Teucrium Commodity Trust S-1, filed Sep 2, 2020
Teucrium Commodity Trust (BTCK)
S-1
2020-09-02
View Original
Added on
October 21, 2026
As filed with the Securities and Exchange Commission on September
2, 2020
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)
27-6715887
(I.R.S. Employer Identification No.)
c/o Teucrium Trading, LLC
Three Main Street
Suite 215
Burlington, VT 05401
Phone: (802) 540-0019
(Address, including zip code, and telephone number, including area
code, of Registrant’s principal executive
offices)
Sal Gilbertie
Chief Executive Officer
Teucrium Trading, LLC
Three Main Street
Suite 215
Burlington, VT 05401
Phone: (802) 540-0019
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
Copy to:
W. Thomas Conner, Esq.
VedderPrice P.C.
1401 I Street NW
Suite 1100
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.
☒
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, smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act.
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Large
accelerated filer ☐
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Accelerated
filer ☒
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Non-accelerated
filer ☐
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Smaller
reporting company ☒
Emerging
growth company ☐
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If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 7(a)(2)(B) of the Securities Act.
☐
CALCULATION OF REGISTRATION FEE
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Amount to be
Registered
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Proposed Maximum
Offering
Price Per
Share*
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Proposed Maximum
Aggregate Offering Price (2)
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Amount
of
Registration Fee
(1)(2)
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Common units of
Teucrium Sugar Fund,
a series of the
Registrant
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15,000,000
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$6.01
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$90,150,000
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$11,701**
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* Estimated solely for the purpose of calculating the registration
fee for the 15,000,000 additional shares of Teucrium Sugar Fund
pursuant to Rule 457(d) under the Securities Act of 1933, based on
a net asset value per share of $6.01 on August 26,
2020.
**
This Registration Statement registers 15,000,000 additional shares
of Teucrium Sugar Fund and, pursuant to Rule 415(a)(6) under the
Securities Act of 1933, carries over 8,375,000 unsold securities
previously registered for sale pursuant to the Registrant’s
Registration Statement on Form S-1 (File No. 333-223941), initially
filed by the Registrant on March 27, 2018 and effective as of April
30, 2018 (“2018 Registration Statement”). The 2018
Registration Statement carried over unsold securities previously
registered for sale pursuant to the Registrant’s Registration
Statement on Form S-1 (File No. 333-217248), initially filed on
April 11, 2017 and effective as of May 1, 2017, carried over unsold
securities previously registered for sale pursuant to the
Registrant’s Registration Statement on Form S-1 (File No.
333-196211) initially filed by the Registrant on May 23, 2014 and
effective as of June 30, 2014, carried over unsold securities
previously registered for sale pursuant to the Registrant’s
Pre-Effective Amendment No. 1 to a Registration Statement on Form
S-1 (File No. 333-167585) initially filed by the Registrant on
March 9, 2011 and effective as of June 13, 2011. The unsold number
of shares of common stock (and associated filing fees paid) is
being carried forward to this Registration
Statement.
This Registration Statement contains a combined prospectus under
Rule 429 of the Securities Act of 1933 which relates to the
prospectus contained in the 2018 Registration Statement. Upon
effectiveness, this Registration Statement, which is a new
Registration Statement, will also act as a post-effective amendment
to the 2018 Registration Statement. Pursuant to Rule 415(a)(6), the
offering of unsold securities under the 2018 Registration Statement
will be deemed terminated as of the date of the effectiveness of
this Registration Statement.
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 prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities
and it is not soliciting an offer to buy these securities in any
jurisdiction where the offer or sale is not permitted.
Subject to Completion
Preliminary Prospectus dated September
2, 2020
Teucrium Sugar Fund
23,375,000
Shares
Teucrium Sugar Fund
(the “Fund” or “Us” or “We” or
“CANE”) is designed to provide investors with a
cost-effective means to gain price exposure to the sugar market for
future delivery. The Fund issues shares (“Shares”) that
trade on the NYSE Arca stock exchange (“NYSE Arca”)
under the symbol “CANE” and that can be purchased and
sold by investors through their broker-dealer. The Fund’s
investment objective is for changes in the Shares’ NAV to
reflect the daily changes of the price of sugar for future
delivery, as measured by the Fund’s Benchmark (as defined
below). Under normal market conditions, the Fund invests in sugar
futures contracts and cash and cash equivalents. The sponsor to the
Fund is Teucrium Trading, LLC (the “Sponsor”), which
receives a management fee. The principal office address and
telephone number of both the Fund and the Sponsor is Three Main
Street, Suite 215, Burlington, Vermont 05401 and (802) 540-0019.
While
most investors will purchase and sell Shares through their
broker-dealer, the Fund continuously offers creation baskets
consisting of 25,000 Shares (“Creation Baskets”) at
their net asset value (“NAV”) to certain parties who
have entered into an agreement with the Sponsor (“Authorized
Purchasers”). Authorized Purchasers, in turn, may sell such
Shares, which are listed on NYSE Arca, to the public at per-Share
offering prices that are expected to reflect, among other factors,
the trading price of the Shares on the NYSE Arca, the NAV of the
Fund at the time the Authorized Purchaser purchased the Creation
Baskets and the NAV at the time of the offer of the Shares to the
public, the supply of and demand for Shares at the time of sale,
and the liquidity of the markets for sugar futures contracts in
which the Fund invests. A list of the Fund’s Authorized
Purchasers as of the date of this Prospectus can be found under
“Plan of Distribution – Distributor and Authorized
Purchasers,” on page 40. The prices of Shares offered
by Authorized Purchasers are expected to fall between the
Fund’s NAV and the trading price of the Shares on the NYSE
Arca at the time of sale. The Fund’s Shares may trade in the
secondary market on the NYSE Arca at prices that are lower or
higher than their NAV per Share.
This is
a best efforts offering; the distributor, Foreside Fund Services,
LLC (the “Distributor”) is not required to sell any
specific number or dollar amount of Shares but will use its best
efforts to sell Shares. An Authorized Purchaser is under no
obligation to purchase Shares. This is intended to be a
continuous offering that will terminate on September 21, 2023
unless suspended or terminated at any earlier time for certain
reasons specified in this prospectus or unless extended as
permitted under the rules of the Securities Act of 1933.
See “Prospectus Summary – The Shares” and
“Creation and Redemption of Shares – Rejection of
Purchase Orders” below.
Investing
in the Fund involves significant risks. See “What Are
the Risk Factors Involved with an Investment in the Fund?”
beginning on page 7. The Fund is not a mutual fund registered
under the Investment Company Act of 1940 and is not subject to
regulation under such Act.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION (“SEC”) NOR ANY
STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE
SECURITIES OFFERED IN THIS PROSPECTUS OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Teucrium Sugar Fund
is a commodity pool and Teucrium Trading, LLC is a commodity pool
operator subject to regulation by the Commodity Futures Trading
Commission and the National Futures Association under the Commodity
Exchange Act (“CEA”).
THE
COMMODITY FUTURES TRADING COMMISSION HAS NOT PASSED UPON THE MERITS
OF PARTICIPATING IN THIS POOL NOR HAS THE COMMISSION PASSED ON THE
ADEQUACY OR ACCURACY OF THIS DISCLOSURE DOCUMENT.
This
prospectus is in two parts: a disclosure document and a statement
of additional information. These parts are bound together, and both
contain important information.
The
date of this prospectus is September 21, 2020
i
COMMODITY
FUTURES TRADING COMMISSION
RISK
DISCLOSURE STATEMENT
YOU
SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS
YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU
SHOULD BE AWARE THAT COMMODITY INTEREST TRADING CAN QUICKLY LEAD TO
LARGE LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN
SHARPLY REDUCE THE NET ASSET VALUE OF THE POOL AND CONSEQUENTLY THE
VALUE OF YOUR INTEREST IN THE POOL. IN ADDITION,
RESTRICTIONS ON REDEMPTIONS MAY AFFECT YOUR ABILITY TO WITHDRAW
YOUR PARTICIPATION IN THE POOL.
FURTHER,
COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR
MANAGEMENT, AND ADVISORY AND BROKERAGE FEES. IT MAY BE
NECESSARY FOR THOSE POOLS THAT ARE SUBJECT TO THESE CHARGES TO MAKE
SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF
THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A
COMPLETE DESCRIPTION OF EACH EXPENSE TO BE CHARGED THIS POOL AT
PAGE 37 AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK
EVEN, THAT IS, TO RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, AT
PAGE 4.
THIS
BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS
NECESSARY TO EVALUATE YOUR PARTICIPATION IN THIS COMMODITY
POOL. THEREFORE, BEFORE YOU DECIDE TO PARTICIPATE IN THIS
COMMODITY POOL, YOU SHOULD CAREFULLY STUDY THIS DISCLOSURE
DOCUMENT, INCLUDING A DESCRIPTION OF THE PRINCIPAL RISK
FACTORS OF THIS INVESTMENT, AT PAGE 2.
YOU
SHOULD ALSO BE AWARE THAT THIS COMMODITY POOL MAY TRADE
FOREIGN FUTURES OR OPTIONS CONTRACTS. TRANSACTIONS ON MARKETS
LOCATED OUTSIDE THE UNITED STATES, INCLUDING MARKETS FORMALLY
LINKED TO A UNITED STATES MARKET, MAY BE SUBJECT TO REGULATIONS
WHICH OFFER DIFFERENT OR DIMINISHED PROTECTION TO THE POOL AND ITS
PARTICIPANTS. FURTHER, UNITED STATES REGULATORY AUTHORITIES
MAY BE UNABLE TO COMPEL THE ENFORCEMENT OF THE RULES OF REGULATORY
AUTHORITIES OR MARKETS IN NON-UNITED STATES JURISDICTIONS WHERE
TRANSACTIONS FOR THE POOL MAY BE EFFECTED.
SWAPS
TRANSACTIONS, LIKE OTHER FINANCIAL TRANSACTIONS, INVOLVE A VARIETY
OF SIGNIFICANT RISKS. THE SPECIFIC RISKS PRESENTED BY A PARTICULAR
SWAP TRANSACTION NECESSARILY DEPEND UPON THE TERMS OF THE
TRANSACTION AND YOUR CIRCUMSTANCES. IN GENERAL, HOWEVER, ALL SWAPS
TRANSACTIONS INVOLVE SOME COMBINATION OF MARKET RISK, CREDIT RISK,
COUNTERPARTY CREDIT RISK, FUNDING RISK, LIQUIDITY RISK, AND
OPERATIONAL RISK.
HIGHLY
CUSTOMIZED SWAPS TRANSACTIONS IN PARTICULAR MAY INCREASE LIQUIDITY
RISK, WHICH MAY RESULT IN A SUSPENSION OF REDEMPTIONS. HIGHLY
LEVERAGED TRANSACTIONS MAY EXPERIENCE SUBSTANTIAL GAINS OR LOSSES
IN VALUE AS A RESULT OF RELATIVELY SMALL CHANGES IN THE VALUE OR
LEVEL OF AN UNDERLYING OR RELATED MARKET FACTOR.
IN EVALUATING THE RISKS AND CONTRACTUAL
OBLIGATIONS ASSOCIATED WITH A PARTICULAR SWAP TRANSACTION, IT IS
IMPORTANT TO CONSIDER THAT A SWAP TRANSACTION MAY BE MODIFIED OR
TERMINATED ONLY BY MUTUAL CONSENT OF THE ORIGINAL PARTIES AND
SUBJECT TO AGREEMENT ON INDIVIDUALLY NEGOTIATED TERMS. THEREFORE,
IT MAY NOT BE POSSIBLE FOR THE COMMODITY POOL OPERATOR TO MODIFY,
TERMINATE, OR OFFSET THE POOL'S OBLIGATIONS OR THE POOL'S EXPOSURE
TO THE RISKS ASSOCIATED WITH A TRANSACTION PRIOR TO ITS SCHEDULED
TERMINATION DATE.
ii
TEUCRIUM
SUGAR FUND
TABLE
OF CONTENTS
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Page
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1
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1
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1
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2
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3
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4
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5
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7
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7
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10
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17
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18
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19
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19
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22
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26
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27
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28
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30
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32
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33
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34
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34
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35
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39
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39
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40
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40
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41
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42
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45
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45
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46
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49
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49
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51
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63
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66
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70
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73
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iii
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 7, 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.
The
Fund is a series of Teucrium Commodity Trust (the
“Trust”). The principal offices of the Sponsor, the
Trust and the Fund are located at Three Main Street, Suite 215,
Burlington, Vermont 05401. The telephone number is (802)
540-0019.
The
amount of trading income required for the redemption value of a
Share at the end of one year to equal the selling price of the
Share, assuming a selling price of $6.00 (the NAV per Share as of
July 31, 2020), is $0.15 or 2.50% of the selling price.
For more information, see “Breakeven Analysis”
below.
Operation of the Fund
The
Fund is a commodity pool that issues Shares that may be purchased
and sold on NYSE Arca. The investment objective of the Fund (which
may be changed at any time at the sole discretion of the Sponsor)
is to have the daily changes in the Shares’ NAV reflect the
daily changes of the price of sugar for future delivery, as
measured by a benchmark (the “Benchmark”) as described
below. The Benchmark for the Fund is the Teucrium Sugar Index
(“TCANE”). Under normal market conditions, the Fund
invests in sugar futures contracts and cash and cash equivalents.
The Fund is organized as a series of the Trust, a Delaware
statutory trust organized on September 11, 2009. The Trust and the
Fund operate pursuant to the Trust’s Fifth Amended and
Restated Declaration of Trust and Trust Agreement (the “Trust
Agreement”), dated April 26, 2019. The Trust Agreement may be
found on the SEC’s EDGAR filing database at https://www.sec.gov/Archives/edgar/data/1471824/000165495419004852/ex31.htm.
The Fund was formed and is managed and controlled by the Sponsor, a
limited liability company formed in Delaware on July 28, 2009. The
Sponsor is registered as a commodity pool operator
(“CPO”) and a commodity trading adviser
(“CTA”) with the Commodity Futures Trading Commission
(“CFTC”) and is a member of the National Futures
Association (“NFA”).
As noted, the investment objective of the Fund is
to have the daily changes in the NAV of the Fund’s Shares
reflect the daily changes in the sugar market for future delivery
as measured by the Benchmark. The Benchmark is a weighted average
of the closing settlement prices for three futures contracts for
No. 11 Sugar (“Sugar Futures Contracts”) that are
traded on the ICE Futures US (“ICE Futures”).
The three Sugar No. 11 Futures Contracts that at any given
time make up the Benchmark are referred to herein as the
“Benchmark Component Futures Contracts.”
The
Fund seeks to achieve its investment objective by investing in
Benchmark Component Futures Contracts. Under normal market
conditions, the Fund expects that 100% of the Fund’s assets
will be invested in Benchmark Component Futures Contracts and in
cash and cash equivalents. The Fund reserves the right to invest in
swap agreements, forward contracts and options, a brief description
of which may be found in “Appendix A – “Glossary
of Defined Terms.”
1
The
Fund invests in Benchmark Component Futures Contracts to the
fullest extent possible without being leveraged or unable to
satisfy its expected current or potential margin or collateral
obligations with respect to its investments in Benchmark Component
Futures Contracts. After fulfilling such margin and
collateral requirements, the Fund invests the remainder of its
proceeds from the sale of baskets in short term financial instruments of
the type commonly known as “cash and cash equivalents.”
Cash and cash equivalents may include short-term Treasury bills,
money market funds, demand deposit accounts, and commercial
paper.
The
Sponsor employs a “neutral” investment strategy
intended to track the changes in the Benchmark regardless of
whether the Benchmark goes up or goes down. The Fund’s
“neutral” investment strategy is designed to permit
investors generally to purchase and sell the Fund’s Shares
for the purpose of investing indirectly in the sugar market in a
cost-effective manner. The Sponsor endeavors to place the
Fund’s trades in Benchmark Component Futures Contracts and
otherwise manage the Fund’s investments so that the
Fund’s average daily tracking error against the Benchmark
will be less than 10 percent over any period of 30 trading days.
However, the Fund incurs certain expenses in connection with its
operations, which cause imperfect correlation between changes in
the Fund’s NAV and changes in the Benchmark because the
Benchmark does not reflect expenses or income. As a result,
investors may incur a partial or complete loss of their investment
even when the performance of the Benchmark is
positive.
Investors may purchase and
sell Shares through their broker-dealers. However, the Fund creates
and redeems Shares only in blocks called Creation Baskets and
Redemption Baskets, respectively, and only Authorized Purchasers
may purchase or redeem Creation Baskets or Redemption Baskets. An
Authorized Purchaser is under no obligation to create or redeem
baskets, and an Authorized Purchaser is under no obligation to
offer to the public Shares of any baskets it does create. Baskets
are generally created when there is a demand for Shares, including,
but not limited to, when the market price per share is at (or
perceived to be at) a premium to the NAV per Share. Similarly,
baskets are generally redeemed when the market price per share is
at (or perceived to be at) a discount to the NAV per Share. Retail
investors seeking to purchase or sell Shares on any day are
expected to affect such transactions in the secondary market, on
the NYSE Arca, at the market price per share, rather than in
connection with the creation or redemption of baskets.
The
Sponsor believes that by investing in Benchmark Component Futures
Contracts, the Fund’s net asset value (“NAV”)
will closely track the Benchmark. The Sponsor also believes that
because of market arbitrage opportunities, the market price at
which investors will purchase and sell Shares through their
broker-dealer will closely track the Fund’s NAV. The Sponsor
believes that the net effect of these relationships is that the
Fund’s market price on the NYSE Arca at which investors
purchase and sell Shares will closely track the sugar market for
future delivery, as measured by the Benchmark.
The
Sponsor maintains a public website on behalf of the Fund,
www.teucrium.com,
which contains information about the Trust, the Fund, and the
Shares.
Note to Secondary Market Investors: Except when aggregated in Redemption Baskets,
Shares are not individually redeemable. Shares can be directly
purchased from the Fund only in Creation Baskets, and only by
Authorized Purchasers. Each Creation Basket consists of 25,000
Shares and therefore requires a significant financial commitment to
purchase. Accordingly, investors who do not have such resources or
who are not Authorized Purchasers should be aware that some of the
information contained in this prospectus, including information
about purchases and redemptions of Shares directly with the Fund,
is only relevant to Authorized Purchasers. There is no guarantee
that Shares will trade at prices that are at or near the per-Share
NAV. When buying or selling Shares on the secondary market through
a broker, most investors incur customary brokerage commissions and
charges.
As
noted, the Fund invests in Sugar Futures Contracts, including those
traded on the ICE Futures. The Fund expressly disclaims any
association with the ICE Futures or endorsement of the Fund by such
exchange and acknowledges that “ICE Futures” and
“ICE Futures US” are registered trademarks of such
exchanges.
An
investment in the Fund involves a degree of risk and you could
incur a partial or total loss of your investment in the Fund.
Some of the risks you may face are summarized below. A more
extensive discussion of these risks appears beginning on page
7.
●
Unlike mutual
funds, commodity pools and other investment pools that manage their
investments so as to realize income and gains for distribution to
their investors, the Fund generally does not distribute dividends
to holders of Fund Shares (“Shareholders”). You should
not invest in the Fund if you will need cash distributions from the
Fund to pay taxes on your share of income and gains of the Fund, if
any, or for other purposes.
●
Investors may
choose to use the Fund as a means of investing indirectly in sugar,
and there are risks involved in this investment strategy. The risks
and hazards that are inherent in sugar production may cause the
price of sugar to fluctuate widely.
2
●
Only an Authorized
Purchaser may engage in creation or redemption transactions with
the Fund. The Fund has a limited number of institutions that act as
Authorized Purchasers. To the extent that these institutions exit
the business or are unable or unwilling to proceed with creation
and/or redemption orders with respect to the Fund, Fund Shares may,
particularly in times of market stress, trade at a discount to the
NAV per Share and possibly face trading halts and/or
delisting.
●
The price
relationship between the near month Sugar Futures Contract to
expire and the Benchmark Component Futures Contracts will vary and
may impact both the Fund’s total return over time and the
degree to which such total return tracks the total return of sugar
price indices. In some cases, the near month contract’s price
is lower than later expiring contracts’ prices (a situation
known as “contango” in the futures markets). In the
event of a prolonged period of contango, and absent the impact of
rising or falling sugar prices, this could have a significant
negative impact on the Fund’s NAV and total return, and you
could incur a partial or total loss of your investment in the
Fund.
●
You will have no
rights to participate in the management of the Fund and will have
to rely on the duties and judgment of the Sponsor to manage the
Fund.
●
The Fund pays fees
and expenses that are incurred regardless of whether it is
profitable.
●
The Fund seeks to
have the changes in its Shares’ NAV track changes in the
Benchmark, rather than profit from speculative trading of Sugar
Futures Contracts or from the use of leverage (i.e., the Sponsor
manages the Fund so that the aggregate value of the Fund’s
exposure to losses from its investments in Benchmark Component
Futures Contracts at any time will not exceed the value of the
Fund’s assets). There is no assurance that the Sponsor will
successfully implement this investment strategy, and if the Fund
becomes leveraged, you could lose all or substantially all of your
investment if the Fund’s trading positions suddenly turn
unprofitable.
●
In addition to
Benchmark Component Futures Contracts, the Fund reserves the right
to invest in other sugar interests. To the extent that these other
sugar interests are contracts individually negotiated between their
parties, they may not be as liquid as Benchmark Component Futures
Contracts and will expose the Fund to credit risk that its
counterparty may not be able to satisfy its obligations to the
Fund.
●
The regulation of
commodity interest transactions in the United States has
historically been comprehensive and is a rapidly changing area of
law and is subject to ongoing modification by governmental and
judicial action. Future U.S. or foreign regulatory changes may
alter the nature of an investment in the Fund, or the ability of
the Fund to continue to implement its investment
strategy.
●
Failures or
breaches of the electronic systems of the Fund, the Sponsor, or
third parties or other events such as the recent COVID-19 pandemic
have the ability to cause disruptions and negatively impact the
Fund’s business operations, potentially resulting in
financial losses to the Fund and its shareholders.
For
additional risks, see “What Are the Risk Factors Involved
with an Investment in the Fund?”
