Blueprint
Filed Pursuant to Rule 424(b)(3)
Registration No.
333-223941
Teucrium Sugar
Fund
10,375,000
Shares
Teucrium Sugar Fund (the
“Fund” or “Us” or “We”) is a
commodity pool that is a series of Teucrium Commodity Trust
(“Trust”), a Delaware statutory trust. The Fund
issues common units representing fractional undivided beneficial
interests in such Fund, called “Shares.” The
Fund continuously offers creation baskets consisting of 25,000
Shares (“Creation Baskets”) at their net asset value
(“NAV”) to “Authorized Purchasers” (as
defined below). Authorized Purchasers, in turn, may offer to
the public Shares of any baskets they create. Authorized
Purchasers sell such Shares, which are listed on the NYSE Arca
exchange (“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 interests 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 61. 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. Fund Shares are listed on
the NYSE Arca under the symbol
“CANE.”
The Fund’s sponsor is Teucrium
Trading, LLC (the “Sponsor”). The investment objective
of the Fund is to have the daily changes in percentage terms of the
Fund’s NAV per Share reflect the daily changes in percentage
terms of a weighted average of the closing settlement prices for
three sugar futures contracts.
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 April 30, 2021 unless suspended or
terminated at any earlier time for certain reasons specified in
this prospectus or unless extended as permitted under the rules
under 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 20. 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.
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.
The date of this prospectus is April
29, 2019.
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 59 AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK
EVEN, THAT IS, TO RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, AT
PAGE 16.
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 13.
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
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7
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8
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8
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8
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8
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12
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12
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13
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15
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16
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17
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20
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20
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25
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35
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35
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36
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40
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40
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40
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45
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45
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49
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52
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53
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54
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54
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56
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60
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60
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61
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61
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64
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64
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66
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69
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70
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71
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79
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84
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85
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86
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86
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86
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86
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87
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87
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87
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88
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88
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90
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99
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102
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103
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104
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105
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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.
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 20, 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 principal office of the Trust
and the Fund is located at Three Main Street, Suite 215,
Burlington, VT 05401. The telephone number is (802)
540-0019. The Sponsor’s principal office is also located
at Three Main Street, Suite 215, Burlington, VT 05401, and its
telephone number is also (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 $7.52 (the NAV per Share as of January 31, 2019), is $0.08 or 1.06% of the selling
price. For more information, see “Breakeven
Analysis” below.
Teucrium
Sugar Fund (the “Fund” or “Us” or
“We”), is a commodity pool that issues Shares that may
be purchased and sold on the NYSE Arca. The Fund is a series
of the Teucrium Commodity Trust (“Trust”), a Delaware
statutory trust organized on September 11, 2009. The Fund is
one of five series of the Trust (collectively, the
“Teucrium Funds”); each series operates as a separate
commodity pool. Additional series of the Trust may be created
in the future. The Trust and the Fund operate pursuant to the
Trust’s Fifth Amended and Restated Declaration of Trust and
Trust Agreement (the “Trust Agreement”), which has been
filed as an exhibit to the registration statement of which this
prospectus is a part. The
Fund was formed and is managed and controlled by the Sponsor,
Teucrium Trading, LLC. The Sponsor is a limited liability
company formed in Delaware on July 28, 2009 that is registered as a
commodity pool operator (“CPO”) with the Commodity
Futures Trading Commission (“CFTC”) and is a member of
the National Futures Association (“NFA”). The
Sponsor registered as a Commodity Trading Advisor
(“CTA”) with the CFTC effective September 8,
2017.
The investment
objective of the Fund is to have the daily changes in percentage
terms of the Shares’ NAV reflect the daily changes in
percentage terms of 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”):
CANE
Benchmark
ICE Sugar Futures
Contract
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Weighting
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Second to expire
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35%
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Third to expire
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30%
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Expiring in the March following the
third to expire contract
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35%
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(The weighted average of the three
Sugar No. 11 Futures Contracts is referred to herein as the
“Benchmark,” and 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 under normal market conditions in
Benchmark Component Futures Contracts or, in certain circumstances,
in other Sugar Futures Contracts traded on ICE Futures or the New
York Mercantile Exchange (“NYMEX”), or on foreign
exchanges. In addition, and to a limited extent, the Fund
also may invest in exchange-traded options on Sugar Futures
Contracts and in sugar-based swap agreements in furtherance of the
Fund's investment objective. Once accountability levels in
Sugar No. 11 Futures Contracts traded on ICE Futures are
applicable, the Fund's intention is to invest in contracts and
instruments such as cash-settled options on Sugar Futures
Contracts, forward contracts, and other over-the-counter
transactions that are based on the price of sugar and Sugar Futures
Contracts (collectively, “Other Sugar Interests,” and
together with Sugar Futures Contracts, “Sugar
Interests”). See “The Offering – Futures
Contracts” below. By utilizing certain or all of these
investments, the Sponsor will endeavor to cause the Fund's
performance to closely track that of the Benchmark. The
Sponsor expects to manage the Fund’s investments directly,
although it has been authorized by the Trust to retain, establish
the terms of retention for, and terminate third-party commodity
trading advisors to provide such management. The Sponsor is
also authorized to select futures commission merchants
(“FCMs”) to execute the Fund’s transactions in
Sugar Futures Contracts.
Sugar No. 11 Futures Contracts
traded on the ICE Futures expire on a specified day in four
different months: March, May, July, and October.
For example, in terms of the Benchmark, in June of a given year,
the next-to-expire or “spot month” Sugar No. 11 Futures
Contract will expire in July of that year, and the Benchmark
Component Futures Contracts will be the contracts expiring in
October of that year (the second-to-expire contract), March of that
year (the third-to-expire contract), and March of the following
year. As another example, in November of a given year, the
Benchmark Component Futures Contracts will be the contracts
expiring in May and March of the following
year.
The Fund seeks to achieve its
investment objective primarily by investing in Sugar Interests such
that daily changes in the Fund’s NAV are expected to closely
track the changes in the Benchmark. The Fund’s
positions in Sugar Interests 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 signal potential market
movements and to make it more difficult for third parties to profit
by trading ahead 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 several
days.
The Fund posts on its website
(www.teucriumcanefund.com) the
roll dates and the contracts into which it will roll for the entire
upcoming calendar year. This information is updated at the
beginning of the calendar year and as needed throughout the
year.
The Fund incurs certain expenses in
connection with its operations and holds most of its assets in
income-producing, short-term securities 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, because the Benchmark does not reflect expenses or
income. Investors should be aware that because the Fund incurs
certain expenses on an ongoing basis, they may incur a partial or
complete loss of their investment even when the performance of the
Benchmark is positive.
In seeking to achieve the
Fund’s investment objective of tracking the Benchmark, the
Sponsor may for certain reasons cause the Fund to enter into or
hold Sugar Futures Contracts other than the Benchmark Component
Futures Contracts and/or Other Sugar Interests. Other Sugar
Interests that do not have standardized terms and are not
exchange-traded, referred to as “over-the-counter”
Sugar Interests, can generally be structured as the parties to the
Sugar Interest contract desire. Therefore, the Fund might
enter into multiple over-the-counter Sugar Interests intended to
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 Benchmark Component Futures Contracts to
facilitate effective trading, consistent with the discussion of the
Fund’s “roll” strategy 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. By utilizing certain or all
of the investments described above, the Sponsor endeavors to cause
the Fund’s performance to closely track that of the
Benchmark.
The Fund invests in Sugar Interests
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 Sugar
Interests. After fulfilling such margin and collateral
requirements, the Fund invests the remainder of its proceeds from
the sale of baskets in obligations of the United States government
(“Treasury Securities”), cash equivalents, including
money-market funds and investment grade commercial paper, and/or
merely hold such assets in cash in interest-bearing
accounts. Therefore, the focus of the Sponsor in
managing the Fund is investing in Sugar Interests and in short-term
Treasury Securities, cash and/or cash equivalents. The
Fund earns interest income from the short-term Treasury Securities
and/or cash equivalents that it purchases and on the cash it holds
at financial institutions.
The Sponsor endeavors to place the
Fund’s trades in Sugar Interests 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. More specifically, the
Sponsor endeavors to manage the Fund so that A will be within
plus/minus 10 percent of B, where:
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A is the average daily change in the
Fund’s NAV for any period of 30 successive valuation days,
i.e., any trading day as of which the Fund calculates its NAV,
and
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B is the average daily change in the
Benchmark over the same period.
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The Sponsor believes that market
arbitrage opportunities will cause the Fund’s Share price on
the NYSE Arca to track the Fund’s NAV per Share. The
Sponsor believes that the net effect of this expected relationship
and the expected relationship described above between the
Fund’s NAV and the Benchmark will be that the changes in the
price of the Fund’s Shares on the NYSE Arca will track, in
percentage terms, changes in the Benchmark. This relationship may
be affected by various market factors, including but not limited
to, the number of shares of the Fund outstanding and the liquidity
of the underlying holdings.
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. 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, an investment in
the Fund involves the risks that the changes in the price of the
Fund’s Shares will not accurately track the changes in the
Benchmark, and that changes in the Benchmark will not closely
correlate with changes in the price of sugar on the spot
market. Furthermore, as noted above, the Fund may also elect
to invest in short-term Treasury Securities, cash and/or cash
equivalents to meet its current or potential margin or collateral
requirements with respect to its investments in Sugar Interests and
to invest cash not required to be used as margin or
collateral. The Fund does not expect there to be any
meaningful correlation between the performance of the Fund’s
investments in short-term Treasury Securities, cash and/or cash
equivalents and the changes in the price of sugar or Sugar
Interests. 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 Sponsor does not
intend to operate the Fund in a fashion such that its per Share NAV
will equal, in dollar terms, the spot price of a pound or other
unit of sugar or the price of any particular Sugar Futures
Contract.
The Fund creates and redeems Shares
only in blocks called Creation Baskets and Redemption Baskets,
respectively. 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. There is a
minimum number of baskets and associated shares specified for the
Fund. Once the minimum number of baskets is reached, there can be
no more basket redemptions until there has been a creation basket.
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. As of January 31, 2019, these minimum levels for
the Fund are 50,000 shares representing 2
baskets.
All proceeds from the sale of
Creation Baskets will be invested as quickly as practicable in the
investments described in this prospectus. The Fund’s
cash and investments are held through the Fund’s Custodian,
in accounts with the Fund’s commodity futures brokers, in
demand deposits with highly-rated financial institutions, in
short-term Treasury Securities, in investment grade commercial
paper, or in collateral accounts with respect to over-the-counter
Sugar Interests. There is no stated maximum time period for
the Fund’s operations and the Fund will continue until all
Shares are redeemed or the Fund is liquidated pursuant to the terms
of the Trust Agreement.
There is no specified limit on the
maximum number of Creation Baskets that can be sold. At some point,
however, applicable position limits on Sugar Futures Contracts or
Other Sugar Interests may practically limit the number of Creation
Baskets that will be sold if the Sponsor determines that the other
investment alternatives available to the Fund at that time will not
enable it to meet its stated investment
objective.
Shares may also be purchased and
sold by individuals and entities that are not Authorized Purchasers
in smaller increments than Creation Baskets on the NYSE Arca.
However, these transactions are effected at bid and ask prices
established by specialist firm(s). Like any listed security,
Shares of the Fund can be purchased and sold at any time a
secondary market is open.
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 will
purchase or sell Sugar Interests with an aggregate market value
that approximates the amount of cash received or paid upon the
purchase or redemption of the basket(s).
Note
to Secondary Market Investors: 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. Shares
are listed and traded on the NYSE Arca under the ticker symbol
“CANE” and may be purchased and sold as individual
Shares. Individuals interested in purchasing Shares in the
secondary market should contact their broker. Shares
purchased or sold through a broker may be subject to
commissions.
Except when aggregated in Redemption Baskets,
Shares are not redeemable securities. There is no guarantee that
Shares will trade at prices that are at or near the per-Share
NAV. There are a minimum
number of baskets and associated shares specified for the Fund.
Once the minimum number of baskets is reached, there can be no more
redemptions until there has been a creation basket. As of January
31, 2019, these minimum levels for the Fund are 50,000 shares
representing 2 baskets.
The Shares are registered as
securities under the Securities Act of 1933 (the “1933
Act”) and the Securities Exchange Act of 1934 (the
“Exchange Act”) and do not provide dividend rights or
conversion rights and there are no sinking funds. The Shares may
only be redeemed when aggregated in Redemption Baskets as discussed
under “Creation and Redemption of Shares” and holders
of Fund Shares (“Shareholders”) generally do not have
voting rights as discussed under “The Trust Agreement –
Voting Rights” below. Cumulative voting is neither permitted
nor required and there are no preemptive rights. The Trust
Agreement provides that, upon liquidation of the Fund, its assets
will be distributed pro rata to the Shareholders based upon the
number of Shares held. Each Shareholder will receive its share of
the assets in cash or in kind, and the proportion of such share
that is received in cash may vary from Shareholder to Shareholder,
as the Sponsor in its sole discretion may
decide.
The offering of Shares under this
prospectus is a continuous offering under Rule 415 of the 1933
Act and will terminate on April 30, 2021. The offering may be
extended beyond such date as permitted by applicable rules under
the 1933 Act. The offering will terminate before such date or
before the end of any extension period if all of the registered
Shares have been sold. However, the Sponsor expects to cause
the Trust to file one or more additional registration statements as
necessary to permit additional Shares to be registered and offered
on an uninterrupted basis. This offering may also be
suspended or terminated at any time for certain specified reasons,
including if and when suitable investments for the Fund are not
available or practicable. See “Creation and Redemption
of Shares – Rejection of Purchase Orders” below.
As discussed above, the minimum purchase requirement for Authorized
Purchasers is a Creation Basket, which consists of 25,000 Shares.
The Fund does not require a minimum purchase amount for investors
who purchase Shares from Authorized Purchasers. There are no
arrangements to place funds in an escrow, trust, or similar
account.
The Fund’s Investments in Sugar
Interests
A brief description of the principal
types of Sugar Interests in which the Fund may invest is set forth
below.
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A futures contract is 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 of or rolled on an exchange before
delivery or receipt of the underlying commodity is
required.
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A 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
sugar swap, the Fund may be obligated to pay a fixed price per
pound of sugar multiplied by a notional number of pounds and be
entitled to receive an amount per pound 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
pounds). As is the case with futures, swaps are financial contracts
and are typically settled financially between counterparties.
Unlike futures, however, swaps may or may not trade on an exchange
and, therefore, they may be less liquid, may be more expensive, and
may take longer to settle or trade out
of.
