addition, the agreements between
the Fund and its third-party service providers, such as the
Distributor and the Custodian, are generally terminable at
specified intervals. Upon termination, the Sponsor may be
required to renegotiate or make other arrangements for obtaining
similar services if the Fund intends to continue to operate.
Comparable services from another party may not be available, or
even if available, these services may not be available on the terms
as favorable as those of the expired or terminated
arrangements.
The Fund may experience a
higher breakeven if interest rates
decline.
The Fund seeks to earn interest on cash
balances available for investment. If actual interest rates earned
were to continue to fall and if the Sponsor were not able to waive
expenses sufficient to cover the deficit, the breakeven estimated
by the Fund in this prospectus could be higher.
The Fund is not actively
managed.
The Fund is not actively managed and is
designed to track a benchmark, regardless of whether the price of
the Benchmark Component Futures Contracts is flat, declining or
rising. As a result, the Fund may sustain losses that may have been
avoidable if the Fund was actively managed.
The Net Asset Value
calculation of the Fund may be overstated or understated due to the
valuation method employed when a settlement price is not available
on the date of net asset value
calculation.
The Fund’s NAV includes, in part, any
unrealized profits or losses on open swap agreements, futures or
forward contracts. Under normal circumstances, the NAV
reflects the quoted ICE Futures settlement price of open futures
contracts on the date when the NAV is being calculated. In
instances when the quoted settlement price of futures contracts
traded on an exchange may not be reflective of fair value based on
market condition, generally due to the operation of daily limits or
other rules of the exchange or otherwise the NAV may not reflect
the fair value of open futures contracts on such date. For purposes
of financial statements and reports, the Sponsor will recalculate
the NAV where necessary to reflect the “fair value” of
a Futures Contract when the Futures Contract closes at its price
fluctuation limit for the day.
An unanticipated number of
redemption requests during a short period of time could have an
adverse effect on the NAV of the Fund.
If a substantial number of requests for
redemption of Redemption Baskets are received by the Fund during a
relatively short period of time, the Fund may not be able to
satisfy the requests from the Fund’s assets not committed to
trading. As a consequence, it could be necessary to liquidate the
Fund’s trading positions before the time that its trading
strategies would otherwise call for liquidation, which may result
in losses.
Fund assets may be depleted
if investment performance does not exceed
fees.
In addition to certain fees paid to the
Fund’s service providers, the Fund pays the Sponsor a fee of
1.00% of asset under management per annum, regardless of Fund
performance. Over time, the Fund’s assets could be depleted
if investment performance does not exceed such
fees.
The liquidity of the Shares
may be affected by the withdrawal from participation of Authorized
Purchasers, market makers, or other significant secondary-market
participants which could adversely affect the market price of the
Shares.
Only an Authorized Purchaser may engage in
creation or redemption transactions directly with the Fund. The
Fund has a limited number of institutions that act as Authorized
Purchasers. To the extent that these institutions exit the business
or are unable to proceed with creation and/or redemption orders
with respect to the Fund and no other Authorized Purchaser is able
to step forward to create or redeem Creation Units, Fund shares may
trade at a discount to NAV and possibly face trading halts and/or
delisting. In addition, a decision by a market maker, lead market
maker, or other large investor to cease activities for the Fund or
a decision by a secondary market participant to sell a significant
number of the Fund’s Shares could adversely affect liquidity,
the spread between the bid and ask quotes, and potentially the
price of the Shares. The Sponsor can make no guarantees that
participation by Authorized Purchasers or market makers will
continue.
If a minimum number of
Shares is outstanding, market makers may be less willing to
purchase Shares in the secondary market which may limit your
ability to sell Shares.
There is a minimum number of baskets and
associated Shares specified for the Fund. If the Fund experienced
redemptions that caused the number of Shares outstanding to
decrease to the minimum level of Shares required to be outstanding,
until the minimum number of Shares is again exceeded through the
purchase of a new Creation Basket, there can be no more redemptions
by an Authorized Purchaser. In such case, market makers may be less
willing to purchase Shares from investors in the secondary market,
which may in turn limit the ability of Shareholders of the Fund to
sell their Shares in the secondary market. These minimum levels for
the Fund are 50,000 Shares representing two baskets. The minimum
level of Shares specified for the Fund is subject to change. As of
February 28, 2021, there were 2,050,004 Shares outstanding. (The
current number of Shares outstanding is posted daily on our
website, www.teucrium.com.)
The postponement,
suspension or rejection of redemption orders could adversely affect
a shareholder redeeming their Shares in the
Fund.
The resulting delay of any postponement,
suspension or rejection may adversely affect the value of the
Shareholders’ redemption proceeds if the NAV of the Fund
declines during the period of delay.
The failure or bankruptcy
of a clearing broker could result in substantial losses for the
Fund; the clearing broker could be subject to proceedings that
impair its ability to execute the Fund’s
trades.
Under CFTC regulations, a clearing broker
with respect to the Fund’s exchange-traded sugar interests
must maintain customers’ assets in a bulk segregated
account. If a clearing broker fails to do so or is unable to
satisfy a substantial deficit in a customer account, its other
customers may be subject to risk of a substantial loss of their
funds in the event of that clearing broker’s
bankruptcy. In that event, the clearing broker’s
customers, such as the Fund, are entitled to recover, even in
respect of property specifically traceable to them, only a
proportional share of all property available for distribution to
all of that clearing broker’s customers. The Fund also
may be subject to the risk of the failure of, or delay in
performance by, any exchanges and markets and their clearing
organizations, if any, on which sugar interests are
traded.
From time to time, the clearing brokers may
be subject to legal or regulatory proceedings in the ordinary
course of their business. A clearing broker’s
involvement in costly or time-consuming legal proceedings may
divert financial resources or personnel away from the clearing
broker’s trading operations, which could impair the clearing
broker’s ability to successfully execute and clear the
Fund’s trades.
The failure or insolvency
of the Fund’s Custodian or other financial institution in
which the Fund has deposits could result in a substantial loss of
the Fund’s assets.
As noted above,
the vast majority of the Fund’s assets are held in cash and
cash equivalents with the Custodian and other financial
institutions, if applicable. The insolvency of the Custodian and
any financial institution in which the Fund holds cash and cash
equivalents could result in a complete loss of the Fund’s
assets.
Third parties may infringe
upon or otherwise violate intellectual property rights or assert
that the Sponsor has infringed or otherwise violated their
intellectual property rights, which may result in significant
costs, litigation, and diverted attention of Sponsor’s
management.
Third parties may assert that the Sponsor
has infringed or otherwise violated their intellectual property
rights. Third parties may independently develop business
methods, trademarks or proprietary software and other technology
similar to that of the Sponsor and claim that the Sponsor has
violated their intellectual property rights, including their
copyrights, trademark rights, trade names, trade secrets and patent
rights. As a result, the Sponsor may have to litigate in the
future to determine the validity and scope of other parties’
proprietary rights or defend itself against claims that it has
infringed or otherwise violated other parties’ rights.
Any litigation of this type, even if the Sponsor is successful and
regardless of the merits, may result in significant costs, divert
resources from the Fund, or require the Sponsor to change its
proprietary software and other technology or enter into royalty or
licensing agreements.
On December 17, 2013, the Sponsor was issued
a patent on certain business methods and procedures used with
respect to the Fund. The patent protects the valuation engine which
calculates asset values of futures contracts corresponding to the
Fund benchmark in a locked position. A U.S. government maintenance
fee is paid every three and one-half years from the issue date. The
Sponsor will pay the maintenance fee in 2021. The Sponsor utilizes
certain proprietary software. Any unauthorized use of such
proprietary software, business methods and/or procedures could
adversely affect the competitive advantage of the Sponsor or the
Fund and/or require the Sponsor to take legal action to protect its
rights.
The Fund may experience
substantial losses on transactions if the computer or
communications system fails.
The Fund’s trading activities depend
on the integrity and performance of the computer and communications
systems supporting them. Extraordinary transaction volume,
hardware or software failure, power or telecommunications failure,
a natural disaster, cyber-attack or other catastrophe could cause
the computer systems to operate at an unacceptably slow speed or
even fail. Any significant degradation or failure of the
systems that the Sponsor uses to gather and analyze information,
enter orders, process data, monitor risk levels and otherwise
engage in trading activities may result in substantial losses on
transactions, liability to other parties, lost profit
opportunities, damages to the Sponsor’s and Fund’s
reputations, increased operational expenses and diversion of
technical resources.
If the computer and
communications systems are not upgraded when necessary, the
Fund’s financial condition could be
harmed.
The development of complex computer and
communications systems and new technologies may render the existing
computer and communications systems supporting the Fund’s
trading activities obsolete. In addition, these computer and
communications systems must be compatible with those of third
parties, such as the systems of exchanges, clearing brokers and the
executing brokers. As a result, if these third parties
upgrade their systems, the Sponsor will need to make corresponding
upgrades to effectively continue its trading activities. The
Sponsor may have limited financial resources for these upgrades or
other technological changes. The Fund’s future success may
depend on the Sponsor’s ability to respond to changing
technologies on a timely and cost-effective
basis.
The Fund depends on the
reliable performance of the computer and communications systems of
third parties, such as brokers and futures exchanges, and may
experience substantial losses on transactions if they
fail.
The Fund depends on the proper and timely
function of complex computer and communications systems maintained
and operated by the futures exchanges, brokers and other data
providers that the Sponsor uses to conduct trading
activities. Failure or inadequate performance of any of these
systems could adversely affect the Sponsor’s ability to
complete transactions, including its ability to close out
positions, and result in lost profit opportunities and significant
losses on commodity interest transactions. This could have a
material adverse effect on revenues and materially reduce the
Fund’s available capital. For example, unavailability
of price quotations from third parties may make it difficult or
impossible for the Sponsor to conduct trading activities so that
the Fund will closely track the Benchmark. Unavailability of
records from brokerage firms may make it difficult or impossible
for the Sponsor to accurately determine which transactions have
been executed or the details, including price and time, of any
transaction executed. This unavailability of information also
may make it difficult or impossible for the Sponsor to reconcile
its records of transactions with those of another party or to
accomplish settlement of executed transactions.
The occurrence of a severe
weather event, natural disaster, terrorist attack, outbreak or
public health emergency as declared by the World Health
Organization, the continuation or expansion of war or other
hostilities, or a prolonged government shutdown may have
significant adverse effects on the Fund and its investments and
alter current assumptions and
expectations.
The operations of the Fund, the exchanges,
brokers and counterparties with which the Fund does business, and
the markets in which the Fund does business could be severely
disrupted in the event of a severe weather event, natural disaster,
major terrorist attack, cyber-attack, data breach, outbreak or
public health emergency as declared by the World Health
Organization (such as the recent pandemic spread of the novel
coronavirus known as COVID-19), or the continuation or expansion of
war or other hostilities. Global terrorist attacks, anti-terrorism
initiatives, and political unrest, as well as the adverse impact
the COVID-19 pandemic will have on the global and U.S. markets and
economy, continue to fuel this concern. For example, the COVID-19
pandemic may adversely impact the level of services currently
provided by the U.S. government, could weaken the U.S. economy,
interfere with the commodities markets that rely upon data
published by U.S. federal government agencies, and prevent the
Funds from receiving necessary regulatory review or approvals. The
types of events discussed above, including the COVID-19 pandemic,
are highly disruptive to economies and markets and have recently
led, and may continue to lead, to increased market volatility and
significant market losses.
More generally, a climate of uncertainty and
panic, including the contagion of the COVID-19 virus and other
infectious viruses or diseases, may adversely affect global,
regional, and local economies and reduce the availability of
potential investment opportunities, and increases the difficulty of
performing due diligence and modeling market conditions,
potentially reducing the accuracy of financial projections. Under
these circumstances, the Fund may have difficulty achieving its
investment objective which may adversely impact performance.
Further, such events can be highly disruptive to economies and
markets, significantly disrupt the operations of individual
companies (including, but not limited to, the Fund’s Sponsor
and third party service providers), sectors, industries, markets,
securities and commodity exchanges, currencies, interest and
inflation rates, credit ratings, investor sentiment, and other
factors affecting the value of the Fund’s investments. These
factors could cause substantial market volatility, exchange trading
suspensions and closures that could impact the ability of the Fund
to complete redemptions and otherwise affect Fund performance and
Fund trading in the secondary market. A widespread crisis may also
affect the global economy in ways that cannot necessarily be
foreseen at the current time. How long such events will last and
whether they will continue or recur cannot be predicted. Impacts
from these events could have significant impact on the Fund’s
performance, resulting in losses to your investment. The past,
current and future global economic impact may cause the underlying
assumptions and expectations of the Fund to become outdated quickly
or inaccurate, resulting in significant losses.
Failures or breaches of
electronic systems could disrupt the Fund’s trading activity
and materially affect the Fund’s
profitability.
Failures or breaches of the electronic
systems of the Fund, the Sponsor, the Custodian or other financial
institutions in which the Fund invests, or the Fund’s other
service providers, market makers, Authorized Purchasers, NYSE Arca,
exchanges on which Sugar Futures Contracts or other sugar interests
are traded or cleared, or counterparties have the ability to cause
disruptions and negatively impact the Fund’s business
operations, potentially resulting in financial losses to the Fund
and its shareholders. Such failures or breaches may include
intentional cyber-attacks that may result in an unauthorized party
gaining access to electronic systems in order to misappropriate the
Fund’s assets or sensitive information. While the Fund has
established business continuity plans and risk management systems
seeking to address system breaches or failures, there are inherent
limitations in such plans and systems. Furthermore, the Fund cannot
control the cyber security plans and systems of the Custodian or
other financial institutions in which the Fund invests, or the
Fund’s other service providers, market makers, Authorized
Purchasers, NYSE Arca, exchanges on which Sugar Futures Contracts
or other sugar interests are traded or cleared, or
counterparties.
An investment in a Fund
faces numerous risks from its shares being traded in the secondary
market, any of which may lead to the Fund’s shares trading at
a premium or discount to NAV.
Although the Fund’s shares are
listed for trading on the NYSE Arca, there can be no assurance that
an active trading market for such shares will develop or be
maintained. Trading in the Fund’s shares may be halted due to
market conditions or for reasons that, in the view of the NYSE
Arca, make trading in shares inadvisable. There can be no assurance
that the requirements of the NYSE Arca necessary to maintain the
listing of the Fund will continue to be met or will remain
unchanged or that the shares will trade with any volume, or at all.
The NAV of the Fund’s shares will generally fluctuate with
changes in the market value of the Fund’s portfolio holdings.
The market prices of shares will generally fluctuate in accordance
with changes in the Fund’s NAV and supply and demand of
shares on the NYSE Arca. It cannot be predicted whether the
Fund’s shares will trade below, at or above their NAV.
Investors buying or selling Fund shares in the secondary market
will pay brokerage commissions or other charges imposed by brokers
as determined by that broker. Brokerage commissions are often a
fixed amount and may be a significant proportional cost for
investors seeking to buy or sell relatively small amounts of
shares.
The NYSE
Arca may halt trading in the Shares which would adversely impact
your ability to sell Shares.
Trading in
Shares of the Fund may be halted due to market conditions or, in
light of NYSE Arca rules and procedures, for reasons that, in view
of the NYSE Arca, make trading in Shares inadvisable. In addition,
trading is subject to trading halts caused by extraordinary market
volatility pursuant to “circuit breaker” rules that
require trading to be halted for a specified period based on a
specified market decline. There can be no assurance that the
requirements necessary to maintain the listing of the Shares will
continue to be met or will remain unchanged. The Fund will be
terminated if its Shares are delisted.
The lack of active trading
markets for the Shares of the Fund may result in losses on your
investment in the Fund at the time of disposition of your
Shares.
Although the Shares of the Fund will be
listed and traded on the NYSE Arca, there can be no guarantee that
an active trading market for the Shares of the Fund will be
maintained. If you need to sell your Shares at a time when no
active market for them exists, the price you receive for your
Shares, assuming that you are able to sell them, likely will be
lower than what you would receive if an active market did
exist.
Risk of
Leverage and Volatility
The Fund may become
leveraged and may result in losses on all or substantially all of
your investment if the Fund’s trading positions suddenly turn
unprofitable.
Commodity pools’ trading positions in
futures contracts or other commodity interests are typically
required to be secured by the deposit of margin funds that
represent only a small percentage of a futures contract’s (or
other commodity interest’s) entire market value. This feature
permits commodity pools to “leverage” their assets by
purchasing or selling futures contracts (or other commodity
interests) with an aggregate notional amount in excess of the
commodity pool’s assets. While this leverage can increase a
pool’s profits, relatively small adverse movements in the
price of the pool’s commodity interests can cause significant
losses to the pool. While the Sponsor does not intend to leverage
the Fund’s assets, it is not prohibited from doing so under
the Trust Agreement. If the Sponsor was to cause or permit the Fund
to become leveraged, you could lose all or substantially all of
your investment if the Fund’s trading positions suddenly turn
unprofitable.
The price of sugar can be
volatile which could cause large fluctuations in the price of
Shares.
As discussed in more detail above, price
movements for sugar are influenced by, among other things, weather
conditions, crop disease, crop failure, transportation and storage
difficulties, production decisions, various planting, growing and
harvesting problems, governmental policies, various economic and
monetary events, changing demand, and seasonal fluctuations in
supply. More generally, commodity prices may be influenced by
economic and monetary events such as changes in interest rates,
changes in balances of payments and trade, U.S. and international
inflation rates, currency valuations and devaluations, U.S. and
international economic events, and changes in the philosophies and
emotions of market participants. Because the Fund invests
primarily in interests in a single commodity, it is not a
diversified investment vehicle, and therefore may be subject to
greater volatility than a diversified portfolio of stocks or bonds
or a more diversified commodity pool.
Over the
counter Contract Risk
Over the counter
transactions are subject to changing
regulation.
A portion of the Fund’s assets may be
used to trade over the counter sugar interests, such as forward
contracts or swaps. The markets for over the counter contracts will
continue to rely upon the integrity of market participants in lieu
of the additional regulation imposed by the CFTC on participants in
the futures markets. To date, the forward markets have been largely
unregulated, except for anti-manipulation and anti-fraud
provisions, forward contracts have been executed bi-laterally and,
in general historically, forward contracts have not been cleared or
guaranteed by a third party. While increased regulation of over the
counter commodity interests is likely to result from changes that
are required to be effectuated by the Dodd-Frank Act, there is no
guarantee that such increased regulation will be effective to
reduce these risks.
The Fund will be subject to
credit risk with respect to counterparties to over the counter
contracts entered into by the Fund.
The Fund faces the risk of non-performance
by the counterparties to the over the counter contracts.
Unlike in futures contracts, the counterparty to these contracts is
generally a single bank or other financial institution, rather than
a clearing organization backed by a group of financial
institutions. As a result, there will be greater counterparty
credit risk in these transactions. A counterparty may not be
able to meet its obligations to the Fund, in which case the Fund
could suffer significant losses on these
contracts.
If a counterparty becomes bankrupt or
otherwise fails to perform its obligations due to financial
difficulties, the Fund may experience significant delays in
obtaining any recovery in a bankruptcy or other reorganization
proceeding. During any such period, the Fund may have
difficulty in determining the value of its contracts with the
counterparty, which in turn could result in the overstatement or
understatement of the Fund’s NAV. The Fund may
eventually obtain only limited recovery or no recovery in such
circumstances.
The Fund may be subject to
liquidity risk with respect to over the counter
contracts.
Over the counter contracts may have terms
that make them less marketable than Sugar Futures Contracts. Over
the counter contracts are less marketable because they are not
traded on an exchange, do not have uniform terms and conditions,
and are entered into based upon the creditworthiness of the parties
and the availability of credit support, such as collateral, and in
general, they are not transferable without the consent of the
counterparty. These conditions make such contracts less liquid than
standardized futures contracts traded on a commodities exchange and
diminish the ability to realize the full value of such contracts.
In addition, even if collateral is used to reduce counterparty
credit risk, sudden changes in the value of over the counter
transactions may leave a party open to financial risk due to a
counterparty default since the collateral held may not cover a
party’s exposure on the transaction in such
situations.
In general, valuing OTC derivatives is less
certain than valuing actively traded financial instruments such as
exchange traded futures contracts and securities because the price
and terms on which such OTC derivatives are entered into or can be
terminated are individually negotiated, and those prices and terms
may not reflect the best price or terms available from other
sources. In addition, while market makers and dealers generally
quote indicative prices or terms for entering into or terminating
OTC contracts, they typically are not contractually obligated to do
so, particularly if they are not a party to the transaction. As a
result, it may be difficult to obtain an independent value for an
outstanding OTC derivatives transaction.
The foregoing liquidity risks could impact
adversely affect the Fund’s ability to meet its investment
objective.
In addition, regulations adopted by global
prudential regulators that are now in effect require certain
prudentially regulated entities and certain of their affiliates and
subsidiaries (including swap dealers) to include in their
derivatives contracts and certain other financial contracts, terms
that delay or restrict the rights of counterparties (such as the
Funds) to terminate such contracts, foreclose upon collateral,
exercise other default rights or restrict transfers of credit
support in the event that the prudentially regulated entity and/or
its affiliates are subject to certain types of resolution or
insolvency proceedings. Similar regulations and laws have been
adopted in non-US jurisdictions that may apply to a Fund’s
counterparties located in those jurisdictions. It is possible that
these new requirements, as well as potential additional related
government regulation, could adversely affect a Fund’s
ability to terminate existing derivatives contracts, exercise
default rights or satisfy obligations owed to it with collateral
received under such contracts.
Risk of Trading in
International Markets
Trading in international
markets would expose the Fund to credit and regulatory
risk.
A significant portion of the Sugar Futures
Contracts entered into by the Fund are traded on United States
exchanges including ICE Futures. However, a portion of the
Fund’s trades may take place on markets or exchanges outside
the United States. Some non-U.S. markets present risks
because they are not subject to the same degree of regulation as
their U.S. counterparts. None of the CFTC, NFA, or any
domestic exchange regulates activities of any foreign boards of
trade or exchanges, including the execution, delivery and clearing
of transactions, has the power to compel enforcement of the rules
of a foreign board of trade or exchange or of any applicable
non-U.S. laws. Similarly, the rights of market participants,
such as the Fund, in the event of the insolvency or bankruptcy of a
non-U.S. market or broker are also likely to be more limited than
in the case of U.S. markets or brokers. As a result, in these
markets, the Fund has less legal and regulatory protection than it
does when it trades domestically. Currently the Fund does not place
trades on any markets or exchanges outside of the United States and
does not anticipate doing so in the foreseeable
future.
In some of these non-U.S. markets, the
performance on a futures contract is the responsibility of the
counterparty and is not backed by an exchange or clearing
corporation and therefore exposes the Fund to credit risk.
Additionally, trading on non-U.S. exchanges is subject to the risks
presented by exchange controls, expropriation, increased tax
burdens and exposure to local economic declines and political
instability. An adverse development with respect to any of
these variables could reduce the profit or increase the loss earned
on trades in the affected international
markets.
International trading
activities subject the Fund to foreign exchange
risk.
The price of any non-U.S. sugar interest
and, therefore, the potential profit and loss on such investment,
may be affected by any variance in the foreign exchange rate
between the time the order is placed and the time it is liquidated,
offset or exercised. However, a portion of the trades for the Fund
may take place in markets and on exchanges outside of the U.S. Some
non-U.S. markets present risks because they are not subject to the
same degree of regulation as their U.S. counterparts. As a
result, changes in the value of the local currency relative to the
U.S. dollar may cause losses to the Fund even if the contract is
profitable.
The CFTC’s implementation of its
regulations under the Dodd-Frank Act may further affect the
Fund’s ability to enter into foreign exchange contracts and
to hedge its exposure to foreign exchange
losses.
The Fund’s
international trading could expose it to losses resulting from
non-U.S. exchanges that are less developed or less reliable than
United States exchanges.
Some non-U.S. exchanges also may be in a
more developmental stage so that prior price histories may not be
indicative of current price dynamics. In addition, the Fund
may not have the same access to certain positions on foreign
trading exchanges as do local traders, and the historical market
data on which the Sponsor bases its strategies may not be as
reliable or accessible as it is for U.S.
exchanges.
Please refer to “U.S. Federal Income
Tax Considerations” for information regarding the U.S.
federal income tax consequences of the purchase, ownership and
disposition of Shares.
Your tax liability from
holding Shares may exceed the amount of distributions, if any, on
your Shares.
Cash or property will be distributed by the
Fund at the sole discretion of the Sponsor, and the Sponsor
currently does not intend to make cash or other distributions with
respect to Shares. You will be required to pay U.S. federal
income tax and, in some cases, state, local, or foreign income tax,
on your allocable share of the Fund’s taxable income, without
regard to whether you receive distributions or the amount of any
distributions. Therefore, the tax liability resulting from
your ownership of Shares may exceed the amount of cash or value of
property (if any) distributed.
Your allocable share of
income or loss for U.S. federal income tax purposes may differ from
your economic income or loss on your
Shares.
Due to the application of the assumptions
and conventions applied by the Fund in making allocations for U.S.
federal income tax purposes and other factors, your allocable share
of the Fund’s income, gain, deduction or loss may be
different than your economic profit or loss from your Shares for a
taxable year. This difference could be temporary or permanent
and, if permanent, could result in your being taxed on amounts in
excess of your economic income.
Items of income, gain,
deduction, loss and credit with respect to Shares could be
reallocated (or for taxable years beginning after December 31,
2017, the Fund itself could be liable for U.S. federal income tax
along with any interest or penalties) if the IRS does not accept
the assumptions and conventions applied by the Fund in allocating
those items, with potential adverse tax consequences for
you.
The Fund is treated as a partnership for
United States federal income tax purposes. The U.S. tax rules
pertaining to entities taxed as partnerships are complex and their
application to publicly traded partnerships such as the Fund, is in
many respects uncertain. The Fund applies certain assumptions and
conventions in an attempt to comply with the intent of the
applicable rules and to report taxable income, gains, deductions,
losses and credits in a manner that properly reflects
Shareholders’ economic gains and losses. These assumptions
and conventions may not fully comply with all aspects of the
Internal Revenue Code of 1986, as amended (the “Code”),
and applicable Treasury Regulations, however, and it is possible
that the U.S. Internal Revenue Service (the “IRS”) will
successfully challenge our allocation methods and require us to
reallocate items of income, gain, deduction, loss or credit in a
manner that adversely affects you. If this occurs, you may be
required to file an amended tax return and to pay additional taxes
plus deficiency interest.
In addition, for taxable years beginning
after December 31, 2017, the Fund may be liable for U.S. federal
income tax on any “imputed underpayment” of tax
resulting from an adjustment as a result of an IRS audit. The
amount of the imputed underpayment generally includes increases in
allocations of items of income or gains to any investor and
decreases in allocations of items of deduction, loss, or credit to
any investor without any offset for any corresponding reductions in
allocations of items of income or gain to any investor or increases
in allocations of items of deduction, loss, or credit to any
investor. If the Fund is required to pay any U.S. federal income
tax on any imputed underpayment, the resulting tax liability would
reduce the net assets of the Fund and would likely have an adverse
impact on the value of the Shares. In such a case, the tax
liability would in effect be borne by Shareholders that own Shares
at the time of such assessment, which may be different persons, or
persons with different ownership percentages, than persons owning
Shares for the tax year under audit. Under certain circumstances,
the Fund may be eligible to make an election to cause Shareholders
to take into account the amount of any imputed underpayment,
including any interest and penalties. The ability of a publicly
traded partnership such as the Fund to make this election is
uncertain. If the election is made, the Fund would be required to
provide Shareholders who owned beneficial interests in the Shares
in the year to which the adjusted allocations relate with a
statement setting forth their proportionate shares of the
adjustment (“Adjusted K-1s”). The investors would be
required to take the adjustment into account in the taxable year in
which the Adjusted K-1s are issued. For an additional discussion
please see “U.S. Federal Income Tax Considerations –
Other Tax Matters.”
If the Fund is required to
withhold tax with respect to any Non-U.S. Shareholders, the cost of
such withholding may be borne by all
Shareholders.
Under certain circumstances, the Fund may be
required to pay withholding tax with respect to allocations to
Non-U.S. Shareholders. Although the Trust Agreement provides that
any such withholding will be treated as being distributed to the
Non-U.S. Shareholder, the Fund may not be able to cause the
economic cost of such withholding to be borne by the Non-U.S.
Shareholder on whose behalf such amounts were withheld since the
Fund does not intend to make any distributions. Under such
circumstances, the economic cost of the withholding may be borne by
all Shareholders, not just the Shareholders on whose behalf such
amounts were withheld. This could have a material impact on the
value of your Shares.
The Fund could be treated
as a corporation for federal income tax purposes, which may
substantially reduce the value of your
Shares.
The Trust has received an opinion of counsel
that, under current U.S. federal income tax laws, the Fund will be
treated as a partnership that is not taxable as a corporation for
U.S. federal income tax purposes, provided that, among other
things, (i) at least 90 percent of the Fund’s annual gross
income consists of “qualifying income” as defined in
the Code, (ii) the Fund is organized and operated in accordance
with its governing agreements and applicable law, and (iii) the
Fund does not elect to be taxed as a corporation for U.S. federal
income tax purposes. Although the Sponsor anticipates that the Fund
has satisfied and will continue to satisfy the “qualifying
income” requirement for all of its taxable years, that result
cannot be assured. The Fund has not requested and will not request
any ruling from the IRS with respect to its classification as a
partnership not taxable as a corporation for U.S. federal income
tax purposes. If the IRS were to successfully assert that the Fund
is taxable as a corporation for U.S. federal income tax purposes in
any taxable year, rather than passing through its income, gains,
losses and deductions proportionately to Shareholders, the Fund
would be subject to tax on its net income for the year at corporate
tax rates. In addition, although the Sponsor does not currently
intend to make distributions with respect to Shares, any
distributions would be taxable to Shareholders as dividend income
to the extent of the Fund’s current and accumulated earnings
and profits, then treated as a tax-free return of capital to the
extent of the Shareholder’s basis in the Shares (and will
reduce the basis), and, to the extent it exceeds a
Shareholder’s basis in such Shares, as capital gain for
Shareholders who hold their Shares as capital assets. Taxation of
the Fund as a corporation could materially reduce the after-tax
return on an investment in Shares and could substantially reduce
the value of your Shares.
