Unassociated Document
As
filed with the Securities and Exchange Commission on June 17,
2010
Registration
No. 333-________
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
S-1
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
Teucrium
Commodity Trust
(Registrant)
Delaware
(State
or other jurisdiction of incorporation or organization)
6799
(Primary
Standard Industrial Classification Code Number)
61-1604335
(I.R.S.
Employer Identification No.)
c/o
Teucrium Trading, LLC
232
Hidden Lake Road
Building
A
Brattleboro,
Vermont 05301
Phone:
(802) 257-1617
(Address,
including zip code, and telephone number, including area code,
of
Registrant’s principal executive offices)
Sal
Gilbertie
President
Teucrium
Trading, LLC
232
Hidden Lake Road
Building
A
Brattleboro,
Vermont 05301
Phone:
(802) 257-1617
(Name,
address, including zip code, and telephone number, including area code, of agent
for service)
Copy
to:
Heather
C. Harker, Esq.
Dykema
Gossett PLLC
1300
I Street, N.W.
Suite
300 West
Washington,
DC 20005
Approximate
date of commencement of proposed sale to the public: As soon as practicable
after the effective date of this Registration Statement.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. x
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company under
Rule 12b-2 of the Securities Exchange Act of 1934. (Check one):
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer x
|
Smaller
reporting company ¨
|
CALCULATION
OF REGISTRATION FEE
Title of Securities to be
Registered
|
|
Amount to be
Registered
|
|
|
Proposed Maximum
Offering Price Per
Share*
|
|
|
Proposed
Maximum
Aggregate
Offering Price*
|
|
|
Amount of
Registration
Fee
|
|
Common
units of Teucrium WTI Crude Oil Fund, a series of the
Registrant
|
|
|
100,000 |
|
|
$ |
25.00 |
|
|
$ |
2,500,000 |
|
|
$ |
178.26
|
|
*
Estimated solely for the purpose of calculating the registration fee pursuant to
Rule 457(d) under the Securities Act of 1933.
The
registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act or until this Registration Statement shall become effective on
such date as the Commission, acting pursuant to said Section 8(a), may
determine.
The
information in this preliminary prospectus is not complete and may be changed.
These securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This preliminary
prospectus is not an offer to sell these securities and the Sponsor and the
Trust are not soliciting an offer to buy these securities in any jurisdiction
where the offer or sale is not permitted.
Preliminary
Prospectus
|
Subject
to Completion June 17,
2010
|
Teucrium
WTI Crude Oil Fund
30,000,000
Shares
Teucrium
WTI Crude Oil Fund
(the “Fund”) is a commodity pool that is a series of Teucrium Commodity Trust
(“Trust”), a Delaware statutory trust. The Fund will issue common
units representing fractional undivided beneficial interests in such Fund,
called “Shares.” The Fund intends to continuously offer creation
baskets consisting of 100,000 Shares at their net asset value (“NAV”) to
“Authorized Purchasers” (as defined below) through [to be provided by
Pre-Effective Amendment to the Registration Statement], which is the marketing
agent for Shares of the Fund (the “Marketing Agent”). Authorized
Purchasers, in turn, may offer to the public Shares of any baskets they
create. [To be provided by Pre-Effective Amendment to the
Registration Statement] is expected to be the initial Authorized
Purchaser. Authorized Purchasers will sell such Shares, which will be
listed on the NYSE Arca exchange (“NYSE Arca”) and, 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 oil
interests. 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 are
expected to trade on the secondary market on the NYSE Arca at prices that are
lower or higher than their net asset value per Share. Fund Shares
will be listed on the NYSE Arca under the symbol “CRUD.”
The
investment objective of the Fund is to have 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 West Texas
Intermediate (“WTI”) crude oil futures contracts. The Fund’s sponsor
is Teucrium Trading, LLC (the “Sponsor“).
This is a
best efforts offering; the Marketing Agent 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 _________, 2012 (two years from the date of this prospectus),
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 16. 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 COMMODITY 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.
|
|
Per share
|
|
|
Per Basket
|
|
Price
of the Shares*
|
|
$ |
25.00 |
|
|
$ |
2,500,000 |
|
The date of this prospectus is ________,
2010.
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 FUTURES AND OPTIONS 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
BEGINNING AT PAGE 57
AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT
IS, TO RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, AT PAGE
1.
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 THE DESCRIPTION OF THE PRINCIPAL RISK
FACTORS OF THIS INVESTMENT, AT PAGE 7.
YOU
SHOULD ALSO BE AWARE THAT THIS COMMODITY POOL MAY TRADE FOREIGN FUTURES OR
OPTIONS CONTRACTS. TRANSACTIONS ON MARKETS LOCATED OUTSIDE THE UNITED
STATES, INCLUDING MARKETS FORMALLY LINKED TO A UNITED STATES MARKET, MAY BE
SUBJECT TO REGULATIONS WHICH OFFER DIFFERENT OR DIMINISHED PROTECTION TO THE
POOL AND ITS PARTICIPANTS. FURTHER, UNITED STATES REGULATORY
AUTHORITIES MAY BE UNABLE TO COMPEL THE ENFORCEMENT OF THE RULES OF REGULATORY
AUTHORITIES OR MARKETS IN NON-UNITED STATES JURISDICTIONS WHERE TRANSACTIONS FOR
THE POOL MAY BE EFFECTED.
THIS POOL HAS NOT
COMMENCED TRADING AND DOES NOT HAVE ANY PERFORMANCE
HISTORY. THE SPONSOR HAS NOT PREVIOUSLY OPERATED ANY OTHER
COMMODITY POOLS OR TRADED ANY OTHER ACCOUNTS.
TEUCRIUM
WTI CRUDE OIL FUND
TABLE
OF CONTENTS
STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
|
iv
|
PROSPECTUS
SUMMARY
|
1
|
Principal
Offices of the Fund and the Sponsor
|
1
|
Breakeven
Point
|
1
|
Overview
of the Fund
|
1
|
The
Shares
|
5
|
The
Fund’s Investments in Oil Interests
|
6
|
Principal
Investment Risks of an Investment in the Fund
|
7
|
Financial
Condition of the Fund
|
9
|
Defined
Terms
|
9
|
Breakeven
Analysis
|
9
|
The
Offering
|
11
|
WHAT
ARE THE RISK FACTORS INVOLVED WITH AN INVESTMENT IN THE
FUND?
|
16
|
Risks
Associated With Investing Directly or Indirectly in Crude
Oil
|
16
|
The
Fund’s Operating Risks
|
23
|
Risk
of Leverage and Volatility
|
35
|
Over-the-Counter
Contract Risk
|
35
|
Risk
of Trading in International Markets
|
36
|
Tax
Risk
|
37
|
THE
OFFERING
|
39
|
The
Fund in General
|
39
|
The
Sponsor
|
|
The
Trustee
|
42
|
Operation
of the Fund
|
43
|
Futures
Contracts
|
47
|
Over-the-Counter
Derivative
|
51
|
Benchmark
Performance
|
53
|
WTI
Lite, Sweet Crude Oil and the Oil Industry
|
53
|
The
Fund’s Investments in Treasury Securities, Cash and Cash
Equivalents
|
54
|
Other
Trading Policies of the Fund
|
54
|
The
Service Providers
|
55
|
Fees
to be Paid by the Fund
|
57
|
Form
of Shares
|
58
|
Transfer
of Shares
|
58
|
Inter-Series
Limitation on Liability
|
59
|
Plan
of Distribution
|
60
|
The
Flow of Shares
|
62
|
Calculating
NAV
|
63
|
Creation
and Redemption of Shares
|
64
|
Secondary
Market Transactions
|
69
|
Use
of Proceeds
|
69
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
70
|
The
Trust Agreement
|
74
|
The
Sponsor Has Conflicts of Interest
|
78
|
Provisions
of Federal and State Securities Laws
|
80
|
Books
and Records
|
80
|
Analysis
of Critical Accounting Policies
|
81
|
Statements,
Filings, and Reports to Shareholders
|
81
|
Fiscal
Year
|
81
|
Governing
Law; Consent to Delaware Jurisdiction
|
82
|
Legal
Matters
|
82
|
Privacy
Policy
|
82
|
U.S.
Federal Income Tax Considerations
|
83
|
Investment
By ERISA Accounts
|
96
|
INFORMATION
YOU SHOULD KNOW
|
99
|
WHERE
YOU CAN FIND MORE INFORMATION
|
100
|
TEUCRIUM
TRADING, LLC -- INDEX TO FINANCIAL STATEMENTS
|
|
TEUCRIUM
COMMODITY TRUST -- INDEX TO FINANCIAL STATEMENTS
|
|
TEUCRIUM WIT
CRUDE OIL FUND -- INDEX TO FINANCIAL
STATEMENTS
|
|
Until
[date] (25 days after the date of this prospectus), all dealers effecting
transactions in the offered Shares, whether or not participating in this
distribution, may be required to deliver a prospectus. This requirement is in
addition to the obligations of dealers to deliver a prospectus when acting as
underwriters and with respect to unsold allotments or
subscriptions.
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.
PROSPECTUS
SUMMARY
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 17, 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 232 Hidden Lake Road,
Building A, Brattleboro, Vermont 05301. The telephone number is (802) 257-1617.
The Sponsor’s principal office is also located at 232 Hidden Lake Road, Building
A, Brattleboro, Vermont 05301, and its telephone number is also (802)
257-1617.
Breakeven
Point
The amount of trading income
required for the redemption value of a Share at the end of one year to equal the
initial selling price of the Share, assuming an initial selling price of $25.00,
is $0.34 or 1.55% of the initial selling price. For more information, see
“Breakeven Analysis” below.
Overview
of the Fund
Teucrium
WTI Crude Oil Fund (the “Fund” or “Us” or “We”) is a commodity pool that will
issue 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 six series of the Trust;
each series is operated 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 Amended and Restated Declaration of Trust and Trust Agreement (the
“Trust Agreement”). 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 first intends to
use this prospectus on or about _____, 2010, the date of this
prospectus.
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 futures contracts for WTI
crude oil, also known as Texas Light Sweet crude oil (“Oil Futures Contracts”)
traded on the NYMEX, specifically (1) the nearest to spot June or December Oil
Futures Contract, weighted 35%; (2) the June or December Oil Futures Contract
following the aforementioned (1), weighted 30%; and (3) the next December Oil
Future Contract that immediately follows the aforementioned (2), weighted 35%;
less the Fund’s expenses.
(This weighted average of the three referenced Oil Futures Contracts is
referred to herein as the “Benchmark,” and the three Oil 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 primarily in Benchmark Component Futures Contracts and in
comparable contracts traded on the NYMEX and to a lesser extent the
IntercontinentalExchange (“ICE”). The Fund may also invest in other kinds of
crude oil futures contracts traded on the NYMEX or ICE or on other domestic or
foreign exchanges. This prospectus refers to exchange-traded crude oil futures
contracts, collectively, as “Oil Futures Contracts.” In addition to Oil Futures
Contracts, the Fund may invest in exchange-traded options on Oil Futures
Contracts and in over-the-counter investment options based on the price of crude
oil and Oil Futures Contracts, such as forward contracts and swaps
(collectively, “Other Oil Interests,” and together with Oil Futures Contracts,
“Oil 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, before taking Fund expenses and any interest income from the
cash, cash equivalents and U.S. Treasury securities held by the Fund into
account, 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 to execute the Fund’s
transactions in Oil Futures Contracts.
Light
Sweet Crude Oil Futures Contracts traded on the NYMEX are listed for the current
year and the next 8 years. However, the nature of the Benchmark is such that the
Fund will not hold futures contracts beyond approximately the first 18 months of
listed Oil Futures Contracts.
It is
the intent of the Sponsor to never hold a Benchmark Component Futures Contract
to spot. For example, in terms of the Benchmark, in April of a given year, the
Benchmark Component Futures Contracts will be the contracts expiring in June
(the first-to-expire Benchmark Component), December (the second-to-expire
Benchmark Component), and June of the following year (the third-to-expire
Benchmark Component). Because the next-to-expire Benchmark Component Oil Futures
Contract (the June contract) will become spot on the third-to-last trading day
prior to the 25th
calendar day in April, the Sponsor will “roll” or change that contract prior to
the third-to-last trading day prior to the 25 calendar day in April for a
position in December of the following year, never holding any futures contract
to spot.
The
Fund seeks to achieve its investment objective primarily by investing in Oil
Interests such that daily changes in the Fund’s NAV will be expected to closely
track the changes in the Benchmark. The Fund’s positions in Oil Interests will
be changed or “rolled” on a regular basis in order to track the changing nature
of the Benchmark. For example, three times a year (on the month in which a
Benchmark Component Oil Futures Contract is set to become the first-to-expire
Oil Futures contract listed on NYMEX (commonly call the “spot” contract), the
first-to-expire Benchmark Component Contract will become the next-to-expire
(spot) Oil 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 typically will not be rolled
entirely on that day, but rather will typically be rolled over a period of
several days.
The Fund
may invest in Oil Interests other than the Benchmark Component Futures
Contracts. For example, Other Oil Interests that do not have standardized terms
and are not exchange-traded, referred to as “over-the-counter” Oil Interests,
can generally be structured as the parties to the Oil Interest contract desire.
Therefore, the Fund might enter into multiple over-the-counter Oil Interests
intended to exactly replicate the performance of each of the three Benchmark
Component Futures Contracts, or a single over-the-counter Oil 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 Oil Interest, the
performance of the Oil 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 Oil 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 Oil 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 will endeavor to cause the Fund’s performance,
before taking Fund expenses and any interest income from the cash, cash
equivalents and U.S. Treasury securities held by the Fund into account, to
closely track that of the Benchmark.
The Fund
invests in Oil 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 Oil Interests. After fulfilling
such margin and collateral requirements, the Fund will invest the remainder of
its proceeds from the sale of baskets in short-term obligations of the United
States government (“Treasury Securities”) or cash equivalents, and/or merely
hold such assets in cash (generally in interest-bearing accounts). Therefore,
the focus of the Sponsor in managing the Fund is investing in Oil Interests and
in Treasury Securities, cash and/or cash equivalents. The Fund will earn
interest income from the Treasury Securities and/or cash equivalents that it
purchases and on the cash it holds through the Fund’s custodian, the Bank of New
York Mellon (the “Custodian”).
The
Sponsor endeavors to place the Fund’s trades in Oil 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:
|
·
|
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 Benchmark over the same
period.
|
The
Sponsor believes that market arbitrage opportunities will cause the Fund’s Share
price on the NYSE Arca to closely 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 closely
track, in percentage terms, changes in the Benchmark, less the Fund’s
expenses.
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 crude oil in a cost-effective manner. Such investors may include participants
in the crude oil market and other industries seeking to hedge the risk of losses
in their crude oil-related transactions, as well as investors seeking exposure
to the crude oil market. Accordingly, depending on the investment objective of
an individual investor, the risks generally associated with investing in the
crude oil 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
WTI light, sweet crude oil on the spot market. Furthermore, as noted above, the
Fund also invests 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 Oil 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
Treasury Securities/cash/cash equivalents and the changes in the price of WTI
light, sweet crude oil or Oil 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 WTI light, sweet crude oil, 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 WTI
light, sweet crude oil. 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 barrel of WTI light, sweet crude oil or the price of any particular Oil
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.
The Fund
will commence making the investments described in this prospectus as quickly as
practicable (no more than three business days) after the initial Creation Basket
is sold. All proceeds from the sale of subsequent Creation Baskets will also be
invested as quickly as practicable in such investments. The Fund’s cash and
investments are held through the Fund’s Custodian, in accounts with the Fund’s
commodity futures brokers or in collateral accounts with respect to
over-the-counter Oil 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 amount of Creation Baskets that can be sold.
At some point, however, accountability levels on Oil Futures Contracts or Other
Oil 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 Oil
Interests with an aggregate market value that approximates the amount of
Treasury Securities and/or cash received or paid upon the purchase or redemption
of the basket(s).
Note to Secondary Market Investors:
The Shares can be directly purchased from or redeemed by the Fund only in
Creation Baskets or Redemption Baskets, respectively, and only by Authorized
Purchasers. Each Creation Basket and Redemption Basket consists of 100,000
Shares and therefore may require a commitment of several million dollars (e.g., 100,000 Shares times an
initial Share price of $25.00 equals $2.5 million). 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 will be listed and traded on the NYSE
Arca under the ticker symbol “CRUD” 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.
The
Shares
The
Shares are registered as securities under the Securities Act of 1933 (“1933
Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”) and do not
provide dividend rights or conversion rights and there will not be 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 will 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 _________, 2012 (two years from the date of this
prospectus). The offering
may be extended beyond such date as permitted under the rules under 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 100,000 Shares. Under the plan of distribution, 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 Oil Interests
The Fund
intends to invest primarily in Oil Futures Contracts.
|
·
|
A
futures contract is a standardized contract traded on a futures exchange
that calls for the future delivery of a specified quantity of a commodity
at a specified price, on a specified date and at a specified
location.
|
The Fund may also invest to a lesser
extent in the following types of Other Oil Interests:
|
·
|
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.
|
|
·
|
A
forward contract is an over-the-counter bilateral contract for the
purchase of sale of a specified quantity of a commodity at a specified
price, on a specified date and at a specified
location.
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|
·
|
An
option on a futures contract, 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, forward contract or commodity, as
applicable, at a specified price on or before a specified date. Options on
futures contracts, like the future contracts to which they relate, are
standardized contracts traded on an exchange, while options on forward
contracts and commodities generally are individually negotiated,
over-the-counter, bilateral
contracts.
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|
·
|
Over-the-counter
contracts (such as swap contracts) generally involve an exchange of a
stream of payments between the contracting parties. Over-the counter
contracts generally are not uniform and are not
exchange-traded.
|
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 WTI light, sweet crude
oil 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 Oil 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.
A more
detailed description of Oil Interests and other aspects of the crude oil and Oil
Interests markets can be found later in this prospectus.
As
noted, the Fund invests in Oil Futures Contracts, including those traded on the
NYMEX and the ICE. The Fund expressly disclaims any association with the NYMEX
or ICE or endorsement of the Fund by such exchange and acknowledges that “NYMEX”
and “New York Mercantile Exchange”, as well as “ICE” and
“IntercontinentalExchange” are registered trademarks of each respective
exchange.
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 16.
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·
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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 will 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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|
·
|
There
is a risk that the changes in the price of the Fund’s Shares on the NYSE
Arca in percentage terms will not closely track the changes in the price
of WTI light, sweet crude oil in percentage terms. 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 the changes in the price of the Benchmark Component Futures
Contracts; or the changes in the Benchmark Component Futures Contracts do
not correlate closely with changes in the cash or spot price of WTI light,
sweet crude oil. 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 crude oil or as a hedge against
the risk of loss in crude oil-related
transactions.
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|
·
|
Investors
may choose to use the Fund as a means of investing indirectly in crude
oil, and there are risks involved in such investments. The risks and
hazards that are inherent in oil production may cause the price of crude
oil to fluctuate widely. Price movements for crude oil are influenced by,
among other things, many operating risks. Such operating risks include,
but are not limited to, risk of fire, explosions, blow-outs, pipe failure,
abnormally pressured formations and environmental hazards. Environmental
hazards include oil spills, natural gas leaks, ruptures and discharges of
toxic gases. Crude oil operations are also subject to various U.S.
federal, state and local regulations that materially affect
operations.
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|
·
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The
Sponsor has limited experience operating a commodity
pool.
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|
·
|
The
Fund has no operating history, so there is no performance history to serve
as a basis for you to evaluate an investment in the
Trust.
|
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·
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The
price relationship between the near month Oil 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 crude oil 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 crude oil
prices, the value of the Benchmark Component Futures Contracts would tend
to decline as they approach expiration. 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 crude oil prices the value of the
Benchmark Component Futures Contracts would tend to rise as they approach
expiration.
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|
·
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Investors,
including those who directly participate in the crude oil 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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|
·
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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 Oil 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 value of the Fund’s exposure to losses from its investments in
Oil 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 Oil Interests. To the extent that these Other Oil
Interests are contracts individually negotiated between their parties,
they may not be as liquid as Oil 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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|
·
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The
Fund invests primarily in Oil Interests that are traded or sold in the
United States. However, a portion of the Fund’s trades may take place in
markets and on 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. In some of these non-U.S. markets,
the performance on a 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. Trading in non-U.S. markets also leaves
the Fund susceptible to fluctuations in the value of the local currency
against the U.S. dollar.
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|
·
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Global
political risks, including geopolitical conflicts and war could cause the
price of WTI sweet, crude oil to fluctuate greatly impacting the Fund’s
ability to meet its investment
strategy.
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|
·
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The
Fund invests primarily in Oil Futures Contracts traded on the NYMEX and
ICE.
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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, 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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·
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The
Fund pays fees and expenses that are incurred regardless of whether it is
profitable.
|
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.
Defined
Terms
For a
glossary of defined terms, see Appendix A.
Breakeven
Analysis
The
breakeven analysis below indicates the approximate dollar returns and percentage
returns required for the redemption value of a hypothetical $25.00 initial
investment in a single Share 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
initial selling price per Share
|
|
$
|
25.00 |
|
Sponsor’s
Fee (1.00%)(1)
|
|
$ |
0.25 |
|
Creation
Basket Fee(2)
|
|
$ |
0.01 |
|
Estimated
Brokerage Fees (0.02%)(3)
|
|
$ |
0.01 |
|
Other
Fund Fees and Expenses(4)
|
|
$ |
0.10 |
|
Interest
Income (0.10%)(5)
|
|
$ |
(0.03 |
) |
Amount
of trading income (loss) required for the redemption value at the end of
one year to equal the initial selling price of the
Share
|
|
$ |
0.34 |
|
Percentage
of initial selling price per share
|
|
|
1.55 |
% |
(1) 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.
(2)
Authorized Purchasers are required to pay a Creation Basket fee of $1,000 for
each order they place to create one or more baskets. An order must be at least
one basket, which is 100,000 Shares. This breakeven analysis assumes a
hypothetical investment in a single Share so the Creation Basket fee is $.01
(1,000/100,000).
(3)
The Fund determined this amount as follows. Assuming that the price of a Share
is $25.00, the Fund would receive $2,500,000 upon the sale of a Creation Basket
(100,000 Shares multiplied by $25.00). Assuming that this entire amount is
invested in Oil Futures Contracts and that there is no change in the settlement
price of such contracts, the Fund would be required to purchase approximately 31
Oil Futures Contracts to support the Creation Basket ($2,500,000 divided by
$80,000, the value of the April 2010 Oil Futures Contract as of October, 2009,
which is used to approximate the price of the Benchmark Component Futures
Contracts). In order to reflect changes in the Benchmark Component Futures
Contracts, the Fund would have to replace one-third (approximately 40) of the
contracts it holds with new contracts two times per year. Assuming further that
futures commission merchants charge approximately $4.00 per Oil Futures Contract
for each purchase or sale, the annual futures commission merchant charge would
be approximately $640.00 (80 total Oil Futures Contract transactions (40
purchases and 40 sales) multiplied by two times per year multiplied by $4.00).
As a percentage of the total investment of $2,500,000, this annual commission
expense would be approximately 0.02%.
(4)
Other Fund Fees and expenses include legal, printing, accounting, custodial,
administration, bookkeeping, transfer agency and marketing agent costs. The
per-share cost of these fixed or estimated fees has been calculated assuming
that the Fund has $100 million in assets.
(5) The
Fund earns interest on funds it deposits with the futures commission merchant
and the Custodian and it estimates that the interest rate will be 0.16% based on
the interest rate on three-month Treasury Bills as of March 16, 2010. The actual
rate will vary.
The
Offering
Offering
|
The
Fund will offer Creation Baskets consisting of 100,000 Shares through the
Marketing Agent to Authorized Purchasers. Authorized Purchasers may
purchase Creation Baskets consisting of 100,000 Shares at the Fund’s NAV,
which is expected to initially be $25.00. The initial Authorized Purchaser
intends to offer the Shares of the initial Creation Basket(s) publicly.
The initial Creation Basket is expected to be purchased by the initial
Authorized Purchaser on, or soon after, the day the SEC declares the
registration statement effective. The Shares are expected to begin trading
on the NYSE Arca on the day following the purchase of the initial Creation
Basket(s) by the initial Authorized Purchaser.