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The Fund may also invest to a lesser
extent in the following types of Sugar Interests (“Other
Sugar Interests”):
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A forward contract
(“Forward”) is 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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●
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An option on a futures contract, a
swap agreement, forward contract or a commodity on the spot market
gives the buyer of the 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. The seller, or writer, of the option is
obligated to take a position in the underlying interest at a
specified price opposite to the option buyer if the option is
exercised. Options on futures contracts, like the future
contracts to which they relate, are standardized contracts traded
on an exchange, and are regulated like futures contracts, while all
other options (except for spot options) are considered swaps and
are regulated as swaps.
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Unlike exchange traded contracts,
over-the-counter contracts expose the Fund to the credit risk of
the other party to the contract. (As discussed below,
exchange-traded contracts may expose the Fund to the risk of the
clearing broker’s and/or the exchange clearing
house(s)’ bankruptcy.) The Sponsor does not
currently intend to purchase and sell sugar in the “spot
market” for the Fund. Spot market transactions are cash
transactions in which the buyer and seller agree to the immediate
purchase and sale of a commodity, usually with a two-day settlement
period. In addition, the Sponsor does not currently intend
that the Fund will enter into or hold spot month Sugar Futures
Contracts, except that spot month contracts that were formerly
second-to-expire contracts may be held for a brief period until
they can be disposed of in accordance with the Fund’s roll
strategy.
Although the Fund has the ability to
trade over-the-counter contracts and swaps, the Sponsor anticipates
that 100% of the Fund’s assets will be used to trade
futures.
A more detailed description of Sugar
Interests and other aspects of the sugar and Sugar Interest markets
can be found later in this prospectus.
As noted, the
Fund invests in Sugar Futures Contracts, including those traded on
the ICE Futures and the NYMEX. The Fund expressly disclaims
any association with the ICE Futures or the NYMEX or endorsement of
the Fund by such exchanges and acknowledges that “ICE
Futures,” “ICE Futures US,” “NYMEX,”
and “New York Mercantile Exchange” 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. Some of the risks you may face are summarized
below. A more extensive discussion of these risks appears beginning
on page 20.
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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 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.
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●
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Investors may choose to use the Fund
as a means of investing indirectly in sugar, and there are risks
involved in such investments. The risks and hazards that are
inherent in sugar production may cause the price of sugar to
fluctuate widely. Global price movements for sugar are influenced
by, among other things: weather conditions, crop failure,
production decisions, governmental policies, changing demand, the
sugar harvest cycle, and various economic and monetary events.
Sugar production is also subject to domestic and foreign
regulations that materially affect operations.
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●
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To the extent that investors use the
Fund as a means of investing indirectly in sugar, there is the risk
that the changes in the price of the Fund’s Shares on the
NYSE Arca will not closely track the changes in spot price of
sugar. This could happen if the price of Shares traded on the NYSE
Arca does not correlate closely with the Fund’s NAV. the
changes in the Fund’s NAV do not correlate closely with
changes in the Benchmark. or the changes in the Benchmark do not
correlate closely with changes in the cash or spot price of sugar.
This is a risk because if these correlations are not sufficiently
close, then investors may not be able to use the Fund as a
cost effective way to invest indirectly in sugar or as a
hedge against the risk of loss in sugar related
transactions.
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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, and no Authorized
Purchaser is able or willing to step forward to create or redeem
shares of 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. In addition, a
decision by a market maker or lead market maker to step away from
activities for the Fund, particularly in times of market stress,
could adversely affect liquidity, the spread between the bid and
ask quotes for the Fund’s Shares, and potentially the price
of the Shares. The Sponsor can make no guarantees that
participation by Authorized Purchasers or market makers will
continue.
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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
cases in which the near month contract’s price is lower than
later expiring contracts’ prices (a situation known as
“contango” in the futures markets), 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 which could cause the Benchmark Component
Futures Contracts, and therefore the Fund’s total return, to
track lower.
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●
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In cases in which the near month
contract’s price is higher than later expiring
contracts’ prices (a situation known as
“backwardation” in the futures markets), 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. 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.
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Investors, including those who
directly participate in the sugar market, may choose to use the
Fund as a vehicle to hedge against the risk of loss and there are
risks involved in hedging activities. While hedging can provide
protection against an adverse movement in market prices, it can
also preclude a hedger’s opportunity to benefit from a
favorable market movement.
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The
structure and operation of the Fund may involve conflicts of
interest. For example, a conflict may arise because the Sponsor and
its principals and affiliates may trade for themselves. In
addition, the Sponsor has sole current authority to manage the
investments and operations of the Fund, including the authority of
the Sponsor to allocate expenses to and between the Teucrium Funds
and the interests of the Sponsor may conflict with the
Shareholders’ best
interests.
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●
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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.
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The
Fund pays fees and expenses that are incurred regardless of whether
it is
profitable.
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The Fund seeks to have the changes
in its Shares’ NAV in percentage terms track changes in the
Benchmark in percentage terms, rather than profit from speculative
trading of Sugar Interests. The Sponsor therefore endeavors to
manage the Fund so that the Fund’s assets are, unlike those
of many other commodity pools, not leveraged (i.e., so that the aggregate amount of
the Fund’s exposure to losses from its investments in Sugar
Interests 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. If the Sponsor permits the Fund
to become leveraged, you could lose all or substantially all of
your investment if the Fund's trading positions suddenly turn
unprofitable. These movements in price may be the result of factors
outside of the Sponsor's control and may not be anticipated by the
Sponsor.
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●
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The Fund may 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 Sugar Futures Contracts and will expose the
Fund to credit risk that its counterparty may not be able to
satisfy its obligations to the Fund.
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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 a trading
facility.
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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 and that
use trading in futures and options as an investment strategy and
not for hedging or price discovery purposes, therefore altering
traditional participation in futures and swaps markets. 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 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.
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Failures or breaches of the
electronic systems of the Fund, the Sponsor, the Custodian, 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
to financial transactions with the Fund, 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. 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, Administrator 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.
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For additional risks, see
“What Are the Risk Factors Involved with an Investment in the
Fund?”
Financial Condition of the
Fund
The Fund’s NAV is determined
as of the earlier of the close of the New York Stock Exchange or
4:00 p.m. New York time on each day that the NYSE Arca is open for
trading.
For a glossary of defined terms, see
Appendix A.
The breakeven analysis below
indicates the approximate dollar returns and percentage returns
required for the redemption value of the hypothetical initial
investment in a single Share, assuming a selling price of $7.52
(the NAV per Share as of January 31, 2019), to equal the amount
invested twelve months after the investment was made. This
breakeven analysis refers to the redemption of baskets by
Authorized Purchasers and is not related to any gains an individual
investor would have to achieve in order to break even. The
breakeven analysis is an approximation only.
Assumed selling price per
Share
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$7.52
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Sponsor’s Fee (1.00%)
(1)
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$0.08
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Creation Basket Fee
(2)
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$0.01
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Estimated Brokerage Fees
(3)
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$0.01
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Other Fund Fees and Expenses
(4)
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$0.18
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Interest Income (2.60%)
(5)
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$(0.20)
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Amount of trading income (loss)
required for the redemption value at the end of one year to equal
the selling price of the Share
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$0.08
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Percentage of selling price
per Share (6)
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1.06%
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(1)
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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.
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(2)
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Authorized Purchasers are required
to pay a Creation Basket fee of $250 for each order they place to
create one or more baskets. An order must be at least one basket,
which is 25,000 Shares. This breakeven analysis assumes a
hypothetical investment in a single Share, so the Creation Basket
fee is $.01 ($250/25,000).
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(3)
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This amount is based on the actual
brokerage fees for the Fund calculated on an annualized basis. The
Fund currently pays $4.50 per Sugar Futures Contract purchase or
sale (rounded to $0.01 in this table based on fees accrued to the
Fund for the year ended December 31, 2018).
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(4)
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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 sponsor 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 per-share cost of these fixed or estimated
fees has been calculated assuming that the Fund has $10.5 million
in assets which was the approximate amount of assets as of January
31, 2019. 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.
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(5)
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The Fund earns interest on funds it
deposits at financial institutions and the Custodian, short-term
Treasury Securities and on commercial paper; and it estimates that
the interest rate will be 2.60% based on the interest rate
currently earned on available cash balances as of February 28,
2019. The actual rate may vary and not all assets of the Fund
will earn interest.
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(6)
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This represents the estimated
approximate percentage of selling price per share net of any
expenses or Sponsor fees waived by the Sponsor. The estimated
approximate percentage of selling price per share before waived
expenses or Sponsor fees is 4.86% based on the Fund assets, net
asset value per share and shares outstanding as of January 31,
2019. 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.
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Offering
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The Fund will offer 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.
The Shares trade on the NYSE Arca.
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Use of Proceeds
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The Sponsor applies substantially
all of the Fund’s assets toward investing in Sugar Interests,
short-term Treasury Securities, cash and/or cash equivalents.
The Sponsor deposits a portion of the Fund’s net assets with
the FCM, or other custodians to be used to meet its current or
potential margin or collateral requirements in connection with its
investment in Sugar Interests. The Fund uses only short-term
Treasury Securities, cash and/or 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 7% of the Fund’s assets
will normally be committed as margin for Sugar Futures Contracts
and Other Sugar Interests. 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 as cash or cash
equivalents, in short-term Treasury Securities, in money market
funds or demand deposit accounts. All interest 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. 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 will not be
issued for the Shares. Instead, Shares will be represented by
one or more global certificates, which will be 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 will be 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 will be 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 will be 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, the Fund’s administrator, U.S. Bancorp Fund
Services, LLC, doing business as
U.S. Global Fund Services (the “Administrator”)
will calculate the NAV of the Fund’s Shares as of the earlier
of 4:00 p.m. New York time or the close of the New York Stock
Exchange each day. ICE Data Indices,
LLC will calculate 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; and (x) extraordinary expenses (including,
but not limited to, legal claims and liabilities and litigation
costs and any indemnification related thereto). The Sponsor bore the costs and
expenses related to the initial offer and sale of Shares, including
registration fees paid or to be paid to the SEC, the Financial
Industry Regulatory Authority (“FINRA”) or any other
regulatory body or self-regulatory organization
(“SRO”). None of the costs and expenses related to the
initial 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. Total fees to be
paid by the Fund, net of the expenses waived by the Sponsor, are
currently estimated to be approximately 1.06% of the daily net
assets of the Fund for the twelve-month period ending April 29,
2020, though this amount may change in future years. 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 Authorized Purchasers is
available from the Distributor. 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 Sugar Interests 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 Sugar
Interests. 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 to fluctuate widely. If the changes in percentage terms
of the Fund’s Shares accurately track the percentage changes
in the Benchmark or the spot price of sugar, then the price of its
Shares will fluctuate accordingly.
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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 and depending on certain factors discussed below, you
could incur a partial or total loss of your
investment.
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 Sugar
Interests, technical factors in the trading of Sugar 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 Sugar Interests so that
the changes in percentage terms in the NAV closely correlate with
the changes in percentage terms 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 does not intend to invest
only in the Benchmark Component Futures Contracts. While its
investments in Sugar Futures Contracts other than the Benchmark
Component Futures Contracts and Other Sugar Interests would be
for the purpose of causing the Fund’s performance to track
that of the Benchmark most effectively and efficiently, the
performance of these Sugar Interests may not correlate well with
the performance of the Benchmark Component Futures Contracts,
resulting in a greater potential for error in tracking price
changes in those futures contracts. Additionally, if the
trading market for Sugar Futures Contracts is suspended or closed,
the Fund may not be able to purchase these investments at the last
reported price for such investments.
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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 securities 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 Sugar Interests 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.
Furthermore, as noted above, the use of Other Sugar Interests may
itself result in imperfect correlation with the Benchmark.
Any amounts not invested in Sugar Interests are held in short-term
Treasury Securities, cash and/or 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 Sugar 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 short-term
Treasury Securities or cash equivalents at a price lower than the
price at which they were acquired.
If the Fund is required to sell its
short-term Treasury Securities or 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 short-term Treasury Securities and
cash equivalents 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 short-term Treasury Securities and 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/or cash
equivalents that it holds to meet its liquidity needs. The
anticipated large value of the positions in Sugar Interests that
the Sponsor will acquire or enter into for the Fund increases the
risk of illiquidity. Because Sugar Interests 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.
While the Fund does not intend to take physical delivery of sugar
under its Sugar Interests, the possibility of physical delivery
impacts the value of the contracts.
While it is not the current
intention of the Fund to take physical delivery of sugar under its
Sugar Interests, Sugar Futures Contracts are traditionally
physically-deliverable contracts, and, unless a portion was not
traded out of or rolled, it is possible to take or make delivery
under these and some Other Sugar Interests. 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 Sugar Interests, 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
will 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. Subsequent to the enactment of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (the “Dodd-Frank
Act”) in 2010, swap agreements became fully regulated by the
CFTC under the amended Commodity Exchange Act and the CFTC’s
regulations thereunder. Considerable regulatory attention has been
focused on non-traditional investment pools that are publicly
distributed in the United States. 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
Teucrium Funds, 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 Fund is
impossible to predict but could be substantial and
adverse.
Further, President Donald J. Trump
has promised and issued several executive orders intended to
relieve the financial burden created by the Dodd-Frank Act,
although these executive orders only set forth several general
principles to be followed by the federal agencies and do not
mandate the wholesale repeal of the Dodd-Frank Act. The scope of
the effect that passage of new financial reform legislation could
have on U.S. securities, derivatives and commodities markets is not
clear at this time because each federal regulatory agency would
have to promulgate new regulations to implement such legislation.
These regulatory changes may affect the continued operation of the
Teucrium Funds. For additional information regarding recent
regulatory developments that may impact the teucrium Funds or the
Trust, refer to the section entitled “Regulation” of
the Statement of Additional Information.
If
you are investing in the Fund for purposes of hedging, you might be
subject to several risks, including the possibility of losing the
benefit of favorable market movements.
Producers and commercial users of
sugar may use the Fund as a vehicle to hedge the risk of losses in
their sugar-related transactions. There are several risks in
connection with using the Fund as a hedging device. While
hedging can provide protection against an adverse movement in
market prices, it can also preclude a hedger’s opportunity to
benefit from a favorable market movement. For instance, in a
hedging transaction the hedger may be a user of a commodity
concerned that the hedged commodity will increase in price but must
recognize the risk that the price may instead decline. If
this happens, the hedger will have lost the benefit of being able
to purchase the commodity at the lower price because the hedging
transaction will result in a loss that would offset (at least in
part) this benefit. Thus, the hedger foregoes the opportunity
to profit from favorable price movements. In addition, if the
hedge is not a perfect one, the hedger can lose on the hedging
transaction and not realize an offsetting gain in the value of the
underlying item being hedged.