Tax legislation that has
been or could be enacted may affect you with respect to your
investment in the Fund.
Legislative, regulatory or administrative
changes could be enacted or promulgated at any time, either
prospectively or with retroactive effect, and may adversely affect
the Fund and its Shareholders. Please consult a tax advisor
regarding the implications of an investment in Shares of the
Teucrium Funds, including without limitation the federal, state,
local and foreign tax consequences.
PROSPECTIVE INVESTORS ARE
STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO
THE POSSIBLE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN SHARES;
SUCH TAX CONSEQUENCES MAY DIFFER IN RESPECT OF DIFFERENT
INVESTORS.
THE
OFFERING
The Fund in General
The Fund’s investment objective is to
provide investors with a cost-efficient way to gain price exposure
to the sugar market for future delivery. The Sponsor developed the
Benchmark as a representation of the sugar market for future
delivery.
Under normal market conditions, the Fund
will invest in the Benchmark Component Futures Contracts and cash
and cash equivalents. The Sponsor believes that by investing in
Benchmark Component Futures Contracts, the Fund’s net asset
value (“NAV”) will closely track the Benchmark. The
Sponsor also believes that because of market arbitrage
opportunities, the market price at which investors will purchase
and sell Shares through their broker-dealer will closely track the
Fund’s NAV. The Sponsor believes that the net effect of these
relationships is that the Fund’s market price on the NYSE
Arca at which investors purchase and sell Shares will closely track
the sugar market for future delivery, as measured by the
Benchmark.
Consistent with applicable provisions of the
Trust Agreement and Delaware law, the Fund has broad authority to
make changes to the Fund’s operations. Consistent with this
authority, the Fund, in its sole discretion and without shareholder
approval or advance notice, may change its investment objective,
Benchmark, or investment strategies. The Fund has no current
intention to make any such change, and any change is subject to
applicable regulatory requirements, including, but not limited to,
any requirement to amend applicable listing rules of the
NYSE.
The reasons for and circumstances that may
trigger any such changes may vary widely and cannot be predicted.
However, by way of example, the Fund may change the term structure
or underlying components of the Benchmark in furtherance of the
Fund’s investment objective of tracking the price of sugar
for future delivery if, due to market conditions, a potential or
actual imposition of position limits by the CFTC or futures
exchange rules, or the imposition of risk mitigation measures by a
futures commission merchant restricts the ability of the Fund to
invest in the current Benchmark Futures Contracts. The Fund would
file a current report on Form 8-K and a prospectus supplement to
describe any such change and the effective date of the change.
Shareholders may modify their holdings of the Fund’s shares
in response to any change by purchasing or selling Fund shares
through their broker-dealer.
The Fund is organized as a series of the
Teucrium Commodity Trust, a statutory trust organized under the
laws of the State of Delaware on September 11, 2009. Currently, the
Trust has five series that are separate operating commodity pools:
the Teucrium Corn Fund, the Teucrium Wheat Fund, the Teucrium
Soybean Fund, the Teucrium Sugar Fund, and the Teucrium
Agricultural Fund. Additional series of the Trust may be created in
the future at the Sponsor’s discretion. The Fund maintains
its main business office at Three Main Street, Suite 215,
Burlington Vermont 05401. The Fund is a commodity pool. It operates
pursuant to the terms of the Trust Agreement, which is dated as of
April 26, 2019 and grants full management control to the
Sponsor.
See “Prior Performance of the
Fund” on page 30 for more information about prior performance
of the Fund.
The Sponsor of the Trust is Teucrium
Trading, LLC, a Delaware limited liability company. The principal
office of the Sponsor and the Trust are located at Three Main
Street, Suite 215, Burlington, Vermont 05401. The Sponsor
registered as a CPO with the CFTC and became a member of the NFA on
November 10, 2009. The Sponsor registered as a Commodity Trading
Advisor (“CTA”) with the CFTC effective September 8,
2017.
Aside from establishing the series of the
Trust, operating those series that have commenced offering their
shares, and obtaining capital from a small number of outside
investors in order to engage in these activities, the Sponsor has
not engaged in any other business activity prior to the date of
this prospectus. Under the Trust Agreement, the Sponsor is solely
responsible for management and conducts or directs the conduct of
the business of the Trust, the Fund, and any series of the Trust
that may from time to time be established and designated by the
Sponsor. The Sponsor is required to oversee the purchase and sale
of Shares by Authorized Purchasers and to manage the Fund’s
investments, including to evaluate the credit risk of FCMs and swap
counterparties and to review daily positions and margin/collateral
requirements. The Sponsor has the power to enter into agreements as
may be necessary or appropriate for the offer and sale of the
Fund’s Shares and the conduct of the Trust’s
activities. Accordingly, the Sponsor is responsible for selecting
the Trustee, Administrator, Distributor, the independent registered
public accounting firm of the Trust, and any legal counsel employed
by the Trust. The Sponsor is also responsible for preparing and
filing periodic reports on behalf of the Trust with the SEC and
will provide any required certification for such reports. No person
other than the Sponsor and its principals was involved in the
organization of the Trust or the Fund.
The Sponsor may determine to engage
marketing agents who will assist the Sponsor in marketing the
Shares. See “Plan of Distribution” for more
information.
The Sponsor maintains a public website on
behalf of the Fund, www.teucrium.com ,
which contains information about the Trust, the Fund, and the
Shares, and oversees certain services for the benefit of
Shareholders.
The Sponsor has discretion to appoint one or
more of its affiliates as additional Sponsors.
The Sponsor receives a fee as compensation
for services performed under the Trust Agreement. The
Sponsor’s fee accrues daily and is paid monthly at an annual
rate of 1.00% of the average daily net assets of the
Fund. For the period from January 1, 2020 through
December 31, 2020, the Fund recognized $104,170 in management fees
to the Sponsor. The Fund is also responsible for other ongoing
fees, costs and expenses of its operations, including brokerage
fees, and legal, printing, accounting, custodial, administration
and transfer agency costs, although the Sponsor bore the costs and
expenses related to the registration of the Shares. None
of the costs and expenses related to the initial registration,
offer and sale of Shares, which totaled approximately $450,000,
were or are chargeable to the Fund, and the Sponsor did not and may
not recover any of these costs and expenses from the
Fund.
Shareholders have no right to elect the
Sponsor on an annual or any other continuing basis or to remove the
Sponsor. If the Sponsor voluntarily withdraws, the holders of
a majority of the Trust’s outstanding Shares (excluding for
purposes of such determination Shares owned by the withdrawing
Sponsor and its affiliates) may elect its successor. Prior to
withdrawing, the Sponsor must give ninety days’ written
notice to the Shareholders and the Trustee.
Ownership or “membership”
interests in the Sponsor are owned by persons referred to as
“members.” The Sponsor currently has three
voting or “Class A” members – Mr. Sal Gilbertie,
Mr. Dale Riker and Mr. Carl N. Miller III – and a small
number of non-voting or “Class B” members who have
provided working capital to the Sponsor. Messrs. Gilbertie
and Riker each currently own 45.7% of the Sponsor’s Class A
membership interests while Mr. Miller holds the remainder, which is
8.52%.
The Sponsor has an information security
program and policy in place. The program takes reasonable care to
look beyond the security and controls developed and implemented for
the Trust and the Funds directly to the platforms and controls in
place for the key service providers. Such review of cybersecurity
and information technology plans of key service providers are part
of the Sponsor’s disaster recovery and business
continuity
planning. The Sponsor provides regular
training to all employees of the Sponsor regarding cybersecurity
topics, in addition to real-time dissemination of information
regarding cybersecurity matters as needed. The information security
plan is reviewed and updated as needed, but at a minimum on an
annual basis.
Management of the
Sponsor
In general, under the Sponsor’s
Amended and Restated Limited Liability Company Operating Agreement,
as amended from time to time, the Sponsor (and as a result the
Trust and each Fund) is managed by the officers of the
Sponsor. The Chief Executive Officer of the Sponsor is
responsible for the overall strategic direction of the Sponsor and
has general control of its business. The Chief Investment Officer
and President of the Sponsor is primarily responsible for new
investment product development with respect to the Funds. The Chief
Operating Officer has primary responsibility for trade operations,
trade execution, and portfolio activities with respect to the Fund.
The Chief Financial Officer, Chief Accounting Officer and Chief
Compliance Officer acts as the Sponsor’s principal financial
and accounting officer. Furthermore, certain fundamental actions
regarding the Sponsor, such as the removal of officers, the
addition or substitution of members, or the incurrence of
liabilities other than those incurred in the ordinary course of
business and de minimis
liabilities, may not be taken without the affirmative vote of a
majority of the Class A members (which is generally defined as the
affirmative vote of Mr. Gilbertie and one of the other two Class A
members). The Sponsor has no board of directors, and the
Trust has no board of directors or officers. The three Class A
members of the Sponsor are Sal Gilbertie, Dale Riker and Carl N.
Miller III.
The Officers of the Sponsor, one of whom is
a Class A Member of the Sponsor, are the
following:
Sal Gilbertie has
been the President of the Sponsor since its inception, its Chief
Investment Officer since September 2011, and its Chief Executive
Officer and Secretary since September 17, 2018, and was approved by
the NFA as a principal of the Sponsor on September 23, 2009 and
registered as an associated person of the Sponsor on November 10,
2009. He maintains his main business office at 65 Adams Road,
Easton, Connecticut 06612. Effective July 16, 2012, Mr.
Gilbertie was registered with the NFA as the Branch Manager for
this location. Since October 18, 2010, Mr. Gilbertie has been
an associated person of the Distributor under the terms of the
Securities Activities and Services Agreement (“SASA”)
between the Sponsor and the Distributor. Additional
information regarding the SASA can be found in the section of this
disclosure document entitled “Plan of
Distribution.” From October 2005 until December 2009,
Mr. Gilbertie was employed by Newedge USA, LLC, an FCM and
broker-dealer registered with the CFTC and the SEC, where he headed
the Renewable Fuels/Energy Derivatives OTC Execution Desk and was
an active futures contract and over the counter derivatives trader
and market maker in multiple classes of commodities. (Between
January 2008 and October 2008, he also held a comparable position
with Newedge Financial, Inc., an FCM and an affiliate of Newedge
USA, LLC.) From October 1998 until October 2005, Mr.
Gilbertie was principal and co-founder of Cambial Asset Management,
LLC, an adviser to two private funds that focused on equity
options, and Cambial Financing Dynamics, a private boutique
investment bank. While at Cambial Asset Management, LLC and
Cambial Financing Dynamics, Mr. Gilbertie served as principal and
managed the day to day activities of the business and the portfolio
of both companies. Mr. Gilbertie is 60 years
old.
Cory Mullen-Rusin,
has been the Chief Financial Officer, Chief Accounting Officer and
Chief Compliance Officer of the Sponsor since September 17, 2018
and Ms. Mullen-Rusin has primary responsibility for the financial
management, compliance and reporting of the Sponsor and is in
charge of its books of account and accounting records, and its
accounting procedures. She maintains her main business office at
Three Main Street, Suite 215, Burlington, Vermont 05401. Ms.
Mullen-Rusin was approved by the NFA as a Principal of the Sponsor
on October 8, 2018. Ms. Mullen-Rusin began working for the Sponsor
in September 2011 and worked directly with the former CFO at
Teucrium for seven years. Her responsibilities included aspects of
financial planning, financial operations, and financial reporting
for the Trust and the Sponsor. Additionally, Ms. Mullen-Rusin
assisted in developing, instituting, and monitoring the
effectiveness of processes and procedures to comply with all
regulatory agency requirements. Ms. Mullen-Rusin graduated from
Boston College with a Bachelor of Arts and Science in
Communications in 2009, where she was a four-year scholarship
player on the NCAA Division I Women’s Basketball team.
In 2017, she earned a Master of Business Administration from
Nichols College. Ms. Mullen-Rusin is 33 years
old.
Steve Kahler, Chief
Operating Officer, began working for the Sponsor in November 2011
as Managing Director in the trading division. He became the Chief
Operating Officer on May 24, 2012 and served in that capacity
through September 6, 2018, at which time he resigned. Mr. Kahler
was unemployed from September 7, 2018 until October 10, 2018, when
he was reappointed as Chief Operating Officer. Mr. Kahler has
primary responsibility for the Trade Operations for the Funds. He
maintains his main business office at 13520 Excelsior Blvd.,
Minnetonka, MN 55345. Mr. Kahler was registered as an
Associated Person of the Sponsor on November 25, 2011, approved as
a Branch Manager of the Sponsor on March 16, 2012 and approved by
the NFA as a Principal of the Sponsor on May 16, 2012. These NFA
registrations were withdrawn on September 7, 2018 and then he
re-registered as an Associated Person and Branch Office Manager of
the Sponsor on October 5, 2018 and as a Principal of the Sponsor on
October 16, 2018. Since January 18, 2012, Mr. Kahler has been an
associated person of the Distributor under the terms of the SASA
between the Sponsor and the Distributor. Additional
information regarding the SASA can be found in the section of this
disclosure document entitled “Plan of Distribution.”
Prior to his employment with the Sponsor, Mr. Kahler worked for
Cargill Inc., an international producer and marketer of food,
agricultural, financial and industrial products and services, from
April 2006 until November 2011 in the Energy Division as Senior
Petroleum Trader. In October 2006 and while employed at Cargill
Inc., Mr. Kahler was approved as an Associated Person of Cargill
Commodity Services Inc., a commodity trading affiliate of Cargill
Inc. from September 13, 2006 to November 9, 2011. Mr. Kahler
graduated from the University of Minnesota with a Bachelors of
Agricultural Business Administration and is 53 years old. Mr.
Kahler is primarily responsible for making trading and investment
decisions for the Fund and other Teucrium Funds, and for directing
Fund and other Teucrium Fund trades for
execution.
Messrs. Gilbertie, Riker, and Kahler and Ms.
Mullen-Rusin are individual “principals,” as that term
is defined in CFTC Rule 3.1, of the Sponsor. These individuals are
principals due to their positions and/or due to their ownership
interests in the Sponsor. Beneficial ownership interests of the
principals, if any, are shown under the section entitled
“Security Ownership of Principal Shareholders and
Management” below and any of the principals may acquire
beneficial interests in the Fund in the future. GFI Group LLC is a
principal for the Sponsor under CFTC Rules due to its ownership of
certain non-voting securities of the Sponsor. NMSIC Classic LLC is
a principal of the Sponsor under CFTC Rules due to its greater than
10% capital contribution to the Sponsor.
Market
Price of Shares
The
Fund’s Shares have traded on the NYSE Arca under the symbol
“CANE” since September 19, 2011. The following table
sets forth the range of reported high and low sales prices of the
Shares as reported on NYSE Arca for the periods indicated
below.
Fiscal Year Ended December 31, 2020:
|
|
|
Quarter
Ended
|
|
|
March 31, 2020
|
$7.59
|
$5.45
|
June 30, 2020
|
$5.95
|
$4.92
|
September 30, 2020
|
$6.20
|
$5.56
|
December 31, 2020
|
$6.75
|
$6.11
|
Fiscal Year Ended December 31, 2019:
|
|
|
Quarter
Ended
|
|
|
March 31, 2019
|
$7.81
|
$6.90
|
June 30, 2019
|
$7.49
|
$6.79
|
September 30, 2019
|
$7.07
|
$6.30
|
December 31, 2019
|
$7.08
|
$6.44
|
As of December
31, 2020, the Fund had approximately 2,526
Shareholders.
Prior Performance of the
Fund
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE
RESULTS
The Teucrium Sugar Fund commenced trading
and investment operations on September 19, 2011. The Teucrium Sugar
Fund is listed on NYSE Arca and is neither: (i) a privately offered
pool pursuant to Section 4(a)(2) of the Securities Act of 1933, as
amended; (ii) a multi-advisor pool as defined in CFTC Regulation
4.10(d)(2); or (iii) a principal-protected pool as defined in CFTC
Regulation 4.10(d)(3).
Units of
beneficial interest issued (from inception until February 28,
2021)
|
7,000,000
|
Aggregate gross
sale price for units issued
|
$
60,826,508
|
NAV per Share
as of February 28, 2021
|
$
7.46
|
Pool NAV as of
February 28, 2021
|
$
15,283,886
|
Worst monthly
percentage drawdown*
|
-23.51% / March
2020
|
Worst peak to
valley drawdown**
|
-78.60% / Sep
2011 – Apr 2020
|
* A drawdown is a loss experienced by the
fund over a specified period. Drawdowns are measured on the basis
of monthly returns only and do not reflect intra-month figures. The
worst monthly percentage drawdown reflects the largest single month
loss sustained over the most recent five calendar years and the
current year to date.
** The worst peak to valley drawdown is the
largest percentage decline in the NAV per unit over the most recent
five calendar years and the current year to date. This need not be
a continuous decline but can be a series of positive and negative
returns. Worst peak to valley drawdown represents the greatest
percentage decline from any month end NAV per unit that occurs
without such month end NAV per unit being equaled or exceeded as of
a subsequent month end. For example, if the NAV per unit declined
by $1 in each of January and February, increased by $1 in March and
declined again by $2 in April, a “peak to valley
drawdown” analysis conducted as of the end of April would
consider that “drawdown” to be continuing and to be $3
in amount, whereas if the NAV per unit had increased by $2 in
March, the drawdown would have ended as of the end of February at
the $2 level.
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE
RESULTS
|
Rates of
Return*
|
Month
|
2016
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
|
January
|
(10.68)
|
%
|
6.62
|
%
|
(8.58)
|
%
|
6.36
|
%
|
3.83
|
%
|
2.81
|
%
|
|
February
|
8.27
|
%
|
(5.34)
|
%
|
(1.56)
|
%
|
0.13
|
%
|
(1.68)
|
%
|
7.93
|
%
|
|
March
|
8.67
|
%
|
(10.14)
|
%
|
(5.90)
|
%
|
(3.05)
|
%
|
(23.51)
|
%
|
|
%
|
|
April
|
4.94
|
%
|
(5.17)
|
%
|
(7.48)
|
%
|
(1.78)
|
%
|
(2.76)
|
%
|
|
%
|
|
May
|
4.98
|
%
|
(6.89)
|
%
|
4.95
|
%
|
(1.95)
|
%
|
1.25
|
%
|
|
%
|
|
June
|
11.38
|
%
|
(7.40)
|
%
|
(5.34)
|
%
|
1.00
|
%
|
5.83
|
%
|
|
%
|
|
July
|
(2.17)
|
%
|
7.57
|
%
|
(9.84)
|
%
|
(1.70)
|
%
|
4.77
|
%
|
|
%
|
|
August
|
5.78
|
%
|
(3.09)
|
%
|
(1.89)
|
%
|
(7.08)
|
%
|
0.89
|
%
|
|
%
|
|
September
|
9.57
|
%
|
(6.17)
|
%
|
(1.63)
|
%
|
2.58
|
%
|
0.90
|
%
|
|
%
|
|
October
|
(3.55)
|
%
|
3.08
|
%
|
15.99
|
%
|
(0.87)
|
%
|
0.16
|
%
|
|
%
|
|
November
|
(8.92)
|
%
|
0.82
|
%
|
(2.34)
|
%
|
2.09
|
%
|
4.00
|
%
|
|
%
|
|
December
|
0.78
|
%
|
(0.10)
|
%
|
(5.86)
|
%
|
4.56
|
%
|
5.64
|
%
|
|
%
|
|
Annual Rate of
Return
|
29.44
|
%
|
(24.52)
|
%
|
(27.78)
|
%
|
(0.48)
|
%
|
(4.51)
|
%
|
10.96
|
%**
|
|
*The monthly rate of return is calculated by
dividing the ending NAV for a given month by the ending NAV for the
previous month, subtracting 1 and multiplying this number by 100 to
arrive at a percentage increase or decrease.
**Not annualized.
The sole Trustee of the Trust is Wilmington
Trust Company, a Delaware banking corporation. The
Trustee’s principal offices are located at 1100 North Market
Street, Wilmington, Delaware 19890-0001. The Trustee is
unaffiliated with the Sponsor. The Trustee’s duties and
liabilities with respect to the offering of Shares and the
management of the Trust and the Fund are limited to its express
obligations under the Trust Agreement.
The Trustee will accept service of legal
process on the Trust in the State of Delaware and will make certain
filings under the Delaware Statutory Trust Act. The Trustee
does not owe any other duties to the Trust, the Sponsor or the
Shareholders. The Trustee is permitted to resign upon at
least sixty (60) days’ notice to the Sponsor. If no
successor trustee has been appointed by the Sponsor within such
sixty-day period, the Trustee may, at the expense of the Trust,
petition a court to appoint a successor. The Trust Agreement
provides that the Trustee is entitled to reasonable compensation
for its services from the Sponsor or an affiliate of the Sponsor
(including the Trust), and is indemnified by the Sponsor against
any expenses it incurs relating to or arising out of the formation,
operation or termination of the Trust, or any action or inaction of
the Trustee under the Trust Agreement, except to the extent that
such expenses result from the gross negligence or willful
misconduct of the Trustee. The Sponsor has the discretion to
replace the Trustee.
The Trustee has not signed the registration
statement of which this prospectus is a part and is not subject to
issuer liability under the federal securities laws for the
information contained in this prospectus and under federal
securities laws with respect to the issuance and sale of the
Shares. Under such laws, neither the Trustee, either in its
capacity as Trustee or in its individual capacity, nor any
director, officer or controlling person of the Trustee is, or has
any liability as, the issuer or a director, officer or controlling
person of the issuer of the Shares.
Under the Trust Agreement, the Trustee has
delegated to the Sponsor the exclusive management and control of
all aspects of the business of the Trust and the Fund. The
Trustee has no duty or liability to supervise or monitor the
performance of the Sponsor, nor does the Trustee have any liability
for the acts or omissions of the Sponsor.
Because the Trustee has delegated
substantially all of its authority over the operation of the Trust
to the Sponsor, the Trustee itself is not registered in any
capacity with the CFTC.
The investment
objective of the Fund is to have the daily changes in the
Shares’ NAV reflect the daily changes in the sugar market for
future delivery, as measured by the Fund’s Benchmark. The
Benchmark is a weighted average of the closing settlement prices
for the Benchmark Component Futures
Contracts:
CANE
Benchmark
ICE Sugar Futures
Contract
|
Weighting
|
Second to
expire
|
35%
|
Third to
expire
|
30%
|
Expiring in the
March following the expiration of the third to expire
contract
|
35%
|
The Fund seeks to achieve its investment
objective by investing under normal market conditions in Benchmark
Component Futures Contracts. Under normal market conditions, the
Fund expects that 100% of the Fund’s assets will be used to
trade Sugar Futures Contracts and invest in cash and cash
equivalents. The Fund reserves the right to invest in swap
agreements, forward contracts and options, a brief description of
which may be found in “Appendix A – Glossary of Defined
Terms.”
The Fund invests in Benchmark Component
Futures Contracts to the fullest extent possible without being
leveraged or unable to satisfy its current or potential margin or
collateral obligations with respect to its investments in Benchmark
Component Futures Contracts. After fulfilling such margin and
collateral requirements, the Fund invests the remainder of its
proceeds from the sale of baskets in cash and cash equivalents,
including money-market funds, investment grade commercial paper,
and/or merely holds such assets in cash in interest-bearing
accounts. The Fund seeks to earn interest and other income from the
cash equivalents that it purchases, and on the cash it holds at
financial institutions.
The Fund seeks to achieve its investment
objective primarily by investing in Benchmark Component Futures
Contracts such that the changes in its NAV are expected to closely
track the changes in the Benchmark. The Fund’s
positions in Benchmark Component Futures Contracts are changed or
“rolled” on a regular basis in order to track the
changing nature of the Benchmark. For example, four times a
year (on the date on which a Sugar No. 11 Futures Contract
expires), the second to expire Sugar No. 11 Futures Contract will
become the next to expire Sugar No. 11 Futures Contract and will no
longer be a Benchmark Component Futures Contract, and the
Fund’s investments will have to be changed accordingly.
In order that the Fund’s trading does not cause unwanted
market movements and to make it more difficult for third parties to
profit by trading based on such expected market movements, the
Fund’s investments may not be rolled entirely on that day,
but rather may be rolled over a period of
days.
The Fund’s total portfolio composition
is disclosed each business day that the NYSE Arca is open for
trading on the Fund’s website at www.teucrium.com . The website
disclosure of portfolio holdings is made daily and includes, as
applicable, the name and value of each commodity futures contract
held and those that are pending, and the value of cash and cash
equivalents held in the Fund. The Fund’s website also
includes the NAV, the 4 p.m. Bid/Ask Midpoint as reported by the
NYSE Arca, the last trade price as reported by the NYSE Arca, the
shares outstanding, the shares available for issuance, and the
shares created or redeemed on that day. The prospectus, Monthly
Statements of Account, Quarterly Performance of the Midpoint versus
the NAV (as required by the CFTC), and the Roll Dates, as well as
Forms 10-Q, Forms 10-K, and other SEC filings for the Fund, are
also posted on the website. The Fund’s website is publicly
accessible at no charge.
In seeking to achieve the Fund’s
investment objective of tracking the Benchmark, the Sponsor
reserves the right to enter into or hold Sugar Futures Contracts
other than the Benchmark Component Futures Contracts and/or other
sugar interests on behalf of the Fund. Over the counter sugar
interests can generally be structured as the parties to the
contract desire. Therefore, the Fund might enter into multiple over
the counter sugar interests intended to exactly replicate the
performance of each of the three Benchmark Component Futures
Contracts, or a single over the counter sugar interest designed to
replicate the performance of the Benchmark as a whole. Assuming
that there is no default by a counterparty to an over the counter
sugar interest, the performance of the sugar interest will
necessarily correlate exactly with the performance of the Benchmark
or the applicable Benchmark Component Futures Contract. The Fund
might also enter into or hold sugar interests other than the
Benchmark Component Futures Contracts to facilitate effective
trading, consistent with the discussion of the Fund’s
“roll” strategy discussed in the preceding paragraph.
In addition, the Fund might enter into or hold sugar interests that
would be expected to alleviate overall deviation between the
Fund’s performance and that of the Benchmark that may result
from certain market and trading inefficiencies or other
reasons.
The Sponsor endeavors to place the
Fund’s trades in Benchmark Component Futures Contracts and
otherwise manage the Fund’s investments so that the
Fund’s average daily tracking error against the Benchmark is
less than 10 percent over any period of 30 trading
days.
The Fund’s investment objective is to
provide investors with a cost-efficient way to gain exposure to the
sugar market for future delivery. The Sponsor developed the
Benchmark as a representation of the sugar market for future
delivery. Under normal market conditions, the Fund will invest in
the Benchmark Component Futures Contracts. The Sponsor believes
that by investing in Benchmark Component Futures Contracts, the
Fund’s net asset value (“NAV”) will closely track
the Benchmark. The Sponsor also believes that because of market
arbitrage opportunities, the market price at which investors will
purchase and sell Shares through their broker-dealer will closely
track the Fund’s NAV. The Sponsor believes that the net
effect of these relationships is that the Fund’s market price
on the NYSE Arca at which investors purchase and sell Shares will
closely track the sugar market for future delivery, as measured by
the Benchmark.
An investment in the Shares provides a means
for diversifying an investor’s portfolio or hedging exposure
to changes in sugar prices. An investment in the Shares allows both
retail and institutional investors to easily gain this exposure to
the sugar market in a transparent, cost-effective
manner.
The Sponsor employs a “neutral”
investment strategy intended to track changes in the Benchmark
regardless of whether the Benchmark goes up or goes down. The
Fund’s “neutral” investment strategy is designed
to permit investors generally to purchase and sell the Fund’s
Shares for the purpose of investing indirectly in the sugar market
in a cost-effective manner. Such investors may include participants
in the sugar industry and other industries seeking to hedge the
risk of losses in their sugar related transactions, as well as
investors seeking exposure to the sugar market. Accordingly,
depending on the investment objective of an individual investor,
the risks generally associated with investing in the sugar market
and/or the risks involved in hedging may exist. In addition, the
Fund does not expect there to be any meaningful correlation between
the performance of the Fund’s investments in cash and cash
equivalents and the changes in the price of sugar or Benchmark
Component Futures Contracts. While the level of interest earned on,
or the market price of, these investments may in some respects
correlate to changes in the price of sugar, this correlation is not
anticipated as part of the Fund’s efforts to meet its
objective. This and certain risk factors discussed in this
prospectus may cause a lack of correlation between changes in the
Fund’s NAV and changes in the price of
sugar.
The Shares issued by the Fund may only be
purchased by Authorized Purchasers and only in blocks of 25,000
Shares called Creation Baskets. The amount of the purchase payment
for a Creation Basket is equal to the aggregate NAV of Shares in
the Creation Basket. Similarly, only Authorized Purchasers may
redeem Shares and only in blocks of 25,000 Shares called Redemption
Baskets. The amount of the redemption proceeds for a Redemption
Basket is equal to the aggregate NAV of Shares in the Redemption
Basket. The purchase price for Creation Baskets and the redemption
price for Redemption Baskets are the actual NAV calculated at the
end of the business day when a request for a purchase or redemption
is received by the Fund. The NYSE Arca publishes an approximate NAV
intra-day based on the prior day’s NAV and the current price
of the Benchmark Component Futures Contracts, but the price of
Creation Baskets and Redemption Baskets is determined based on the
actual NAV calculated at the end of each trading
day.
While the Fund issues Shares only in
Creation Baskets, Shares may also be purchased and sold in much
smaller increments on the NYSE Arca. These transactions, however,
are effected at the bid and ask prices established by the
specialist firm(s). Like any listed security, Shares can be
purchased and sold at any time a secondary market is
open.
The Fund’s Investment
Strategy
In managing the Fund’s assets, the
Sponsor does not use a technical trading system that automatically
issues buy and sell orders. Instead, each time one or more
baskets are purchased or redeemed, the Sponsor purchases or sells
Benchmark Component Futures Contracts with an aggregate market
value that approximates the amount of cash received or paid upon
the purchase or redemption of the basket(s).