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Use
of Proceeds
|
The
Sponsor will apply substantially all of the Fund’s assets toward investing
in Oil Interests, Treasury Securities, cash and/or cash equivalents. The
Sponsor will deposit a portion of the Fund’s net assets with the futures
commission merchant, Newedge USA, LLC, or other custodians to be used to
meet its current or potential margin or collateral requirements in
connection with its investment in Oil Interests. The Fund will use only
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 5% to 10% of the Fund’s assets will normally be committed as
margin for Oil Futures Contracts and collateral for Other Oil 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 will be held in Treasury
Securities, cash and/or cash equivalents by the Custodian. All interest
income earned on these investments is retained for the Fund’s
benefit.
|
NYSE
Arca Symbol
|
“CRUD”
|
|
|
Creation
and Redemption
|
Authorized
Purchasers pay a $1,000 fee for each order to create or redeem one or more
Creation Baskets or 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 on any day after the
effective date of the registration statement relating to this prospectus
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
|
The
Fund is one of multiple 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.
|
Registration
Clearance and Settlement
|
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 Custodian 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
|
The
NAV will be calculated by taking the current market value of the Fund’s
total assets and subtracting any liabilities. Under the Fund’s current
operational procedures, the Fund’s administrator, The Bank of New York
Mellon (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. NYSE Arca 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 NYMEX’s main pricing mechanism is
open.
|
Fund
Expenses
|
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 after the time any
Shares have begun trading on the 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 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
(xi) extraordinary expenses (including, but not limited to, legal claims
and liabilities and litigation costs and any indemnification related
thereto). The
Sponsor will bear the costs and expenses related to the initial offer and
sale of Shares, including registration fees paid or to be paid to the SEC,
FINRA or any other regulatory body. Total fees to be paid by the Fund are
currently estimated to be approximately 1.71% of the daily net assets for
the twelve-month period ending ______, 2011, 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 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, Marketing Agent or
Administrator, under certain
circumstances.
|
Termination
Events
|
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
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 to dissolve the Trust, subject to certain conditions; and (6)
the determination by the Sponsor to dissolve the Trust or the Fund,
subject to certain conditions. 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
|
We
expect the initial Authorized Purchaser to be [to be provided by
Pre-Effective Amendment to the Registration Statement], and we expect that
there will be additional Authorized Purchasers in the future. A list of
Authorized Purchasers will be available from the Marketing Agent.
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 Marketing
Agent.
|
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, which includes the Fund’s and the Sponsor’s financial statements and
the related notes.
Risks
Associated With Investing Directly or Indirectly in Crude Oil
Investing
in Oil Interests subjects the Fund to the risks of the crude oil 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 crude oil market because it invests
in Oil Interests. The risks and hazards that are inherent in the oil market may
cause the price of oil 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 WTI light, sweet crude oil, then the price of its Shares will
fluctuate accordingly.
|
·
|
The
price and availability of light, sweet crude oil is influenced by economic
and industry conditions, including but not limited
to:
|
|
Ø
|
the
economic activity of users - as certain economies expand, oil consumption
and prices increase, and as economies contract (in a recession or
depression), oil demand and prices
fall;
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the
increases in oil production due to price increases making it more
economical to extract oil from additional sources which may later
stabilize further price increases;
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Ø
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decisions
of the cartel of oil producing countries (e.g., OPEC, the Organization of
the Petroleum Exporting Countries) to produce more or less
oil;
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Ø
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mechanical
difficulties or shortages or delays in the delivery of drilling rigs and
other equipment;
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Ø
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compliance
with government regulations;
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Ø
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adverse
weather conditions;
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Ø
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political
conflicts- including war;
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Ø
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the
cancellation, shortening or delaying of crude oil drilling and production
activities;
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Ø
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not
finding commercially productive crude oil
reservoirs;
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Ø
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operating
risks including risk of fire, explosions, blow-outs, pipe failure,
abnormally pressured formations and environmental hazards;
and
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Ø
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environmental
hazards including oil spills, natural gas leaks, ruptures and the
discharge of toxic gases.
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Crude oil operations are also subject
to various U.S. federal, state and local regulations that materially affect
operations. Matters regulated include discharge permits for drilling operations,
drilling and abandonment bonds, reports concerning operations the spacing of
wells and pooling of properties and taxation. At various times, regulatory
agencies have imposed price controls and limitations on production. In order to
conserve supplies of crude oil and natural gas, these agencies have restricted
the rates of flow of crude oil and natural gas wells below actual production
capacity. Federal, state and local laws regulate production, handling, storage,
transportation and disposal of crude oil and natural gas, by-products from crude
oil and natural gas and other substances and materials produced or used in
connection with crude oil and natural gas operations.
The
impact of environmental and other laws and regulations may affect the price of
crude oil.
Environmental and other governmental
laws and regulations have increased the costs to plan, design, drill, install,
operate and abandon oil wells. Other laws have prevented exploration and
drilling of oil in certain environmentally sensitive federal lands and waters.
Several environmental laws that have a direct or an indirect impact on the price
of crude oil include, but are not limited to, the Clean Air Act, Clean Water
Act, Resource Conservation and Recovery Act, and the Comprehensive Environmental
Response, Compensation and Liability Act of 1980. .
The
Benchmark is not designed to correlate exactly with the spot price of WTI light,
sweet crude oil and this could cause the changes in the price of the Shares to
substantially vary from the changes in the spot price of WTI light, sweet crude
oil. Therefore, you may not be able to effectively use the Fund to hedge against
oil-related losses or to indirectly invest in crude oil.
The
Benchmark Component Futures Contracts reflect the price of WTI light, sweet
crude oil for future delivery, not the current spot price of WTI light, sweet
crude oil, so at best the correlation between changes in such Oil Futures
Contracts and the spot price of WTI light, sweet crude oil will be only
approximate. Weak correlation between the Benchmark and the spot price of WTI
light, sweet crude oil may result from the typical seasonal fluctuations in WTI
light, sweet crude oil prices discussed above. Imperfect correlation may also
result from speculation in Oil Interests, technical factors in the trading of
Oil 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 WTI
light, sweet crude oil, then the price of Shares may not accurately track the
spot price of WTI light, sweet crude oil and you may not be able to effectively
use the Fund as a way to hedge the risk of losses in your oil-related
transactions or as a way to indirectly invest in crude oil.
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 crude oil-related losses or as a way to
indirectly invest in crude oil.
The
Sponsor endeavors to invest the Fund’s assets as fully as possible in Oil
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 Oil Futures Contracts other than the
Benchmark Component Futures Contracts and in Other Oil 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 Oil
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 Oil 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 will incur certain expenses in connection with its operations, and
will hold 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 will 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 Oil Interests
having an aggregate notional amount exactly equal to the Fund’s NAV. As a
standardized contract, a single Oil Futures Contract is for a specified
amount of light, sweet crude oil, and the Fund’s NAV and the proceeds from
the sale of a Creation Basket are 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 $2,500,000 for the sale of a Creation
Basket and that the value (i.e., the notional amount) of a Oil Futures
Contract is $80,000, the Fund could only enter into 31 Oil Futures
Contracts with an aggregate value of $2,480,000). While the Fund may be
better able to achieve the exact amount of exposure to the crude oil
market through the use of over-the-counter Other Oil Interests, there is
no assurance that the Sponsor will be able to continually adjust the
Fund’s exposure to such Other Oil Interests to maintain such exact
exposure. Furthermore, as noted above, the use of Other Oil Interests may
itself result in imperfect correlation with the Benchmark. Any amounts not
invested in Oil Interests will be 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 Oil 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 crude oil market. On the other hand, if the Fund’s NAV is equal to
100.9 times the value of a single Oil 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 Oil Futures
Contracts due to accountability levels imposed by the relevant exchanges.
In these instances, the Fund would likely invest to a greater extent in
Oil Interests not subject to these accountability levels. To the extent
that the Fund invests in Other Oil Interests, the correlation between the
Fund’s NAV and the Benchmark may be lower. In certain circumstances,
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 crude
oil-related losses or indirectly invest in crude oil.
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 crude oil-related
losses or to indirectly invest in crude oil.
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 WTI light, sweet crude oil, even if the
Fund’s NAV was closely tracking movements in the spot price of WTI light, sweet
crude oil. If this occurs, you may not be able to effectively use the Fund to
hedge the risk of losses in your crude oil-related transactions or to indirectly
invest in crude oil.
The
Fund may experience a loss if it is required to sell Treasury Securities or cash
equivalents at a price lower than the price at which they were
acquired.
If the
Fund is required to sell Treasury Securities or 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 WTI light, sweet crude oil. The value of Treasury Securities and other
debt securities 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 Treasury Securities and cash equivalents should minimize
the interest rate risk to which the Fund is subject, it is possible that the
Treasury Securities and 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. 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 Oil 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 Oil 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 crude oil 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 Treasury Securities, cash and/or cash equivalents
that it holds to meet its liquidity needs. The anticipated large value of the
positions in Oil Interests that the Sponsor will acquire or enter into for the
Fund increases the risk of illiquidity. Oil Interests in which the Fund invests,
such as over-the counter contracts, may have a greater likelihood of being
illiquid since they are contracts between two parties that take into account not
only market risk, but also the relative credit, tax and settlement risks under
such contracts. Such contracts also have limited transferability that results
from such risks and the express limitations in the contracts. Because Oil
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 crude oil
purchasers are the predominant hedgers in the market, the Fund might have to
reinvest at higher futures prices or choose Other Oil Interests.
The
changing nature of the participants in the crude oil market will influence
whether futures prices are above or below the expected future spot price. WTI
crude oil producers and distributors will typically seek to hedge against
falling WTI crude oil prices by selling Oil Futures Contracts. Therefore, if WTI
crude oil producers and distributors become the predominant hedgers in the
futures market, prices of Oil Futures Contracts will typically be below expected
future spot prices. Conversely, if the predominant hedgers in the futures market
are the purchasers of WTI crude oil who purchase Oil Futures Contracts to hedge
against a rise in prices, prices of Oil 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 Oil Futures Contract that is no longer a
Benchmark Component Futures Contract and purchase a new Oil Futures Contract or
sell a Oil Futures Contract to meet redemption requests.
While
the Fund does not intend to take physical delivery of crude oil under its Oil
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 crude oil
under its Oil Interests, Oil Futures Contracts are traditionally not
cash-settled contracts, and it is possible to take delivery under these and some
Other Oil Interests. Storage costs associated with purchasing crude oil could
result in costs and other liabilities that could impact the value of Oil Futures
Contracts or certain Other Oil Interests. Storage costs include the time value
of money invested in crude oil as a physical commodity plus the actual costs of
storing the crude oil less any benefits from ownership of crude oil that are not
obtained by the holder of a futures contract. In general, Oil Futures Contracts
have a one-month delay for contract delivery and back month contracts (the back
month is any future delivery month other than the spot month) includes storage
costs. To the extent that these storage costs change for crude oil while the
Fund holds Oil Interests, the value of the Oil 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 Oil Futures Contacts 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 crude oil
price indices.
The
design of the Fund’s Benchmark is such that the Benchmark Component Futures
Contracts will change two 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 near month Oil Futures Contract to expire becomes the
next near month contract to expire, 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 crude oil 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 crude oil 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 crude oil 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
crude oil 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 crude oil.
In the event of a prolonged period of contango, and absent the impact of rising
or falling light, sweet crude oil prices, this could have a significant negative
impact on the Fund’s NAV and total return.
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 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 or higher margin
requirements, the establishment of daily price limits and the suspension of
trading.
The
regulation of commodity interest transactions in the United States is a rapidly
changing area of the law and is subject to ongoing modification by governmental
and judicial action. Considerable regulatory attention has recently been focused
on both over-the-counter commodity interests and non-traditional publicly
distributed investment pools such as the Fund, and a number of proposals that
would alter the regulation of Oil Interests are being considered by federal
regulators and Congress. These proposals include the extension of position and
accountability limits to futures contracts on non-U.S. exchanges and to
over-the-counter commodity interests previously exempt from such limits, and the
forced use of certain clearinghouse mechanisms for all over-the-counter
transactions. There is a possibility that future regulatory changes would result
in changes, perhaps to a material extent, to the nature of an investment in the
Fund and the investments that may be available to the Fund, and that could
affect the ability of the Fund to continue to implement its investment strategy.
In addition, 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 Fund is impossible to predict, but could be substantial
and adverse.
If
you are investing in the Fund for purposes of hedging, you might be subject to
several risks, including the possibility of losing the benefit of favorable
market movements.
Participants
in the crude oil industry may use the Fund as a vehicle to hedge the risk of
losses in their crude oil-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 forgoes 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 Oil 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 crude oil 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 energy
costs, such as investing in crude oil, heating oil, gasoline, natural gas or
other fuels and electricity, generally may not be successful because changes in
the price of crude oil may vary substantially from changes in the prices of
other energy products. In addition, the price of crude oil 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.
Historically,
Oil Interests have not generally been correlated to the performance of other
asset classes such as stocks and bonds. Non-correlation means that there is a
low statistical relationship between the performance of Oil Interests, on the
one hand, and stocks or bonds, on the other hand. However, there can be no
assurance that such non-correlation will continue during future periods. If,
contrary to historic patterns, the Fund’s performance were to move in the same
general direction as 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 floods, weather, embargoes, tariffs and other political events may have
a larger impact on prices for crude oil and crude-oil linked instruments,
including Oil Interests, than on prices for traditional securities. These
additional variables may create additional investment risks that subject the
Fund’s investments to greater volatility than investments in traditional
securities.
Non-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 crude oil 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 has limited experience operating a commodity pool.
While certain of the Sponsor’s
principals have experience with investing in Oil Interests and other commodity
interests, the Sponsor has been formed for the purpose of sponsoring the Trust
and serving as the Fund’s commodity pool operator and has limited experience
operating a commodity pool or trading other commodity accounts. In addition, the
series of the Trust is newly formed and the Fund is new and has no operating
history. Therefore, you do not have the benefit of reviewing past performance of
the Sponsor, the Fund or other series of the Trust. If the experience of the
Sponsor and its management is not adequate or suitable, the operation and
performance of the Fund may be adversely affected.
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 Mr. Sal Gilbertie, Mr. Dale Riker, Mr. Carl N.
Miller III and Mr. Kelley Teevan If one or more of these individuals were to
leave or be unable to carry out their present responsibilities, it may have an
adverse effect on the management of the Fund. These individuals currently manage
one commodity pool which is the first series of the Trust. The first series of
the Trust was available to the public on June 9, 2010. It is the intention of
the Sponsor to establish additional commodity pools in the future. 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 and any other series of the Trust, 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.
Accountability
levels, position limits 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 crude
oil-related losses or as a way to indirectly invest in crude oil.
The CFTC
and U.S. designated contract markets such as the NYMEX have established
accountability levels and position limits on the maximum net long or net short
futures contracts in commodity interests that any person or group of persons
under common trading control (other than as a hedge, which an investment by the
Fund is not) may hold, own or control. For example, the current accountability
level for investments at any one time in Oil Futures Contracts is 20,000. While
this is not a fixed ceiling, it is a threshold above which the NYMEX may
exercise greater scrutiny and control over an investor, including limiting an
investor to holding no more than 20,000 Oil Future Contracts. With regard to
position limits, the NYMEX limits an investor from holding more than 3,000 net
futures in the last 3 days of trading in the near month contract to expire. The
Fund, however, does not believe the current position limits imposed by the NYMEX
will have any impact on the Fund and therefore, position limits are not
addressed further as a specific risk factor. On January 26, 2010, the CFTC
proposed additional position limits to be placed on energy futures contracts,
which would include Oil Futures Contracts (see, Commodity Futures
Trading Commission, Federal Speculative Position Limits for Referenced Energy
contracts and Associated Regulations 17 CFR Parts 1, 20 and 151). The Sponsor
does not believe that the proposed rules, if adopted, will have any material
impact on the Fund’s investment objective.
In
addition to accountability levels and position limits, the exchanges set daily
price fluctuation limits on futures contracts. The daily price fluctuation limit
establishes the maximum amount that the price of futures contracts may vary
either up or down from the previous day’s settlement price. Once the daily price
fluctuation limit has been reached in a particular futures contract, no trades
may be made at a price beyond that limit.
For
example, the NYMEX imposes a $10.00 per barrel ($10,000 per contract) price
fluctuation limit for Oil Futures Contracts. This limit is initially based off
of the previous trading day’s settlement price. If any Oil Futures Contract is
traded, bid or offered at the limit for five minutes, trading is halted for five
minutes. When trading resumes it begins at the point where the limit was imposed
and the limit is reset to be $10.00 per barrel in either direction of that
point. If another halt were triggered, the market would continue to be expanded
by $10.00 per barrel in either direction after each successive five-minute
trading halt. There is no maximum price fluctuation limit during any one trading
session.
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 crude oil-related losses or
as a way to indirectly invest in crude oil.
The Fund
does not intend to limit the size of the offering and will attempt to expose
substantially all of its proceeds to the oil market utilizing Oil Interests. If
the Fund encounters position limits, accountability levels, or price fluctuation
limits for Oil Futures Contracts on the NYMEX or ICE, it may, if permitted under
applicable regulatory requirements, purchase Other Oil Interests and/or Oil
Futures Contracts listed on foreign exchanges. However, the Oil Futures
Contracts available on such foreign exchanges may have different underlying
sizes, deliveries, and prices. In addition, the Oil 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, accountability levels and
position limits could force the Fund to limit the number of Creation Baskets
that it sells.
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. In
addition, it is possible that a computer or software program may malfunction and
cause an error in computation.
The
Sponsor may use spreads and straddles as part of its trading strategy which may
cause the Fund’s NAV to not closely track the change in the
Benchmark.
The
Sponsor may use spreads and straddles as part of its overall trading strategy
to closely follow the Benchmark. There is risk that the Fund’s NAV may
not closely track the change in the Benchmark.
Spreads combine simultaneous long and
short positions in related futures contracts that differ by commodity, by market
or by delivery month (long June, short December). Spreads gain or lose value as
a result of relative changes in price between the long and short positions.
Spreads often reduce risk to investors, because the contracts tend to move up or
down together. However, both legs of the spread could move against an investor
simultaneously, in which case the spread would lose value. Certain types of
spreads may face unlimited risk, e.g., because the price of a
futures contract underlying a short position and increase by an unlimited amount
and the investor would have to take delivery or offset at that
price.
A commodity straddle takes both long
and short option positions in the same commodity in the same market and delivery
month simultaneously. The buyer of a straddle profits if either the long or the
short leg of the straddle moves further than the combined cost of both options.
The seller of the straddle profits if both the long and short positions do not
trade beyond a range equal to the combined premium for selling both
options.
If the Sponsor were to utilize a spread
or straddle position and the position performed differently than expected, the
results could impact the Fund’s tracking error. This could affect the Fund’s
investment objective of having its NAV closely track the Benchmark.
Additionally, a loss on the position would negatively impact the Fund’s absolute
return.
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,
directors 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, directors or employees may trade
futures and related contracts for their own accounts. A conflict of interest may
exist if their trades are in the same markets and 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, directors 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. 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
currently has only nominal assets, 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 a 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 series of the Trust and other commodity pools, and
has limited financial resources and no significant source of income apart from
its management fee from the series of the Trust 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 Fund to terminate
unless shareholders holding a majority of the outstanding shares of the Trust
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. However, no level of losses will require the Sponsor to
terminate the Fund. The Fund’s termination would result in the
liquidation of its investments and the distribution of its remaining assets to
the Shareholders on a pro rata basis in accordance with their Shares, and the
Fund could incur losses in liquidating its investments in connection with a
termination. Termination could also negatively affect the overall
maturity and timing of your investment portfolio.
As
a Shareholder, you will not have the rights enjoyed by investors in certain
other types of entities.
As
interests in separate series of a Delaware statutory trust, the Shares do not
involve the rights normally associated with the ownership of shares of a
corporation (including, for example, the right to bring shareholder oppression
and derivative actions). In addition, the Shares have limited voting
and distribution rights (for example, Shareholders do not have the right to
elect directors, as the Trust does not have a board of directors, and generally
will not receive regular distributions of the net income and capital gains
earned by the Fund). The Fund is also not subject to certain investor
protection provisions of the Sarbanes Oxley Act of 2002 and the NYSE Arca
governance rules (for example, audit committee requirements).
A
court could potentially conclude that the assets and liabilities of the Fund are
not segregated from those of another series of the Trust, thereby potentially
exposing assets in the Fund to the liabilities of another
series.
The Fund
is a series of a Delaware statutory trust and not itself a separate legal
entity. 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 are 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 any other series of the Trust currently in existence, as well as
any 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 Oil 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 reaches
levels that merit distribution, e.g., at levels where such income is not
necessary to support its underlying investments in Oil 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 earn gains sufficient to compensate for the
fees and expenses that it must pay and as such the Fund may not earn any
profit.
The Fund
pays management fees at an annual rate of 1.00% of its average net assets,
brokerage charges of approximately 0.02% (based on futures commission merchant
fees of $4.00 per buy or sell), over-the-counter spreads and various other
expenses of its ongoing operations (e.g., fees of the Administrator, Trustee and
Marketing Agent), resulting in a total estimated expense ratio of approximately
1.71% of net assets (not including the transaction fees paid by Authorized
Purchaser when purchasing or redeeming Creation Baskets). These fees
and expenses must be paid in all events, regardless of whether the Fund’s
activities are profitable. Accordingly, the Fund must realize
interest income and/or gains on Oil Interests sufficient to cover these fees and
expenses before it can earn any profit.
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 date of this prospectus
have been or will be 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.
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 Marketing
Agent 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 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, it 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
expertise.
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 will reflect the settlement price of open futures contracts on the date
when the NAV is being calculated. However, if a futures contract
traded on an exchange could not be liquidated on such day (due to the operation
of daily limits or other rules of the exchange or otherwise), the settlement
price on the most recent day on which the futures contract position could have
been liquidated will be the basis for determining the market value of such
position for such day. In these situations, there is a risk that the
calculation of the NAV of the Fund on such day will not accurately reflect the
realizable market value of the futures contracts.
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.
The
financial markets have recently been in a period of disruption and
recession and these conditions may not improve in the near future.
A period
of recession for the economy as a whole began in 2008, and, the financial
markets have experienced very difficult conditions and volatility since that
period. The conditions in these markets resulted in a decrease in
availability of corporate credit and liquidity and led indirectly to the
insolvency, closure or acquisition of a number of major financial institutions
and contributed to further consolidation within the financial services
industry. A continued recession or a depression could adversely
affect the financial condition and results of operations of the Fund’s service
providers and Authorized Purchasers, which would impact the ability of the
Sponsor to achieve the Fund’s investment objective.
The
liquidity of the Shares may be affected by the withdrawal from participation of
Authorized Purchasers, which could adversely affect the market price of the
Shares.
In the
event that one or more Authorized Purchasers that are actively involved in
purchasing and selling Shares cease to be so involved, the liquidity of the
Shares will likely decrease, which could adversely affect the market price of
the Shares and result in your incurring a loss on your investment.
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; or (3) for such other period as the
Sponsor determines to be necessary for the protection of
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. 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.
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
Oil 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 Oil 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 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, cash and/or cash equivalents with the Custodian. The
insolvency of the Custodian could result in a complete loss of the Fund’s assets
held by the Custodian, which, at any given time, would likely comprise a
substantial portion of the Fund’s total assets.
Third
parties may infringe upon or otherwise violate intellectual property rights or
assert that the Sponsor has infringed or otherwise violated their intellectual
property rights, which may result in significant costs and diverted
attention.
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.
Third
parties may utilize the Sponsor’s intellectual property or technology, including
the use of its business methods, trademarks or trade names and trading program
software, without permission, which could cause competitive harm to the Sponsor
and the Fund. The Sponsor has not registered any trademarks and does
not have patent protections on any business methods or technology used with
respect to the Fund. The Sponsor does not currently have any
proprietary software. However, if it obtains proprietary software in
the future, then any unauthorized use of such proprietary software and other
technology could also adversely affect the competitive advantage of the Sponsor
or the Fund and/or cause 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
Fund may experience substantial losses on transactions if the computer or
communications system fails.