When using Sugar Interests as a
hedging technique, at best, the correlation between changes in
prices of futures contracts and of the items being hedged can be
only approximate. The degree of imperfection of correlation depends
upon circumstances such as: variations in speculative markets,
demand for futures and for sugar products, technical influences in
futures trading, and differences between anticipated costs being
hedged and the instruments underlying the standard futures
contracts available for trading. Even a well-conceived hedge
may be unsuccessful to some degree because of unexpected market
behavior as well as the expenses associated with creating the
hedge.
In addition, using an investment in
the Fund as a hedge for changes in food costs generally may not be
successful because changes in the price of sugar may vary
substantially from changes in the prices of other food
products. In addition, the price of sugar and the
Fund’s NAV would not reflect the refining, transportation,
and other costs that are specific to the
hedger.
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.
We cannot predict to what extent the
performance of Sugar Interests 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, 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 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 and the NYMEX
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 and position limits, exchanges may establish
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.
There are no independent advisers representing Fund
investors.
The Sponsor has consulted with legal
counsel, accountants and other advisers regarding the formation and
operation of the Trust and Fund. No counsel has been
appointed to represent you in connection with the offering of
Shares. Accordingly, you should consult your own legal, tax
and financial advisers regarding the desirability of an investment
in the Shares.
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 Teucrium
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.
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 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. 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 Sugar Interests
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 Sugar Interests 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 charges
and various other expenses of its ongoing operations (e.g., fees of
the Administrator, Trustee and Distributor), resulting in a total
estimated expense ratio of approximately 1.06% of net assets, net
of the expenses waived by the Sponsor. These fees and expenses must
be paid in all events, regardless of the Fund’s total net
assets.
If this offering of Shares does not raise sufficient funds to make
the Fund’s future operations viable, the Fund may be forced
to terminate, and investors may lose all or part of their
investment.
All of the expenses relating to the
Fund incurred prior to the commencement of operations (September
19, 2011) were paid by the Sponsor. These payments by the
Sponsor were designed to allow the Fund the ability to commence the
public offering of its Shares. 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.
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 earns interest on cash
balances available for investment. If actual interest rates earned
were 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 may miss certain trading opportunities because it will not
receive the benefit of the expertise of independent trading
advisors.
The Sponsor does not employ trading
advisors for the Fund; however, the Sponsor reserves the right to
employ them in the future. The only advisor to the Fund is
the Sponsor. A lack of independent trading advisors may be
disadvantageous to the Fund because it will not receive the benefit
of their independent expertise.
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 or NYMEX 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.
Fund assets may be depleted if investment performance does not
exceed fees.
In addition to certain fees paid to
each Fund’s service providers, each Fund pays the Sponsor a
fee of 1.00% of asset under management per annum, regardless of
Fund performance. Over time, a 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. As of January 31, 2019, 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 January
31, 2019, there were 1,400,004 Shares outstanding. (The current
number of Shares outstanding is posted daily on our website,
www.teucriumcanefund.com.)
You may be adversely affected by redemption orders that are subject
to postponement, suspension or rejection under certain
circumstances.
The Trust may, in its discretion,
suspend the right to redeem Shares of the Fund or postpone the
redemption settlement date: (1) for any period during
which an applicable exchange is closed other than customary weekend
or holiday closing, or trading is suspended or restricted; (2) for
any period during which an emergency exists as a result of which
delivery, disposal or evaluation of the Fund’s assets is not
reasonably practicable; (3) for such other period as the Sponsor
determines to be necessary for the protection of 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. In addition, the Trust
will reject a redemption order if the order is not in proper form
as described in the agreement with the Authorized Purchaser 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. Any such
postponement, suspension or rejection could adversely affect a
redeeming Shareholder. For example, the resulting delay may
adversely affect the value of the Shareholder’s redemption
proceeds if the NAV of the Fund declines during the period of
delay. The Trust Agreement provides that the Sponsor and its
designees will not be liable for any loss or damage that may result
from any such suspension or postponement.
Any postponement, suspension or
rejection of a redemption order could adversely affect a redeeming
Shareholder. For example, the resulting delay may adversely affect
the value of a Shareholder’s redemption proceeds if the NAV
of the Fund declines during the period of delay. The Trust
Agreement provides that the Sponsor and its designees will not be
liable for any loss or damage that may result from any such
suspension or postponement.
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 short-term
Treasury Securities, in cash and/or cash equivalents with the
Custodian, other financial institutions, or in commercial paper
with a maturity date of 90 days or less. The insolvency of the
Custodian, any financial institution in which the Fund has demand
deposits, a commercial paper issuer, or United States Treasury
could result in a complete loss of the Fund’s assets. The
Fund currently has cash and or cash equivalents at the Custodian,
Rabobank, N.A, in commercial paper, and in short-term United States
Treasury Securities held by the FCM.
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.
The Sponsor has a patent on certain
business methods and procedures used with respect to the
Fund. 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 success of the Fund depends on the ability of the Sponsor to
accurately implement its trading strategies, and any failure to do
so could subject the Fund to losses on such
transactions.
The Sponsor’s trading strategy
is quantitative in nature and it is possible that the Sponsor will
make errors in its implementation. The execution of the
quantitative strategy is subject to human error, such as incorrect
inputs into the Sponsor’s computer systems and incorrect
information provided to the Fund’s clearing brokers. In
addition, it is possible that a computer or software program may
malfunction and cause an error in computation. Any failure,
inaccuracy or delay in executing the Fund’s transactions
could affect its ability to achieve its investment objective.
It could also result in decisions to undertake transactions based
on inaccurate or incomplete information. This could cause
substantial losses on transactions. The Sponsor is not required to
reimburse the Fund for any costs associated with an error in the
placement or execution of a trade in commodity future
interests.
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, or the outbreak, continuation or expansion of war
or other hostilities could disrupt the Fund’s trading
activity and materially affect the Fund’s
profitability.
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-attacks, data breach or the
outbreak, continuation or expansion of war or other hostilities.
Global terrorist attacks, anti-terrorism initiatives, and political
unrest continue to fuel this concern. In addition, a prolonged U.S.
government shutdown 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.
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
mutual funds 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 commodity 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
mutual funds 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 commodity 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
If the Sponsor causes or permits the Fund to become leveraged, you
could lose 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, transportation and storage
difficulties, various planting, growing and harvesting problems,
governmental policies, 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 its
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.
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 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 understatement” of
tax resulting from an adjustment as a result of an IRS audit. The
amount of the imputed understatement 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
taxes on any imputed understatement, 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, then 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 understatement,
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 (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 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 federal income
tax purposes. If the IRS were to successfully assert that the
Fund is taxable as a corporation for 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. 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. Tax legislation informally
known as the Tax Cuts and Jobs Act of 2017 (the “2017 Tax
Cuts and Jobs Act”) was signed into law on December 22, 2017,
generally effective for taxable years beginning on or after January
1, 2018. In addition to modifying income tax rates for individuals
and corporations, the 2017 Tax Cuts and Jobs Act made certain
changes to the tax treatment for passthrough entities, such as the
Fund. Please consult a tax advisor regarding the implications of
the 2017 Tax Cuts and Jobs Act on an investment in Shares of the
Teucrium Funds.
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 Fund is a series of the 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, 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 grants
full management control to the Sponsor.
The Fund is publicly traded and
seeks to have the daily changes in percentage terms of the
Shares’ NAV reflect the daily changes in percentage terms of
the price of sugar for future delivery, as measured by the
Benchmark. The Fund invests in a mixture of listed Sugar
Futures Contracts, Other Sugar Interests, cash and cash
equivalents.
See “Prior Performance of the
Fund” on page 44 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 is 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.
Under
the Trust Agreement, the Sponsor is solely responsible for the
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.teucriumcanefund.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, 2018
through December 31, 2018, the Fund recognized $122,198 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
technology plan (the “IT Plan”) in place which is part
of the internal controls of the Trust and the Fund. The IT Plan is
tested, and the Sponsor takes reasonable care to look beyond the
controls developed and implemented for the Trust and the Fund
directly to the platforms and controls in place for the key service
providers. Such review of the IT plans of key service providers is
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 IT 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 also Class A members 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 58 years
old.
Cory Mullen-Rusin,
Chief Financial Officer, Chief Accounting Officer and Chief
Compliance Officer, began working for the Sponsor on August 16,
2011. She became the Chief Financial Officer, Chief
Accounting Officer and Chief Compliance Officer on September 17,
2018 and 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 worked directly with the former CFO at
Teucrium for the past 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 31 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 51 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.
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, 2018:
|
|
High
|
|
|
Low
|
|
Quarter
Ended
|
|
|
|
|
|
|
March 31, 2018
|
|
$
|
9.94
|
|
|
$
|
8.27
|
|
June 30, 2018
|
|
$
|
8.36
|
|
|
$
|
7.42
|
|
September 30,
2018
|
|
$
|
7.32
|
|
|
$
|
6.50
|
|
December 31,
2018
|
|
$
|
8.07
|
|
|
$
|
6.84
|
|
Fiscal Year Ended December 31, 2017:
|
|
High
|
|
|
Low
|
|
Quarter
Ended
|
|
|
|
|
|
|
March 31, 2017
|
|
$
|
14.20
|
|
|
$
|
11.87
|
|
June 30, 2017
|
|
$
|
11.83
|
|
|
$
|
9.00
|
|
September 30,
2017
|
|
$
|
10.40
|
|
|
$
|
9.31
|
|
December 31, 201
|
|
$
|
10.00
|
|
|
$
|
8.88
|
|
As of December 31,
2018, the Fund had approximately 1,405
Shareholders.
Prior Performance of the Fund
PERFORMANCE DATA
FOR 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 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 January 31,
2019)
|
4,475,000
|
Aggregate gross sale
price for units issued
|
$
45,028,921
|
NAV per Share as of
January 31, 2019
|
$
7.52
|
Pool NAV as of
January 31, 2019
|
$
10,525,312
|
Worst monthly
percentage draw-down*
|
(13.33)
%
|
March
2015
|
Worst peak-to-valley
draw-down**
|
(73.50)
%
|
September 2011 -
September 2018
|
* A draw-down is a loss experienced
by the fund over a specified period. Draw-downs are measured on the
basis of monthly returns only and do not reflect intra-month
figures. The worst monthly percentage draw-down 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
draw-down 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
draw-down 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 draw-down” analysis conducted
as of the end of April would consider that “draw-down”
to be continuing and to be $3 in amount, whereas if the NAV per
unit had increased by $2 in March, the draw-down would have ended
as of the end of February at the $2 level.
|
Rates
of Return*
|
Month
|
2014
|
|
2015
|
|
2016
|
|
2017
|
|
2018
|
|
2019
|
|
January
|
(3.97)
|
%
|
0.76
|
%
|
(10.68)
|
%
|
6.86
|
%
|
(8.58)
|
%
|
6.36
|
%
|
February
|
10.04
|
%
|
(7.47)
|
%
|
8.27
|
%
|
(5.34)
|
%
|
(1.56)
|
%
|
0.13
|
%
|
March
|
2.28
|
%
|
(13.33)
|
%
|
8.67
|
%
|
(10.14)
|
%
|
(5.90)
|
%
|
(3.05)
|
%
|
April
|
(1.38)
|
%
|
7.22
|
%
|
4.94
|
%
|
(5.17)
|
%
|
(7.48)
|
%
|
|
%
|
May
|
(0.47)
|
%
|
(8.00)
|
%
|
4.98
|
%
|
(6.89)
|
%
|
4.95
|
%
|
|
%
|
June
|
0.47
|
%
|
0.64
|
%
|
11.38
|
%
|
(7.40)
|
%
|
(5.34)
|
%
|
|
%
|
July
|
(3.99)
|
%
|
(9.48)
|
%
|
(2.17)
|
%
|
7.57
|
%
|
(9.84)
|
%
|
|
%
|
August
|
(2.91)
|
%
|
(4.54)
|
%
|
5.78
|
%
|
(3.09)
|
%
|
(1.89)
|
%
|
|
%
|
September
|
(5.92)
|
%
|
6.71
|
%
|
9.57
|
%
|
(6.17)
|
%
|
(1.63)
|
%
|
|
%
|
October
|
(1.82)
|
%
|
9.14
|
%
|
(3.55)
|
%
|
3.08
|
%
|
15.99
|
%
|
|
%
|
November
|
(2.94)
|
%
|
1.47
|
%
|
(8.92)
|
%
|
0.82
|
%
|
(2.34)
|
%
|
|
%
|
December
|
(5.81)
|
%
|
3.41
|
%
|
0.78
|
%
|
(0.10)
|
%
|
(5.86)
|
%
|
|
%
|
Annual Rate of
Return
|
(16.10)
|
%
|
(15.30)
|
%
|
29.44
|
%
|
(24.52)
|
%
|
(27.78)
|
%
|
3.25
|
%**
|
*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 percentage
terms of the Shares’ Net Asset Value (“NAV”)
reflect the daily changes in percentage terms of 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:
CANE
Benchmark
ICE Sugar Futures
Contract
|
Weighting
|
Second to expire
|
35%
|
Third to expire
|
30%
|
Expiring in the March following 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 or, in certain circumstances,
in other Sugar Futures Contracts traded on ICE Futures, the NYMEX,
or on foreign exchanges. In addition, and to a limited
extent, the Fund also may invest in exchange-traded options on
Sugar Futures Contracts in furtherance of the Fund's investment
objective. Once position limits in Sugar No. 11 Futures
Contracts traded on ICE Futures are applicable, the Fund's
intention is to invest in Other Sugar Interests. See
“The Offering – Futures Contracts” below.
By utilizing certain or all of these investments, the Sponsor
endeavors to cause the Fund's performance to closely track that of
the Benchmark.
The Fund invests in Sugar Interests
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 Sugar Interests. After
fulfilling such margin and collateral requirements, the Fund
invests the remainder of its proceeds from the sale of baskets in
short-term Treasury Securities or cash equivalents, including
money-market funds and investment grade commercial paper, and/or
merely hold such assets in cash in interest-bearing
accounts. Therefore, the focus of the Sponsor in
managing the Fund is investing in Sugar Interests and cash and/or
cash equivalents. The Fund earns interest income from
the cash equivalents that it purchases and on the cash it holds at
financial institutions.
The Sponsor expects to manage the
Fund’s investments directly, although it has been authorized
by the Trust to retain, establish the terms of retention for, and
terminate third-party commodity trading advisors to provide such
management. The Sponsor has substantial discretion in
managing the Fund’s investments consistent with meeting its
investment objective of tracking the Benchmark, including the
discretion: (1) to choose whether to invest in the Benchmark
Component Futures Contracts or other Sugar Futures Contracts, or
Other Sugar Interests with similar investment characteristics; (2)
to choose when to “roll” the Fund’s positions in
Sugar Interests as described below, and (3) to manage the
Fund’s investments in short-term Treasury Securities or in
cash and cash equivalents.