As an example, assume that a Creation Basket
is sold by the Fund, and that the Fund’s closing NAV per
Share is $14.00. In that case, the Fund would receive
$350,000 in proceeds from the sale of the Creation Basket ($14.00
NAV per Share multiplied by 25,000 Shares and ignoring the Creation
Basket fee of $250). If one were to assume further that the
Sponsor wants to invest the entire proceeds from the Creation
Basket in the Benchmark Component Futures Contracts and that the
market value of each such Benchmark Component Futures Contracts is
$17,920 (or otherwise not a round number), the Fund would be unable
to buy an exact number of Sugar Futures Contracts with an aggregate
market value equal to $350,000. Instead, the Fund would be
able to purchase 19 Benchmark Component Futures
Contracts with an aggregate market value of approximately
$340,480. Assuming a margin requirement equal to 10% of the
value of the Sugar Futures Contracts (although the actual
percentage is approximately 6%), the Fund would be required to
deposit $34,048 in cash with the FCM through which the Sugar
Futures Contracts were purchased. The remainder of the
proceeds from the sale of the Creation Basket,
$315,952, would remain
invested in cash and/or cash equivalents, as determined by the
Sponsor from time to time based on factors such as potential calls
for margin or anticipated redemptions.
The specific sugar interests purchased
depend on various factors, including a judgment by the Sponsor as
to the appropriate diversification of the Fund’s
investments. While the Sponsor anticipates that, under normal
market conditions, a substantial majority of the Fund’s
assets will be invested in ICE Sugar Futures Contracts and cash and
cash equivalents, the Sponsor reserves the right to enter into
other sugar interests on behalf of the Fund, including swaps in the
over the counter market.
The Sponsor does not anticipate letting its
Benchmark Component Futures Contracts expire and taking delivery of
sugar. Instead, the Sponsor will close out existing
positions, e.g., in response to ongoing changes in the Benchmark or
if it otherwise determines it would be appropriate to do so and
reinvest the proceeds in new Benchmark Component Futures
Contracts. Positions may also be closed out to meet orders
for Redemption Baskets, in which case the proceeds from closing the
positions will not be reinvested.
Futures contracts are agreements between two
parties that are executed on a designated contract market
(“DCM”), i.e., a commodity futures exchange, and that
are cleared and margined through a derivatives clearing
organization (“DCO”), i.e., a clearing house. One
party agrees to buy a commodity such as sugar from the other party
at a later date at a price and quantity agreed upon when the
contract is made. In market terminology, a party who
purchases a futures contract is long in the market and a party who
sells a futures contract is short in the market. The
contractual obligations of a buyer or seller may generally be
satisfied by taking or making physical delivery of the underlying
commodity or by making an offsetting sale or purchase of an
identical futures contract on the same or linked exchange before
the designated date of delivery. The difference between the
price at which the futures contract is purchased or sold and the
price paid for the offsetting sale or purchase, after allowance for
brokerage commissions, constitutes the profit or loss to the
trader.
If the price of the commodity increases
after the original futures contract is entered into, the buyer of
the futures contract will generally be able to sell a futures
contract to close out its original long position at a price higher
than that at which the original contract was purchased, generally
resulting in a profit to the buyer. Conversely, the seller of
a futures contract will generally profit if the price of the
underlying commodity decreases, as it will generally be able to buy
a futures contract to close out its original short position at a
price lower than that at which the original contract was
sold. Because the Fund seeks to track the Benchmark directly
and profit when the price of sugar increases and, as a likely
result of an increase in the price of sugar, the price of Sugar
Futures Contracts increases, the Fund will generally be long in the
market for sugar and will generally sell Sugar Futures Contracts
only to close out existing long positions.
Futures contracts are typically traded on
futures exchanges (i.e., DCMs) such as the ICE Futures, which
provide centralized market facilities in which multiple persons may
trade contracts. Members of a particular futures exchange and
the trades executed on such exchange are subject to the rules of
that exchange. Futures exchanges and their related clearing
organizations (i.e., DCOs) are given reasonable latitude in
promulgating rules and regulations to control and regulate their
members.
Trades on a futures exchange are generally
cleared by the DCO, which provides services designed to mutualize
or transfer the credit risk arising from the trading of contracts
on an exchange. The clearing organization effectively becomes
the other party to the trade, and each clearing member party to the
trade looks only to the clearing organization for
performance.
The Sugar No. 11 Futures Contract is the
world benchmark contract for raw sugar trading. This contract
prices the physical delivery of raw cane sugar, delivered to the
receiver’s vessel at a specified port within the country of
origin of the sugar. Sugar No. 11 Futures Contracts trade on
the ICE Futures and in units of 112,000 pounds. The Sugar No.
16 Futures Contract prices physical delivery of U.S.-grown (or
foreign origin with duty paid by deliverer) raw cane sugar at one
of five U.S. refinery ports as selected by the receiver.
Sugar No. 16 futures contracts trade on the ICE Futures in units of
112,000 pounds. Because of the higher price of sugar in the
U.S. market, Sugar No. 16 Futures Contracts tend to be priced
higher than Sugar No. 11 Futures Contracts, but each Sugar Futures
Contract tends to experience similar proportionate fluctuations in
price. There is no difference between Sugar No. 11 and Sugar
No. 16 Futures Contracts in terms of the quality or type of sugar
to be delivered. Because the Benchmark Component Futures
Contracts are Sugar No. 11 Futures Contracts, the Sugar Futures
Contracts entered into by the Fund will typically be Sugar No. 11
Futures Contracts, although Sugar No. 16. Futures Contract may be
entered into to a limited extent.
Generally, futures contracts traded on the
ICE Futures are priced by floor brokers and other exchange members
through an electronic, screen-based system that electronically
determines the price by matching offers to purchase and sell.
Futures contracts may also be based on commodity indices, in that
they call for a cash payment based on the change in the value of
the specified index during a specified period. No futures
contracts based on an index of sugar prices are currently
available, although the Fund could enter into such contracts should
they become available in the future.
Certain typical and significant
characteristics of Sugar Futures Contracts are discussed
below. Additional risks of investing in Sugar Futures
Contracts are included in “What are the Risk Factors Involved
with an Investment in the Fund?”
Impact of Position Limits,
Accountability Levels, and Price Fluctuation
Limits.
Position Limits, Accountability Levels, and
Price Fluctuation Limits may potentially cause a tracking error
between the price of the Shares and the Benchmark. This may in turn
prevent you from being able to effectively use the Fund as a way to
hedge against sugar related losses or as a way to indirectly invest
in sugar.
The Fund does not intend to limit the size
of the offering and will attempt to expose substantially all of its
proceeds to Benchmark Component Futures Contracts and cash and cash
equivalents. If the Fund encounters position limits, accountability
levels, or price fluctuation limits for Sugar Futures Contracts on
ICE Futures, it may then, if permitted under applicable regulatory
requirements, purchase other sugar interests and/or Sugar Futures
Contracts listed on the New York Mercantile Exchange
(“NYMEX”) or foreign exchanges. However, the Sugar
Futures Contracts available on such foreign exchanges may have
different underlying sizes, deliveries, and prices. In addition,
the Sugar Futures Contracts available on these exchanges may be
subject to their own position limits and accountability levels. In
any case, notwithstanding the potential availability of these
instruments in certain circumstances, position limits could force
the Fund to limit the number of Creation Baskets that it
sells.
Price
Volatility
Despite daily price limits, the price
volatility of futures contracts generally has been historically
greater than that for traditional securities such as stocks and
bonds. Price volatility often is greater day to day as
opposed to intra-day. Economic factors that may cause
volatility in Sugar Futures Contracts include changes in interest
rates; governmental, agricultural, trade, fiscal, monetary and
exchange control programs and policies; weather and climate
conditions; changing supply and demand relationships; changes in
balances of payments and trade; U.S. and international rates of
inflation; currency devaluations and revaluations; U.S. and
international political and economic events; global trade
disruption due to outbreaks or public health emergency as declared
by the World Health Organization; and changes in philosophies and
emotions of market participants. Because the Fund invests a
significant portion of its assets in futures contracts, the assets
of the Fund, and therefore the price of the Fund’s Shares,
may be subject to greater volatility than traditional
securities.
Term Structure of Futures
Contracts and the Impact on Total Return
Over time, the price of sugar fluctuates
based on a number of market factors, including demand for sugar
relative to its supply. The value of Sugar Futures Contracts
likewise fluctuates in reaction to a number of market
factors. Because the Fund seeks to maintain its holdings in
Sugar Futures Contracts with a roughly constant expiration profile
and not take delivery of the sugar, the Fund must periodically
“roll” futures contract positions, closing out soon to
expire contracts that are no longer part of the Benchmark and
entering into subsequent to expire contracts. One factor
determining the total return from investing in futures contracts is
the price relationship between soon to expire contracts and later
to expire contracts.
If the futures market is in a state of
backwardation (i.e., when the price of sugar in the future is
expected to be less than the current price), the Fund will buy
later to expire contracts for a lower price than the sooner to
expire contracts that it sells. Hypothetically, and assuming no
changes to either prevailing sugar prices or the price relationship
between the immediate delivery, soon to expire contracts and later
to expire contracts, the value of a contract will rise as it
approaches expiration. Over time, if backwardation remained
constant, the differences would continue to
increase.
If the futures market is in contango, the
Fund will buy later to expire contracts for a higher price than the
sooner to expire contracts that it sells. Hypothetically, and
assuming no other changes to either prevailing sugar prices or the
price relationship between the spot price, soon to expire contracts
and later to expire contracts, the value of a contract will fall as
it approaches expiration. Over time, if contango remained constant,
the difference would continue to increase. Historically, the sugar
futures markets have experienced periods of both contango and
backwardation. Frequently, whether contango or backwardation exists
is a function, among other factors, of the seasonality of the sugar
market and the sugar harvest cycle. All other things being equal, a
situation involving prolonged periods of contango may adversely
impact the returns of the Fund; conversely a situation involving
prolonged periods of backwardation may positively impact the
returns of the Fund.
Margin Requirements and
Marking to Market Futures Positions
“Initial margin” is an amount of
funds that must be deposited by a commodity interest trader with
the trader’s broker to initiate an open position in futures
contracts. A margin deposit is like a cash performance
bond. It helps assure the trader’s performance of the
futures contracts that he or she purchases or sells. Futures
contracts are customarily bought and sold on initial margin that
represents a small percentage of the aggregate purchase or sales
price of the contract. The amount of margin required in
connection with a particular futures contract is set by the
exchange on which the contract is traded. Brokerage firms,
such as the Fund’s clearing broker, carrying accounts for
traders in commodity interest contracts may require higher amounts
of margin as a matter of policy to further protect
themselves.
Futures contracts are marked to market at
the end of each trading day and the margin required with respect to
such contracts is adjusted accordingly. This process of
marking to market is designed to prevent losses from accumulating
in any futures account. Therefore, if the Fund’s
futures positions have declined in value, the Fund may be required
to post “variation margin” to cover this decline.
Alternatively, if the Fund’s futures positions have increased
in value, this increase will be credited to the Fund’s
account.
Over the
counter Derivatives
Under normal market conditions, the Fund
expects that 100% of the Fund’s assets will be used to trade
futures and invest in cash and cash equivalents; however, the Fund
has the ability to trade over the counter contracts and swaps. A
description of such over the counter derivatives is included the
statement of additional information that is part of this prospectus
under the heading “Over the counter
Derivatives.”
The
Fund’s Investments in Cash and Cash
Equivalents
The Fund seeks to have the aggregate
“notional” amount of the Benchmark Component Futures
Contracts it holds approximate at all times the Fund’s
aggregate NAV. At any given time, however, most of the Fund’s
investments are in cash and cash equivalents that support the
Fund’s positions in Benchmark Component Futures Contracts.
For example, the purchase of a Sugar Futures Contract with a stated
or notional amount of $10 million would not require the Fund to pay
$10 million upon entering into the contract; rather, only a margin
deposit, approximately 4-6% of the notional amount, would be
required. To secure its Sugar Futures Contract obligations, the
Fund would deposit the required margin with the FCM and would
separately hold its remaining assets through its Custodian or other
financial institution in cash and cash equivalents, specifically in
demand deposits, in short-term Treasury Securities held by the FCM,
in money-market funds or in commercial paper. Such remaining assets
may be used to meet future margin payments that the Fund is
required to make on its Sugar Futures Contracts. Other sugar
interests typically also involve collateral requirements that
represent a small fraction of their notional amounts, so most of
the Fund’s assets dedicated to these sugar interests are also
held in cash, and cash equivalents.
The Fund earns interest and other income
from the cash equivalents that it purchases, and on the cash, it
holds through the Custodian or other financial institutions. The
earned interest and other income increase the Fund’s NAV. The
Fund applies the earned interest and other income to the
acquisition of additional investments or uses it to pay its
expenses. When the Fund reinvests the earned interest and other
income, it makes investments that are consistent with its
investment objectives.
Any cash equivalent invested in by the Fund
will have a remaining maturity of less than 3 months at the time of
investment or will be subject to a demand feature that enables that
Fund to sell the security within that time period at approximately
the security’s face value (plus accrued interest). Any cash
equivalents invested in by the Fund will be or will be deemed by
the Sponsor to be of investment grade credit
quality.
Other Trading Policies of the
Fund
Exchange for Related
Position
An “exchange for related
position” (“EFRP”) can be used by the Fund as a
technique to facilitate the exchanging of a futures hedge position
against a creation or redemption order, and thus the Fund may use
an EFRP transaction in connection with the creation and redemption
of shares. The market specialist/market maker that is the ultimate
purchaser or seller of shares in connection with the creation or
redemption basket, respectively, agrees to sell or purchase a
corresponding offsetting shares or futures position which is then
settled on the same business day as a cleared futures transaction
by the FCMs. The Fund will become subject to the credit risk of the
market specialist/market maker until the EFRP is settled within the
business day, which is typically 7 hours or less. The Fund reports
all activity related to EFRP transactions under the procedures and
guidelines of the CFTC and the exchanges on which the futures are
traded.
EFRPs are subject to specific rules of the
CME and CFTC guidance. It is likely that EFRP mechanisms will
significantly change in the future which may make it uneconomical
or impossible from a regulatory perspective for the Fund to utilize
these mechanisms.
Options on Futures
Contracts
An option on a futures contract gives the
buyer of the option the right, but not the obligation, to buy or
sell a futures contract at a specified price on or before a
specified date. The option buyer deposits the purchase price
or “premium” for the option with his broker, and the
money goes to the option seller. Regardless of how much the
market swings, the most an option buyer can lose is the option
premium and the commissions and fees associated with the
transaction. However, the buyer will typically lose the
premium if the exercise price of the option is above (in the case
of an option to buy or “call” option) or below (in the
case of an option to sell or “put” option) the market
value at the time of exercise. Option sellers, on the other
hand, face risks similar to participants in the futures
markets. For example, since the seller of a call option is
assigned a short futures position if the option is exercised, his
risk is the same as someone who initially sold a futures
contract. Because no one can predict exactly how the market
will move, the option seller posts margin to demonstrate his
ability to meet any potential contractual
obligations.
In addition to Sugar Futures Contracts,
there are also a number of options on Sugar Futures Contracts
listed on the ICE Futures. These contracts offer investors
and hedgers another set of financial vehicles to use in managing
exposure to the commodities market. The Fund may purchase and
sell (write) options on Sugar Futures Contracts in pursuing its
investment objective, except that it will not sell call options
when it does not own the underlying Sugar Futures Contract.
The Fund would make use of options on Sugar Futures Contracts if,
in the opinion of the Sponsor, such an approach would cause the
Fund to more closely track its Benchmark or if it would lead to an
overall lower cost of trading to achieve a given level of economic
exposure to movements in sugar prices.
Liquidity
The Fund invests only in Sugar Futures
Contracts that, in the opinion of the Sponsor, are traded in
sufficient volume to permit the ready taking and liquidation of
positions in these financial interests and in over the counter
commodity interests that, in the opinion of the Sponsor, may be
readily liquidated with the original counterparty or through a
third party assuming the Fund’s position.
Spot
Commodities
While most futures contracts can be
physically settled, the Fund does not intend to take or make
physical delivery. However, the Fund may from time to time
trade in other sugar interests based on the spot price of
sugar.
Leverage
The Sponsor endeavors to have the value of
the Fund’s cash and cash equivalents, whether held by the
Fund or posted as margin or collateral, at all times approximate
the aggregate market value of its obligations under the
Fund’s Benchmark Component Futures Contracts. Commodity
pools’ trading positions in futures contracts are typically
required to be secured by the deposit of margin funds that
represent only a small percentage of a futures contract’s (or
other commodity interest’s) entire market
value.
Borrowings
The Fund does not intend to nor foresee the
need to borrow money or establish credit lines. The Fund maintains
cash and cash equivalents, either held by the Fund or posted as
margin or collateral, with a value that at all times approximates
the aggregate market value of its obligations under Benchmark
Component Futures Contracts. The Fund meets its liquidity needs in
the normal course of business from the proceeds of the sale of its
investments or from the cash and cash equivalents that it intends
to hold at all times.
Benchmark
Performance
The chart below shows the percent change in
the NAV per share for the Fund, the market price of the Fund
shares, represented by the closing price of the Fund on the NYSE
Arca, and the Benchmark for five specific periods. The Benchmark
does not reflect any impact of expenses, which would generally
reduce the Fund’s NAV, or interest income, which would
generally increase the NAV. The actual results for the NAV include
the impacts of both expenses and interest
income.
Teucrium Sugar ETF Performance as of 12/31/2020
|
|
|
|
|
|
NAV
|
10.05%
|
-4.51%
|
-11.79%
|
-7.67%
|
-13.19%
|
Price
|
10.84%
|
-3.85%
|
-11.63%
|
-7.67%
|
-13.15%
|
Benchmark
(TCANE)
|
10.40%
|
-2.20%
|
-10.15%
|
-6.00%
|
-10.79%
|
The Sugar
Market
Sugarcane accounts for about 79% of the
world’s sugar production, while sugar beets account for the
remainder of the world’s sugar production. Sugar
manufacturers use sugar beets and sugarcane as the raw material
from which refined sugar (sucrose) for industrial and consumer use
is produced. The United States Department of Agriculture
(“USDA”) publishes two major reports annually on U.S.
domestic and worldwide sugar production and consumption. These are
usually released in November and May. In addition, the USDA
publishes periodic, but not as comprehensive, reports on sugar
monthly. These reports are available on the USDA’s website,
www.usda.gov, at no charge. For more information about the Sugar
Market, please see the statement of additional information that is
part of this prospectus under the heading “The Sugar
Market.”
The
Fund’s Service Providers
Contractual Arrangements
with the Sponsor and Third-Party Service
Providers
Sponsor
The Sponsor is responsible for investing the
assets of the Fund in accordance with the objectives and policies
of the Fund. In addition, the Sponsor arranges for one or more
third parties to provide administrative, custodial, accounting,
transfer agency and other necessary services to the Fund. For these
third-party services, the Fund pays the fees set forth in the table
below entitled “Contractual Fees and Compensation
Arrangements with the Sponsor and Third-Party Service
Providers.” For the Sponsor’s services, the Fund is
contractually obligated to pay a monthly management fee to the
Sponsor, based on average daily net assets, at a rate equal to
1.00% per annum. The Sponsor can elect to waive the payment of this
fee in any amount at its sole discretion, at any time and from time
to time, in order to reduce the Fund’s expenses or for any
other purpose.
Custodian, Registrar,
Transfer Agent, Fund Accountant, and Fund
Administrator
In its capacity as the Fund’s
custodian, the Custodian, currently U.S. Bank, N.A., holds the
Fund’s securities, cash and/or cash equivalents pursuant to a
custodial agreement. U.S. Bancorp Fund Services, LLC, doing
business as U.S. Bank Global Fund Services (“Global Fund
Services”), an entity affiliated with U.S. Bank, N.A., is the
registrar and transfer agent for the Fund’s Shares. In
addition, Global Fund Services also serves as Administrator for the
Fund, performing certain administrative and accounting services and
preparing certain SEC and CFTC reports on behalf of the Fund. The
Custodian is located at 1555 North Rivercenter Drive, Suite 302,
Milwaukee, Wisconsin 53212. U.S. Bank N.A. is a nationally
chartered bank, regulated by the Office of the Comptroller of the
Currency, Department of the Treasury, and is subject to regulation
by the Board of Governors of the Federal Reserve System. The
principal address for Global Fund Services is 615 East Michigan
Street, Milwaukee, WI, 53202.
Distributor
The Fund employs Foreside Fund Services, LLC
as the Distributor for the Fund. Pursuant to a Consulting Services
Agreement, Foreside Consulting Services, LLC, performs certain
consulting support services for the Trust’s Sponsor, Teucrium
Trading, LLC. Additionally, Foreside Distributors, LLC performs
certain distribution consulting services pursuant to a Distribution
Consulting Agreement with the Trust’s Sponsor, Teucrium
Trading, LLC.
The Distribution Services Agreement among
the Distributor, the Sponsor, and the Trust calls for the
Distributor to work with the Custodian in connection with the
receipt and processing of orders for Creation Baskets and
Redemption Baskets and the review and approval of all Fund sales
literature and advertising materials. The Distributor and the
Sponsor have also entered into a Securities Activities and Service
Agreement (the “SASA”) under which certain employees
and officers of the Sponsor are licensed as registered
representatives or registered principals of the Distributor, under
“FINRA” rules (“Registered
Representatives”). As Registered Representatives of the
Distributor, these persons are permitted to engage in certain
marketing activities for the Fund that they would otherwise not be
permitted to engage in. Under the SASA, the Sponsor is obligated to
ensure that such marketing activities comply with applicable law
and are permitted by the SASA and the Distributor’s internal
procedures.
The Distributor’s principal business
address is Three Canal Plaza, Suite 100, Portland, Maine 04101. The
Distributor is a broker-dealer registered with the U.S. Securities
and Exchange Commission (“SEC”) and a member of
FINRA.
Clearing
Broker
E D & F Man Capital Markets, Inc.
(“E D & F Man”) serves as the Fund’s clearing
broker to execute and clear the Fund’s futures and provide
other brokerage-related services. E D & F Man is registered as
an FCM with the CFTC, is a member of the National Futures
Association (“NFA”) and is a clearing member of all
major U.S. futures exchanges. E D & F Man’s
Designated Self-Regulatory Organization is the Chicago Mercantile
Exchange Inc. (www.cmegroup.com).
E D & F Man is also registered as a broker-dealer
(“BD”) with the U.S. Securities and Exchange Commission
(“SEC”) and is a member of the Financial Industry
Regulatory Authority, Inc.
(“FINRA”).
Except as indicated below, there have been
no material civil, administrative, or criminal proceedings pending,
on appeal, or concluded against E D & F Man Capital Markets
Inc. or its principals in the past five (5)
years.
United States District
Court for the Southern District of New York, Civil Action No.
19-CV-8217
In a private litigation, plaintiffs allege,
among other things, that E D & F Man made certain fraudulent
misrepresentations to them that they relied upon in connection with
a futures account carried by E D & F Man in its capacity as a
futures commission merchant. The plaintiffs allege claims of common
law fraud, negligence, breach of fiduciary duty, breach of
contract, breach of the duty of good faith and fair dealing and
misrepresentation/omission and seek
compensatory damages of approximately $2,029,659 plus interest,
costs, attorneys’ fees and punitive damages. E D &
F Man filed an Amended Answer and a Counterclaim in which E D &
F Man denies the substantive allegations against it and asserted a
counterclaim for breach of contract, indemnification and legal
fees.
For a list of concluded actions,
please go to http://www.nfa.futures.org/basicnet/welcome.aspx.
This link will take you to the Welcome Page of the NFA’s
Background Affiliation Status Information Center
(“BASIC”). At this page, there is a box where you can
enter the NFA ID of E D & F Man Capital Markets Inc. (0002613)
and then click “Go”. You will be transferred to the
NFA’s information specific to E D & F Man Capital Markets
Inc. Under the heading “Regulatory Actions”, click
“details” and you will be directed to the full list of
regulatory actions brought by the CFTC and
exchanges.
E D & F Man, in its capacity as a
registered FCM, will serve as the Fund's clearing broker and, as
such, will arrange for the execution and clearing of the Fund's
futures and options on futures transactions. E D & F Man acts
as clearing broker for many other funds and
individuals.
The investor should be advised that E D
& F Man is not affiliated with and does not act as a supervisor
of the Fund or the Fund's Sponsor, investment managers, members,
officers, administrators, transfer agents, registrars or
organizers. Additionally, E D & F Man is not acting as an
underwriter or sponsor of the offering of any shares or interests
in the Fund and has not passed upon the adequacy of this
prospectus, the merits of participating in this offering or on the
accuracy of the information contained herein.
Additionally, E D & F Man does not
provide any commodity trading advice regarding the Fund's trading
activities. Investors should not rely upon E D & F Man in
deciding whether to invest in the Fund or retain their interests in
the Fund. Investors should also note that the Fund may select
additional clearing brokers or replace E D & F Man as the
Fund's clearing broker.
Payments to Certain Third
Parties
The Sponsor employs Thales Capital Partners
LLC (Thales) for distribution and solicitation-related services.
Thales is registered as a Broker-Dealer with the SEC and a member
of Financial Industry Regulatory Authority (FINRA) and SIPC. Thales
receives an annual fee of $90,000 and an additional 0.0015%
of average daily net assets in
referred accounts for distribution and solicitation-related
services. This additional fee is determined by an agreed
upon level of assets at the time of signing the
contract.
Commodity Trading
Advisor
Currently, the Sponsor does not employ
commodity trading advisors. If, in the future, the Sponsor does
employ commodity trading advisors, it will choose each advisor
based on arm’s length negotiations and will consider the
advisor’s experience, fees, and
reputation.
Contractual Fees and
Compensation Arrangements with the Sponsor and Third-Party Service
Providers
Service
Provider
|
Compensation
Paid by the Fund
|
Teucrium Trading, LLC,
Sponsor
|
1.00% of average net assets
annually
|
U.S. Bank N.A.,
Custodian
U.S. Bancorp Fund Services, LLC, doing
business as U.S. Bank Global Fund Services, Transfer Agent, Fund
Accountant and Fund Administrator
|
For custody services: 0.0075% of average
gross assets up to $1 billion, and .0050% of average gross assets
over $1 billion, annually, plus certain per-transaction
charges
For Transfer Agency, Fund Accounting and
Fund Administration services, based on the total assets for all the
Teucrium Funds in the Trust: 0.05% of average gross assets on the
first $500 million, 0.04% on the next $500 million, 0.03% on the
next $2 billion and 0.02% on the balance over $3 billion
annually
A combined minimum annual fee of $47,000 for
custody, transfer agency, accounting and administrative services is
assessed per Fund.
|
Foreside Fund Services, LLC,
Distributor
|
The Distributor receives a fee of 0.01% of
the Fund’s average daily net assets and an aggregate annual
fee of $100,000 for all Teucrium Funds, along with certain expense
reimbursements. Expense reimbursements consist of costs for sales
and advertising review fees and will not exceed $6,000 for the
two-year period of May 1, 2021 to May 1, 2023 (the “two year
offering period”). The asset-based fees which will be paid to
the Distributor by the Fund for distribution services will not
exceed $43,500 for the two-year offering
period.
Under the Securities Activities and Service
Agreement (the “SASA”), the Distributor receives
compensation from the fund for its activities on behalf of all the
Teucrium Funds. The fees paid to the Distributor pursuant to the
SASA for this offering will not exceed $2,500 for the two-year
offering period. The total expenses payable to the Distributor
relating to the registration, continuing education and other
administrative expenses of the Registered Representatives for this
offering will not exceed $2,000 for the two-year offering
period.
In sum, the total fees the Distributor will
receive over the two-year offering period for all of its services
will not exceed $51,500. The total expenses that will be reimbursed
to the Distributor over the two-year offering period for all of its
services will not exceed $8,000, $6,000 of which are issuer costs
for sales and advertising materials.
|
E D & F Man Capital Markets, Inc.,
Futures Commission Merchant and Clearing Broker
|
$4.50 per Sugar Futures Contract
half-turn
|
Wilmington Trust Company,
Trustee
Employees of the Sponsor
Registered
with the Distributor (the “Registered
Representatives”)
|
$3,300 annually for the
Trust
For non-marketing services to the Fund,
72,000 and, for marketing and wholesaling purposes, $70,000. These
amounts include expenses that will be reimbursed to the Registered
Representatives for travel and other expenses related to their
activities for the Fund. Of the total amount, approximately $14,200
will be paid by the Sponsor, the rest by the Fund. Registered
Representatives will also receive continuing education valued at a
maximum of $300 for the two-year offering
period.
|
Other Non-Contractual
Payments by the Fund
The Fund pays for all brokerage fees,
taxes and other expenses, including licensing fees for the use of
intellectual property, registration or other fees paid to the SEC,
FINRA, or any other regulatory agency in connection with the offer
and sale of subsequent Shares after its initial registration and
all legal, accounting, printing and other expenses associated
therewith. The Fund also pays its portion of the fees and expenses
for services directly attributable to the Fund such as accounting,
financial reporting, regulatory compliance and trading activities,
which the Sponsor elected not to outsource. Certain aggregate
expenses common to all Teucrium Funds within the Trust are
allocated by the Sponsor to the respective funds based on activity
drivers deemed most appropriate by the Sponsor for such expenses,
including but not limited to relative assets under management and
creation order activity. These aggregate common expenses include,
but are not limited to, legal, auditing, accounting and financial
reporting, tax-preparation, regulatory compliance, trading
activities, and insurance costs, as well as fees paid to the
Distributor. A portion of these aggregate common expenses are
related to the Sponsor or related parties of principals of the
Sponsor; these are necessary services to the Teucrium Funds, which
are primarily the cost of performing certain accounting and
financial reporting, regulatory compliance, and trading activities
that are directly attributable to the Fund and are included,
primarily, in distribution and marketing fees.
|
Year
Ended
December 31,
2020
|
Year
Ended
December 31,
2019
|
Year
Ended
December 31,
2018
|
Recognized
Related Party Transactions
|
$
126,960
|
$
183,750
|
$
242,126
|
Waived Related
Party Transactions
|
$ 50,547
|
$ 77,532
|
$ 93,112
|
The Sponsor can elect to pay (or waive
reimbursement for) certain fees or expenses that would generally be
paid for by the Fund, although it has no contractual obligation to
do so. Any election to pay or waive reimbursement for fees that
would generally be paid by the Fund, can be changed at the
discretion of the Sponsor. All asset-based fees and expenses are
calculated on the prior day's net assets.