The
Fund’s trading activities, including its risk management, 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 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 continue effectively its
trading activities. The Fund’s future success may depend on the Fund’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 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
Fund does business, and the markets in which the Fund does business could be
severely disrupted in the event of a major terrorist attack 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.
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 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.
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 face 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 were 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 crude oil can be volatile which could cause large fluctuations in the
price of Shares.
Movements
in the price of crude oil will be the result of factors outside of the Sponsor’s
control and may not be anticipated by the Sponsor. As discussed in
more detail above, price movements for barrels of crude oil are influenced by,
among other things: (1) operational hazards, such as risk of fire,
explosions, blow outs, pipe failure and abnormally pressured formations; (2)
environmental hazards, such as oil spills, natural gas leaks, ruptures and the
discharge of toxic gases; (3) weather and climate changes; (4) economic
variances, such as changes in interest rates, actions by oil producing
countries, such as OPEC, changes in supply and demand, shifts in demand
domestically or other countries such as India and China, currency deviations,
inflation rates and changes in balances of payment and trade, as well as changes
in philosophies and emotions of market participants; and (4) political
influences, such as war, counter-terrorism and government regulation and
oversight. 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 little, if any, regulation.
A portion
of the Fund’s assets may be used to trade over-the-counter Oil Interests, such
as forward contracts or swaps. Over-the-counter contracts are
typically traded on a principal-to-principal basis through dealer markets that
are dominated by major money center and investment banks and other institutions
and are essentially unregulated by the CFTC. You therefore do not
receive the protection of CFTC regulation or the statutory scheme of the
Commodity Exchange Act in connection with this trading activity. The
markets for over-the-counter contracts rely upon the integrity of market
participants in lieu of the additional regulation imposed by the CFTC on
participants in the futures markets. The lack of regulation in these
markets could expose the Fund in certain circumstances to significant losses in
the event of trading abuses or financial failure by
participants.
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 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 may diminish the ability to realize the full value of such
contracts.
Risk
of Trading in International Markets
Trading
in international markets would expose the Fund to credit and regulatory
risk.
The
Sponsor may make substantial investments for the Fund in Oil Futures Contracts,
a significant portion of which will be on United States exchanges including the
NYMEX. However, a portion of the Fund’s trades may take place on
markets and 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, nor
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.
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. Oil 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. 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
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.
Tax
Risk
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 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 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 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 if the IRS does not accept the assumptions and conventions applied
by the Fund in allocating those items, with potential adverse consequences for
you.
The Fund
will be 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 will apply
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 (the “Code”) and applicable Treasury
Regulations, however, and it is possible that the U.S. Internal Revenue Service
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.
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.
PROSPECTIVE
INVESTORS ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO
THE POSSIBLE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN SHARES; SUCH TAX
CONSEQUENCES MAY DIFFER IN RESPECT OF DIFFERENT INVESTORS.
THE
OFFERING
The
Fund in General
The Fund
is a series of the Trust, a statutory trust organized under the laws of the
State of Delaware on September 11, 2009. The Fund is one of six
series of the Trust. Additional series may be offered in the future
at the Sponsor’s discretion. The Fund maintains its main business
office at 232 Hidden Lake Road, Building A, Brattleboro, Vermont
05301. The Fund is a commodity pool. It operates pursuant
to the terms of the Trust Agreement dated as of March 31, 2010, 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
WTI light, sweet crude oil delivered to Cushing, Oklahoma for future delivery,
as measured by the Benchmark, less the Fund’s expenses. The Fund will
invest in a mixture of Oil Futures Contracts, Other Oil Interests, Treasury
Securities, cash and cash equivalents.
THE
FUND HAS NOT COMMENCED TRADING AND DOES NOT HAVE ANY
PERFORMANCE
HISTORY.
The
Sponsor
The
Sponsor of the Trust is Teucrium Trading, LLC, a Delaware limited liability
company. The principal office of the Sponsor and the Trust are
located at 232 Hidden Lake Road, Building A, Brattleboro, Vermont
05301. The Sponsor registered as a CPO with the CFTC and became a
member of the NFA on November 10, 2009.
The
Sponsor established the Trust and the Fund and registered the Shares of the Fund
covered by this prospectus. The Sponsor has previously established
the Teucrium Corn Fund, a series of the Trust. The Sponsor has also
begun to establish five additional series of the Trust, including the Teucrium
WTI Crude
Oil Fund described in this prospectus. Aside from the activity
described in the previous sentence and obtaining capital from a small number of
outside investors in order to engage in this activity, the Sponsor did not
engage in any business activity prior to the date of this
prospectus. 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 other 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 futures commission merchants 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, Marketing Agent, 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
Marketing Agent will assist the Sponsor in marketing the Shares. The
Sponsor may determine to engage additional or successor marketing
agents. See “Plan of Distribution” for more information about the
Marketing Agent.
The
Sponsor maintains a public website on behalf of the Fund,
www.teucriumoilfund.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. The
Sponsor receives no compensation from the Fund other than such
fee. The Fund is also responsible for other ongoing fees, costs and
expenses of its operations, including brokerage fees, SEC and FINRA registration
fees and legal, printing, accounting, custodial, administration and transfer
agency costs, although the Sponsor has borne or
will bear the costs and expenses related to the initial offer and sale of
Shares.
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% of the Sponsor’s Class A membership interests.
Management
of the Sponsor
In
general, under the Sponsor’s Limited Liability Company Agreement, the Sponsor
(and as a result the Trust and the Fund) is managed by the officers of the
Sponsor. In particular, the President of the Sponsor is responsible
for the general and active management of the business of the Sponsor, and for
the supervision and direction of the Sponsor’s other
officers. However, 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, two of whom also serve as its officers, are as
follows:
Sal Gilbertie
has been the President of the Sponsor since its inception, was approved
by the NFA as a principal of the Sponsor on September 23, 2009, and was
registered as an associated person of the Sponsor on November 10,
2009. He maintains his main business office at 653A Garcia, Santa Fe,
NM 87505. From October, 2005 until December, 2009, Mr.
Gilbertie was employed by Newedge USA, LLC, 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 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. Mr. Gilbertie is 50 years
old.
Dale Riker
has been the Treasurer of the Sponsor since its inception and its
Secretary since January, 2010, was approved by the NFA as a principal of the
Sponsor on October 29, 2009, and was registered as an associated person of the
Sponsor on February 17, 2010. He maintains his main business office
at 232 Hidden Lake Road, Brattleboro, Vermont 05301. From February
2005 to the present, Mr. Riker has been President of Cambial Emerging Markets
LLC, a consulting company specializing in emerging market equity
investment. From July 1996 to February 2005, Mr. Riker was a private
investor. Mr. Riker is 52 years old.
Carl N. (Chuck)
Miller III was approved by the NFA as a principal of the Sponsor on
November 10, 2009, and was registered as an associated person of the Sponsor on
April 19, 2010. He maintains his main business office at 369
Montezuma Avenue, Suite 434, Santa Fe, New Mexico 87501. Mr. Miller
has been a Member of Garnet Advisors, LLC, a proprietary trading firm that
focuses on a broad array of investment opportunities, since he founded such firm
in November, 2001. Mr. Miller is 58 years old.
The three
individuals set forth above are individual “principals,” as that term is defined
in CFTC Rule 3.1, for the Sponsor. These individuals are principals
due to their positions and/or due to their ownership interests in the
Sponsor. None of the principals owns or has any other beneficial
interest in the Fund. In addition, each of the three Class A members
of the Sponsor are registered with the CFTC as associated persons of the Sponsor
and are NFA associate members. GFI Group LLC is a principal for the
Sponsor under CFTC Rules due to its ownership of certain non-voting securities
of the Sponsor.
Mr.
Gilbertie and Kelly Teevan, an employee of the Sponsor who is not a member of
the Sponsor, are primarily responsible for making trading and investment
decisions for the Fund, and for directing Fund trades for
execution. Mr. Teevan has been a Managing Director of the Sponsor
since October 2009, was approved by the NFA as a principal of the Sponsor on
March 25, 2010, and was registered as an associated person of the Sponsor
on February 24, 2010. He maintains his main business office at
42 West Union Street, Goffstown, NH 03045. Mr. Teevan graduated from
Phillips Exeter Academy, Harvard College and Stanford Graduate School of
Business, following which he worked as commodities broker and trader at several
brokerage and investment firms in New York City, San Francisco and Sydney,
Australia. He has primarily been retired since January 2003, although
he was a self-employed market research consultant from August 2005 until
September 2005, and has served during his retirement on non-profit boards
without compensation, focusing on financial, treasury and endowment
issues. Mr. Teevan is 59 years old.
Prior
Performance of the Sponsor and Affiliates
THIS POOL OPERATOR AND ITS
TRADING PRINCIPALS HAVE LIMITED EXPERIENCE OPERATING ANY OTHER POOLS OR
TRADING ANY OTHER ACCOUNTS.
The
Trustee
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.
Operation
of the Fund
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 WTI crude oil, also known as Texas Light Sweet crude oil (“Oil Futures
Contracts”) that are traded on the NYMEX, specifically (1) the nearest to spot
June or December Oil Futures Contract, weighted 35%; (2) the June or December
Oil Futures Contract following the aforementioned (1), weighted 30%; and (3) the
next December Oil Future Contract that immediately follows the aforementioned
(2), weighted 35%; less the Fund’s expenses. (This weighted average of
the three referenced Oil Futures Contracts is referred to herein as the
“Benchmark,” and the three Oil 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 Oil Futures Contracts traded on the NYMEX or on foreign
exchanges. The Fund intends to invest in Oil Future Contracts and in
Other Oil 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, before taking fund expenses and
any interest income from the cash, cash equivalents and U.S. Treasury securities
held by the Fund into account, to closely track that of the
Benchmark.
The Fund
intends to invest in Oil Interests to the fullest extent possible an aggregate
notional amount equal to the Fund’s NAV without being leveraged or unable to
satisfy its current or potential margin or collateral obligations with respect
to its investments in Oil Interests. After fulfilling such margin and
collateral requirements, the Fund will invest the remainder of its proceeds from
the sale of baskets in short-term Treasury Securities or cash equivalents,
and/or merely hold such assets in cash (generally in interest-bearing
accounts). Therefore, the focus of the Sponsor in managing the Fund
is investing in Oil Interests and in Treasury Securities, cash and/or cash
equivalents. 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 closely tracking the Benchmark, including the discretion: (1) to choose
whether to invest in the Benchmark Component Futures Contracts or Other Oil
Interests with similar investment characteristics; (2) to choose when to “roll”
the Fund’s positions in Oil Interests as described above, and (3) to manage the
Fund’s investments in Treasury Securities, cash and cash
equivalents.
The
Fund seeks to achieve its investment objective primarily by investing in Oil
Interests such that daily changes in the Fund’s NAV will be expected to closely
track the changes in the Benchmark. The Fund’s positions in Crude Oil Interests
will be changed or “rolled” on a regular basis in order to track the changing
nature of the Benchmark. For example, three times a year (on the month in which
a Benchmark Component Futures Contract is set to become the first-to-expire Oil
Futures contract listed on NYMEX (commonly call the “spot” contract), the
first-to-expire Benchmark Component Contract will become the next-to-expire
(spot) Oil 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 typically will not be rolled
entirely on that day, but rather will typically be rolled over a period of
several
Consistent
with achieving the Fund’s investment objective of closely tracking the
Benchmark, the Sponsor may for certain reasons cause the Fund to enter into or
hold Oil Futures Contracts other than the Benchmark Component Futures Contracts
and/or Other Oil Interests. For example, over-the-counter Oil
Interests can generally be structured as the parties to the contract
desire. Therefore, the Fund might enter into multiple
over-the-counter Oil Interests intended to exactly replicate the performance of
each of the three Benchmark Component Futures Contracts, or a single
over-the-counter Oil 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 Oil Interest, the performance of the Oil
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 Oil Interests other than the 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 Oil
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 will endeavor to cause the
Fund’s performance, before taking Fund expenses and any interest income from the
cash, cash equivalents and Treasury Securities held by the Fund into account, to
closely track that of the Benchmark.
The
Sponsor endeavors to place the Fund’s trades in Oil 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:
|
·
|
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 closely 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 closely track daily changes in the
Benchmark, less the Fund’s expenses. While the Benchmark is composed
of Oil Futures Contracts and is therefore a measure of the price of WTI light,
sweet crude oil for future delivery, there is nonetheless expected to be a
reasonable degree of correlation between the Benchmark and the cash or spot
price of WTI light, sweet crude oil.
These
relationships are illustrated in the following diagram:
An
investment in the Shares provides a means for diversifying an investor’s
portfolio or hedging exposure to changes in crude oil prices. An
investment in the Shares allows both retail and institutional investors to
easily gain this exposure to the crude oil 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 crude oil market in a cost-effective
manner. Such investors may include participants in the crude oil
market and other industries seeking to hedge the risk of losses in their crude
oil-related transactions, as well as investors seeking exposure to the crude oil
market. Accordingly, depending on the investment objective of an
individual investor, the risks generally associated with investing in the crude
oil 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 WTI light, sweet crude oil on the spot
market. Furthermore, as noted above, the Fund will also hold
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 Oil 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 Treasury
Securities/cash/cash equivalents and the changes in the price of WTI light,
sweet crude oil or Oil 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 WTI light, sweet crude oil, this correlation is not
anticipated as part of the Fund’s efforts to meet its
objective.
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.teucriumoilfund.com. The website disclosure of portfolio holdings
is made daily and includes, as applicable, the name and value of each Oil
Futures Contract, the specific types of Other Oil Interests and characteristics
of such Other Oil Interests, the name and value of each Treasury Security and
cash equivalent, and the amount of cash held in the Fund’s
portfolio. 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 100,000 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 100,000 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 will publish 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 will purchase or sell Oil
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 $25.00. In that case, the Fund would receive
$2,500,000 in proceeds from the sale of the Creation Basket ($25.00 NAV per
share multiplied by 100,000 Shares, and ignoring the Creation Basket fee of
$1,000). If one were to assume further that the Sponsor wants to
expose the entire proceeds from the Creation Basket to the Benchmark Component
Futures Contracts and that the market value of each such Benchmark Component
Futures Contracts is $80,000, the Fund would be unable to buy an exact number of
Oil Futures Contracts with an aggregate market value equal to
$2,500,000. Instead, the Fund would be able to purchase 31 Benchmark
Component Futures Contracts with an aggregate market value of
$2,480,000. Assuming a margin requirement equal to 10% of the value
of the Oil Futures Contracts, the Fund would be required to deposit $248,000 in
Treasury Securities and cash with the futures commission merchant through which
the Oil Futures Contracts were purchased. The remainder of the
proceeds from the sale of the Creation Basket, $2,252,000, would remain invested in
cash, cash equivalents, and Treasury Securities as determined by the Sponsor
from time to time based on factors such as potential calls for margin or
anticipated redemptions.
The
specific Oil Interests purchased will depend on various factors, including a
judgment by the Sponsor as to the appropriate diversification of the Fund’s
investments in Oil Interests. While the Sponsor anticipates that a
substantial majority of its assets will be exposed to Oil Futures Contracts, for
various reasons, including the ability to enter into the precise amount of
exposure to the crude oil market and position limits on Oil Futures Contracts,
it will also hold Other Oil Interests, including swaps, in the over-the-counter
market to a potentially significant degree.
The
Sponsor does not anticipate letting its Oil Futures Contracts expire and taking
delivery of crude oil. 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 Oil 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 reallocated.
Futures
Contracts
Futures
contracts are agreements between two parties. One party agrees to buy
a commodity such as crude oil 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 which the original contract was
sold. Because the Fund seeks to track the Benchmark directly and
profit when the price of WTI light, sweet crude oil and, as a likely result of
an increase in the price of WTI light, sweet crude oil, the price of Oil Futures
Contracts increase, the Fund will generally be long in the market for WTI light,
sweet crude oil, and will generally sell Oil Futures Contracts only to close out
existing long positions.
Certain
typical and significant characteristics of Oil Futures Contracts are discussed
below. The Fund anticipates that to the extent that it invests in Oil
Futures Contracts other than WTI light, sweet crude oil contracts and Other Oil
Interests, it will enter into various non-exchange traded derivative contracts
to hedge the short-term price movements of such Oil Futures Contracts and Other
Oil Interests against the current Benchmark Component Futures Contracts.
Additional risks of investing in Oil 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.
The CFTC
and U.S. designated contract markets such as the NYMEX have established position
limits and accountability levels on the maximum net long or net short positions
in futures contracts in commodities that any person or group of persons under
common trading control (other than as a hedge, which an investment by the Fund
would not be) may hold, own or control. The net position is the
difference between an individual or firm’s open long contracts and open short
contracts in any one commodity. In addition, most U.S. futures
exchanges, such as the NYMEX, limit the daily price fluctuation for futures
contracts.
Accountability
levels for the Oil Futures Contracts traded on the NYMEX are not a fixed
ceiling, but rather a threshold above which the NYMEX may exercise greater
scrutiny and control over an investor’s positions. The current accountability
level for any one month in the Benchmark Component Futures Contracts is 10,000
contracts. In addition, the NYMEX imposes an accountability level for
all months of 20,000 net futures contracts for investments in future contracts
for light, sweet crude oil. If the Fund exceeds these accountability
levels for investments in light, sweet crude oil, the NYMEX will monitor the
Fund’s exposure and 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 the
NYMEX orders the Fund to reduce it position back to the accountability level, or
to an accountability level that the NYMEX deems appropriate for the Fund, such
an accountability level may impact the mix of investments in Oil
Interests. To illustrate, assume that the price of the Benchmark
Component Futures Contract and the share price of the Fund are each $100, and
that the NYMEX has determined that the Fund may not own more than 10,000
contracts in Benchmark Component Futures Contracts. In such case, the
Fund could invest up to $1 billion of its daily net assets in the Benchmark
Component Futures Contract (i.e., $100 per contract
multiplied by 1,000 (a Benchmark Component Futures Contract is a contract for
1,000 barrels of oil multiplied by 10,000 contracts)) before reaching the
accountability level imposed by the NYMEX. Once the daily net assets
of the Fund exceed $1 billion in the Benchmark Component Futures Contracts, the
Fund may not be able to make any further investments in the Benchmark Component
Futures Contract, depending on whether the NYMEX imposes limits. If
the NYMEX does impose limits at the $1 billion level (or another level), the
Fund anticipates that it will invest the majority of its assets above that level
in a mix of Oil Interests.
In
addition to accountability levels, the NYMEX may impose position limits on
contracts held in the last few days of trading in the near month contract to
expire. It is unlikely that the Fund will be subject to such position
limits because the Fund’s investment strategy is to “roll” from the near month
contract to expire to the next month contract during the period beginning two
weeks from the expiration of the contract.
There is
a limit on the amount of price fluctuation for Oil Futures Contracts imposed by
the NYMEX of $10 per barrel ($10,000 per contract). This limit is
initially based off the previous trading day’s settlement price. If
any Oil Futures Contract is traded, bid, or offered at the limit for five
minutes, trading is halted for five minutes. When trading resumes it
begins at the point where the limit was imposed and the limit is reset to be $10
per barrel in either direction after successive five-minute trading
halt. There is no maximum price fluctuation limit during any one
trading session.
Generally,
futures contracts traded on the NYMEX are priced by floor brokers and other
exchange members through an “open outcry” to offers to purchase or sell the
contracts and through an electronic, screen-based system that determines the
price by matching electronically offers to purchase and sell. Futures
contracts may also be based on commodities indices, in that they call for a cash
payment based on the change in the value of the specified index during a
specified period.
The
Fund anticipates that to the extent that it invest in Oil Interests, it will
enter into various non-exchange-traded derivative contracts to achieve our
investment objective of tracking the Benchmark.
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 Oil Futures
Contracts include changes in interest rates; governmental, 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 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 the crude oil will fluctuate based on a number of market
factors, including demand for crude oil relative to its supply. The
value of Oil Futures Contracts will likewise fluctuate in reaction to a number
of market factors. If investors seek to maintain their holdings in
Oil Futures Contracts with a roughly constant expiration profile and not take
delivery of the crude oil, 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 crude oil
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 crude oil 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 Treasury
Securities, cash and/or cash equivalents). For example, assume the
price of crude oil for immediate delivery (“spot price”) is $80 per barrel and
the value of a position in the near month futures contract was also
$80. In backwardation, the investment would tend to rise slower than
the spot price of crude oil, or fall faster. As a result, it would be
possible for the spot price of crude oil to have risen to $100 after some period
of time, while the value of the investment in the futures contract would have
only risen to $90, assuming the backwardation is large enough or enough time has
elapsed. Similarly, the spot price of crude oil could have fallen to
$70 while the value of an investment in the futures contract could have remained
at $80. Over time, if backwardation remained constant, the
differences would continue to increase.
If the
futures market is in contango, the Fund will buy later-to-expire contracts for a
higher price than the sooner-to-expire contracts that it
sells. Hypothetically, and assuming no other changes to either
prevailing crude oil 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 Treasury
Securities, cash and/or cash equivalents). For example, in contango,
the $80 investment would rise faster than the spot price of crude oil, or fall
slower. As a result, it is possible, for the spot price to have risen
to $100 per barrel after some period time, while the value of the investment in
the futures contract has risen to $110, assuming contango is large enough or
enough time has elapsed. Similarly, the spot price of crude could
have fallen to $60 while the value of an investment in the futures contact would
have fallen to $70. Over time, if contango remained constant, the
difference would continue to increase.
Historically,
the crude oil futures markets have experienced periods of both contango and
backwardation. During 2006 and the first half of 2007, the crude oil
futures markets experienced contango. However, starting early in the
third quarter 2007, the crude oil futures markets moved into backwardation and
remained in backwardation until late in the second quarter 2008 when the crude
oil futures markets moved into contango. The crude oil markets
remained in contango until late third quarter 2008, when they moved into
backwardation. The crude oil markets moved back into contango for the
balance of 2008, reaching supercontango in December 2008. The crude
oil futures markets have been in contango since 2008.
Marking-to-Market
Futures Positions
Futures
contracts are marked to market at the end of each trading day and the margin
required with respect to such contracts is adjusted accordingly. This
process of marking-to-market is designed to prevent losses from accumulating in
any futures account. Therefore, if the Fund’s futures positions have
declined in value, the Fund may be required to post “variation margin” to cover
this decline. Alternatively, if the Fund’s futures positions have
increased in value, this increase will be credited to the Fund’s
account.
Over-the-Counter Derivatives
In
addition to futures contracts and options on futures contracts, derivative
contracts that are tied to various commodities, including crude oil, are entered
into outside of public exchanges. These “over-the-counter” contracts
are entered into between two parties in private contracts. Unlike Oil
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, i.e., the risk
that the other party will not be able to perform its obligations under its
contract.
Some
crude oil-based 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 closely tracking the Benchmark. The
over-the-counter contracts that the Fund may enter into will take the form of
either forward contracts or swaps.
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. Unlike
futures contracts, however, forward contracts are typically traded in the
over-the-counter markets. In some instances such contracts may
provide for cash settlement instead of making or taking delivery of the
underlying commodity. 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 instances such
contracts may provide a right of offset 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 an oil swap, the Fund may be obligated to pay a fixed price per
barrel of crude oil and be entitled to receive an amount per barrel equal to the
current value of an index of crude oil prices, the price of a specified Oil
Futures Contract, or the average price of a group of Oil Futures Contracts such
as the Benchmark. Each party to the swap, however, is subject to the
credit risk of the other party. The Fund will only enter 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. Accordingly,
the Fund’s risk of loss with respect to an over-the-counter swap will generally
be 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 will generally enter 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 will assess or review, 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 has over
25 years of experience in over-the-counter derivatives trading, including the
counterparty creditworthiness analysis inherent therein, and the Sponsor’s
Treasurer and Secretary, through his prior experience as a Chief Financial
Officer and Treasurer, has extensive experience evaluating the creditworthiness
of business partners and counterparties to commercial and derivative
contracts. Notwithstanding this experience, 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) banks regulated by a United States federal bank regulator, (b)
broker-dealers regulated by the SEC, (c) insurance companies domiciled in the
United States, (d) producers of crude oil and crude oil-related products, (e)
users of crude oil such as refiners, (f) any other person (including affiliates
of any of the above) who are engaged to a substantial degree in the business of
trading commodities. Certain of these types of counterparties will
not be subject to regulation by the CFTC or any other significant federal or
state regulatory structure; While it is the Sponsor’s preference to use
regulated entities as counterparties, the Sponsor will primarily consider
creditworthiness in selecting counterparties rather than the primary business of
the prospective counterparty or the regulatory structure to which it is
subject.