The Fund seeks to achieve its
investment objective primarily by investing in Sugar Interests such
that the changes in its NAV are expected to closely track the
changes in the Benchmark. The Fund’s positions in Sugar
Interests 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 posts on its website
(www.teucriumcanefund.com) the
roll dates and the contracts into which it will roll for the entire
upcoming calendar year. This information is updated at the
beginning of the calendar year and as needed throughout the
year.
The Sponsor does not intend to
operate the Fund in a fashion such that its per Share NAV will
equal, in dollar terms, the spot price of a pound or the price of
any particular Sugar Futures Contract.
The Sponsor endeavors to place the
Fund’s trades in Sugar Interests 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. More specifically, the Sponsor
endeavors to manage the Fund so that A will be within plus/minus 10
percent of B, where:
|
●
|
A is the average daily change in the
Fund’s NAV for any period of 30 successive valuation days;
i.e., any trading day as of which the Fund calculates its NAV,
and
|
|
●
|
B is the average daily change in the
price of the Benchmark over the same period.
|
The Sponsor believes that market
arbitrage opportunities cause daily changes in the Fund’s
Share price on the NYSE Arca to track daily changes in the
Fund’s NAV per Share. The Sponsor believes that the net
effect of this expected relationship and the expected relationship
described above between the Fund’s NAV and the Benchmark will
be that daily changes in the price of the Fund’s Shares on
the NYSE Arca will track daily changes in the Benchmark. This
relationship may be affected by various market factors, including
but not limited to, the number of shares of the Fund outstanding
and the liquidity of the underlying
holdings.
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, an investment in the Fund
involves the risk that the changes in the price of the Fund’s
Shares will not accurately track the changes in the Benchmark, and
that changes in the Benchmark will not closely correlate with
changes in the price of sugar on the spot market.
Furthermore, as noted above, the Fund may also elect to invest in
short-term Treasury Securities, cash and/or cash equivalents to
meet its current or potential margin or collateral requirements
with respect to its investments in Sugar Interests and to invest
cash not required to be used as margin or collateral. The Fund does
not expect there to be any meaningful correlation between the
performance of the Fund’s investments in short-term Treasury
Securities, cash and/or cash equivalents and the changes in the
price of sugar or Sugar Interests. 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 Sponsor does not intend to operate the Fund
in a fashion such that its per Share NAV will equal, in dollar
terms, the spot price of a pound or other unit of sugar the price
of any particular Sugar Futures Contract
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.teucriumcanefund.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, the name and
value of each cash equivalent held in the Fund, and the amount of
cash held in the Fund’s portfolio. 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.
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 Sugar Interests 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 a substantial
majority of the Fund’s assets will be invested in ICE Futures
Sugar Futures Contracts, for various reasons, including the ability
to enter into the precise amount of exposure to the sugar market
and accountability levels on Sugar Futures Contracts, the Fund will
also invest in Other Sugar Interests, including swaps, in the
over-the-counter market to a potentially significant
degree.
The Sponsor does not anticipate
letting its Sugar 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 Sugar Interests. 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 increase, 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 CBOT, 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 the NYMEX 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 and the NYMEX 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.
All of these 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 the sugar market utilizing Sugar Interests.
If the Fund encounters position limits, accountability levels, or
price fluctuation limits for Sugar Futures Contracts on the NYMEX
or ICE, it may then, if permitted under applicable regulatory
requirements, purchase Other Sugar Interests and/or Sugar Futures
Contracts listed on 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; 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
Several factors determine the total
return from investing in futures contracts. Because 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
such factor is the price relationship between soon-to-expire
contracts and later-to-expire contracts. For example, if
market conditions are such that the prices of soon-to-expire
contracts are higher than later-to-expire contracts (a situation
referred to as “backwardation” in the futures market),
then absent a change in the market, the price of contracts will
rise as they approach expiration. Conversely, if the price of
soon-to-expire contracts is lower than later-to-expire contracts (a
situation referred to as “contango” in the futures
market), then absent a change in the market the price of contracts
will decline as they approach expiration.
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. If investors seek to maintain their holdings in
Sugar Futures Contracts with a roughly constant expiration profile
and not take delivery of the sugar, they must on an ongoing basis
sell their current positions as they approach expiration and invest
in 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 spot price, soon-to-expire contracts and
later-to-expire contracts, the value of a contract will rise as it
approaches expiration, increasing the Fund’s total return
(ignoring the impact of commission costs and the interest earned on
short-term Treasury Securities, cash and/or cash
equivalents.)
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, decreasing the
Fund’s total return (ignoring the impact of commission costs
and the interest earned on short-term Treasury Securities, cash
and/or cash equivalents).
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, as discussed
above.
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.
Over-the-Counter
Derivatives
In addition to futures contracts and
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 certain 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 pound of sugar multiplied by a notional
number of pounds and be entitled to receive an amount per pound
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 pounds). 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.
See the information presented in the
“Results of Operations” on page 73 of this
prospectus.
Sugarcane accounts
for about 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 byproduct 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 2018 report forecasts that India,
with estimated record production of 35.9 million metric tons,
surpassed Brazil as the leading producer of sugarcane worldwide for
the first time in 16 years. India's production, which outpaces the
other principal global producers, namely Brazil, Thailand and
China, equates to approximately 19% of the world’s supply.
The principal producers of sugar beets, as forecast by the USDA for
2019, include the European Union, the United States, and
Russia.
World estimated raw sugar production
is 186 million metric tons, which is forecast down 9 million tons
from the prior year primarily due to the drop in Brazil caused by
unfavorable weather and more sugarcane being diverted towards
ethanol production. The USDA’s report released in November
2018 estimates that for the 2018/2019 Crop Year, record global
consumption of 176 million metric tons will still be below
production and ending stocks are projected to rise to 53 million
metric tons. Similar to the 2017/18 Crop Year, the current period
may see the global supply for sugar exceed demand. In the past,
this situation has, generally, resulted in price decrease. However,
if the global demand of sugar exceeds global supply, prices will
generally increase.
The USDA, in its November 2018
report highlights, in the graph immediately below, projecting
record stocks and consumption despite lower production compared to
the 2017/2018 Crop Year. The second graph shows India, the leading
producer of sugarcane, which surpasses Brazil for the first time in
16 years.
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 soon 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. Over time if the
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 differences 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.
The Fund’s Investments in
Short-term Treasury Securities, Cash and Cash
Equivalents
The Fund seeks to have the aggregate
“notional” amount of the Sugar Interests it holds
approximate at all times the Fund’s aggregate NAV. At any
given time, however, most of the Fund’s investments are in
short-term Treasury Securities, cash and cash equivalents that
support the Fund’s positions in Sugar Interests. 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 5% 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 in cash and cash
equivalents, in demand deposits in highly-rated financial
institutions, 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 short-term Treasury Securities, cash and cash
equivalents.
The Fund earns interest income from
the cash equivalents that it purchases and on the cash it holds
through the Custodian or other financial institutions. The earned
interest income increases the Fund’s NAV. The Fund applies
the earned interest income to the acquisition of additional
investments or uses it to pay its expenses. When the Fund reinvests
the earned interest income, it makes investments that are
consistent with its investment objectives.
Any short-term Treasury Security and
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-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 and the NYMEX. 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 short-term Treasury Securities, 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 Sugar Interests. 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. While the
Sponsor does not intend to leverage the Fund’s assets, it is
not prohibited from doing so under the Trust
Agreement.
Borrowings
The Fund does not intend to nor
foresee the need to borrow money or establish credit lines.
The Fund maintains short-term Treasury Securities, 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 Sugar
Interests.
Pyramiding
The Fund does not and will not
employ the technique, commonly known as pyramiding, in which the
speculator uses unrealized profits on existing positions as
variation margin for the purchase or sale of additional positions
in the same or another commodity interest.
The Fund’s
Service Providers
Contractual Arrangements with the Sponsor and Third-Party Service
Providers
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 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.
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 (“Fund
Services”), an entity affiliated with U.S. Bank, N.A., is the
registrar and transfer agent for the Fund’s Shares. In
addition, USBFS 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. For
these services, the Fund pays fees to the Custodian and USBFS set
forth in the table entitled “Contractual Fees and
Compensation Arrangements with the Sponsor and Third-Party Service
Providers.”
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 USBFS is 615 East Michigan Street, Milwaukee,
WI, 53202.
The Fund employs Foreside Fund
Services, LLC as the Distributor for the Fund. The Distributor
receives, for its services as distributor for the Fund, a fee which
is set forth in the table entitled “Contractual Fees and
Compensation Arrangements with the Sponsor and Third-Party Service
Providers.”
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.
Currently, ED&F Man Capital
Markets, Inc. (“ED&F Man”) serves as the
Fund’s clearing broker to execute and clear the Fund’s
futures and provide other brokerage-related services. ED&F Man
is registered as a futures commission merchant (“FCM”)
with the U.S. Commodity Futures Trading Commission
(“CFTC”) and is a member of the National Futures
Association (“NFA”). ED&F Man is also registered as
a broker/dealer with the U.S. Securities and Exchange Commission
and is a member of FINRA. ED&F Man is a clearing member of ICE
Futures U.S., Inc., Chicago Board of Trade, Chicago Mercantile
Exchange, New York Mercantile Exchange, and all other major United
States commodity exchanges.
There has been no material civil,
administrative, or criminal proceedings pending, on appeal, or
concluded against ED&F Man or its principals in the past five
(5) years. 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 ED&F Man Capital Markets Inc. (0002613) and
then click “Go”. You will be transferred to the
NFA’s information specific to ED&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.
ED&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. ED&F Man acts as
clearing broker for many other funds and
individuals.
The investor should be advised that
ED&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, ED&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, ED&F Man does not
provide any commodity trading advice regarding the Fund's trading
activities. Investors should not rely upon ED&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 ED&F Man as the Fund's
clearing broker.
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: 0.06% of average gross assets on
the first $250 million, 0.05% on the next $250 million, 0.04% on
the next $500 million and 0.03% on the balance over $1 billion
annually
A combined minimum annual fee of
$64,500 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 issuer
costs for sales and advertising review fees and will not exceed
$6,000 for the two-year period of April 29, 2019 to April 29, 2021
(the “two year offering period”). The fees which will
be paid to the Distributor by the Fund for distribution services
will not exceed $40,000 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 $5,000 for the
two-year offering period. In addition, the Distributor receives
certain expense reimbursements relating to the registration,
continuing education and other administrative expenses of the
Registered Representatives in relation to the Teucrium Funds. The
expense reimbursements for this offering will not exceed $8,000 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 $50,000. 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.
|
ED&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, $65,000 and, for marketing and wholesaling purposes, $30,000.
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
$15,000 will be paid by the Sponsor, the rest by the Fund.
Registered Representatives will also receive continuing education
valued at a maximum of $1,000 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, formerly the National Association of Securities
Dealers, 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,
2018
|
Year
Ended
December 31,
2017
|
Year
Ended
December 31,
2016
|
Recognized Related
Party Transactions
|
$
242,126
|
$
109,266
|
$ 102,601
|
Waived Related Party
Transactions
|
$ 93,112
|
$ 57,667
|
$
71,311
|
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 16.
Professional Fees1
|
$0.04
|
Distribution and Marketing
Fees2
|
0.10
|
Custodian Fees and
Expenses3
|
0.01
|
General
and Administrative Fees4
|
0.01
|
Business Permits and
Licenses
|
0.02
|
Other
Expenses
|
0.00
|
Total Other Fund
Fees and Expenses
|
$0.18
|
(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 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. USBFS has been
appointed registrar and transfer agent for the purpose of
transferring Shares in certificated form. USBFS 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 has advised us as
follows: It 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 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 Sponsor and the Trust are
parties to an Amended and Restated Distribution Services Agreement
dated as of November 17, 2010 (the “Distribution
Agreement”), which amended and restated in its entirety a
Distribution Services Agreement between the Sponsor, the Trust, and
Foreside Fund Services, LLC (the “Distributor”) dated
as of October 15, 2010. Pursuant to the Distribution Agreement the
Distributor, together with USBFS, is required to provide services
in connection with the receipt and processing of orders for
Creation Baskets and Redemption baskets of units of the funds that
are series of the Trust, including the Fund.
The Distribution Agreement, as
amended, remains in full force and effect between the parties. The
Distribution Agreement was most recently amended on December 10,
2014 and was previously amended on May 25, 2011, October 1, 2011,
and April 22, 2014. The first amendment to the Distribution
Agreement, dated May 25, 2011, provided for the application of the
agreement to additional series of the Trust and revised the fee
schedule, including the specific fees and expenses allocable to the
Fund and each of the funds that are series of the
Trust.
The second amendment and third
amendments revised the fee schedule between the parties, including
the specific fees and expenses allocable to the Fund and each
Teucrium Fund. The fourth amendment eliminated the two series of
the Trust which ceased operations on December 21,
2014.
The Distributor receives a fee at an
annual rate of 0.01% of each Teucrium Fund’s average daily
net assets calculated and billed monthly, and an annual aggregate
fee of $100,000 for all Teucrium Funds for which the Distributor
serves as such. The fee to be paid to the Distributor will not
exceed $50,000 for the two-year offering period. The Distributor
also receives certain expense reimbursements for its filing of
sales and advertising material on behalf of the Fund. These expense
reimbursements are issuer costs and will not exceed $6,000 for the
two-year offering period.
The Sponsor and the Distributor are
also parties to a Securities Activities and Services Agreement, as
amended from time to time (the “SASA”), pursuant to
which certain employees and officers of the Sponsor are licensed as
Registered Representatives or registered principals of the
Distributor under FINRA rules. 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 Distributor receives
compensation for its activities on behalf of the Teucrium Funds
which will not exceed $5,000 for the two-year offering period, as
well as certain expense reimbursements relating to the
registration, continuing education and other administrative
expenses of the Registered Representatives in relation to the
Teucrium Funds, which will not exceed $2,000 for the two year
offering period. The Registered Representatives will also be paid
non-transaction based compensation for certain non-marketing
related services provided to the Fund. This amount will not exceed
$65,000 over the two-year offering period. Registered
Representatives will also be paid for marketing and wholesaling
services to the Fund. This amount will not exceed $30,000 over the
two-year offering period. Of these amounts, the Sponsor will pay
approximately $15,000. The remainder will be paid by the Fund.
Registered Representatives will also receive continuing education
valued at a maximum of $1,000 for the two-year offering
period.
In no event may the aggregate
compensation from any source payable to underwriters,
broker-dealers, or affiliates thereof for distribution-related
services in connection with this offering exceed ten percent (10%)
of the gross proceeds of this offering.