The contractual and non-contractual fees and
expenses paid by the Fund as described above (exclusive of the
Sponsor’s management fee and estimated brokerage fees) are as
follows, net of any expenses waived by the Sponsor. These are also
the “Other Fund Fees and Expenses” included in the
section entitled “Breakeven Analysis” in this
prospectus on page 9.
|
|
Professional
Fees1
|
$0.02
|
Distribution
and Marketing Fees2
|
0.04
|
Custodian Fees
and Expenses3
|
0.01
|
General and
Administrative Fees4
|
-
|
Business
Permits and Licenses
|
-
|
Other
Expenses
|
-
|
Total Other Fund Fees and
Expenses
|
$0.07
|
(1) Professional fees consist of primarily,
but not entirely, legal, auditing and tax-preparation related
costs.
(2) Distribution and marketing fees consist
of primarily, but not entirely, fees paid to the Distributor
(Foreside Fund Services, LLC), costs related to regulatory
compliance activities, costs related to marketing and solicitation
services, and other costs related to the trading activities of the
Fund.
(3) Custodian and Administrator fees consist
of fees to the Administrator and the Custodian for accounting,
transfer agent and custodian activities.
(4) General and Administrative fees consist
of primarily, but not entirely, insurance and printing
costs.
Asset-based fees are calculated on a daily
basis (accrued at 1/365 of the applicable percentage of NAV on that
day) and paid on a monthly basis. NAV is calculated by taking the
current market value of the Fund’s total assets and
subtracting any liabilities.
Registered
Form
Shares are issued in registered form in
accordance with the Trust Agreement. Global Fund
Services has been appointed registrar and transfer agent for the
purpose of transferring Shares in certificated
form. Global Fund Services keeps a record of all
Shareholders and holders of the Shares in certificated form in the
registry (“Register”). The Sponsor
recognizes transfers of Shares in certificated form only if done in
accordance with the Trust Agreement. The beneficial
interests in such Shares are held in book-entry form through
participants and/or accountholders in DTC.
Book
Entry
Individual certificates are not issued for
the Shares. Instead, Shares are represented by one or
more global certificates, which are deposited by the Administrator
with DTC and registered in the name of Cede & Co., as nominee
for DTC. The global certificates evidence all of the
Shares outstanding at any time. Shareholders are limited
to (1) participants in DTC such as banks, brokers, dealers and
trust companies (“DTC Participants”), (2) those who
maintain, either directly or indirectly, a custodial relationship
with a DTC Participant (“Indirect Participants”), and
(3) those who hold interests in the Shares through DTC Participants
or Indirect Participants, in each case who satisfy the requirements
for transfers of Shares. DTC Participants acting on
behalf of investors holding Shares through such participants’
accounts in DTC will follow the delivery practice applicable to
securities eligible for DTC’s Same Day Funds Settlement
System. Shares are credited to DTC Participants’
securities accounts following confirmation of receipt of
payment.
DTC
DTC is a limited purpose trust company
organized under the laws of the State of New York and is a member
of the Federal Reserve System, a “clearing corporation”
within the meaning of the New York Uniform Commercial Code and a
“clearing agency” registered pursuant to the provisions
of Section 17A of the Securities Exchange Act of 1934 (“the
Exchange Act”). DTC holds securities for DTC
Participants and facilitates the clearance and settlement of
transactions between DTC Participants through electronic book-entry
changes in accounts of DTC Participants.
The Shares are only transferable through the
book-entry system of DTC. Shareholders who are not DTC
Participants may transfer their Shares through DTC by instructing
the DTC Participant holding their Shares (or by instructing the
Indirect Participant or other entity through which their Shares are
held) to transfer the Shares. Transfers are made in
accordance with standard securities industry
practice.
Transfers of interests in Shares with DTC
are made in accordance with the usual rules and operating
procedures of DTC and the nature of the transfer. DTC
has established procedures to facilitate transfers among the
participants and/or accountholders of DTC. Because DTC
can only act on behalf of DTC Participants, who in turn act on
behalf of Indirect Participants, the ability of a person or entity
having an interest in a global certificate to pledge such interest
to persons or entities that do not participate in DTC, or otherwise
take actions in respect of such interest, may be affected by the
lack of a certificate or other definitive document representing
such interest.
DTC has advised us that it will take any
action permitted to be taken by a Shareholder (including, without
limitation, the presentation of a global certificate for exchange)
only at the direction of one or more DTC Participants in whose
account with DTC interests in global certificates are credited and
only in respect of such portion of the aggregate principal amount
of the global certificate as to which such DTC Participant or
Participants has or have given such direction.
Inter-Series Limitation on
Liability
Because the Trust was established as a
Delaware statutory trust, each Teucrium Fund and each other series
that may be established under the Trust in the future will be
operated so that it will be liable only for obligations
attributable to such series and will not be liable for obligations
of any other series or affected by losses of any other
series. If any creditor or shareholder of any particular
series (such as the Fund) asserts against the series a valid claim
with respect to its indebtedness or shares, the creditor or
shareholder will only be able to obtain recovery from the assets of
that series and not from the assets of any other series or the
Trust generally. The assets of the Fund and any other
series will include only those funds and other assets that are paid
to, held by or distributed to the series on account of and for the
benefit of that series, including, without limitation, amounts
delivered to the Trust for the purchase of shares in a
series. This limitation on liability is referred to as
the Inter-Series Limitation on Liability. The
Inter-Series Limitation on Liability is expressly provided for
under the Delaware Statutory Trust Act, which provides that if
certain conditions (as set forth in Section 3804(a)) are met, then
the debts of any particular series will be enforceable only against
the assets of such series and not against the assets of any other
series or the Trust generally. In furtherance of the
Inter-Series Limitation on Liability, every party providing
services to the Trust, the Fund or the Sponsor on behalf of the
Trust or the Fund, will acknowledge and consent in writing to the
Inter-Series Limitation on Liability with respect to such
party’s claims.
The existence of a Trustee should not be
taken as an indication of any additional level of management or
supervision over the Fund. Consistent with Delaware law,
the Trustee acts in an entirely passive role, delegating all
authority for the management and operation of the Fund and the
Trust to the Sponsor. The Trustee does not provide
custodial services with respect to the assets of the
Fund.
Buying and Selling
Shares
Most investors buy and sell Shares of the
Fund in secondary market transactions through
brokers. Shares trade on the NYSE Arca under the ticker
symbol “CANE.” Shares are bought and sold
throughout the trading day like other publicly traded
securities. When buying or selling Shares through a
broker, most investors incur customary brokerage commissions and
charges. Investors are encouraged to review the terms of
their brokerage account for details on applicable charges and, as
discussed below under “U.S. Federal Income Tax
Considerations,” any provisions authorizing the broker to
borrow Shares held on your behalf.
Distributor and Authorized
Purchasers
The offering of the Fund’s Shares is a
best efforts offering. The Fund continuously offers Creation
Baskets consisting of 25,000 Shares at their NAV through the
Distributor, to Authorized Purchasers. Deutsche Bank Securities,
Inc. was the initial Authorized Purchaser. The initial Authorized
Purchaser purchased two Creation Baskets of 50,000 Shares each at a
per Share price of $25.00 on September 18, 2011. All Authorized
Purchasers pay a $250 fee for each Creation Basket
order.
The following entities have entered into
Authorized Purchaser Agreements with respect to the Fund:
J.P. Morgan Securities LLC;
Merrill Lynch Professional Clearing Corp.; Goldman Sachs & Co.;
Citadel Securities LLC; and Virtu Americas LLC. Effective October
16, 2020, Deutsche Bank Securities Inc. terminated their agreement
as an Authorized Purchaser for the Fund.
Because new Shares can be created and issued
on an ongoing basis, at any point during the life of the Fund, a
“distribution,” as such term is used in the 1933 Act,
will be occurring. Authorized Purchasers, other broker-dealers and
other persons are cautioned that some of their activities may
result in their being deemed participants in a distribution in a
manner that would render them statutory underwriters and subject
them to the prospectus delivery and liability provisions of the
1933 Act. For example, an Authorized Purchaser, other broker-dealer
firm or its client will be deemed a statutory underwriter if it
purchases a basket from the Fund, breaks the basket down into the
constituent Shares and sells the Shares to its customers; or if it
chooses to couple the creation of a supply of new Shares with an
active selling effort involving solicitation of secondary market
demand for the Shares. In contrast, Authorized Purchasers may
engage in secondary market or other transactions in Shares that
would not be deemed “underwriting.” For example, an
Authorized Purchaser may act in the capacity of a broker or dealer
with respect to Shares that were previously distributed by other
Authorized Purchasers. A determination of whether a particular
market participant is an underwriter must take into account all the
facts and circumstances pertaining to the activities of the
broker-dealer or its client in the particular case, and the
examples mentioned above should not be considered a complete
description of all the activities that would lead to designation as
an underwriter and subject them to the prospectus delivery and
liability provisions of the 1933 Act.
Dealers who are neither Authorized
Purchasers nor “underwriters” but are nonetheless
participating in a distribution (as contrasted to ordinary
secondary trading transactions), and thus dealing with Shares that
are part of an “unsold allotment” within the meaning of
Section 4(a)(3)(C) of the 1933 Act, would be unable to take
advantage of the prospectus delivery exemption provided by Section
4(a)(3) of the 1933 Act.
The Sponsor expects that any broker-dealers
selling Shares will be members of FINRA. Investors intending to
create or redeem baskets through Authorized Purchasers in
transactions not involving a broker-dealer registered in such
investor’s state of domicile or residence should consult
their legal advisor regarding applicable broker-dealer regulatory
requirements under the state securities laws prior to such creation
or redemption.
While the Authorized Purchasers may be
indemnified by the Sponsor, they will not be entitled to receive a
discount or commission from the Trust or the Sponsor for their
purchases of Creation Baskets.
The Fund’s NAV per Share is calculated
by:
|
●
|
taking the current market value of its total
assets, and
|
|
●
|
subtracting any liabilities and dividing the
balance by the number of Shares.
|
Global Fund Services, in its capacity as the
Administrator calculates the NAV of the Fund once each trading
day. It calculates NAV as of the earlier of the close of
the New York Stock Exchange or 4:00 p.m. (EST). The NAV
for a particular trading day is released after 4:15 p.m.
(EST).
For purposes of determining the value of
Sugar Futures Contracts, the Administrator uses the ICE Futures
settlement price, except that the “fair value” of Sugar
Futures Contracts (as described in more detail below) may be used
when Sugar Futures Contracts close at their price fluctuation limit
for the day. The Administrator determines the value of
all other Fund investments as of the earlier of the close of the
New York Stock Exchange or 4:00 p.m. (EST), in accordance with the
current Services Agreement between the Administrator and the
Trust. The value of over the counter Sugar Interests is
determined based on the value of the commodity or Futures Contract
underlying such sugar interest, except that a fair value may be
determined if the Sponsor believes that the Fund is subject to
significant credit risk relating to the counterparty to such sugar
interest. NAV includes any unrealized profit or loss on
open sugar interests and any other credit or debit accruing to the
Fund but unpaid or not received by the Fund.
The fair value of a sugar interest is
determined by the Sponsor in good faith and in a manner that
assesses the sugar interest’s value based on a consideration
of all available facts and all available information on the
valuation date. When a Sugar Futures Contract has closed
at its price fluctuation limit, the fair value determination
attempts to estimate the price at which such Sugar Futures Contract
would be trading in the absence of the price fluctuation limit
(either above such limit when an upward limit has been reached or
below such limit when a downward limit has been
reached). Typically, this estimate will be made
primarily by reference to the price of comparable sugar interests
trading in the over the counter market. The fair value
of a sugar interest may not reflect such security’s market
value or the amount that the Fund might reasonably expect to
receive for the sugar interest upon its current
sale.
In addition, in order to provide updated
information relating to the Fund for use by investors and market
professionals, ICE Data Indices, LLC calculates and disseminates
throughout the trading day an updated “indicative fund
value.” The indicative fund value is calculated by
using the prior day’s closing NAV per Share of the Fund as a
base and updating that value throughout the trading day to reflect
changes in the value of the Fund’s sugar interests during the
trading day. Changes in the value of cash and cash
equivalents are not included in the calculation of indicative
value. For this and other reasons, the indicative fund
value disseminated during NYSE Arca trading hours should not be
viewed as an actual real time update of the NAV. NAV is
calculated only once at the end of each trading
day.
The indicative fund value is disseminated on
a per Share basis every 15 seconds during regular NYSE Arca trading
hours of 9:30 a.m. (EST) to 4:00 p.m. (EST). The normal trading hours for Sugar
Futures Contracts on ICE Futures are generally shorter than those
of the NYSE Arca. This means that there is a gap in time at the
beginning and the end of each day during which the Fund’s
Shares are traded on the NYSE Arca, but real-time ICE trading
prices for Sugar Futures Contracts traded on such exchange are not
available. As a result, during those gaps there is no update to the
indicative fund value. The trading hours for the ICE can be found
at: http://www.theice.com/productguide/Search.shtml?tradingHours=.
ICE Data Indices, LLC disseminates the
indicative fund value through the facilities of CTA/CQ High Speed
Lines. In addition, the indicative fund value is
available through on-line information services such as Bloomberg
and Reuters.
Dissemination of the indicative fund value
provides additional information that is not otherwise available to
the public and is useful to investors and market professionals in
connection with the trading of Fund Shares on the NYSE
Arca. Investors and market professionals are able
throughout the trading day to compare the market price of the Fund
and the indicative fund value. If the market price of
Fund Shares diverges significantly from the indicative fund value,
market professionals may have an incentive to execute arbitrage
trades. For example, if the Fund appears to be trading
at a discount compared to the indicative fund value, a market
professional could buy Fund Shares on the NYSE Arca, aggregate them
into Redemption Baskets, and receive the NAV of such Shares by
redeeming them to the Trust, provided that there is not a minimum
number of shares outstanding for the Fund. Such
arbitrage trades can tighten the tracking between the market price
of the Fund and the indicative fund value.
Creation and Redemption
of Shares
The Fund creates and redeems Shares from
time to time, but only in one or more Creation Baskets or
Redemption Baskets. The creation and redemption of
baskets are only made in exchange for delivery to the Fund or the
distribution by the Fund of the amount of cash, cash equivalents
and/or commodity futures equal to the combined NAV of the number of
Shares included in the baskets being created or redeemed determined
as of 4:00 p.m. (EST) on the day the order to create or redeem
baskets is properly received.
Authorized Purchasers are the only persons
that may place orders to create and redeem
baskets. Authorized Purchasers must be (1) either
registered broker-dealers or other securities market participants,
such as banks and other financial institutions, that are not
required to register as broker-dealers to engage in securities
transactions as described below, and (2) DTC
Participants. To become an Authorized Purchaser, a
person must enter into an Authorized Purchaser Agreement with the
Sponsor. The Authorized Purchaser Agreement provides the
procedures for the creation and redemption of baskets and for the
delivery of the cash, cash equivalents and/or commodity futures
required for such creations and redemptions. The
Authorized Purchaser Agreement and the related procedures attached
thereto may be amended by the Sponsor, without the consent of any
Shareholder, and the related procedures may generally be amended by
the Sponsor without the consent of the Authorized
Purchaser. Authorized Purchasers pay a transaction fee
of $250 to the Custodian for each creation order they place and a
fee of $250 per order for redemptions. Authorized
Purchasers who make deposits with the Fund in exchange for baskets
receive no fees, commissions or other form of compensation or
inducement of any kind from either the Trust or the Sponsor, and no
such person will have any obligation or responsibility to the Trust
or the Sponsor to effect any sale or resale of
Shares.
Certain Authorized Purchasers are expected
to be capable of participating directly in the physical sugar and
the sugar interest markets. Some Authorized Purchasers
or their affiliates may from time to time buy or sell sugar or
sugar interests and may profit in these
instances.
Each Authorized Purchaser will be
required to be registered as a broker-dealer under the Exchange Act
and a member in good standing with FINRA or be exempt from being or
otherwise not required to be registered as a broker-dealer or a
member of FINRA and will be qualified to act as a broker or dealer
in the states or other jurisdictions where the nature of its
business so requires. Certain Authorized Purchasers may
also be regulated under federal and state banking laws and
regulations. Each Authorized Purchaser has its own set
of rules and procedures, internal controls and information barriers
it deems appropriate in light of its own regulatory
regime.
Under the Authorized Purchaser Agreement,
the Sponsor has agreed to indemnify the Authorized Purchasers
against certain liabilities, including liabilities under the 1933
Act, and to contribute to the payments the Authorized Purchasers
may be required to make in respect of those
liabilities.
The following description of the procedures
for the creation and redemption of baskets is only a summary and an
investor should refer to the relevant provisions of the Trust
Agreement and the form of Authorized Purchaser Agreement for more
detail, each of which has been incorporated by reference as an
exhibit to the registration statement of which this prospectus is a
part. See “Where You Can Find More
Information” for information about where you can obtain the
registration statement.
Creation
Procedures
On any business day, an Authorized Purchaser
may place an order with Global Fund Services in their capacity as
the transfer agent to create one or more baskets. For
purposes of processing purchase and redemption orders, a
“business day” means any day other than a day when any
of the NYSE Arca, ICE Futures, or the New York Stock Exchange is
closed for regular trading. Purchase orders must be
placed by 12:00 p.m. (EST) or the close of regular trading on the
New York Stock Exchange, whichever is earlier. The day
on which the Distributor receives a valid purchase order is
referred to as the purchase order date.
By placing a purchase order, an Authorized
Purchaser agrees to deposit cash, cash equivalents, commodity
futures and/or a combination thereof with the Fund, as described
below. Prior to the delivery of baskets for a purchase
order, the Authorized Purchaser must also have wired to the Sponsor
the non-refundable transaction fee due for the purchase
order. Authorized Purchasers may not withdraw a purchase
order without the prior consent of the Sponsor in its
discretion.
Determination of Required
Deposits
The total deposit required to create each
basket (“Creation Basket Deposit”) is the amount of
cash, cash equivalents and/or commodity futures that is in the same
proportion to the total assets of the Fund (net of estimated
accrued but unpaid fees, expenses and other liabilities) on the
purchase order date as the number of Shares to be created under the
purchase order is in proportion to the total number of Shares
outstanding on the purchase order date. The Sponsor
determines, directly in its sole discretion or in consultation with
the Custodian and the Administrator, the requirements for cash,
cash equivalents and/or commodity futures, including the remaining
maturities of the cash equivalents, that may be included in
deposits to create baskets. If cash equivalents are to
be included in a Creation Basket Deposit for orders placed on a
given business day, the Administrator will publish an estimate of
the Creation Basket Deposit requirements at the beginning of such
day.
Delivery of Required
Deposits
An Authorized Purchaser who places a
purchase order is responsible for transferring to the Fund’s
account with the Custodian the required amount of cash, cash
equivalents and/or commodity futures by the end of the next
business day following the purchase order date or by the end of
such later business day, not to exceed three business days after
the purchase order date, as agreed to between the Authorized
Purchaser and the Custodian when the purchase order is placed (the
“Purchase Settlement Date”). Upon receipt of
the deposit amount, the Custodian directs DTC to credit the number
of baskets ordered to the Authorized Purchaser’s DTC account
on the Purchase Settlement Date.
Because orders to purchase baskets must be
placed by 12:00 p.m., (EST), but the total payment required to
create a basket during the continuous offering period will not be
determined until 4:00 p.m., (EST), on the date the purchase order
is received, Authorized Purchasers will not know the total amount
of the payment required to create a basket at the time they submit
an irrevocable purchase order for the basket. The
Fund’s NAV and the total amount of the payment required to
create a basket could rise or fall substantially between the time
an irrevocable purchase order is submitted and the time the amount
of the purchase price in respect thereof is
determined.
Rejection of Purchase
Orders
The Sponsor acting by itself or through the
Distributor or transfer agent may reject a purchase order or a
Creation Basket Deposit if:
|
●
|
it determines that, due to position limits
or otherwise, investment alternatives that will enable the Fund to
meet its investment objective are not available or practicable at
that time;
|
|
●
|
it determines that the purchase order or the
Creation Basket Deposit is not in proper form;
|
|
●
|
it believes that acceptance of the purchase
order or the Creation Basket Deposit would have adverse tax
consequences to the Fund or its Shareholders;
|
|
●
|
the acceptance or receipt of the Creation
Basket Deposit would, in the opinion of counsel to the Sponsor, be
unlawful;
|
|
●
|
circumstances outside the control of the
Sponsor, Distributor or transfer agent make it, for all practical
purposes, not feasible to process creations of
baskets;
|
|
●
|
there is a possibility that any or all of
the Benchmark Component Futures Contracts of the Fund on the ICE
Futures from which the NAV of the Fund is calculated will be priced
at a daily price limit restriction; or
|
|
●
|
if, in the sole discretion of the Sponsor,
the execution of such an order would not be in the best interest of
the Fund or its Shareholders.
|
None of the Sponsor, Distributor or transfer
agent will be liable for the rejection of any purchase order or
Creation Basket Deposit.
Redemption
Procedures
The procedures by which an Authorized
Purchaser can redeem one or more baskets mirror the procedures for
the creation of baskets. On any business day, an
Authorized Purchaser may place an order with the transfer agent to
redeem one or more baskets. Redemption orders must be
placed by 12:00 p.m. (EST) or the close of regular trading on the
New York Stock Exchange, whichever is earlier. A
redemption order so received will be effective on the date it is
received in satisfactory form by the Distributor. The
redemption procedures allow Authorized Purchasers to redeem baskets
and do not entitle an individual Shareholder to redeem any Shares
in an amount less than a Redemption Basket, or to redeem baskets
other than through an Authorized Purchaser. By placing a
redemption order, an Authorized Purchaser agrees to deliver the
baskets to be redeemed through DTC’s book-entry system to the
Fund by the end of the next business day following the effective
date of the redemption order or by the end of such later business
day. Prior to the delivery of the redemption distribution for a
redemption order, the Authorized Purchaser must also have wired to
the Sponsor’s account at the Custodian the non-refundable
transaction fee due for the redemption order. An
Authorized Purchaser may not withdraw a redemption order without
the prior consent of the Sponsor in its
discretion.
Determination of Redemption
Distribution
The redemption distribution from the Fund
consists of a transfer to the redeeming Authorized Purchaser of an
amount of cash, cash equivalents and/or commodity futures that is
in the same proportion to the total assets of the Fund (net of
estimated accrued but unpaid fees, expenses and other liabilities)
on the date the order to redeem is properly received as the number
of Shares to be redeemed under the redemption order is in
proportion to the total number of Shares outstanding on the date
the order is received. The Sponsor, directly or in consultation
with the Custodian and the Administrator, determines the
requirements for cash, cash equivalents and/or commodity futures,
including the remaining maturities of the cash equivalents and
cash, that may be included in distributions to redeem baskets. If
cash equivalents are to be included in a redemption distribution
for orders placed on a given business day, the Custodian and
Administrator will publish an estimate of the redemption
distribution composition as of the beginning of such
day.
Delivery of Redemption
Distribution
The redemption distribution due from a Fund
will be delivered to the Authorized Purchaser on the Redemption
Settlement Date if the Fund’s DTC account has been credited
with the baskets to be redeemed. If the Fund’s DTC
account has not been credited with all of the baskets to be
redeemed by the end of such date, the redemption distribution will
be delivered to the extent of whole baskets
received. Any remainder of the redemption distribution
will be delivered on the next business day after the Redemption
Settlement Date to the extent of remaining whole baskets
received. Pursuant to information from the Sponsor, the
Custodian will also be authorized to deliver the redemption
distribution notwithstanding that the baskets to be redeemed are
not credited to the Fund’s DTC account by noon (EST) on the
Redemption Settlement Date if the Authorized Purchaser has
collateralized its obligation to deliver the baskets through
DTC’s book-entry system on such terms as the Sponsor may from
time to time determine.
Suspension or Rejection of
Redemption Orders
The Sponsor may, in its discretion, suspend
the right of redemption, or postpone the redemption settlement
date, (1) for any period during which the NYSE Arca or ICE Futures
is closed other than customary weekend or holiday closings, or
trading on the NYSE Arca or ICE Futures is suspended or restricted,
(2) for any period during which an emergency exists as a result of
which delivery, disposal or evaluation of cash equivalents is not
reasonably practicable, (3) for such other period as the Sponsor
determines to be necessary for the protection of the Shareholders,
(4) if there is a possibility that any or all of the Benchmark
Component Futures Contracts of the Fund on the ICE Futures from
which the NAV of the Fund is calculated will be priced at a daily
price limit restriction, or (5) if, in the sole discretion of the
Sponsor, the execution of such an order would not be in the best
interest of the Fund or its Shareholders. For example,
the Sponsor may determine that it is necessary to suspend
redemptions to allow for the orderly liquidation of the
Fund’s assets at an appropriate value to fund a
redemption. If the Sponsor has difficulty liquidating
the Fund’s positions, e.g., because of a market disruption
event in the futures markets or an unanticipated delay in the
liquidation of a position in an over the counter contract, it may
be appropriate to suspend redemptions until such time as such
circumstances are rectified. None of the Sponsor, the
Distributor, or the transfer agent will be liable to any person or
in any way for any loss or damages that may result from any such
suspension or postponement.
Redemption orders must be made in whole
baskets. The Sponsor will reject a redemption order if the order is
not in proper form as described in the Authorized Purchaser
Agreement or if the fulfillment of the order, in the opinion of its
counsel, might be unlawful. The Sponsor may also reject
a redemption order if the number of Shares being redeemed would
reduce the remaining outstanding Shares to 50,000 Shares (i.e., two
baskets of 25,000 Shares each) or less, unless the Sponsor has
reason to believe that the placer of the redemption order does in
fact possess all the outstanding Shares of the Fund and can deliver
them.
Creation and Redemption
Transaction Fees
To compensate for expenses in connection
with the creation and redemption of baskets, an Authorized
Purchaser is required to pay a transaction fee of $250 per order to
the Custodian. The transaction fees may be reduced,
increased or otherwise changed by the
Sponsor.
Tax
Responsibility
Authorized Purchasers are responsible for
any transfer tax, sales or use tax, stamp tax, recording tax, value
added tax or similar tax or governmental charge applicable to the
creation or redemption of baskets, regardless of whether or not
such tax or charge is imposed directly on the Authorized Purchaser,
and agree to indemnify the Sponsor and the Fund if they are
required by law to pay any such tax, together with any applicable
penalties, additions to tax and interest
thereon.
Secondary Market
Transactions
As noted, the Fund will create and redeem
Shares from time to time, but only in one or more Creation Baskets
or Redemption Baskets. The creation and redemption of
baskets are only made in exchange for delivery to the Fund or the
distribution by the Fund of the amount of cash, cash equivalents,
and/or commodity futures equal to the aggregate NAV of the number
of Shares included in the baskets being created or redeemed
determined on the day the order to create or redeem baskets is
properly received.
As discussed above, Authorized Purchasers
are the only persons that may place orders to create and redeem
baskets. Authorized Purchasers must be registered
broker-dealers or other securities market participants, such as
banks and other financial institutions that are not required to
register as broker-dealers to engage in securities
transactions. An Authorized Purchaser is under no
obligation to create or redeem baskets, and an Authorized Purchaser
is under no obligation to offer to the public Shares of any baskets
it does create. Authorized Purchasers that do offer to
the public Shares from the baskets they create will do so at per
Share offering prices that are expected to reflect, among other
factors, the trading price of the Shares on the NYSE Arca, the NAV
of the Shares at the time the Authorized Purchaser purchased the
Creation Baskets, the NAV of the Shares at the time of the offer of
the Shares to the public, the supply of and demand for Shares at
the time of sale, and the liquidity of the sugar interest
markets. The prices of Shares offered by Authorized
Purchasers are expected to fall between the Fund’s NAV and
the trading price of the Shares on the NYSE Arca at the time of
sale. Shares initially comprising the same basket but
offered by Authorized Purchasers to the public at different times
may have different offering prices. An order for one or
more baskets may be placed by an Authorized Purchaser on behalf of
multiple clients. Shares are expected to trade in the
secondary market on the NYSE Arca. Shares may trade in
the secondary market at prices that are lower or higher relative to
their NAV per Share. The amount of the discount or
premium in the trading price relative to the NAV per Share may be
influenced by various factors, including the number of investors
who seek to purchase or sell Shares in the secondary market and the
liquidity of the sugar interest markets. While the
Shares trade on the NYSE Arca until 4:00 p.m. (EST), liquidity in
the markets for sugar interests may be reduced after the close of
the ICE Futures. As a result, during this time, trading
spreads, and the resulting premium or discount, on the Shares may
widen.
The Sponsor causes the Fund to transfer the
proceeds of the sale of Creation Baskets to the Custodian or
another financial institution for use in trading activities and/or
investment in Benchmark Component Futures Contracts and cash and
cash equivalents. Under normal market conditions, the Sponsor
invests the Fund’s assets in Benchmark Component Futures
Contracts and cash and cash equivalents. When the Fund purchases
Benchmark Component Futures Contracts, the Fund is required to
deposit with the FCM on behalf of the exchange a portion of the
value of the contract or other interest as security to ensure
payment for the obligation under the Benchmark Component Futures
Contracts at maturity. This deposit is known as initial margin.
Counterparties in transactions in over the counter sugar interests
will generally impose similar collateral requirements on the Fund.
The Sponsor invests the Fund’s assets that remain after
margin and collateral is posted in cash and cash equivalents.