Determination of NAV
The
Fund’s NAV is determined as of the earlier of the close of
the New York Stock Exchange or 4:00 p.m. (EST) on each day that the
NYSE Arca is open for trading.
For a
glossary of defined terms, see Appendix A.
3
Breakeven Analysis
The
breakeven analysis set forth below is a hypothetical illustration
of the approximate dollar returns and percentage returns that an
investment in either a single Share or an entire Creation Basket
(25,000 Shares) would have to generate for an investor to break
even. The total estimated investment return that the Fund must
generate for an investor to break even are expressed as a
percentage of a single Share valued at $6.00 (the Net Asset Value
per Share on July 31, 2020) and as a percentage of an entire
Creation Basket valued at $150,000 (the Net Asset Value per Basket
on July 31, 2020). The breakeven analysis is an approximation only
and assumes a constant month-end Net Asset Value. You should note that you
may pay brokerage commissions on purchases and sales of
CANE’s shares through your broker, which are not reflected in
the table.
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Per
Share
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Per
Basket
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Assumed selling
price
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$6.00
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$150,000
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Management Fee
(1.00%) (1)
|
$0.06
|
$1,500
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Brokerage
Commissions (2)
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$0.01
|
$250
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Other Fund Fees and
Expenses (3)
(4)
|
$0.10
|
$2,500
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Interest and Other
Income (0.40%) (5)
|
$(0.02)
|
$(500)
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Amount of trading
income (loss) required for the redemption value at the end of one
year to equal the selling price
|
$0.15
|
$3,750
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Percentage of
selling price (6)
|
2.50%
|
2.50%
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(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. The Sponsor can elect to waive the
payment of the fee in any amount at its sole discretion, at any
time and from time to time, in order to reduce the Fund’s
expenses or for any other purpose.
(2) The Fund will pay $4.50 per half-turn for Sugar Futures
Contract purchase or sale and reflected on a per trade basis. The
estimated fee is based on the actual brokerage commissions and
trading fees paid for the year ending December 31,
2019.
(3) In connection with orders to create or redeem baskets,
Authorized Purchasers will pay a transaction fee in the amount of
$250 per order. Because these transaction fees are de minimis in
amount, are paid to the Fund’s custodian, U.S. Bank, N.A.
(the “Custodian”) and charged on a
transaction-by-transaction basis (and not on a Basket by Basket
basis), and are borne by the Authorized Participants, they have not
been included in the Breakeven Table. See “Creation and Redemption Transaction
Fees,” page 45.
(4) Other Fund Fees and Expenses are an estimate based on an
allocation to the Fund of the total estimated expenses anticipated
to be incurred by the Trust on behalf of the Fund, net of any
expenses or management fee waived by the Sponsor, and include:
Professional fees (primarily legal, auditing and tax-preparation
related costs); Custodian and Administrator fees and expenses,
Distribution and Marketing fees (primarily fees paid to the
Distributor, costs related to regulatory compliance activities and
other costs related to the trading activities of the Fund);
Business Permits and Licenses; General and Administrative expenses
(primarily insurance and printing), and Other Expenses. The
expenses presented are based on estimated expenses for the current
fiscal year, and do not represent the maximum amounts payable under
the contracts with third-party service providers, as discussed
below in the section of this disclosure document entitled
“Contractual Fees and Compensation Arrangements with the
Sponsor and Third-Party Service Providers.” The cost of these
fixed or estimated fees has been calculated assuming that the Fund
has $9.7 million in assets, which was the approximate amount of
assets as of July 31, 2020. The Sponsor can elect to pay (or waive
reimbursement for) certain fees or expenses that would generally be
paid by the Fund, although it has no contractual obligation to do
so. Any election to pay or waive reimbursement for fees and
expenses that would generally be paid by the Fund can be changed at
the discretion of the Sponsor.
(5) The Fund seeks to earn interest and other income
in high credit quality, short-duration instruments or deposits
associated with the pool’s buy-and-hold cash management
strategy that may be used to offset expenses. These investments may
include, but are not limited to, short-term Treasury Securities,
demand deposits, money market funds and investments in commercial
paper. Management estimates that the blended interest rate will be
0.40% based on the current interest rate environment and outlook as
of June 30, 2020. The actual rate may vary and not all assets of
the Fund will earn interest.
(6) This represents the estimated approximate percentage of
selling price net of any expenses or management fees waived by the
Sponsor that the Fund would need to generate for an investor to
break even after twelve months. The estimated approximate
percentage of selling price before waived expenses is 4.50% or
$0.27 per share, based on the Fund assets, net asset value per
share and shares outstanding as of July 31, 2020. The fees waived
by the Sponsor is an estimate, can be applied to any expense
related to the Fund, and may be terminated at any time at the
discretion of the Sponsor.
4
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Offering
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The
Fund’s Shares are listed on the NYSE Arca and investors may
purchase and sell Shares through their broker-dealer. The Fund only
offers Creation Baskets consisting of 25,000 Shares through the
Distributor to Authorized Purchasers. Authorized Purchasers
may purchase Creation Baskets consisting of 25,000 Shares at the
Fund’s NAV.
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Use of
Proceeds
|
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The Sponsor applies substantially all of the Fund’s assets
toward investing in Benchmark Component Futures
Contracts, cash, and cash equivalents.
The Sponsor deposits a portion of the Fund’s net assets with
its futures commission merchant (“FCM”) or other
financial institutions to be used to meet its current or potential
margin or collateral requirements in connection with its investment
in Benchmark Component Futures Contracts. The Fund uses only cash and cash equivalents to
satisfy these requirements. The Sponsor expects that all entities
that will hold or trade the Fund’s assets will be based in
the United States and will be subject to United States regulations.
The Sponsor believes that approximately 4-6% of the Fund’s
assets will normally be committed as margin for Benchmark
Component Futures Contracts. However,
from time to time, the percentage of assets committed as
margin/collateral may be substantially more, or less, than such
range. The remaining portion of the Fund’s assets is held in
cash or cash equivalents. All interest or other income earned on
these investments is retained for the Fund’s
benefit.
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NYSE
Arca Symbol
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“CANE”
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Creation
and Redemption
|
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Authorized
Purchasers pay a $250 fee per order to create Creation Baskets, and
a $250 fee per order for Redemption Baskets, which is paid to the
Custodian. Authorized Purchasers are not required to sell any
specific number or dollar amount of Shares. The per share
price of Shares offered in Creation Baskets is the total NAV of the
Fund calculated as of the close of the NYSE Arca on that day
divided by the number of issued and outstanding
Shares.
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Inter-Series
Limitation on Liability
|
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While
the Fund is currently one of five separate series of the Trust,
additional series may be created in the future. The Trust has
been formed and will be operated with the goal that the Fund and
any other series of the Trust will be liable only for obligations
of such series, and a series will not be responsible for or
affected by any liabilities or losses of or claims against any
other series. If any creditor or shareholder in any
particular series (such as the Fund) were to successfully assert
against a series a claim with respect to its indebtedness or
Shares, the creditor or shareholder could recover only from that
particular series and its assets. Accordingly, the debts and
other obligations incurred, contracted for or otherwise existing
solely with respect to a particular series will be enforceable only
against the assets of that series, and not against any other series
or the Trust generally or any of their respective assets. The
assets of the Fund and any other series will include only those
funds and other assets that are paid to, held by or distributed to
the series on account of and for the benefit of that series,
including, without limitation, amounts delivered to the Trust for
the purchase of Shares in a series.
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Registration
Clearance and Settlement
|
|
Individual
certificates are not issued for the Shares. Instead, Shares will be
represented by one or more global certificates, which are deposited
by the transfer agent with the Depository Trust Company
(“DTC”) and registered in the name of Cede & Co.,
as nominee for DTC. The global certificates evidence all of the
Shares outstanding at any time. Beneficial interests in Shares are
held through DTC’s book-entry system, which means that
Shareholders are limited to: (1) participants in DTC such as banks,
brokers, dealers and trust companies (“DTC
Participants”), (2) those who maintain, either directly or
indirectly, a custodial relationship with a DTC Participant
(“Indirect Participants”), and (3) those who hold
interests in the Shares through DTC Participants or Indirect
Participants, in each case who satisfy the requirements for
transfers of Shares. DTC Participants acting on behalf of investors
holding Shares through such DTC Participants’ accounts in DTC
will follow the delivery practice applicable to securities eligible
for DTC’s Same-Day Funds Settlement System. Shares are
credited to DTC Participants’ securities accounts following
confirmation of receipt of payment.
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5
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Net
Asset Value
|
|
The NAV is calculated by taking the current market value of the
Fund’s total assets and subtracting any liabilities and
dividing the balance by the number of Shares. Under the
Fund’s current operational procedures, U.S. Bancorp
Fund Services, LLC, doing business as U.S. Bank Global Fund
Services (“Global Fund Services”), the Fund’s
“Administrator” calculates
the NAV of the Fund’s Shares as of the earlier of 4:00 p.m.
(EST) or the close of the New York Stock Exchange each day. ICE
Data Indices, LLC calculates an approximate net asset value every
15 seconds throughout each day that the Fund’s Shares are
traded on the NYSE Arca for as long as the ICE Futures’ main
pricing mechanism is open.
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||
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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; (iii)
the routine expenses associated with the preparation and, if
required, the printing and mailing of monthly, quarterly, annual
and other reports required by applicable U.S. federal and state
regulatory authorities, Trust meetings and preparing, printing and
mailing proxy statements to Shareholders; (iv) the payment of any
distributions related to redemption of Shares; (v) payment for
routine services of the Trustee, legal counsel and independent
accountants; (vi) payment for routine accounting, bookkeeping,
custody and transfer agency services, whether performed by an
outside service provider or by Affiliates of the Sponsor; (vii)
postage and insurance; (viii) costs and expenses associated with
investor relations and services; (ix) costs of preparation of all
federal, state, local and foreign tax returns and any taxes payable
on the income, assets or operations of the Fund; (x) payment for
marketing services; and (xi) extraordinary expenses (including, but
not limited to, legal claims and liabilities and litigation costs
and any indemnification related thereto). The estimated amount of
fees and expenses that are anticipated to be incurred in a single
Share during the first twelve (12) months of ownership is $0.15 or
2.50% of the selling price. The total estimated fees and expenses
are expressed as a percentage of the net asset value as of July 31,
2020. These fees and expenses are net of any expenses or management
fees waived by the Sponsor. The Sponsor may, in its discretion, pay
or reimburse the Fund for, or waive a portion of its management fee
to offset, expenses that would otherwise be borne by the
Fund.
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General
expenses of the Trust will be allocated among the existing Teucrium
Funds and any future series of the Trust as determined by the
Sponsor in its discretion. The Trust may be required to
indemnify the Sponsor, and the Trust and/or the Sponsor may be
required to indemnify the Trustee, Distributor or Administrator,
under certain circumstances.
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Termination
Events
|
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The
Trust and the Fund shall continue in existence from the date of
their formation in perpetuity, unless the Trust or the Fund, as the
case may be, is sooner terminated upon the occurrence of certain
events specified in the Trust Agreement, including the following:
(1) the filing of a certificate of dissolution or cancellation of
the Sponsor or revocation of the Sponsor’s charter or the
withdrawal of the Sponsor, unless shareholders holding a majority
of the outstanding shares of the Trust, voting together as a single
class, elect within ninety (90) days after such event to continue
the business of the Trust and appoint a successor Sponsor; (2) the
occurrence of any event which would make the existence of the Trust
or the Fund unlawful; (3) the suspension, revocation, or
termination of the Sponsor’s registration as a CPO with the
CFTC or membership with the NFA; (4) the insolvency or bankruptcy
of the Trust or the Fund; (5) a vote by the shareholders holding at
least seventy-five percent (75%) of the outstanding shares of the
Trust, voting together as a single class, to dissolve the Trust
subject to certain conditions; (6) the determination by the Sponsor
to dissolve the Trust or the Fund, subject to certain conditions.;
(7) the Trust is required to be registered as an investment company
under the Investment Company Act of 1940, and (8) DTC is unable or
unwilling to continue to perform its functions and a comparable
replacement is unavailable. Upon termination of the Fund, the
affairs of the Fund shall be wound up and all of its debts and
liabilities discharged or otherwise provided for in the order of
priority as provided by law. The fair market value of the remaining
assets of the Fund shall then be determined by the Sponsor.
Thereupon, the assets of the Fund shall be distributed pro rata to
the Shareholders in accordance with their Shares.
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Authorized
Purchasers
|
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A list
of the Fund's Authorized Purchasers as of the date of this
Prospectus can be found under "Plan of Distribution - Distributor and Authorized Purchasers,"
on page 40. Authorized Purchasers must be (1) registered
broker-dealers or other securities market participants, such as
banks and other financial institutions, that are not required to
register as broker-dealers to engage in securities transactions,
and (2) DTC Participants. To become an Authorized Purchaser,
a person must enter into an Authorized Purchaser Agreement with the
Sponsor.
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6
WHAT ARE THE RISK FACTORS INVOLVED WITH AN
INVESTMENT IN THE FUND?
You should consider carefully the risks described below before
making an investment decision. You should also refer to the other
information included in this prospectus, and the Fund’s and
the Trust’s financial statements and the related notes
incorporated by reference herein. See “Incorporation by
Reference of Certain Information.”
Investing in Benchmark Component Futures Contracts subjects the
Fund to the risks of the world sugar market, and this could result
in substantial fluctuations in the price of the Fund’s
Shares.
The
Fund is subject to the risks and hazards of the world sugar market
because it invests in Benchmark Component Futures Contracts. The
two primary sources for the production of sugar are sugarcane and
sugar beets, both of which are grown in various countries around
the world. The risks and hazards that are inherent in the
world sugar market may cause the price of sugar and the
Fund’s Shares to fluctuate widely and you could incur a
partial or total loss of your investment in the Fund.
|
|
●
|
The
global price and availability of sugar is influenced by economic
and industry conditions, including but not limited to supply and
demand factors such as: crop disease; weed control; water
availability; various planting, growing, or harvesting problems;
severe weather conditions such as drought, floods, or frost that
are difficult to anticipate and which cannot be controlled;
uncontrolled fires, including arson; challenges in doing business
with foreign companies; legal and regulatory restrictions;
fluctuation of shipping rates; currency exchange rate fluctuations;
and political and economic instability. Global demand for
sugar to produce ethanol has also been a significant factor
affecting the price of sugar. Additionally, demand for sugar
is affected by changes in consumer tastes, national, regional and
local economic conditions, and demographic trends. The spread
of consumerism and the rising affluence of emerging nations such as
China and India have created demand for sugar. An influx of
people in developing countries moving from rural to urban areas may
create more disposable income to be spent on sugar products and
might also reduce sugar production in rural areas on account of
worker shortages, all of which would result in upward pressure on
sugar prices. On the other hand, public health concerns
regarding obesity, heart disease and diabetes, particularly in
developed countries, may reduce demand for sugar. In light of
the time it takes to grow sugarcane and sugar beets and the cost of
new facilities for processing these crops, it may not be possible
to increase supply quickly or in a cost-effective manner in
response to an increase in demand for sugar.
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●
|
Sugar
production is subject to United States and foreign policies and
regulations that materially affect operations. Governmental
policies affecting the agricultural industry, such as taxes,
tariffs, duties, subsidies, incentives, acreage control, and import
and export restrictions on agricultural commodities and commodity
products, can influence the planting of certain crops, the location
and size of crop production, the volume and types of imports and
exports, and industry profitability. Many foreign countries
subsidize sugar production, resulting in lower prices, but this has
led other countries, including the United States, to impose tariffs
and import restrictions on sugar imports. Sugar producers
also may need to comply with various environmental laws and
regulations, such as those regulating the use of certain
pesticides.
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|
|
●
|
Seasonal
fluctuations in the price of sugar may cause risk to an investor
because of the possibility that Share prices will be depressed
because of the sugar harvest cycle. In the futures market,
contracts expiring during the harvest season are typically priced
lower than contracts expiring in the winter and spring. While
the sugar harvest seasons varies from country to country, prices of
Sugar Futures Contracts tend to be lowest in the late spring and
early summer, reflecting the harvest season in Brazil, the
world’s leading producer of sugarcane. Thus, seasonal
fluctuations could result in an investor incurring losses upon the
sale of Fund Shares, particularly if the investor needs to sell
Shares when the Benchmark Component Futures Contracts are, in whole
or part, Sugar Futures Contracts expiring in the late spring or
early summer.
|
An investment in the Fund is subject to correlation risk. Your
return on an investment in the Fund may differ from the return of
the Benchmark, changes in the Fund’s NAV and the spot price
of sugar.
There
is a risk that changes in the price of Shares on the NYSE Arca will
not correlate with changes in the Fund’s NAV; that changes in
the NAV will not correlate with changes in the price of the
Benchmark; and/or changes in the price of the Benchmark will not
correlate with changes in the spot price of sugar. Depending on
certain factors associated with each of these correlations which
are discussed in more detail below, you could incur a partial or
total loss of your investment in the Fund.
7
The Benchmark is not designed to correlate with the spot price of
sugar, and this could cause the changes in the price of the Shares
to substantially vary from the changes in the spot price of
sugar. Therefore, you may not be able to effectively use the
Fund to hedge against sugar related losses or to indirectly invest
in sugar.
The
Benchmark Component Futures Contracts reflect the price of sugar
for future delivery, not the current spot price of sugar, so at
best the correlation between changes in such Sugar Futures
Contracts and the spot price of sugar will be only
approximate. Weak correlation between the Benchmark and the
spot price of sugar may result from the typical seasonal
fluctuations in sugar prices discussed above. Imperfect
correlation may also result from speculation in Benchmark Component
Futures Contracts, technical factors in the trading of Benchmark
Component Futures Contracts, and expected inflation in the economy
as a whole. If there is a weak correlation between the
Benchmark and the spot price of sugar, then the price of Shares may
not accurately track the spot price of sugar and you may not be
able to effectively use the Fund as a way to hedge the risk of
losses in your sugar related transactions or as a way to indirectly
invest in sugar.
Changes in the Fund’s NAV may not correlate well with changes
in the price of the Benchmark. If this were to occur, you may
not be able to effectively use the Fund as a way to hedge against
sugar related losses or as a way to indirectly invest in
sugar.
The
Sponsor endeavors to invest the Fund’s assets as fully as
possible in Benchmark Component Futures Contracts so that the
changes in the NAV closely correlate with the changes in the
Benchmark. However, changes in the Fund’s NAV may not
correlate with the changes in the Benchmark for various reasons,
including those set forth below.
|
|
●
|
The
Fund incurs certain expenses in connection with its operations and
holds most of its assets in income producing, short-term financial
instruments for margin and other liquidity purposes and to meet
redemptions that may be necessary on an ongoing basis. These
expenses and income cause imperfect correlation between changes in
the Fund’s NAV and changes in the Benchmark.
|
|
|
●
|
The
Sponsor may not be able to invest the Fund’s assets in
Benchmark Component Futures Contracts having an aggregate notional
amount exactly equal to the Fund’s NAV. As a
standardized contract, a single Sugar Futures Contract is for a
specified amount of sugar, and the Fund’s NAV and the
proceeds from the sale of a Creation Basket is unlikely to be an
exact multiple of that amount. In such case, the Fund could
not invest the entire proceeds from the purchase of the Creation
Basket in such futures contracts. (For example, assuming the
Fund receives $350,000 for the sale of a Creation Basket and that
the value (i.e., the notional amount) of a Sugar Futures Contract
is $17,920, the Fund could only enter into 19 Sugar Futures
Contracts with an aggregate value of $340,480). While the
Fund may be better able to achieve the exact amount of exposure to
the sugar market through the use of over the counter other sugar
interests, there is no assurance that the Sponsor will be able to
continually adjust the Fund’s exposure to such other sugar
interests to maintain such exact exposure. Any amounts not
invested in Benchmark Component Futures Contracts are held in cash
and cash equivalents.
|
|
|
●
|
As Fund
assets increase, there may be more or less correlation. On
the one hand, as the Fund grows it should be able to invest in
Benchmark Component Futures Contracts with a notional amount that
is closer on a percentage basis to the Fund’s NAV. For
example, if the Fund’s NAV is equal to 4.9 times the value of
a single futures contract, it can purchase only four futures
contracts, which would cause only 81.6% of the Fund’s assets
to be exposed to the sugar market. On the other hand, if the
Fund’s NAV is equal to 100.9 times the value of a single
Sugar Futures Contract, it can purchase 100 such contracts,
resulting in 99.1% exposure. However, at certain asset levels
the Fund may be limited in its ability to purchase Sugar Futures
Contracts due to position limits or accountability levels imposed
by the CFTC or the relevant exchanges. In these instances, the Fund would
likely invest to a greater extent in sugar interests not subject to
these position limits or accountability levels. To the extent
that the Fund invests in other sugar interests, the correlation
between the Fund’s NAV and the Benchmark may be lower.
In certain circumstances, position limits or accountability levels
could limit the number of Creation Baskets that will be
sold.
|
If
changes in the Fund’s NAV do not correlate with changes in
the Benchmark, then investing in the Fund may not be an effective
way to hedge against sugar related losses or indirectly invest in
sugar.
Changes in the price of the Fund’s Shares on the NYSE Arca
may not correlate perfectly with changes in the NAV of the
Fund’s Shares. If this variation occurs, then you may
not be able to effectively use the Fund to hedge against sugar
related losses or to indirectly invest in sugar.
While
it is expected that the trading prices of the Shares will fluctuate
in accordance with the changes in the Fund’s NAV, the prices
of Shares may also be influenced by other factors, including the
supply of and demand for the Shares, whether for the short term or
the longer term. There is no guarantee that the Shares will
not trade at appreciable discounts from, and/or premiums to, the
Fund’s NAV. This could cause the changes in the price
of the Shares to substantially vary from the changes in the spot
price of sugar, even if the Fund’s NAV was closely tracking
movements in the spot price of sugar. If this occurs, you may
not be able to effectively use the Fund to hedge the risk of losses
in your sugar related transactions or to indirectly invest in
sugar.
The Fund may experience a loss if it is required to sell cash
equivalents at a price lower than the price at which they were
acquired.