The offering of baskets is being
made in compliance with Conduct Rule 2310 of FINRA. Accordingly,
Authorized Purchasers will not make any sales to any account over
which they have discretionary authority without the prior written
approval of a purchaser of Shares.
The per share price of Shares
offered in Creation Baskets on any day is the total NAV of the Fund
calculated shortly after the close of the NYSE Arca on that day
divided by the number of issued and outstanding Shares. An
Authorized Purchaser is not required to sell any specific number or
dollar amount of Shares.
By executing an Authorized Purchaser
Agreement, an Authorized Purchaser becomes part of the group of
parties eligible to purchase baskets from, and put baskets for
redemption to, the Fund. An Authorized Purchaser is under no
obligation to create or redeem baskets or to offer to the public
Shares of any baskets it does create. If an Authorized Purchaser
sells Shares that it has created to the public, it will be expected
to sell them 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 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.
The following entities have entered
into Authorized Purchaser Agreements with respect to the Fund:
Deutsche Bank Securities Inc., J.P.
Morgan Securities LLC, Merrill Lynch Professional Clearing
Corp., Goldman Sachs & Co., Citadel Securities, LLC, and Virtu
Financial BD LLC.
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:
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taking the current market value of
its total assets, and
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|
subtracting any liabilities and
dividing the balance by the number of Shares.
|
USBFS, 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. New York
time. The NAV for a particular trading day is released
after 4:15 p.m. New York time.
In 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. New York time, 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. Cash equivalents held by the Fund are
valued by the Administrator using values received from recognized
third-party vendors (such as Reuters) and dealer
quotes. 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
shall be 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, NYSE Arca 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 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. New York time to 4:00 p.m. New
York time. The normal
trading hours for Sugar Futures Contracts on the ICE 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 CBOT
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=.
The NYSE Arca disseminates the
indicative fund value through the facilities of CTA/CQ High Speed
Lines. In addition, the indicative fund value is
published on the NYSE Arca’s website and 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. New York time 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 Sponsor 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 USBFS 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. New York time 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 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., New York time, but the total payment
required to create a basket during the continuous offering period
will not be determined until 4:00 p.m., New York time, 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 Custodian may reject a purchase order or
a Creation Basket Deposit if:
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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;
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it determines that the purchase
order or the Creation Basket Deposit is not in proper
form;
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it believes that acceptance of the
purchase order or the Creation Basket Deposit would have adverse
tax consequences to the Fund or its
Shareholders;
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the acceptance or receipt of the
Creation Basket Deposit would, in the opinion of counsel to the
Sponsor, be unlawful;
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circumstances outside the control of
the Sponsor, Distributor or transfer agent make it, for all
practical purposes, not feasible to process creations of
baskets;
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there is a possibility that any or
all of the Benchmark Component Futures Contracts of the Fund on the
ICE Futures or NYMEX from which the NAV of the Fund is calculated
will be priced at a daily price limit restriction;
or
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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.
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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. New York time 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, not to exceed three
business days after the effective date of the redemption order, as
agreed to between the Authorized Purchaser and the transfer agent
when the redemption order is placed (the “Redemption
Settlement Date”). 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 proportions of 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 the
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
the 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
if the Sponsor receives the fee applicable to the extension of the
Redemption Settlement Date which the Sponsor may, from time to
time, determine and the remaining baskets to be redeemed are
credited to the Fund’s DTC account on such next business
day. Any further outstanding amount of the redemption
order shall be cancelled. 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 12:00
p.m. New York time 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
CBOT 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 and can
deliver them.
Creation and Redemption Transaction Fees
To compensate the Sponsor for its
expenses in connection with the creation and redemption of baskets,
an Authorized Purchaser is required to pay a transaction fee to the
Sponsor of $250 per order. 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 short-term
Treasury Securities, cash 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. New York time,
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 custodian for use in trading
activities. The Sponsor invests the Fund’s assets
in Sugar Futures Contracts and Other Sugar Interests, short-term
Treasury Securities, cash and cash equivalents. When the
Fund purchases Sugar Futures Contracts and certain Other Sugar
Interests that are exchange-traded, 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 Sugar Interests 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/or 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 custodians;
|
|
●
|
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 7% of the notional amount of
a Sugar Interest as initial margin when entering into such Sugar
Interest. 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. The short-term
Treasury Securities, cash, and cash equivalents held by the Fund
constitute reserves that are available to meet ongoing margin and
collateral requirements. All interest 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 7% of the
Fund’s assets held by the FCM are held in segregation
pursuant to the CEA and CFTC regulations.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Critical Accounting Policies
Preparation of the financial
statements and related disclosures in conformity with U.S.
generally accepted accounting principles (“GAAP”)
requires the application of appropriate accounting rules and
guidance, as well as the use of estimates, and requires management
to make estimates and assumptions that affect the reported amounts
of assets and liabilities, revenue, and expense and related
disclosure of contingent assets and liabilities during the
reporting period of the combined financial statements and
accompanying notes. The Trust’s application of these policies
involves judgments, and actual results may differ from the
estimates used.
The Sponsor has determined that the
valuation of commodity interests that are not traded on a U.S. or
internationally recognized futures exchange (such as swaps and
other over-the-counter contracts) involves a critical accounting
policy. The values which are used by the Teucrium Funds
for futures contracts will be provided by the commodity broker who
will use market prices when available, while over-the-counter
contracts will be valued based on the present value of estimated
future cash flows that would be received from or paid to a third
party in settlement of these derivative contracts prior to their
delivery date. Values
will be determined on a daily basis.
Commodity futures contracts held by
the Fund are recorded on the trade date. All such transactions are
recorded on the identified cost basis and marked to market daily.
Unrealized appreciation or depreciation on commodity futures
contracts are reflected in the statement of operations as the
difference between the original contract amount and the fair market
value as of the last business day of the year or as of the last
date of the financial statements. Changes in the appreciation or
depreciation between periods are reflected in the statement of
operations. Interest on cash equivalents and deposits with the FCM
are recognized on the accrual basis. The Fund earns interest on
funds held at the custodian and at other financial institutions at
prevailing market rates for such investments.
Cash and cash equivalents are cash
held at financial institutions in demand-deposit accounts or
highly-liquid investments with original maturity dates of three
months or less at inception. The Fund reports cash equivalents in
the statements of assets and liabilities at market value, or at
carrying amounts that approximate fair value, because of their
highly-liquid nature and short-term maturities. The Fund has a
substantial portion of its assets on deposit with banks. Assets
deposited with financial institutions may, at times, exceed
federally insured limits.
The use of fair value to measure
financial instruments, with related unrealized gains or losses
recognized in earnings in each period is fundamental to the
Trust’s financial statements. In accordance with GAAP, fair
value is defined as the price that would be received to sell an
asset or paid to transfer a liability (i.e., the “exit
price”) in an orderly transaction between market participants
at the measurement date.
In determining fair value, the Trust
uses various valuation approaches. In accordance with GAAP, a fair
value hierarchy for inputs is used in measuring fair value that
maximizes the use of observable inputs and minimizes the use of
unobservable inputs by requiring that the most observable inputs be
used when available. Observable inputs are those that market
participants would use in pricing the asset or liability based on
market data obtained from sources independent of the Trust.
Unobservable inputs reflect the Trust’s assumptions about the
inputs market participants would use in pricing the asset or
liability developed based on the best information available in the
circumstances. The fair value hierarchy is categorized into three
levels: a) Level 1 -
Valuations based on unadjusted quoted prices in active markets for
identical assets or liabilities that the Trust has the ability to
access. Valuation adjustments and block discounts are not applied
to Level 1 securities and financial instruments. Since valuations
are based on quoted prices that are readily and regularly available
in an active market, valuation of these securities and financial
instruments does not entail a significant degree of judgment, b)
Level 2 - Valuations based
on quoted prices in markets that are not active or for which all
significant inputs are observable, either directly or indirectly,
and c) Level 3 - Valuations
based on inputs that are unobservable and significant to the
overall fair value measurement. See the notes within the financial
statements for further information.
The Fund and the Trust record their
derivative activities at fair value. Gains and losses from
derivative contracts are included in the statement of operations.
Derivative contracts include futures contracts related to commodity
prices. Futures, which are listed on a national securities
exchange, such as the CBOT or the New York Mercantile Exchange
(“NYMEX”), or reported on another national market, are
generally categorized in Level 1 of the fair value hierarchy. OTC
derivatives contracts (such as forward and swap contracts) which
may be valued using models, depending on whether significant inputs
are observable or unobservable, are categorized in Levels 2 or 3 of
the fair value hierarchy.
Brokerage commissions on all open
commodity futures contracts are accrued on a full-turn
basis.
Margin is the minimum amount of
funds that must be deposited by a commodity interest trader with
the trader’s broker to initiate and maintain an open position
in futures contracts. A margin deposit acts to assure the
trader’s performance of the futures contracts purchased or
sold. Futures contracts are customarily bought and sold on initial
margin that represents a very small percentage of the aggregate
purchase or sales price of the contract. Because of such low margin
requirements, price fluctuations occurring in the futures markets
may create profits and losses that, in relation to the amount
invested, are greater than are customary in other forms of
investment or speculation. As discussed below, adverse price
changes in the futures contract may result in margin requirements
that greatly exceed the initial margin. In addition, the amount of
margin required in connection with a particular futures contract is
set from time to time by the exchange on which the contract is
traded and may be modified from time to time by the exchange during
the term of the contract. Brokerage firms, such as the Funds’
clearing brokers, carrying accounts for traders in commodity
interest contracts generally require higher amounts of margin as a
matter of policy to further protect themselves. Over-the-counter
trading generally involves the extension of credit between
counterparties, so the counterparties may agree to require the
posting of collateral by one or both parties to address credit
exposure.
When a trader purchases an option,
there is no margin requirement; however, the option premium must be
paid in full. When a trader sells an option, on the other hand, he
or she is required to deposit margin in an amount determined by the
margin requirements established for the underlying interest and, in
addition, an amount substantially equal to the current premium for
the option. The margin requirements imposed on the selling of
options, although adjusted to reflect the probability that
out-of-the-money options will not be exercised, can in fact be
higher than those imposed in dealing in the futures markets
directly. Complicated margin requirements apply to spreads and
conversions, which are complex trading strategies in which a trader
acquires a mixture of options positions and positions in the
underlying interest.
Ongoing or “maintenance”
margin requirements are computed each day by a trader’s
clearing broker. When the market value of a particular open futures
contract changes to a point where the margin on deposit does not
satisfy maintenance margin requirements, a margin call is made by
the broker. If the margin call is not met within a reasonable time,
the broker may close out the trader’s position. With respect
to the Teucrium Funds’ trading, the Teucrium Funds (and not
its shareholders personally) are subject to margin
calls.
The Sponsor is responsible for investing the
assets of the Fund in accordance with the objectives and policies
of 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 Funds and are included, primarily, in distribution and
marketing fees. In addition, the Funds, except for TAGS which has
no such fee, are 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.
Finally, many major U.S. exchanges
have passed certain cross margining arrangements involving
procedures pursuant to which the futures and options positions held
in an account would, in the case of some accounts, be aggregated,
and margin requirements would be assessed on a portfolio basis,
measuring the total risk of the combined
positions.
For tax purposes, the Fund will be
treated as a partnership. Therefore, the Fund does not record a
provision for income taxes because the partners report their share
of a Fund’s income or loss on their income tax returns. The
financial statements reflect the Fund’s transactions without
adjustment, if any, required for income tax
purposes.
For commercial paper, the Teucrium
Funds use the effective interest method for calculating the actual
interest rate in a period based on the amount of a financial
instrument's book value at the beginning of the accounting period.
Accretion on these investments are recognized on the effective
interest method in U.S. dollars and recognized in cash equivalents.
All discounts on purchase prices of debt securities are accreted
over the life of the respective security.
Results of Operations
The Teucrium Sugar Fund commenced
investment operations on September 19, 2011. The investment
objective of the Fund is to have the daily changes in percentage
terms of the Shares’ Net Asset Value (“NAV”)
reflect the daily changes in percentage terms of a weighted average
of the closing settlement prices for three futures contracts for
sugar (“Sugar Futures Contracts”) that are traded on
ICE Futures US (“ICE Futures”), specifically: (1) the
second-to-expire Sugar No. 11 Futures Contract (a “Sugar No.
11 Futures Contract”), weighted 35%, (2) the third-to-expire
Sugar No. 11 Futures Contract, weighted 30%, and (3) the Sugar No.
11 Futures Contract expiring in the March following the expiration
month of the third-to-expire contract, weighted 35%. On December
31, 2018, the Fund held a total of 770 ICE sugar futures contracts
with a notional value of $10,774,120. Of these, 513 had an asset
fair value of $233,979, while 257 contracts had a liability fair
value of $47,656. The weighting of the notional value of the
contracts was weighted as follows: (1) 35% to the MAY19 ICE No 11
contracts, (2) 30% to the JUL19 ICE No 11 contracts, and (3) 35% to
the MAR20 ICE No 11 contracts.
The benchmark for the Fund is the
Teucrium Sugar Index (TCANE) which is defined as: A weighted
average of daily changes in the closing settlement prices (1) the
second- to-expire Sugar No. 11 Futures Contract (a “Sugar No.
11 Futures Contract”), weighted 35%, (2) the third-to-expire
Sugar No. 11 Futures Contract, weighted 30%, and (3) the Sugar No.
11 Futures Contract expiring in the March following the expiration
month of the third-to-expire contract, weighted 35%. To convert to
an index, 100 is set to $25, the opening day price of
CANE.
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 or the mid-point of the 4 pm bid and ask if no closing
price is available, and TCANE for two periods. One period is
December 31, 2017 compared to December 31, 2018. The second period
is from the commencement of operations to December 31, 2018. 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 do
include the impacts of both expenses and interest
income.
Period
|
Change
in NAV per share
|
Change
in Market Price
|
Change
in the Benchmark (TCANE)
|
December 31, 2017 to
December 31,
2018
|
-27.81%
|
-27.52%
|
-26.53%
|
September 19, 2011 to
December 31,
2018
|
-72.06%
|
-72.28%
|
-65.34%
|
For the Year Ended December 31, 2018 Compared to the Years Ended
December 31, 2017 and 2016
Total net assets for the Fund were
$10,778,739 on December 31, 2018, compared to $6,363,710 on
December 31, 2017 and $5,513,971 on December 31, 2016. The Net
Asset Values (“NAV”) per share related to these
balances were $7.07, $9.79, and $12.97 respectively. When comparing
December 31, 2018 with 2017, there was an increase in total net
assets of 69%, driven by a combination of an increase in total
shares outstanding of 135% and by a change in the NAV per share
which decreased by ($2.72) or 28%. When comparing December 31, 2018
with 2016, there was an increase in total net assets of 95%, driven
by an increase in total shares outstanding of 259% and by a
decrease in the NAV per share of ($5.90) or 45%. The closing prices
per share for 2018, 2017 and 2016, as reported by the NYSE Arca,
were $7.09, $9.78, and $13.00 respectively. The change from
December 31, 2018 over prior years was a 28% decrease from 2017 and
a 45% decrease from 2016.