Subject to these margin and collateral requirements, the Sponsor
has sole authority to determine the percentage of assets that will
be:
|
●
|
held as margin or collateral with FCMs or
other custodian;
|
|
●
|
used for other investments;
and
|
|
●
|
held in bank accounts to pay current
obligations and as reserves.
|
In general, the Fund expects that it will be
required to post approximately 4-6% of the notional amount of a
Benchmark Component Futures Contracts as initial margin when
entering into such Benchmark Component Futures Contracts. Ongoing
margin and collateral payments will generally be required for both
exchange-traded and over the counter sugar interests based on
changes in the value of the sugar interests. Furthermore, ongoing
collateral requirements with respect to over the counter sugar
interests are negotiated by the parties, and may be affected by
overall market volatility, volatility of the underlying commodity
or index, the ability of the counterparty to hedge its exposure
under the sugar interest, and each party’s creditworthiness.
In light of the differing requirements for initial payments under
exchange-traded and over the counter sugar interests and the
fluctuating nature of ongoing margin and collateral payments, it is
not possible to estimate what portion of the Fund’s assets
will be posted as margin or collateral at any given time. Cash and
cash equivalents held by the Fund constitute reserves that are
available to meet ongoing margin and collateral requirements. All
interest or other income is used for the Fund’s
benefit.
An FCM, counterparty, government agency or
commodity exchange could increase margin or collateral requirements
applicable to the Fund to hold trading positions at any
time. Moreover, margin is merely a security deposit and
has no bearing on the profit or loss potential for any positions
held. Further, under recently adopted CFTC rules, the Fund may be
obligated to post both initial and variation margin with respect to
swaps (and options that qualify as swaps) and traded over-the
-counter, and, where applicable, on SEFs.
The approximate 4-6% of the Fund’s
assets held by the FCM are held in segregation pursuant to the CEA
and CFTC regulations.
The following paragraphs are a summary of
certain provisions of the Trust Agreement. The following discussion
is qualified in its entirety by reference to the Trust
Agreement.
Authority of the
Sponsor
The Sponsor is generally authorized to
perform all acts deemed necessary to carry out the purposes of the
Trust and to conduct the business of the Trust. The Trust and the
Fund will continue to exist until terminated in accordance with the
Trust Agreement.
The Sponsor’s
Obligations
In addition to the duties imposed by the
Delaware Trust Statute, under the Trust Agreement the Sponsor has
obligations as a Sponsor of the Trust, which include, among others,
responsibility for certain organizational and operational
requirements of the Trust, as well as fiduciary responsibility for
the safekeeping and use of the Trust’s assets, whether or not
in the Sponsor’s immediate possession or
control.
To the extent that, at law (common or
statutory) or in equity, the Sponsor has duties (including
fiduciary duties) and liabilities relating thereto to the Trust,
the Fund, the Shareholders or to any other person, the Sponsor will
not be liable to the Trust, the Fund, the Shareholders or to any
other person for its good faith reliance on the provisions of the
Trust Agreement or this prospectus unless such reliance constitutes
gross negligence or willful misconduct on the part of the Sponsor.
The provisions of the Trust Agreement, to the extent they restrict
or eliminate the duties and liabilities of the Sponsor otherwise
existing at law or in equity, replace such other duties and
liabilities of the Sponsor.
Liability and
Indemnification
Under the Trust Agreement, the Sponsor, the
Trustee and their respective Affiliates (collectively,
“Covered Persons”) shall have no liability to the
Trust, the Fund, or to any Shareholder for any loss suffered by the
Trust or the Fund which arises out of any action or inaction of
such Covered Person if such Covered Person, in good faith,
determined that such course of conduct was in the best interest of
the Trust or the Fund and such course of conduct did not constitute
gross negligence or willful misconduct of such Covered Person.
Subject to the foregoing, neither the Sponsor nor any other Covered
Person shall be personally liable for the return or repayment of
all or any portion of the capital or profits of any Shareholder or
assignee thereof, it being expressly agreed that any such return of
capital or profits made pursuant to the Trust Agreement shall be
made solely from the assets of the applicable Teucrium Fund without
any rights of contribution from the Sponsor or any other Covered
Person. A Covered Person shall not be liable for the conduct or
willful misconduct of any administrator or other delegate selected
by the Sponsor with reasonable care, provided, however, that the
Trustee and its Affiliates shall not, under any circumstances be
liable for the conduct or willful misconduct of any administrator
or other delegate or any other person selected by the Sponsor to
provide services to the Trust.
The Trust Agreement also provides that the
Sponsor shall be indemnified by the Trust (or by a series
separately to the extent the matter in question relates to a single
series or disproportionately affects a specific series in relation
to other series) against any losses, judgments, liabilities,
expenses and amounts paid in settlement of any claims sustained by
it in connection with its activities for the Trust, provided that
(i) the Sponsor was acting on behalf of or performing services for
the Trust and has determined, in good faith, that such course of
conduct was in the best interests of the Trust and such liability
or loss was not the result of gross negligence, willful misconduct, or
a breach of the Trust Agreement on the part of the Sponsor and (ii)
any such indemnification will only be recoverable from the assets
of the applicable series. The Sponsor’s rights to
indemnification permitted under the Trust Agreement shall not be
affected by the dissolution or other cessation to exist of the
Sponsor, or the withdrawal, adjudication of bankruptcy or
insolvency of the Sponsor, or the filing of a voluntary or
involuntary petition in bankruptcy under Title 11 of the Bankruptcy
Code by or against the Sponsor.
Notwithstanding the above, the Sponsor shall
not be indemnified for any losses, liabilities or expenses arising
from or out of an alleged violation of U.S. federal or state
securities laws unless (i) there has been a successful adjudication
on the merits of each count involving alleged securities law
violations as to the particular indemnitee and the court approves
the indemnification of such expenses (including, without
limitation, litigation costs), (ii) such claims have been dismissed
with prejudice on the merits by a court of competent jurisdiction
as to the particular indemnitee and the court approves the
indemnification of such expenses (including, without limitation,
litigation costs), or (iii) a court of competent jurisdiction
approves a settlement of the claims against a particular indemnitee
and finds that indemnification of the settlement and related costs
should be made.
The payment of any indemnification shall be
allocated, as appropriate, among the Trust’s series. The
Trust and its series shall not incur the cost of that portion of
any insurance which insures any party against any liability, the
indemnification of which is prohibited under the Trust
Agreement.
Expenses incurred in defending a threatened
or pending action, suit or proceeding against the Sponsor shall be
paid by the Trust in advance of the final disposition of such
action, suit or proceeding, if (i) the legal action relates to the
performance of duties or services by the Sponsor on behalf of the
Trust; (ii) the legal action is initiated by a party other than the
Trust; and (iii) the Sponsor undertakes to repay the advanced funds
with interest to the Trust in cases in which it is not entitled to
indemnification.
The Trust Agreement provides that the
Sponsor and the Trust shall indemnify the Trustee and its
successors, assigns, legal representatives, officers, directors,
shareholders, employees, agents and servants (the “Trustee
Indemnified Parties”) against any liabilities, obligations,
losses, damages, penalties, taxes (excluding any taxes on the
compensation received for services as Trustee or on indemnity
payments received), claims, actions, suits, costs, expenses or
disbursements which may be imposed on a Trustee Indemnified Party
relating to or arising out of the formation, operation or
termination of the Trust, the execution, delivery and performance
of any other agreements to which the Trust is a party, or the
action or inaction of the Trustee under the Trust Agreement or any
other agreement, except for expenses resulting from the gross
negligence or willful misconduct of a Trustee Indemnified Party.
Further, certain officers of the Sponsor are insured against
liability for certain errors or omissions which an officer may
incur or that may arise out of his or her capacity as
such.
In the event the Trust is made a party to
any claim, dispute, demand or litigation or otherwise incurs any
liability or expense as a result of or in connection with any
Shareholder’s (or assignee’s) obligations or
liabilities unrelated to the Trust business, such Shareholder (or
assignees cumulatively) is required under the Trust Agreement to
indemnify the Trust for all such liability and expense incurred,
including attorneys’ and accountants’
fees.
Withdrawal of the
Sponsor
The Sponsor may withdraw voluntarily as the
Sponsor of the Trust only upon ninety (90) days’ prior
written notice to the holders of the Trust’s outstanding
shares and the Trustee. If the withdrawing Sponsor is
the last remaining Sponsor, shareholders holding a majority (over
50%) of the outstanding shares of the Teucrium Funds, voting
together as a single class (not including shares acquired by the
Sponsor through its initial capital contribution) may vote to elect
a successor Sponsor. The successor Sponsor will continue
the business of the Trust. Shareholders have no right to
remove the Sponsor.
In the event of withdrawal, the Sponsor is
entitled to a redemption of the shares it acquired through its
initial capital contribution to any of the series of the Trust at
their NAV per Share. If the Sponsor withdraws and a
successor Sponsor is named, the withdrawing Sponsor shall pay all
expenses as a result of its withdrawal.
Meetings
Meetings of the Trust’s shareholders
may be called by the Sponsor and will be called by it upon the
written request of Shareholders holding at least 25% of the
outstanding Shares of the Trust or the Fund, as applicable (not
including Shares acquired by the Sponsor through its initial
capital contribution). The Sponsor shall deposit in the United
States mail or electronically transmit written notice to all
Shareholders of the Fund of the meeting and the purpose of the
meeting, which shall be held on a date not less than 30 nor more
than 60 days after the date of mailing of such notice, at a
reasonable time and place. Where the meeting is called upon the
written request of the shareholders of the Fund, or any other
Teucrium Fund, as applicable, such written notice shall be mailed
or transmitted not more than 45 days after such written request for
a meeting was received by the Sponsor.
Voting
Rights
Shareholders have no voting rights with
respect to the Trust or the Fund except as expressly provided in
the Trust Agreement. The Trust Agreement provides that shareholders
representing at least a majority (over 50%) of the outstanding
shares of the Teucrium Funds voting together as a single class
(excluding shares acquired by the Sponsor in connection with its
initial capital contribution to any Trust series) may vote to (i)
continue the Trust by electing a successor Sponsor as described
above, and (ii) approve amendments to the Trust Agreement that
impair the right to surrender Redemption Baskets for redemption.
(Trustee consent to any amendment to the Trust Agreement is
required if the Trustee reasonably believes that such amendment
adversely affects any of its rights, duties or liabilities.) In
addition, shareholders holding shares representing seventy-five
percent (75%) of the outstanding shares of the Teucrium Funds,
voting together as a single class (excluding shares acquired by the
Sponsor in connection with its initial capital contribution to any
Trust series) may vote to dissolve the Trust upon not less than
ninety (90) days’ notice to the Sponsor.
Limited Liability of
Shareholders
Shareholders shall be entitled to the same
limitation of personal liability extended to stockholders of
private corporations for profit organized under the general
corporation law of Delaware, and no Shareholder shall be liable for
claims against, or debts of the Trust or the Fund in excess of his
share of the Fund’s assets. The Trust or the Fund shall not
make a claim against a Shareholder with respect to amounts
distributed to such Shareholder or amounts received by such
Shareholder upon redemption unless, under Delaware law, such
Shareholder is liable to repay such amount.
The Trust or the Fund shall indemnify to the
full extent permitted by law and the Trust Agreement each
Shareholder (excluding the Sponsor to the extent of its ownership
of any Shares acquired through its initial capital contribution)
against any claims of liability asserted against such Shareholder
solely because of its ownership of Shares (other than for taxes on
income from Shares for which such Shareholder is
liable).
The Trust Agreement provides that every
written note, bond, contract, instrument, certificate or
undertaking made or issued by or on behalf of the Fund shall give
notice to the effect that the obligations of such instrument are
not binding upon the Shareholders individually but are binding only
upon the assets and property of the Fund.
The Sponsor
Has Conflicts of Interest
There are present and potential future
conflicts of interest in the Trust’s structure and operation
you should consider before you purchase Shares. The Sponsor may use
this notice of conflicts as a defense against any claim or other
proceeding made.
The Sponsor’s principals, officers and
employees, do not devote their time exclusively to the Funds.
Notwithstanding obligations and expectations related to the
management of the Sponsor, the Sponsor’s principals, officers
and employees may be directors, officers or employees of other
entities, and may manage assets of other entities, including the
other Teucrium Funds, through the Sponsor or otherwise. As a
result, the principals could have a conflict between
responsibilities to the Fund on the one hand and to those other
entities on the other.
The Sponsor and its principals, officers and
employees may trade securities, futures and related contracts for
their own accounts, creating the potential for preferential
treatment of their own accounts. Shareholders will not be permitted
to inspect the trading records of such persons or any written
policies of the Sponsor related to such trading. A conflict of
interest may exist if their trades are in the same markets and at
approximately the same times as the trades for the Fund. A
potential conflict also may occur when the Sponsor’s
principals trade their accounts more aggressively or take positions
in their accounts which are opposite, or ahead of, the positions
taken by the Fund.
The Sponsor has sole current authority to
manage the investments and operations of the Fund, and this may
allow it to act in a way that furthers its own interests which may
create a conflict with your best interests, including the authority
of the Sponsor to allocate expenses to and between the Teucrium
Funds. Shareholders have very limited voting rights with respect to
the Fund, which will limit the ability to influence matters such as
amendment of the Trust Agreement, change in the Fund’s basic
investment policies, or dissolution of the Fund or the
Trust.
The Sponsor serves as the Sponsor to the
Teucrium Funds and may in the future serve as the Sponsor or
investment adviser to commodity pools other than the Teucrium
Funds. The Sponsor may have a conflict to the extent that its
trading decisions for the Fund may be influenced by the effect they
would have on the other pools it manages. In addition, the Sponsor
may be required to indemnify the officers and directors of the
other pools, if the need for indemnification arises. This potential
indemnification will cause the Sponsor’s assets to decrease.
If the Sponsor’s other sources of income are not sufficient
to compensate for the indemnification, it could cease operations,
which could in turn result in Fund losses and/or termination of the
Fund.
In addition, the Sponsor may be required to
indemnify the officers and directors of the other pools, if the
need for indemnification arises. This potential indemnification
will cause the Sponsor’s assets to decrease. If the
Sponsor’s other sources of income are not sufficient to
compensate for the indemnification, it could cease operations,
which could in turn result in Fund losses and/or termination of the
Fund.
If the Sponsor acquires knowledge of a
potential transaction or arrangement that may be an opportunity for
the Fund, it shall have no duty to offer such opportunity to the
Fund. The Sponsor will not be liable to the Fund or the
Shareholders for breach of any fiduciary or other duty if the
Sponsor pursues such opportunity or directs it to another person or
does not communicate such opportunity to the Fund, and is not
required to share income or profits derived from such business
ventures with the Fund.
Resolution of Conflicts
Procedures
The Trust Agreement provides that whenever a
conflict of interest exists between the Sponsor or any of its
Affiliates, on the one hand, and the Trust, any shareholder of a
Trust series, or any other person, on the other hand, the Sponsor
shall resolve such conflict of interest, take such action or
provide such terms, considering in each case the relative interest
of each party (including its own interest) to such conflict,
agreement, transaction or situation and the benefits and burdens
relating to such interests, any customary or accepted industry
practices, and any applicable generally accepted accounting
practices or principles. In the absence of bad faith by the
Sponsor, the resolution, action or terms so made, taken or provided
by the Sponsor shall not constitute a breach of the Trust Agreement
or any other agreement contemplated therein or of any duty or
obligation of the Sponsor at law or in equity or
otherwise.
Interests of Named
Experts and Counsel
No expert hired by the Fund to give advice
on the preparation of this offering document has been hired on a
contingent fee basis, nor do any of them have any present or
future expectation of interest in the Sponsor, Distributor,
Authorized Purchasers, Custodian/Administrator or other service
providers to the Fund.
Provisions of
Federal and State Securities Laws
This offering is made pursuant to federal
and state securities laws. The SEC and state securities
agencies take the position that indemnification of the Sponsor that
arises out of an alleged violation of such laws is prohibited
unless certain conditions are met. Those conditions
require that no indemnification of the Sponsor or any underwriter
for the Fund may be made in respect of any losses, liabilities or
expenses arising from or out of an alleged violation of federal or
state securities laws unless: (i) there has been a
successful adjudication on the merits of each count involving
alleged securities law violations as to the party seeking
indemnification and the court approves the indemnification; (ii)
such claim has been dismissed with prejudice on the merits by a
court of competent jurisdiction as to the party seeking
indemnification; or (iii) a court of competent jurisdiction
approves a settlement of the claims against the party seeking
indemnification and finds that indemnification of the settlement
and related costs should be made, provided that, before seeking
such approval, the Sponsor or other indemnitee must apprise the
court of the position held by regulatory agencies against such
indemnification.
The Trust keeps its books of record and
account at its office located at Three Main Street, Suite 215,
Burlington, VT 05401, or at the offices of the Administrator, U.S.
Bancorp Fund Services, LLC, doing business as U.S. Bank Global Fund
Services located at 777 E. Wisconsin Ave, Milwaukee, Wisconsin
53202, or such office, including of an administrative agent, as it
may subsequently designate upon notice. The books of account
of the Fund are open to inspection by any Shareholder (or any duly
constituted designee of a Shareholder) at all times during the
usual business hours of the Fund upon reasonable advance notice to
the extent such access is required under CFTC rules and
regulations. In addition, the Trust keeps a copy of the Trust
Agreement on file in its office which will be available for
inspection by any Shareholder at all times during its usual
business hours upon reasonable advance notice.
Statements, Filings, and
Reports to Shareholders
The Trust will furnish to DTC Participants
for distribution to Shareholders annual reports (as of the end of
each fiscal year) for the Fund as are required to be provided to
Shareholders by the CFTC and the NFA. These annual
reports will contain financial statements prepared by the Sponsor
and audited by an independent registered public accounting firm
designated by the Sponsor. The Trust will also post
monthly reports to the Fund’s website (www.teucrium.com). These
monthly reports will contain certain unaudited financial
information regarding the Fund, including the Fund’s
NAV. The Sponsor will furnish to the Shareholders other
reports or information which the Sponsor, in its discretion,
determines to be necessary or appropriate. In addition,
under SEC rules the Trust will be required to file quarterly and
annual reports for the Fund with the SEC, which need not be sent to
Shareholders but will be publicly available through the
SEC. The Trust will post the same information that would
otherwise be provided in the Trust’s CFTC, NFA and SEC
reports on the Fund’s website: www.teucrium.com.
The accountants’ report on its audit
of the Fund’s financial statements will be furnished by the
Trust to Shareholders upon request. The Trust will file such tax
returns, and prepare, disseminate and file such tax reports for the
Fund as it is advised by its counsel or accountants are from time
to time required by any applicable statute, rule or regulation and
will make such tax elections for the Fund as it deems
advisable.
PricewaterhouseCoopers (“PwC”),
2001 Ross Avenue, Suite 1800, Dallas, Texas 75201-2997, will
provide tax information in accordance with the Code and applicable
U.S. Treasury Regulations. Persons treated as middlemen for
purposes of these regulations may obtain tax information regarding
the Fund from PwC or from the Fund’s website,
www.teucrium.com.
Fiscal
Year
The fiscal year of the Fund is the calendar
year.
Governing
Law
The rights of the Sponsor, the Trust, the
Fund, DTC (as registered owner of the Fund’s global
certificate for Shares) and the Shareholders are governed by the
laws of the State of Delaware, except with respect to causes of
action for violations of U.S. federal or state securities laws. The
Trust Agreement and the effect of every provision thereof shall
control over any contrary or limiting statutory or common law of
the State of Delaware, other than the Delaware Trust
Statute.
Security
Ownership of Principal Shareholders and
Management
The following
table sets forth information with respect to each person or entity
known to own beneficially more than 5% of the outstanding shares of
CANE as of December 31, 2020, based on information known to the
Sponsor.
(1)
Title of
Class
|
(2)
Name and Address of Beneficial
Owner
|
(3)
Amount and Nature of Beneficial
Ownership
|
(4)
Percent of
Class
|
CANE
|
Jane Street Capital LLC
New York, NY
|
115,527 common units (1)
|
6.08%
|
CANE
|
Korean Securities
Depository
Seoul, Korea
|
114,809 common units (1)
|
6.04%
|
CANE
|
Gelber Securities
Chicago, IL
|
102,746 common units (1)
|
5.41%
|
(1) These
individuals and entities have not filed any public reports with the
SEC.
The following table sets forth information
regarding the beneficial ownership of shares of CANE by the
executive officers of the Sponsor as of February 28, 2021.
Except as listed, no other executive officer of the Sponsor is a
beneficial owner of shares of the Fund.
(1)
Title of
Class
|
(2)
Name of
Beneficial Owner
|
(3)
Amount and
nature of Beneficial Ownership
|
(4)
Percent of
Class
|
CANE
|
Sal Gilbertie
|
500 common units
|
*
|
*Less than 1%.
Legal
Matters
Litigation and
Claims
Sal
Gilbertie, et al. vs. Dale Riker and Barbara
Riker: On November 30, 2020,
certain Company officers and members, along with the Sponsor, filed
a Verified Complaint in the Delaware Court of Chancery, C.A. No.
2020-1018-AGB, asserting various claims against Dale Riker, the
Sponsor’s former Chief Executive Officer and Barbara Riker,
the Sponsor’s former Chief Financial Officer and Chief
Compliance Officer. Among other things, the Action responded to and
addressed certain allegations that Mr. Riker had made in a draft
complaint that he threatened to file (and subsequently did file) in
New York Supreme Court (see below discussion of that New York
action). Through this Action, as amended through an Amended
Verified Complaint filed on February 18, 2021, the plaintiffs
assert claims for a declaration concerning the effects of the final
order and judgment in the Riker Books and Records Action; for a
declaration concerning Mr. Riker’s allegation that Mr.
Gilbertie had entered into an agreement to purchase Mr.
Riker’s equity in the Company; for an order compelling the
return of property from Mr. Riker; for a declaration concerning Mr.
Riker’s allegations that the Sponsor and certain of the
plaintiffs had improperly removed him as an officer and caused
purportedly false financial information to be published; for breach
of Ms. Riker’s separation agreement with the Sponsor; for
tortious interference by Mr. Riker with Ms. Riker’s
separation agreement; for a declaration concerning the releases
that had been provided to Ms. Riker through her separation
agreement; for breach of the Company’s LLC agreement by Mr.
Riker; and for breach of fiduciary duty by Mr.
Riker.
Dale Riker
vs. Sal Gilbertie, et al.: On
November 24, 2020, Mr. Riker, through counsel, threatened to file
an action in New York Supreme Court against Mr. Gilbertie, Ms.
Mullen-Rusin, Mr. Kahler, and Mr. Miller, providing a copy of the
draft complaint that he threatened to file. On December 7, 2020,
Mr. Riker filed a version of his threatened complaint in the New
York Supreme Court, New York County, Index No. 656794/2020,
asserting both direct claims on his own behalf and derivative
claims on behalf of the Company (the “Riker v. Gilbertie
Action”). Through the Riker v. Gilbertie Action, Mr. Riker
asserts derivative claims for breach of fiduciary duty against Mr.
Gilbertie, Mr. Kahler, Ms. Mullen-Rusin, and Mr. Miller; a direct
claim for defamation against Messrs. Miller and Gilbertie; a direct
claim against Messrs. Miller and Gilbertie seeking a declaration
concerning the validity of actions taken by Company Class A
members; a direct claim for breach of the implied covenant of good
faith and fair dealing against Messrs. Miller and Gilbertie; a
direct claim against Mr. Gilbertie seeking specific performance of
an alleged agreement for Mr. Gilbertie to purchase Mr.
Riker’s equity in the Company; a derivative claim against Mr.
Gilbertie, Mr. Kahler, and Ms. Mullen-Rusin for unjust enrichment;
and a direct claim against Mr. Gilbertie, Mr. Miller, and Ms.
Mullen-Rusin for an equitable accounting. The complaint did not
seek any damages against the Sponsor.
With respect to the Dale Riker v. Sal Gilbertie et al.
Action, on April 22, 2021, the Supreme Court of the State of New
York, New York County dismissed the case without prejudice to the
case being refiled after the conclusion of the Gilbertie case in Delaware Chancery
Court. See Dale Riker, et al. v. Teucrium Trading, LLC et
al, Decision + Order on Motions, No. 6567943-2020 (N.Y. Sup.
Ct) (Apr. 22, 2021).
The Sponsor intends to pursue its claims in
Delaware.
Except as described above, within the past
10 years of the date of this prospectus, there have been no
material administrative, civil or criminal actions against the
Sponsor, the Trust or the Fund, or any principal or affiliate of
any of them. This includes any actions pending, on appeal,
concluded, threatened, or otherwise known to
them.
Legal
Opinion
Vedder Price P.C. (“Vedder
Price”) has been retained to advise the Trust and the Sponsor
with respect to the Shares being offered hereby and has passed upon
the validity of the Shares being issued
hereunder. Vedder Price P.C. has also provided the
Sponsor with its opinion with respect to federal income tax matters
addressed below in “U.S. Federal Income Tax
Considerations.”
Experts
The financial statements of the Trust and
the Fund incorporated by reference in this prospectus and elsewhere
in the registration statement have been so incorporated by
reference in reliance upon the report of Grant Thornton LLP
(“Grant Thornton”), independent registered public
accountants, upon the authority of said firm as experts in
accounting and auditing.
Privacy
Policy
The following discussion is qualified in its
entirety by reference to the privacy policy. A copy of the privacy
policy is available at www.teucrium.com.
The Sponsor, the Trust, and the Teucrium
Funds have adopted a privacy policy relating to the collection,
maintenance, and use of nonpublic personal information about the
Teucrium Funds’ current and former investors, as required
under federal law. Federal law
gives investors the right to limit some but not all sharing of
their nonpublic personal information. Federal law also requires the
Sponsor to tell investors how it collects, shares, and protects
such nonpublic personal information.
Collection of Nonpublic
Personal Information
The Sponsor may collect or have access to
nonpublic personal information about current and former Fund
investors for certain purposes relating to the operation of the
Funds. This information may include information received from
investors, such as their name, social security number, telephone
number, and address, and information about investors’
holdings and transactions in shares of the Teucrium
Funds.
Use and Disclosure of
Nonpublic Personal Information
The Sponsor does not sell nonpublic personal
information to any third parties. The Sponsor primarily uses
investors’ nonpublic personal information to complete
financial transactions that may be requested. The Sponsor may
disclose investors’ nonpublic personal information to third
parties under specific circumstances described in the privacy
policy. These circumstances include, among others, information
needed to complete financial transactions, information released at
the direction of an investor, and certain information requested by
courts, regulators, law enforcement, or tax authorities. Investors
may not opt out of these disclosures.
Investors’ nonpublic personal
information, particularly information about investors’
holdings and transactions in shares of the Teucrium Funds, may be
shared between and amongst the Sponsor and the Teucrium Funds.
An investor cannot opt-out of the
sharing of nonpublic personal information between and amongst the
Sponsor and the Teucrium Funds. However, the Sponsor and the
Teucrium Funds will not use this information for any
cross-marketing purposes. In other
words, all investors will be treated as having “opted
out” of receiving marketing solicitations from Teucrium Funds
other than the Teucrium Fund(s) in which it
invests.
Protection of Nonpublic
Personal Information
As described in the privacy policy, the
Sponsor takes safeguards to protect investors’ nonpublic
personal information, which include, among others, restricting
access to such information, requiring third parties to follow
appropriate standards of security and confidentiality, and
maintaining physical, technical, administrative, and procedural
safeguards.
Teucrium’s Website is hosted in the
United States and any data provided to Teucrium is stored in the
United States. If you choose to provide Personal Data from regions
outside of the United States, then by your submission of such data,
you acknowledge and agree that: (a) you are transferring your
personal information outside of those regions to the United States
voluntarily and with consent; (b) the laws and regulations of the
United States shall govern your use of the provision of your
information, which laws and regulations may differ from those of
your country of residence; and (c) you permit your personal
information to be used for the purposes herein and in the Privacy
Policy above.
U.S. Federal
Income Tax Considerations
The following discussion summarizes the
material U.S. federal income tax consequences of the purchase,
ownership and disposition of Shares of the Fund and the U.S.
federal income tax treatment of the Fund. Except where noted
otherwise, it deals only with the tax consequences relating to
Shares held as capital assets by U.S. Shareholders (as defined
below) who are not subject to special tax treatment. For example,
in general it does not address the tax consequences, such as, but
not limited to dealers in securities or currencies or commodities,
traders in securities or dealers or traders in commodities that
elect to use a mark to market method of accounting, financial
institutions, tax-exempt entities (except as discussed below),
insurance companies, persons holding Shares as a part of a position
in a “straddle” or as part of a “hedging,”
“conversion” or other integrated transaction for
federal income tax purposes, persons with “applicable
financial statements” within the meaning of Section 451(b) of
the Internal Revenue Code of 1986, as amended (the
“Code”), or holders of Shares whose “functional
currency” is not the U.S. dollar. Furthermore, the discussion
below is based on the provisions of the Code, and regulations
(“Treasury Regulations”), rulings and judicial
decisions thereunder as of the date hereof, and such authorities
may be repealed, revoked or modified (possibly with retroactive
effect) so as to result in U.S. federal income tax consequences
different from those discussed below.
The Sponsor has received the opinion of
Vedder Price, counsel to the Trust, that the material U.S. federal
income tax consequences to the Fund and to U.S. Shareholders and
Non-U.S. Shareholders (as defined below) will be as described in
the following paragraphs. In rendering its opinion, Vedder Price
has relied on the facts and assumptions described in this
prospectus as well as certain factual representations made by the
Trust, the Fund, and the Sponsor. This opinion is not binding on
the Internal Revenue Service (the "IRS") and is not a guarantee of
the results. No ruling has been requested from the IRS with respect
to any matter affecting the Fund or prospective investors. The IRS
may disagree with the tax positions taken by the Trust, and if the
IRS were to challenge the Trust’s tax positions in
litigation, they might not be sustained by the
courts.
As used herein, the term “U.S.