If the
Fund is required to sell its cash equivalents at a price lower than
the price at which they were acquired, the Fund will experience a
loss. This loss may adversely impact the price of the
Shares and may decrease the correlation between the price of the
Shares, the Benchmark, and the spot price of sugar. The
value of cash
equivalents held by the Fund generally moves inversely with
movements in interest rates. The prices of longer
maturity securities are subject to greater market fluctuations as a
result of changes in interest rates. While the
short-term nature of the Fund’s investments in cash
equivalents should minimize the interest rate risk to which the
Fund is subject, it is possible that the cash equivalents held by
the Fund will decline in value.
8
Certain of
the Fund’s investments could be illiquid, which could cause
large losses to investors at any time or from time to
time.
The
Fund may not always be able to liquidate its positions in its
investments at the desired price for reasons including, among
others, insufficient trading volume, limits imposed by exchanges or
other regulatory organizations, or lack of liquidity. As to futures
contracts, it may be difficult to execute a trade at a specific
price when there is a relatively small volume of buy and sell
orders in a market. Limits imposed by futures exchanges or
other regulatory organizations, such as accountability levels,
position limits and price fluctuation limits, may contribute to a
lack of liquidity with respect to some exchange-traded sugar
interests. In addition, over the counter contracts may be
illiquid because they are contracts between two parties and
generally may not be transferred by one party to a third party
without the counterparty’s consent. Conversely, a
counterparty may give its consent, but the Fund still may not be
able to transfer an over the counter sugar interest to a third
party due to concerns regarding the counterparty’s credit
risk.
A
market disruption, such as a foreign government taking political
actions that disrupt the market in its currency, its sugar
production or exports, or in another major export, can also make it
difficult to liquidate a position. Unexpected market
illiquidity may cause major losses to investors at any time or from
time to time. In addition, the Fund does not intend at this
time to establish a credit facility, which would provide an
additional source of liquidity, but instead will rely only on the
cash and cash equivalents that it holds to meet its liquidity
needs. The anticipated value of the positions in Benchmark
Component Futures Contracts that the Sponsor will acquire or enter
into for the Fund increases the risk of illiquidity. Because
Benchmark Component Futures Contracts may be illiquid, the
Fund’s holdings may be more difficult to liquidate at
favorable prices in periods of illiquid markets and losses may be
incurred during the period in which positions are being
liquidated.
If the nature of the participants in the futures market shifts such
that sugar purchasers are the predominant hedgers in the market,
the Fund might have to reinvest at higher futures prices or choose
other sugar interests.
The
changing nature of the participants in the sugar market will
influence whether futures prices are above or below the expected
future spot price. Sugar producers will typically seek to
hedge against falling sugar prices by selling Sugar Futures
Contracts. Therefore, if sugar producers become the
predominant hedgers in the futures market, prices of Sugar Futures
Contracts will typically be below expected future spot
prices. Conversely, if the predominant hedgers in the futures
market are the purchasers of the sugar who purchase Sugar Futures
Contracts to hedge against a rise in prices, prices of Sugar
Futures Contracts will likely be higher than expected future spot
prices. This can have significant implications for the Fund
when it is time to sell a Sugar Futures Contract that is no longer
a Benchmark Component Futures Contract and purchase a new Sugar
Futures Contract or to sell a Sugar Futures Contract to meet
redemption requests.
Storage costs could impact the value of the Benchmark Component
Futures Contracts.
Storage
costs associated with purchasing sugar could result in costs and
other liabilities that could impact the value of Sugar Futures
Contracts or certain other sugar interests. Storage costs
include the time value of money invested in sugar as a physical
commodity plus the actual costs of storing the sugar less any
benefits from ownership of sugar that are not obtained by the
holder of a futures contract. In general, Sugar Futures
Contracts have a one-month delay for contract delivery and the
pricing of back month contracts (the back month is any future
delivery month other than the spot month) include storage
costs. To the extent that these storage costs change for
sugar while the Fund holds Sugar Interests, the value of the
Benchmark Component Futures Contracts, and therefore the
Fund’s NAV, may change as well.
The price relationship between the Benchmark Component Futures
Contracts at any point in time and the Sugar Futures Contracts that
will become Benchmark Component Futures Contracts on the next roll
date will vary and may impact both the Fund’s total return
and the degree to which its total return tracks that of sugar price
indices.
The
design of the Fund’s Benchmark is such that the Benchmark
Component Futures Contracts will change four times per year, and
the Fund’s investments must be rolled periodically to reflect
the changing composition of the Benchmark. For example, when
the second to expire Sugar Futures Contract becomes the first to
expire contract, such contract will no longer be a Benchmark
Component Futures Contract and the Fund’s position in it will
no longer be consistent with tracking the Benchmark. In the
event of a sugar futures market where near to expire contracts
trade at a higher price than longer to expire contracts, a
situation referred to as “backwardation,” then absent
the impact of the overall movement in sugar prices the value of the
Benchmark Component Futures Contracts would tend to rise as they
approach expiration. As a result, the Fund may benefit
because it would be selling more expensive contracts and buying
less expensive ones on an ongoing basis. Conversely, in the
event of a sugar futures market where near to expire contracts
trade at a lower price than longer to expire contracts, a situation
referred to as “contango,” then absent the impact of
the overall movement in sugar prices the value of the Benchmark
Component Futures Contracts would tend to decline as they approach
expiration. As a result, the Fund’s total return may be lower
than might otherwise be the case because it would be selling less
expensive contracts and buying more expensive ones. The
impact of backwardation and contango may lead the total return of
the Fund to vary significantly from the total return of other price
references, such as the spot price of sugar. In the event of
a prolonged period of contango, and absent the impact of rising or
falling sugar prices, this could have a significant negative impact
on the Fund’s NAV and total return, and you could incur a
partial or total loss of your investment in the Fund.
Regulation of the commodity interests and commodity markets is
extensive and constantly changing; future regulatory developments
are impossible to predict but may significantly and adversely
affect the Fund.
The
regulation of futures markets, futures contracts and futures
exchanges has historically been comprehensive. The CFTC and the
exchanges are authorized to take extraordinary actions in the event
of a market emergency including, for example, the retroactive
implementation of speculative position limits, increased margin
requirements, the establishment of daily price limits and the
suspension of trading on an exchange or trading
facility.
9
The
regulation of commodity interest transactions in the United States
is a rapidly changing area of law and is subject to ongoing
modification by governmental and judicial action. Congress enacted
the Dodd-Frank Wall Street Reform and Consumer Protection Act (the
“Dodd-Frank Act”) in 2010. As the Dodd-Frank Act
continues to be implemented by the CFTC and the SEC, there is a
possibility of future regulatory changes within the United States
altering, perhaps to a material extent, the nature of an investment
in the Fund, or the ability for the Fund to continue to implement
its investment strategy. In addition, various national governments
outside of the United States have expressed concern regarding the
disruptive effects of speculative trading in the commodities
markets and the need to regulate the derivatives markets in
general. The effect of any future regulatory change on the Fund is
impossible to predict but could be substantial and
adverse.
If you are investing in the Fund for purposes of hedging, you might
be subject to several risks unique to the Fund, and the Fund may
not be appropriate for hedging purposes. The Fund was not designed
for hedging purposes; those using the Fund as a hedge of any kind
do so exclusively at their own risk.
An investment in the Fund may provide you little or no
diversification benefits. Thus, in a declining market, the Fund may
have no gains to offset your losses from other investments, and you
may suffer losses on your investment in the Fund at the same time
you incur losses with respect to other asset
classes.
It
cannot be predicted to what extent the performance of Benchmark
Component Futures Contracts will or will not correlate to the
performance of other broader asset classes such as stocks and
bonds. If the Fund’s performance were to move more
directly with the financial markets, you will obtain little or no
diversification benefits from an investment in the Shares. In
such a case, the Fund may have no gains to offset your losses from
other investments, and you may suffer losses on your investment in
the Fund at the same time you incur losses with respect to other
investments.
Variables such as
drought, floods, weather, embargoes, market disruptions, tariffs
and other political events may have a larger impact on sugar and
sugar interest prices than on traditional securities and broader
financial markets. These additional variables may create
additional investment risks that subject the Fund’s
investments to greater volatility than investments in traditional
securities.
Lower correlation should not be confused with
negative correlation, where the performance of two asset classes
would be opposite of each other. There is no historic
evidence that the spot price of sugar and prices of other financial
assets, such as stocks and bonds, are negatively correlated.
In the absence of negative correlation, the Fund cannot be expected
to be automatically profitable during unfavorable periods for the
stock market, or vice versa.
The Fund is not a registered investment company, so you do not have
the protections of the Investment Company Act of 1940.
The
Fund is not an investment company subject to the Investment Company
Act of 1940. Accordingly, you do not have the protections
afforded by that statute, which, for example, requires investment
companies to have a board of directors with a majority of
disinterested directors and regulates the relationship between the
investment company and its investment manager.
The Sponsor is leanly staffed and relies heavily on key personnel
to manage trading activities.
In
managing and directing the day to day activities and affairs of the
Fund, the Sponsor relies almost entirely on a small number of
individuals, including Mr. Sal Gilbertie, Mr. Steve Kahler and Ms.
Cory Mullen-Rusin. If Mr. Gilbertie, Mr. Kahler or Ms.
Mullen-Rusin were to leave or be unable to carry out their present
responsibilities, it may have an adverse effect on the management
of the Fund. To the extent that the Sponsor establishes
additional commodity pools, even greater demands will be placed on
these individuals.
The Sponsor has limited capital and may be unable to continue to
manage the Fund if it sustains continued losses.
The
Sponsor was formed for the purpose of managing the Trust, including
the Fund, the other Teucrium Funds, and any other series of the
Trust that may be formed in the future, and has been provided with
capital primarily by its principals and a small number of outside
investors. If the Sponsor operates at a loss for an extended
period, its capital will be depleted, and it may be unable to
obtain additional financing necessary to continue its
operations. If the Sponsor were unable to continue to provide
services to the Fund, the Fund would be terminated if a replacement
sponsor could not be found. Any expenses related to the operation
of the Fund would need to be paid by the Fund at the time of
termination.
10
Position limits, accountability levels and daily price fluctuation
limits set by the CFTC and the exchanges have the potential to
cause tracking error, which could cause the price of Shares to
substantially vary from the Benchmark and prevent you from being
able to effectively use the Fund as a way to hedge against sugar
related losses or as a way to indirectly invest in
sugar.
The
CFTC and U.S. designated contract markets, such as the ICE Futures
have established position limits and accountability levels on the
maximum net long or net short Sugar Futures Contracts that any
person or group of persons under common trading control may hold,
own or control. For example, the current ICE Futures
established position limit level for investments in Sugar No. 11
Futures Contracts for the spot month, which is defined as on and
after the second business day following the expiration of the
regular option contract traded on the expiring futures contract, is
5,000, the accountability level for investments in ICE Sugar No. 11
Futures Contracts for any one month is 10,000, and the
accountability level for all combined months is 15,000. While
accountability levels are not fixed ceilings, they are thresholds
above which the exchange may exercise greater scrutiny and control
over an investor, including limiting an investor to holding no more
Sugar No. 11 Futures Contracts than the amount established by the
accountability level. The Fund does not intend to invest in
Sugar Futures Contracts in excess of any applicable accountability
levels.
Accountability
levels differ from position limits in that they do not represent a
fixed ceiling, but rather a threshold above which a futures
exchange may exercise greater scrutiny and control over an
investor’s positions. If a Fund were to exceed an applicable
accountability level for investments in futures contracts, the
exchange will monitor the Fund’s exposure and may ask for
further information on its activities, including the total size of
all positions, investment and trading strategy, and the extent of
liquidity resources of the Fund. If deemed necessary by the
exchange, the Fund could be ordered to reduce its aggregate net position back to the accountability
level
In
addition to position limits and accountability 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. Currently, ICE Futures has not imposed maximum daily price
fluctuation limits on Sugar Futures Contracts.
On
December 16, 2016, as mandated by the Dodd-Frank Act, the CFTC
adopted a final rule that aggregate all positions, for purposes of
position limits; such positions include futures contracts,
futures-equivalent positions, over the counter swaps and options
(i.e., contracts that are not traded on exchanges). These
aggregation requirements became effective on February 14, 2017 and
could limit the Fund’s ability to establish positions in
commodity over the counter instruments if the assets of the Fund
were to grow substantially.
On January 30, 2020, the CFTC
re-proposed regulations that would establish revised specific
limits on speculative positions in futures contracts, option
contracts and swaps on 25 agricultural, energy and metals
commodities (the “Proposed Position Limit
Rules”). In general, the Proposed Position Limit
Rules, do not appear to have a substantial or adverse effect on the
Fund. However, if the total net assets of the Fund were to increase
significantly from current levels, the Position Limit Rules as
proposed could negatively impact the ability of the Fund to meet
its respective investment objectives through limits that may
inhibit the Sponsor’s ability to sell additional Creation
Baskets of the Fund. However, it is not expected that the Fund will
reach asset levels that would cause these position limits to be
reached in the near future.
There are technical and fundamental risks inherent in the trading
system the Sponsor intends to employ.
The
Sponsor’s trading system is quantitative in nature and it is
possible that the Sponsor may make errors. Any errors or
imperfections in the Sponsor’s trading system’s
quantitative models, or in the data on which they are based, could
adversely affect the Sponsor’s effective use of such trading
systems. It is not possible or practicable for the Sponsor’s
trading system to factor all relevant, available data into
quantitative systems and/or trading decision. There is no guarantee
that the Sponsor will use any specific data or type of data in
making trading decisions on behalf of the Fund, nor is there any
guarantee that the data actually utilized in making trading
decisions on behalf of the Fund will be the most accurate data or
free from errors. In addition, it is possible that a computer or
software program may malfunction and cause an error in
computation.
The Fund and the Sponsor may have conflicts of interest, which may
cause them to favor their own interests to your
detriment.
The
Fund and the Sponsor may have inherent conflicts to the extent the
Sponsor attempts to maintain the Fund’s asset size in order
to preserve its fee income and this may not always be consistent
with the Fund’s objective of having the value of its
Shares’ NAV track changes in the Benchmark. The
Sponsor’s officers and employees do not devote their time
exclusively to the Fund. These persons may be directors,
officers or employees of other entities. They could have a
conflict between their responsibilities to the Fund and to those
other entities.
11
In
addition, the Sponsor’s principals, officers or employees may
trade securities and futures and related contracts for their own
accounts. A conflict of interest may exist if their trades
are in the same markets and occur at the same time as the Fund
trades using the clearing broker to be used by the Fund. A
potential conflict also may occur if the Sponsor’s
principals, officers or employees trade their accounts more
aggressively or take positions in their accounts that are opposite,
or ahead of, the positions taken by the Fund.
The
Sponsor has sole current authority to manage the investments and
operations of the Fund, and this may allow it to act in a way that
furthers its own interests and in conflict with your best
interests, including the authority of the Sponsor to allocate
expenses to and between the Funds. Shareholders have very
limited voting rights, which will limit the ability to influence
matters such as amendment of the Trust Agreement, changes in the
Fund’s basic investment policies, dissolution of the Fund, or
the sale or distribution of the Fund’s assets.
Shareholders have only very limited voting rights and generally
will not have the power to replace the Sponsor. Shareholders
will not participate in the management of the Fund and do not
control the Sponsor so they will not have influence over basic
matters that affect the Fund.
Shareholders will
have very limited voting rights with respect to the Fund’s
affairs. Shareholders may elect a replacement sponsor only if
the current Sponsor resigns voluntarily or loses its corporate
charter. Shareholders will not be permitted to participate in
the management or control of the Fund or the conduct of its
business. Shareholders must therefore rely upon the duties
and judgment of the Sponsor to manage the Fund’s
affairs.
The Sponsor may manage a large amount of assets and this could
affect the Fund’s ability to trade profitably.
Increases in assets under management may affect
trading decisions. While the Fund’s assets are
currently at manageable levels, the Sponsor does not intend to
limit the amount of Fund assets. The more assets the Sponsor
manages, the more difficult it may be for it to trade profitably
because of the difficulty of trading larger positions without
adversely affecting prices and performance and of managing risk
associated with larger positions.
The liability of the Sponsor and the Trustee are limited, and the
value of the Shares will be adversely affected if the Fund is
required to indemnify the Trustee or the Sponsor.
Under
the Trust Agreement, the Trustee and the Sponsor are not liable,
and have the right to be indemnified, for any liability or expense
incurred absent gross negligence or willful misconduct on the part
of the Trustee or Sponsor, as the case may be. That means the
Sponsor may require the assets of the Fund to be sold in order to
cover losses or liability suffered by the Sponsor or by the
Trustee. Any sale of that kind would reduce the NAV of the
Fund and the value of its Shares.
Although the Shares of the Fund are limited liability investments,
certain circumstances such as bankruptcy could increase a
Shareholder’s liability.
The
Shares of the Fund are limited liability investments; Shareholders
may not lose more than the amount that they invest plus any profits
recognized on their investment. However, Shareholders could
be required, as a matter of bankruptcy law, to return to the estate
of the Fund any distribution they received at a time when the Fund
was in fact insolvent or that was made in violation of its Trust
Agreement.
You cannot be assured of the Sponsor’s continued services,
and discontinuance may be detrimental to the Fund.
You
cannot be assured that the Sponsor will be willing or able to
continue to service the Fund for any length of time. The
Sponsor was formed for the purpose of sponsoring the Fund and other
commodity pools and has limited financial resources and no
significant source of income apart from its management fees from
such commodity pools to support its continued service for the
Fund. If the Sponsor discontinues its activities on behalf of
the Fund or another series of the Trust, the Fund may be adversely
affected. If the Sponsor’s registrations with the CFTC
or memberships in the NFA were revoked or suspended, the Sponsor
would no longer be able to provide services to the
Fund.
12
The Fund could terminate at any time and cause the liquidation and
potential loss of your investment and could upset the overall
maturity and timing of your investment portfolio.
The
Fund may terminate at any time, regardless of whether the Fund has
incurred losses, subject to the terms of the Trust Agreement.
For example, the dissolution or resignation of the Sponsor would
cause the Trust to terminate unless shareholders holding a majority
of the outstanding shares of the Trust, voting together as a single
class, elect within 90 days of the event to continue the Trust and
appoint a successor Sponsor. In addition, the Sponsor may
terminate the Fund if it determines that the Fund’s aggregate
net assets in relation to its operating expenses make the continued
operation of the Fund unreasonable or imprudent. As of the
date of this prospectus, the Fund pays the fees, costs, and
expenses of its operations. If the Sponsor and the Fund are unable
to raise sufficient funds so that the Fund’s expenses are
reasonable in relation to its NAV, the Fund may be forced to
terminate, and investors may lose all or part of their investment.
Any expenses related to the operation of the Fund would need to be
paid by the Fund at the time of termination.
However, no level
of losses will require the Sponsor to terminate the Fund. The
Fund’s termination would result in the liquidation of its
investments and the distribution of its remaining assets to the
Shareholders on a pro rata basis in accordance with their Shares,
and the Fund could incur losses in liquidating its investments in
connection with a termination. Termination could also
negatively affect the overall maturity and timing of your
investment portfolio.
As a Shareholder, you will not have the rights enjoyed by investors
in certain other types of entities.
As
interests in separate series of a Delaware statutory trust, the
Shares do not involve the rights normally associated with the
ownership of shares of a corporation (including, for example, the
right to bring shareholder oppression and derivative
actions). In addition, the Shares have limited voting and
distribution rights (for example, Shareholders do not have the
right to elect directors, as the Trust does not have a board of
directors, and generally will not receive regular distributions of
the net income and capital gains earned by the Fund). The
Fund is also not subject to certain investor protection provisions
of the Sarbanes Oxley Act of 2002 and the NYSE Arca governance
rules (for example, audit committee requirements).
A court could potentially conclude that the assets and liabilities
of the Fund are not segregated from those of another series of the
Trust, thereby potentially exposing assets in the Fund to the
liabilities of another series.
The
Fund is a series of a Delaware statutory trust and not itself a
legal entity separate from the other Teucrium Funds. The
Delaware Statutory Trust Act provides that if certain provisions
are included in the formation and governing documents of a
statutory trust organized in series and if separate and distinct
records are maintained for any series and the assets associated
with that series are held in separate and distinct records and are
accounted for in such separate and distinct records separately from
the other assets of the statutory trust, or any series thereof,
then the debts, liabilities, obligations and expenses incurred by a
particular series are enforceable against the assets of such series
only, and not against the assets of the statutory trust generally
or any other series thereof. Conversely, none of the debts,
liabilities, obligations and expenses incurred with respect to any
other series thereof is enforceable against the assets of such
series. The Sponsor is not aware of any court case that has
interpreted this inter-series limitation on liability or provided
any guidance as to what is required for compliance. The
Sponsor intends to maintain separate and distinct records for the
Fund and account for the Fund separately from any other Trust
series, but it is possible a court could conclude that the methods
used do not satisfy the Delaware Statutory Trust Act, which would
potentially expose assets in the Fund to the liabilities of one or
more of the Teucrium Funds and/or any other Trust series created in
the future.
The Sponsor and the Trustee are not obligated to prosecute any
action, suit or other proceeding in respect of any Fund
property.
Neither
the Sponsor nor the Trustee is obligated to, although each may in
its respective discretion, prosecute any action, suit or other
proceeding in respect of any Fund property. The Trust
Agreement does not confer upon Shareholders the right to prosecute
any such action, suit or other proceeding.
The Fund does not expect to make cash distributions.
The
Sponsor intends to re-invest any income and realized gains of the
Fund in additional Benchmark Component Futures Contracts or cash
and cash equivalents rather than distributing cash to
Shareholders. Therefore, unlike mutual funds, commodity pools
or other investment pools that generally distribute income and
gains to their investors, the Fund generally will not distribute
cash to Shareholders. You should not invest in the Fund if
you will need cash distributions from the Fund to pay taxes on your
share of income and gains of the Fund, if any, or for any other
reason. Although the Fund does not intend to make cash
distributions, it reserves the right to do so in the
Sponsor’s sole discretion, in certain situations, including
for example, if the income earned from its investments held
directly or posted as margin may reach levels that merit
distribution, e.g., at levels where such income is not necessary to
support its underlying investments in Benchmark Component Futures
Contracts and investors adversely react to being taxed on such
income without receiving distributions that could be used to pay
such tax. Cash distributions may be made in these and similar
instances.