The
Fund may also employ spreads or straddles to mitigate the differences in its
investment portfolio and in order to achieve its goal of tracking the
Benchmark.
Benchmark
Performance
See the graph below under “Benchmark
Performance” in the Statement of Additional Information at the end of this
prospectus.
WTI
Lite, Sweet Crude Oil and the Oil Industry
WTI light, sweet crude oil comprises a
blend of several U.S. domestic streams of crude oil delivered to Cushing,
Oklahoma where there are many intersecting pipelines and storage facilities,
along with easy access to refiners and suppliers. WTI light, sweet
crude oil flows both inbound and outbound from Cushing.
Light, sweet crudes are preferred by
refiners because of the low sulfur content and relatively high yields of
high-value products such as gasoline, diesel fuel, heating oil, and jet
fuel. The price of light, sweet crude oil has historically exhibited
periods of significant volatility.
Demand for petroleum products by
consumers, as well as agricultural, manufacturing and transportation industries,
determines demand for crude oil by refiners. Since product demand is
linked to economic activity, crude oil demand will tend to reflect economic
conditions. According to the U.S. Primary Energy Consumption by
Source and Sector, dated [XX], about 70% of petroleum was used for
transportation, 24% by industry, 5% for residential and 2% for electricity
production. Changes in consumer behavior, such as mass transportation
initiatives, alternative fuels, and change in economic standards in China and
India may change petroleum consumption. In addition, other factors
such as weather also influence product and crude oil demand.
Crude oil supply is determined by
economic, political and environmental factors. Oil prices (along with
drilling costs, availability of attractive prospects for drilling, taxes and
technology, among other factors) determine exploration and development spending,
which influence output capacity with a lag. In the short run,
production decisions by OPEC also affect supply and prices. Oil
export embargoes represent other routes through which political developments
move the market. Oil extraction may also have a significant impact on
the environment, from accidents and routine activities such as seismic
exploration and drilling. Oil spills, such as the 2010 oil spill on
the Gulf Coast, can spread for hundreds of nautical miles, killing sea birds,
mammals, shellfish and other organisms. Control and clean-up of an
oil spill can be time-consuming and costly and also negatively impact other
industries, such as the commercial fishing industry. It is not possible to
predict the aggregate effect of all or any combination of these
factors.
The Fund’s Investments in Treasury
Securities, Cash and Cash Equivalents
The Fund
seeks to have the aggregate “notional” amount of the Oil Interests it holds
approximate at all times the Fund’s aggregate NAV. At any given time,
however, most of the Fund’s investments will be in short-term Treasury
Securities, cash and/or cash equivalents that support the Fund’s positions in
Oil Interests. For example, the purchase of an Oil 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,
generally of 5%-10% of the notional amount, would be required. To
secure its Oil Futures Contract obligations, the Fund would deposit the required
margin with the futures commission merchant and would separately hold its
remaining assets through its Custodian in Treasury Securities, cash and/or cash
equivalents. Such remaining assets may be used to meet future margin
payments that the Fund is required to make on its Oil Futures
Contracts. Other Oil 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 Oil Interests will also be held in
Treasury Securities, cash and cash equivalents.
The Fund
earns interest income from the Treasury Securities and/or cash equivalents that
it purchases and on the cash it holds through the Custodian. The
Sponsor anticipates that the earned interest income will increase the Fund’s
NAV. The Fund applies the earned interest income to the acquisition
of additional investments or uses it to pay its expenses. If the Fund
reinvests the earned interest income, it makes investments that are consistent
with its investment objectives.
Any
Treasury Security and cash equivalent invested in by the Fund will have a
remaining maturity of less than two years at the time of investment, or will be
subject to a demand feature that enables that Fund to sell the security within
one year at approximately the security’s face value (plus accrued
interest). Any cash equivalents invested in by the Fund will be rated
in the highest short-term rating category by a nationally recognized statistical
rating organization or will be deemed by the Sponsor to be of comparable
quality.
Other
Trading Policies of the Fund
Exchange
For Risk
An
“exchange for risk” transaction, sometimes refers to a “exchange for swap” or
“exchange of futures for risk,” is a privately negotiated and simultaneous
exchange of a futures contract position for a swap or other over-the-counter
instrument on the corresponding commodity. An exchange for risk can
be used by the Fund as a technique to avoid taking physical delivery of light,
sweet crude oil, in that a counterparty will take the Fund’s position in an Oil
Futures Contract into its own account in exchange for a swap that does not by
its terms call for physical delivery. The Fund will become subject to
the credit risk of a counterparty when it acquires an over-the-counter position
in an exchange for risk transaction.
Options
on Futures Contracts
In
addition to Oil Futures Contracts, there are also a number of options on Oil
Futures Contracts listed on 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 Oil Futures Contracts in pursuing its investment objective,
except that it will not sell call options when it does not own the underlying
Oil Futures Contract. The Fund would make use of options on Oil
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 WTI light, sweet crude oil prices.
Liquidity
The Fund
invests only in Oil 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 Oil 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 Oil Interests based on the spot price of WTI light, sweet
crude oil.
Leverage
The
Sponsor endeavors to have the value of the Fund’s 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 Oil Interests.
Borrowings
Borrowings
are not used by the Fund unless it is required to borrow money in the event of
physical delivery, if it trades in cash commodities, or for short-term needs
created by unexpected redemptions. The Fund maintains the value of
its Treasury Securities, cash and cash equivalents, whether held by the Fund or
posted as margin or collateral, to at all times approximate the aggregate market
value of its obligations under Oil Interests. The Fund does not plan
to establish credit lines.
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
Service Providers
In its
capacity as the Fund’s custodian, the Custodian holds the Fund’s Treasury
Securities, cash and/or cash equivalents pursuant to a custodial
agreement. The Custodian is also the registrar and transfer agent for
the Fund’s Shares. In addition, the Custodian 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 as set
forth in the table below.
The
Custodian’s principal business address is One Wall Street, New York, New York
10286. The Custodian is a New York state chartered bank subject to
regulation by the Board of Governors of the Federal Reserve System and the New
York State Banking Department.
The Fund
also employs [to be provided by Pre-Effective Amendment to the Registration
Statement] as Marketing Agent, which is further discussed under “Plan of
Distribution” The Fund pays the Marketing Agent’s fees as set forth
in the table below. In no event may the aggregate compensation paid
to the Marketing Agent and any affiliate of the Marketing Agent for
distribution-related services in connection with the offering of Shares exceed
ten percent (10%) of the gross proceeds of the offering.
The
Marketing Agent’s principal business address is [to be provided by
Pre-Effective Amendment to the Registration Statement]. The Marketing
Agent is a broker-dealer registered with the Financial Industry Regulatory
Authority and a member of the Securities Investor Protection
Corporation.
Currently,
Newedge USA, LLC (“Newedge”) serves as the Fund’s clearing broker to execute and
clear the Fund’s futures transactions and provide other brokerage-related
services. Newedge USA’s affiliate, Newedge Alternative Strategies,
Inc. (“NAST”), may execute foreign exchange or other over the counter
transactions with the Fund as principal. Newedge USA and NAST are
subsidiaries of Newedge Group. Newedge is a futures commission
merchant and broker-dealer registered with the CFTC and the
SEC. Newedge is a clearing member of all principal futures exchanges
located in the United States as well as a member of the Chicago Board Options
Exchange, International Securities Exchange, New York Stock Exchange, Options
Clearing Corporation, and Government Securities Clearing
Corporation. NAST is an eligible swap participant that is not
registered or required to be registered with the CFTC or the SEC, and is not a
member of any exchange.
Newedge
and NAST are headquartered at 550 W. Jackson, Suite 500, Chicago, IL 60661 with
branch offices in San Francisco, California; New York, New York; Philadelphia,
Pennsylvania; Kansas City, Missouri and Houston, Texas.
Prior to
January 2, 2008, Newedge USA was known as Fimat USA, LLC, while NAST was known
as Fimat Alternative Strategies Inc. On September 1, 2008, Newedge
merged with future commission merchant and broker-dealer Newedge Financial Inc.
(“NFI”) – formerly known as Calyon Financial Inc. Newedge was the
surviving entity.
In March
2008, NFI settled, without admitting or denying the allegations, a disciplinary
action brought by the New York Mercantile Exchange (“NYMEX”) alleging that NFI
violated NYMEX rules related to: numbering and time stamping orders by failing
properly to record a floor order ticket; wash trading; failure to adequately
supervise employees; and violation of a prior NYMEX cease and desist order,
effective as of December 5, 2006, related to numbering and time stamping orders
and block trades. NFI paid a $100,000 fine to NYMEX in connection
with this settlement.
Other
than the foregoing proceeding, which did not have a material adverse effect upon
the financial condition of Newedge, there have been no material administrative,
civil or criminal actions brought, pending or concluded against Newedge, NAST or
their principals in the past five years.
None of
Newedge, NAST or any affiliate, officer, director or employee thereof have
passed on the merits of this prospectus or the offering of Shares, or given any
guarantee as to the performance or any other aspect of the Fund.
Newedge
is not affiliated with the Fund or the Sponsor. Therefore, the
Sponsor and the Fund do not believe that the Fund has any conflicts of interest
with them or their trading principals arising from their acting as the Fund’s
futures commission merchant. While Sal Gilbertie, the President of
the Sponsor, was previously employed by Newedge, he no longer receives any
compensation from Newedge and will not receive any share of the commissions paid
to Newedge by the Fund.
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.
Fees
to be Paid by the Fund
Fees
and Compensation Arrangements with the Sponsor and Non-Affiliated Service
Providers
Service
Provider
|
|
Compensation
Paid by the Fund
|
Teucrium
Trading, LLC, Sponsor
|
|
1.00%
of average net assets annually
|
The
Bank of New York Mellon, Custodian, Transfer Agent and
Administrator
|
|
For
custody services: 0.0075% of average gross assets up to $1
billion, and 0.0050% of average gross assets over $1 billion, annually,
plus certain per-transaction charges
For
transfer agency services: 0.0075% of average gross assets
annually
For
administrative services: 0.05% of average gross assets up to $1
billion, 0.04% of average gross assets between $1 billion and $3 billion,
and 0.03% of average gross assets over $3 billion, annually
A
combined minimum annual fee of $125,000 for custody, transfer agency and
administrative services will be assessed.
|
[To
be provided by Pre-Effective Amendment to the Registration Statement],
Marketing Agent
|
|
0.10%
of average net assets annually, with a minimum annual fee of
$XX
|
Newedge
USA, LLC, Futures Commission Merchant and Clearing Broker
|
|
$4.00
per Oil Futures Contract purchase or sale
|
Wilmington
Trust Company, Trustee
|
|
$3,000
annually
|
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.
Form
of Shares
Registered
Form
Shares
are issued in registered form in accordance with the Trust
Agreement. The Custodian has been appointed registrar and transfer
agent for the purpose of transferring Shares in certificated
form. The Custodian 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.
Transfer
of Shares
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, the Fund and each other
series established under the Trust 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.
Plan
of Distribution
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 “CRUD.” 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.
Marketing
Agent and Authorized Purchasers
The
offering of the Fund’s Shares is a best efforts offering. The Fund
will continuously offer Creation Baskets consisting of 100,000 Shares at their
NAV through the Marketing Agent, to Authorized Purchasers. [To be
provided by Pre-Effective Amendment to the Registration Statement] is expected
to be the initial Authorized Purchaser. It is expected that on the
effective date, the initial Authorized Purchaser will purchase one or more
initial Creation Baskets of 100,000 Shares the initial NAV of $25.00 per
Share. The initial NAV of $25.00 was set as an appropriate and
convenient price that would facilitate secondary market trading of Shares, and
the Shares of the Fund acquired by the Sponsor in connection with its initial
capital contribution were purchased at a price of $25.00 per
Share. All Authorized Purchasers pay a $1,000 fee for each order to
create one or more Creation Baskets, regardless of the number of Creation
Baskets in the order.
The
Marketing Agent will receive, for its services as marketing agent to the Fund, a
fee at an annual rate of 0.10% of the Fund’s average daily net assets, subject
to a minimum annual fee of $100,000; provided, however, that in no event may the
aggregate compensation paid to the Marketing Agent and any affiliate of the
Marketing Agent for distribution-related services in connection with this
offering of Shares exceed 10 percent (10%) of the gross proceeds of this
offering. The maximum compensation the Marketing Agent may receive
over the expected two year period of this offering is estimated to be
$1,500,000. This estimate assumes that: (1) all Shares being
registered are sold on the first day of the offering at a price equal to the
closing NAV on that day ($25.00); and (2) the value of the Fund's net assets
remain constant throughout the period. This actual compensation
received by the Marketing Agent may vary. The actual compensation
could be lower if the NAV of the Shares declines or if, as is likely, the full
number of Shares being registered is not sold on the first day of the offering,
and could be higher if the NAV of the Shares increases.
In
exchange for its fees, the Marketing Agent will develop an overall sales and
marketing plan for the Fund, supervise sales-related activities, and participate
in field sales activities. The Marketing Agent Agreement among the
Marketing Agent, the Sponsor and the Trust calls for the Marketing Agent to
provide a shared National Accounts Manager, shared external and internal
wholesalers, and call center support for the Fund.
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 subsequent day will be
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 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 Corn 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.
As of the
date of this prospectus, there is no named Authorized Purchaser. A
list of Authorized Purchasers will be available from the Marketing
Agent. 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, the initial Authorized Purchaser will be a statutory underwriter with
respect to the initial purchase of Creation Baskets. In addition, 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 this regard, the excess, if any, of the price at which an
Authorized Purchaser sells a Share over the price paid by such Authorized
Purchaser in connection with the creation of such Share in a Creation Basket may
be deemed to be underwriting compensation. 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(3)(C) of the 1933 Act, would be
unable to take advantage of the prospectus-delivery exemption provided by
Section 4(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
Flow of Shares
Calculating
NAV
The
Fund’s NAV is calculated by:
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Taking
the current market value of its total assets,
and
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Subtracting
any liabilities.
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The
Administrator will calculate the NAV of the Fund once each trading
day. It will calculate 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 will be released after 4:15 p.m. New York
time.
In
determining the value of Oil Futures Contracts, the Administrator will use the
NYMEX closing price (usually determined as of 2:30 p.m. New York
time). The Administrator will determine 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 Oil Interests will be determined based on the value of the
commodity or Futures Contract underlying such Oil 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 Oil
Interest. Treasury Securities held by the Fund will be valued by the
Administrator using values received from recognized third-party vendors (such as
Reuters) and dealer quotes. NAV will include any unrealized profit or
loss on open Oil Interests and any other credit or debit accruing to the Fund
but unpaid or not received by the Fund.
In
addition, in order to provide updated information relating to the Fund for use
by investors and market professionals, NYSE Arca will calculate and disseminate
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 Oil Interests during the trading
day. Changes in the value of Treasury Securities and cash equivalents
will not be 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 will be 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 Oil Futures Contracts on the NYMEX are 9:00 a.m. New
York time to 2:30 p.m. New York time. 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 NYMEX trading prices for Oil Futures
Contracts traded on such Exchange are not available. As a result,
during those gaps there will be no update to the indicative fund
value.
The NYSE
Arca will disseminate 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 will 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. Such arbitrage trades can tighten the tracking between the
market price of the Fund and the indicative fund value and thus can be
beneficial to all market participants.
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 Treasury Securities and/or cash 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 Treasury Securities and/or
cash 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 or Authorized
Purchaser. Authorized Purchasers pay a transaction fee of $1,000 to
the Sponsor for each order they place to create or redeem one or more
baskets. 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 crude oil and the Oil Interest markets. Some Authorized
Purchasers or their affiliates may from time to time buy or sell crude oil or
Oil Interests and may profit in these instances. The Sponsor believes
that the size and operation of the oil market make it unlikely that Authorized
Purchasers’ direct activities in the crude oil or securities markets will
significantly affect the price of crude oil, Oil Interests, or the Fund’s
Shares.
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 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 as it determines is
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 filed 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 the Custodian 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, the NYMEX 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 Custodian receives a valid purchase
order is referred to as the purchase order date.
By
placing a purchase order, an Authorized Purchaser agrees to deposit Treasury
Securities, cash or a combination of Treasury Securities and cash with the
Trust, as described below. Prior to the delivery of baskets for a
purchase order, the Authorized Purchaser must also have wired to the Custodian
the non-refundable transaction fee due for the purchase
order. Authorized Purchasers may not withdraw a creation
request.
Determination
of Required Deposits
The total
deposit required to create each basket (“Creation Basket Deposit”) is the amount
of Treasury Securities and/or cash 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, the
requirements for Treasury Securities and cash, including the remaining
maturities of the Treasury Securities and proportions of Treasury Securities and
cash, that will be included in deposits to create baskets. The
Marketing Agent will publish an estimate of the Creation Basket Deposit
requirements at the beginning of each business 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 Treasury
Securities and/or cash 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 will direct 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 Marketing Agent 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;
or
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circumstances
outside the control of the Sponsor, Marketing Agent or Custodian make it,
for all practical purposes, not feasible to process creations of
baskets.
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None of
the Sponsor, Marketing Agent or Custodian 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 Custodian 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
Custodian. 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 Custodian 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.
Determination
of Redemption Distribution
The
redemption distribution from the Fund will consist of a transfer to the
redeeming Authorized Purchaser of an amount of Treasury Securities and/or cash
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, determines the requirements for Treasury
Securities and cash, including the remaining maturities of the Treasury
Securities and proportions of Treasury Securities and cash, that may be included
in distributions to redeem baskets. The Custodian will publish an
estimate of the redemption distribution per basket as of the beginning of each
business 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
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 the
NYMEX is closed other than customary weekend or holiday closings, or trading on
the NYSE Arca or the NYMEX is suspended or restricted, (2) for any period during
which an emergency exists as a result of which delivery, disposal or evaluation
of Treasury Securities is not reasonably practicable, or (3) for such other
period as the Sponsor determines to be necessary for the protection of the
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 Marketing Agent, or the Custodian
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 100,000 Shares (i.e., one basket) 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 Fee
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 $1,000 per order to create or redeem baskets, regardless
of the number of baskets in such order. The transaction fee may be
reduced, increased or otherwise changed by the Sponsor. The Sponsor
shall notify DTC of any change in the transaction fee and will not implement any
increase in the fee for the redemption of baskets until 30 days after the date
of the notice.
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 Treasury Securities and/or cash 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 Oil 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 Oil Interest markets. While the
Shares trade on the NYSE Arca until 4:00 p.m. New York time, liquidity in the
markets for Oil Interests may be reduced after the close of the NYMEX at 2:30
p.m. New York time. As a result, during this time, trading spreads, and the
resulting premium or discount, on the Shares may widen.
Use
of Proceeds
The
Sponsor will cause 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 will invest the Fund’s assets in Oil Futures
Contracts and Other Oil Interests, short-term Treasury Securities, cash and cash
equivalents. When the Fund purchases Oil Futures Contracts and
certain Other Oil Interests that are exchange-traded, the Fund will be required
to deposit with the futures commission merchant 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 Oil Interests at maturity. This
deposit is known as initial margin. Counterparties in transactions in
over-the-counter Oil Interests will generally impose similar collateral
requirements on the Fund. The Sponsor will invest the Fund’s assets
that remain after margin and collateral is posted in short-term Treasury
Securities, 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:
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held
as margin or collateral with futures commission merchants or other
custodians;
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used
for other investments; and
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held
in bank accounts to pay current obligations and as
reserves.
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In
general, the Fund expects that it will be required to post between 5% and 10% of
the notional amount of a Oil Interest as initial margin when entering into such
Oil Interest. Ongoing margin and collateral payments will generally be required
for both exchange-traded and over-the-counter Oil Interests based on changes in
the value of the Oil Interests. Furthermore, ongoing collateral requirements
with respect to over-the-counter Oil 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 Oil Interest, and each party’s creditworthiness. In light of the differing
requirements for initial payments under exchange-traded and over-the-counter Oil
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 Treasury Securities, cash and
cash equivalents held by the Fund will constitute reserves that will be
available to meet ongoing margin and collateral requirements. All interest
income will be used for the Fund’s benefit.
A futures
commission merchant, 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.
The
Fund’s assets will be held in segregation pursuant to the Commodity Exchange Act
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 compliance with
accounting principles generally accepted in the United States requires the
application of appropriate accounting rules and guidance, as well as the use of
estimates. The Trust’s application of these policies involves
judgments and actual results may differ from the estimates used.
The
Sponsor has evaluated the nature and types of estimates that it will make in
preparing the Fund’s financial statements and related disclosures once the Fund
commences operations. The Sponsor has determined that the valuation
of Oil 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. While not currently applicable given the
fact that the Fund is not currently involved in trading activities, the Administrator will use the NYMEX
closing price to determine the value of Oil Futures Contracts, and will
determine the value of over-the-counter Oil Interests based on the value of the
commodity or Futures Contract underlying such Oil 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 Oil
Interests. Values will be determined on a daily
basis.
Liquidity
and Capital Resources
The Fund
does not anticipate making use of borrowings or other lines of credit to meet
its obligations. It is anticipated that the Fund will meet its
liquidity needs in the normal course of business from the proceeds of the sale
of its investments or from the cash, cash equivalents and/or the Treasury
Securities 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 Oil Interests, and payment of expenses, summarized below
under “Contractual Obligations.”
The Fund
will generate cash primarily from (i) the sale of Creation Baskets and (ii)
interest earned on cash, cash equivalents and its investments in Treasury
Securities. Trading activities for the Fund have not
begun. Once the Fund begins trading activities, it is anticipated
that all of the net assets of the Fund will be allocated to trading in Oil
Interests. Most of the assets of the Fund will be held in Treasury
Securities, cash and/or cash equivalents that could or will be used as margin or
collateral for trading in Oil Interests. The percentage that such
assets will bear to the total net assets will vary from period to period as the
market values of the Oil Interests change. Interest earned on
interest-bearing assets of the Fund will be paid to the Fund.
The
investments of the Fund in Oil Interests will be subject to periods of
illiquidity because of market conditions, regulatory considerations and other
reasons. For example, the NYMEX limits the fluctuations in Oil
Futures Contract prices during a single day by regulations referred to as “daily
limits.” During a single day, no trades may be executed at prices
beyond the daily limit. Once the price of a Oil Futures Contract has
increased or decreased by an amount equal to the daily limit, positions in the
contracts can neither be taken nor liquidated unless the traders are willing to
effect trades at or within the limit. Such market conditions could
prevent the Fund from promptly liquidating a position in Oil Futures
Contracts.
To date,
all of the expenses of the Trust and the Fund have been funded by
Sponsor. If the Fund is unsuccessful in raising sufficient funds to
cover the expenses of the Fund and the Trust or in locating any other source of
funding, the Fund may terminate.
Market
Risk
Trading
in Oil Interests such as Oil Futures Contracts will involve the Fund entering
into contractual commitments to purchase or sell specific amounts of WTI light,
sweet crude oil at a specified date in the future. The gross or face
amount of the contracts is expected to significantly exceed the future cash
requirements of the Fund since the Fund intends to close 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 will be limited to the aggregate face amount of the contacts
held.
The
exposure of the Fund to market risk will depend on a number of factors including
the markets for WTI light, sweet crude oil, the volatility of interest rates and
foreign exchange rates, the liquidity of the Oil Interest markets and the
relationships among the contracts held by the Fund. The lack of
experience of the Sponsor in utilizing its model to trade in Oil Interests in a
manner that tracks changes in the Benchmark, as well as drastic market
events, could ultimately lead to the loss of all or substantially all of a
Shareholder’s investment.