Shareholder” means a Shareholder that is, for U.S. federal
income tax purposes, (i) a citizen or resident of the United
States, (ii) a corporation created or organized in or under the
laws of the United States or any political subdivision thereof,
(iii) an estate the income of which is subject to U.S. federal
income taxation regardless of its source or (iv) a trust that (a)
is subject to the supervision of a court within the United States
and the control of one or more United States persons as described
in section 7701(a)(30) of the Code, or (b) has a valid election in
effect under applicable Treasury Regulations to be treated as a
United States person. A “Non-U.S. Shareholder” is a
holder that is not a U.S. Shareholder. If a partnership or other
entity or arrangement treated as a partnership holds our Shares,
the tax treatment of a partner will generally depend upon the
status of the partner and the activities of the partnership. If you
are a partner of a partnership holding our Shares, the discussion
below may not be applicable to you and you should consult your own
tax advisor regarding the tax consequences of acquiring, owning and
disposing of Shares.
EACH PROSPECTIVE INVESTOR IS ADVISED TO
CONSULT ITS OWN TAX ADVISOR REGARDING THE U.S. FEDERAL INCOME TAX
CONSEQUENCES OF AN INVESTMENT IN SHARES, AS WELL AS ANY APPLICABLE
STATE, LOCAL OR FOREIGN TAX CONSEQUENCES, IN LIGHT OF ITS
PARTICULAR CIRCUMSTANCES.
Tax Classification of the
Trust and the Fund
The Trust is organized and will be operated
as a statutory trust in accordance with the provisions of the Trust
Agreement and applicable Delaware law. Notwithstanding the
Trust’s status as a statutory trust and the Fund’s
status as a series of the Trust, due to the nature of its
activities the Fund will be treated as a partnership rather than a
trust for U.S. federal income tax purposes. In addition, the
trading of Shares on the NYSE Arca will cause the Fund to be
classified as a “publicly traded partnership” for
federal income tax purposes. Under the Code, a publicly traded
partnership is generally taxable as a corporation. In the case of
an entity (such as the Fund) not registered under the Investment
Company Act of 1940 as amended, and not meeting certain other
conditions, however, an exception to this general rule applies if
at least 90% of the entity’s gross income is
“qualifying income” for each taxable year of its
existence (the “qualifying income exception”). For this
purpose, qualifying income is defined as including, in pertinent
part, interest (other than from a financial business), dividends,
and gains from the sale or disposition of capital assets held for
the production of interest or dividends. In the case of a
partnership of which a principal activity is the buying and selling
of commodities other than as inventory or of futures, forwards and
options with respect to commodities, “qualifying
income” also includes income and gains from commodities and
from such futures, forwards, options, and provided the partnership
is a trader or investor with respect to such assets, swaps and
other notional principal contracts with respect to commodities. The
Trust and the Sponsor have represented the following to Vedder
Price:
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at least 90% of the Fund’s gross
income for each taxable year will constitute “qualifying
income” within the meaning of Code section 7704 (as described
above);
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the Fund is organized and will be operated
in accordance with its governing documents and applicable law;
and
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the Fund has not elected, and will not
elect, to be classified as a corporation for U.S. federal income
tax purposes.
|
Based in part on these representations,
Vedder Price is of the opinion that the Fund will be treated as a
partnership that it is not taxable as a corporation for U.S.
federal income tax purposes. The Fund’s taxation as a
partnership rather than a corporation will require the Sponsor to
conduct the Fund’s business activities in such a manner that
it satisfies the requirements of the qualifying income exception on
a continuing basis. No assurances can be given that the
Fund’s operations for any given year will produce income that
satisfies these requirements. Vedder Price will not review the
Fund’s ongoing compliance with these requirements and will
have no obligation to advise the Trust, the Fund or the
Fund’s Shareholders in the event of any subsequent change in
the facts, representations or applicable law relied upon in
reaching its opinion.
If the Fund failed to satisfy the qualifying
income exception in any year, other than a failure that is
determined by the IRS to be inadvertent and that is cured within a
reasonable time after discovery (in which case, as a condition of
relief, the Fund could be required to pay the government amounts
determined by the IRS), the Fund would be taxable as a corporation
for federal income tax purposes and would pay federal income tax on
its income at regular corporate rates. In that event, Shareholders
would not report their share of the Fund’s income or loss on
their tax returns. Distributions by the Fund (if any) would be
treated as dividend income to the Shareholders to the extent of the
Fund’s current and accumulated earnings and profits, then
treated as a tax-free return of capital to the extent of the
Shareholder’s basis in the Shares (and will reduce the
basis), and, to the extent it exceeds a Shareholder’s basis
in such Shares, as capital gain for Shareholders who hold their
Shares as capital assets. Accordingly, if the Fund were to be
taxable as a corporation, it would likely have a material adverse
effect on the economic return from an investment in the Fund and on
the value of the Shares.
The remainder of this summary assumes that
the Fund is classified for federal income tax purposes as a
partnership that it is not taxable as a
corporation.
U.S.
Shareholders
Tax Consequences of
Ownership of Shares
Taxation of
the Fund’s Income. No U.S. federal income tax is paid
by the Fund on its income. Instead, the Fund files annual
partnership returns, and each U.S. Shareholder is required to
report on its U.S. federal income tax return its allocable share of
the income, gain, loss, deductions and credits reflected on such
partnership returns. If the Fund recognizes income, including
interest on cash equivalents and net capital gains from cash
settlement of Benchmark Component Futures Contracts for a taxable
year, Shareholders must report their share of these items even
though the Fund makes no distributions of cash or property during
the taxable year. Consequently, a Shareholder may be taxable on
income or gain recognized by the Fund but receive no cash
distribution with which to pay the resulting tax liability or may
receive a distribution that is insufficient to pay such liability.
Because the Sponsor currently does not intend to make
distributions, it is likely that a U.S. Shareholder that realizes
net income or gain with respect to Shares for a taxable year will
be required to pay any resulting tax from sources other than Fund
distributions. Additionally, individuals with modified adjusted
gross income in excess of $200,000 ($250,000 in the case of married
individuals filing jointly) and certain estates and trusts are
subject to an additional 3.8% tax on their “net investment
income,” which generally includes net income from interest,
dividends, annuities, royalties, and rents, and net capital gains
(other than certain amounts earned from trades or businesses). Also
included as income subject to the additional 3.8% tax is income
from businesses involved in the trading of financial instruments or
commodities. Shareholders subject to this provision may be required
to pay this 3.8% surtax on interest income and capital gains
allocated to them by the Fund.
Monthly
Conventions for Allocations of the Fund’s Profit and Loss and
Capital Account Restatements. Under Code section 704, the
determination of a partner’s distributive share of any item
of income, gain, loss, deduction or credit is governed by the
applicable organizational document unless the allocation provided
by such document lacks “substantial economic effect.”
An allocation that lacks substantial economic effect nonetheless
will be respected if it is in accordance with the partners’
interests in the partnership, determined by considering all facts
and circumstances relating to the economic arrangements among the
partners. Subject to the possible exception for certain conventions
to be used by the Fund as discussed below, allocations pursuant to
the Trust Agreement should be considered as having substantial
economic effect or being in accordance with Shareholders’
interests in the Fund.
In situations where a partner’s
interest in a partnership is redeemed or sold during a taxable
year, the Code generally requires that partnership tax items for
the year be allocated to the partner using either an interim
closing of the books or a daily proration method. The Fund intends
to allocate tax items using an interim closing of the book’s
method under which income, gains, losses and deductions will be
determined on a monthly basis, taking into account the Fund’s
accrued income and deductions and gains and losses (both realized
and unrealized) for the month. The tax items for each month during
a taxable year will then be allocated among the holders of Shares
in proportion to the number of Shares owned by them as of the close
of trading on the last trading day of the preceding month (the
“monthly allocation convention”).
Under the monthly allocation convention, an
investor who disposes of a Share during the current month will be
treated as disposing of the Share as of the end of the last day of
the calendar month. For example, an investor who buys a Share on
April 10 of a year and sells it on May 20 of the same year will be
allocated all of the tax items attributable to May (because it is
deemed to hold the Share through the last day of May) but none of
those attributable to April. The tax items attributable to that
Share for April will be allocated to the person who held the Share
as of the close of trading on the last trading day of March. Under
the monthly allocation convention, an investor who purchases and
sells a Share during the same month, and therefore does not hold
(and is not deemed to hold) the Share at the close of the last
trading day of either that month or the previous month, will
receive no allocations with respect to that Share for any period.
Accordingly, investors may receive no allocations with respect to
Shares that they actually held or may receive allocations with
respect to Shares attributable to periods that they did not
actually hold the Shares.
By investing in Shares, a U.S. Shareholder
agrees that, in the absence of new legislation, regulatory or
administrative guidance, or judicial rulings to the contrary, it
will file its U.S. income tax returns in a manner that is
consistent with the monthly allocation convention as described
above and with the IRS Schedule K-1 or any successor form provided
to Shareholders by the Fund or the Trust.
For any month in which a Creation Basket is
issued or a Redemption Basket is redeemed, the Fund will credit or
debit the “book” capital accounts of existing
Shareholders with the amount of any unrealized gain or loss,
respectively, on Fund assets. For this purpose, the Fund will use a
convention whereby unrealized gain or loss will be computed based
on the lowest NAV of the Fund’s assets during the month in
which Shares are issued or redeemed, which may be different than
the value of the assets on the date of an issuance or redemption.
The capital accounts as adjusted in this manner will be used in
making tax allocations intended to account for differences between
the tax basis and fair market value of property owned by the Fund
at the time new Shares are issued or outstanding Shares are
redeemed (so-called “reverse Code section 704(c)
allocations”). The intended effect of these adjustments is to
equitably allocate among Shareholders any unrealized appreciation
or depreciation in the Fund’s assets existing at the time of
a contribution or redemption for book and tax
purposes.
The conventions used by the Fund, as noted
above, in making tax allocations may cause a Shareholder to be
allocated more or less income or loss for U.S. federal income tax
purposes than its proportionate share of the economic income or
loss realized by the Fund during the period it held its Shares.
This mismatch between taxable and economic income or loss in some
cases may be temporary, reversing itself in a later year when the
Shares are sold, but could be permanent. As one example, a
Shareholder could be allocated income accruing after it sold its
Shares, resulting in an increase in the basis of the Shares (see
“Tax Basis of
Shares” below). In connection with the disposition of
the Shares, the additional basis might produce a capital loss the
deduction of which may be limited (see “Limitations on Deductibility of Losses and
Certain Expenses”, below).
Section 754
election. The Fund has made the election permitted by Code
section 754 (a “section 754 election”) which election
is irrevocable without the consent of the IRS. The effect of this
election is that when a secondary market sale of Shares occurs, the
Fund adjusts the purchaser’s proportionate share of the tax
basis of the Fund’s assets to fair market value, as reflected
in the price paid for the Shares, as if the purchaser had made a
direct acquisition of an interest in the Fund’s assets. The
section 754 election is intended to eliminate disparities between a
partner’s basis in its partnership interest and its share of
the tax basis of the partnership’s assets, so that the
partner’s allocable share of taxable gain or loss on a
disposition of an asset will correspond to the partner’s
share of the appreciation or depreciation in the value of the asset
since the partner acquired its interest. Depending on the price
paid for Shares and the tax basis of the Fund’s assets at the
time of the purchase, the effect of the section 754 election on a
purchaser of Shares may be favorable or unfavorable. In order to
make the appropriate basis adjustments in a cost-effective manner,
the Fund will use certain simplifying conventions and assumptions.
In particular, the Fund will obtain information regarding secondary
market transactions in its Shares and use this information to
adjust the Shareholders’ indirect basis in the Fund’s
assets. It is possible the IRS could be successful in asserting
that the conventions and assumptions applied are improper and
require different basis adjustments to be made, which could
adversely affect some Shareholders.
Section
1256 Contracts. Under the Code, special rules apply to
instruments constituting “section 1256 contracts.”
Section 1256 requires that such instruments held at the end of a
taxable year be treated as if they were sold for their fair market
value on the last business day of the taxable year (i.e., “marked to
market”). Moreover, any gain or loss realized from a
disposition, termination or marking-to-market of section 1256
contracts is treated as long-term capital gain or loss to the
extent of 60% thereof, and as short-term capital gain or loss to
the extent of 40% thereof, without regard to the actual holding
period (“60-40 Treatment”). The term
“section 1256 contract” generally includes, in relevant
part: (1) a ”regulated futures contract,”
defined as a contract (a) that is traded on or subject to the rules
of a national securities exchange that is registered with the SEC,
a domestic board of trade designated as a contract market by the
CFTC, or any other board of trade or exchange designated by the
Secretary of the Treasury (a “qualified board or
exchange”), and (b) with respect to which the amount required
to be deposited and the amount that may be withdrawn depends on a
system of “marking to market”; and (2) a non-equity
option traded on or subject to the rules of a qualified board or
exchange.
Many of the Fund’s Sugar Futures
Contracts will qualify as “section 1256 contracts”
under the Code, as will some other sugar interests that are cleared
through a qualified board or exchange. Any gain or loss recognized
with respect to section 1256 contracts will be subject to the 60-40
treatment and will be allocated to Shareholders in accordance with
the monthly allocation convention. Commodity swaps will most likely
not qualify as section 1256 contracts. If a commodity swap is not
taxable as a section 1256 contract, any gain or loss on the swap
will be recognized at the time of disposition or termination as
long-term or short-term capital gain or loss depending on the
holding period of the swap in the Fund’s
hands.
Foreign exchange gains and losses realized
by the Fund in connection with certain transactions involving
foreign currency-denominated debt securities, certain futures
contracts, forward contracts, options and similar investments
denominated in a foreign currency, and payables or receivables
denominated in a foreign currency are subject to section 988 of the
Code, which generally causes such gain and loss to be treated as
ordinary income or loss. To the extent the Fund hold foreign
investments, it may be subject to withholding and other taxes
imposed by foreign countries. Tax treaties between certain
countries and the United States may reduce or eliminate such taxes.
Because the amount of the Fund’s investments in various
countries will change from time to time, it is not possible to
determine the effective rate of such taxes in
advance.
Limitations
on Deductibility of Losses and Certain Expenses. A number of
different provisions of the Code may defer or disallow the
deduction of losses or expenses allocated to Shareholders by the
Fund, including but not limited to those described
below.
A Shareholder’s deduction of its
allocable share of any loss of the Fund is limited to the lesser of
(1) the tax basis in its Shares or (2) in the case of a Shareholder
that is an individual or a closely held corporation, the amount
which the Shareholder is considered to have “at risk”
with respect to the Fund’s activities. In general, the amount
at risk initially will be a Shareholder’s invested capital.
Losses in excess of the amount at risk must be deferred until years
in which the Fund generates additional taxable income against which
to offset such carryover losses or until additional capital is
placed at risk.
Individuals and other non-corporate
taxpayers are permitted to deduct capital losses only to the extent
of their capital gains for the taxable year plus $3,000 of other
income. Unused capital losses can be carried forward and used in
future years, subject to these same limitations. In addition, an
individual taxpayer may elect to carry back net losses on section
1256 contracts to each of the three preceding years and use them to
offset section 1256 contract gains in those years, subject to
certain limitations. Corporate taxpayers generally may deduct
capital losses only to the extent of capital gains, subject to
special carryback and carryforward rules.
The deduction for expenses incurred by
non-corporate taxpayers constituting “miscellaneous itemized
deductions,” generally including investment-related expenses
(other than interest and certain other specified expenses), is
suspended for taxable years beginning after December 31, 2017 and
before January 1, 2026. During these taxable years, non-corporate
taxpayers will not be able to deduct miscellaneous itemized
deductions. Provided the suspension is not extended, for taxable
years ending on or after January 1, 2026, miscellaneous itemized
deductions are deductible only to the extent they exceed 2% of the
taxpayer’s adjusted gross income for the year. Although the
matter is not free from doubt, we believe management fees the Fund
pays to the Sponsor and other expenses of the Fund constitute
investment-related expenses subject to this miscellaneous itemized
deduction limitation, rather than expenses incurred in connection
with a trade or business and will report these expenses consistent
with that interpretation. For taxable years beginning on or after
January 1, 2026, the Code imposes additional limitations on the
amount of certain itemized deductions allowable to individuals with
adjusted gross income in excess of certain amounts by reducing the
otherwise allowable portion of such deductions by an amount equal
to the lesser of:
● 3% of the individual’s
adjusted gross income in excess of certain threshold amounts;
or
● 80% of the amount of certain
itemized deductions otherwise allowable for the taxable
year.
Non-corporate Shareholders generally may
deduct “investment interest expense” only to the extent
of their “net investment income.” Investment interest
expense of a Shareholder will generally include any interest
expense accrued by the Fund and any interest paid or accrued on
direct borrowings by a Shareholder to purchase or carry its Shares,
such as interest with respect to a margin account. Net investment
income generally includes gross income from property held for
investment (including “portfolio income” under the
passive loss rules but not, absent an election, long-term capital
gains or certain qualifying dividend income) less deductible
expenses other than interest directly connected with the production
of investment income.
If the Fund
incurs indebtedness that is treated as allocable to a trade or
business, the Fund’s ability to deduct interest on such
indebtedness is limited to an amount equal to the sum of (1) the
Fund’s business interest income during the year and (2) 30%
of the Fund’s adjusted taxable income for such taxable year.
If the Fund is not entitled to fully deduct its business interest
in any taxable year, such excess business interest expense will be
allocated to each Shareholder as excess business interest and can
be carried forward by the Shareholder to successive taxable years
and used to offset any excess taxable income allocated by the Fund
to such Shareholder. Any excess business interest expense allocated
to a Shareholder will reduce such Shareholder’s basis in its
Shares in the year of the allocation even if the expense does not
give rise to a deduction to the Shareholder in that year.
Immediately prior to a Shareholder’s disposition of its
Shares, the Shareholder’s basis will be increased by the
amount by which such basis reduction exceeds the excess interest
expense that has been deducted by such
Shareholder.
To the extent that the Fund allocates losses
or expenses to a Shareholder that must be deferred or are
disallowed as a result of these or other limitations in the Code,
the Shareholder may be taxed on income in excess of your economic
income or distributions (if any) on its Shares. As one example, a
Shareholder could be allocated and required to pay tax on its share
of interest income accrued by the Fund for a particular taxable
year, and in the same year be allocated a share of a capital loss
that the Shareholder cannot deduct currently because it has
insufficient capital gains against which to offset the loss. As
another example, a Shareholder could be allocated and required to
pay tax on its share of interest income and capital gains for a
year but be unable to deduct some or all of its share of Fund
expenses and/or margin account interest incurred by the Shareholder
with respect to its Shares. Each Shareholder is urged to consult
its own tax advisor regarding the effect of limitations under the
Code on the ability to deduct their allocable share of the
Fund’s losses and expenses.
Tax Basis of
Shares
A Shareholder’s tax basis in its
Shares is important in determining (1) the amount of taxable gain
or loss it will realize on the sale or other disposition of its
Shares, (2) the amount of non-taxable distributions that it may
receive from the Fund, and (3) its ability to utilize its
distributive share of any losses of the Fund on its federal income
tax return. A Shareholder’s initial tax basis of its Shares
will equal its cost for the Shares plus its share of the
Fund’s liabilities (if any) at the time of purchase. In
general, a Shareholder’s “share” of those
liabilities will equal the sum of (i) the entire amount of any
otherwise nonrecourse liability of the Fund as to which the
Shareholder or certain affiliates of the Shareholder is the
creditor (a “partner nonrecourse liability”) and (ii) a
pro rata share of any nonrecourse liabilities of the Fund that are
not partner nonrecourse liabilities as to any
Shareholder.
A Shareholder’s tax basis in its
Shares generally will be (1) increased by (a) its allocable share
of the Fund’s taxable income and gain and (b) any additional
contributions by the Shareholder to the Fund and (2) decreased (but
not below zero) by (a) its allocable share of the Fund’s tax
deductions and losses and (b) any distributions by the Fund to the
Shareholder. For this purpose, an increase in a Shareholder’s
share of the Fund’s liabilities will be treated as a
contribution of cash by the Shareholder to the Fund and a decrease
in that share will be treated as a distribution of cash by the Fund
to the Shareholder. Pursuant to certain IRS rulings, a Shareholder
will be required to maintain a single, “unified” basis
in all Shares that it owns. As a result, when a Shareholder that
acquired its Shares at different prices sells less than all of its
Shares, such Shareholder will not be entitled to specify particular
Shares (e.g., those with a
higher basis) as having been sold. Rather, it must determine its
gain or loss on the sale by using an “equitable
apportionment” method to allocate a portion of its unified
basis in its Shares to the Shares sold.
Treatment
of Fund Distributions. If the Fund makes non-liquidating
distributions to Shareholders, such distributions generally will
not be taxable to the Shareholders for federal income tax purposes
except to the extent that the amount of money distributed exceeds
the Shareholder’s adjusted basis of its interest in the Fund
immediately before the distribution. Any money distributed that is
in excess of a Shareholder’s tax basis generally will be
treated as gain from the sale or exchange of Shares. For purposes
of determining the gain recognized on a distribution from a
partnership, a marketable security distributed to a partner is
generally treated as money. This treatment, however, does not apply
to distributions to “eligible partners” of an
“investment partnership,” as those terms are defined in
the Code.
Tax Consequences of
Disposition of Shares
If a Shareholder sells its Shares, it
will recognize gain or loss equal to the difference between the
amount realized and its adjusted tax basis for the Shares sold. A
Shareholder’s amount realized will be the sum of the cash or
the fair market value of other property received plus its share of
the Fund's liabilities.
Gain or loss recognized by a
Shareholder on the sale or exchange of Shares held for more than
one year will generally be taxable as long-term capital gain or
loss; otherwise, such gain or loss will generally be taxable as
short-term capital gain or loss. A special election is available
under the Treasury Regulations that allows Shareholders to identify
and use the actual holding periods for the Shares sold for purposes
of determining whether the gain or loss recognized on a sale of
Shares will give rise to long-term or short-term capital gain or
loss. It is expected that most Shareholders will be eligible to
elect, and generally will elect, to identify and use the actual
holding periods for Shares sold. If a Shareholder who has differing
holding periods for its Shares fails to make the election or is not
able to identify the holding periods of the Shares sold, the
Shareholder will have a split holding period in the Shares sold.
Under such circumstances, a Shareholder will be required to
determine its holding period in the Shares sold by first
determining the portion of its entire interest in the Fund that
would give rise to long-term capital gain or loss if its entire
interest were sold and the portion that would give rise to
short-term capital gain or loss if the entire interest were sold.
The Shareholder would then treat each Share sold as giving rise to
long-term capital gain or loss and short-term capital gain or loss
in the same proportions as if it had sold its entire interest in
the Fund.
Under Code section 751, a portion of a
Shareholder’s gain or loss from the sale of Shares
(regardless of the holding period for such Shares), will be
computed separately and taxed as ordinary income or loss to the
extent attributable to “unrealized receivables” or
“inventory” owned by the Fund. The term
“unrealized receivables” includes, among other things,
market discount bonds and short-term debt instruments to the extent
that such items would give rise to ordinary income if sold by the
Fund. However, the short-term capital gain on section 1256
contracts resulting from 60-40 Treatment, described above, should
not be subject to this rule.
If some or all of a
Shareholder’s Shares are lent by its broker or other agent to
a third party — for example, for use by the third party in
covering a short sale — the Shareholder may be considered as
having made a taxable disposition of the loaned Shares, in which
case —
|
●
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the Shareholder may recognize taxable gain
or loss to the same extent as if it had sold the Shares for
cash;
|
|
●
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any of the income, gain, loss or deduction
allocable to those Shares during the period of the loan is not
reportable by the Shareholder for tax purposes;
and
|
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●
|
any distributions the Shareholder receives
with respect to the Shares under the loan agreement will be fully
taxable to the Shareholder, most likely as ordinary
income.
|
Shareholders desiring to avoid these and
other possible consequences of a deemed disposition of their Shares
should consider modifying any applicable brokerage account
agreements to prohibit the lending of their
Shares.
Other U.S. Federal Income
Tax Matters
Information Reporting. The Fund provides tax
information to the Shareholders and to the IRS, as required.
Shareholders are treated as partners for U.S. federal income tax
purposes. Accordingly, the Fund will furnish Shareholders each
year, with tax information on IRS Schedule K-1 (Form 1065), which
will be used by the Shareholders in completing their tax returns.
The IRS has ruled that assignees of partnership interests who have
not been admitted to a partnership as partners but who have the
capacity to exercise substantial dominion and control over the
assigned partnership interests will be considered partners for U.S.
federal income tax purposes. On the basis of this ruling, except as
otherwise provided herein, we will treat as a Shareholder any
person whose shares are held on their behalf by a broker or other
nominee if that person has the right to direct the nominee in the
exercise of all substantive rights attendant to the ownership of
the Shares.
Persons who hold an interest in the Fund as
a nominee for another person are required to furnish to us the
following information: (1) the name, address and taxpayer
identification number of the beneficial owner and the nominee; (2)
whether the beneficial owner is (a) a person that is not a U.S.
person, (b) a foreign government, an international organization or
any wholly-owned agency or instrumentality of either of the
foregoing, or (c) a tax-exempt entity; (3) the number and a
description of Shares acquired or transferred for the beneficial
owner; and (4) certain information including the dates of
acquisitions and transfers, means of acquisitions and transfers,
and acquisition cost for purchases, as well as the amount of net
proceeds from sales. Brokers and financial institutions are
required to furnish additional information, including whether they
are U.S. persons and certain information on Shares they acquire,
hold or transfer for their own account. A penalty of $250 per
failure (as adjusted for inflation), up to a maximum of $3,000,000
per calendar year (as adjusted for inflation), is imposed by the
Code for failure to report such information correctly to the Fund.
If the failure to furnish such information correctly is determined
to be willful, the per failure penalty increases to $500 (as
adjusted for inflation) or, if greater, 10% of the aggregate amount
of items required to be reported, and the $3,000,000 maximum does
not apply. The nominee is required to supply the beneficial owner
of the Shares with the federal income tax information furnished by
the Fund.
Partnership Audit Procedures. The IRS may
audit the U.S. federal income tax returns filed by the Fund.
Adjustments resulting from any such audit may require a Shareholder
to adjust a prior year’s tax liability and could result in an
audit of the Shareholder’s own return. Any audit of a
Shareholder’s return could result in adjustments of
non-partnership items as well as Fund items. Partnerships are
generally treated as separate entities for purposes of U.S. federal
income tax audits, judicial review of administrative adjustments by
the IRS, and tax settlement proceedings. The tax treatment of
partnership items of income, gain, loss and deduction are
determined at the partnership level in a unified partnership
proceeding rather than in separate proceedings with the partners.
The Code provides for one partner to be designated as the
“tax matters partner” and to represent the partnership
for purposes of these proceedings. The Trust Agreement appoints the
Sponsor as the tax matters partner of the Fund.
The Bipartisan Budget Act of 2015 adopted a
new partnership-level audit and assessment procedure for all
entities treated as partnerships for U.S. federal income tax
purposes. These new rules generally apply to partnership taxable
years beginning after December 31, 2017. Under these rules, tax
deficiencies (including interest and penalties) that arise from an
adjustment to partnership items generally would be assessed and
collected from the partnership (rather than from the partners), and
generally would be calculated using maximum applicable tax rates
(although such partnership level tax may be reduced or eliminated
under limited circumstances). A narrow category of partnerships
(generally, partnerships having no more than 100 partners that
consist exclusively of individuals, C corporations, S corporations
and estates) are permitted to elect out of the new
partnership-level audit rules. As an alternative to
partnership-level tax liability, a partnership may elect to furnish
adjusted Schedule K-1s to the IRS and to each person who was a
partner in the audit year, stating such partner’s share of
any partnership adjustments, and each such partner would then take
the adjustments into account on its tax returns in the year in
which it receives its adjusted Schedule K-1 (rather than by
amending their tax returns for the audited year). If the Fund were
subject to a partnership level tax as a result of these new rules,
the economic return of all Shareholders (including Shareholders
that did not own Shares in the Fund during the taxable year to
which the audit relates) may be affected.
To address these new rules, the
Sponsor amended the Trust Agreement so that if the Fund becomes
subject to any tax as a result of any adjustment to taxable income,
gain, loss, deduction or credit for any taxable year of the Fund
(pursuant to a tax audit or otherwise), such Shareholder (and each
former Shareholder) is obligated to indemnify the Fund and the
Sponsor against any such taxes (including any interest and
penalties) to the extent such tax (or portion thereof) is properly
attributable to such Shareholder (or former Shareholder). In
addition, the Sponsor, on behalf of the Fund, will be authorized to
take any action permitted under applicable law to avoid the
assessment of any such taxes against the Fund (including an
election to issue adjusted Schedule K-1s to the Shareholders
(and/or former Shareholders) which takes such adjustments to
taxable income, gain, loss, deduction or credit into
account.
Reportable Transaction Rules. In certain
circumstances the Code and Treasury Regulations require that the
IRS be notified of transactions through a disclosure statement
attached to a taxpayer’s U.S. federal income tax return.
These disclosure rules may apply to transactions irrespective of
whether they are structured to achieve particular tax benefits and
they could require disclosure by the Trust or Shareholders if a
Shareholder incurs a loss in excess of a specified threshold from a
sale or redemption of its Shares and possibly in other
circumstances. While these rules generally do not require
disclosure of a loss recognized on the disposition of an asset in
which the taxpayer has a “qualifying basis” (generally
a basis equal to the amount of cash paid by the taxpayer for such
asset), they apply to a loss recognized with respect to interests
in a pass-through entity, such as the Shares, even if the
taxpayer’s basis in such interests is equal to the amount of
cash it paid for such interests. In addition, significant monetary
penalties may be imposed in connection with a failure to comply
with these reporting requirements. Investors should consult their
own tax advisor concerning the application of these reporting
requirements to their specific situation.