13
There is a risk that the Fund will not have sufficient total net
assets to compensate for the fees and expenses that it must pay and
as such the expense ratio of the Fund may be higher than that filed
in this document.
The Fund pays management fees at an annual rate
of 1.00% of its average net assets, brokerage commissions and
various other expenses from its ongoing operations (e.g., fees of
the Administrator, Trustee and Distributor), resulting in a total
estimated net expense ratio of approximately
2.50% of net assets, net of the
expenses waived by the Sponsor. These fees and expenses must be
paid in all events, regardless of the Fund’s total net
assets.
The Fund may incur higher fees and expenses upon renewing existing
or entering into new contractual relationships.
The
arrangements between clearing brokers and counterparties on the one
hand and the Fund on the other generally are terminable by the
clearing brokers or counterparty upon notice to the Fund. In
addition, the agreements between the Fund and its third-party
service providers, such as the Distributor and the Custodian, are
generally terminable at specified intervals. Upon
termination, the Sponsor may be required to renegotiate or make
other arrangements for obtaining similar services if the Fund
intends to continue to operate. Comparable services from
another party may not be available, or even if available, these
services may not be available on the terms as favorable as those of
the expired or terminated arrangements.
The Fund may experience a higher breakeven if interest rates
decline.
The
Fund earns interest on cash balances available for investment. If
actual interest rates earned were to continue to fall and if the
Sponsor were not able to waive expenses sufficient to cover the
deficit, the breakeven estimated by the Fund in this prospectus
could be higher.
The Fund is not actively managed.
The
Fund is not actively managed and is designed to track a benchmark,
regardless of whether the price of the Benchmark Component Futures
Contracts is flat, declining or rising. As a result, the Fund may
sustain losses that may have been avoidable if the Fund was
actively managed.
The Net Asset Value calculation of the Fund may be overstated or
understated due to the valuation method employed when a settlement
price is not available on the date of net asset value
calculation.
The
Fund’s NAV includes, in part, any unrealized profits or
losses on open swap agreements, futures or forward contracts.
Under normal circumstances, the NAV reflects the quoted ICE Futures
settlement price of open futures contracts on the date when the NAV
is being calculated. In instances when the quoted settlement
price of futures contracts traded on an exchange may not be
reflective of fair value based on market condition, generally due
to the operation of daily limits or other rules of the exchange or
otherwise the NAV may not reflect the fair value of open futures
contracts on such date. For purposes of financial statements and
reports, the Sponsor will recalculate the NAV where necessary to
reflect the “fair value” of a Futures Contract when the
Futures Contract closes at its price fluctuation limit for the
day.
An unanticipated number of redemption requests during a short
period of time could have an adverse effect on the NAV of the
Fund.
If a
substantial number of requests for redemption of Redemption Baskets
are received by the Fund during a relatively short period of time,
the Fund may not be able to satisfy the requests from the
Fund’s assets not committed to trading. As a consequence, it
could be necessary to liquidate the Fund’s trading positions
before the time that its trading strategies would otherwise call
for liquidation, which may result in losses.
14
Fund assets may be depleted if investment performance does not
exceed fees.
In
addition to certain fees paid to the Fund’s service
providers, the Fund pays the Sponsor a fee of 1.00% of asset under
management per annum, regardless of Fund performance. Over time,
the Fund’s assets could be depleted if investment performance
does not exceed such fees.
The liquidity of the Shares may be affected by the withdrawal from
participation of Authorized Purchasers, market makers, or other
significant secondary-market participants which could adversely
affect the market price of the Shares.
Only an Authorized Purchaser
may engage in creation or redemption transactions directly with the
Fund. The Fund has a limited number of institutions that act as
Authorized Purchasers. To the extent that these institutions exit
the business or are unable to proceed with creation and/or
redemption orders with respect to the Fund and no other Authorized
Purchaser is able to step forward to create or redeem Creation
Units, Fund shares may trade at a discount to NAV and possibly face
trading halts and/or delisting. In addition, a decision by a market
maker, lead market maker, or other large investor to cease
activities for the Fund or a decision by a secondary market
participant to sell a significant number of the Fund’s Shares
could adversely affect liquidity, the spread between the bid and
ask quotes, and potentially the price of the Shares. The Sponsor
can make no guarantees that participation by Authorized Purchasers
or market makers will continue.
If a minimum number of Shares is outstanding, market makers may be
less willing to purchase Shares in the secondary market which may
limit your ability to sell Shares.
There is a minimum number of baskets and
associated Shares specified for the Fund. If the Fund experienced
redemptions that caused the number of Shares outstanding to
decrease to the minimum level of Shares required to be outstanding,
until the minimum number of Shares is again exceeded through the
purchase of a new Creation Basket, there can be no more redemptions
by an Authorized Purchaser. In such case, market makers may be less
willing to purchase Shares from investors in the secondary market,
which may in turn limit the ability of Shareholders of the Fund to
sell their Shares in the secondary market. These minimum levels for
the Fund are 50,000 Shares representing two baskets. The minimum
level of Shares specified for the Fund is subject to change. As of
July 31, 2020, there were 1,625,004 Shares outstanding. (The
current number of Shares outstanding is posted daily on our
website, www.teucrium.com
.)
The postponement, suspension or rejection of redemption orders
could adversely affect a shareholder redeeming their Shares in the
Fund.
The
resulting delay of any postponement, suspension or rejection may
adversely affect the value of the Shareholders’ redemption
proceeds if the NAV of the Fund declines during the period of
delay.
The failure or bankruptcy of a clearing broker could result in
substantial losses for the Fund; the clearing broker could be
subject to proceedings that impair its ability to execute the
Fund’s trades.
Under
CFTC regulations, a clearing broker with respect to the
Fund’s exchange-traded sugar interests must maintain
customers’ assets in a bulk segregated account. If a
clearing broker fails to do so or is unable to satisfy a
substantial deficit in a customer account, its other customers may
be subject to risk of a substantial loss of their funds in the
event of that clearing broker’s bankruptcy. In that
event, the clearing broker’s customers, such as the Fund, are
entitled to recover, even in respect of property specifically
traceable to them, only a proportional share of all property
available for distribution to all of that clearing broker’s
customers. The Fund also may be subject to the risk of the
failure of, or delay in performance by, any exchanges and markets
and their clearing organizations, if any, on which sugar interests
are traded.
From
time to time, the clearing brokers may be subject to legal or
regulatory proceedings in the ordinary course of their
business. A clearing broker’s involvement in costly or
time-consuming legal proceedings may divert financial resources or
personnel away from the clearing broker’s trading operations,
which could impair the clearing broker’s ability to
successfully execute and clear the Fund’s
trades.
The failure or insolvency of the Fund’s Custodian or other
financial institution in which the Fund has deposits could result
in a substantial loss of the Fund’s assets.
As
noted above, the vast majority of the Fund’s assets are held
in cash and cash equivalents with the Custodian and other financial
institutions, if applicable. The insolvency of the Custodian and
any financial institution in which the Fund holds cash and cash
equivalents could result in a complete loss of the Fund’s
assets.
15
Third parties may infringe upon or otherwise violate intellectual
property rights or assert that the Sponsor has infringed or
otherwise violated their intellectual property rights, which may
result in significant costs, litigation, and diverted attention of
Sponsor’s management.
Third
parties may assert that the Sponsor has infringed or otherwise
violated their intellectual property rights. Third parties
may independently develop business methods, trademarks or
proprietary software and other technology similar to that of the
Sponsor and claim that the Sponsor has violated their intellectual
property rights, including their copyrights, trademark rights,
trade names, trade secrets and patent rights. As a result,
the Sponsor may have to litigate in the future to determine the
validity and scope of other parties’ proprietary rights or
defend itself against claims that it has infringed or otherwise
violated other parties’ rights. Any litigation of this
type, even if the Sponsor is successful and regardless of the
merits, may result in significant costs, divert resources from the
Fund, or require the Sponsor to change its proprietary software and
other technology or enter into royalty or licensing
agreements.
The
Sponsor has a patent on certain business methods and procedures
used with respect to the Fund. The Sponsor utilizes certain
proprietary software. Any unauthorized use of such
proprietary software business methods and/or procedures could
adversely affect the competitive advantage of the Sponsor or the
Fund and/or require the Sponsor to take legal action to protect its
rights.
The Fund may experience substantial losses on transactions if the
computer or communications system fails.
The Fund’s trading activities depend on the
integrity and performance of the computer and communications
systems supporting them. Extraordinary transaction volume,
hardware or software failure, power or telecommunications failure,
a natural disaster, cyber-attack or other catastrophe could cause
the computer systems to operate at an unacceptably slow speed or
even fail. Any significant degradation or failure of the
systems that the Sponsor uses to gather and analyze information,
enter orders, process data, monitor risk levels and otherwise
engage in trading activities may result in substantial losses on
transactions, liability to other parties, lost profit
opportunities, damages to the Sponsor’s and Fund’s
reputations, increased operational expenses and diversion of
technical resources.
If the computer and communications systems are not upgraded when
necessary, the Fund’s financial condition could be
harmed.
The
development of complex computer and communications systems and new
technologies may render the existing computer and communications
systems supporting the Fund’s trading activities
obsolete. In addition, these computer and communications
systems must be compatible with those of third parties, such as the
systems of exchanges, clearing brokers and the executing
brokers. As a result, if these third parties upgrade their
systems, the Sponsor will need to make corresponding upgrades to
effectively continue its trading activities. The Sponsor may have
limited financial resources for these upgrades or other
technological changes. The Fund’s future success may depend
on the Sponsor’s ability to respond to changing technologies
on a timely and cost-effective basis.
The Fund depends on the reliable performance of the computer and
communications systems of third parties, such as brokers and
futures exchanges, and may experience substantial losses on
transactions if they fail.
The
Fund depends on the proper and timely function of complex computer
and communications systems maintained and operated by the futures
exchanges, brokers and other data providers that the Sponsor uses
to conduct trading activities. Failure or inadequate
performance of any of these systems could adversely affect the
Sponsor’s ability to complete transactions, including its
ability to close out positions, and result in lost profit
opportunities and significant losses on commodity interest
transactions. This could have a material adverse effect on
revenues and materially reduce the Fund’s available
capital. For example, unavailability of price quotations from
third parties may make it difficult or impossible for the Sponsor
to conduct trading activities so that the Fund will closely track
the Benchmark. Unavailability of records from brokerage firms
may make it difficult or impossible for the Sponsor to accurately
determine which transactions have been executed or the details,
including price and time, of any transaction executed. This
unavailability of information also may make it difficult or
impossible for the Sponsor to reconcile its records of transactions
with those of another party or to accomplish settlement of executed
transactions.
The occurrence of a severe weather event, natural disaster,
terrorist attack, outbreak or public health emergency as declared
by the World Health Organization, the continuation or expansion of
war or other hostilities, or a prolonged government shutdown may
have significant adverse effects on the Fund and its investments
and alter current assumptions and expectations.
The
operations of the Fund, the exchanges, brokers and counterparties
with which the Fund does business, and the markets in which the
Fund does business could be severely disrupted in the event of a
severe weather event, natural disaster, major terrorist attack,
cyber-attack, data breach, outbreak or public health emergency as
declared by the World Health Organization (such as the recent
pandemic spread of the novel coronavirus known as COVID-19), or the
continuation or expansion of war or other hostilities. Global
terrorist attacks, anti-terrorism initiatives, and political
unrest, as well as the adverse impact the COVID-19 pandemic will
have on the global and U.S. markets and economy, continue to fuel
this concern. For example, the COVID-19 pandemic may adversely
impact the level of services currently provided by the U.S.
government, could weaken the U.S. economy, interfere with the
commodities markets that rely upon data published by U.S. federal
government agencies, and prevent the Funds from receiving necessary
regulatory review or approvals. The types of events discussed
above, including the COVID-19 pandemic, are highly disruptive to
economies and markets and have recently led, and may continue to
lead, to increased market volatility and significant market
losses.
16
More
generally, a climate of uncertainty and panic, including the
contagion of the COVID-19 virus and other infectious viruses or
diseases, may adversely affect global, regional, and local
economies and reduce the availability of potential investment
opportunities, and increases the difficulty of performing due
diligence and modeling market conditions, potentially reducing the
accuracy of financial projections. Under these circumstances, the
Fund may have difficulty achieving its investment objective which
may adversely impact performance. Further, such events can be
highly disruptive to economies and markets, significantly disrupt
the operations of individual companies (including, but not limited
to, the Fund’s Sponsor and third party service providers),
sectors, industries, markets, securities and commodity exchanges,
currencies, interest and inflation rates, credit ratings, investor
sentiment, and other factors affecting the value of the Fund's
investments. These factors could cause substantial market
volatility, exchange trading suspensions and closures that could
impact the ability of the Fund to complete redemptions and
otherwise affect Fund performance and Fund trading in the secondary
market. A widespread crisis may also affect the global economy in
ways that cannot necessarily be foreseen at the current time. How
long such events will last and whether they will continue or recur
cannot be predicted. Impacts from these events could have
significant impact on the Fund’s performance, resulting in
losses to your investment. The global economic shocks being
experienced as of the date hereof may cause the underlying
assumptions and expectations of the Fund to become outdated quickly
or inaccurate, resulting in significant losses.
Failures or breaches of electronic systems could disrupt the
Fund’s trading activity and materially affect the
Fund’s profitability.
Failures or
breaches of the electronic systems of the Fund, the Sponsor, the
Custodian or other financial institutions in which the Fund
invests, or the Fund’s other service providers, market
makers, Authorized Purchasers, NYSE Arca, exchanges on which Sugar
Futures Contracts or other sugar interests are traded or cleared,
or counterparties have the ability to cause disruptions and
negatively impact the Fund’s business operations, potentially
resulting in financial losses to the Fund and its shareholders.
Such failures or breaches may include intentional cyber-attacks
that may result in an unauthorized party gaining access to
electronic systems in order to misappropriate the Fund’s
assets or sensitive information. While the Fund has established
business continuity plans and risk management systems seeking to
address system breaches or failures, there are inherent limitations
in such plans and systems. Furthermore, the Fund cannot control the
cyber security plans and systems of the Custodian or other
financial institutions in which the Fund invests, or the
Fund’s other service providers, market makers, Authorized
Purchasers, NYSE Arca, exchanges on which Sugar Futures Contracts
or other sugar interests are traded or cleared, or
counterparties.
An investment in a Fund faces numerous risks from its shares being
traded in the secondary market, any of which may lead to the
Fund’s shares trading at a premium or discount to
NAV.
Although the Fund’s shares are
listed for trading on the NYSE Arca, there can be no assurance that
an active trading market for such shares will develop or be
maintained. Trading in the Fund’s shares may be halted due to
market conditions or for reasons that, in the view of the NYSE
Arca, make trading in shares inadvisable. There can be no assurance
that the requirements of the NYSE Arca necessary to maintain the
listing of the Fund will continue to be met or will remain
unchanged or that the shares will trade with any volume, or at all.
The NAV of the Fund’s shares will generally fluctuate with
changes in the market value of the Fund’s portfolio holdings.
The market prices of shares will generally fluctuate in accordance
with changes in the Fund’s NAV and supply and demand of
shares on the NYSE Arca. It cannot be predicted whether the
Fund’s shares will trade below, at or above their NAV.
Investors buying or selling Fund shares in the secondary market
will pay brokerage commissions or other charges imposed by brokers
as determined by that broker. Brokerage commissions are often a
fixed amount and may be a significant proportional cost for
investors seeking to buy or sell relatively small amounts of
shares.
The NYSE Arca may halt trading in the Shares which would adversely
impact your ability to sell Shares.
Trading
in Shares of the Fund may be halted due to market conditions or, in
light of NYSE Arca rules and procedures, for reasons that, in view
of the NYSE Arca, make trading in Shares inadvisable. In addition,
trading is subject to trading halts caused by extraordinary market
volatility pursuant to “circuit breaker” rules that
require trading to be halted for a specified period based on a
specified market decline. There can be no assurance that the
requirements necessary to maintain the listing of the Shares will
continue to be met or will remain unchanged. The Fund will be
terminated if its Shares are delisted.
The lack of active trading markets for the Shares of the Fund may
result in losses on your investment in the Fund at the time of
disposition of your Shares.
Although the Shares
of the Fund will be listed and traded on the NYSE Arca, there can
be no guarantee that an active trading market for the Shares of the
Fund will be maintained. If you need to sell your Shares at a time
when no active market for them exists, the price you receive for
your Shares, assuming that you are able to sell them, likely will
be lower than what you would receive if an active market did
exist.
Risk of Leverage and
Volatility
The Fund may become leveraged and may result in losses on all or
substantially all of your investment if the Fund’s trading
positions suddenly turn unprofitable.
Commodity
pools’ trading positions in futures contracts or other
commodity interests are typically required to be secured by the
deposit of margin funds that represent only a small percentage of a
futures contract’s (or other commodity interest’s)
entire market value. This feature permits commodity pools to
“leverage” their assets by purchasing or selling
futures contracts (or other commodity interests) with an aggregate
notional amount in excess of the commodity pool’s assets.
While this leverage can increase a pool’s profits, relatively
small adverse movements in the price of the pool’s commodity
interests can cause significant losses to the pool. While the
Sponsor does not intend to leverage the Fund’s assets, it is
not prohibited from doing so under the Trust Agreement. If the
Sponsor was to cause or permit the Fund to become leveraged, you
could lose all or substantially all of your investment if the
Fund’s trading positions suddenly turn
unprofitable.
17
The price of sugar can be volatile which could cause large
fluctuations in the price of Shares.
As
discussed in more detail above, price movements for sugar are
influenced by, among other things, weather conditions, crop
disease, crop failure, transportation and storage difficulties,
production decisions, various planting, growing and harvesting
problems, governmental policies, various economic and monetary
events, changing demand, and seasonal fluctuations in supply.
More generally, commodity prices may be influenced by economic and
monetary events such as changes in interest rates, changes in
balances of payments and trade, U.S. and international inflation
rates, currency valuations and devaluations, U.S. and international
economic events, and changes in the philosophies and emotions of
market participants. Because the Fund invests primarily in
interests in a single commodity, it is not a diversified investment
vehicle, and therefore may be subject to greater volatility than a
diversified portfolio of stocks or bonds or a more diversified
commodity pool.
Over the counter Contract
Risk
Over the counter transactions are subject to changing
regulation.
A
portion of the Fund’s assets may be used to trade over the
counter sugar interests, such as forward contracts or swaps. The
markets for over the counter contracts will continue to rely upon
the integrity of market participants in lieu of the additional
regulation imposed by the CFTC on participants in the futures
markets. To date, the forward markets have been largely
unregulated, except for anti-manipulation and anti-fraud
provisions, forward contracts have been executed bi-laterally and,
in general historically, forward contracts have not been cleared or
guaranteed by a third party. While increased regulation of over the
counter commodity interests is likely to result from changes that
are required to be effectuated by the Dodd-Frank Act, there is no
guarantee that such increased regulation will be effective to
reduce these risks.
The Fund will be subject to credit risk with respect to
counterparties to over the counter contracts entered into by the
Fund.
The
Fund faces the risk of non-performance by the counterparties to the
over the counter contracts. Unlike in futures contracts, the
counterparty to these contracts is generally a single bank or other
financial institution, rather than a clearing organization backed
by a group of financial institutions. As a result, there will
be greater counterparty credit risk in these transactions. A
counterparty may not be able to meet its obligations to the Fund,
in which case the Fund could suffer significant losses on these
contracts.
If a
counterparty becomes bankrupt or otherwise fails to perform its
obligations due to financial difficulties, the Fund may experience
significant delays in obtaining any recovery in a bankruptcy or
other reorganization proceeding. During any such period, the
Fund may have difficulty in determining the value of its contracts
with the counterparty, which in turn could result in the
overstatement or understatement of the Fund’s NAV. The
Fund may eventually obtain only limited recovery or no recovery in
such circumstances.
The Fund may be subject to liquidity risk with respect to over the
counter contracts.
Over
the counter contracts may have terms that make them less marketable
than Sugar Futures Contracts. Over the counter contracts are less
marketable because they are not traded on an exchange, do not have
uniform terms and conditions, and are entered into based upon the
creditworthiness of the parties and the availability of credit
support, such as collateral, and in general, they are not
transferable without the consent of the counterparty. These
conditions make such contracts less liquid than standardized
futures contracts traded on a commodities exchange and diminish the
ability to realize the full value of such contracts. In addition,
even if collateral is used to reduce counterparty credit risk,
sudden changes in the value of over the counter transactions may
leave a party open to financial risk due to a counterparty default
since the collateral held may not cover a party’s exposure on
the transaction in such situations.
In
general, valuing OTC derivatives is less certain than valuing
actively traded financial instruments such as exchange traded
futures contracts and securities because the price and terms on
which such OTC derivatives are entered into or can be terminated
are individually negotiated, and those prices and terms may not
reflect the best price or terms available from other sources. In
addition, while market makers and dealers generally quote
indicative prices or terms for entering into or terminating OTC
contracts, they typically are not contractually obligated to do so,
particularly if they are not a party to the transaction. As a
result, it may be difficult to obtain an independent value for an
outstanding OTC derivatives transaction.
The
foregoing liquidity risks could impact adversely affect the
Fund’s ability to meet its investment objective.
18
In
addition, regulations adopted by global prudential regulators that
are now in effect require certain prudentially regulated entities
and certain of their affiliates and subsidiaries (including swap
dealers) to include in their derivatives contracts and certain
other financial contracts, terms that delay or restrict the rights
of counterparties (such as the Funds) to terminate such contracts,
foreclose upon collateral, exercise other default rights or
restrict transfers of credit support in the event that the
prudentially regulated entity and/or its affiliates are subject to
certain types of resolution or insolvency proceedings. Similar
regulations and laws have been adopted in non-US jurisdictions that
may apply to a Fund’s counterparties located in those
jurisdictions. It is possible that these new requirements, as well
as potential additional related government regulation, could
adversely affect a Fund’s ability to terminate existing
derivatives contracts, exercise default rights or satisfy
obligations owed to it with collateral received under such
contracts.