Credit
Risk
When the
Fund enters into Oil Interests, it will be exposed to the credit risk that the
counterparty will not be able to meet its obligations. For purposes
of credit risk, the counterparty for the Oil Futures Contracts traded on the
NYMEX is the clearinghouse associated with the NYMEX. 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 Oil
Interest contract is generally a single bank or other financial
institution. As a result, there will be 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
Sponsor will attempt 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 Oil Interests it holds. The Sponsor will implement procedures
that will include, but will not be 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.
Any
commodity broker for the Fund, when acting as the futures commission merchant in
accepting orders to purchase or sell futures contracts on United States
exchanges, will be required by CFTC regulations to separately account for and
treat as belonging to the Fund all of the Fund’s assets that relate to domestic
futures contract trading. These commodity brokers are not allowed to
commingle the assets of the Fund with the commodity broker’s other assets
although commodity brokers are allowed to commingle the assets of multiple
customers in a bulk segregated account. In addition, the CFTC
requires commodity brokers to hold in a secure account the assets of the Fund
related to foreign futures contract trading.
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 will require 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 Treasury Securities) 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 will be with the Sponsor and certain
other service providers. The Sponsor, in return for its services,
will be 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 will
also be 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 (xi) 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.
Each Fund
pays its own brokerage and other transaction costs. The Fund will pay
fees to futures commission merchants in connection with its transactions in
futures contracts. Futures commission merchant fees are estimated to
be 0.02% annually for the Fund. In general, transaction costs on
over-the-counter Oil Interests and on Treasury Securities and other short-term
securities will be 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, included but not limited to the fees paid to
the Custodian and Marketing Agent with respect to the Fund, are estimated to be
0.65% for the twelve-month period ending ______, 2011, 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 Fund and any other
series of the Trust 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, Marketing Agent 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
Trust Agreement
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
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
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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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;
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Receive
from Authorized Purchasers and process, or cause the Marketing Agent or
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;
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Interact
with the Depository; and
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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. 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.
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.
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, 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.
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 all Shareholders and the
Trustee. If the withdrawing Sponsor is the last remaining Sponsor,
Shareholders holding a majority (over 50%) of the Trust’s Shares (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 the Fund 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 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 Shares of the
Trust or the Fund, as applicable (not including Shares acquired by the Sponsor
through its initial capital contribution), to vote on any matter with respect to
which Shareholders have a right to vote under the Trust
Agreement. 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. When the meeting is being requested by
Shareholders, the notice of the meeting shall be mailed or transmitted within 45
days after receipt of the written request from Shareholders. Any
notice of meeting shall be accompanied by a description of the action to be
taken at the meeting. Shareholders may vote in person or by proxy at
any such meeting. 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 holding Shares representing at least a majority (50%)
of the Trust’s outstanding Shares (excluding Shares acquired by the Sponsor in
connection with its initial capital contribution) may vote to (i) continue the
Trust by electing a successor Sponsor as described above, and (ii) approve
amendments to the Trust Agreement that impair the right to surrender Redemption
Baskets for redemption. (Trustee consent to any amendment to the
Trust Agreement is required if the Trustee reasonably believes that such
amendment adversely affects any of its rights, duties or
liabilities.) In addition, Shareholders holding Shares representing
seventy-five percent (75%) of the Trust’s outstanding Shares (excluding Shares
acquired by the Sponsor in connection with its initial capital contribution) 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.
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 Fund. Under the organizational documents of the
Sponsor, Mr. Sal Gilbertie and Mr. Dale Riker are obligated to use commercially
reasonable efforts to manage the Sponsor, devote such amount of time to the
Sponsor as would be consistent with their roles in similarly placed commodity
pool operators, and remain active in managing the Sponsor until they are no
longer managing members of the Sponsor or the Sponsor
dissolves. In
addition, the Sponsor expects that it will generally constitute the principal
and a 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 through the Sponsor or otherwise. The
Fund is currently one of several commodity pools managed by the Sponsor and its
personnel. In addition, the Sponsor may establish additional pools in
the future. The principals could have a conflict between their
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 their
ability to provide services to the Fund. However, it is not possible
to quantify the proportion of their time that the Sponsor’s personnel will
devote to the Fund and its management, which in large part will depend on
whether the Sponsor establishes additional commodity pools in the future and how
many such pools are established.
The
Sponsor and its principals, officers and employees may trade futures and related
contracts for 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
and conflicts with your best interests. Shareholders have very
limited voting rights, 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 or investment adviser to commodity pools other
than the Fund. 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 or any
Shareholder or any other Person, on the other hand, the Sponsor shall resolve
such conflict of interest considering the relative interest of each party
(including its own interest) and the benefits and burdens relating to such
interests, any customary or accepted industry practices, and any applicable
accepted accounting practices or principles.
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.
Books
and Records
The Trust
keeps its books of record and account at its office located at 232 Hidden Lake
Road, Building A, Brattleboro, Vermont 05301, or at the offices of the
Administrator located at One Wall Street, New York, New York 10286, 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 in this prospectus prepared in accordance with accounting principles
generally accepted in the United States, 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 Oil 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.teucriumoilfund.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.teucriumoilfund.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.
Rothstein,
Kass & Company, P.C. (“Rothstein Kass”), 4 Becker Farm Road, Roseland, NJ
07068, the Fund’s independent registered public accounting firm, as
representative of the Trust and the Fund, will provide tax information in
accordance with applicable U.S. Treasury Regulations relating to information
reporting with respect to widely held fixed investment
trusts. Persons treated as middlemen for purposes of these
regulations may obtain tax information regarding the Fund from Rothstein Kass or
from the Fund’s website, www.teucriumoilfund.com.
Fiscal
Year
The
fiscal year of the Fund is the calendar year.
Governing
Law; Consent to Delaware Jurisdiction
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. The Sponsor, the Trust, the Fund and DTC and, by
accepting Shares, each DTC Participant and each Shareholder, consent to the
jurisdiction of the courts of the State of Delaware and any federal courts
located in Delaware. Such consent is not required for any person to
assert a claim of Delaware jurisdiction over the Sponsor, the Trust or the
Fund.
Legal
Matters
Litigation
and Claims
Within
the past 5 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
The
validity of the Shares being issued hereunder will be passed upon on behalf of
the Trust and the Sponsor by Dykema Gossett PLLC. The opinion with
respect to federal income tax matters will be provided by Pre-Effective
Amendment to the Registration Statement.
Experts
Rothstein
Kass, an independent registered public accounting firm, has audited the
financial statements of the Trust and the Sponsor as of December 31,
2009.
Privacy
Policy
The Trust
and the Sponsor collect certain nonpublic personal information about investors
from the information provided by them in certain documents, as well as in the
course of processing transaction requests. None of this information
is disclosed except as necessary in the course of processing creations and
redemptions and otherwise administering the Trust (and then only subject to
customary undertakings of confidentiality) or as required by law. The
Trust and the Sponsor restrict access to the nonpublic personal information they
collect from investors to those employees and service providers who need access
to this information to provide services relating to the Trust to
investors. The Trust and the Sponsor each maintain physical,
electronic and procedural controls to safeguard this
information. These standards are reasonably designed to (1) ensure
the security and confidentiality of investors’ records and information, (2)
protect against any anticipated threats or hazards to the security or integrity
of investors’ records and information, and (3) protect against unauthorized
access to or use of investors’ records or information that could result in
substantial harm or inconvenience to any investor. A copy of the current Privacy
Policy can be provided on request and is provided to investors
annually.
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 persons not subject to special tax
treatment. For example, in general it does not address the tax
consequences 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, 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, 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.
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 or partnership 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 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, you should consult your own tax advisor regarding the tax
consequences.
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
Status 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 that 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, 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 a principal activity of which
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 swaps and other notional principal contracts with respect to
commodities. The Trust and the Sponsor have represented the following
to Dykema.
|
•
|
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, Dykema 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. Dykema 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. In addition, any distributions to Shareholders would not be
deductible by the Fund in computing its taxable income. Such distributions would
be treated as ordinary 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 Treasury
Securities and net capital gains from cash settlement of Oil 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 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.
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 discussion below
concerning certain conventions to be used by the Fund, allocations pursuant to
the Trust Agreement should be considered as having substantial economic effect
or being in accordance with Shareholders’ interest 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 beginning of
the first day of the immediately succeeding 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 he owned it is
deemed to hold it 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 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 Share. Investors who hold a Share on the last trading
day of the first month of the Fund’s operation will be allocated the tax items
for that month, as well as the tax items for the following month, attributable
to the Share.
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
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
Sponsor believes that application of the conventions and methods described above
is consistent with the intent of the partnership provisions of the Code and that
the resulting allocations should have substantial economic effect or otherwise
should be respected as being in accordance with Shareholders’ interests in the
Fund for federal income tax purposes. The Code and existing Treasury Regulations
do not expressly permit adoption of these conventions, although the monthly
allocation convention described above is consistent with a method permitted
under recently proposed Treasury Regulations. It is possible that the IRS could
successfully challenge the Fund’s allocation methods on the ground that they do
not satisfy the technical requirements of the Code or Treasury Regulations,
requiring a Shareholder to report a greater or lesser share of items of income,
gain, loss, or deduction than if the conventions were respected. The Sponsor is
authorized to revise the Fund’s methods to conform to the requirements of any
future Treasury Regulations.
As noted
above, the conventions used by the Fund in making tax allocations may cause a
Shareholder to be allocated more or less income or loss for 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 before it purchased its Shares,
resulting in an increase in the basis of the Shares (see “Tax Basis of Shares”, below).
On a subsequent 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 bases 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 bases 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 Shareholders’ 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”).
Many of
the Fund’s Oil Futures Contracts will qualify as “section 1256 contracts” under
the Code. Some Other Oil Interests that are cleared through a qualified board or
exchange will also constitute section 1256 contracts. Gain or loss recognized as
a result of the disposition, termination or marking-to-market of the Fund’s
section 1256 contracts during a calendar month will be subject to 60-40
treatment and allocated to Shareholders in accordance with the monthly
allocation convention.
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 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 to offset capital
gains in future years. In addition, a non-corporate 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.
Otherwise
deductible expenses incurred by non-corporate taxpayers constituting
“miscellaneous itemized deductions,” generally including investment-related
expenses (other than interest and certain other specified expenses), 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.
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 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.
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 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 your 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 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 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 sum
of (i) the amount of cash and (ii) the fair market value of marketable
securities distributed exceeds the Shareholder’s adjusted basis of its interest
in the Fund immediately before the distribution. Any cash distributions in
excess of a Shareholder’s tax basis generally will be treated as gain from the
sale or exchange of Shares.
Constructive Termination of the
Partnership. The Fund will be considered to have been
terminated for tax purposes if there is a sale or exchange of 50% or more of the
total interests in its Shares within a 12-month period. A termination would
result in the closing of the Fund’s taxable year for all Shareholders. In the
case of a Shareholder reporting on a taxable year other than a fiscal year
ending December 31, the closing of the Fund’s taxable year may result in more
than 12 months of our taxable income or loss being includable in its taxable
income for the year of termination. We would be required to make new tax
elections after a termination. A termination could result in tax penalties if we
were unable to determine that the termination had occurred. Moreover, a
termination might either accelerate the application of, or subject us to, any
tax legislation enacted before the termination.
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 any Fund debt
outstanding.
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 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.
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 —
|
•
|
the
Shareholder may recognize taxable gain or loss to the same extent as if it
had sold the Shares for cash;
|
|
•
|
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
|
|
•
|
any
distributions
the Shareholder receives with respect to the Shares under the loan
agreement will be fully taxable to the Shareholder, most likely as
ordinary income.
|
Shareholders
desiring to avoid these and other possible consequences of a deemed disposition
of their Shares should consider modifying any applicable brokerage account
agreements to prohibit the lending of their Shares.
Other
Tax Matters
Information
Reporting. The Fund provides tax information to the beneficial
owners of Shares and to the IRS. 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 $50 per failure, up to a
maximum of $100,000 per calendar year, is imposed by the Code for failure to
report such information to the Fund. 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 each
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 purposes of these proceedings. The Trust
Agreement appoints the Sponsor as the tax matters partner of the
Fund.
Tax Shelter Disclosure
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
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 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.
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 a qualified publicly traded partnership.
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, determinable, annual and 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 subject to a withholding tax at a rate of 35% for both
individual and corporate Shareholders.
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 35%) on allocations of our income to Non-U.S.
Shareholders. 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.
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.
The Trust
expects that most of the Fund’s interest income will qualify as portfolio
interest. 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.
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”) at a rate of 28% 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 has failed to properly report certain
interest and dividend income to the IRS and to respond to notices to that
effect. 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.
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. Dykema
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.
Additionally,
under the recently-enacted Hiring Incentives to Restore Employment Act (“Hire
Act”), Congress modified certain rules with respect to information reporting and
certification requirements, in particular with respect to “U.S. accounts”
maintained at foreign institutions. Congress delegated broad authority to
the United States Treasury Department to promulgate regulations to implement the
new withholding and reporting regime. Prospective investors in Shares
should consult their tax advisors regarding elements of the Hire Act that may be
relevant to an investment in Shares.
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 an employee benefit plan as
defined in ERISA or a plan as defined in Section 4975 of the Code who has
investment discretion should take into account before deciding to invest the
plan’s assets in the Fund. Employee benefit plans under ERISA and plans
under the Code 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
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:
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(1)
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freely
transferable (determined based on the relevant facts and
circumstances);
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(2)
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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
|
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(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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·
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exercise
any discretionary authority or discretionary control with respect to
management of the plan;
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·
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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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|
·
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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.
|
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
Marketing Agent 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.
INFORMATION
YOU SHOULD KNOW
This
prospectus contains information you should consider when making an investment
decision about the Shares. You should rely only on the information
contained in this prospectus or any applicable prospectus supplement. None
of the Trust, the Fund or the Sponsor has authorized any person to provide you
with different information and, if anyone provides you with different or
inconsistent information, you should not rely on it. This prospectus is
not an offer to sell the Shares in any jurisdiction where the offer or sale of
the Shares is not permitted.
The
information contained in this prospectus was obtained from us and other sources
believed by us to be reliable.
You
should disregard anything we said in an earlier document that is inconsistent
with what is included in this prospectus or any applicable prospectus
supplement. Where the context requires, when we refer to this
“prospectus,” we are referring to this prospectus and (if applicable) the
relevant prospectus supplement.
You
should not assume that the information in this prospectus or any applicable
prospectus supplement is current as of any date other than the date on the front
page of this prospectus or the date on the front page of any applicable
prospectus supplement.
We
include cross references in this prospectus to captions in these materials where
you can find further related discussions. The table of contents tells you
where to find these captions.
WHERE
YOU CAN FIND MORE INFORMATION
The Trust
has filed on behalf of the Fund a registration statement on Form S-1 with the
SEC under the 1933 Act. This prospectus does not contain all of the
information set forth in the registration statement (including the exhibits to
the registration statement), parts of which have been omitted in accordance with
the rules and regulations of the SEC. For further information about the
Trust, the Fund or the Shares, please refer to the registration statement, which
you may inspect, without charge, at the public reference facilities of the SEC
at the below address or online at www.sec.gov, or obtain at prescribed rates
from the public reference facilities of the SEC at the below address.
Information about the Trust, the Fund and the Shares can also be obtained from
the Fund’s website, which is www.teucriumoilfund.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 at the
public reference facilities of the SEC located at 100 F Street, N.E.,
Washington, DC 20549 and online at www.sec.gov. You may also obtain copies of
such material from the public reference facilities of the SEC at 100 F Street,
NE, Washington, D.C. 20549, at prescribed rates. You may obtain more information
concerning the operation of the public reference facilities of the SEC by
calling the SEC at 1-800-SEC-0330 or visiting online at www.sec.gov.
TEUCRIUM
TRADING, LLC — INDEX TO FINANCIAL STATEMENTS
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
|
|
Consolidated
Statement of Financial Condition
|
|
|
|
Consolidated
Statement of Operations |
|
|
|
Consolidated
Statement of Changes in Members’ Equity
|
105
|
|
|
Consolidated
Statement of Cash Flows
|
106
|
|
|
Notes
to Consolidated Financial Statements
|
107
|
Report of
Independent Registered Public Accounting Firm
To the
Members of
Teucrium
Trading, LLC
We have
audited the accompanying consolidated statement of financial condition of
Teucrium Trading, LLC (a corporation in the development stage) (the “Company”)
as of December 31, 2009, and the related consolidated statements of operations,
changes in members’ equity, and cash flows for the period from September 1, 2009
(date of inception) to December 31, 2009. These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Teucrium Trading, LLC as of
December 31, 2009, and the results of its operations, changes in members’ equity
and its cash flows for the period from September 1, 2009 (date of inception) to
December 31, 2009, in conformity with U.S. generally accepted accounting
principles.
/s/ Rothstein, Kass & Company,
P.C.
Roseland,
New Jersey
March
22, 2010
TEUCRIUM
TRADING, LLC and Subsidiary
(a
development stage company)
CONSOLIDATED
STATEMENT OF FINANCIAL CONDITION
|
|
March 31, 2010
(unaudited)
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
$ |
642,251 |
|
|
$ |
847,433 |
|
Prepaid
Expenses
|
|
|
11,552 |
|
|
|
6,000 |
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
653,803 |
|
|
$ |
853,433 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND MEMBERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Accrued
Expenses
|
|
$ |
323,980 |
|
|
$ |
163,040 |
|
|
|
|
|
|
|
|
|
|
Members'
Equity
|
|
|
379,823 |
|
|
|
740,393 |
|
Less
Subscription Receivable
|
|
|
(50,000 |
) |
|
|
(50,000 |
) |
|
|
|
329,823 |
|
|
|
690,393 |
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Members' Equity
|
|
$ |
653,803 |
|
|
$ |
853,433 |
|
The
accompanying notes are an integral part of this consolidated financial
statement.
TEUCRIUM
TRADING, LLC and Subsidiary
(a
development stage company)
CONSOLIDATED
STATEMENT OF OPERATIONS
|
|
For
the three months ended March 31, 2010
|
|
|
From
Inception (September 1, 2009) through December 31,
2009
|
|
|
From
Inception (September
1,
2009) through March 31, 2010
|
|
|
|
(unaudited)
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
$ |
397 |
|
|
$ |
- |
|
|
$ |
397 |
|
Change
in Unrealized Gain/Loss
|
|
|
73 |
|
|
|
- |
|
|
|
73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Income
|
|
|
470 |
|
|
|
- |
|
|
|
470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Unit-based
compensation
|
|
|
86,000 |
|
|
|
- |
|
|
|
86,000 |
|
Salaries,
Wages and Benefits
|
|
|
82,675 |
|
|
|
41,118 |
|
|
|
123,793 |
|
Business
Permits and Licenses
|
|
|
585 |
|
|
|
117,580 |
|
|
|
118,165 |
|
Professional
Fees
|
|
|
254,794 |
|
|
|
816,374 |
|
|
|
1,071,168 |
|
General
and Administrative
|
|
|
22,986 |
|
|
|
11,035 |
|
|
|
34,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Expenses
|
|
|
447,040 |
|
|
|
986,107 |
|
|
|
1,433,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$ |
(446,570 |
) |
|
$ |
(986,107 |
) |
|
$ |
(1,432,677 |
) |
The
accompanying notes are an integral part of this consolidated financial
statement.
TEUCRIUM
TRADING, LLC and Subsidiary
(a
development stage company)
CONSOLIDATED
STATEMENT OF CHANGES IN MEMBERS' EQUITY
For
the Period from Inception (September 31, 2009) through
December
31, 2009 and for the Three Months Ended March 31, 2010
(Unaudited)
|
|
|
|
|
|
|
|
Class
A
|
|
|
Class
B-1
|
|
Class
B-2
|
|
|
|
|
|
|
|
Members'
|
|
|
|
|
|
|
Per
Unit
|
|
|
Equity
|
|
|
Equity
|
|
Equity
|
|
|
|
|
Subscription
|
|
|
Equity
|
|
|
|
Units
|
|
|
Value
|
|
|
Total
|
|
|
Total
|
|
Total
|
|
Subtotal
|
|
|
Receivable
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
at Inception
|
|
|
|
|
|
|
|
$ |
- |
|
|
$ |
- |
|
$ |
-
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
Contributed through Note Conversion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
B-1 Units - issued October 26, 2009
|
|
|
38.961 |
|
|
$ |
5,775.01 |
|
|
|
|
|
|
|
225,000 |
|
|
|
|
|
225,000 |
|
|
|
(50,000 |
) |
|
|
175,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
Contributed for Member Interest and Option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A Units - issued August 12, 2009
|
|
|
1000.000 |
|
|
|
1.50 |
|
|
|
1,500 |
|
|
|
|
|
|
|
|
|
1,500 |
|
|
|
|
|
|
|
1,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
B-1 Units - issued October 26, 2009
|
|
|
259.740 |
|
|
|
5,775.01 |
|
|
|
|
|
|
|
1,500,000 |
|
|
|
|
|
1,500,000 |
|
|
|
|
|
|
|
1,500,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
(882 |
) |
|
|
(985,225 |
) |
|
|
|
|
(986,107 |
) |
|
|
|
|
|
|
(986,107 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
December 31, 2009
|
|
|
1,298.701 |
|
|
|
|
|
|
|
618 |
|
|
|
739,775 |
|
|
|
|
|
740,393 |
|
|
|
(50,000 |
) |
|
|
690,393 |
|
Class
B-2 Units- issued February 11, 2010 (Unaudited) |
|
|
100.000 |
|
|
|
860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss (Unaudited) |
|
|
|
|
|
|
|
|
|
|
(352 |
) |
|
|
(422,221 |
) |
|
(23,997
|
) |
|
(446,570 |
) |
|
|
|
|
|
|
(446,570 |
) |
Balances,
March 31, 2010 (Unaudited) |
|
|
1,398.701 |
|
|
|
|
|
|
$ |
266 |
|
|
$ |
317,554 |
|
$ |
|
|
$ |
379,823 |
|
|
$ |
(50,000 |
) |
|
$ |
329,823 |
|
The
accompanying notes are an integral part of this consolidated financial
statement.
TEUCRIUM
TRADING, LLC and Subsidiary
(a
development stage company)
CONSOLIDATED
STATEMENT OF CASH FLOWS
|
|
For
the three months ended March 31, 2010
|
|
|
From
Inception (September 1, 2009) through December 31,
2009
|
|
|
From
Inception (September
1,
2009) through March 31, 2010
|
|
|
|
(unaudited)
|
|
|
|
|
|
(unaudited)
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$ |
(446,570 |
) |
|
$ |
(986,107 |
) |
|
$ |
(1,432,677 |
) |
Adjustments
to reconcile net loss to net cash used in
operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unit-based
compensation
|
|
|
86,000 |
|
|
|
|
|
|
|
86,000 |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in Prepaid Expenses
|
|
|
(5,551 |
) |
|
|
(6,000 |
) |
|
|
(11,551 |
) |
Increase
in Accrued Expenses
|
|
|
160,940 |
|
|
|
163,040 |
|
|
|
323,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(205,181 |
) |
|
|
(829,067 |
) |
|
|
(1,034,248 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flow from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from Convertible Debt
|
|
|
- |
|
|
|
175,000 |
|
|
|
175,000 |
|
Proceeds
from Sale of Member Equity and Option
|
|
|
- |
|
|
|
1,501,500 |
|
|
|
1,501,500 |
|
Net
cash provided by financing activities
|
|
|
- |
|
|
|
1,676,500 |
|
|
|
1,676,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Increase in Cash and Cash Equivalents
|
|
|
(205,181 |
) |
|
|
847,433 |
|
|
|
642,252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents,
beginning of period
|
|
|
847,433 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents,
end of period
|
|
$ |
642,252 |
|
|
$ |
847,433 |
|
|
$ |
642,252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Cash
Transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of debt into members' equity (including
$50,000
which had not been received by the company)
|
|
$ |
- |
|
|
$ |
225,000 |
|
|
$ |
225,000 |
|
Issuance
of B-2 units
|
|
$ |
86,000 |
|
|
|
- |
|
|
$ |
86,000 |
|
The
accompanying notes are an integral part of this consolidated financial
statement.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Note
1 — Organization and Operation
Teucrium
Trading, LLC, (the “Company”), a Delaware limited liability company, formed on
July 28, 2009 and began operations on September 1, 2009. The
principal office is located at 232 Hidden Lake Road, Brattleboro, Vermont
05301. The Company is registered as a commodity pool operator (“CPO”)
with the Commodity Futures Trading Commission (“CFTC”) and became a member of
the National Futures Association (“NFA”) on November 10, 2009.