Tax-Exempt Organizations. Subject to
numerous exceptions, qualified retirement plans and individual
retirement accounts, charitable organizations and certain other
organizations that otherwise are exempt from U.S. federal income
tax (collectively, “exempt organizations”) nonetheless
are subject to the tax on unrelated business taxable income
(“UBTI”). Generally, UBTI means the gross income
derived by an exempt organization from a trade or business that it
regularly carries on, the conduct of which is not substantially
related to the exercise or performance of its exempt purpose or
function, less allowable deductions directly connected with that
trade or business. If the Fund were to regularly carry on (directly
or indirectly) a trade or business that is unrelated with respect
to an exempt organization Shareholder, then in computing its UBTI,
the Shareholder must include its share of (1) the Fund’s
gross income from the unrelated trade or business, whether or not
distributed, and (2) the Fund’s allowable deductions directly
connected with that gross income. An exempt organization that has
more than one unrelated trade or business must compute its UBTI
separately for each such trade or business.
UBTI generally does not include dividends,
interest, or payments with respect to securities loans and gains
from the sale of property (other than property held for sale to
customers in the ordinary course of a trade or business).
Nonetheless, income on, and gain from the disposition of,
“debt-financed property” is UBTI. Debt-financed
property generally is income-producing property (including
securities), the use of which is not substantially related to the
exempt organization’s tax-exempt purposes, and with respect
to which there is “acquisition indebtedness” at any
time during the taxable year (or, if the property was disposed of
during the taxable year, the 12-month period ending with the
disposition). Acquisition indebtedness includes debt incurred to
acquire property, debt incurred before the acquisition of property
if the debt would not have been incurred but for the acquisition,
and debt incurred subsequent to the acquisition of property if the
debt would not have been incurred but for the acquisition and at
the time of acquisition the incurrence of debt was foreseeable. The
portion of the income from debt-financed property attributable to
acquisition indebtedness is equal to the ratio of the average
outstanding principal amount of acquisition indebtedness over the
average adjusted basis of the property for the year. The Fund
currently does not anticipate that it will borrow money to acquire
investments; however, the Fund cannot be certain that it will not
borrow for such purpose in the future, which could result in an
exempt organization Shareholder having UBTI. In addition, an exempt
organization Shareholder that incurs acquisition indebtedness to
purchase its Shares in the Fund may have UBTI.
The U.S. federal income tax rate applicable
to an exempt organization Shareholder on its UBTI generally will be
either the corporate or trust tax rate, depending upon the
Shareholder’s form of organization. The Fund may report to
each such Shareholder information as to the portion, if any, of the
Shareholder’s income and gains from the Fund for any year
that will be treated as UBTI; the calculation of that amount is
complex, and there can be no assurance that the Fund’s
calculation of UBTI will be accepted by the IRS. An exempt
organization Shareholder will be required to make payments of
estimated U.S. federal income tax with respect to its
UBTI.
Regulated Investment Companies.
Interests in and income from “qualified publicly traded
partnerships” satisfying certain gross income tests are
treated as qualifying assets and income, respectively, for purposes
of determining eligibility under the Code for regulated investment
company (“RIC”) status. A RIC may invest up to 25% of
its assets in interests in qualified publicly traded partnerships.
The determination of whether a publicly traded partnership such as
the Fund is a qualified publicly traded partnership is made on an
annual basis. The Fund expects to be a qualified publicly traded
partnership in each of its taxable years. However, such
qualification is not assured.
Non-U.S.
Shareholders
Generally, non-U.S. persons who derive
U.S. source income or gain from investing or engaging in a U.S.
business are taxable on two categories of income. The first
category consists of amounts that are fixed or determinable, annual
or periodic income, such as interest, dividends and rent that are
not connected with the operation of a U.S. trade or business
(“FDAP”). The second category is income that is
effectively connected with the conduct of a U.S. trade or business
(“ECI”). FDAP income (other than interest that is
considered “portfolio interest;” as discussed below) is
generally subject to a 30% withholding tax, which may be reduced
for certain categories of income by a treaty between the U.S. and
the recipient’s country of residence. In contrast, ECI is
generally subject to U.S. tax on a net basis at graduated rates
upon the filing of a U.S. tax return. Where a non-U.S. person has
ECI as a result of an investment in a partnership, the ECI is
currently subject to a withholding tax at a rate of 37% for
individual Shareholders and a rate of 21% for corporate
Shareholders. The tax withholding on ECI, which is the highest tax
rate under Code section 1 for non-corporate Non-U.S. Shareholders
and Code section 11(b) for corporate Non-U.S. Shareholders, may
increase in future tax years if tax rates increase from their
current levels.
Withholding on Allocations and
Distributions. The Code provides that a non-U.S. person who
is a partner in a partnership that is engaged in a U.S. trade or
business during a taxable year will also be considered to be
engaged in a U.S. trade or business during that year. Classifying
an activity by a partnership as an investment or an operating
business is a factual determination. Under certain safe harbors in
the Code, an investment fund whose activities consist of trading in
stocks, securities, or commodities for its own account generally
will not be considered to be engaged in a U.S. trade or business
unless it is a dealer is such stocks, securities, or commodities.
This safe harbor applies to investments in commodities only if the
commodities are of a kind customarily dealt in on an organized
commodity exchange and if the transaction is of a kind customarily
consummated at such place. Although the matter is not free from
doubt, the Fund believes that the activities directly conducted by
the Fund do not result in the Fund being engaged in a trade or
business within the United States. However, there can be no
assurance that the IRS would not successfully assert that the
Fund’s activities constitute a U.S. trade or
business.
In the event that the Fund is
considered to be engaged in a U.S. trade or business, the Fund
would be required to withhold at the highest rate specified in Code
section 1 (currently 37%) on allocations of its ECI to
non-corporate Non-U.S. Shareholders and the highest rate specified
in Code section 11(b) (currently 21%) on allocations of its ECI to
corporate Non-U.S. Shareholders, when such income is distributed.
Non-U.S. Shareholders would also be subject to a 10% withholding
tax on the consideration payable upon a sale or exchange of such
Non-U.S. Shareholder’s Shares, although the IRS has
temporarily suspended this withholding for interests in publicly
traded partnerships until regulations implementing such withholding
are issued. If recently promulgated regulations are finalized as
proposed, such regulations would provide, with respect to transfers
of publicly traded interests in publicly traded partnerships
effected through a broker, that the obligation to withhold is
imposed on the transferor’s broker. However, it is not clear
when such regulations will be finalized and if they will be
finalized in their current form. A Non-U.S. Shareholder with ECI
generally will be required to file a U.S. federal income tax
return, and the return will provide the Non-U.S. Shareholder with
the mechanism to seek a refund of any withholding in excess of such
Shareholder’s actual U.S. federal income tax
liability.
Even if the Fund did not realize ECI, a
Non-U.S. Shareholder nevertheless may be treated as having FDAP
income, which would be subject to a 30% U.S. withholding tax
(possibly subject to reduction by treaty), with respect to some or
all of its distributions from the Fund or its allocable share of
Fund income.
Amounts withheld by the Fund on behalf of a
Non-U.S. Shareholder will be treated as being distributed to such
Shareholder to the extent possible. In some cases, the Fund
may not be able to match the economic cost of satisfying its
withholding obligations to a particular Non-U.S. Shareholder, which
may result in that cost being borne by the Fund, generally, and
accordingly, by all Shareholders
proportionately.
To the extent any interest income allocated
to a Non-U.S. Shareholder that otherwise constitutes FDAP is
considered “portfolio interest,” neither the allocation
of such interest income to the Non-U.S. Shareholder nor a
subsequent distribution of such interest income to the Non-U.S.
Shareholder will be subject to withholding, provided that the
Non-U.S. Shareholder is not otherwise engaged in a trade or
business in the U.S. and provides the Fund with a timely and
properly completed and executed IRS Form W-8BEN or other applicable
form. In general, portfolio interest is interest paid on debt
obligations issued in registered form, unless the recipient owns
10% or more of the voting power of the issuer. A Non-U.S.
Shareholder’s allocable share of interest on U.S. bank
deposits, certificates of deposit and discount obligations with
maturities from original issue of 183 days or less should also not
be subject to withholding. Generally, other interest from U.S.
sources paid to the Fund and allocable to Non-U.S. Shareholders
will be subject to withholding.
In order for the Fund to avoid withholding
on any interest income allocable to Non-U.S. Shareholders that
would qualify as portfolio interest, it will be necessary for all
Non-U.S. Shareholders to provide the Fund with a timely and
properly completed and executed Form W-8BEN (or other applicable
form).
Gain
from Sale of Shares. Gain from the sale or exchange of
Shares may be taxable to a Non-U.S. Shareholder if the Non-U.S.
Shareholder is a nonresident alien individual who is present in the
U.S. for 183 days or more during the taxable year. In such case,
the nonresident alien individual may be subject to a 30%
withholding tax on the amount of such individual’s
gain.
Branch
Profits Tax on Corporate Non-U.S. Shareholders. In addition
to the taxes noted above, any Non-U.S. Shareholders that are
corporations may also be subject to an additional tax, the branch
profits tax, at a rate of 30%. The branch profits tax is imposed on
a non-U.S. corporation’s dividend equivalent amount, which
generally consists of the corporation’s after-tax earnings
and profits that are effectively connected with the
corporation’s U.S. trade or business but are not reinvested
in a U.S. business. This tax may be reduced or eliminated by an
income tax treaty between the United States and the country in
which the Non-U.S. Shareholder is a “qualified
resident.”
Foreign
Account Tax Compliance Act. Legislation commonly referred to
as the Foreign Account Tax Compliance Act or "FATCA", generally
imposes a 30% U.S. withholding tax on payments of certain types of
income to foreign financial institutions that fail to enter into an
agreement with the United States Treasury to report certain
required information with respect to accounts held by U.S. persons
(or held by foreign entities that have U.S. persons as substantial
owners). The types of income subject to the withholding tax include
U.S.-source interest and dividends and the gross proceeds from the
sale of any property that could produce U.S.-source interest or
dividends. Proposed Treasury Regulations, however, generally
eliminate withholding under FATCA on gross proceeds. Taxpayers
generally may rely on these proposed Treasury Regulations until
final Treasury Regulations are issued. The information required to
be reported includes the identity and taxpayer identification
number of each account holder that is a U.S. person and transaction
activity within the holder’s account. In addition, subject to
certain exceptions, this legislation also imposes a 30% U.S.
withholding tax on payments to foreign entities that are not
financial institutions unless the foreign entity certifies that it
does not have a greater than 10% U.S. owner or provides the
withholding agent with identifying information on each greater than
10% U.S. owner. Depending on the status of a Non-U.S. Shareholder
and the status of the intermediaries through which it holds Shares,
a Non-U.S. Shareholder could be subject to this 30% U.S.
withholding tax with respect to distributions on its Shares. Under
certain circumstances, a Non-U.S. Shareholder may be eligible for a
refund or credit of such taxes.
Prospective Non-U.S. Shareholders
should consult their own tax advisor regarding these and other tax
issues unique to Non-U.S. Shareholders.
Backup
Withholding
The Fund may be required to withhold U.S.
federal income tax (“backup withholding”) from payments
to: (1) any Shareholder who fails to furnish the Fund with his, her
or its correct taxpayer identification number or a certificate that
the Shareholder is exempt from backup withholding, and (2) any
Shareholder with respect to whom the IRS notifies the Fund that the
Shareholder is subject to backup withholding. Backup
withholding is not an additional tax and may be returned or
credited against a taxpayer’s regular federal income tax
liability if appropriate information is provided to the
IRS. The backup withholding rate is the fourth lowest
rate applicable to individuals under Code section 1(c) (currently
24%) and may increase in future tax years.
Other Tax
Considerations
In addition to U.S. federal income taxes,
Shareholders may be subject to other taxes, such as state and local
income taxes, unincorporated business taxes, business franchise
taxes, and estate, gift, inheritance or intangible taxes that may
be imposed by the various jurisdictions in which the Fund does
business or owns property or where the Shareholder
resides. Although an analysis of those various taxes is
not presented here, each prospective Shareholder should consider
their potential impact on its investment in the Fund. It
is each Shareholder’s responsibility to file the appropriate
U.S. federal, state, local, and foreign tax returns. Vedder
Price has not provided an opinion concerning any aspects of state,
local or foreign tax or U.S. federal tax other than those U.S.
federal income tax issues discussed under the heading “U.S.
Federal Income Tax Considerations.”
Investment
by ERISA Accounts
General
Most employee benefit plans and individual
retirement accounts (“IRAs”) are subject to the
Employee Retirement Income Security Act of 1974, as amended
(“ERISA”), or the Code, or both. This
section discusses certain considerations that arise under ERISA and
the Code that a fiduciary of: (i) an employee benefit plan as
defined in ERISA; (ii) a plan as defined in Section 4975 of the
Code; or (iii) any collective investment vehicle, business
trust, investment partnership, pooled separate account or other
entity the assets of which are treated as comprised (at least in
part) of “plan assets” under the ERISA “plan
assets” rules (“plan asset entity”) who has
investment discretion should take into account before deciding to
invest the plan’s assets in the Fund. Employee
benefit plans under ERISA, plans under the Code and plan asset
entities are collectively referred to below as “plans,”
and fiduciaries with investment discretion are referred to below as
“plan fiduciaries.”
This summary is based on the provisions of
ERISA and the Code as of the date hereof. This summary
is not intended to be complete, but only to address certain
questions under ERISA and the Code likely to be raised by your
advisors. The summary does not include state or local
law.
Potential
plan investors are urged to consult with their own advisors
concerning the appropriateness of an investment in the Fund and the
manner in which Shares should be
purchased.
Special Investment
Considerations
Each plan fiduciary must consider the facts
and circumstances that are relevant to an investment in the Fund,
including the role that an investment in the Fund would play in the
plan’s overall investment portfolio. Each plan
fiduciary, before deciding to invest in the Fund, must be satisfied
that the investment is prudent for the plan, that the investments
of the plan are diversified so as to minimize the risk of large
losses, and that an investment in the Fund complies with the terms
of the plan. The Sponsor is not undertaking to provide investment
advice, or to give advice in a fiduciary capacity, in connection
with a plan’s investment in the Fund.
The Fund and Plan
Assets
A regulation issued under ERISA contains
rules for determining when an investment by a plan in an equity
interest of a statutory trust will result in the underlying assets
of the statutory trust being deemed plan assets for purposes of
ERISA and Section 4975 of the Code. Those rules provide
that assets of a statutory trust will not be plan assets of a plan
that purchases an equity interest in the statutory trust if the
equity interest purchased is a publicly offered
security. If the underlying assets of a statutory trust
are considered to be assets of any plan for purposes of ERISA or
Section 4975 of the Code, the operations of that trust would be
subject to and, in some cases, limited by the provisions of ERISA
and Section 4975 of the Code.
The publicly offered security exception
described above applies if the equity interest is a security that
is:
(1) freely transferable (determined based on
the relevant facts and circumstances);
(2) part of a class of securities that is
widely held (meaning that the class of securities is owned by 100
or more investors independent of the issuer and of each other);
and
(3) either (a) part of a class of securities
registered under Section 12(b) or 12(g) of the Exchange Act or (b)
sold to the plan as part of a public offering pursuant to an
effective registration statement under the 1933 Act and the class
of which such security is a part is registered under the Exchange
Act within 120 days (or such later time as may be allowed by the
SEC) after the end of the fiscal year of the issuer in which the
offering of such security occurred.
The plan asset regulations under ERISA state
that the determination of whether a security is freely transferable
is to be made based on all the relevant facts and
circumstances. In the case of a security that is part of
an offering in which the minimum investment is $10,000 or less, the
following requirements, alone or in combination, ordinarily will
not affect a finding that the security is freely transferable: (1)
a requirement that no transfer or assignment of the security or
rights relating to the security be made that would violate any
federal or state law; and (2) a requirement that no transfer or
assignment be made without advance written notice given to the
entity that issued the security.
The Sponsor believes that the conditions
described above are satisfied with respect to the
Shares. The Sponsor believes that the Shares therefore
constitute publicly offered securities, and the underlying assets
of the Fund should not be considered to constitute plan assets of
any plan that purchases Shares.
Prohibited
Transactions
ERISA and the Code generally prohibit
certain transactions involving a plan and persons who have certain
specified relationships to the plan. In general, Shares
may not be purchased with the assets of a plan if the Sponsor, the
clearing brokers, the trading advisors (if any), or any of their
affiliates, agents or employees either:
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exercise any discretionary authority or
discretionary control with respect to management of the
plan;
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exercise any authority or control with
respect to management or disposition of the assets of the
plan;
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render investment advice for a fee or other
compensation, direct or indirect, with respect to any moneys or
other property of the plan;
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have any authority or responsibility to
render investment advice with respect to any monies or other
property of the plan; or
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have any discretionary authority or
discretionary responsibility in the administration of the
plan.
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Also, a prohibited transaction may occur
under ERISA or the Code when circumstances indicate that (1) the
investment in Shares is made or retained for the purpose of
avoiding application of the fiduciary standards of ERISA, (2) the
investment in Shares constitutes an arrangement under which the
Fund is expected to engage in transactions that would otherwise be
prohibited if entered into directly by the plan purchasing the
Shares, (3) the investing plan, by itself, has the authority or
influence to cause the Fund to engage in such transactions, or (4)
a person who is prohibited from transacting with the investing plan
may, but only with the aid of certain of its affiliates and the
investing plan, cause the Fund to engage in such transactions with
such person.
Special IRA
Rules
IRAs are not subject to ERISA’s
fiduciary standards, but are subject to their own rules, including
the prohibited transaction rules of Section 4975 of the Code, which
generally mirror ERISA’s prohibited transaction
rules. For example, IRAs are subject to special custody
rules and must maintain a qualifying IRA custodial arrangement
separate and distinct from the Fund and its custodial
arrangement. If a separate qualifying custodial
arrangement is not maintained, an investment in the Shares will be
treated as a distribution from the IRA. Second, IRAs are
prohibited from investing in certain commingled investments, and
the Sponsor makes no representation regarding whether an investment
in Shares is an inappropriate commingled investment for an
IRA. Third, in applying the prohibited transaction
provisions of Section 4975 of the Code, in addition to the rules
summarized above, the individual for whose benefit the IRA is
maintained is also treated as the creator of the
IRA. For example, if the owner or beneficiary of an IRA
enters into any transaction, arrangement, or agreement involving
the assets of his or her IRA to benefit the IRA owner or
beneficiary (or his or her relatives or business affiliates)
personally, or with the understanding that such benefit will occur,
directly or indirectly, such transaction could give rise to a
prohibited transaction that is not exempted by any available
exemption. Moreover, in the case of an IRA, the
consequences of a non-exempt prohibited transaction are that the
IRA’s assets will be treated as if they were distributed,
causing immediate taxation of the assets (including any early
distribution penalty tax applicable under Section 72 of the Code),
in addition to any other fines or penalties that may
apply.
Exempt
Plans
Certain employee benefit plans may be
governmental plans or church plans. Governmental plans
and church plans are generally not subject to ERISA, nor do the
prohibited transaction provisions described above apply to
them. These plans are, however, subject to prohibitions
against certain related-party transactions under Section 503 of the
Code, which are similar to the prohibited transaction rules
described above. In addition, the fiduciary of any
governmental or church plan must consider any applicable state or
local laws and any restrictions and duties of common law imposed
upon the plan.
No view is expressed as to whether an
investment in the Fund (and any continued investment in the Fund),
or the operation and administration of the fund, is appropriate or
permissible for any governmental plan or church plan under Code
Section 503, or under any state, county, local or other law
relating to that type of plan.
Allowing an
investment in the Fund is not to be construed as a representation
by the Trust, the Fund, the Sponsor, any trading advisor, any
clearing broker, the Distributor or legal counsel or other advisors
to such parties or any other party that this investment meets some
or all of the relevant legal requirements with respect to
investments by any particular plan or that this investment is
appropriate for any such particular plan. The person
with investment discretion should consult with the plan’s
attorney and financial advisors as to the propriety of an
investment in the Fund in light of the circumstances of the
particular plan, current tax law and
ERISA.
INCORPORATION BY REFERENCE OF CERTAIN
INFORMATION
We are a reporting company and file annual,
quarterly and current reports and other information with the SEC.
The rules of the SEC allow us to “incorporate by
reference” information that we file with them, which means
that we can disclose important information to you by referring you
to those documents. The information incorporated by reference is an
important part of this prospectus. This prospectus incorporates by
reference the documents set forth below that have been previously
filed with the SEC and any future filings that the Trust makes with
the SEC under Section 13(a), 13(c), 14 and 15(d) of the Securities
Exchange Act of 1934 (in each case other than those documents or
portions of those documents not deemed to have been filed in
accordance with SEC rules) between the date of this prospectus and
the termination of the offering of the securities to be issued
under the registration statement:
● our Annual Report
on Form 10-K for the fiscal year ended December 31, 2020, filed
with the SEC on March 16, 2021; and
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Any statement contained in a document
incorporated by reference in this prospectus shall be deemed to be
modified or superseded for purposes of this prospectus to the
extent that a statement contained in this prospectus or in any
other subsequently filed document that also is or is deemed to be
incorporated by reference in this prospectus modifies or supersedes
such statement. Any statement so modified or superseded shall not
be deemed, except as so modified or superseded, to constitute a
part of this prospectus.
We will provide to each person to whom a
prospectus is delivered, including any beneficial owner, a copy of
any document incorporated by reference in the prospectus (excluding
any exhibits to those documents unless the exhibit is specifically
incorporated by reference as an exhibit in that document) at no
cost, upon written or oral request at the following address or
telephone number:
Teucrium Sugar Fund
Attention: Cory
Mullen-Rusin
Three Main Street, Suite
215
Burlington, VT 05401
(802) 540-0019
Our Internet website is www.teucrium.com. We
make our electronic filings with the SEC, including our annual
reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to these reports available on
our website free of charge as soon as practicable after we file or
furnish them with the SEC. The information contained on our website
is not incorporated by reference in this prospectus and should not
be considered a part of this prospectus.
INFORMATION
YOU SHOULD KNOW
This prospectus contains information you
should consider when making an investment decision about the
Shares. You should rely only on the information
contained in this prospectus or any applicable prospectus
supplement. None of the Trust, the Fund or the Sponsor
has authorized any person to provide you with different information
and, if anyone provides you with different or inconsistent
information, you should not rely on it. This prospectus
is not an offer to sell the Shares in any jurisdiction where the
offer or sale of the Shares is not permitted.
The information contained in this prospectus
was obtained from us and other sources believed by us to be
reliable.
You should disregard anything we said in an
earlier document that is inconsistent with what is included in this
prospectus or any applicable prospectus
supplement. Where the context requires, when we refer to
this “prospectus,” we are referring to this prospectus
and (if applicable) the relevant prospectus
supplement.
You should not assume that the information
in this prospectus or any applicable prospectus supplement is
current as of any date other than the date on the front page of
this prospectus or the date on the front page of any applicable
prospectus supplement.
We include cross references in this
prospectus to captions in these materials where you can find
further related discussions. The table of contents tells
you where to find these captions.
WHERE YOU
CAN FIND MORE INFORMATION
The Trust has filed on behalf of the Fund a
registration statement on Form S-1 with the SEC under the 1933
Act. This prospectus does not contain all of the
information set forth in the registration statement (including the
exhibits to the registration statement), parts of which have been
omitted in accordance with the rules and regulations of the
SEC. For further information about the Trust, the Fund
or the Shares, please refer to the registration statement, which
you may inspect online at www.sec.gov.
Information about the Trust, the Fund and the Shares can also be
obtained from the Fund’s website, which is www.teucrium.com. The
Fund’s website address is only provided here as a convenience
to you and the information contained on or connected to the website
is not part of this prospectus or the registration statement of
which this prospectus is part. The Trust is subject to
the informational requirements of the Exchange Act and will file
certain reports and other information with the SEC under the
Exchange Act. The Sponsor will file an updated
prospectus annually for the Fund pursuant to the 1933
Act. The reports and other information can be inspected
online at www.sec.gov, which is the
Internet site maintained by the SEC that contains reports, proxy
and information statements and other information regarding issuers
that file electronically with the SEC.
STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes
“forward-looking statements” which generally relate to
future events or future performance. In some cases, you can
identify forward-looking statements by terminology such as
“may,” “will,” “should,”
“expect,” “plan,” “anticipate,”
“believe,” “estimate,”
“predict,” “potential” or the negative of
these terms or other comparable terminology. All statements (other
than statements of historical fact) included in this prospectus
that address activities, events or developments that will or may
occur in the future, including such matters as movements in the
commodities markets and indexes that track such movements, the
Fund’s operations, the Sponsor’s plans and references
to the Fund’s future success and other similar matters, are
forward-looking statements. These statements are only predictions.
Actual events or results may differ materially. These statements
are based upon certain assumptions and analyses the Sponsor has
made based on its perception of historical trends, current
conditions and expected future developments, as well as other
factors appropriate in the circumstances. Whether or not actual
results and developments will conform to the Sponsor’s
expectations and predictions, however, is subject to a number of
risks and uncertainties, including the special considerations
discussed in this prospectus, general economic, market and business
conditions, changes in laws or regulations, including those
concerning taxes, made by governmental authorities or regulatory
bodies, and other world economic and political developments. See
“What Are the Risk Factors Involved with an Investment in the
Fund?” Consequently, all the forward-looking statements made
in this prospectus are qualified by these cautionary statements,
and there can be no assurance that actual results or developments
the Sponsor anticipates will be realized or, even if substantially
realized, that they will result in the expected consequences to, or
have the expected effects on, the Fund’s operations or the
value of its Shares.
APPENDIX
A
Glossary of
Defined Terms
In this prospectus, each of the following
terms have the meanings set forth after such
term:
Administrator:
U.S. Bancorp Fund Services,
LLC, doing business as U.S. Bank Global Fund
Services
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Authorized
Purchaser: One that
purchases or redeems Creation Baskets or Redemption Baskets,
respectively, from or to the Fund.
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Benchmark: A weighted average of the closing
settlement prices for three Sugar Futures Contracts, specifically
futures contracts on Sugar No. 11, that are traded on ICE Futures:
(1) the second to expire ICE Futures Sugar Futures Contract,
weighted 35%, (2) the third to expire ICE Futures Sugar Futures
Contract, weighted 30%, and (3) the ICE Futures Sugar Futures
Contract expiring in the March following the expiration month of
the third to expire contract, weighted
35%.
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Benchmark Component Futures
Contracts: The three
Sugar Futures Contracts that at any given time make up the
Benchmark.
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Business
Day: Any day other
than a day when any of the NYSE Arca, ICE Futures, or the New York
Stock Exchange is closed for regular
trading.
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CFTC: Commodity
Futures Trading Commission, an independent federal agency with the
mandate to regulate commodity futures and options in the United
States.
Code: Internal Revenue Code of 1986, as
amended.
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Commodity
Pool: An enterprise
in which several individuals contribute funds in order to trade
futures contracts or options on futures contracts
collectively.
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Commodity Pool Operator or
CPO: Any person
engaged in a business which is of the nature of an investment
trust, syndicate, or similar enterprise, and who, in connection
therewith, solicits, accepts, or receives from others, funds,
securities, or property, either directly or through capital
contributions, the sale of stock or other forms of securities, or
otherwise, for the purpose of trading in any swap or commodity for
future delivery or commodity option on or subject to the rules of
any contract market.
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Creation
Basket: A block of
25,000 Shares used by the Fund to issue
Shares.
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Custodian: U.S.
Bank, N.A.
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Distributor:
Foreside Fund Services,
LLC.
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DTC: The
Depository Trust Company. DTC will act as the securities
depository for the Shares.
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DTC
Participant: An
entity that has an account with DTC.
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Exchange
Act: The Securities
Exchange Act of 1934.
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Exchange for Related
Position: A
privately negotiated and simultaneous exchange of a futures
contract position for a swap or other over the counter instrument
on the corresponding commodity.
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FINRA: Financial
Industry Regulatory Authority.
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Forward
Contract: an over the counter bilateral contract for the
purchase or sale of a specified quantity of a commodity at a
specified price, on a specified date and at a specified location.
Forwards are almost always settled by delivery of the underlying
commodity. Although not impossible, it is unusual to settle a
Forward financially; therefore, Forwards are generally
illiquid.
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Futures
Contract: an exchange-traded contract traded with standard
terms that calls for the delivery of a specified quantity of a
commodity at a specified price, on a specified date and at a
specified location. Typically, a futures contract is traded out or
rolled on an exchange before delivery or receipt of the underlying
commodity is required.
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ICE
Futures: The primary
exchange on which Sugar Futures Contracts are traded in the
U.S. The Fund expressly disclaims any association with
or endorsement of the Fund by ICE Futures and acknowledges that
“ICE Futures” and “ICE Futures US” are
registered trademarks of such exchange.
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Indirect
Participants: Banks,
brokers, dealers and trust companies that clear through or maintain
a custodial relationship with a DTC Participant, either directly or
indirectly.
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Limited Liability Company
(LLC): A type of
business ownership combining several features of corporation and
partnership structures.
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Margin: The
amount of equity required for an investment in futures
contracts.
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NAV: Net
Asset Value of the Fund.
New York Mercantile Exchange
(NYMEX): An exchange on which
Sugar Futures Contracts are traded in the U.S. The Fund
expressly disclaims any association with or endorsement of the Fund
by the NYMEX and acknowledges that “New York Mercantile
Exchange” and “NYMEX” are registered trademarks
of such exchange.
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NFA: National
Futures Association.
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NSCC: National
Securities Clearing Corporation.
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1933
Act: The Securities
Act of 1933.
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Option: The
right, but not the obligation, to buy or sell a futures contract,
swap agreement, forward contract or commodity, as applicable, at a
specified price on or before a specified
date.
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Over the counter
Derivative: A
financial contract, whose value is designed to track the return on
stocks, bonds, currencies, commodities, or some other benchmark,
that is traded over the counter or off organized
exchanges.
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Redemption
Basket: A block of
25,000 Shares used by the Fund to redeem
Shares.
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SEC: Securities
and Exchange Commission.
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Secondary
Market: The stock
exchanges and the over the counter market. Securities are first
issued as a primary offering to the public. When the securities are
traded from that first holder to another, the issues trade in these
secondary markets.