Trading in international markets would expose the Fund to credit
and regulatory risk.
A
significant portion of the Sugar Futures Contracts entered into by
the Fund are traded on United States exchanges including ICE
Futures. However, a portion of the Fund’s trades may
take place on markets or exchanges outside the United States.
Some non-U.S. markets present risks because they are not subject to
the same degree of regulation as their U.S. counterparts.
None of the CFTC, NFA, or any domestic exchange regulates
activities of any foreign boards of trade or exchanges, including
the execution, delivery and clearing of transactions, has the power
to compel enforcement of the rules of a foreign board of trade or
exchange or of any applicable non-U.S. laws. Similarly, the
rights of market participants, such as the Fund, in the event of
the insolvency or bankruptcy of a non-U.S. market or broker are
also likely to be more limited than in the case of U.S. markets or
brokers. As a result, in these markets, the Fund has less
legal and regulatory protection than it does when it trades
domestically. Currently the Fund does not place trades on any
markets or exchanges outside of the United States and does not
anticipate doing so in the foreseeable future.
In some
of these non-U.S. markets, the performance on a futures contract is
the responsibility of the counterparty and is not backed by an
exchange or clearing corporation and therefore exposes the Fund to
credit risk. Additionally, trading on non-U.S. exchanges is
subject to the risks presented by exchange controls, expropriation,
increased tax burdens and exposure to local economic declines and
political instability. An adverse development with respect to
any of these variables could reduce the profit or increase the loss
earned on trades in the affected international
markets.
International trading activities subject the Fund to foreign
exchange risk.
The
price of any non-U.S. sugar interest and, therefore, the potential
profit and loss on such investment, may be affected by any variance
in the foreign exchange rate between the time the order is placed
and the time it is liquidated, offset or exercised. However, a
portion of the trades for the Fund may take place in markets and on
exchanges outside of the U.S. Some non-U.S. markets present risks
because they are not subject to the same degree of regulation as
their U.S. counterparts. As a result, changes in the value of
the local currency relative to the U.S. dollar may cause losses to
the Fund even if the contract is profitable.
The
CFTC’s implementation of its regulations under the Dodd-Frank
Act may further affect the Fund’s ability to enter into
foreign exchange contracts and to hedge its exposure to foreign
exchange losses.
The Fund’s international trading could expose it to losses
resulting from non-U.S. exchanges that are less developed or less
reliable than United States exchanges.
Some
non-U.S. exchanges also may be in a more developmental stage so
that prior price histories may not be indicative of current price
dynamics. In addition, the Fund may not have the same access
to certain positions on foreign trading exchanges as do local
traders, and the historical market data on which the Sponsor bases
its strategies may not be as reliable or accessible as it is for
U.S. exchanges.
Please
refer to “U.S. Federal Income Tax Considerations” for
information regarding the U.S. federal income tax consequences of
the purchase, ownership and disposition of Shares.
Your tax liability from holding Shares may exceed the amount of
distributions, if any, on your Shares.
Cash or
property will be distributed by the Fund at the sole discretion of
the Sponsor, and the Sponsor currently does not intend to make cash
or other distributions with respect to Shares. You will be
required to pay U.S. federal income tax and, in some cases, state,
local, or foreign income tax, on your allocable share of the
Fund’s taxable income, without regard to whether you receive
distributions or the amount of any distributions. Therefore,
the tax liability resulting from your ownership of Shares may
exceed the amount of cash or value of property (if any)
distributed.
19
Your allocable share of income or loss for U.S. federal income tax
purposes may differ from your economic income or loss on your
Shares.
Due to
the application of the assumptions and conventions applied by the
Fund in making allocations for U.S. federal income tax purposes and
other factors, your allocable share of the Fund’s income,
gain, deduction or loss may be different than your economic profit
or loss from your Shares for a taxable year. This difference
could be temporary or permanent and, if permanent, could result in
your being taxed on amounts in excess of your economic
income.
Items of income, gain, deduction, loss and credit with respect to
Shares could be reallocated (or for taxable years beginning after
December 31, 2017, the Fund itself could be liable for U.S. federal
income tax along with any interest or penalties) if the IRS does
not accept the assumptions and conventions applied by the Fund in
allocating those items, with potential adverse tax consequences for
you.
The
Fund is treated as a partnership for United States federal income
tax purposes. The U.S. tax rules pertaining to entities taxed as
partnerships are complex and their application to publicly traded
partnerships such as the Fund, is in many respects uncertain. The
Fund applies certain assumptions and conventions in an attempt to
comply with the intent of the applicable rules and to report
taxable income, gains, deductions, losses and credits in a manner
that properly reflects Shareholders’ economic gains and
losses. These assumptions and conventions may not fully comply with
all aspects of the Internal Revenue Code of 1986, as amended (the
“Code”), and applicable Treasury Regulations, however,
and it is possible that the U.S. Internal Revenue Service (the
“IRS”) will successfully challenge our allocation
methods and require us to reallocate items of income, gain,
deduction, loss or credit in a manner that adversely affects you.
If this occurs, you may be required to file an amended tax return
and to pay additional taxes plus deficiency interest.
In
addition, for taxable years beginning after December 31, 2017, the
Fund may be liable for U.S. federal income tax on any
“imputed underpayment” of tax resulting from an
adjustment as a result of an IRS audit. The amount of the imputed
underpayment generally includes increases in allocations of items
of income or gains to any investor and decreases in allocations of
items of deduction, loss, or credit to any investor without any
offset for any corresponding reductions in allocations of items of
income or gain to any investor or increases in allocations of items
of deduction, loss, or credit to any investor. If the Fund is
required to pay any U.S. federal income taxes on any imputed
underpayment, the resulting tax liability would reduce the net
assets of the Fund and would likely have an adverse impact on the
value of the Shares. In such a case, the tax liability would in
effect be borne by Shareholders that own shares at the time of such
assessment, which may be different persons, or persons with
different ownership percentages, than persons owning Shares for the
tax year under audit. Under certain circumstances, the Fund may be
eligible to make an election to cause Shareholders to take into
account the amount of any imputed underpayment, including any
interest and penalties. The ability of a publicly traded
partnership such as the Fund to make this election is uncertain. If
the election is made, the Fund would be required to provide
Shareholders who owned beneficial interests in the Shares in the
year to which the adjusted allocations relate with a statement
setting forth their proportionate shares of the adjustment
(“Adjusted K-1s”). The investors would be required to
take the adjustment into account in the taxable year in which the
Adjusted K-1s are issued. For an additional discussion please see
“U.S. Federal Income Tax Considerations – Other Tax
Matters.”
If the Fund is required to withhold tax with respect to any
Non-U.S. Shareholders, the cost of such withholding may be borne by
all Shareholders.
Under certain circumstances, the Fund may be
required to pay withholding tax with respect to allocations to
Non-U.S. Shareholders. Although the Trust Agreement provides that
any such withholding will be treated as being distributed to the
Non-U.S. Shareholder, the Fund may not be able to cause the
economic cost of such withholding to be borne by the Non-U.S.
Shareholder on whose behalf such amounts were withheld since the
Fund does not intend to make any distributions. Under such
circumstances, the economic cost of the withholding may be borne by
all Shareholders, not just the Shareholders on whose behalf such
amounts were withheld. This could have a material impact on the
value of your Shares.
The Fund could be treated as a corporation for federal income tax
purposes, which may substantially reduce the value of your
Shares.
The
Trust has received an opinion of counsel that, under current U.S.
federal income tax laws, the Fund will be treated as a partnership
that is not taxable as a corporation for U.S. federal income tax
purposes, provided that, among other things, (i) at least 90
percent of the Fund’s annual gross income consists of
“qualifying income” as defined in the Code, (ii) the
Fund is organized and operated in accordance with its governing
agreements and applicable law, and (iii) the Fund does not elect to
be taxed as a corporation for 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 to the extent of the
Fund’s current and accumulated earnings and profits, then
treated as a tax-free return of capital to the extent of the
Shareholder’s basis in the Shares (and will reduce the
basis), and, to the extent it exceeds a Shareholder’s basis
in such Shares, as capital gain for Shareholders who hold their
Shares as capital assets. Taxation of the Fund as a corporation
could materially reduce the after-tax return on an investment in
Shares and could substantially reduce the value of your
Shares.
20
Tax legislation that has been or could be enacted may affect you
with respect to your investment in the Fund.
Legislative,
regulatory or administrative changes could be enacted or
promulgated at any time, either prospectively or with retroactive
effect, and may adversely affect the Fund and its Shareholders.
Please consult a tax advisor regarding the implications of an
investment in Shares of the Teucrium Funds, including without
limitation the federal, state, local and foreign tax
consequences.
PROSPECTIVE INVESTORS ARE STRONGLY URGED TO CONSULT THEIR OWN TAX
ADVISORS WITH RESPECT TO THE POSSIBLE TAX CONSEQUENCES TO THEM OF
AN INVESTMENT IN SHARES; SUCH TAX CONSEQUENCES MAY DIFFER IN
RESPECT OF DIFFERENT INVESTORS.
21
THE OFFERING
The
Fund’s investment objective is to provide investors with a
cost-efficient way to gain price exposure to the sugar market for
future delivery. The Sponsor developed the Benchmark as a
representation of the sugar market for future
delivery.
Under
normal market conditions, the Fund will invest in the Benchmark
Component Futures Contracts and cash and cash equivalents. The
Sponsor believes that by investing in Benchmark Component Futures
Contracts, the Fund’s net asset value (“NAV”)
will closely track the Benchmark. The Sponsor also believes that
because of market arbitrage opportunities, the market price at
which investors will purchase and sell Shares through their
broker-dealer will closely track the Fund’s NAV. The Sponsor
believes that the net effect of these relationships is that the
Fund’s market price on the NYSE Arca at which investors
purchase and sell Shares will closely track the sugar market for
future delivery, as measured by the Benchmark.
The
Fund is organized as a series of the Teucrium Commodity Trust, a
statutory trust organized under the laws of the State of Delaware
on September 11, 2009. Currently, the Trust has five series that
are separate operating commodity pools: the Teucrium Corn Fund, the
Teucrium Wheat Fund, the Teucrium Soybean Fund, the Teucrium Sugar
Fund, and the Teucrium Agricultural Fund. Additional series of the
Trust may be created in the future at the Sponsor’s
discretion. The Fund maintains its main business office at Three
Main Street, Suite 215, Burlington Vermont 05401. The Fund is a
commodity pool. It operates pursuant to the terms of the Trust
Agreement, which is dated as of April 26, 2019 and grants full
management control to the Sponsor.
See
“Prior Performance of the Fund” on page 26 for more information about prior
performance of the Fund.
The
Sponsor of the Trust is Teucrium Trading, LLC, a Delaware limited
liability company. The principal office of the Sponsor and the
Trust is located at Three Main Street, Suite 215,
Burlington, Vermont 05401. The Sponsor registered as a CPO
with the CFTC and became a member of the NFA on November 10, 2009.
The Sponsor registered as a Commodity Trading Advisor
(“CTA”) with the CFTC effective September 8,
2017.
Aside
from establishing the series of the Trust, operating those series
that have commenced offering their shares, and obtaining capital
from a small number of outside investors in order to engage in
these activities, the Sponsor has not engaged in any other business
activity prior to the date of this prospectus. Under the Trust
Agreement, the Sponsor is solely responsible for management and
conducts or directs the conduct of the business of the Trust, the
Fund, and any series of the Trust that may from time to time be
established and designated by the Sponsor. The Sponsor is required
to oversee the purchase and sale of Shares by Authorized Purchasers
and to manage the Fund’s investments, including to evaluate
the credit risk of FCMs and swap counterparties and to review daily
positions and margin/collateral requirements. The Sponsor has the
power to enter into agreements as may be necessary or appropriate
for the offer and sale of the Fund’s Shares and the conduct
of the Trust’s activities. Accordingly, the Sponsor is
responsible for selecting the Trustee, Administrator, Distributor,
the independent registered public accounting firm of the Trust, and
any legal counsel employed by the Trust. The Sponsor is also
responsible for preparing and filing periodic reports on behalf of
the Trust with the SEC and will provide any required certification
for such reports. No person other than the Sponsor and its
principals was involved in the organization of the Trust or the
Fund.
The
Sponsor may determine to engage marketing agents who will assist
the Sponsor in marketing the Shares. See “Plan of
Distribution” for more information.
The
Sponsor maintains a public website on behalf of the Fund,
www.teucrium.com ,
which contains information about the Trust, the Fund, and the
Shares, and oversees certain services for the benefit of
Shareholders.
22
The Sponsor has discretion to appoint one or more
of its affiliates as additional Sponsors.
The Sponsor
receives a fee as compensation for services performed under the
Trust Agreement. The Sponsor’s fee accrues daily
and is paid monthly at an annual rate of 1.00% of the average daily
net assets of the Fund. For the period from January 1,
2019 through December 31, 2019, the Fund recognized $103,160 in
management fees to the Sponsor. The Fund is also responsible for
other ongoing fees, costs and expenses of its operations, including
brokerage fees, and legal, printing, accounting, custodial,
administration and transfer agency costs, although the Sponsor bore the costs and
expenses related to the registration of the Shares. None
of the costs and expenses related to the initial registration,
offer and sale of Shares, which totaled approximately $450,000,
were or are chargeable to the Fund, and the Sponsor did not and may
not recover any of these costs and expenses from the
Fund.
Shareholders have
no right to elect the Sponsor on an annual or any other continuing
basis or to remove the Sponsor. If the Sponsor voluntarily
withdraws, the holders of a majority of the Trust’s
outstanding Shares (excluding for purposes of such determination
Shares owned by the withdrawing Sponsor and its affiliates) may
elect its successor. Prior to withdrawing, the Sponsor must
give ninety days’ written notice to the Shareholders and the
Trustee.
Ownership or
“membership” interests in the Sponsor are owned by
persons referred to as “members.” The
Sponsor currently has three voting or “Class A” members
– Mr. Sal Gilbertie, Mr. Dale Riker and Mr. Carl N. Miller
III – and a small number of non-voting or “Class
B” members who have provided working capital to the
Sponsor. Messrs. Gilbertie and Riker each currently own 45.7%
of the Sponsor’s Class A membership interests while Mr.
Miller holds the remainder, which is 8.52%.
The
Sponsor has an information security program and policy in place.
The program takes reasonable care to look beyond the security and
controls developed and implemented for the Trust and the Funds
directly to the platforms and controls in place for the key service
providers. Such review of cybersecurity and information technology
plans of key service providers are part of the Sponsor’s
disaster recovery and business continuity
planning.
The Sponsor provides regular training to all employees of the
Sponsor regarding cybersecurity topics, in addition to real-time
dissemination of information regarding cybersecurity matters as
needed. The information security plan is reviewed and updated as
needed, but at a minimum on an annual basis.
Management of the Sponsor
In general,
under the Sponsor’s Amended and Restated Limited Liability
Company Operating Agreement, as amended from time to time, the
Sponsor (and as a result the Trust and each Fund) is managed by the
officers of the Sponsor. The Chief Executive Officer of
the Sponsor is responsible for the overall strategic direction of
the Sponsor and has general control of its business. The Chief
Investment Officer and President of the Sponsor is primarily
responsible for new investment product development with respect to
the Funds. The Chief Operating Officer has primary responsibility
for trade operations, trade execution, and portfolio activities
with respect to the Fund. The Chief Financial Officer, Chief
Accounting Officer and Chief Compliance Officer acts as the
Sponsor’s principal financial and accounting officer.
Furthermore, certain fundamental actions regarding the Sponsor,
such as the removal of officers, the addition or substitution of
members, or the incurrence of liabilities other than those incurred
in the ordinary course of business and de minimis liabilities, may not be
taken without the affirmative vote of a majority of the Class A
members (which is generally defined as the affirmative vote of Mr.
Gilbertie and one of the other two Class A members). The
Sponsor has no board of directors, and the Trust has no board of
directors or officers. The three Class A members of the Sponsor are
Sal Gilbertie, Dale Riker and Carl N. Miller III.
The
Officers of the Sponsor, one of whom is a Class A Member of the
Sponsor, are the following:
Sal Gilbertie has been the President of the Sponsor since
its inception, its Chief Investment Officer since September 2011,
and its Chief Executive Officer and Secretary since September 17,
2018, and was approved by the NFA as a principal of the Sponsor on
September 23, 2009 and registered as an associated person of the
Sponsor on November 10, 2009. He maintains his main business
office at 65 Adams Road, Easton, Connecticut 06612. Effective
July 16, 2012, Mr. Gilbertie was registered with the NFA as the
Branch Manager for this location. Since October 18, 2010, Mr.
Gilbertie has been an associated person of the Distributor under
the terms of the Securities Activities and Services Agreement
(“SASA”) between the Sponsor and the Distributor.
Additional information regarding the SASA can be found in the
section of this disclosure document entitled “Plan of
Distribution.” From October 2005 until December 2009,
Mr. Gilbertie was employed by Newedge USA, LLC, an FCM and
broker-dealer registered with the CFTC and the SEC, where he headed
the Renewable Fuels/Energy Derivatives OTC Execution Desk and was
an active futures contract and over the counter derivatives trader
and market maker in multiple classes of commodities. (Between
January 2008 and October 2008, he also held a comparable position
with Newedge Financial, Inc., an FCM and an affiliate of Newedge
USA, LLC.) From October 1998 until October 2005, Mr.
Gilbertie was principal and co-founder of Cambial Asset Management,
LLC, an adviser to two private funds that focused on equity
options, and Cambial Financing Dynamics, a private boutique
investment bank. While at Cambial Asset Management, LLC and
Cambial Financing Dynamics, Mr. Gilbertie served as principal and
managed the day to day activities of the business and the portfolio
of both companies. Mr. Gilbertie is 60 years
old.
23
Cory Mullen-Rusin, has been the Chief Financial Officer,
Chief Accounting Officer and Chief Compliance Officer of the
Sponsor since September 17, 2018 and Ms. Mullen-Rusin has primary
responsibility for the financial management, compliance and
reporting of the Sponsor and is in charge of its books of account
and accounting records, and its accounting procedures. She
maintains her main business office at Three Main Street, Suite 215,
Burlington, Vermont 05401. Ms. Mullen-Rusin was approved by the NFA
as a Principal of the Sponsor on October 8, 2018. Ms. Mullen-Rusin
began working for the Sponsor in September 2011 and worked directly
with the former CFO at Teucrium for seven years. Her
responsibilities included aspects of financial planning, financial
operations, and financial reporting for the Trust and the Sponsor.
Additionally, Ms. Mullen-Rusin assisted in developing, instituting,
and monitoring the effectiveness of processes and procedures to
comply with all regulatory agency requirements. Ms. Mullen-Rusin
graduated from Boston College with a Bachelor of Arts and Science
in Communications in 2009, where she was a four-year scholarship
player on the NCAA Division I Women’s Basketball team.
In 2017, she earned a Master of Business Administration from
Nichols College. Ms. Mullen-Rusin is 33 years old.
Steve Kahler, Chief Operating Officer, began working for the
Sponsor in November 2011 as Managing Director in the trading
division. He became the Chief Operating Officer on May 24, 2012 and
served in that capacity through September 6, 2018, at which time he
resigned. Mr. Kahler was unemployed from September 7, 2018 until
October 10, 2018, when he was reappointed as Chief Operating
Officer. Mr. Kahler has primary responsibility for the Trade
Operations for the Funds. He maintains his main business
office at 13520 Excelsior Blvd., Minnetonka, MN 55345. Mr.
Kahler was registered as an Associated Person of the Sponsor on
November 25, 2011, approved as a Branch Manager of the Sponsor on
March 16, 2012 and approved by the NFA as a Principal of the
Sponsor on May 16, 2012. These NFA registrations were withdrawn on
September 7, 2018 and then he re-registered as an Associated Person
and Branch Office Manager of the Sponsor on October 5, 2018 and as
a Principal of the Sponsor on October 16, 2018. Since January 18,
2012, Mr. Kahler has been an associated person of the Distributor
under the terms of the SASA between the Sponsor and the
Distributor. Additional information regarding the SASA can be
found in the section of this disclosure document entitled
“Plan of Distribution.” Prior to his employment with
the Sponsor, Mr. Kahler worked for Cargill Inc., an international
producer and marketer of food, agricultural, financial and
industrial products and services, from April 2006 until November
2011 in the Energy Division as Senior Petroleum Trader. In October
2006 and while employed at Cargill Inc., Mr. Kahler was approved as
an Associated Person of Cargill Commodity Services Inc., a
commodity trading affiliate of Cargill Inc. from September 13, 2006
to November 9, 2011. Mr. Kahler graduated from the University of
Minnesota with a Bachelors of Agricultural Business Administration
and is 53 years old. Mr. Kahler is primarily responsible for making
trading and investment decisions for the Fund and other Teucrium
Funds, and for directing Fund and other Teucrium Fund trades for
execution.
Messrs.
Gilbertie, Riker, and Kahler and Ms. Mullen-Rusin are individual
“principals,” as that term is defined in CFTC Rule 3.1,
of the Sponsor. These individuals are principals due to their
positions and/or due to their ownership interests in the Sponsor.
Beneficial ownership interests of the principals, if any, are shown
under the section entitled “Security Ownership of Principal
Shareholders and Management” below and any of the principals
may acquire beneficial interests in the Fund in the future. GFI
Group LLC is a principal for the Sponsor under CFTC Rules due to
its ownership of certain non-voting securities of the Sponsor.
NMSIC Classic LLC is a principal of the Sponsor under CFTC Rules
due to its greater than 10% capital contribution to the
Sponsor.