The graph below shows the actual
shares outstanding, total net assets (or AUM) and net asset value
per share (NAV per share) for the Fund from inception to December
31, 2018 and serves to illustrate the relative changes of these
components.
Total loss for the year ended
December 31, 2018 was ($1,996,430) resulting primarily from the
realized loss on commodity futures contracts totaling ($2,314,984)
and a gain generated by the net change in unrealized appreciation
on commodity futures contracts of $69,137. Total (loss) income was
($2,092,835) in 2017 and $1,489,291 in 2016. Realized gain or loss
on trading of commodity futures contracts is a function of: 1) the
change in the price of the particular contracts sold as part of a
“roll” in contracts as the nearest to expire contracts
are exchanged for the appropriate contact given the investment
objective of the fund, 2) the change in the price of particular
contracts sold in relation to redemption of shares, 3) the gain or
loss associated with rebalancing trades which are made to ensure
conformance to the benchmark and 4) the number of contracts held
and then sold for either circumstance aforementioned. Unrealized
gain or loss on trading of commodity futures contracts is a
function of the change in the price of contracts held on the final
date of the period versus the purchase price for each contract and
the number of contracts held in each contract month. The Sponsor
has a static benchmark as described above and trades futures
contracts to adhere to that benchmark and to adjust for the
creation or redemption of shares.
Interest income for year ended
December 31, 2018, 2017, and 2016, respectively, was $249,417,
$78,889, and $32,048. This increase year-over-year was the result
of the Sponsor investing, at times, a portion of the available cash
for the Fund in alternative demand deposit savings accounts with
more attractive overnight deposit rates. Effective October 3, 2017,
the Fund invested in investment grade commercial paper with
maturities of ninety days or less. These investments provide a
higher rate than money market products offered in the past.
Interest rates paid on cash balances of the Fund have increased
beginning March 2017 and have continued to increase through
December 2018. These higher levels of interest rates are projected
to remain at the current level in 2019 or slightly increase, absent
any decreases in the Federal Funds rate.
Total expenses gross of expenses
waived by the Sponsor (“Total expenses”) for 2018 were
$708,276; total expenses for 2017 were $326,587 and $288,309 in
2016. This represents a $381,689 or 117% increase for 2018 over
2017 and a $419,967 or 146% increase for 2018 over 2016. The
increase for 2018 over 2017 was driven by increases of: 1) a
$51,436 or 73% increase in management fee paid to the Sponsor due
to higher average net assets; 2) a $122,819 or 194% increase in
professional fees related to auditing, legal and tax preparation
fees; 3) a $150,881 or 120% increase in distribution and marketing
expenses; 4) a $14,863 or 78% increase in custodian fees and
expenses; 5) a $11,947 or 69% increase in business permits and
licenses; 6) a $9,716 or 67% increase in general and administrative
expenses; 7) a $13,505 or 128% increase in brokerage commissions
due to an increase in contracts purchased and rolled; and 8) a
$6,522 or 132% increase in other expenses. The increases year over
year were generally due to higher average net assets relative to
the other Funds.
The increase for 2018 over 2016 was
driven by increases of: 1) a $65,921 or 117% increase in management
fee paid to the Sponsor due to higher average net assets; 2) a
$139,176 or 296% increase in professional fees related to auditing,
legal and tax preparation fees; 3) a $161,535 or 140% increase in
distribution and marketing expenses; 4) a $15,326 or 83% increase
in custodian fees and expenses; 5) a $10,765 or 58% increase in
business permits and licenses; 6) a $6,686 or 38% increase in
general and administrative expenses; 7) a $15,349 or 177% increase
in brokerage commissions due to an increase in contracts purchased
and rolled; and 8) a $5,209 or 83% increase in other expenses. The
increases year over year were generally due to higher average net
assets. The total expense ratio gross of expenses waived by the
Sponsor for these years was 5.80% in 2018, 4.62% in 2017, and 4.72%
in 2016. The management fee is calculated at an annual rate of 1%
of the Fund’s daily average net assets.
The Sponsor has the ability to elect
to pay certain expenses on behalf of the Fund or waive the
management fee. This election is subject to change by the Sponsor,
at its discretion. For the year ended December 31, 2018, the
Sponsor waived fees of $268,920; the Sponsor has determined that no
reimbursement will be sought in future periods for those expenses
which have been waived for the year. The Sponsor permanently waived
$129,334 of expenses in 2017 and $148,281 in
2016.
Total expenses net of expenses
waived by the Sponsor (“Total expenses, net”) for 2018,
2017 and 2016 were $439,356, $197,253, and $140,028, respectively.
The total expense ratio net of expenses waived by the Sponsor
periods was 3.60% in 2018, 2.79% in 2017, and 2.29% in 2016. Net
investment loss, which includes the impact of expenses and interest
income, was 1.56% in 2018, 1.68% in 2017, and 1.77% in
2016.
Other than the management fee to the
Sponsor and the brokerage commissions, most of the expenses
incurred by the Fund are associated with the day-to-day operation
of the Fund and the necessary functions related to regulatory
compliance. These are generally based on contracts, which extend
for some period of time and up to one year, or commitments
regardless of the level of assets under management. The structure
of the Fund and the nature of the expenses are such that as total
net assets grow, there is a scalability of expenses that may allow
the total expense ratio to be reduced. However, if total net assets
for the Fund fall, the total expense ratio of the Fund will
increase unless additional reductions are made by the Sponsor to
the daily expense accrual. The Sponsor can elect to adjust the
daily expense accruals at its discretion based on market conditions
and other Fund considerations.
Net cash used in the
Fund’s operating activities during the 2018 was ($2,518,149).
Net cash (used in) provided by operating activities by the Fund was
($2,301,151) in 2017 and $1,359,306 in 2016. In 2018, proceeds from
the sale of shares were $18,588,300 representing 2,450,000 shares
while payments for the redemption of shares were $11,737,485
representing 1,575,000 shares. In 2017, proceeds from the sale of
shares were $10,190,950 representing 925,000 shares while payments
for the redemption of shares were $7,051,123 representing 700,000
shares. In 2016, proceeds from the sale of shares was $2,805,578
representing 250,000 while payments for the redemption of shares
were $4,149,533 representing 375,000 shares.
Total expenses gross of expenses
waived by the Sponsor (“Total expenses”) for 2018 were
$708,276; total expenses for 2017 were $326,587 and $288,309 in
2016. This represents a $381,689 or 117% increase for 2018 over
2017 and a $419,967 or 146% increase for 2018 over 2016. The
increase for 2018 over 2017 was driven by increases of: 1) a
$51,436 or 73% increase in management fee paid to the Sponsor due
to higher average net assets; 2) a $122,819 or 194% increase in
professional fees related to auditing, legal and tax preparation
fees; 3) a $150,881 or 120% increase in distribution and marketing
expenses; 4) a $14,863 or 78% increase in custodian fees and
expenses; 5) a $11,947 or 69% increase in business permits and
licenses; 6) a $9,716 or 67% increase in general and administrative
expenses; 7) a $13,505 or 128% increase in brokerage commissions
due to an increase in contracts purchased and rolled; and 8) a
$6,522 or 132% increase in other expenses. The increases year over
year were generally due to higher average net assets relative to
the other Funds.
The increase for 2018 over 2016 was
driven by increases of: 1) a $65,921 or 117% increase in management
fee paid to the Sponsor due to higher average net assets; 2) a
$139,176 or 296% increase in professional fees related to auditing,
legal and tax preparation fees; 3) a $161,535 or 140% increase in
distribution and marketing expenses; 4) a $15,326 or 83% increase
in custodian fees and expenses; 5) a $10,765 or 58% increase in
business permits and licenses; 6) a $6,686 or 38% increase in
general and administrative expenses; 7) a $15,349 or 177% increase
in brokerage commissions due to an increase in contracts purchased
and rolled; and 8) a $5,209 or 83% increase in other expenses. The
increases year over year were generally due to higher average net
assets. The total expense ratio gross of expenses waived by the
Sponsor for these years was 5.80% in 2018, 4.62% in 2017, and 4.72%
in 2016. The management fee is calculated at an annual rate of 1%
of the Fund’s daily average net assets.
The Sponsor has the ability to elect
to pay certain expenses on behalf of the Fund or waive the
management fee. This election is subject to change by the Sponsor,
at its discretion. For the year ended December 31, 2018, the
Sponsor waived fees of $268,920; the Sponsor has determined that no
reimbursement will be sought in future periods for those expenses
which have been waived for the year. The Sponsor permanently waived
$129,334 of expenses in 2017 and $148,281 in
2016.
Total expenses net of expenses
waived by the Sponsor (“Total expenses, net”) for 2018,
2017 and 2016 were $439,356, $197,253, and $140,028, respectively.
The total expense ratio net of expenses waived by the Sponsor
periods was 3.60% in 2018, 2.79% in 2017, and 2.29% in 2016. Net
investment loss, which includes the impact of expenses and interest
income, was 1.56% in 2018, 1.68% in 2017, and 1.77% in
2016.
Other than the management fee
to the Sponsor and the brokerage commissions, most of the expenses
incurred by the Fund are associated with the day-to-day operation
of the Fund and the necessary functions related to regulatory
compliance. These are generally based on contracts, which extend
for some period of time and up to one year, or commitments
regardless of the level of assets under management. The structure
of the Fund and the nature of the expenses are such that as total
net assets grow, there is a scalability of expenses that may allow
the total expense ratio to be reduced. However, if total net assets
for the Fund fall, the total expense ratio of the Fund will
increase unless additional reductions are made by the Sponsor to
the daily expense accrual. The Sponsor can elect to adjust the
daily expense accruals at its discretion based on market conditions
and other Fund considerations.
Net cash used in the Fund’s
operating activities during the 2018 was ($2,518,149). Net cash
(used in) provided by operating activities by the Fund was
($2,301,151) in 2017 and $1,359,306 in 2016. In 2018, proceeds from
the sale of shares were $18,588,300 representing 2,450,000 shares
while payments for the redemption of shares were $11,737,485
representing 1,575,000 shares. In 2017, proceeds from the sale of
shares were $10,190,950 representing 925,000 shares while payments
for the redemption of shares were $7,051,123 representing 700,000
shares. In 2016, proceeds from the sale of shares was $2,805,578
representing 250,000 while payments for the redemption of shares
were $4,149,533 representing 375,000 shares.
Benchmark
Performance
As noted above, the Sponsor
endeavors to place the Fund’s trades in Sugar Interests 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.
More specifically, the Sponsor will endeavor to manage the Fund so
that A will be within plus/minus 10 percent of B,
where:
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A is the average daily change in the
Fund’s NAV for any period of 30 successive valuation days,
i.e., any trading day as of which the Fund calculates its NAV,
and
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B is the average daily change in the
Benchmark over the same period.
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During the period from January 1,
2018 through December 31, 2018 the average daily change in the
Fund’s NAV was within plus/minus 10 percent of the average
daily change in the Fund’s Benchmark.
Liquidity and Capital Resources
The Fund does not make use of
borrowings or other lines of credit to meet its obligations. 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/or cash equivalents that it intends to hold at all times. The
Fund’s liquidity needs include: redeeming Shares, providing
margin deposits for existing futures contracts or the purchase of
additional futures contracts, posting collateral for
over-the-counter Sugar Interests, and payment of expenses,
summarized below under “Contractual
Obligations.”
All of the Fund’s source of
capital is derived from the offering of Shares to Authorized
Purchasers. Authorized Purchasers may then subsequently redeem such
Shares. The Fund in turn allocates its net assets to commodities
trading. A significant portion of the NAV is held in short-term
Treasury Securities, cash and cash equivalents, which is used as
margin for the Fund’s trading in commodities. The percentage
that cash equivalents bear to the total net assets will vary from
period to period as the market values of the Fund’s Sugar
Interests change. The balance of the net assets is held in the
Fund’s commodity trading account. Interest earned on
interest-bearing assets of the Fund is paid to the
Fund.
The investments of the Fund in Sugar
Interests may be subject to periods of illiquidity because of
market conditions, regulatory considerations and other
reasons. Such market conditions could prevent the Fund
from promptly liquidating its Sugar Interest
positions. If daily limits on the fluctuation in Sugar
Futures Contract prices are adopted by ICE Futures or NYMEX,
periods of illiquidity could become more frequent, as it would not
be possible to executed trades at prices beyond the daily
limit.
Beginning in the quarter-ended June
30, 2015, the Sponsor invested a portion of the available cash for
the Teucrium Funds in alternative demand-deposit savings accounts;
as of January 31, 2019, the Sponsor has cash deposits at Rabobank,
N.A., a U.S. chartered bank headquartered in Roseville,
CA. These accounts have higher overnight deposit rates
than were available in the money market products at the Custodians
that had been utilized solely in the past. In addition, the Fund
has established an account at Morgan Stanley so that the Fund may
invest in commercial paper rated at the date of purchase
“Prime-1” or “Prime-2” by Moody’s
and/or “A-1” or “A-2” by S&P, or if
unrated, of comparable quality as determined by the Sponsor.
Commercial paper represents short-term unsecured promissory notes
issued in bearer form by banks or bank holding companies,
corporations and finance companies. The duration until maturity of
such commercial paper held by the Fund will not exceed ninety
days.
Market
Risk
Trading in Sugar Interests such as
Sugar Futures Contracts involves the Fund entering into contractual
commitments to purchase or sell specific amounts of sugar at a
specified date in the future. The gross or face amount
of the contracts significantly exceeds the future cash requirements
of the Fund since the Fund typically closes out any open positions
prior to the contractual expiration date. As a result,
the Fund’s market risk is the risk of loss arising from the
decline in value of the contracts, not from the need to make
delivery under the contracts. The Fund considers the
“fair value” of derivative instruments to be the
unrealized gain or loss on the contracts. The market
risk associated with the commitment by the Fund to purchase a
specific commodity is limited to the aggregate face amount of the
contracts held.
The exposure of the Fund to market
risk depends on a number of factors including the markets for
sugar, the volatility of interest rates and foreign exchange rates,
the liquidity of the Sugar Interest markets and the relationships
among the contracts held by the Fund. The limited
experience of the Sponsor in trading Sugar Interests in a manner
that tracks changes in the Benchmark, as well as drastic market events,
could ultimately lead to substantial losses for
shareholders.