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Shareholders: Holders
of Shares.
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Shares: Common units representing fractional
undivided beneficial interests in the
Fund.
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Sponsor: Teucrium
Trading, LLC, a Delaware limited liability company, which is
registered as a Commodity Pool Operator, who controls the
investments and other decisions of the
Fund.
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Spot
Contract: A cash
market transaction in which the buyer and seller agree to the
immediate purchase and sale of a commodity, usually with a two-day
settlement.
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Sugar Futures
Contracts: Futures
contracts for sugar that are traded on ICE Futures, the NYMEX, or
foreign exchanges.
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Sugar No. 11 Futures
Contracts: Futures
contracts that are traded on ICE Futures and NYMEX for the physical
delivery of raw cane sugar, delivered to the receiver’s
vessel at a specified port within the country of origin of the
sugar.
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Swap
Agreement: An over
the counter derivative that generally involves an exchange of a
stream of payments between the contracting parties based on a
notional amount and a specified index.
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Tracking
Error: Possibility
that the daily NAV of the Fund will not track the
Benchmark.
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Trust
Agreement: The Fifth
Amended and Restated Declaration of Trust and Trust Agreement of
the Trust effective as of April 26, 2019.
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Valuation
Day: Any day as of
which the Fund calculates its NAV.
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You: The
owner of Shares
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STATEMENT OF
ADDITIONAL INFORMATION
TEUCRIUM
SUGAR FUND
This statement of additional information is
the second part of a two-part document. The first part
is the Fund’s disclosure document. The disclosure
document and this statement of additional information are bound
together, and both parts contain important
information. This statement of additional information
should be read in conjunction with the disclosure
document. To obtain a copy of the disclosure document
without charge, call the Fund at (802) 540-0019. Before you decide
whether to invest, you should read the entire prospectus carefully
and consider the risk factors beginning on
page 12.
This statement of additional information and
accompanying disclosure document are both dated May 1,
2021.
TEUCRIUM SUGAR FUND
TABLE OF
CONTENTS
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The Sugar Market
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75
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Over the counter Derivatives
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76
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Commodity Market
Participants
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77
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Regulation
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77
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Potential Advantages of
Investment
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81
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Fund Performance
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81
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The Sugar
Market
Sugarcane accounts for nearly 80% of the
world’s sugar production, while sugar beets account for the
remainder of the world’s sugar production. Sugar
manufacturers use sugar beets and sugarcane as the raw material
from which refined sugar (sucrose) for industrial and consumer use
is produced. Sugar is produced in various forms, including
granulated, powdered, liquid, brown, and molasses. The food
industry (in particular, producers of baked goods, beverages,
cereal, confections, and dairy products) uses sugar and sugarcane
molasses to make sugar containing food products. Sugar beet pulp
and molasses products are used as animal feed ingredients. Ethanol
is an important by-product of sugarcane processing. Additionally,
the material that is left over after sugarcane is processed is used
to manufacture paper, cardboard, and “environmentally
friendly” eating utensils.
The Sugar No. 11 Futures Contract is
the world benchmark contract for raw sugar trading. This contract
prices the physical delivery of raw cane sugar, delivered to the
receiver’s vessel at a specified port within the country of
origin of the sugar. Sugar No. 11 Futures Contracts trade on ICE
Futures US and the NYMEX in units of 112,000
pounds.
The United States Department of
Agriculture (“USDA”) publishes two major reports
annually on U.S. domestic and worldwide sugar production and
consumption. These are usually released in November and May. In
addition, the USDA publishes periodic, but not as comprehensive,
reports on sugar monthly. These reports are available on the
USDA’s website, www.usda.gov, at no charge. The USDA’s
November 2020 report forecasts 2020/21 global production of 182
Million, up 16 million metric tons raw value with Brazil expected
to account for 75% of the rise. Consumption is expected to rise due
to growth in markets such as India, China, Indonesia, and Iran and
is estimated to draw stocks lower despite a rebound in output.
Exports are expected to be up sharply with rising supplies,
particularly in Brazil. . Global sugar consumption may fluctuate
year over year due to any number of reasons which may include, but
is not limited to, economic conditions, global health concerns,
international trade policy. Sugar is a staple commodity used
pervasively across the globe so that any contractions in
consumption may only be temporary as has historically been the
case.
![](image1.jpg)
If the futures market is in a state of
backwardation (i.e., when the price of sugar in the future is
expected to be less than the current price), the Fund will buy
later to expire contracts for a lower price than the sooner to
expire contracts that it sells. Hypothetically, and assuming no
changes to either prevailing sugar prices or the price relationship
between immediate delivery, soon to expire contracts and later to
expire contracts, the value of a contract will rise as it
approaches expiration. If the futures market is in contango, the
Fund will buy later to expire contracts for a higher price than the
sooner to expire contracts that it sells. Hypothetically, and
assuming no other changes to either prevailing sugar prices or the
price relationship between the spot price, soon to expire contracts
and later to expire contracts, the value of a contract will fall as
it approaches expiration. Historically, the sugar futures markets
have experienced periods of both contango and backwardation.
Frequently, whether contango or backwardation exists is a function,
among other factors, of the seasonality of the sugar market and the
sugar harvest cycle. All other things being equal, a situation
involving prolonged periods of contango may adversely impact the
returns of the Funds; conversely a situation involving prolonged
periods of backwardation may positively impact the returns of the
Funds.
Futures contracts may be either bought or
sold long or short. The U.S Commodity Futures Trading Commission
weekly releases the “Commitment of Traders” (COT)
report, which depicts the open interest as well as long and short
positions in the market. Market participants may use this report to
gauge market sentiment.
Over the
counter Derivatives
In addition to futures contracts, options on
futures contracts, derivative contracts that are tied to various
commodities, including sugar, are entered into outside of public
exchanges. These “over the counter” contracts are
entered into between two parties in private contracts, or on a
recently formed swap execution facility (“SEF”) for
standardized swaps. Unlike Sugar Futures Contracts, which are
guaranteed by a clearing organization, each party to an over the
counter derivative contract bears the credit risk of the other
party (unless such over the counter swap is cleared through a DCO),
i.e., the risk that the other party will not be able to perform its
obligations under its contract.
Some over the counter derivatives
contracts contain relatively standardized terms and conditions and
are available from a wide range of participants. Others have highly
customized terms and conditions and are not as widely available.
While the Fund may enter into these more customized contracts, the
Fund will only enter into over the counter contracts containing
certain terms and conditions, as discussed further below, that are
designed to minimize the credit risk to which the Fund will be
subject and only if the terms and conditions of the contract are
consistent with achieving the Fund’s investment objective of
tracking the Benchmark. The over the counter contracts that the
Fund may enter into will take the form of either forward contracts,
swaps or options.
A forward contract is a contractual
obligation to purchase or sell a specified quantity of a commodity
at or before a specified date in the future at a specified price
and, therefore, is economically similar to a futures contract
except that, unlike a futures contract it cannot be financially
settled (i.e., one must intend to make or take delivery of a
commodity under a forward contract). Unlike futures contracts,
however, forward contracts are typically privately negotiated or
are traded in the over the counter markets. Forward contracts for a
given commodity are generally available for various amounts and
maturities and are subject to individual negotiation between the
parties involved. Moreover, generally there is no direct means of
offsetting or closing out a forward contract by taking an
offsetting position as one would a futures contract on a U.S.
exchange. If a trader desires to close out a forward contract
position, he generally will establish an opposite position in the
contract but will settle and recognize the profit or loss on both
positions simultaneously on the delivery date. Thus, unlike in the
futures contract market where a trader who has offset positions
will recognize profit or loss immediately, in the forward market a
trader with a position that has been offset at a profit will
generally not receive such profit until the delivery date, and
likewise a trader with a position that has been offset at a loss
will generally not have to pay money until the delivery date.
However, in some very limited instances such contracts may provide
a right of look out that will allow for the receipt of profit and
payment for losses prior to the delivery date.
An over the counter swap agreement is a
bilateral contract to exchange a periodic stream of payments
determined by reference to a notional amount, with payment
typically made between the parties on a net basis. For instance, in
the case of a sugar swap, the Fund may be obligated to pay a fixed
price per bushel of sugar multiplied by a notional number of
bushels and be entitled to receive an amount per bushel equal to
the current value of an index of sugar prices, the price of a
specified Sugar Futures Contract, or the average price of a group
of Sugar Futures Contracts such as the Benchmark (times the same
notional number of bushels. Each party to the swap is subject to
the credit risk of the other party. The Fund only enters into over
the counter swaps on a net basis, where the two payment streams are
netted out on a daily basis, with the parties receiving or paying,
as the case may be, only the net amount of the two payments. Swaps
do not generally involve the delivery of underlying assets or
principal and are therefore financially settled. Accordingly, the
Fund’s risk of loss with respect to an over the counter swap
generally is limited to the net amount of payments that the
counterparty is contractually obligated to make less any collateral
deposits the Fund is holding.
To reduce the credit risk that arises
in connection with over the counter contracts, the Fund generally
enters into an agreement with each counterparty based on the Master
Agreement published by the International Swaps and Derivatives
Association, Inc. that provides for the netting of the Fund’s
overall exposure to its counterparty and for daily payments based
on the marked to market value of the contract.
The creditworthiness of each potential
counterparty will be assessed by the Sponsor. The Sponsor assesses
or reviews, as appropriate, the creditworthiness of each potential
or existing counterparty to an over the counter contract pursuant
to guidelines approved by the Sponsor. The creditworthiness of
existing counterparties will be reviewed periodically by the
Sponsor. The Sponsor’s President, Chief Investment Officer,
and Chief Executive Officer has over 25 years of experience in over
the counter derivatives trading, including the counterparty
creditworthiness analysis inherent therein. There is no guarantee
that the Sponsor’s creditworthiness analysis will be
successful and that counterparties selected for Fund transactions
will not default on their contractual
obligations.
The Fund also may require that a
counterparty be highly rated and/or provide collateral or other
credit support. The Sponsor on behalf of the Fund may enter into
over the counter contracts with various types of counterparties,
including: (a) entities registered as swap dealers
(“SD”) or major swap participants (“MSP”),
or (b) any other entities that qualify as eligible contract
participants (“ECP”).
After the enactment of the Dodd-Frank Act,
swaps (and options that are regulated as swaps) are subject to the
CFTC’s exclusive jurisdiction and are regulated as rigorously
as futures. Generally, however, if a swap is entered into with an
SD or MSP, such counterparty will conduct all necessary compliance
with respect to swaps and options under the Dodd-Frank
Act.
Commodity
Market Participants
The two broad classes of persons who trade
commodities are hedgers and speculators. Hedgers include
financial institutions that manage or deal in interest
rate-sensitive instruments, foreign currencies or stock portfolios,
and commercial market participants, such as farmers and
manufacturers, that market or process
commodities. Hedging is a protective procedure designed
to effectively lock in prices that would otherwise change due to an
adverse movement in the price of the underlying commodity, such as
the adverse price movement between the time a merchandiser or
processor enters into a contract to buy or sell a raw or processed
commodity at a certain price and the time he must perform the
contract. For example, if a hedger contracts to
physically sell the commodity at a future date, he may
simultaneously buy a futures or forward contract for the necessary
equivalent quantity of the commodity. At the time for
performance of the physical contract, the hedger may accept
delivery under his futures contract and sell the commodity quantity
as required by the physical contract or he may buy the actual
commodity, sell it under the physical contract and close out his
futures contract position by making an offsetting
sale.
The Commodity Interest markets enable the
hedger to shift the risk of price fluctuations. The
usual objective of the hedger is to protect the profit that he
expects to earn from farming, merchandising, or processing
operations rather than to profit from his
trading. However, at times the impetus for a hedge
transaction may result in part from speculative objectives and
hedgers can end up paying higher prices than they would have if
they did not enter into a Commodity Interest transaction if current
market prices are lower than the locked-in
price.
Unlike the hedger, the speculator generally
expects neither to make nor take delivery of the underlying
commodity. Instead, the speculator risks his capital
with the hope of making profits from price fluctuations in the
commodities. The speculator is, in effect, the risk
bearer who assumes the risks that the hedger seeks to
avoid. Speculators rarely make or take delivery of the
underlying commodity; rather they attempt to close out their
positions prior to the delivery date. A speculator who
takes a long position generally will make a profit if the price of
the underlying commodity goes up and incur a loss if the price of
the underlying commodity goes down, while a speculator who takes a
short position generally will make a profit if the price of the
underlying commodity goes down and incur a loss if the price of the
underlying commodity goes up.
Regulation
The regulation of futures markets, futures
contracts, and futures exchanges has historically been
comprehensive. The CFTC and the exchanges are authorized to take
extraordinary actions in the event of a market emergency including,
for example, the retroactive implementation of speculative position
limits, increased margin requirements, the establishment of daily
price limits and the suspension of trading on an exchange or
trading facility.
Pursuant to authority in the CEA, the NFA
has been formed and registered with the CFTC as a registered
futures association. At the present time, the NFA is the only
SRO for commodity interest professionals, other than futures
exchanges. The CFTC has delegated to the NFA responsibility
for the registration of CPOs and FCMs and their respective
associated persons. The Sponsor and the Fund’s clearing
broker are members of the NFA. As such, they will be subject
to NFA standards relating to fair trade practices, financial
condition and consumer protection. The NFA also
arbitrates disputes between members and their customers and
conducts registration and fitness screening of applicants for
membership and audits of its existing members. Neither the
Trust nor the Teucrium Funds are required to become a member of the
NFA. The regulation of commodity interest transactions in the
United States is a rapidly changing area of law and is subject to
ongoing modification by governmental and judicial action.
Considerable regulatory attention has been focused on
non-traditional investment pools that are publicly distributed in
the United States. There is a possibility of future regulatory
changes within the United States altering, perhaps to a material
extent, the nature of an investment in the Fund, or the ability of
a Fund to continue to implement its investment strategy. In
addition, various national governments outside of the United States
have expressed concern regarding the disruptive effects of
speculative trading in the commodities markets and the need to
regulate the derivatives markets in general. The effect of any
future regulatory change on the Teucrium Funds is impossible to
predict but could be substantial and adverse.
The CFTC possesses exclusive jurisdiction to
regulate the activities of commodity pool operators and commodity
trading advisors with respect to "commodity interests," such as
futures and swaps and options, and has adopted regulations with
respect to the activities of those persons and/or entities.
Under the Commodity Exchange Act (“CEA”), a registered
commodity pool operator, such as the Sponsor, is required to make
annual filings with the CFTC and the NFA describing its
organization, capital structure, management and controlling
persons. In addition, the CEA authorizes the CFTC to require
and review books and records of, and documents prepared by,
registered commodity pool operators. Pursuant to this
authority, the CFTC requires commodity pool operators to keep
accurate, current and orderly records for each pool that they
operate. The CFTC may suspend the registration of a commodity
pool operator (1) if the CFTC finds that the operator’s
trading practices tend to disrupt orderly market conditions, (2) if
any controlling person of the operator is subject to an order of
the CFTC denying such person trading privileges on any exchange,
and (3) in certain other circumstances. Suspension,
restriction or termination of the Sponsor’s registration as a
commodity pool operator would prevent it, until that registration
were to be reinstated, from managing the Fund, and might result in
the termination of the Fund if a successor sponsor is not elected
pursuant to the Trust Agreement. Neither the Trust nor the
Fund is required to be registered with the CFTC in any
capacity.
The Fund’s investors are afforded
prescribed rights for reparations under the CEA. Investors
may also be able to maintain a private right of action for
violations of the CEA. The CFTC has adopted rules
implementing the reparation provisions of the CEA, which provide
that any person may file a complaint for a reparations award with
the CFTC for violation of the CEA against a floor broker or an FCM,
introducing broker, commodity trading advisor, CPO, and their
respective associated persons.
The regulations of the CFTC and the NFA
prohibit any representation by a person registered with the CFTC or
by any member of the NFA, that registration with the CFTC, or
membership in the NFA, in any respect indicates that the CFTC or
the NFA has approved or endorsed that person or that person’s
trading program or objectives. The registrations and
memberships of the parties described in this summary must not be
considered as constituting any such approval or endorsement.
Likewise, no futures exchange has given or will give any similar
approval or endorsement.
Trading venues in the United States are
subject to varying degrees of regulation under the CEA depending on
whether such exchange is a designated contract market (i.e. a
futures exchange) or a swap execution facility. Clearing
organizations are also subject to the CEA and the rules and
regulations adopted thereunder as administered by the CFTC. The
CFTC’s function is to implement the CEA’s objectives of
preventing price manipulation and excessive speculation and
promoting orderly and efficient commodity interest markets. In
addition, the various exchanges and clearing organizations
themselves as SROs exercise regulatory and supervisory authority
over their member firms.
The Dodd-Frank Wall Street Reform and
Consumer Protection Act (the “Dodd-Frank Act”) was
enacted in response to the economic crisis of 2008 and 2009 and it
significantly altered the regulatory regime to which the securities
and commodities markets are subject. To date, the CFTC has issued
proposed or final versions of almost all of the rules it is
required to promulgate under the Dodd-Frank Act, and it continues
to issue proposed versions of additional rules that it has
authority to promulgate. Provisions of the new law include the
requirement that position limits be established on a wide range of
commodity interests, including agricultural, energy, and
metal-based commodity futures contracts, options on such futures
contracts and uncleared swaps that are economically equivalent to
such futures contracts and options (“Reference
Contracts”); new registration and recordkeeping requirements
for swap market participants; capital and margin requirements for
“swap dealers” and “major swap
participants,” as determined by the new law and applicable
regulations; reporting of all swap transactions to swap data
repositories; and the mandatory use of clearinghouse mechanisms for
sufficiently standardized swap transactions that were historically
entered into in the over the counter market, but are now designated
as subject to the clearing requirement; and margin requirements for
over the counter swaps that are not subject to the clearing
requirements.
In addition, considerable regulatory
attention has recently been focused on non-traditional publicly
distributed investment pools such as the Fund. Furthermore, various
national governments have expressed concern regarding the
disruptive effects of speculative trading in certain commodity
markets and the need to regulate the derivatives markets in
general. The effect of any future regulatory change on the Teucrium
Funds is impossible to predict but could be substantial and
adverse.
The Dodd-Frank Act was intended to reduce
systemic risks that may have contributed to the 2008/2009 financial
crisis. Since the first draft of what became the Dodd-Frank Act,
supporters and opponents have debated the scope of the legislation.
As the Administrations of the U.S. change, the interpretation and
implementation will change along with them. Nevertheless,
regulatory reform of any kind may have a significant impact on U.S.
regulated entities.
Position
Limits, Aggregation Limits, Price Fluctuation
Limits
The CFTC and US futures exchanges impose
limits on the maximum net long or net short speculative positions
that any person may hold or control in any particular futures or
options contracts traded on US futures exchanges. For example, the
CFTC currently imposes speculative position limits on a number of
agricultural commodities (e.g., corn, oats, wheat, soybeans and
cotton) and US futures exchanges currently impose speculative
position limits on many other commodities. A Fund could be required
to liquidate positions it holds in order to comply with position
limits or may not be able to fully implement trading instructions
generated by its trading models, in order to comply with position
limits. Any such liquidation or limited implementation could result
in substantial costs to a Fund.
The Dodd-Frank Act significantly expanded
the CFTC’s authority to impose position limits with respect
to futures contracts and options on futures contracts, swaps that
are economically equivalent to futures or options on futures, and
swaps that are traded on a regulated exchange and certain swaps
that perform a significant price discovery function. On December
16, 2016, the CFTC issued a final rule to amend part 150 of the
CFTC’s regulations with respect to the policy for aggregation
under the CFTC’s position limits regime for futures and
option contracts on nine agricultural commodities (“the
Aggregation Requirements”). This final rule addressed the
circumstances under which market participants would be required to
aggregate all their positions, for purposes of the position limits,
of all positions in Reference Contracts of the 9 agricultural
commodities held by a single entity and its affiliates, regardless
of whether such positions exist on US futures exchanges, non-US
futures exchanges, or in over the counter swaps. An affiliate of a
market participant is defined as two or more persons acting
pursuant to an express or implied agreement or understanding. The
Aggregation Requirements became effective on February 14, 2017. On
August 10, 2017, the CFTC issued a No-Action Relief Letter No.
17-37 to clarify several provisions under Regulation 150.4,
regarding position aggregation filing requirements of market
participants. The Sponsor does not anticipate that this order will
have an impact on the ability of a Fund to meet its respective
investment objectives.
As published in the January 14, 2021 Federal
Register, the Commodity Futures Trading Commission (CFTC) voted to
approve a final rule (Final Rule) regarding position limits for
certain futures contracts and economically equivalent
swaps. The Final Rule ends a decade of rulemaking activity in
which the CFTC proposed, amended, and re-proposed its position
limit rules and aggregation standards for speculative positions due
to certain amendments to the Commodity Exchange Act (CEA) by the
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
(Dodd-Frank Act). In the Final Rule, the CFTC confirmed that
federal speculative position limits are necessary for 25 core
referenced futures contracts and for any futures contracts and
options on futures contracts that are linked to those
contracts. The 25 core referenced futures contracts include
the nine “legacy” agricultural contracts that are
currently subject to federal position limits and 16 additional
non-legacy contracts.
The aggregate position limits currently in
place under the current position limits and the Aggregation
Requirements are as follows for each of the commodities traded by
the Fund:
Commodity Future
|
Spot Month Position
Limit
|
All Month Aggregate Position
Limit
|
sugar
|
5,000 contracts
|
Only Accountability
Limits
|
The nine legacy contracts are subject to two
types of position limits: (1) a position limit that applies in the
spot month only and (2) a position limit that applies in any single
non-spot month as well as all months combined. Both types of
position limits have been updated by the Final Rule. Significantly,
the new spot month position limit is higher than or equal to
current federal and exchange-set spot month position limits. The
new single non-spot month and all-months-combined position limits
are also higher than or equal to the respective current federal and
exchange-set limits. For a discussion generally regarding the risks
that position limits may pose for the Fund, see the risk factor in
“WHAT ARE THE RISK FACTORS INVOLVED WITH AN INVESTMENT IN THE
FUND” regarding position limits, accountability levels and
daily price fluctuation limits.
The CFTC also adopted federal position
limits on cash-settled futures and options on futures that are
directly or indirectly linked to physically settled contracts in
order to further the statutory objective in Section 4a(a)(3)(B)(iv)
of the CEA—the deterrence and prevention of market
manipulation. In taking this step, the CFTC stated that, in
the absence of position limits, an entity with positions in both
the physically delivered and cash-settled contracts may have an
increased ability and an increased incentive to manipulate one of
these contracts to benefit positions in the other
contract.
To prevent evasion through the creation of
economically equivalent futures contracts that do not directly
reference the price of the core referenced futures contracts, the
CFTC determined that futures contracts and options on futures
contracts that are indirectly linked to the core referenced futures
contracts will be subject to the position limits in the same manner
as the referenced futures contracts. Futures that settle to the
price of a referenced contract but not to the price of a core
referenced futures contract would be indirectly linked to the core
referenced futures contract as “economically equivalent
swaps.”
The Final Rule clarifies the applicable
standard for market participants seeking a bona fide hedging
exemption from position limits. A bona fide hedging
transaction may exceed the federal position limits only if the
transaction satisfies each of the following
elements:
1.
the position
represents a substitute for transactions or positions made or to be
made at a later time in a physical marketing channel (temporary
substitute test);
2.
the position
is economically appropriate to the reduction of price risks in the
conduct and management of a commercial enterprise (economically
appropriate test); and
3.
the position
arises from the potential change in value of actual or anticipated
assets, liabilities, or services (change in value
requirement).
Notably, this definition tightens the
“temporary substitute test” such that a bona fide hedge
must be connected to the production, sale, or use of a physical
cash-market commodity in all cases, rather than
“normally” connected to such activities. As noted
above, this adjustment is intended to restrict market participants
from treating “risk management” positions as bona fide
hedges, except for pass-through or offset positions related to
another transaction that is itself a bona fide hedge. The Final
Rule also expands the list of enumerated bona fide hedges, which
means that any market participant utilizing such a hedge need not
notify the CFTC because the enumerated bona fide hedges are
self-effectuating. However, a market participant would still
need to notify the relevant exchange if executing a bona fide hedge
would exceed an exchange set position limit.
In addition, the Final Rule elaborates on
how and when a market participant may measure risk on a gross basis
rather than on a net basis. Currently, market participants
generally may only hedge positions on a net basis. However, the
Final Rule permits hedge positions on a gross basis so long as the
risk calculations are done consistently over time and not with the
intent of evading federal position
limits.
The Final Rule became effective on March 15,
2021, but a number of the requirements in the Final Rule have a
general compliance date of January 1, 2022, and later compliance
date of January 1, 2023 with respect to swaps-related requirements
and the elimination of previously granted risk management
exemptions. In particular, January 1, 2022 is the implementation
date of federal speculative position limits for 16 non-legacy core
referenced futures contracts and any referenced futures contracts
(other than economically equivalent swaps) relating to those 16
core referenced futures contracts and for exchanges to establish
limits and exemptions, including collecting cash market information
from market participants in connection with bona fide hedge
exemptions. January 1, 2023 is the implementation date of federal
speculative position limits for economically equivalent swaps and
for the elimination of previously granted risk management
exemptions. The CFTC also will reevaluate the ability of the
exchanges to establish and implement appropriate surveillance
mechanisms with respect to economically equivalent
swaps.
It is unknown at this time the effect that
such passage, adoption or modification will have, positively or
negatively, on our industry or on a Fund. The size or duration of
positions available to a Fund may be severely limited. Pursuant to
the CFTC’s and the exchanges’ aggregation requirements,
all accounts owned or managed by the Sponsor are likely to be
combined for speculative position limits purposes. The Funds could
be required to liquidate positions it holds in order to comply with
such limits or may not be able to fully implement trading
instructions generated by its trading models, in order to comply
with such limits. Any such liquidation or limited implementation
could result in substantial costs to a Fund.
These new regulations and the resulting
increased costs and regulatory oversight requirements may result in
market participants being required or deciding to limit their
trading activities, which could lead to decreased market liquidity
and increased market volatility. In addition, transaction costs
incurred by market participants are likely to be higher due to the
increased costs of compliance with the new regulations. These
consequences could adversely affect a Fund’s
returns.
Accountability levels differ from position
limits in that they do not represent a fixed ceiling, but rather a
threshold above which a futures exchange may exercise greater
scrutiny and control over an investor’s positions. If a Fund
were to exceed an applicable accountability level for investments
in futures contracts, the exchange will monitor the Fund’s
exposure and may ask for further information on its activities,
including the total size of all positions, investment and trading
strategy, and the extent of liquidity resources of the Fund. If
deemed necessary by the exchange, the Fund could be ordered to
reduce its aggregate net position back to the accountability
level.
In addition to position limits and
accountability levels, the exchanges set daily price fluctuation
limits on futures contracts. The daily price fluctuation limit
establishes the maximum amount that the price of futures contracts
may vary either up or down from the previous day’s settlement
price. Once the daily price fluctuation limit has been reached in a
particular futures contract, no trades may be made at a price
beyond that limit.
Margin for
OTC Uncleared Swaps
During 2015 and 2016, the CFTC and the US
bank prudential regulators completed their rulemakings under the
Dodd-Frank Act on margin for uncleared over the counter swaps (and
option agreements that qualify as swaps). Margin requirements went
into effect for the largest swap entities in September 2016 and
went into effect for financial end users in March 2017. Under these
regulations, swap dealers (such as sell-side counterparties to
swaps), major swap participants, and financial end users (such as
buy-side counterparties to swaps who are not physical traders) are
required in most instances, to post and collect initial and
variation margin, depending on the regulatory classification of
their counterparty. European and Asian regulators are also
implementing similar regulations, which were scheduled to become
effective on the same dates as the US-promulgated rules. As a
result of these requirements, additional capital will be required
to be committed to the margin accounts to support transactions
involving uncleared over the counter swaps and, consequently, these
transactions may become more expensive. While the Fund currently
does not generally engage in uncleared over the counter swaps, to
the extent they do so in the future, the additional margin required
to be posted could adversely impact the profitability (if any) to
the Fund from entering into these transactions.
FCMs
The CEA requires all FCMs, such as the
Teucrium Funds’ clearing brokers, to meet and maintain
specified fitness and financial requirements, to segregate customer
funds from proprietary funds and account separately for all
customers’ funds and positions, and to maintain specified
books and records open to inspection by the staff of the CFTC. The
CFTC has similar authority over introducing brokers, or persons who
solicit or accept orders for commodity interest trades but who do
not accept margin deposits for the execution of trades. The CEA
authorizes the CFTC to regulate trading by FCMs and by their
officers and directors, permits the CFTC to require action by
exchanges in the event of market emergencies, and establishes an
administrative procedure under which customers may institute
complaints for damages arising from alleged violations of the CEA.
The CEA also gives the states powers to enforce its provisions and
the regulations of the CFTC.
On November 14, 2013, the CFTC published
final regulations that require enhanced customer protections, risk
management programs, internal monitoring and controls, capital and
liquidity standards, customer disclosures and auditing and
examination programs for FCMs. The rules are intended to afford
greater assurances to market participants that customer segregated
funds and secured amounts are protected, customers are provided
with appropriate notice of the risks of futures trading and of the
FCMs with which they may choose to do business, FCMs are monitoring
and managing risks in a robust manner, the capital and liquidity of
FCMs are strengthened to safeguard the continued operations and the
auditing and examination programs of the CFTC and the SROs are
monitoring the activities of FCMs in a thorough
manner.
Potential
Advantages of Investment
Interest Income and
Expense
Unlike some alternative investment funds,
the Fund does not borrow money in order to obtain leverage, so the
Fund does not incur any interest expense. Rather, the
Fund’s margin deposits, and cash reserves are maintained in
cash and cash equivalents and interest is generally earned on
available assets, which include unrealized profits credited to the
Fund’s accounts
Fund
Performance
The following graph sets forth the
historical performance of the Fund from commencement of operations
on September 19, 2011 until February 28, 2021.
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE
RESULTS.