24
Market Price of Shares
The
Fund’s Shares have traded on the NYSE Arca under the symbol
“CANE” since September 19, 2011. The following table
sets forth the range of reported high and low sales prices of the
Shares as reported on NYSE Arca for the periods indicated
below.
|
Fiscal Year Ended December 31, 2020:
|
High
|
Low
|
|
Quarter
Ended
|
|
|
|
March 31,
2020
|
$7.59
|
$5.45
|
|
June 30,
2020
|
$5.95
|
$4.92
|
|
Fiscal Year Ended December 31, 2019:
|
High
|
Low
|
|
Quarter
Ended
|
|
|
|
March 31,
2019
|
$7.81
|
$6.90
|
|
June 30,
2019
|
$7.49
|
$6.79
|
|
September 30,
2019
|
$7.07
|
$6.30
|
|
December 31,
2019
|
$7.08
|
$6.44
|
|
Fiscal Year Ended December 31, 2018:
|
High
|
Low
|
|
Quarter
Ended
|
|
|
|
March 31,
2018
|
$9.94
|
$8.27
|
|
June 30,
2018
|
$8.36
|
$7.42
|
|
September 30,
2018
|
$7.32
|
$6.50
|
|
December 31,
2018
|
$8.07
|
$6.84
|
As
of December 31, 2019, the Fund had approximately 1,712
Shareholders.
25
Prior Performance of the
Fund
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE
RESULTS
The
Teucrium Sugar Fund commenced trading and investment operations on
September 19, 2011. The Fund is listed on NYSE Arca and is neither:
(i) a privately offered pool pursuant to Section 4(a)(2) of the
Securities Act of 1933, as amended; (ii) a multi-advisor pool as
defined in CFTC Regulation 4.10(d)(2); or (iii) a
principal-protected pool as defined in CFTC Regulation
4.10(d)(3).
|
Units of beneficial interest issued (from inception until July 31,
2020)
|
5,850,000
|
|
Aggregate gross sale price for units issued
|
$
53,643,503
|
|
NAV per Share as of July 31, 2020
|
$
6.00
|
|
Pool NAV as of July 31, 2020
|
$
9,746,025
|
|
Worst monthly percentage drawdown*
|
(23.51) %
|
|
March 2020
|
|
|
Worst peak to valley drawdown**
|
(78.60) %
|
|
September 2011 – April 2020
|
|
* A
drawdown is a loss experienced by the fund over a specified period.
Drawdowns are measured on the basis of monthly returns only and do
not reflect intra-month figures. The worst monthly percentage
drawdown reflects the largest single month loss sustained over the
most recent five calendar years and the current year to
date.
** The
worst peak to valley drawdown is the largest percentage decline in
the NAV per unit over the most recent five calendar years and the
current year to date. This need not be a continuous decline but can
be a series of positive and negative returns. Worst peak to valley
drawdown represents the greatest percentage decline from any month
end NAV per unit that occurs without such month end NAV per unit
being equaled or exceeded as of a subsequent month end. For
example, if the NAV per unit declined by $1 in each of January and
February, increased by $1 in March and declined again by $2 in
April, a “peak to valley drawdown” analysis conducted
as of the end of April would consider that “drawdown”
to be continuing and to be $3 in amount, whereas if the NAV per
unit had increased by $2 in March, the drawdown would have ended as
of the end of February at the $2 level.
26
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE
RESULTS
|
Rates of Return *
|
||||||||||||
|
Month
|
2015
|
|
2016
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
|
January
|
0.76
|
%
|
(10.68)
|
%
|
6.86
|
%
|
(8.58)
|
%
|
6.36
|
%
|
3.83
|
%
|
|
February
|
(7.47)
|
%
|
8.27
|
%
|
(5.34)
|
%
|
(1.56)
|
%
|
0.13
|
%
|
(1.68)
|
%
|
|
March
|
(13.33)
|
%
|
8.67
|
%
|
(10.14)
|
%
|
(5.90)
|
%
|
(3.05)
|
%
|
(23.51)
|
%
|
|
April
|
7.22
|
%
|
4.94
|
%
|
(5.17)
|
%
|
(7.48)
|
%
|
(1.78)
|
%
|
(2.76)
|
%
|
|
May
|
(8.00)
|
%
|
4.98
|
%
|
(6.89)
|
%
|
4.95
|
%
|
(1.95)
|
%
|
1.25
|
%
|
|
June
|
0.64
|
%
|
11.38
|
%
|
(7.40)
|
%
|
(5.34)
|
%
|
1.00
|
%
|
5.83
|
%
|
|
July
|
(9.48)
|
%
|
(2.17)
|
%
|
7.57
|
%
|
(9.84)
|
%
|
(1.70)
|
%
|
4.77
|
%
|
|
August
|
(4.54)
|
%
|
5.78
|
%
|
(3.09)
|
%
|
(1.89)
|
%
|
(7.08)
|
%
|
|
%
|
|
September
|
6.71
|
%
|
9.57
|
%
|
(6.17)
|
%
|
(1.63)
|
%
|
2.58
|
%
|
|
%
|
|
October
|
9.14
|
%
|
(3.55)
|
%
|
3.08
|
%
|
15.99
|
%
|
(0.87)
|
%
|
|
%
|
|
November
|
1.47
|
%
|
(8.92)
|
%
|
0.82
|
%
|
(2.34)
|
%
|
2.09
|
%
|
|
%
|
|
December
|
3.41
|
%
|
0.78
|
%
|
(0.10)
|
%
|
(5.86)
|
%
|
4.56
|
%
|
|
%
|
|
Annual Rate of Return
|
(15.30)
|
%
|
29.44
|
%
|
(24.52)
|
%
|
(27.78)
|
%
|
(0.48)
|
%
|
(14.76)
|
%**
|
*The
monthly rate of return is calculated by dividing the ending NAV for
a given month by the ending NAV for the previous month, subtracting
1 and multiplying this number by 100 to arrive at a percentage
increase or decrease.
**Not
annualized.
The
sole Trustee of the Trust is Wilmington Trust Company, a Delaware
banking corporation. The Trustee’s principal offices
are located at 1100 North Market Street, Wilmington, Delaware
19890-0001. The Trustee is unaffiliated with the
Sponsor. The Trustee’s duties and liabilities with
respect to the offering of Shares and the management of the Trust
and the Fund are limited to its express obligations under the Trust
Agreement.
27
The
Trustee will accept service of legal process on the Trust in the
State of Delaware and will make certain filings under the Delaware
Statutory Trust Act. The Trustee does not owe any other
duties to the Trust, the Sponsor or the Shareholders. The
Trustee is permitted to resign upon at least sixty (60) days’
notice to the Sponsor. If no successor trustee has been
appointed by the Sponsor within such sixty-day period, the Trustee
may, at the expense of the Trust, petition a court to appoint a
successor. The Trust Agreement provides that the Trustee is
entitled to reasonable compensation for its services from the
Sponsor or an affiliate of the Sponsor (including the Trust), and
is indemnified by the Sponsor against any expenses it incurs
relating to or arising out of the formation, operation or
termination of the Trust, or any action or inaction of the Trustee
under the Trust Agreement, except to the extent that such expenses
result from the gross negligence or willful misconduct of the
Trustee. The Sponsor has the discretion to replace the
Trustee.
The
Trustee has not signed the registration statement of which this
prospectus is a part and is not subject to issuer liability under
the federal securities laws for the information contained in this
prospectus and under federal securities laws with respect to the
issuance and sale of the Shares. Under such laws, neither the
Trustee, either in its capacity as Trustee or in its individual
capacity, nor any director, officer or controlling person of the
Trustee is, or has any liability as, the issuer or a director,
officer or controlling person of the issuer of the
Shares.
Under
the Trust Agreement, the Trustee has delegated to the Sponsor the
exclusive management and control of all aspects of the business of
the Trust and the Fund. The Trustee has no duty or liability
to supervise or monitor the performance of the Sponsor, nor does
the Trustee have any liability for the acts or omissions of the
Sponsor.
Because
the Trustee has delegated substantially all of its authority over
the operation of the Trust to the Sponsor, the Trustee itself is
not registered in any capacity with the CFTC.
The
investment objective of the Fund is to have the daily changes in
the Shares’ NAV reflect the daily changes in the sugar market
for future delivery, as measured by the Fund’s Benchmark. The
Benchmark is a weighted average of the closing settlement prices
for the Benchmark Component Futures Contracts:
CANE Benchmark
|
ICE Sugar Futures Contract
|
Weighting
|
|
Second to expire
|
35%
|
|
Third to expire
|
30%
|
|
Expiring in the March following the expiration of the third to
expire contract
|
35%
|
The
Fund seeks to achieve its investment objective by investing under
normal market conditions in Benchmark Component Futures Contracts.
Under normal market conditions, the Fund expects that 100% of the
Fund’s assets will be used to trade Sugar Futures Contracts
and invest in cash and cash equivalents. The Fund reserves the
right to invest in swap agreements, forward contracts and options,
a brief description of which may be found in “Appendix A
– Glossary of Defined Terms”.
The
Fund invests in Benchmark Component Futures Contracts to the
fullest extent possible without being leveraged or unable to
satisfy its current or potential margin or collateral obligations
with respect to its investments in Benchmark Component Futures
Contracts. After fulfilling such margin and collateral
requirements, the Fund invests the remainder of its proceeds from
the sale of baskets in cash and cash equivalents, including
money-market funds, investment grade commercial paper, and/or
merely holds such assets in cash in interest-bearing accounts. The
Fund earns interest and other income from the cash equivalents that
it purchases, and on the cash it holds at financial
institutions.
The Fund seeks to achieve its investment
objective primarily by investing in Benchmark Component Futures
Contracts such that the changes in its NAV are expected to closely
track the changes in the Benchmark. The Fund’s
positions in Benchmark Component Futures Contracts are changed or
“rolled” on a regular basis in order to track the
changing nature of the Benchmark. For example, four times a
year (on the date on which a Sugar No. 11 Futures Contract
expires), the second to expire Sugar No. 11 Futures Contract will
become the next to expire Sugar No. 11 Futures Contract and will no
longer be a Benchmark Component Futures Contract, and the
Fund’s investments will have to be changed accordingly.
In order that the Fund’s trading does not cause unwanted
market movements and to make it more difficult for third parties to
profit by trading based on such expected market movements, the
Fund’s investments may not be rolled entirely on that day,
but rather may be rolled over a period of days.
28
The
Fund’s total portfolio composition is disclosed each business
day that the NYSE Arca is open for trading on the Fund’s
website at www.teucrium.com.
The website disclosure of portfolio holdings is made daily and
includes, as applicable, the name and value of each commodity
futures contract held and those that are pending, and the value of
cash and cash equivalents held in the Fund. The Fund’s
website also includes the NAV, the 4 p.m. Bid/Ask Midpoint as
reported by the NYSE Arca, the last trade price as reported by the
NYSE Arca, the shares outstanding, the shares available for
issuance, and the shares created or redeemed on that day. The
prospectus, Monthly Statements of Account, Quarterly Performance of
the Midpoint versus the NAV (as required by the CFTC), and the Roll
Dates, as well as Forms 10-Q, Forms 10-K, and other SEC filings for
the Fund, are also posted on the website. The Fund’s website
is publicly accessible at no charge.
In
seeking to achieve the Fund’s investment objective of
tracking the Benchmark, the Sponsor reserves the right to enter
into or hold Sugar Futures Contracts other than the Benchmark
Component Futures Contracts and/or other sugar interests on behalf
of the Fund. Over the counter sugar interests can generally be
structured as the parties to the contract desire. Therefore, the
Fund might enter into multiple over the counter sugar interests
intended to exactly replicate the performance of each of the three
Benchmark Component Futures Contracts, or a single over the counter
sugar interest designed to replicate the performance of the
Benchmark as a whole. Assuming that there is no default by a
counterparty to an over the counter sugar interest, the performance
of the sugar interest will necessarily correlate exactly with the
performance of the Benchmark or the applicable Benchmark Component
Futures Contract. The Fund might also enter into or hold sugar
interests other than the Benchmark Component Futures Contracts to
facilitate effective trading, consistent with the discussion of the
Fund’s “roll” strategy discussed in the preceding
paragraph. In addition, the Fund might enter into or hold sugar
interests that would be expected to alleviate overall deviation
between the Fund’s performance and that of the Benchmark that
may result from certain market and trading inefficiencies or other
reasons.
The
Sponsor endeavors to place the Fund’s trades in Benchmark
Component Futures Contracts and otherwise manage the Fund’s
investments so that the Fund’s average daily tracking error
against the Benchmark is less than 10 percent over any period of 30
trading days.
The
Fund’s investment objective is to provide investors with a
cost-efficient way to gain exposure to the sugar market for future
delivery. The Sponsor developed the Benchmark as a representation
of the sugar market for future delivery. Under normal market
conditions, the Fund will invest in the Benchmark Component Futures
Contracts. The Sponsor believes that by investing in Benchmark
Component Futures Contracts, the Fund’s net asset value
(“NAV”) will closely track the Benchmark. The Sponsor
also believes that because of market arbitrage opportunities, the
market price at which investors will purchase and sell Shares
through their broker-dealer will closely track the Fund’s
NAV. The Sponsor believes that the net effect of these
relationships is that the Fund’s market price on the NYSE
Arca at which investors purchase and sell Shares will closely track
the sugar market for future delivery, as measured by the
Benchmark.
An
investment in the Shares provides a means for diversifying an
investor’s portfolio or hedging exposure to changes in sugar
prices. An investment in the Shares allows both retail and
institutional investors to easily gain this exposure to the sugar
market in a transparent, cost-effective manner.
The
Sponsor employs a “neutral” investment strategy
intended to track changes in the Benchmark regardless of whether
the Benchmark goes up or goes down. The Fund’s
“neutral” investment strategy is designed to permit
investors generally to purchase and sell the Fund’s Shares
for the purpose of investing indirectly in the sugar market in a
cost-effective manner. Such investors may include participants in
the sugar industry and other industries seeking to hedge the risk
of losses in their sugar related transactions, as well as investors
seeking exposure to the sugar market. Accordingly, depending on the
investment objective of an individual investor, the risks generally
associated with investing in the sugar market and/or the risks
involved in hedging may exist. In addition, the Fund does not
expect there to be any meaningful correlation between the
performance of the Fund’s investments in cash and cash
equivalents and the changes in the price of sugar or Benchmark
Component Futures Contracts. While the level of interest earned on,
or the market price of, these investments may in some respects
correlate to changes in the price of sugar, this correlation is not
anticipated as part of the Fund’s efforts to meet its
objective. This and certain risk factors discussed in this
prospectus may cause a lack of correlation between changes in the
Fund’s NAV and changes in the price of sugar.
The
Shares issued by the Fund may only be purchased by Authorized
Purchasers and only in blocks of 25,000 Shares called Creation
Baskets. The amount of the purchase payment for a Creation Basket
is equal to the aggregate NAV of Shares in the Creation Basket.
Similarly, only Authorized Purchasers may redeem Shares and only in
blocks of 25,000 Shares called Redemption Baskets. The amount of
the redemption proceeds for a Redemption Basket is equal to the
aggregate NAV of Shares in the Redemption Basket. The purchase
price for Creation Baskets and the redemption price for Redemption
Baskets are the actual NAV calculated at the end of the business
day when a request for a purchase or redemption is received by the
Fund. The NYSE Arca publishes an approximate NAV intra-day based on
the prior day’s NAV and the current price of the Benchmark
Component Futures Contracts, but the price of Creation Baskets and
Redemption Baskets is determined based on the actual NAV calculated
at the end of each trading day.
While
the Fund issues Shares only in Creation Baskets, Shares may also be
purchased and sold in much smaller increments on the NYSE Arca.
These transactions, however, are effected at the bid and ask prices
established by the specialist firm(s). Like any listed security,
Shares can be purchased and sold at any time a secondary market is
open.
29
The Fund’s Investment Strategy
In
managing the Fund’s assets, the Sponsor does not use a
technical trading system that automatically issues buy and sell
orders. Instead, each time one or more baskets are purchased
or redeemed, the Sponsor purchases or sells Benchmark Component
Futures Contracts with an aggregate market value that approximates
the amount of cash received or paid upon the purchase or redemption
of the basket(s).
As an
example, assume that a Creation Basket is sold by the Fund, and
that the Fund’s closing NAV per Share is $14.00. In
that case, the Fund would receive $350,000 in proceeds from the
sale of the Creation Basket ($14.00 NAV per Share multiplied by
25,000 Shares and ignoring the Creation Basket fee of $250).
If one were to assume further that the Sponsor wants to invest the
entire proceeds from the Creation Basket in the Benchmark Component
Futures Contracts and that the market value of each such Benchmark
Component Futures Contracts is $17,920 (or otherwise not a round
number), the Fund would be unable to buy an exact number of Sugar
Futures Contracts with an aggregate market value equal to
$350,000. Instead, the Fund would be able to
purchase 19 Benchmark Component Futures
Contracts with an aggregate market value of approximately
$340,480. Assuming a margin requirement equal to 10% of the
value of the Sugar Futures Contracts (although the actual
percentage is approximately 6%), the Fund would be required to
deposit $34,048 in cash with the FCM through which the Sugar
Futures Contracts were purchased. The remainder of the
proceeds from the sale of the Creation Basket,
$315,952, would remain
invested in cash and/or cash equivalents, as determined by the
Sponsor from time to time based on factors such as potential calls
for margin or anticipated redemptions.
The
specific sugar interests purchased depend on various factors,
including a judgment by the Sponsor as to the appropriate
diversification of the Fund’s investments. While the
Sponsor anticipates that, under normal market conditions, a
substantial majority of the Fund’s assets will be invested in
ICE Sugar Futures Contracts and cash and cash equivalents, the
Sponsor reserves the right to enter into other sugar interests on
behalf of the Fund, including swaps in the over the counter
market.
The
Sponsor does not anticipate letting its Benchmark Component Futures
Contracts expire and taking delivery of sugar. Instead, the
Sponsor will close out existing positions, e.g., in response to
ongoing changes in the Benchmark or if it otherwise determines it
would be appropriate to do so and reinvest the proceeds in new
Benchmark Component Futures Contracts. Positions may also be
closed out to meet orders for Redemption Baskets, in which case the
proceeds from closing the positions will not be
reinvested.
Futures
contracts are agreements between two parties that are executed on a
designated contract market (“DCM”), i.e., a commodity
futures exchange, and that are cleared and margined through a
derivatives clearing organization (“DCO”), i.e., a
clearing house. One party agrees to buy a commodity such as
sugar from the other party at a later date at a price and quantity
agreed upon when the contract is made. In market terminology,
a party who purchases a futures contract is long in the market and
a party who sells a futures contract is short in the market.
The contractual obligations of a buyer or seller may generally be
satisfied by taking or making physical delivery of the underlying
commodity or by making an offsetting sale or purchase of an
identical futures contract on the same or linked exchange before
the designated date of delivery. The difference between the
price at which the futures contract is purchased or sold and the
price paid for the offsetting sale or purchase, after allowance for
brokerage commissions, constitutes the profit or loss to the
trader.
If the
price of the commodity increases after the original futures
contract is entered into, the buyer of the futures contract will
generally be able to sell a futures contract to close out its
original long position at a price higher than that at which the
original contract was purchased, generally resulting in a profit to
the buyer. Conversely, the seller of a futures contract will
generally profit if the price of the underlying commodity
decreases, as it will generally be able to buy a futures contract
to close out its original short position at a price lower than that
at which the original contract was sold. Because the Fund
seeks to track the Benchmark directly and profit when the price of
sugar increases and, as a likely result of an increase in the price
of sugar, the price of Sugar Futures Contracts increases, the Fund
will generally be long in the market for sugar and will generally
sell Sugar Futures Contracts only to close out existing long
positions.
Futures
contracts are typically traded on futures exchanges (i.e. DCMs)
such as the ICE Futures, which provide centralized market
facilities in which multiple persons may trade contracts.
Members of a particular futures exchange and the trades executed on
such exchange are subject to the rules of that exchange.
Futures exchanges and their related clearing organizations (i.e.
DCOs) are given reasonable latitude in promulgating rules and
regulations to control and regulate their members.
30
Trades
on a futures exchange are generally cleared by the DCO, which
provides services designed to mutualize or transfer the credit risk
arising from the trading of contracts on an exchange. The
clearing organization effectively becomes the other party to the
trade, and each clearing member party to the trade looks only to
the clearing organization for performance.
The
Sugar No. 11 Futures Contract is the world benchmark contract for
raw sugar trading. This contract prices the physical delivery
of raw cane sugar, delivered to the receiver’s vessel at a
specified port within the country of origin of the sugar.
Sugar No. 11 Futures Contracts trade on the ICE Futures and in
units of 112,000 pounds. The Sugar No. 16 Futures Contract
prices physical delivery of U.S.-grown (or foreign origin with duty
paid by deliverer) raw cane sugar at one of five U.S. refinery
ports as selected by the receiver. Sugar No. 16 futures
contracts trade on the ICE Futures in units of 112,000
pounds. Because of the higher price of sugar in the U.S.
market, Sugar No. 16 Futures Contracts tend to be priced higher
than Sugar No. 11 Futures Contracts, but each Sugar Futures
Contract tends to experience similar proportionate fluctuations in
price. There is no difference between Sugar No. 11 and Sugar
No. 16 Futures Contracts in terms of the quality or type of sugar
to be delivered. Because the Benchmark Component Futures
Contracts are Sugar No. 11 Futures Contracts, the Sugar Futures
Contracts entered into by the Fund will typically be Sugar No. 11
Futures Contracts, although Sugar No. 16. Futures Contract may be
entered into to a limited extent.
Generally, futures
contracts traded on the ICE Futures are priced by floor brokers and
other exchange members through an electronic, screen-based system
that electronically determines the price by matching offers to
purchase and sell. Futures contracts may also be based on
commodity indices, in that they call for a cash payment based on
the change in the value of the specified index during a specified
period. No futures contracts based on an index of sugar
prices are currently available, although the Fund could enter into
such contracts should they become available in the
future.
Certain
typical and significant characteristics of Sugar Futures Contracts
are discussed below. Additional risks of investing in Sugar
Futures Contracts are included in “What are the Risk Factors
Involved with an Investment in the Fund?”
Impact of Position Limits, Accountability Levels, and Price
Fluctuation Limits.
Position Limits,
Accountability Levels, and Price Fluctuation Limits may potentially
cause a tracking error between the price of the Shares and the
Benchmark. This may in turn prevent you from being able to
effectively use the Fund as a way to hedge against sugar related
losses or as a way to indirectly invest in sugar.