Credit Risk
When the Fund enters into Sugar
Interests, it is exposed to the credit risk that the counterparty
will not be able to meet its obligations. For purposes
of credit risk, the counterparties for Sugar Futures Contracts are
the clearinghouses associated with the relevant
exchanges. In general, clearinghouses are backed by
their members who may be required to share in the financial burden
resulting from the nonperformance of one of their members, which
should significantly reduce credit risk. Some foreign
exchanges are not backed by their clearinghouse members but may be
backed by a consortium of banks or other financial
institutions. Unlike in the case of exchange-traded
futures contracts, the counterparty to an over-the-counter Sugar
Interest contract is generally a single bank or other financial
institution such as an SD. As a result, there is greater
counterparty credit risk in over-the-counter
transactions. There can be no assurance that any
counterparty, clearing house, or their financial backers will
satisfy their obligations to the Fund.
The Fund may engage in off exchange
transactions broadly called an “exchange for related
position” (“EFRP”) transaction. For purposes of
the Dodd-Frank Act and related CFTC rules, an EFRP transaction is
treated as a “swap.” 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 or an
Underlying 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.
The Sponsor attempts to manage the
credit risk of the Fund by following certain trading limitations
and policies. In particular, the Fund intends to post
margin and collateral and/or hold liquid assets that will be equal
to approximately the face amount of the Sugar Interests it
holds. The Sponsor has implemented procedures that
include, but are not limited to, executing and clearing trades and
entering into over-the-counter transactions only with parties it
deems creditworthy and/or requiring the posting of collateral by
such parties for the benefit of the Fund to limit its credit
exposure.
The Fund will generally retain cash
positions of approximately 93% of total net assets; this balance
represents the total net assets less the initial margin
requirements held by the FCM. These cash assets are either: 1)
deposited by the Sponsor in demand deposit accounts of financial
institutions which are rated in the highest short-term rating
category by a nationally recognized statistical rating organization
or deemed by the Sponsor to be of comparable quality; 2) invested
in short-term Treasury Securities through the FCM or commercial
paper; or 3) held in a money-market fund which is deemed to be a
cash equivalent under the most recent SEC
definition.
Off Balance Sheet Financing
As of the date of this prospectus,
neither the Trust nor the Fund has any loan guarantees, credit
support or other off-balance sheet arrangements of any kind other
than agreements entered into in the normal course of business,
which may include indemnification provisions relating to certain
risks service providers undertake in performing services which are
in the best interests of the Fund. While the
Fund’s exposure under these indemnification provisions cannot
be estimated, they are not expected to have a material impact on
the Fund’s financial positions.
Redemption Basket Obligation
Other than as necessary to meet the
investment objective of the Fund and pay its contractual
obligations described below, the Fund requires liquidity to redeem
Redemption Baskets. The Fund intends to satisfy this
obligation through the transfer of cash of the Fund (generated, if
necessary, through the sale of cash equivalents) in an amount
proportionate to the number of Shares being redeemed, as described
above under “Redemption
Procedures.”
Contractual Obligations
The Fund’s primary contractual
obligations are with the Sponsor and certain other service
providers. The Sponsor, in return for its services, is
entitled to a management fee calculated as a fixed percentage of
the Fund’s NAV, currently 1.00% of its average net
assets. The Fund also is responsible for all ongoing
fees, costs and expenses of its operation, 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 after the time any Shares have begun
trading on NYSE Arca; (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 client 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; and (x) extraordinary expenses (including, but not limited
to, legal claims and liabilities and litigation costs and any
indemnification related thereto).
While the Sponsor has agreed to pay
registration fees to the SEC, FINRA and any other regulatory agency
in connection with the offer and sale of the Shares offered through
this prospectus, the legal, printing, accounting and other expenses
associated with such registrations, and the initial fee of $5,000
for listing the Shares on the NYSE Arca, the Fund will be
responsible for any registration fees and related expenses incurred
in connection with any future offer and sale of Shares of the Fund
in excess of those offered through this
prospectus.
The Fund pays its own brokerage and
other transaction costs. The Fund pays fees to FCMs in
connection with its transactions in futures
contracts. FCM fees are estimated to be minimal annually for the
Fund. In general, transaction costs on over-the-counter
Sugar Interests and on other short-term securities are embedded in
the purchase or sale price of the instrument being purchased or
sold and may not readily be estimated. Other expenses to
be paid by the Fund, including but not limited to the fees paid to
the Custodian, Administrator and Distributor with respect to the
Fund, are estimated to be 2.51% for the twelve-month period ending
April 29, 2020, though this amount may change in future
years. 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.
Any general expenses of the Trust
will be allocated among the Teucrium Funds and each other series
that may be established under the Trust in the future as determined
by the Sponsor in its sole and absolute discretion. The
Trust is also responsible for extraordinary expenses, including,
but not limited to, legal claims and liabilities and litigation
costs and any indemnification related thereto. The Trust
and/or the Sponsor may be required to indemnify the Trustee,
Distributor or Custodian/Administrator under certain
circumstances.
The parties cannot anticipate the
amount of payments that will be required under these arrangements
for future periods as the Fund’s NAV and trading levels to
meet their investment objectives will not be known until a future
date. These agreements are effective for a specific term
agreed upon by the parties with an option to renew, or, in some
cases, are in effect for the duration of the Fund’s
existence. The parties may terminate these agreements
earlier for certain reasons listed in the
agreements.
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
authority includes, without limitation, the right to take the
following actions:
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To enter into, execute, deliver and
maintain contracts, agreements and any other documents as may be in
furtherance of the Trust’s purpose or necessary or
appropriate for the offer and sale of the Shares and the conduct of
Trust activities;
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To establish, maintain, deposit
into, sign checks and otherwise draw upon accounts on behalf of the
Trust with appropriate banking and savings institutions, and
execute and accept any instrument or agreement incidental to the
Trust’s business and in furtherance of its
purposes;
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To supervise the preparation and
filing of any registration statement (and supplements and
amendments thereto) for the Fund;
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To adopt, implement or amend, from
time to time, such disclosure and financial reporting information
gathering, and control policies and procedures as are necessary or
desirable to ensure compliance with applicable disclosure and
financial reporting obligations under any applicable securities
laws;
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To make any necessary determination
or decision in connection with the preparation of the Trust’s
financial statements and amendments thereto;
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To prepare, file and distribute, if
applicable, any periodic reports or updates that may be required
under the 1934 Exchange Act, the CEA or rules and regulations
promulgated thereunder;
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To pay or authorize the payment of
distributions to the Shareholders and expenses of the
Fund;
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To make any elections on behalf of
the Trust under the Code, or any other applicable U.S. federal or
state tax law as the Sponsor shall determine to be in the best
interests of the Trust; and
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In its sole discretion, to determine
to admit an affiliate or affiliates of the Sponsor as additional
Sponsors.
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The Sponsor’s Obligations
In addition to the duties imposed by
the Delaware Trust Statute, under the Trust Agreement the Sponsor
has the following obligations as a sponsor of the
Trust:
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Devote to the business and affairs
of the Trust such of its time as it determines in its discretion
(exercised in good faith) to be necessary for the benefit of the
Trust and the Shareholders;
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Execute, file, record and/or publish
all certificates, statements and other documents and do any and all
other things as may be appropriate for the formation, qualification
and operation of the Trust and for the conduct of its business in
all appropriate jurisdictions;
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Appoint and remove independent
public accountants to audit the accounts of the Trust and employ
attorneys to represent the Trust;
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Use its best efforts to maintain the
status of the Trust as a statutory trust for state law purposes and
as a partnership for U.S. federal income tax
purposes;
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Invest, reinvest, hold uninvested,
sell, exchange, write options on, lease, lend and subject to
certain limitations set forth in the Trust Agreement, pledge,
mortgage, and hypothecate the estate of the Fund in accordance with
the purposes of the Trust and any registration statement filed on
behalf of the Fund;
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Have fiduciary responsibility for
the safekeeping and use of the Trust’s assets, whether or not
in the Sponsor’s immediate possession or
control;
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Enter into and perform agreements
with each Authorized Purchaser, receive from Authorized Purchasers
and process properly submitted purchase orders, receive Creation
Basket Deposits, deliver or cause the delivery of Creation Baskets
to the Depository for the account of the Authorized Purchaser
submitting a purchase order;
Receive from Authorized Purchasers
and process, or cause the Distributor and other Fund service
provider to process, properly submitted redemption orders, receive
from the redeeming Authorized Purchasers through the Depository,
and thereupon cancel or cause to be cancelled, Shares corresponding
to the Redemption Baskets to be redeemed:
Interact with the Depository;
and
Delegate duties to one or more
administrators, as the Sponsor determines.
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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.
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 delegatee 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 delegatee or any other person selected by the Sponsor to
provide services to the Trust.
To the extent that, at law (common
or statutory) or in equity, the Sponsor has duties (including
fiduciary duties) and liabilities relating to the Trust, the
Teucrium Funds, the shareholders of the Teucrium Funds, or to any
other person, the Sponsor, acting under the Trust Agreement, shall
not be liable to the Trust, the Teucrium Funds, the shareholders of
the Teucrium Funds or to any other person for its good faith
reliance on the provisions of the Trust Agreement. 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.
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. Any notice of meeting shall
be accompanied by a description of the action to be taken at the
meeting and, if applicable, an opinion of independent counsel as to
the effect of such proposed action on the liability of shareholders
of the Fund, or any other Teucrium Fund, as applicable, for the
debts of the applicable Teucrium Fund. Shareholders may vote in
person or by proxy at any such meeting. The Sponsor shall be
entitled to establish voting and quorum requirements and other
reasonable procedures for shareholder voting. Any action required
or permitted to be taken by Shareholders by vote may be taken
without a meeting by written consent setting forth the actions so
taken. Such written consents shall be treated for all purposes as
votes at a meeting. If the vote or consent of any Shareholder to
any action of the Trust, the Fund or any Shareholder, as
contemplated by the Trust Agreement, is solicited by the Sponsor,
the solicitation shall be effected by notice to each Shareholder
given in the manner provided in accordance with the Trust
Agreement.
Voting Rights
Shareholders have very limited
voting rights. Specifically, the Trust Agreement
provides that shareholders of the Teucrium Funds holding shares
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 of the Teucrium
Funds 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. Shareholders
have no voting rights with respect to the Trust or the Fund except
as expressly provided in the Trust
Agreement.
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).
Every written note, bond, contract,
instrument, certificate or undertaking made or issued by the
Sponsor on behalf of the Trust or the Fund shall give notice to the
effect that the same was executed or made by or on behalf of the
Trust or the Fund and 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 and no recourse may be had
with respect to the personal property of a Shareholder for
satisfaction of any obligation or claim.
Amendments to the Trust Agreement
Effective April 16, 2018, the
Sponsor, pursuant to its authority under the Trust Agreement, has
amended the Trust Agreement to reflect certain provisions of the
Bipartisan Budget Act of 2015 and the tax legislation commonly
referred to as the Tax Cuts and Jobs Act of 2017, each of which
became effective on January 1, 2018. The changes to the Trust
Agreement reflect changes to partnership audit rules under the Code
and reflect certain changes to partnership rules under the Code
(see “U.S. Federal Income
Tax Considerations” for additional information about
the changes to the Code.)
Effective April 26,
2019, the Sponsor, pursuant to its authority under the Trust
Agreement, has amended the Trust Agreement to remove a requirement
that any shareholder of the Fund that wishes to maintain a
derivative action on behalf of the Trust be joined by at least ten
percent (10%) of the outstanding Shares of the Fund in the bringing
of such action.
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. Under the organizational documents of the Sponsor, Mr. Sal
Gilbertie in his respective capacities as President, Chief
Investment Officer of the Sponsor and Chief Executive Officer and
Secretary of the Sponsor, is obligated to use commercially
reasonable efforts to manage the Sponsor, devote such amount of
time to the Sponsor as would be consistent with his role in
similarly placed commodity pool operators, and remain active in
managing the Sponsor until he is no longer managing members of the
Sponsor or the Sponsor dissolves. In addition, the Sponsor expects
that operating the Teucrium Funds will generally constitute the
principal and full-time business activity of its principals,
officers and employees. Notwithstanding these obligations and
expectations, the Sponsor’s principals 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. In particular, the principals could have a
conflict between his responsibilities to the Fund on the one hand
and to those other entities on the other. The Sponsor believes that
it currently has sufficient personnel, time, and working capital to
discharge its responsibilities to the Fund in a fair manner and
that these persons’ conflicts should not impair his ability
to provide services to the Fund. However, it is not possible to
quantify the proportion of his time that the Sponsor’s
personnel will devote to the Fund and its
management.
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.
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
Sponsor pursues such opportunity or directs it to another person or
does not communicate such opportunity to the
Fund. Neither the Fund nor any Shareholder has any
rights or obligations by virtue of the Trust Agreement, the trust
relationship created thereby, or this prospectus in such business
ventures or the income or profits derived from such business
ventures. The pursuit of such business ventures, even if
competitive with the activities of the Fund, will not be deemed
wrongful or improper.
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.
The Sponsor or any affiliate thereof
may engage in or possess an interest in other profit-seeking or
business ventures of any nature or description, independently or
with others, whether or not such ventures are competitive with the
Trust and the doctrine of corporate opportunity, or any analogous
doctrine, shall not apply to the Sponsor. If the Sponsor acquires
knowledge of a potential transaction, agreement, arrangement or
other matter that may be an opportunity for the Trust, it shall
have no duty to communicate or offer such opportunity to the Trust,
and the Sponsor shall not be liable to the Trust or to the
Shareholders for breach of any fiduciary or other duty by reason of
the fact that the Sponsor pursues or acquires for, or directs such
opportunity to, another person or does not communicate such
opportunity or information to the Trust. Neither the Trust nor any
Shareholder shall have any rights or obligations by virtue of the
Trust Agreement, or the trust relationship created thereby in or to
such independent ventures or the income or profits or losses
derived therefrom, and the pursuit of such ventures, even if
competitive with the activities of the Trust, shall not be deemed
wrongful or improper. Except to the extent expressly provided in
the Trust Agreement, the Sponsor may engage or be interested in any
financial or other transaction with the Trust, the Shareholders or
any affiliate of the Trust or the
Shareholders.
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 615 East Michigan Street, 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.