The
Company is solely responsible for the management and conducts or directs the
conduct of the business of the Teucrium Commodity Trust (the “Trust”), a
Delaware statutory trust, and any other series of the Trust that may from time
to time be established and designated by the Company. Teucrium Corn Fund (the
“Fund”) is a commodity pool that is a series of the Trust.
The
Company is required to oversee the purchase and sale of Shares by Authorized
Purchasers (one that
purchases or redeems creation baskets or redemption baskets, respectively, from
or to the Fund), and to manage the Fund’s investments, including to evaluate the
credit risk of futures commission merchants and swap counterparties and to
review daily positions and margin/collateral requirements.
The
Company has the power to enter into agreements as may be necessary or
appropriate for the offer and sale of the Fund’s units and the conduct of the
Trust’s activities.
The
Company, together with the Fund, entered into marketing agent agreements with
ALPS Distributors, Inc. (“ALPS”), a Colorado corporation, whereby ALPS provides
certain marketing services for the Funds as outlined in their respective
agreements.
Subsequent
Events
The
audited financial statements for the period from Inception (September 1, 2009)
through December 31, 2009 were approved by management and available for issuance
on March 22, 2010. Subsequent events related to the audited financial statements
have been evaluated through this date.
Note
2 — Summary of Significant Accounting Policies
Principles
of Consolidation
The
consolidated financial statements include the Company and the Trust. All
material inter-company transactions and balances have been eliminated in the
consolidation.
Basis
of Presentation
The
accompanying unaudited interim consolidated financial statements for the three
months ended March 31, 2010 have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission and were prepared on the
same basis as the consolidated financial statements for the period ended
December 31, 2009. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments necessary for a fair
presentation of the information for this interim period, have been
made. The operations for such interim period are not necessarily
indicative of the operations for the full year.
Development
Stage Company
The
Company is considered to be in the development stage as defined by U.S.
Generally Accepted Accounting Principles (“GAAP”) and subject to the reporting
requirements associated therewith.
Revenue
Recognition
The
Company will receive a fee as compensation for services performed under the
Trust agreement. The Company’s fee will accrue daily and will be paid
monthly at an annual rate of 1.00% of the average daily net assets of the
Fund. The Company will receive no compensation from the Fund other
than such fee. The Fund is also responsible for other ongoing fees,
costs and expenses of its operations, including brokerage fees, SEC (“Securities
and Exchange Commission”) and the Financial Industry Regulatory Authority
(“FINRA”) registration fees and legal, printing, accounting, custodial,
administration and transfer agency costs. The Company has borne or will bear the
costs and expenses related to the initial offering and sale of
units.
Calculation
of Net Asset Value
The Fund
will calculate its net asset value on each trading day by taking the current
market value of its total assets, subtracting any liabilities, and dividing the
amount by the total number of its units issued and outstanding. The Fund will
use the Chicago Board of Trade closing price on that day for contracts held on
the Chicago Board of Trade.
Additions and
Redemptions
Authorized
purchasers may purchase creation baskets of the Fund only in blocks of 100,000
units equal to the net asset value of the units calculated shortly after the
close of the core trading session on the NYSE (“New York Stock Exchange”) Arca
on the day the order is placed. Authorized purchasers may redeem units from the
Fund only in blocks of 100,000 units called “Redemption Baskets”. The amount of
the redemption proceeds for a Redemption Basket will be equal to the net asset
value of the Fund’s units in the Redemption Basket as of the end of each
business day.
The Fund
will receive or pay the proceeds from units sold or redeemed within three
business days after the trade-date of the purchase or redemption. The amounts
due from authorized purchasers will be reflected in the Fund’s statement of
financial condition as receivables for units sold, and amounts payable to
authorized purchasers upon redemption are reflected as payable for units
redeemed.
Accounting
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Income
Taxes
The
Company does not record a provision for income taxes because the partners report
their share of the Company’s income or loss on their income tax
returns. The financial statements reflect the Company’s transactions
without adjustment, if any, required for income tax purposes.
In
accordance with GAAP, the Company is required to determine whether a tax
position is more likely than not to be sustained upon examination by the
applicable taxing authority, including resolution of any related appeals or
litigation processes, based on the technical merits of the
position. The Company files an income tax return in the U.S. federal
jurisdiction, and may file income tax returns in various U.S. states and foreign
jurisdictions. The Company is subject to income tax examinations by
major taxing authorities for all tax years since inception. The tax benefit
recognized is measured as the largest amount of benefit that has a greater than
fifty percent likelihood of being realized upon ultimate
settlement. De-recognition of a tax benefit previously recognized
results in the Company recoding a tax liability that reduces net
assets. This policy has been applied to all existing tax positions
upon the Company’s initial adoption for the period ended December 31,
2009. Based on its analysis, the Company has determined that the
adoption of this policy did not have a material impact on the Company’s
financial statements upon adoption. However, the Company’s
conclusions regarding this policy may be subject to review and adjustment at a
later date based on factors including, but not limited to, on-going analysis of
and changes to tax laws, regulations, and interpretations
thereof. The Company recognizes interest accrued related to
unrecognized tax benefits and penalties related to unrecognized tax benefits in
income tax fees payable, if assessed. No interest expense or
penalties have been recognized as of and for the periods ended March 31, 2010
(unaudited) and December 31, 2009.
Offering
Costs
The
Company expenses all initial offering costs associated with the registration of
the Fund. Costs include, but are not limited to, legal fees pertaining to the
Fund’s units offered for sale, SEC and state registration fees, initial fees
paid to be listed on an exchange and underwriting and other similar costs. The
initial offering and organization costs incurred to start the Fund will be borne
by the Company and not be charged to the Fund.
Cash
Equivalents
Cash
equivalents are highly-liquid investments with original maturity dates of three
months or less. The Company reported its cash equivalents in the
Consolidated Statement of Financial Condition at market value, or at carrying
amounts that approximate fair value, because of their highly-liquid nature and
short-term maturities. The Company has a substantial portion of its assets on
deposit with banks. Assets deposited with the bank may, at times, exceed
federally insured limits. The Company had a balance of $202,129
(unaudited) and $183,167 in money market funds at March 31, 2010 and December
31, 2009, respectively; these balances are included in cash and cash equivalents
on the Consolidated Statement of Financial Condition.
Valuation
of Cash Equivalents at Fair Value - Definition and Hierarchy
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 Fund 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 Fund. Unobservable inputs reflect the Fund’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
based on the inputs as follows:
Level 1 - Valuations based on
unadjusted quoted prices in active markets for identical assets or liabilities
that the Fund has the ability to access. Valuation adjustments and block
discounts are not applied to Level 1 securities. Since valuations are
based on quoted prices that are readily and regularly available in an active
market, valuation of these securities does not entail a significant degree of
judgment.
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.
Level 3 - Valuations based on
inputs that are unobservable and significant to the overall fair value
measurement.
The
availability of valuation techniques and observable inputs can vary from
security to security and is affected by a wide variety of factors including, the
type of security, whether the security is new and not yet established in the
marketplace, and other characteristics particular to the transaction. To
the extent that valuation is based on models or inputs that are less observable
or unobservable in the market, the determination of fair value requires more
judgment. Those estimated values do not necessarily represent the amounts
that may be ultimately realized due to the occurrence of future circumstances
that cannot be reasonably determined. Because of the inherent uncertainty
of valuation, those estimated values may be materially higher or lower than the
values that would have been used had a ready market for the securities
existed. Accordingly, the degree of judgment exercised by the Fund in
determining fair value is greatest for securities categorized in Level 3.
In certain cases, the inputs used to measure fair value may fall into
different levels of the fair value hierarchy. In such cases, for
disclosure purposes, the level in the fair value hierarchy within which the fair
value measurement in its entirety falls, is determined based on the lowest level
input that is significant to the fair value
measurement.
Fair
value is a market-based measure considered from the perspective of a market
participant rather than an entity-specific measure. Therefore, even when
market assumptions are not readily available, the Fund’s own assumptions are set
to reflect those that market participants would use in pricing the asset or
liability at the measurement date. The Fund uses prices and inputs that
are current as of the measurement date, including periods of market
dislocation. In periods of market dislocation, the observability of prices
and inputs may be reduced for many securities. This condition could cause
a security to be reclassified to a lower level within the fair value hierarchy.
The Company’s adoption this standard did not have a material effect on its
consolidated financial position, results of operations or
liquidity.
Note
3 – Fair Value Measurements
The
Fund’s assets and liabilities recorded at fair value have been categorized based
upon a fair value hierarchy as described in the Fund’s significant accounting
policies in Note 2.
The
following table presents information about the Fund’s assets measured at fair
value as of March 31, 2010 and December 31, 2009:
March 31, 2010
(Unaudited)
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
other
|
|
|
Significant
|
|
|
Balance
|
|
|
|
Identical
Assets
|
|
|
Observable
Inputs
|
|
|
Unobservable
Inputs
|
|
|
as
of
March
31,
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
equivalents
|
|
$
|
202,129
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
202,129
|
|
December 31, 2009
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
other
|
|
|
Significant
|
|
|
Balance
|
|
|
|
Identical
Assets
|
|
|
Observable
Inputs
|
|
|
Unobservable
Inputs
|
|
|
as
of
December
31,
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
equivalents
|
|
$
|
183,167
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
183,167
|
|
Note
4 – Capitalization (including convertible debt)
The
Company is authorized to issue equity interests in the Company designated as
"membership units" which shall constitute "membership interests" and shall
initially include Class A units, Class B-1 units and Class B-2 units. Class A
Units are granted the right to vote on all matters regarding management and
members. The voting rights granted to Class B units are limited to matters
requiring a majority vote of Class A units, including but not limited to,
dissolution.
The
members (acting by a majority vote of the Class A members) are authorized, by
resolution or resolutions, to create and to issue, on behalf of the Company,
different classes, groups or series of membership units and to fix for each such
class, group or series such voting powers (full or limited or no voting powers),
and such distinctive designations, preferences and relative participating,
optional or other special rights and qualifications, limitations or restrictions
as determined by the members (acting by a majority vote of the Class A members)
in exchange for contributions of cash or property, the provision of services or
such other consideration, as may be determined by the members (acting by a
majority vote of the Class A members). Each membership unit of a class of
membership units shall be identical in all respects to each other membership
unit of such class. All membership units may be issued as fractional
units.
During
the period from inception (September 1, 2009) through December 31, 2009,
GFI Group LLC contributed $1,500,000 in cash in connection with its interest in
the Company through Class B-1 units and an option agreement.
The
Company granted GFI Group LLC the right and option to purchase that number of
Class B-1 units of the Company representing the Percentage Interest in the
Company at the exercise price shown below (the “Option”):
Percentage
Interest subject to Option: Up to 5%
Exercise
Price: $2,500,000 per each two and one-half percent (2.5%) (the “Incremental
Exercise Percentage”) Percentage Interest, for an aggregate exercise
price of $5,000,000.
This
option shall become vested and exercisable in full as of the date of
grant.
The
Option shall expire and cease to be exercisable upon the five-year anniversary
of the date the option was granted, October 28, 2009.
Ownership
or “membership” interests in the Company are owned by persons referred to as
“members.” The Company 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 Company. Messrs. Gilbertie and Riker each currently
own 45% of the Company’s Class A membership interests.
The
Company entered into convertible notes on September 28, 2009 for $225,000, and
the note holders have rights to convert for 3% interest in the Company. On
October 28, 2009, the note holders converted $225,000, including $50,000 which
had not been received by the Company. Due primarily to the short-term nature of
the convertible notes, the Company has determined that the bifurcation of the
convertible debt would not have had material impact on the consolidated
financial statements.
In
February 2010, the Company issued Class B-2 shares to a small number of
non-employee individuals representing 7% of the total collective Company
membership interests. The Class B-2 shares were awarded based on
services. The Class B-2 shares generally have the same rights as Class B-1
shares; however in the event of termination, the Class B-2 shares
are subordinate to Class B-1 shares regarding any distributions. The Class
B-2 shares are redeemable at the sole option of the Company at a
predetermined price $1,000,000 per 1% of collective membership interests
represented by the Class B-2 shares. For the three months and inception to date
period ended March 31, 2010, $86,000 (unaudited) of unit-based compensation
expense representing the estimated fair value of the Class B-2 shares issued is
included on the statement of operations. In
accordance with FASB Accounting Standards Codification Topic No. 505, “Equity,”
the Company determined the fair value of the Class B-2 shares issued based on
recent similar transactions, the financial condition and book value of the
Company at the time of issuance, and the respective rights of the Class B-2
shares versus the other classes of membership interests.
Note
5 — Related Party Transactions
The Riker
Group has invoiced $60,000 (unaudited) and $100,000 for professional services
rendered by Dale Riker for the periods ending March 31, 2010 and December 31,
2009, respectively; $20,000 is included in the accounts payable balance on
the accompanying Consolidated Statement of Financial Condition at March 31, 2010
(unaudited) and December 31, 2009.
Carl
Miller received a salary of $30,000 (unaudited) and $20,000 for the periods
ending March 31, 2010 and December 31, 2009, respectively.
Gilbertie
Herb Farm was paid $9,000 for rent for the period September 1, 2009 through
December 31, 2010. Prepaid Expenses on the Statement of Financial
Condition included prepaid rent of $4,500 (unaudited) and $6,000 at March 31,
2010 and December 31, 2009, respectively.
Note 6 — Recent
Accounting Pronouncements
In June
2009, the FASB issued SFAS No.
168, “The FASB Accounting
Standards Codification TM and the Hierarchy of Generally Accepted Accounting
Principles – a replacement of FASB Statement No. 162 ” (“SFAS 168”). The
FASB Accounting Standards
Codification TM , (“Codification” or “ASC”) became the source of
authoritative GAAP recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants. On
the effective date of SFAS 168, the Codification superseded all then-existing
non-SEC accounting and reporting standards. All other non-grandfathered non-SEC
accounting literature not included in the Codification became
non-authoritative.
Following
SFAS 168, the FASB will no longer issue new standards in the form of Statements,
FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead, it will
issue Accounting Standards Updates (ASU’s). The FASB will not consider ASU’s as
authoritative in their own right; rather these updates will serve only to update
the Codification, provide background information about the guidance, and provide
the bases for conclusions on the change(s) in the Codification. SFAS
No. 168 is incorporated in ASC Topic 105, Generally Accepted Accounting
Principles. The Company has adopted SFAS No. 168, and the
Company will provide reference to both the Codification topic reference and the
previously authoritative references related to Codification topics and
subtopics, as appropriate.
In March
2008, the FASB released FASB Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities (“Statement No.
161”). Statement No. 161, which is incorporated in FASB ASC Topic No.
815, “Derivatives
and Hedging”, requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about
fair value amounts of and gains and losses on derivative instruments, and
disclosures about credit-risk-related contingent features in derivative
agreements. The adoption of this standard did not have a material impact on the
Company’s financial position and results of operations.
In
October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active, which
addresses the application of Statement of Financial Accounting Standards
(“SFAS”) No.157 for illiquid financial instruments. FSP FAS 157-3,
which is incorporated in FASB ASC Topic No. 820, “Fair Value Measurements and
Disclosures”, clarifies that approaches to determining fair value other
than the market approach may be appropriate when the market for a financial
asset is not active. The adoption of FSP FAS 157-3 did not have a
material effect on the Company’s financial statements.
In April
2009, the Financial Accounting Standards Board (“FASB”) issued FASB Staff
Position (“FSP”) FAS 157-4, “Determining Fair Value when the Volume and Level of
Activity for the Asset or Liability have Significantly Decreased and Identifying
Transactions that are not Orderly” (“FSP 157-4”), which is effective for the
Company for the quarterly period beginning September 1, 2009. FSP 157-4, which
is also incorporated in FASB ASC Topic No. 820, “Fair Value Measurements and
Disclosures”, affirms that the objective of fair value when the market
for an asset is not active is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date under current market conditions. The FSP
provides guidance for estimating fair value when the volume and level of market
activity for an asset or liability have significantly decreased and determining
whether a transaction was orderly. This FSP applies to all fair value
measurements when appropriate. The adoption of FSP FAS 157-4 did not have a
material effect on the Company’s financial statements.
In
April 2009, the FASB issued FASB Staff Position (“FSP”) SFAS No. 107-1
and Accounting Principles Board (“APB”) Opinion No. 28-1 (“APB
No. 28-1”), “Interim Disclosures about Fair Value of Financial
Instruments,” which amends SFAS No. 107, “Disclosures about Fair Value of
Financial Instruments,” and requires disclosures about the fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. FSP SFAS No. 107-1 and APB
No. 28-1, which is now incorporated in FASB ASC Topic No. 825, “Financial Instruments”,
also amends APB Opinion No. 28, “Interim Financial Reporting,” to require
those disclosures in summarized financial information for interim reporting
periods. FSP SFAS No. 107-1 and APB No. 28-1 is effective for interim
reporting periods ending after June 15, 2009. The adoption of FSP SFAS No.
107-1 and APB No. 28-1 did not have a material effect on the Company’s financial
position and results of operations.
In
May 2009, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 165, “Subsequent
Events” (“SFAS 165”). This standard, which is incorporated in FASB ASC Topic No.
855, “Subsequent
Events”, is intended to establish general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. Specifically,
this standard sets forth the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. SFAS 165 is effective for
fiscal years and interim periods ended after June 15, 2009 and will be
applied prospectively. The adoption of this standard did not have a material
impact on the Company’s financial position and results of
operations.
In June
2009, the FASB issued guidance on the consolidation of variable interest
entities. The new guidance requires revised evaluations of whether entities
represent variable interest entities, ongoing assessments of control over such
entities, and additional disclosures for variable interests. The adoption of
this standard did not have a material impact on the Company’s financial position
and results of operations.
In
January 2010, the FASB issued guidance to amend the disclosure requirements
related to recurring and nonrecurring fair value measurements. The guidance
requires new disclosures on the transfers of assets and liabilities between
Level 1 (quoted prices in active market for identical assets or liabilities) and
Level 2 (significant other observable inputs) of the fair value measurement
hierarchy, including the reasons and the timing of the transfers. Additionally,
the guidance requires a roll forward of activities on purchases, sales,
issuance, and settlements of the assets and liabilities measured using
significant unobservable inputs (Level 3 fair value measurements). Other than
requiring additional disclosures, adoption of this new guidance will not have a
material impact on the Company’s consolidated financial statements and will be
effective January 1, 2011.
At
inception, the Company adopted the guidance issued by the FASB that changes the
accounting and reporting for non-controlling interests. Non-controlling
interests are to be reported as a component of equity separate from the parent’s
equity, and purchases or sales of equity interests that do not result in a
change in control are to be accounted for as equity transactions. In addition,
net income attributable to a non-controlling interest is to be included in net
income and, upon a loss of control, the interest sold, as well as any interest
retained, is to be recorded at fair value with any gain or loss recognized in
net income. Adoption of the new guidance did not have a material impact on the
Company’s consolidated financial statements.
Note
7 — Subsequent Events (Unaudited)
On June
7, 2010, the Company entered into a debt agreement (the “Loan Agreement”) with
GFI Group LLC. Under the terms of the Loan Agreement, the Company borrowed
$800,000 for a one year term at an annual interest rate of 8.25%.
The payment of principal and interest is due at maturity and is subject to
optional prepayment by the Company at anytime without premium or
penalty. The Loan Agreement is collateralized by substantially all of
the current and future assets of the Company.
As
discussed in Note 4, the Company previously granted GFI Group LLC the right and
option to purchase Class B-1 units of the Company (the “Option
Agreement”). In connection with the execution of the Loan Agreement,
the terms of the Option Agreement were modified to allow GFI Group LLC to
purchase that number of Class B-1 units of the Company representing the
Percentage Interest in the Company at the exercise price shown below (the
“Modified Option”):
Percentage
Interest subject to the Modified Option: Up to 5%
Exercise
Price: $2,100,000 per each two and one-half percent (2.5%)
Incremental Exercise Percentage Interest for an aggregate exercise price of
$4,200,000.
On June
9, 2010, the Teucrium Corn Fund began trading on the NYSE Arca
exchange.
TEUCRIUM
COMMODITY TRUST — INDEX TO FINANCIAL STATEMENTS
|
|
Page
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
115
|
|
|
|
Statement
of Assets and Liabilities
|
|
116
|
|
|
|
Notes
to Statement of Assets and Liabilities
|
|
116
|
Report of
Independent Registered Public Accounting Firm
To the
Sponsor of
Teucrium
Commodity Trust
We have
audited the accompanying statement of assets and liabilities of Teucrium
Commodity Trust (the
“Trust”) as of December 31, 2009. These financial statements are the
responsibility of the Trust’s management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Trust is not required to have,
nor were we engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Trust’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Teucrium Commodity Trust as of December 31, 2009,
in conformity with U.S. generally accepted accounting principles.
/s/ Rothstein, Kass & Company,
P.C.
Roseland,
New Jersey
March
22, 2010
TEUCRIUM
COMMODITY TRUST
STATEMENT
OF ASSETS AND LIABILITIES
Assets
|
March
31, 2010
(unaudited)
|
|
December
31, 2009
|
|
|
|
|
|
|
Cash
|
|
$ |
100 |
|
|
$ |
100 |
|
|
|
|
|
|
|
|
|
|
Net
Assets
|
|
$ |
100 |
|
|
$ |
100 |
|
The
accompanying notes are an integral part of this financial
statement.
Teucrium
Commodity Trust
NOTES
TO STATEMENT OF ASSETS AND LIABILITIES
Note
1 — Organization and Business
Teucrium
Commodity Trust (“Trust”) is a Delaware statutory trust organized on September
11, 2009, and is a series trust which includes Teucrium Corn Fund (the “Fund”),
a commodity pool that will issue shares that may be purchased and sold on the
New York Stock Exchange (“NYSE”) Arca. Additional series of the Trust that will
be separate commodity pools may be created in the future, but the Fund is
currently the Trust’s only series. The Trust and the Fund operate
pursuant to the Trust’s Declaration of Trust and Trust Agreement (the “Trust
Agreement”). 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
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 corn (“Corn Futures Contracts”) that are traded on
the Chicago Board of Trade (“CBOT”), specifically (1) the second-to-expire CBOT
Corn Futures Contract, weighted 35%, (2) the third-to-expire CBOT Corn Futures
Contract, weighted 30%, and (3) the CBOT Corn Futures Contract expiring in the
December following the expiration month of the third-to-expire contract,
weighted 35%, less the Fund’s expenses.
The Fund
seeks to achieve its investment objective by investing under normal market
conditions in the three Corn Futures Contracts set forth in the preceding
paragraph or, in certain circumstances, in other Corn Futures Contracts traded
on the CBOT or on foreign exchanges. In addition, and to a limited
extent, the Fund also may invest in corn-based swap agreements that are cleared
through the CBOT or its affiliated provider of clearing services (“Cleared Corn
Swaps”) in furtherance of the Fund's investment objective. Once
position limits in Corn Futures Contracts are applicable, the Fund's intention
is to invest first in Cleared Corn Swaps to the extent permitted by the position
limits applicable to Cleared Corn Swaps and appropriate in light of the
liquidity in the Cleared Corn Swap market, and then in contracts and instruments
such as cash-settled options on Corn Futures Contracts and forward contracts,
swaps other than Cleared Corn Swaps, and other over-the-counter transactions
that are based on the price of corn and Corn Futures Contracts (collectively,
“Other Corn Interests,” and together with Corn Futures Contracts and Cleared
Corn Swaps, “Corn Interests”). 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 to execute the Fund’s
transactions in Corn Futures Contracts.
The Fund
will invest in Corn 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 Corn
Interests. After fulfilling such margin and collateral requirements,
the Fund will invest the remainder of its proceeds from the sale of baskets in
short-term obligations of the United States government (“Treasury Securities”)
or other cash equivalents, and/or merely hold such assets in cash (generally in
interest-bearing accounts). Therefore, the focus of the Sponsor in
managing the Fund is investing in Corn Interests and in Treasury Securities,
cash and/or cash equivalents. The Fund will earn interest
income from the Treasury Securities and/or cash equivalents that it purchases
and on the cash it holds through the Custodian.