The
Fund does not intend to limit the size of the offering and will
attempt to expose substantially all of its proceeds to Benchmark
Component Futures Contracts and cash and cash equivalents. If the
Fund encounters position limits, accountability levels, or price
fluctuation limits for Sugar Futures Contracts on ICE Futures, it
may then, if permitted under applicable regulatory requirements,
purchase other sugar interests and/or Sugar Futures Contracts
listed on the New York Mercantile Exchange (“NYMEX”) or
foreign exchanges. However, the Sugar Futures Contracts available
on such foreign exchanges may have different underlying sizes,
deliveries, and prices. In addition, the Sugar Futures Contracts
available on these exchanges may be subject to their own position
limits and accountability levels. In any case, notwithstanding the
potential availability of these instruments in certain
circumstances, position limits could force the Fund to limit the
number of Creation Baskets that it sells.
Price Volatility
Despite
daily price limits, the price volatility of futures contracts
generally has been historically greater than that for traditional
securities such as stocks and bonds. Price volatility often
is greater day to day as opposed to intra-day. Economic
factors that may cause volatility in Sugar Futures Contracts
include changes in interest rates; governmental, agricultural,
trade, fiscal, monetary and exchange control programs and policies;
weather and climate conditions; changing supply and demand
relationships; changes in balances of payments and trade; U.S. and
international rates of inflation; currency devaluations and
revaluations; U.S. and international political and economic events;
global trade disruption due to outbreaks or public health emergency
as declared by the World Health Organization; and changes in
philosophies and emotions of market participants. Because the
Fund invests a significant portion of its assets in futures
contracts, the assets of the Fund, and therefore the price of the
Fund’s Shares, may be subject to greater volatility than
traditional securities.
Term Structure of Futures Contracts and the Impact on Total
Return
Over
time, the price of sugar fluctuates based on a number of market
factors, including demand for sugar relative to its supply.
The value of Sugar Futures Contracts likewise fluctuates in
reaction to a number of market factors. Because the Fund
seeks to maintain its holdings in Sugar Futures Contracts with a
roughly constant expiration profile and not take delivery of the
sugar, the Fund must periodically “roll” futures
contract positions, closing out soon to expire contracts that are
no longer part of the Benchmark and entering into subsequent to
expire contracts. One factor determining the total return from
investing in futures contracts is the price relationship between
soon to expire contracts and later to expire
contracts.
31
If the
futures market is in a state of backwardation (i.e., when the price
of sugar in the future is expected to be less than the current
price), the Fund will buy later to expire contracts for a lower
price than the sooner to expire contracts that it sells.
Hypothetically, and assuming no changes to either prevailing sugar
prices or the price relationship between immediate delivery, soon
to expire contracts and later to expire contracts, the value of a
contract will rise as it approaches expiration. Over time, if
backwardation remained constant, the differences would continue to
increase. If the futures market is in contango, the Fund will buy
later to expire contracts for a higher price than the sooner to
expire contracts that it sells. Hypothetically, and assuming no
other changes to either prevailing sugar prices or the price
relationship between the spot price, soon to expire contracts and
later to expire contracts, the value of a contract will fall as it
approaches expiration. Over time, if contango remained constant,
the difference would continue to increase. Historically, the sugar
futures markets have experienced periods of both contango and
backwardation. Frequently, whether contango or backwardation exists
is a function, among other factors, of the seasonality of the sugar
market and the sugar harvest cycle. All other things being equal, a
situation involving prolonged periods of contango may adversely
impact the returns of the Fund; conversely a situation involving
prolonged periods of backwardation may positively impact the
returns of the Fund.
Margin Requirements and Marking to Market Futures
Positions
“Initial
margin” is an amount of funds that must be deposited by a
commodity interest trader with the trader’s broker to
initiate an open position in futures contracts. A margin
deposit is like a cash performance bond. It helps assure the
trader’s performance of the futures contracts that he or she
purchases or sells. Futures contracts are customarily bought
and sold on initial margin that represents a small percentage of
the aggregate purchase or sales price of the contract. The
amount of margin required in connection with a particular futures
contract is set by the exchange on which the contract is
traded. Brokerage firms, such as the Fund’s clearing
broker, carrying accounts for traders in commodity interest
contracts may require higher amounts of margin as a matter of
policy to further protect themselves.
Futures
contracts are marked to market at the end of each trading day and
the margin required with respect to such contracts is adjusted
accordingly. This process of marking to market is designed to
prevent losses from accumulating in any futures account.
Therefore, if the Fund’s futures positions have declined in
value, the Fund may be required to post “variation
margin” to cover this decline. Alternatively, if the
Fund’s futures positions have increased in value, this
increase will be credited to the Fund’s account.
Over the counter
Derivatives
Under
normal market conditions, the Fund expects that 100% of the
Fund’s assets will be used to trade futures and invest in
cash and cash equivalents; however, the Fund has the ability to
trade over the counter contracts and swaps. A description of such
over the counter derivatives is included the statement of
additional information that is part of this prospectus under the
heading “Over the counter Derivatives.”
The Fund’s Investments
in Cash and Cash Equivalents
The
Fund seeks to have the aggregate “notional” amount of
the Benchmark Component Futures Contracts it holds approximate at
all times the Fund’s aggregate NAV. At any given time,
however, most of the Fund’s investments are in cash and cash
equivalents that support the Fund’s positions in Benchmark
Component Futures Contracts. For example, the purchase of a Sugar
Futures Contract with a stated or notional amount of $10 million
would not require the Fund to pay $10 million upon entering into
the contract; rather, only a margin deposit, approximately 4-6% of
the notional amount, would be required. To secure its Sugar Futures
Contract obligations, the Fund would deposit the required margin
with the FCM and would separately hold its remaining assets through
its Custodian or other financial institution in cash and cash
equivalents, specifically in demand deposits, in short-term
Treasury Securities held by the FCM, in money-market funds or in
commercial paper. Such remaining assets may be used to meet future
margin payments that the Fund is required to make on its Sugar
Futures Contracts. Other sugar interests typically also involve
collateral requirements that represent a small fraction of their
notional amounts, so most of the Fund’s assets dedicated to
these sugar interests are also held in short-term Treasury
Securities, cash, and cash equivalents.
The
Fund earns interest and other income from the cash equivalents that
it purchases, and on the cash, it holds through the Custodian or
other financial institutions. The earned interest and other income
increase the Fund’s NAV. The Fund applies the earned interest
and other income to the acquisition of additional investments or
uses it to pay its expenses. When the Fund reinvests the earned
interest and other income, it makes investments that are consistent
with its investment objectives.
Any
cash equivalent invested in by the Fund will have a remaining
maturity of less than 3 months at the time of investment or will be
subject to a demand feature that enables that Fund to sell the
security within that time period at approximately the
security’s face value (plus accrued interest). Any cash
equivalents invested in by the Fund will be or will be deemed by
the Sponsor to be of investment grade credit
quality.
32
Exchange for Related Position
An
“exchange for related position” (“EFRP”)
can be used by the Fund as a technique to facilitate the exchanging
of a futures hedge position against a creation or redemption order,
and thus the Fund may use an EFRP transaction in connection with
the creation and redemption of shares. The market specialist/market
maker that is the ultimate purchaser or seller of shares in
connection with the creation or redemption basket, respectively,
agrees to sell or purchase a corresponding offsetting shares or
futures position which is then settled on the same business day as
a cleared futures transaction by the FCMs. The Fund will become
subject to the credit risk of the market specialist/market maker
until the EFRP is settled within the business day, which is
typically 7 hours or less. The Fund reports all activity related to
EFRP transactions under the procedures and guidelines of the CFTC
and the exchanges on which the futures are
traded.
EFRPs
are subject to specific rules of the CME and CFTC guidance. It is
likely that EFRP mechanisms will significantly change in the future
which may make it uneconomical or impossible from a regulatory
perspective for the Fund to utilize these mechanisms.
Options on Futures Contracts
An
option on a futures contract gives the buyer of the option the
right, but not the obligation, to buy or sell a futures contract at
a specified price on or before a specified date. The option
buyer deposits the purchase price or “premium” for the
option with his broker, and the money goes to the option
seller. Regardless of how much the market swings, the most an
option buyer can lose is the option premium and the commissions and
fees associated with the transaction. However, the buyer will
typically lose the premium if the exercise price of the option is
above (in the case of an option to buy or “call”
option) or below (in the case of an option to sell or
“put” option) the market value at the time of
exercise. Option sellers, on the other hand, face risks
similar to participants in the futures markets. For example,
since the seller of a call option is assigned a short futures
position if the option is exercised, his risk is the same as
someone who initially sold a futures contract. Because no one
can predict exactly how the market will move, the option seller
posts margin to demonstrate his ability to meet any potential
contractual obligations.
In
addition to Sugar Futures Contracts, there are also a number of
options on Sugar Futures Contracts listed on the ICE Futures.
These contracts offer investors and hedgers another set of
financial vehicles to use in managing exposure to the commodities
market. The Fund may purchase and sell (write) options on
Sugar Futures Contracts in pursuing its investment objective,
except that it will not sell call options when it does not own the
underlying Sugar Futures Contract. The Fund would make use of
options on Sugar Futures Contracts if, in the opinion of the
Sponsor, such an approach would cause the Fund to more closely
track its Benchmark or if it would lead to an overall lower cost of
trading to achieve a given level of economic exposure to movements
in sugar prices.
Liquidity
The
Fund invests only in Sugar Futures Contracts that, in the opinion
of the Sponsor, are traded in sufficient volume to permit the ready
taking and liquidation of positions in these financial interests
and in over the counter commodity interests that, in the opinion of
the Sponsor, may be readily liquidated with the original
counterparty or through a third party assuming the Fund’s
position.
33
Spot Commodities
While
most futures contracts can be physically settled, the Fund does not
intend to take or make physical delivery. However, the Fund
may from time to time trade in other sugar interests based on the
spot price of sugar.
Leverage
The
Sponsor endeavors to have the value of the Fund’s cash and
cash equivalents, whether held by the Fund or posted as margin or
collateral, at all times approximate the aggregate market value of
its obligations under the Fund’s Benchmark Component Futures
Contracts. Commodity pools’ trading positions in futures
contracts are typically required to be secured by the deposit of
margin funds that represent only a small percentage of a futures
contract’s (or other commodity interest’s) entire
market value.
Borrowings
The
Fund does not intend to nor foresee the need to borrow money or
establish credit lines. The Fund maintains cash and cash
equivalents, either held by the Fund or posted as margin or
collateral, with a value that at all times approximates the
aggregate market value of its obligations under Benchmark Component
Futures Contracts. The Fund meets its liquidity needs in the normal
course of business from the proceeds of the sale of its investments
or from the cash and cash equivalents that it intends to hold at
all times.
Benchmark Performance
The
chart below shows the percent change in the NAV per share for the
Fund, the market price of the Fund shares, represented by the
closing price of the Fund on the NYSE Arca, and the Benchmark
(“TCANE”) for five specific periods. The Benchmark does
not reflect any impact of expenses, which would generally reduce
the Fund’s NAV, or interest income, which would generally
increase the NAV. The actual results for the NAV include the
impacts of both expenses and interest income.
Teucrium
Sugar ETF Performance as of
6/30/2020
|
|
Three
Month
|
Year
to Date
|
3
Year Annualized
|
5
Year Annualized
|
Inception
Annualized
|
|
NAV
|
4.19%
|
-18.64%
|
-15.94%
|
-9.62%
|
-15.44%
|
|
Price
|
5.41%
|
-18.09%
|
-15.80%
|
-9.54%
|
-15.40%
|
|
Benchmark
(TCANE)
|
5.19%
|
-17.46%
|
-14.43%
|
-7.98%
|
-13.07%
|
The Sugar Market
Sugarcane accounts
for about 79% of the world’s sugar production, while sugar
beets account for the remainder of the world’s sugar
production. Sugar manufacturers use sugar beets and sugarcane as
the raw material from which refined sugar (sucrose) for industrial
and consumer use is produced. The United States Department of
Agriculture (“USDA”) publishes two major reports
annually on U.S. domestic and worldwide sugar production and
consumption. These are usually released in November and May. In
addition, the USDA publishes periodic, but not as comprehensive,
reports on sugar monthly. These reports are available on the
USDA’s website, www.usda.gov, at no charge. For more
information about the Sugar Market, please see the statement of
additional information that is part of this prospectus under the
heading “The Sugar Market.”
34
The Fund’s Service
Providers
Contractual Arrangements with the Sponsor and Third-Party Service
Providers
Sponsor
The
Sponsor is responsible for investing the assets of the Fund in
accordance with the objectives and policies of the Fund. In
addition, the Sponsor arranges for one or more third parties to
provide administrative, custodial, accounting, transfer agency and
other necessary services to the Fund. For these third-party
services, the Fund pays the fees set forth in the table below
entitled “Contractual Fees and Compensation Arrangements with
the Sponsor and Third-Party Service Providers.” For the
Sponsor’s services, the Fund is contractually obligated to
pay a monthly management fee to the Sponsor, based on average daily
net assets, at a rate equal to 1.00% per annum. The Sponsor can
elect to waive the payment of this fee in any amount at its sole
discretion, at any time and from time to time, in order to reduce
the Fund’s expenses or for any other purpose.
Custodian, Registrar, Transfer Agent, Fund Accountant, and Fund
Administrator
In its
capacity as the Fund’s custodian, the Custodian, currently
U.S. Bank, N.A., holds the Fund’s securities, cash and/or
cash equivalents pursuant to a custodial agreement. U.S. Bancorp
Fund Services, LLC, doing business as U.S. Bank Global Fund
Services (“Global Fund Services”), an entity affiliated
with U.S. Bank, N.A., is the registrar and transfer agent for the
Fund’s Shares. In addition, Global Fund Services also serves
as Administrator for the Fund, performing certain administrative
and accounting services and preparing certain SEC and CFTC reports
on behalf of the Fund. The Custodian is located at 1555 North
Rivercenter Drive, Suite 302, Milwaukee, Wisconsin 53212. U.S. Bank
N.A. is a nationally chartered bank, regulated by the Office of the
Comptroller of the Currency, Department of the Treasury, and is
subject to regulation by the Board of Governors of the Federal
Reserve System. The principal address for Global Fund Services is
615 East Michigan Street, Milwaukee, WI, 53202.
Distributor
The
Fund employs Foreside Fund Services, LLC as the Distributor for the
Fund. Pursuant to a Consulting Services Agreement, Foreside
Consulting Services, LLC, performs certain consulting support
services for the Trust’s Sponsor, Teucrium Trading, LLC.
Additionally, Foreside Distributors, LLC performs certain
distribution consulting services pursuant to a Distribution
Consulting Agreement with the Trust’s Sponsor, Teucrium
Trading, LLC.
The
Distribution Services Agreement among the Distributor, the Sponsor,
and the Trust calls for the Distributor to work with the Custodian
in connection with the receipt and processing of orders for
Creation Baskets and Redemption Baskets and the review and approval
of all Fund sales literature and advertising materials. The
Distributor and the Sponsor have also entered into a Securities
Activities and Service Agreement (the “SASA”) under
which certain employees and officers of the Sponsor are licensed as
registered representatives or registered principals of the
Distributor, under “FINRA” rules (“Registered
Representatives”). As Registered Representatives of the
Distributor, these persons are permitted to engage in certain
marketing activities for the Fund that they would otherwise not be
permitted to engage in. Under the SASA, the Sponsor is obligated to
ensure that such marketing activities comply with applicable law
and are permitted by the SASA and the Distributor’s internal
procedures.
The
Distributor’s principal business address is Three Canal
Plaza, Suite 100, Portland, Maine 04101. The Distributor is a
broker-dealer registered with the U.S. Securities and Exchange
Commission (“SEC”) and a member of FINRA.
Clearing Broker
Currently, ED&F
Man Capital Markets, Inc. (“ED&F Man”) serves as
the Fund’s clearing broker to execute and clear the
Fund’s futures and provide other brokerage-related services.
ED&F Man is registered as an FCM with the CFTC, is a member of
the National Futures Association (“NFA”) and is a
clearing member of all major U.S. futures exchanges. The
Firm’s Designated Self-Regulatory Organization is the Chicago
Mercantile Exchange Inc. (www.cmegroup.com).
The Firm is also registered as a broker-dealer (“BD”)
with the U.S. Securities and Exchange Commission
(“SEC”) and is a member of the Financial Industry
Regulatory Authority, Inc.
(“FINRA”).
35
There
have been no material civil, administrative, or criminal
proceedings pending, on appeal, or concluded against E D & F
Man Capital Markets Inc. or its principals in the past five (5)
years. For a list of concluded actions, please go to http://www.nfa.futures.org/basicnet/welcome.aspx.
This link will take you to the Welcome Page of the NFA’s
Background Affiliation Status Information Center
(“BASIC”). At this page, there is a box where you can
enter the NFA ID of ED&F Man Capital Markets Inc. (0002613) and
then click “Go”. You will be transferred to the
NFA’s information specific to ED&F Man Capital Markets
Inc. Under the heading “Regulatory Actions”, click
“details” and you will be directed to the full list of
regulatory actions brought by the CFTC and exchanges.
ED&F Man, in
its capacity as a registered FCM, will serve as the Fund's clearing
broker and, as such, will arrange for the execution and clearing of
the Fund's futures and options on futures transactions. ED&F
Man acts as clearing broker for many other funds and
individuals.
The
investor should be advised that ED&F Man is not affiliated with
and does not act as a supervisor of the Fund or the Fund's Sponsor,
investment managers, members, officers, administrators, transfer
agents, registrars or organizers. Additionally, ED&F Man is not
acting as an underwriter or sponsor of the offering of any shares
or interests in the Fund and has not passed upon the adequacy of
this prospectus, the merits of participating in this offering or on
the accuracy of the information contained herein.
Additionally,
ED&F Man does not provide any commodity trading advice
regarding the Fund's trading activities. Investors should not rely
upon ED&F Man in deciding whether to invest in the Fund or
retain their interests in the Fund. Investors should also note that
the Fund may select additional clearing brokers or replace ED&F
Man as the Fund's clearing broker.
Marketing Agent
Currently, Thales
Capital Partners LLC (TCP) serves as the Fund’s Marketing
Agent. TCP is registered as a Broker-Dealer with the SEC and a
member of Financial Industry Regulatory Authority (FINRA) and SIPC.
The Fund pays the Marketing Agent an annual fee for distribution
and solicitation-related services. Additionally, the Marketing
Agent will receive an additional 0.0015% of the Fund’s average daily net assets in
referred accounts. This additional fee is determined by an
agreed upon level of assets at the time of signing the
contract.
Commodity Trading Advisor
Currently, the
Sponsor does not employ commodity trading advisors. If, in the
future, the Sponsor does employ commodity trading advisors, it will
choose each advisor based on arm’s length negotiations and
will consider the advisor’s experience, fees, and
reputation.
36
Contractual Fees and Compensation Arrangements with the Sponsor and
Third-Party Service Providers
|
Service Provider
|
Compensation Paid by the Fund
|
|
Teucrium
Trading, LLC, Sponsor
|
1.00%
of average net assets annually
|
|
U.S.
Bank N.A., Custodian
U.S.
Bancorp Fund Services, LLC, doing business as U.S. Bank Global Fund
Services, Transfer Agent, Fund Accountant and Fund
Administrator
|
For
custody services: 0.0075% of average gross assets up to $1 billion,
and .0050% of average gross assets over $1 billion, annually, plus
certain per-transaction charges
For
Transfer Agency, Fund Accounting and Fund Administration services,
based on the total assets for all the Teucrium Funds in the Trust:
0.06% of average gross assets on the first $250 million, 0.05% on
the next $250 million, 0.04% on the next $500 million and 0.03% on
the balance over $1 billion annually
A
combined minimum annual fee of $64,500 for custody, transfer
agency, accounting and administrative services is assessed per
Fund.
|
|
Foreside
Fund Services, LLC, Distributor
|
The
Distributor receives a fee of 0.01% of the Fund’s average
daily net assets and an aggregate annual fee of $100,000 for all
Teucrium Funds, along with certain expense reimbursements. Expense
reimbursements consist of costs for sales and advertising review
fees and will not exceed $6,000 for the two-year period of April
29, 2019 to April 29, 2021 (the “two year offering
period”). The asset-based fees which will be paid to the
Distributor by the Fund for distribution services will not exceed
$40,000 for the two-year offering period.
Under
the Securities Activities and Service Agreement (the
“SASA”), the Distributor receives compensation from the
fund for its activities on behalf of all the Teucrium Funds. The
fees paid to the Distributor pursuant to the SASA for this offering
will not exceed $5,000 for the two-year offering period. The total
expenses payable to the Distributor relating to the registration,
continuing education and other administrative expenses of the
Registered Representatives for this offering will not exceed $3,000
for the two-year offering period.
In sum,
the total fees the Distributor will receive over the two-year
offering period for all of its services will not exceed $54,000.
The total expenses that will be reimbursed to the Distributor over
the two-year offering period for all of its services will not
exceed $9,000, $6,000 of which are issuer costs for sales and
advertising materials.
|
|
Thales
Capital Partners LLC,
Marketing
Agent
ED&F
Man Capital Markets, Inc., Futures Commission Merchant and Clearing
Broker
|
The
marketing agent shall receive an annual fee of $90,000.
Additionally, the marketing agent will receive an additional
0.0015% of the Fund’s average
daily net assets in referred accounts. This additional fee
is determined by an agreed upon level of assets at the time
of signing the contract.