Analysis of Critical
Accounting Policies
The Fund’s critical accounting
policies are set forth in the financial statements that are
incorporated by reference in this prospectus prepared in accordance
with accounting principles generally accepted in the United States
of America, which require the use of certain accounting policies
that affect the amounts reported in these financial statements,
including the following: (i) Fund trades are accounted
for on a trade-date basis and marked to market on a daily basis;
(ii) the difference between the cost and market value of Sugar
Interests is recorded as “change in unrealized
profit/loss” for open (unrealized) contracts, and recorded as
“realized profit/loss” when open positions are closed
out; and (iii) earned interest income, as well as the fees and
expenses of the Fund, are recorded on an accrual
basis. The Sponsor believes that all relevant accounting
assumptions and policies have been considered.
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.teucriumcanefund.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.teucriumcanefund.com.
The Sponsor is responsible for the
registration and qualification of the Shares under the federal
securities laws, federal commodities laws, and laws of any other
jurisdiction as the Sponsor may select. The Sponsor is
responsible for preparing all required reports but has entered into
an agreement with the Administrator to prepare these reports on the
Trust’s behalf.
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
make such elections, 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.
PricewaterhouseCoopers
(“PwC”), 2001 Ross Avenue, Suite 1800, Dallas, Texas
75201-2997, will provide tax information in accordance with
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.teucriumcanefund.com.
The fiscal year of the Fund is the
calendar year.
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 known to own
beneficially more than 5% of the outstanding shares of any series
in the Trust as of December 31, 2018, 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
|
Chang Chen Koo San
Marino CA, 91108
|
210,639 common units
(1)
|
13.81%
|
CANE
|
Korea Securities
Depository, 4 Gil 23 Yoinaruro, Youngdeungpo Gu, Seoul
KS
|
155,588 common units
(1)
|
10.20%
|
(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 by the
executive officers of the Sponsor as of December 31, 2018.
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%
Litigation and Claims
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. 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 herein under the heading "U.S. Federal
Income Tax Considerations."
Experts
The financial statements of the
Trust and the Fund, and management’s assessment of the
effectiveness of internal control over financial reporting 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 reports of Grant Thornton LLP,
independent registered public accountants, upon the authority of
said firm as experts in accounting and
auditing.
This Privacy Policy explains the
policies of the Sponsor, a commodity pool operator registered with
the CFTC, and (i) the Trust, and (ii) each commodity pool for which
the Sponsor serves as Sponsor currently or in the future including
Teucrium Corn Fund, Teucrium Wheat Fund, Teucrium Sugar Fund, and
Teucrium Soybean Fund, and Teucrium Agricultural Fund (each of
which is a series of the Trust), relating to the collection,
maintenance, and use of nonpublic personal information about the
Teucrium Funds’ 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. Please read this policy carefully to
understand what the Sponsor does. This Privacy Policy
applies to the nonpublic personal information of investors who are
individuals and who obtain financial products or services from the
Sponsor, the Trust, and the Teucrium Funds primarily for personal,
family, or household purposes. This Privacy Policy applies to both
current and former Fund investors; the Sponsor will only disclose
nonpublic personal information about former investors to the same
extent as for current investors, as described
below.
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 Teucrium 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 recognizes and respects
the privacy expectation of each of the Teucrium Funds’
investors. The Sponsor believes that the confidentiality and
protection of investors’ nonpublic personal information is
one of its fundamental responsibilities. This means, most
importantly, that 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.
Below are the circumstances in which
the Sponsor may disclose investors’ nonpublic personal
information to third parties; investors may not opt out of these
disclosures:
●
|
The Sponsor may provide an
investor’s nonpublic personal information to non-affiliated
service providers involved in servicing and administering products
and services for, or on behalf of the Sponsor (e.g., accountants, compliance
consultants, legal advisors, broker-dealers, introducing brokers,
futures commissions merchants, investment companies, investment
advisers, commodity trading advisors, commodity pool operators,
administrators, and custodians). In all such cases, the Sponsor
will provide the third party with only the nonpublic personal
information necessary to carry out its assigned responsibilities
and only for that purpose.
|
●
|
The Sponsor will release nonpublic
personal information if directed by an investor to do so. The
Sponsor may also release nonpublic personal information to persons
acting in a fiduciary or representative capacity on behalf of an
investor.
|
●
|
The Sponsor may release an
investor’s nonpublic personal information to courts and other
parties related to a subpoena or other court, government, or SRO
order or process, as authorized by law.
|
●
|
The Sponsor may release an
investor’s nonpublic personal information to regulators
(including SROs) or governmental entities that have made a
reasonable request for such information, as authorized by
law.
|
●
|
The Sponsor may release an
investor’s nonpublic personal information to certain
governmental entities and others to prevent money laundering or in
connection with tax filings, as authorized by
law.
|
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
●
|
The Sponsor restricts access to
investors’ nonpublic personal information only to those
employees, agents, and representatives who require that information
to provide financial products and services.
|
●
|
The Sponsor requires all employees,
financial professionals, and companies providing services on its
behalf to keep investors’ nonpublic personal information
confidential.
|
●
|
Third parties with whom the Sponsor
shares investor nonpublic personal information must agree to follow
appropriate standards of security and confidentiality, which
includes safeguarding such information physically, electronically,
and procedurally.
|
●
|
The Sponsor maintains physical,
technical, administrative, and procedural safeguards that comply
with federal standards to protect the confidentiality and security
of investors’ nonpublic personal information including, where
applicable, its disposal.
|
●
|
Employees, agents, and
representatives who have access to shareholder reports or other
correspondence containing investors’ nonpublic personal
information are required to utilize passwords on all electronic
devices used to carry out their professional
responsibilities.
|
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 upon 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 P.C. (“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 and the
Sponsor. This opinion is not binding on the Internal Revenue
Service (the "IRS"). No ruling has been requested from the IRS with
respect to any matter affecting the Fund or prospective investors,
and the IRS may disagree with the tax positions taken by the Trust.
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
United States 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 United States federal income taxation regardless of
its source or (iv) a trust that (X) 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 (Y) 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 your 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, 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 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:
|
●
|
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);
|
|
●
|
the Fund is organized and will be
operated in accordance with its governing documents and applicable
law; and
|
|
●
|
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. 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 returns. If the Fund recognizes
income in the form of interest on short-term Treasury Securities or
cash equivalents and net capital gains from cash settlement of
Sugar Interests 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.
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 taking into account 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 books
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 is the actual or deemed holder of 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, 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. For 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 intends
to make the election permitted by section 754 of the Code, 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 directly acquired 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 its share of the
appreciation or depreciation in the value of the asset since it
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 make
adjustments to the Shareholders’ indirect basis in Fund
assets. It is possible the IRS could successfully assert 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.” A section 1256 contract is defined as including,
in relevant part: (1) a futures contract that is traded on or
subject to the rules of a national securities exchange which 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, and 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. Section 1256 contracts
held at the end of each taxable year are treated as if they were
sold for their fair market value on the last business day of the
taxable year (i.e., are
“marked to market”). In addition, any gain or loss
realized from a disposition, termination or marking-to-market of a
section 1256 contract 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”).
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 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 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, the Fund’s ability to deduct
interest on its indebtedness allocable to its trade or business 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 you that must be deferred or are
disallowed as a result of these or other limitations in the Code,
you may be taxed on income in excess of your economic income or
distributions (if any) on your Shares. As one example, you could be
allocated and required to pay tax on your 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 you cannot deduct
currently because you have insufficient capital gains against which
to offset the loss. As another example, you could be allocated and
required to pay tax on your share of interest income and capital
gain for a year but be unable to deduct some or all of your share
of management fees and/or margin account interest incurred by you
with respect to your Shares. Shareholders are urged to consult
their own professional tax advisor regarding the effect of
limitations under the Code on their 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 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 an affiliate 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
cash distributed exceeds the Shareholder’s adjusted basis of
its interest in the Fund immediately before the distribution. Any
cash 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 cash. 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 period for Shares sold. If a Shareholder who has differing
holding period 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 Section 751 of the Code,
a portion of a Shareholder’s gain or loss from the sale of
Shares (regardless of the holding period for such Shares), will be
separately computed 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
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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●
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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.
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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
Tax Matters
Information Reporting. The Fund
provides tax information to the Shareholders and to the IRS, as
needed. Shareholders of the Fund are treated as partners for
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 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 information furnished to the
Fund.
Partnership Audit Procedures. The IRS may audit the 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 federal 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 United States federal
income tax return. These disclosure rules may apply to transactions
irrespective of whether they are structured to achieve particular
tax benefits. 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. 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
seperately 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. In addition, an exempt
organization Shareholder that incurs acquisition indebtedness to
purchase its Shares in the Fund may have UBTI.
The federal 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 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 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 in 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’s activities were considered to constitute 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
our income to non-corporate Non-U.S. Shareholders and the highest
rate specified in Code section 11(b) (currently 21%) on allocations
of our income 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. A Non-U.S. Shareholder with ECI will
generally 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. Any
amount withheld by the Fund will be treated as a distribution to
the Non-U.S. 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 said cost being borne by the Fund, generally, and
accordingly, by all Shareholders.
If the Fund is not treated as
engaged in a U.S. trade or business, a Non-U.S. Shareholder may
nevertheless be treated as having FDAP income, which would be
subject to a 30% 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 on
behalf of a Non-U.S. Shareholder will be treated as being
distributed to such Shareholder.
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
will 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 "FACTA", 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. 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
and proceeds from the sale of 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 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, inheritance or intangible taxes that may be
imposed by the various jurisdictions in which the Fund does
business or owns property or where the Shareholders
reside. 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 herein.
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 professional 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 other future filing that we make 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:
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our Annual Report on Form 10-K for
the fiscal year ended December 31, 2018, filed with the SEC on
March 15, 2019.
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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 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.teucriumcanefund.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 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.teucriumcanefund.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.
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.
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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, formerly the National Association of
Securities Dealers.
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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.
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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 or
forward contract at a specified price on or before a specified
date.
|
|
Other Sugar
Interests: Other
sugar-related investments such as options on Sugar Futures
Contracts, swaps agreements and forward contracts relating to
sugar, and over-the-counter transactions that are based on the
price of sugar, Sugar Futures Contracts and indices based on the
foregoing.
|
|
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.
|
|
Redemption
Basket: A block of
25,000 Shares used by the Fund to redeem
Shares.
|
|
SEC: Securities
and Exchange Commission.
|
|
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.
|
|
Shareholders: Holders
of Shares.
|
|
Shares: Common units representing fractional
undivided beneficial interests in the
Fund.
|
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.
|
|
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.
|
|
Sugar Futures
Contracts: Futures
contracts for sugar that are traded on ICE Futures, the NYMEX, or
foreign exchanges.
|
|
Sugar
Interests: Sugar
Futures Contracts and Other Sugar
Interests.
|
|
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.
|
|
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.
|
|
Tracking
Error: Possibility
that the daily NAV of the Fund will not track the
Benchmark.
|
|
Trust
Agreement: The Fifth
Amended and Restated Declaration of Trust and Trust Agreement of
the Trust effective as of April 26, 2019.
|
|
Valuation
Day: Any day as of
which the Fund calculates its NAV.
|
|
You: The
owner of Shares
|
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 20.
This statement of additional
information and accompanying disclosure document are both dated
April 29, 2019.
TEUCRIUM SUGAR
FUND
TABLE OF
CONTENTS
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.
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, opponents have criticized the broad scope of the
legislation and, in particular, the regulations implemented by
federal agencies as a result. Since 2010, and most notably in 2015
and 2016, Republicans have proposed comprehensive legislation both
in the House and the Senate of the US Congress. These bills are
intended to pare back some of the provisions of the Dodd-Frank Act
of 2010 that critics view as overly broad, unnecessary to the
stability of the U.S. financial system, and inhibiting the growth
of the U.S. economy. Further, during the campaign and after taking
office, President Donald J. Trump has promised and issued several
executive orders intended to relieve the financial burden created
by the Dodd-Frank Act, although these executive orders only set
forth several general principles to be followed by the federal
agencies and do not mandate the wholesale repeal of the Dodd-Frank
Act. The scope of the effect that passage of new financial reform
legislation could have on U.S. securities, derivatives and
commodities markets is not clear at this time because each federal
regulatory agency would have to promulgate new regulations to
implement such legislation. Nevertheless, regulatory reform may
have a significant impact on U.S.-regulated
entities.
Position Limits,
Aggregation Limits, Price Fluctuation Limits
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 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 the Fund to meet its respective
investment objectives.
In addition, on December 30, 2016,
the CFTC reproposed regulations that would establish revised
specific limits on speculative positions in futures contracts,
option contracts and swaps on 25 agricultural, energy and metals
commodities (the “Proposed Position Limit
Rules”).
The Proposed Position Limit Rules
were a reproposal and the CFTC has requested comments from the
public. It remains to be seen whether the Proposed Position Limit
Rules will become effective as the CFTC has proposed, as comments
could result in modifications to the proposed limits or
implementation could be delayed for other reasons. In general, the
Proposed Position Limit Rules do not appear to have a substantial
or adverse effect on the Fund. However, if the total net assets of
the Fund were to increase significantly from current levels, the
Position Limit Rules as proposed could negatively impact the
ability of the Fund to meet its respective investment objectives
through limits that may inhibit the Sponsor’s ability to sell
additional Creation Baskets of the Fund. However, it is not
expected that the Fund will reach asset levels that would cause
these position limits to be reached in the near
future.
In addition, the Proposed Position
Limit Rules state that the CFTC will review, and may amend, the
Position Limit Rules at a minimum every two years and more often as
deemed necessary. Such future amendments may affect the Fund, and
it may, at that time, be substantial and adverse. By way of
example, future amendments, in combination with the Position Limit
Rules, may negatively impact the ability of the Fund to meet its
respective investment objectives through limits that may inhibit
the Sponsor’s ability to sell additional Creation Baskets of
the Fund, if the total net assets of a Fund grow significantly from
current levels.
The futures exchanges, e.g. the CME,
may under the Proposed Position Limit Rules impose position limits
which are lower than those imposed by the CFTC. Such a limit by an
exchange on which the Fund trades futures contracts may negatively
and adversely impact the ability of the Fund to meet its respective
investment objectives through limits that may inhibit the
Sponsor’s ability to sell additional Creation Baskets of the
Fund. No such lower limits by an exchange are currently in
place.
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 aggregate speculative position
limits currently as proposed in the Proposed Position Limit Rules
are as follows for each of the commodities traded by the
Fund:
Commodity Future
|
Spot Month Position
Limit
|
All Month Aggregate Position
Limit
|
sugar
|
23,300 contracts
|
38,400 contracts
|
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 the 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 may 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. There
are currently no daily price fluctuation limits set for sugar
futures on ICE or NYMEX.
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
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 short-term Treasury Securities, in cash and cash equivalents and
interest is generally earned on available assets, which include
unrealized profits credited to the Fund’s
accounts
The following graph sets forth the
historical performance of the Fund from commencement of operations
on September 19, 2011 until January 31, 2019.
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE
RESULTS.