The Fund
will create and redeem units 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 units of any
baskets it does create. Baskets are generally created when there is a
demand for units, including, but not limited to, when the market price per unit
is at (or perceived to be at) a premium to the NAV per
share. Authorized purchasers will then sell such units, which will be
listed on the NYSE (“New York Stock Exchange”) Arca, to the public at per-unit
offering prices that are expected to reflect, among other factors, the trading
price of the units 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 units to the public, the supply of and demand for units at the
time of sale, and the liquidity of the corn futures contracts market and the
market for other corn interests. The prices of units offered by
authorized purchasers are expected to fall between the Fund’s NAV and the
trading price of the units on the NYSE Arca at the time of
sale. Similarly, baskets are generally redeemed when the market price
per unit is at (or perceived to be at) a discount to the NAV per
share. Retail investors seeking to purchase or sell units on any day
are expected to effect such transactions in the secondary market, on the NYSE
Arca, at the market price per unit, rather than in connection with the creation
or redemption of baskets.
Sponsor
Fee
Under the
Trust Agreement, 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 will arrange for one or more third parties to provide administrative,
custody, 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 on average net assets. The Fund will pay for all
brokerage fees, taxes and other expenses, including licensing fees for the use
of intellectual property, registration or other fees paid to the Securities and
Exchange Commission (“SEC”), the Financial Industry Regulatory Authority
(“FINRA”), formerly the National Association of Securities Dealers, or any other
regulatory agency in connection with the offer and sale of subsequent Units
after its initial registration and all legal, accounting, printing and other
expenses associated therewith. The Fund also pays the fees and expenses
associated with the Trust’s tax accounting and reporting requirements with the
exception of certain initial implementation services fees and base services fees
which will be paid by the Sponsor.
Income Taxes
The Trust
does not record a provision for income taxes because the partners report their
share of the Trust’s income or loss on their income tax returns. The
financial statements reflect the Trust’s transactions without adjustment, if
any, required for income tax purposes.
In
accordance with GAAP, the Trust is required to determine whether a tax position
is more likely than not to be sustained upon examination by the applicable
taxing authority, including resolution of any related appeals or litigation
processes, based on the technical merits of the position. The Trust
files an income tax return in the U.S. federal jurisdiction, and may file income
tax returns in various U.S. states and foreign jurisdictions. The Trust is
subject to income tax examinations by major taxing authorities for all tax years
since inception. The tax benefit recognized is measured as the largest
amount of benefit that has a greater than fifty percent likelihood of being
realized upon ultimate settlement. De-recognition of a tax benefit
previously recognized results in the Trust recoding a tax liability that reduces
net assets. This policy has been applied to all existing tax
positions upon the Trust’s initial adoption for the period ended December 31,
2009. Based on its analysis, the Trust has determined that the
adoption of this policy did not have a material impact on the Trust’s financial
statements upon adoption. However, the Trust’s conclusions regarding
this policy may be subject to review and adjustment at a later date based on
factors including, but not limited to, on-going analysis of and changes to tax
laws, regulations, and interpretations thereof. The Trust recognizes
interest accrued related to unrecognized tax benefits and penalties related to
unrecognized tax benefits in income tax fees payable, if assessed. No
interest expense or penalties have been recognized as of and for the periods
ended March 31, 2010 (unaudited) and December 31, 2009.
Additions
and Redemptions
Authorized
purchasers may purchase creation baskets consisting of 100,000 units from the
Fund as of the beginning of each business day based upon the prior day’s net
asset value. Authorized purchasers may redeem units from the Fund only in blocks
of 100,000 units called “redemption baskets”. The amount of the redemption
proceeds for a redemption basket will be equal to the net asset value of the
units in the redemption basket determined as of 4:00 p.m. New York Time on the
day the order to redeem the basket is properly received.
The Fund
receives or pays the proceeds from units sold or redeemed within three business
days after the trade date of the purchase or redemption. The amounts due from
authorized purchasers are reflected in the Fund’s statement of assets and
liabilities as receivable for Units sold and amounts payable to authorized
purchasers upon redemption is reflected as payable for Units
redeemed.
Calculation
of Net Asset Value
The
Fund’s NAV is calculated by:
|
·
|
Taking
the current market value of its total assets,
and
|
|
·
|
Subtracting
any liabilities.
|
The
administrator will calculate the NAV of the Fund once each trading
day. It will calculate 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 will be released after 4:15 p.m. New York
time.
In
determining the value of Corn Futures Contracts, the administrator will use the
CBOT closing price (typically 2:15 p.m. New York time). The
administrator will determine 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.
The value of over-the-counter corn interests will be determined based on the
value of the commodity or futures contract underlying such corn 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 corn
interest. Treasury Securities held by the Fund will be valued by the
administrator using values received from recognized third-party vendors and
dealer quotes. NAV will include any unrealized profit or loss on open
corn interests and any other income or expense accruing to the Fund but unpaid
or not received by the Fund.
Basis
of Presentation
The
accompanying unaudited interim consolidated financial statements for the three
months ended March 31, 2010 have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission and were prepared on the
same basis as the consolidated financial statements for the period ended
December 31, 2009. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments necessary for a fair
presentation of the information for this interim period, have been
made. The operations for such interim period are not necessarily
indicative of the operations for the full year.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of the revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
Subsequent
Events
The
audited financial statements for the period from Inception (September 1, 2009)
through December 31, 2009 were approved by management and available for issuance
on March 22, 2010. Subsequent events related to the audited financial statements
have been evaluated through this date.
Note 2 — Recent
Accounting Pronouncements
In June
2009, the FASB issued SFAS No.
168, “The FASB Accounting
Standards Codification TM and the Hierarchy of Generally Accepted Accounting
Principles – a replacement of FASB Statement No. 162 ” (“SFAS 168”). The
FASB Accounting Standards
Codification TM , (“Codification” or “ASC”) became the source of
authoritative GAAP recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants. On
the effective date of SFAS 168, the Codification superseded all then-existing
non-SEC accounting and reporting standards. All other non-grandfathered non-SEC
accounting literature not included in the Codification became
non-authoritative.
Following
SFAS 168, the FASB will no longer issue new standards in the form of Statements,
FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead, it will
issue Accounting Standards Updates (ASU’s). The FASB will not consider ASU’s as
authoritative in their own right; rather these updates will serve only to update
the Codification, provide background information about the guidance, and provide
the bases for conclusions on the change(s) in the Codification. SFAS
No. 168 is incorporated in ASC Topic 105, Generally Accepted Accounting
Principles. The Trust has adopted SFAS No. 168, and the
Company will provide reference to both the Codification topic reference and the
previously authoritative references related to Codification topics and
subtopics, as appropriate.
In March
2008, the FASB released FASB Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities (“Statement No.
161”). Statement No. 161, which is incorporated in FASB ASC Topic No.
815, “Derivatives
and Hedging”, requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about
fair value amounts of and gains and losses on derivative instruments, and
disclosures about credit-risk-related contingent features in derivative
agreements. The adoption of this standard did not have a material impact on the
Trust’s financial position and results of operations.
In
October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active, which
addresses the application of Statement of Financial Accounting Standards
(“SFAS”) No.157 for illiquid financial instruments. FSP FAS 157-3,
which is incorporated in FASB ASC Topic No. 820, “Fair Value Measurements and
Disclosures”, clarifies that approaches to determining fair value other
than the market approach may be appropriate when the market for a financial
asset is not active. The adoption of FSP FAS 157-3 did not have a
material effect on the Trust’s financial statements.
In April
2009, the Financial Accounting Standards Board (“FASB”) issued FASB Staff
Position (“FSP”) FAS 157-4, “Determining Fair Value when the Volume and Level of
Activity for the Asset or Liability have Significantly Decreased and Identifying
Transactions that are not Orderly” (“FSP 157-4”), which is effective for the
Company for the quarterly period beginning September 1, 2009. FSP 157-4, which
is also incorporated in FASB ASC Topic No. 820, “Fair Value Measurements and
Disclosures”, affirms that the objective of fair value when the market
for an asset is not active is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date under current market conditions. The FSP
provides guidance for estimating fair value when the volume and level of market
activity for an asset or liability have significantly decreased and determining
whether a transaction was orderly. This FSP applies to all fair value
measurements when appropriate. The adoption of FSP FAS 157-4 did not have a
material effect on the Trust’s financial statements.
In
April 2009, the FASB issued FASB Staff Position (“FSP”) SFAS No. 107-1
and Accounting Principles Board (“APB”) Opinion No. 28-1 (“APB
No. 28-1”), “Interim Disclosures about Fair Value of Financial
Instruments,” which amends SFAS No. 107, “Disclosures about Fair Value of
Financial Instruments,” and requires disclosures about the fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. FSP SFAS No. 107-1 and APB
No. 28-1, which is now incorporated in FASB ASC Topic No. 825, “Financial Instruments”,
also amends APB Opinion No. 28, “Interim Financial Reporting,” to require
those disclosures in summarized financial information for interim reporting
periods. FSP SFAS No. 107-1 and APB No. 28-1 is effective for interim
reporting periods ending after June 15, 2009. The adoption of FSP SFAS
No. 107-1 and APB No. 28-1 did not have a material effect on the
Trust’s financial position and results of operations.
In
May 2009, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 165, “Subsequent
Events” (“SFAS 165”). This standard, which is incorporated in FASB ASC Topic No.
855, “Subsequent
Events”, is intended to establish general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. Specifically,
this standard sets forth the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. SFAS 165 is effective for
fiscal years and interim periods ended after June 15, 2009 and will be
applied prospectively. The adoption of this standard did not have a material
impact on the results of operations and financial position.
In
January 2010, the FASB issued guidance to amend the disclosure requirements
related to recurring and nonrecurring fair value measurements. The guidance
requires new disclosures on the transfers of assets and liabilities between
Level 1 (quoted prices in active market for identical assets or liabilities) and
Level 2 (significant other observable inputs) of the fair value measurement
hierarchy, including the reasons and the timing of the transfers. Additionally,
the guidance requires a roll forward of activities on purchases, sales,
issuance, and settlements of the assets and liabilities measured using
significant unobservable inputs (Level 3 fair value measurements). Other than
requiring additional disclosures, adoption of this new guidance will not have a
material impact on the Trust’s financial statements.
Note
3 - Organizational and Offering Costs
Expenses
incurred in organizing of the Trust and the initial offering of the shares,
including applicable SEC registration fees will be borne directly by the
Sponsor. The Trust will not be obligated to reimburse the Sponsor.
Note
4 - Indemnification
Under the
Trust Agreement, the trustee (and its directors, employees and agents) is
indemnified against any liability, cost or expense it incurs without gross
negligence, bad faith or willful misconduct on its part and without reckless
disregard on its part of its obligations and duties under the Trust’s
organizational documents. The Trust’s maximum exposure under these arrangements
is unknown as this would involve future claims that may be made against the
Trust that have not yet occurred.
Note 5 - Subsequent
Events (Unaudited)
On June
9, 2010, the Teucrium Corn Fund began trading on the NYSE area
exchange.
TEUCRIUM WTI
CRUDE OIL FUND -- INDEX TO FINANCIAL STATEMENTS
TO BE FURNISHED BY PRE-EFFECTIVE AMENDMENT TO THE REGISTRATION
STATAMENT
APPENDIX
A
Glossary
of Defined Terms
In this
prospectus, each of the following terms have the meanings set forth after such
term:
Administrator: The Bank of New
York Mellon
Authorized
Purchaser: One that purchases or redeems Creation Baskets or
Redemption Baskets, respectively, from or to the Fund.
Benchmark: A
weighted average of daily changes in the closing settlement prices
of: (1) the nearest to spot June or December Oil Futures Contract,
weighted 35%; (2) the June or December Oil Futures Contract following the
aforementioned (1), weighted 30%; and (3) the next December Oil Future Contract
that immediately follows the aforementioned (2), weighted 35%; less the Fund’s
expenses.
Benchmark Component Futures
Contracts: The three Oil Futures Contracts that at any given
time make up the Benchmark.
Business Day: Any
day other than a day when any of the NYSE Arca, the NYMEX or the New York Stock
Exchange is closed for regular trading.
CFTC: Commodity
Futures Trading Commission, an independent agency with the mandate to regulate
commodity futures and options in the United States.
Code: Internal Revenue
Code.
Commodity Pool: An
enterprise in which several individuals contribute funds in order to trade
futures contracts or options on futures contracts collectively.
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
commodity for future delivery or commodity option on or subject to the rules of
any contract market.
Creation Basket: A
block of 100,000 Shares used by the Fund to issue Shares.
Custodian: The Bank
of New York Mellon
DTC: The Depository
Trust Company. DTC will act as the securities depository for the
Shares.
DTC Participant: An
entity that has an account with DTC.
DTEF: A derivatives
transaction execution facility.
Exchange Act: The
Securities Exchange Act of 1934.
Exchange for
Risk: A privately negotiated and simultaneous exchange of a
futures contract position for a swap or other over-the-counter instrument on the
corresponding commodity.
FINRA: Financial
Industry Regulatory Authority, formerly the National Association of Securities
Dealers.
Indirect
Participants: Banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a DTC Participant,
either directly or indirectly.
IntercontinentalExchange
(ICE): An Internet-based exchange for the trading of
over-the-counter energy contracts. The Fund expressly disclaims any
association with the ICE or endorsement of the Fund by the ICE and acknowledges
that “ICE” and the “IntercontinentalExchange” are registered trademarks of such
exchange
Limited Liability Company
(LLC): A type of business ownership combining several features
of corporation and partnership structures.
Margin: The amount
of equity required for an investment in futures contracts.
NAV: Net Asset
Value of the Fund.
NFA: National
Futures Association.
NSCC: National
Securities Clearing Corporation.
New York Mercantile Exchange
(“NYMEX”): The primary exchange on which Oil Futures Contracts
are traded in the U.S. The Fund expressly disclaims any association with
the NYMEX or endorsement of the Fund by the NYMEX and acknowledges that “NYMEX”
and “New York Mercantile Exchange” are registered trademarks of such
exchange.
1933 Act: The
Securities Act of 1933.
Oil Futures
Contracts: WTI future contracts and other future contracts
that are traded on the NYMEX or other domestic or foreign
exchanges.
Oil Interests: Oil
Futures Contracts and Other Oil Interests.
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 Oil
Interests: Other crude oil-related investments such as options
on Oil Futures Contracts, swaps agreements and forward contracts relating to
crude oil, and over-the-counter transactions that are based on the price of
crude oil, Oil 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 100,000 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.
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.
Treasury
Securities: Obligations of the U.S. government with remaining
maturities of 2 years or less.
Trust
Agreement: The Amended and Restated Declaration of Trust and
Trust Agreement of the Trust effective as of March 31, 2010.
Valuation Day: Any
day as of which the Fund calculates its NAV.
You: The owner of
Shares.
[This
page intentionally left blank.]
STATEMENT
OF ADDITIONAL INFORMATION
TEUCRIUM
WTI CRUDE OIL 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. Before you decide whether to invest, you should read the entire
prospectus carefully and consider the risk factors beginning on page
16.
This
statement of additional information and accompanying disclosure document are
both dated [date], 2010.
TEUCRIUM
WTI CRUDE OIL FUND
TABLE
OF CONTENTS
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Page
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The
Commodity Interest Markets
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127
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Potential
Advantages of Investment
|
137
|
Benchmark
Performance
|
138
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The
Commodity Interest Markets
General
The
Commodity Exchange Act or CEA governs the regulation of commodity interest
transactions, markets and intermediaries. In December 2000, the CEA was
amended by the Commodity Futures Modernization Act of 2000, or CFMA, which
substantially revised the regulatory framework governing certain commodity
interest transactions and the markets on which they trade. The CEA, as
amended by the CFMA, now provides for varying degrees of regulation of commodity
interest transactions depending upon the variables of the transaction. In
general, these variables include (1) the type of instrument being traded (e.g.,
contracts for future delivery, options, swaps or spot contracts), (2) the type
of commodity underlying the instrument (distinctions are made between
instruments based on agricultural commodities, energy and metals commodities and
financial commodities), (3) the nature of the parties to the transaction
(retail, eligible contract participant, or eligible commercial entity), (4)
whether the transaction is entered into on a principal-to-principal or
intermediated basis, (5) the type of market on which the transaction occurs, and
(6) whether the transaction is subject to clearing through a clearing
organization. Information regarding commodity interest transactions,
markets and intermediaries, and their associated current regulatory environment,
is provided below. Legislative and regulatory changes relating to the
information set forth below are currently being discussed, so such information
is subject to change.
Futures
Contracts
A futures
contract such as an Oil Futures Contract is a standardized contract traded on,
or subject to the rules of, an exchange that calls for the future delivery of a
specified quantity and type of a commodity at a specified time and place.
Futures contracts are traded on a wide variety of physical and financial
commodities, including agricultural products, bonds, stock indices, interest
rates, currencies, energy and metals. The size and terms of futures
contracts on a particular commodity are identical and are not subject to any
negotiation, other than with respect to price and the number of contracts traded
between the buyer and seller.
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. Some futures
contracts, such as stock index contracts, settle in cash (reflecting the
difference between the contract purchase/sale price and the contract settlement
price) rather than by delivery of the underlying commodity.
In market
terminology, a trader who purchases a futures contract is long in the market and
a trader who sells a futures contract is short in the market. Before a
trader closes out his long or short position by an offsetting sale or purchase,
his outstanding contracts are known as open trades or open positions. The
aggregate amount of open positions held by traders in a particular contract is
referred to as the open interest in such contract.
Options
on Futures Contracts
Options
on futures contracts are standardized contracts traded on an exchange. An
option on futures contract gives the buyer of the option the right, but not the
obligation, to take a position at a specified price (the striking, strike, or
exercise price) in the underlying futures contract or underlying interest.
The buyer of a call option acquires the right, but not the obligation, to
purchase or take a long position in the underlying interest, and the buyer of a
put option acquires the right, but not the obligation, to sell or take a short
position in the underlying interest.
The
seller, or writer, of an 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. Thus, the seller of a call option must stand ready to
take a short position in the underlying interest at the strike price if the
buyer should exercise the option. The seller of a put option, on the other
hand, must stand ready to take a long position in the underlying interest at the
strike price.
A call
option is said to be in-the-money if the strike price is below current market
levels and out-of-the-money if the strike price is above current market
levels. Conversely, a put option is said to be in-the-money if the strike
price is above the current market levels and out-of-the-money if the strike
price is below current market levels.
Options
have limited life spans, usually tied to the delivery or settlement date of the
underlying interest. Some options, however, expire significantly in
advance of such date. The purchase price of an option is referred to as
its premium, which consists of its intrinsic value (which is related to the
underlying market value) plus its time value. As an option nears its
expiration date, the time value shrinks and the market and intrinsic values move
into parity. An option that is out-of-the-money and not offset by the time
it expires becomes worthless. On certain exchanges, in-the-money options
are automatically exercised on their expiration date, but on others all
unexercised options simply become worthless after their expiration
date.
Regardless
of how much the market swings, the most an option buyer can lose is the option
premium. The option buyer deposits his premium with his broker, and the
money goes to the option seller. 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.
Over-the-Counter
Contracts (Forward Contracts and Swaps)
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. Unlike
futures contracts, however, forward contracts are typically traded in the
over-the-counter markets and are not standardized contracts. 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. In recent years, however,
the terms of forward contracts have become more standardized, and in some
instances such contracts now provide a right of offset or cash settlement as an
alternative to making or taking delivery of the underlying
commodity.
The
forward markets provide what has typically been a highly liquid market for
foreign exchange trading, and in certain cases the prices quoted for foreign
exchange forward contracts may be more favorable than the prices for foreign
exchange futures contracts traded on U.S. exchanges. The forward markets
are largely unregulated. Forward contracts are, in general, not cleared or
guaranteed by a third party. Commercial banks participating in trading
foreign exchange forward contracts often do not require margin deposits, but
rely upon internal credit limitations and their judgments regarding the
creditworthiness of their counterparties. In recent years, however, many
over-the-counter market participants in foreign exchange trading have begun to
require that their counterparties post margin.
Swap
transactions generally involve contracts between two parties to exchange a
stream of payments computed by reference to a notional amount and the price of
the asset that is the subject of the swap. Like forward contracts, swap
agreements are principally traded off-exchange. Swaps are usually entered
into on a net basis, that is, the two payment streams are netted out in a cash
settlement on the payment date or dates specified in the agreement, 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. Accordingly, the risk of loss with respect to swaps is
generally limited to the net amount of payments that the party is contractually
obligated to make. In some swap transactions one or both parties may
require collateral deposits from the counterparty to support that counterparty’s
obligation under the swap agreement. If the counterparty to such a swap
defaults, the risk of loss consists of the net amount of payments that the party
is contractually entitled to receive less to any collateral deposits it is
holding.
As the
result of the CFMA, over-the-counter derivative instruments such as forward
contracts and swap agreements (and options on forwards and physical commodities)
may begin to be traded on lightly-regulated exchanges or electronic trading
platforms that may, but are not required to, provide for clearing
facilities. (Exchanges and electronic trading platforms on which
over-the-counter instruments may be traded and the regulation and criteria for
that trading are more fully described below under “Futures Exchanges and
Clearing Organizations.”) Absent a clearing facility, trading in
forward contracts and swap agreements is exposed to the creditworthiness of the
counterparties on the other side of the trades. In contrast, where a
clearing facility is present, a market participant can look to the clearing
facility to guarantee the counterparty’s performance, which effectively
eliminates counterparty risk as a concern in entering into derivative
instruments.
Options
on Forward Contracts or Commodities
Options
on forward contracts or commodities operate in a manner similar to options on
futures contracts. An option on a forward contract or commodity gives the
buyer of the option the right, but not the obligation, to take a position at a
specified price in the underlying forward contract or commodity. However,
similar to forward contracts, options on forward contracts or on commodities are
individually negotiated contracts between counterparties and are typically
traded in the over-the-counter market. Therefore, options on forward
contracts and physical commodities possess many of the same characteristics of
forward contracts with respect to offsetting positions and credit risk that are
described above. As a result of certain regulatory limitations, options on
forward contracts and other over-the-counter options relating to energy
commodities such as light, sweet crude oil may not be generally available in
United States markets.
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 oil producers 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, for example, 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 drilling, 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.
Futures
Exchanges and Clearing Organizations
Futures
exchanges provide centralized market facilities in which multiple persons have
the ability to execute or trade contracts by accepting bids and offers from
multiple participants. Futures exchanges may provide for execution of
trades at a physical location utilizing trading pits and/or may provide for
trading to be done electronically through computerized matching of bids and
offers pursuant to various algorithms. Members of a particular exchange
and the trades executed on such exchange are subject to the rules of that
exchange. Futures exchanges and clearing organizations are given
reasonable latitude in promulgating rules and regulations to control and
regulate their members. Examples of regulations by exchanges and clearing
organizations include the establishment of initial margin levels, rules
regarding trading practices, contract specifications, speculative position
limits, daily price fluctuation limits, and execution and clearing
fees.
Clearing
organizations provide services designed to mutualize or transfer the credit risk
arising from the trading of contracts on an exchange or other electronic trading
facility. Once trades made between members of an exchange or electronic
trading facility have been confirmed, the clearing organization becomes
substituted for the clearing member acting on behalf of each buyer and each
seller of contracts traded on the exchange or trading platform and in effect
becomes the other party to the trade. Thereafter, each clearing member
party to the trade looks only to the clearing organization for
performance. The clearing organization generally establishes some sort of
security or guarantee fund to which all clearing members of the exchange must
contribute; this fund acts as an emergency buffer that is intended to enable the
clearing organization to meet its obligations with regard to the other side of
an insolvent clearing member’s contracts. Furthermore, the clearing
organization requires margin deposits and continuously marks positions to market
to provide some assurance that its members will be able to fulfill their
contractual obligations. Thus, a central function of the clearing
organization is to ensure the integrity of trades, and members effecting
transactions on an exchange need not concern themselves with the solvency of the
party on the opposite side of the trade; their only remaining concerns are the
respective solvencies of their own customers, their clearing broker and the
clearing organization. The clearing organizations do not deal with
customers, but only with their member firms and the guarantee of performance for
open positions provided by the clearing organization does not run to
customers.
U.S.
Futures Exchanges
Futures
exchanges in the United States are subject to varying degrees of regulation by
the CFTC based on their designation as one of the following: a designated
contract market, a derivatives transaction execution facility, an exempt board
of trade or an electronic trading facility.
A
designated contract market is the most highly regulated level of futures
exchange. Designated contract markets may offer products to retail
customers on an unrestricted basis. To be designated as a contract market,
the exchange must demonstrate that it satisfies specified general criteria for
designation, such as having the ability to prevent market manipulation, rules
and procedures to ensure fair and equitable trading, minimization of conflicts
of interest and protection of market participants, position limits and dispute
resolution procedures. Among the principal designated contract markets in
the United States are the NYMEX, Chicago Board of Trade and the Chicago
Mercantile Exchange. Each of the designated contract markets in the United
States must provide for the clearance and settlement of transactions with a
CFTC-registered derivatives clearing organization.
A
derivatives transaction execution facility, or DTEF, is a new type of exchange
that is subject to fewer regulatory requirements than a designated contract
market but is subject to both commodity interest and participant
limitations. DTEFs limit access to eligible traders that qualify as either
eligible contract participants or eligible commercial entities for futures and
option contracts on commodities that have a nearly inexhaustible deliverable
supply, are highly unlikely to be susceptible to the threat of manipulation, or
have no cash market, security futures products, and futures and option contracts
on commodities that the CFTC may determine, on a case-by-case basis, are highly
unlikely to be susceptible to the threat of manipulation. In addition,
certain commodity interests excluded or exempt from the CEA, such as swaps, may
be traded on a DTEF. There is no requirement that a DTEF use a clearing
organization, except with respect to trading in security futures contracts, in
which case the clearing organization must be a securities clearing agency.
However, if futures contracts and options on futures contracts traded on a DTEF
are cleared, then it must be through a CFTC-registered derivatives clearing
organization, except that some excluded or exempt commodities traded on a DTEF
may be cleared through a clearing organization other than one registered with
the CFTC.
An exempt
board of trade is also a newly designated form of exchange. An exempt
board of trade is substantially unregulated, subject only to CFTC anti-fraud and
anti-manipulation authority. An exempt board of trade is permitted to
trade futures contracts and options on futures contracts provided that the
underlying commodity is not a security or securities index and has an
inexhaustible deliverable supply or no cash market. All traders on an
exempt board of trade must qualify as eligible contract participants.
Contracts deemed eligible to be traded on an exempt board of trade include
contracts on interest rates, exchange rates, currencies, credit risks or
measures, debt instruments, measures of inflation, or other macroeconomic
indices or measures. There is no requirement that an exempt board of trade
use a clearing organization. However, if contracts on an exempt board of
trade are cleared, then it must be through a CFTC-registered derivatives
clearing organization. A board of trade electing to operate as an exempt
board of trade must file a written notification with the CFTC.
An
electronic trading facility is a new form of trading platform that operates by
means of an electronic or telecommunications network and maintains an automated
audit trail of bids, offers, and the matching of orders or the execution of
transactions on the electronic trading facility. The CEA does not apply
to, and the CFTC has no jurisdiction over, transactions on an electronic trading
facility in certain excluded commodities that are entered into between
principals that qualify as eligible contract participants, subject only to CFTC
anti-fraud and anti-manipulation authority. In general, excluded
commodities include interest rates, currencies, securities, securities indices
or other financial, economic or commercial indices or measures, but not physical
commodities.
The
Sponsor intends to monitor the development of and opportunities and risks
presented by the new less-regulated exchanges and exempt boards as well as other
trading platforms currently in place or that are being considered by regulators
and may, in the future, allocate a percentage of the Fund’s assets to trading in
products on these exchanges. Provided the Fund maintains assets exceeding $5
million, the Fund would qualify as an eligible contract participant and thus
would be able to trade on such exchanges.
Non-U.S.
Futures Exchanges
Non-U.S.
futures exchanges differ in certain respects from their U.S. counterparts.
Importantly, non-U.S. futures exchanges are not subject to regulation by the
CFTC, but rather are regulated by their home country regulator. In
contrast to U.S. designated contract markets, some non-U.S. exchanges are
principals’ markets, where trades remain the liability of the traders involved,
and the exchange or a clearing organization does not become substituted for any
party. Due to the absence of a clearing system, such exchanges are
significantly more susceptible to disruptions. Further, participants in
such markets must often satisfy themselves as to the individual creditworthiness
of each entity with which they enter into a trade. Trading on non-U.S.
exchanges is often in the currency of the exchange’s home jurisdiction.
Consequently, if it enters into transactions on these non-U.S. exchanges, the
Fund would be subject to the additional risk of fluctuations in the exchange
rate between such currency and the U.S. dollar and the possibility that exchange
controls could be imposed in the future. Trading on non-U.S. exchanges may
differ from trading on U.S. exchanges in a variety of ways and, accordingly, may
subject the Fund to additional risks.
Accountability
Levels and Position Limits
The CFTC
and U.S. designated contract market have established accountability levels on
the maximum net long or net short futures contracts in commodity interests that
any person or group of persons under common trading control (other than a
hedger, which the Fund is not) may hold, own or control. Accountability
levels are not fixed ceilings, but rather thresholds above which an exchange may
exercise greater scrutiny and control over an investor including by imposing
position limits. Among the purposes of accountability levels and position
limits is to prevent a corner or squeeze on a market or undue influence on
prices by any single trader or group of traders. The accountability levels
currently established by the CFTC and NYMEX apply to certain energy commodity
interests, such as crude oil and natural gas. Specifically, the NYMEX’s
accountability levels for oil future contracts are 20,000. While this is
not a fixed ceiling, it is a threshold above which the .NYMEX may exercise
greater scrutiny and control over an investor, including limiting an investor to
holding no more than 20,000 Oil Future Contracts. U.S. exchanges may set
accountability levels and position limits for all commodity interests traded on
that exchange. Certain exchanges or clearing organizations also set limits
on the total net positions that may be held by a clearing broker. In
general, no position limits are in effect in forward or other over-the-counter
contract trading or in trading on non-U.S. futures exchanges, although the
principals with which the Fund and the clearing brokers may trade in such
markets may impose such limits as a matter of credit policy. The Fund’s
commodity interest positions will not be attributable to Shareholders for
purposes of determining whether those Shareholders have exceeded applicable
accountability levels and position limits.
Daily
Price Limits
Most U.S.
futures exchanges (but generally not non-U.S. exchanges) limit the amount of
fluctuation in some futures contract or options on futures contract prices
during a single trading period by regulations. These regulations specify
what are referred to as daily price fluctuation limits or more commonly, daily
limits. The daily limits establish the maximum amount that the price of a
futures or option on a futures contract may vary either up or down from the
previous day’s settlement price. In general, the NYMEX daily limit for
light, sweet crude oil futures contracts is $10 per barrel ($10,000 per
contract). Once the daily limit has been reached in a particular futures
or option on a futures contract, no trades may be made at a price beyond the
limit. Positions in the futures or options contract may then be taken or
liquidated, if at all, only if traders are willing to effect trades at or within
the limit. Because the daily limit rule governs price movement only for a
particular trading day, it does not limit losses and may in fact substantially
increase losses because it may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved the daily limit
for several consecutive trading days, thus preventing prompt liquidation of
positions and subjecting the trader to substantial losses for those days.
The concept of daily price limits is not relevant to over-the-counter contracts,
including forwards and swaps, and thus such limits are not imposed by banks and
others who deal in those markets.
Commodity
Prices
Commodity
prices are volatile and, although ultimately determined by the interaction of
supply and demand, are subject to many other influences, including the
psychology of the marketplace and speculative assessments of future world and
economic events. Political climate, interest rates, treaties, balance of
payments, exchange controls and other governmental interventions as well as
numerous other variables affect the commodity markets, and even with
comparatively complete information it is impossible for any trader to predict
reliably commodity prices.
Regulation
Futures
exchanges in the United States are subject to varying degrees of regulation
under the CEA depending on whether such exchange is a designated contract
market, DTEF, exempt board of trade or electronic trading facility.
Derivatives clearing organizations are also subject to the CEA and CFTC
regulation. The CFTC is the governmental agency charged with
responsibility for regulation of futures exchanges and commodity interest
trading conducted on those exchanges. 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 exercise
regulatory and supervisory authority over their member firms.
The CFTC
possesses exclusive jurisdiction to regulate the activities of commodity pool
operators and commodity trading advisors and has adopted regulations with
respect to the activities of those persons and/or entities. Under the CEA,
a registered commodity pool operator, such as the Sponsor, is required to make
annual filings with the CFTC 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 CEA
gives the CFTC similar authority with respect to the activities of commodity
trading advisors. If a trading advisor’s commodity trading advisor
registration were to be terminated, restricted or suspended, the trading advisor
would be unable, until the registration were to be reinstated, to render trading
advice to the Fund.
The CEA
requires all futures commission merchants, such as the Fund’s 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, who are persons that solicit or accept orders for commodity
interest trades but that do not accept margin deposits for the execution of
trades. The CEA authorizes the CFTC to regulate trading by futures
commission merchants 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.
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 a futures commission merchant, introducing broker, commodity
trading advisor, commodity pool operator, and their respective associated
persons.
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
self-regulatory organization for commodity interest professionals, other than
futures exchanges. The CFTC has delegated to the NFA responsibility for
the registration of commodity trading advisors, commodity pool operators,
futures commission merchants, introducing brokers, and their respective
associated persons and floor brokers. The Sponsor, any trading advisor,
the selling agents and the clearing brokers will be members of the NFA. As
such, they will be subject to NFA standards relating to fair trade practices,
financial condition and consumer protection. Neither the Trust nor the
Fund is itself required to become a member of the NFA. As the self-regulatory
body of the commodity interest industry, the NFA promulgates rules governing the
conduct of professionals and disciplines those professionals that do not comply
with these rules. 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.
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, as the case may be, 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.
The
regulation of commodity interest trading in the United States and other
countries is an evolving area of the law. The various statements made in
this summary are subject to modification by legislative action and changes in
the rules and regulations of the CFTC, the NFA, the futures exchanges, clearing
organizations and other regulatory bodies.
The
function of the CFTC is to implement the objectives of the CEA of preventing
price manipulation and other disruptions to market integrity, avoiding systemic
risk, preventing fraud and promoting innovation, competition and financial
integrity of transactions. As mentioned above, this regulation, among
other things, provides that the trading of commodity interest contracts
generally must be upon exchanges designated as contract markets or DTEFs and
that all trading on those exchanges must be done by or through exchange
members. Under the CFMA, commodity interest trading in some commodities
between sophisticated persons may be traded on a trading facility not regulated
by the CFTC. As a general matter, trading in spot contracts, forward
contracts, options on forward contracts or commodities, or swap contracts
between eligible contract participants is not within the jurisdiction of the
CFTC and may therefore be effectively unregulated. The Sponsor may engage
in those transactions on behalf of the Fund in reliance on this exclusion from
regulation. Although U.S. banks that may act as the Fund’s counterparties
in commodity interest transactions are regulated in various ways by the Federal
Reserve Board, the Comptroller of the Currency and other U.S. federal and state
banking officials, banking authorities do not regulate the commodity interest
markets.
The CFTC
is prohibited by statute from regulating trading on non-U.S. futures exchanges
and markets. The CFTC, however, has adopted regulations relating to the
marketing of non-U.S. futures contracts in the United States. These regulations
permit certain contracts traded on non-U.S. exchanges to be offered and sold in
the United States.
Commodity
Margin
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 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 very small percentage (ranging upward from less
than 2%) 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 Fund’s
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 Fund’s trading, the Fund (and
not its Shareholders personally) is subject to margin calls.
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.
Potential
Advantages of Investment
The
Advantages of Non-Correlation
Given
that historically, the price of crude oil and of Oil Interests has had very
little correlation to the stock and bond markets, the Sponsor believes that the
performance of the Fund should also exhibit little correlation with the
performance of traditional equity and debt portfolio components. However,
non-correlation does not mean that the Fund’s performance will be better than
that of other types of investment, and it is entirely possible that the Fund may
not outperform other sectors of an investor’s portfolio, or may produce
losses. Additionally, although adding the Fund’s Shares to an investor’s
portfolio may provide diversification, the Fund is not a hedging mechanism
vis-a-vis traditional debt and equity portfolio components and you should not
assume that Fund Shares will appreciate during periods of inflation or stock and
bond market declines.
Non-correlated
performance should not be confused with negatively correlated performance.
Negative correlation occurs when the performance of two asset classes tend to
move in opposite direction to each other. Non-correlation means only that
the Fund’s performance will likely have little relation to the performance of
equity and debt instruments, reflecting that certain factors that affect equity
and debt prices may affect the Fund differently and that certain factors that
affect equity and debt prices may not affect the Fund at all. The Fund’s
net asset value per share may decline or increase more or less than equity and
debt instruments during periods of both rising and falling equity and debt
markets. The Sponsor does not expect that the Fund’s performance will be
negatively correlated to general debt and equity markets.
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 Treasury
Securities and interest is earned on 100% of the Fund’s available assets, which
include unrealized profits credited to the Fund’s accounts
Benchmark
Performance
The
following graph provides certain information about the historical performance
and volatility of the Benchmark, and the historical correlation of the Benchmark
with the spot price of WTI light, sweet crude oil. The graph shows (1)
historical price information for the Benchmark by taking the prices of each
Benchmark Component Futures Contract according to publicly available data,
weighting each such futures contract as weighted in the Benchmark, and deducting
estimated commission charges and other fees and expenses that the Fund will pay,
and (2) historical information on the spot price of WTI light, sweet crude oil
using the price of the spot month Oil Futures Contract as a proxy. The
graph assumes that each Benchmark Component Futures Contract was rolled into its
replacement on the date that it no longer was a Benchmark Component Futures
Contract, and each spot month Oil Futures Contract was rolled into the new spot
month Oil Futures Contract on its expiration date, and each of these “rolls” is
volume adjusted to account for price differentials between the original Oil
Futures Contract and its replacement. For example, if the original Oil
Futures Contracts were closed out at a lower price than the price at which the
replacement Oil Futures Contracts were entered into, then a lesser number of
replacement Oil Futures Contracts were entered into than were closed out.
In this way, the graph takes the hypothetical effect of contango and
backwardation into account. The spot month data in the chart does not
reflect any commission charges or the other fees and expenses that the Fund will
pay.
The information regarding
the Benchmark in the graph is hypothetical, in that neither the Sponsor nor the
Fund was using the Benchmark to trade Oil Interests during the period covered by
the chart. HYPOTHETICAL PERFORMANCE RESULTS HAVE
MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO
REPRESENTATION IS BEING MADE THAT THE FUND WILL OR IS LIKELY TO ACHIEVE PROFITS
OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP
DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS
ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.
ONE
OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE
GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION,
HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL
TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL
TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A
PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH
CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER
FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY
SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION
OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL
TRADING RESULTS.
THE
SPONSOR HAS HAD NO EXPERIENCE IN TRADING ACTUAL ACCOUNTS FOR ITSELF OF FOR
CUSTOMERS. BECAUSE THERE ARE NO ACTUAL TRADING RESULTS TO COMPARE TO THE
HYPOTHETICAL PERFORMANCE RESULTS, INVESTORS SHOULD BE PARTICULARLY WARY OF
PLACING UNDUE RELIANCE ON THESE HYPOTHETICAL PERFORMANCE RESULTS.
Furthermore,
while the graph below provides information on the hypothetical correlation of
the Benchmark with the spot price of WTI light, sweet crude oil, it does not
attempt to provide any information on the ability of the Sponsor to cause the
Fund’s performance to correlate closely with that of the
Benchmark.
PART
II
Information
Not Required in the Prospectus
Item
13. Other Expenses of Issuance
and Distribution
Set forth
below is an estimate (except as indicated) of the amount of fees and expenses
(other than underwriting commissions and discounts) payable by the registrant in
connection with the issuance and distribution of the units pursuant to the
prospectus contained in this registration statement.
|
|
Amount
|
|
SEC
registration fee (actual)
|
|
$ |
178.26 |
|
NYSE
Arca Listing Fee
|
|
$ |
5,000.00 |
|
FINRA
filing fees
|
|
$ |
75,500.00 |
|
Blue
Sky expenses
|
|
|
n/a |
|
Auditor’s
fees and expenses
|
|
$ |
47,500.00 |
|
Legal
fees and expenses
|
|
$ |
250,000.00 |
|
Printing
expenses
|
|
$ |
50,000.00 |
|
Miscellaneous
expenses
|
|
|
n/a |
|
Total
|
|
$ |
428,178.26 |
|
Item
14. Indemnification of
Directors and Officers
The
Trust’s Declaration of Trust and Trust Agreement (the “Trust Agreement”)
provides that the Sponsor shall be indemnified by the Trust (or, by a series of
the Trust separately to the extent the matter in question relates to a single
series or disproportionately affects a 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 applicable trust estate or trust estates. All rights to
indemnification permitted by the Trust Agreement and payment of associated
expenses 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 foregoing, 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 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 by the Trust Agreement.
Expenses
incurred in defending a threatened or pending civil, administrative or criminal
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
under the Trust Agreement.
For
purposes of the indemnification provisions of the Trust Agreement, the term
“Sponsor” includes, in addition to the Sponsor, any other covered person
performing services on behalf of the Trust and acting within the scope of the
Sponsor’s authority as set forth in the Trust Agreement.
In the
event the Trust is made a party to any claim, dispute, demand or litigation or
otherwise incurs any loss, liability, damage, cost or expense as a result of or
in connection with any Shareholder’s (or assignee’s) obligations or liabilities
unrelated to Trust business, such Shareholder (or assignees cumulatively) shall
indemnify, defend, hold harmless, and reimburse the Trust for all such loss,
liability, damage, cost and expense incurred, including attorneys’ and
accountants’ fees.
The
payment of any amount pursuant to the Trust Agreement shall take into account
the allocation of liabilities and other amounts, as appropriate, among the
series of the Trust.
Item
15. Recent Sales of
Unregistered Securities
Not applicable
Item
16. Exhibits and Financial
Statement Schedules
(a) Exhibits
(a)
Exhibits
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3.1
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Amended
and Restated Declaration of Trust and Trust Agreement of the
Registrant.*
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3.2
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Certificate
of Trust of the Registrant.**
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5.1
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Opinion
of Dykema Gossett PLLC relating to the legality of the
Shares.***
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8.1
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Opinion
of Dykema Gossett PLLC with respect to federal income tax
consequences.***
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10.1
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Form
of Authorized Purchaser Agreement.***
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10.2
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Marketing
Agent Agreement***
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10.3
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Global
Custody Agreement.****
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10.4
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Services
Agreement.****
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10.5
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Transfer
Agency and Service Agreement.****
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23.1
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Consent
of Dykema Gossett PLLC (included in Exhibit 5.1).***
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23.2
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Consent
of Rothstein, Kass & Company, P.C.—filed herewith
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* Incorporated
by reference to pre-effective Amendment No. 4 on Form S-1 for Teucrium
Commodity Trust (File No. 333-162033) filed on May 26, 2010 (Accession No.
0001144204-10-030457).
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* *
Incorporated by reference to Registration Statement on Form S-1 for
Teucrium Commodity Trust (File No. 333-162033) filed on September 21, 2009
(Accession No. 0001144204-09-049264).
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*** To
be filed by Pre-Effective Amendment.
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**** Incorporated
by reference to Pre-Effective Amendment No. 3 on Form S-1 for Teucrium
Commodity Trust (File No. 333-162033) filed on March 29, 2010 (Accession
No.
0001144204-10-016181).
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(b) Financial Statement
Schedules
The
financial statement schedules are either not applicable or the required
information is included in the financial statements and footnotes related
thereto.
Item
17. Undertakings
(a) Each
undersigned registrant hereby undertakes:
(1) To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration
statement:
(i) To
include any prospectus required by section 10(a)(3) of the Securities Act of
1933;
(ii) To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Securities and Exchange Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the “Calculation of Registration
Fee” table in the effective registration statement.
(iii) To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement.
(2) That,
for the purpose of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
(4) That,
for the purpose of determining liability under the Securities Act of 1933 to any
purchaser:
(i) If
the registrant is subject to Rule 430C (§230.430C of this chapter), each
prospectus filed pursuant to Rule 424(b) as part of a registration statement
relating to an offering, other than registration statements relying on Rule 430B
or other than prospectuses filed in reliance on Rule 430A (§230.430A of this
chapter), shall be deemed to be part of and included in the registration
statement as of the date it is first used after effectiveness. Provided,
however, that no statement made in a registration statement or prospectus that
is part of the registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement or prospectus
that is part of the registration statement will, as to a purchaser with a time
of contract of sale prior to such first use, supersede or modify any statement
that was made in the registration statement or prospectus that was part of the
registration statement or made in any such document immediately prior to such
date of first use.
(5) That,
for the purpose of determining liability of the registrant under the Securities
Act of 1933 to any purchaser in the initial distribution of the securities: The
undersigned registrant undertakes that in a primary offering of securities of
the undersigned registrant pursuant to this registration statement, regardless
of the underwriting method used to sell the securities to the purchaser, if the
securities are offered or sold to such purchaser by means of any of the
following communications, the undersigned registrant will be a seller to the
purchaser and will be considered to offer or sell such securities to such
purchaser:
(i) Any
preliminary prospectus or prospectus of the undersigned registrant relating to
the offering required to be filed pursuant to Rule 424 (§230.424 of this
chapter);
(ii) Any
free writing prospectus relating to the offering prepared by or on behalf of the
undersigned registrant or used or referred to by the undersigned
registrant;
(iii) The
portion of any other free writing prospectus relating to the offering containing
material information about the undersigned registrant or its securities provided
by or on behalf of the undersigned registrant; and
(iv) Any
other communication that is an offer in the offering made by the undersigned
registrant to the purchaser.
(b)
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the Registrant has duly
caused this Registration Statement on Form S-1 to be signed on its behalf by the
undersigned, thereunder duly authorized, in the town of Easton, state of
Connecticut, on June 15, 2010.
Teucrium
Commodity Trust
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By:
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Teucrium
Trading, LLC, Sponsor
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|
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|
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By:
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/s/ Sal
Gilbertie
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June
15, 2010
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Name:
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Sal
Gilbertie
|
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Title:
President, Principal Executive Officer and Member
POWER
OF ATTORNEY
The
undersigned members and officers of Teucrium Trading, LLC, the sponsor of
Teucrium Commodity Trust, hereby constitute and appoint Sal Gilbertie and Carl
N. Miller III and each of them with full power to act with full power of
substitution and resubstitution, our true and lawful attorneys-in-fact with full
power to execute in our name and behalf in the capacities indicated below this
Registration Statement on Form S-1 and any and all amendments thereto, including
post-effective amendments to this Registration Statement and to sign any and all
additional registration statements relating to the same offering of securities
as this Registration Statement that are filed pursuant to Rule 462(b) of the
Securities Act of 1933, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission and thereby ratify and confirm that such attorneys-in-fact, or any of
them, or their substitutes shall lawfully do or cause to be done by virtue
hereof. Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature
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Title
|
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Date
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|
|
|
|
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/s/ Sal Gilbertie
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In
his own capacity as
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|
June
15, 2010
|
Sal
Gilbertie
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President/Principal
Executive
|
|
|
|
|
Officer/Member
of the Sponsor, and
|
|
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as
Attorney-In- Fact
|
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/s/ Dale Riker
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Treasurer/Principal
Financial
|
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June
15, 2010
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Dale
Riker
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Officer/Principal
Accounting
|
|
|
|
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Officer/Secretary/Member
of the
|
|
|
|
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Sponsor
|
|
|
|
|
|
|
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/s/ Carl N. Miller III
|
|
Member
of the Sponsor
|
|
June
15, 2010
|
Carl
N. Miller III
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|
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EXHIBIT
INDEX
23.2
|
Consent
of Rothstein, Kass & Company,
P.C.
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