$4.50
per Sugar Futures Contract half-turn
|
|
Wilmington
Trust Company, Trustee
Employees
of the Sponsor Registered
with
the Distributor (the “Registered
Representatives”)
|
$3,300
annually for the Trust
For
non-marketing services to the Fund, $72,000 and, for marketing and
wholesaling purposes, $70,000. These amounts include expenses that
will be reimbursed to the Registered Representatives for travel and
other expenses related to their activities for the Fund. Of the
total amount, approximately $14,200 will be paid by the Sponsor,
the rest by the Fund. Registered Representatives will also receive
continuing education valued at a maximum of $300 for the two-year
offering period.
|
37
Other Non-Contractual Payments by the Fund
The Fund pays
for all brokerage fees, taxes and other expenses, including
licensing fees for the use of intellectual property, registration
or other fees paid to the SEC, FINRA, or any other regulatory
agency in connection with the offer and sale of subsequent Shares
after its initial registration and all legal, accounting, printing
and other expenses associated therewith. The Fund also pays its
portion of the fees and expenses for services directly attributable
to the Fund such as accounting, financial reporting, regulatory
compliance and trading activities, which the Sponsor elected not to
outsource. Certain aggregate expenses common to all Teucrium Funds
within the Trust are allocated by the Sponsor to the respective
funds based on activity drivers deemed most appropriate by the
Sponsor for such expenses, including but not limited to relative
assets under management and creation order activity. These
aggregate common expenses include, but are not limited to, legal,
auditing, accounting and financial reporting, tax-preparation,
regulatory compliance, trading activities, and insurance costs, as
well as fees paid to the Distributor. A portion of these aggregate
common expenses are related to the Sponsor or related parties of
principals of the Sponsor; these are necessary services to the
Teucrium Funds, which are primarily the cost of performing certain
accounting and financial reporting, regulatory compliance, and
trading activities that are directly attributable to the Fund and
are included, primarily, in distribution and marketing
fees.
|
|
Year Ended
December 31, 2019
|
Year Ended
December 31, 2018
|
Year Ended
December 31, 2017
|
|
Recognized Related Party Transactions
|
$ 183,750
|
$ 242,126
|
$ 109,266
|
|
Waived Related Party Transactions
|
$
77,532
|
$
93,112
|
$
57,667
|
The
Sponsor can elect to pay (or waive reimbursement for) certain fees
or expenses that would generally be paid for by the Fund, although
it has no contractual obligation to do so. Any election to pay or
waive reimbursement for fees that would generally be paid by the
Fund, can be changed at the discretion of the Sponsor. All
asset-based fees and expenses are calculated on the prior day's net
assets.
The
contractual and non-contractual fees and expenses paid by the Fund
as described above (exclusive of the Sponsor’s management fee
and estimated brokerage fees) are as follows, net of any expenses
waived by the Sponsor. These are also the “Other Fund Fees
and Expenses” included in the section entitled
“Breakeven Analysis” in this prospectus on page
4.
|
|
Per
Share
|
Per
Basket
|
|
Professional Fees1
|
$0.04
|
$1,000
|
|
Distribution and Marketing Fees2
|
0.05
|
1,250
|
|
Custodian Fees and Expenses3
|
0.01
|
250
|
|
General and Administrative Fees4
|
0.01
|
250
|
|
Business
Permits and Licenses
|
0.01
|
250
|
|
Other
Expenses
|
-
|
-
|
|
Total
Other Fund Fees and Expenses
|
$0.12
|
$3,000
|
(1)
Professional fees consist of primarily, but not entirely, legal,
auditing and tax-preparation related costs.
(2)
Distribution and marketing fees consist of primarily, but not
entirely, fees paid to the Distributor (Foreside Fund Services,
LLC), costs related to regulatory compliance activities, costs
related to marketing and solicitation services, and other costs
related to the trading activities of the Fund.
(3)
Custodian and Administrator fees consist of fees to the
Administrator and the Custodian for accounting, transfer agent and
custodian activities.
(4)
General and Administrative fees consist of primarily, but not
entirely, insurance and printing costs.
38
Asset-based
fees are calculated on a daily basis (accrued at 1/365 of the
applicable percentage of NAV on that day) and paid on a monthly
basis. NAV is calculated by taking the current market value of the
Fund’s total assets and subtracting any
liabilities.
Registered Form
Shares
are issued in registered form in accordance with the Trust
Agreement. Global Fund Services has been appointed
registrar and transfer agent for the purpose of transferring Shares
in certificated form. Global Fund Services keeps a
record of all Shareholders and holders of the Shares in
certificated form in the registry
(“Register”). The Sponsor recognizes
transfers of Shares in certificated form only if done in accordance
with the Trust Agreement. The beneficial interests in
such Shares are held in book-entry form through participants and/or
accountholders in DTC.
Book Entry
Individual
certificates are not issued for the Shares. Instead,
Shares are represented by one or more global certificates, which
are deposited by the Administrator with DTC and registered in the
name of Cede & Co., as nominee for DTC. The global
certificates evidence all of the Shares outstanding at any
time. Shareholders are limited to (1) participants in
DTC such as banks, brokers, dealers and trust companies (“DTC
Participants”), (2) those who maintain, either directly or
indirectly, a custodial relationship with a DTC Participant
(“Indirect Participants”), and (3) those who hold
interests in the Shares through DTC Participants or Indirect
Participants, in each case who satisfy the requirements for
transfers of Shares. DTC Participants acting on behalf
of investors holding Shares through such participants’
accounts in DTC will follow the delivery practice applicable to
securities eligible for DTC’s Same Day Funds Settlement
System. Shares are credited to DTC Participants’
securities accounts following confirmation of receipt of
payment.
DTC
DTC is
a limited purpose trust company organized under the laws of the
State of New York and is a member of the Federal Reserve System, a
“clearing corporation” within the meaning of the New
York Uniform Commercial Code and a “clearing agency”
registered pursuant to the provisions of Section 17A of the
Exchange Act. DTC holds securities for DTC Participants
and facilitates the clearance and settlement of transactions
between DTC Participants through electronic book-entry changes in
accounts of DTC Participants.
The
Shares are only transferable through the book-entry system of
DTC. Shareholders who are not DTC Participants may
transfer their Shares through DTC by instructing the DTC
Participant holding their Shares (or by instructing the Indirect
Participant or other entity through which their Shares are held) to
transfer the Shares. Transfers are made in accordance
with standard securities industry practice.
Transfers of
interests in Shares with DTC are made in accordance with the usual
rules and operating procedures of DTC and the nature of the
transfer. DTC has established procedures to facilitate
transfers among the participants and/or accountholders of
DTC. Because DTC can only act on behalf of DTC
Participants, who in turn act on behalf of Indirect Participants,
the ability of a person or entity having an interest in a global
certificate to pledge such interest to persons or entities that do
not participate in DTC, or otherwise take actions in respect of
such interest, may be affected by the lack of a certificate or
other definitive document representing such interest.
DTC has
advised us that it will take any action permitted to be taken by a
Shareholder (including, without limitation, the presentation of a
global certificate for exchange) only at the direction of one or
more DTC Participants in whose account with DTC interests in global
certificates are credited and only in respect of such portion of
the aggregate principal amount of the global certificate as to
which such DTC Participant or Participants has or have given such
direction.
39
Because
the Trust was established as a Delaware statutory trust, each
Teucrium Fund and each other series that may be established under
the Trust in the future will be operated so that it will be liable
only for obligations attributable to such series and will not be
liable for obligations of any other series or affected by losses of
any other series. If any creditor or shareholder of any
particular series (such as the Fund) asserts against the series a
valid claim with respect to its indebtedness or shares, the
creditor or shareholder will only be able to obtain recovery from
the assets of that series and not from the assets of any other
series or the Trust generally. The assets of the Fund
and any other series will include only those funds and other assets
that are paid to, held by or distributed to the series on account
of and for the benefit of that series, including, without
limitation, amounts delivered to the Trust for the purchase of
shares in a series. This limitation on liability is
referred to as the Inter-Series Limitation on
Liability. The Inter-Series Limitation on Liability is
expressly provided for under the Delaware Statutory Trust Act,
which provides that if certain conditions (as set forth in Section
3804(a)) are met, then the debts of any particular series will be
enforceable only against the assets of such series and not against
the assets of any other series or the Trust
generally. In furtherance of the Inter-Series Limitation
on Liability, every party providing services to the Trust, the Fund
or the Sponsor on behalf of the Trust or the Fund, will acknowledge
and consent in writing to the Inter-Series Limitation on Liability
with respect to such party’s claims.
The
existence of a Trustee should not be taken as an indication of any
additional level of management or supervision over the
Fund. Consistent with Delaware law, the Trustee acts in
an entirely passive role, delegating all authority for the
management and operation of the Fund and the Trust to the
Sponsor. The Trustee does not provide custodial services
with respect to the assets of the Fund.
Buying and Selling Shares
Most
investors buy and sell Shares of the Fund in secondary market
transactions through brokers. Shares trade on the NYSE
Arca under the ticker symbol “CANE.” Shares
are bought and sold throughout the trading day like other publicly
traded securities. When buying or selling Shares through
a broker, most investors incur customary brokerage commissions and
charges. Investors are encouraged to review the terms of
their brokerage account for details on applicable charges and, as
discussed below under “U.S. Federal Income Tax
Considerations,” any provisions authorizing the broker to
borrow Shares held on your behalf.
Distributor and Authorized Purchasers
The
offering of the Fund’s Shares is a best efforts offering. The
Fund continuously offers Creation Baskets consisting of 25,000
Shares at their NAV through the Distributor, to Authorized
Purchasers. Deutsche Bank Securities, Inc. was the initial
Authorized Purchaser. The initial Authorized Purchaser purchased
two Creation Baskets of 50,000 Shares each at a per Share price of
$25.00 on September 18, 2011. All Authorized Purchasers pay a $250
fee for each Creation Basket order.
The
following entities have entered into Authorized Purchaser
Agreements with respect to the Fund: Deutsche Bank Securities Inc.,
J.P. Morgan Securities LLC,
Merrill Lynch Professional Clearing Corp., Goldman Sachs & Co.,
Citadel Securities, LLC, and Virtu Americas LLC.
Because
new Shares can be created and issued on an ongoing basis, at any
point during the life of the Fund, a “distribution,” as
such term is used in the 1933 Act, will be occurring. Authorized
Purchasers, other broker-dealers and other persons are cautioned
that some of their activities may result in their being deemed
participants in a distribution in a manner that would render them
statutory underwriters and subject them to the prospectus delivery
and liability provisions of the 1933 Act. For example, an
Authorized Purchaser, other broker-dealer firm or its client will
be deemed a statutory underwriter if it purchases a basket from the
Fund, breaks the basket down into the constituent Shares and sells
the Shares to its customers; or if it chooses to couple the
creation of a supply of new Shares with an active selling effort
involving solicitation of secondary market demand for the Shares.
In contrast, Authorized Purchasers may engage in secondary market
or other transactions in Shares that would not be deemed
“underwriting.” For example, an Authorized Purchaser
may act in the capacity of a broker or dealer with respect to
Shares that were previously distributed by other Authorized
Purchasers. A determination of whether a particular market
participant is an underwriter must take into account all the facts
and circumstances pertaining to the activities of the broker-dealer
or its client in the particular case, and the examples mentioned
above should not be considered a complete description of all the
activities that would lead to designation as an underwriter and
subject them to the prospectus delivery and liability provisions of
the 1933 Act.
Dealers
who are neither Authorized Purchasers nor
“underwriters” but are nonetheless participating in a
distribution (as contrasted to ordinary secondary trading
transactions), and thus dealing with Shares that are part of an
“unsold allotment” within the meaning of Section
4(a)(3)(C) of the 1933 Act, would be unable to take advantage of
the prospectus delivery exemption provided by Section 4(a)(3) of
the 1933 Act.
The
Sponsor expects that any broker-dealers selling Shares will be
members of FINRA. Investors intending to create or redeem baskets
through Authorized Purchasers in transactions not involving a
broker-dealer registered in such investor’s state of domicile
or residence should consult their legal advisor regarding
applicable broker-dealer regulatory requirements under the state
securities laws prior to such creation or redemption.
40
While
the Authorized Purchasers may be indemnified by the Sponsor, they
will not be entitled to receive a discount or commission from the
Trust or the Sponsor for their purchases of Creation
Baskets.
The
Fund’s NAV per Share is calculated by:
|
|
●
|
taking
the current market value of its total assets, and
|
|
|
●
|
subtracting any
liabilities and dividing the balance by the number of
Shares.
|
Global
Fund Services, in its capacity as the Administrator calculates the
NAV of the Fund once each trading day. It calculates NAV
as of the earlier of the close of the New York Stock Exchange or
4:00 p.m. (EST). The NAV for a particular trading day is
released after 4:15 p.m. (EST).
In
determining the value of Sugar Futures Contracts, the Administrator
uses the ICE Futures settlement price, except that the “fair
value” of Sugar Futures Contracts (as described in more
detail below) may be used when Sugar Futures Contracts close at
their price fluctuation limit for the day. The
Administrator determines the value of all other Fund investments as
of the earlier of the close of the New York Stock Exchange or 4:00
p.m. (EST), in accordance with the current Services Agreement
between the Administrator and the Trust. The value of
over the counter Sugar Interests is determined based on the value
of the commodity or Futures Contract underlying such sugar
interest, except that a fair value may be determined if the Sponsor
believes that the Fund is subject to significant credit risk
relating to the counterparty to such sugar interest.
NAV includes any unrealized profit or loss on open sugar interests
and any other credit or debit accruing to the Fund but unpaid or
not received by the Fund.
The
fair value of a sugar interest is determined by the Sponsor in good
faith and in a manner that assesses the sugar interest’s
value based on a consideration of all available facts and all
available information on the valuation date. When a
Sugar Futures Contract has closed at its price fluctuation limit,
the fair value determination attempts to estimate the price at
which such Sugar Futures Contract would be trading in the absence
of the price fluctuation limit (either above such limit when an
upward limit has been reached or below such limit when a downward
limit has been reached). Typically, this estimate will
be made primarily by reference to the price of comparable sugar
interests trading in the over the counter market. The
fair value of a sugar interest may not reflect such
security’s market value or the amount that the Fund might
reasonably expect to receive for the sugar interest upon its
current sale.
In
addition, in order to provide updated information relating to the
Fund for use by investors and market professionals, ICE Data
Indices, LLC calculates and disseminates throughout the trading day
an updated “indicative fund value.” The
indicative fund value is calculated by using the prior day’s
closing NAV per Share of the Fund as a base and updating that value
throughout the trading day to reflect changes in the value of the
Fund’s sugar interests during the trading
day. Changes in the value of cash equivalents are not
included in the calculation of indicative value. For
this and other reasons, the indicative fund value disseminated
during NYSE Arca trading hours should not be viewed as an actual
real time update of the NAV. NAV is calculated only once
at the end of each trading day.
The
indicative fund value is disseminated on a per Share basis every 15
seconds during regular NYSE Arca trading hours of 9:30 a.m. (EST)
to 4:00 p.m. (EST). The normal trading hours for Sugar
Futures Contracts on ICE Futures are generally shorter than those
of the NYSE Arca. This means that there is a gap in time at the
beginning and the end of each day during which the Fund’s
Shares are traded on the NYSE Arca, but real-time ICE trading
prices for Sugar Futures Contracts traded on such exchange are not
available. As a result, during those gaps there is no update to the
indicative fund value. The trading hours for the ICE can be found
at: http://www.theice.com/productguide/Search.shtml?tradingHours=.
ICE
Data Indices, LLC disseminates the indicative fund value through
the facilities of CTA/CQ High Speed Lines. In addition,
the indicative fund value is published on the NYSE Arca’s
website and is available through on-line information services such
as Bloomberg and Reuters.
Dissemination of
the indicative fund value provides additional information that is
not otherwise available to the public and is useful to investors
and market professionals in connection with the trading of Fund
Shares on the NYSE Arca. Investors and market
professionals are able throughout the trading day to compare the
market price of the Fund and the indicative fund
value. If the market price of Fund Shares diverges
significantly from the indicative fund value, market professionals
may have an incentive to execute arbitrage trades. For
example, if the Fund appears to be trading at a discount compared
to the indicative fund value, a market professional could buy Fund
Shares on the NYSE Arca, aggregate them into Redemption Baskets,
and receive the NAV of such Shares by redeeming them to the Trust
provided that there is not a minimum number of shares outstanding
for the Fund. Such arbitrage trades can tighten the
tracking between the market price of the Fund and the indicative
fund value.
41
The
Fund creates and redeems Shares from time to time, but only in one
or more Creation Baskets or Redemption Baskets. The
creation and redemption of baskets are only made in exchange for
delivery to the Fund or the distribution by the Fund of the amount
of cash, cash equivalents and/or commodity futures equal to the
combined NAV of the number of Shares included in the baskets being
created or redeemed determined as of 4:00 p.m. (EST) on the day the
order to create or redeem baskets is properly
received.
Authorized
Purchasers are the only persons that may place orders to create and
redeem baskets. Authorized Purchasers must be (1) either
registered broker-dealers or other securities market participants,
such as banks and other financial institutions, that are not
required to register as broker-dealers to engage in securities
transactions as described below, and (2) DTC
Participants. To become an Authorized Purchaser, a
person must enter into an Authorized Purchaser Agreement with the
Sponsor. The Authorized Purchaser Agreement provides the
procedures for the creation and redemption of baskets and for the
delivery of the cash, cash equivalents and/or commodity futures
required for such creations and redemptions. The
Authorized Purchaser Agreement and the related procedures attached
thereto may be amended by the Sponsor, without the consent of any
Shareholder, and the related procedures may generally be amended by
the Sponsor without the consent of the Authorized
Purchaser. Authorized Purchasers pay a transaction fee
of $250 to the Custodian for each creation order they place and a
fee of $250 per order for redemptions. Authorized
Purchasers who make deposits with the Fund in exchange for baskets
receive no fees, commissions or other form of compensation or
inducement of any kind from either the Trust or the Sponsor, and no
such person will have any obligation or responsibility to the Trust
or the Sponsor to effect any sale or resale of Shares.
Certain Authorized Purchasers are expected to be
capable of participating directly in the physical sugar and the
sugar interest markets. Some Authorized Purchasers or
their affiliates may from time to time buy or sell sugar or sugar
interests and may profit in these
instances.
Each
Authorized Purchaser will be required to be registered as a
broker-dealer under the Exchange Act and a member in good standing
with FINRA, or be exempt from being or otherwise not required to be
registered as a broker-dealer or a member of FINRA, and will be
qualified to act as a broker or dealer in the states or other
jurisdictions where the nature of its business so
requires. Certain Authorized Purchasers may also be
regulated under federal and state banking laws and
regulations. Each Authorized Purchaser has its own set
of rules and procedures, internal controls and information barriers
it deems appropriate in light of its own regulatory
regime.
Under
the Authorized Purchaser Agreement, the Sponsor has agreed to
indemnify the Authorized Purchasers against certain liabilities,
including liabilities under the 1933 Act, and to contribute to the
payments the Authorized Purchasers may be required to make in
respect of those liabilities.
The
following description of the procedures for the creation and
redemption of baskets is only a summary and an investor should
refer to the relevant provisions of the Trust Agreement and the
form of Authorized Purchaser Agreement for more detail, each of
which has been incorporated by reference as an exhibit to the
registration statement of which this prospectus is a
part. See “Where You Can Find More
Information” for information about where you can obtain the
registration statement.
Creation Procedures
On any
business day, an Authorized Purchaser may place an order with
Global Fund Services in their capacity as the transfer agent to
create one or more baskets. For purposes of processing
purchase and redemption orders, a “business day” means
any day other than a day when any of the NYSE Arca, ICE Futures, or
the New York Stock Exchange is closed for regular
trading. Purchase orders must be placed by 12:00 p.m.
(EST) or the close of regular trading on the New York Stock
Exchange, whichever is earlier. The day on which the
Distributor receives a valid purchase order is referred to as the
purchase order date.
By
placing a purchase order, an Authorized Purchaser agrees to deposit
cash, cash equivalents, commodity futures and/or a combination
thereof with the Fund, as described below. Prior to the
delivery of baskets for a purchase order, the Authorized Purchaser
must also have wired to the Sponsor the non-refundable transaction
fee due for the purchase order. Authorized Purchasers
may not withdraw a purchase order without the prior consent of the
Sponsor in its discretion.
42
Determination of Required Deposits
The
total deposit required to create each basket (“Creation
Basket Deposit”) is the amount of cash, cash equivalents
and/or commodity futures that is in the same proportion to the
total assets of the Fund (net of estimated accrued but unpaid fees,
expenses and other liabilities) on the purchase order date as the
number of Shares to be created under the purchase order is in
proportion to the total number of Shares outstanding on the
purchase order date. The Sponsor determines, directly in
its sole discretion or in consultation with the Custodian and the
Administrator, the requirements for cash, cash equivalents and/or
commodity futures, including the remaining maturities of the cash
equivalents, that may be included in deposits to create
baskets. If cash equivalents are to be included in a
Creation Basket Deposit for orders placed on a given business day,
the Administrator will publish an estimate of the Creation Basket
Deposit requirements at the beginning of such day.
Delivery of Required Deposits
An
Authorized Purchaser who places a purchase order is responsible for
transferring to the Fund’s account with the Custodian the
required amount of cash, cash equivalents and/or commodity futures
by the end of the next business day following the purchase order
date or by the end of such later business day, not to exceed three
business days after the purchase order date, as agreed to between
the Authorized Purchaser and the Custodian when the purchase order
is placed (the “Purchase Settlement
Date”). Upon receipt of the deposit amount, the
Custodian directs DTC to credit the number of baskets ordered to
the Authorized Purchaser’s DTC account on the Purchase
Settlement Date.
Because
orders to purchase baskets must be placed by 12:00 p.m., (EST), but
the total payment required to create a basket during the continuous
offering period will not be determined until 4:00 p.m., (EST), on
the date the purchase order is received, Authorized Purchasers will
not know the total amount of the payment required to create a
basket at the time they submit an irrevocable purchase order for
the basket. The Fund’s NAV and the total amount of
the payment required to create a basket could rise or fall
substantially between the time an irrevocable purchase order is
submitted and the time the amount of the purchase price in respect
thereof is determined.
Rejection of Purchase Orders
The
Sponsor acting by itself or through the Distributor or Custodian
may reject a purchase order or a Creation Basket Deposit
if:
|
|
●
|
it
determines that, due to position limits or otherwise, investment
alternatives that will enable the Fund to meet its investment
objective are not available or practicable at that
time;
|
|
|
●
|
it
determines that the purchase order or the Creation Basket Deposit
is not in proper form;
|
|
|
●
|
it believes that acceptance of
the purchase order or the Creation Basket Deposit would have
adverse tax consequences to the Fund or its
Shareholders;
|
|
|
●
|
the
acceptance or receipt of the Creation Basket Deposit would, in the
opinion of counsel to the Sponsor, be unlawful;
|
|
|
●
|
circumstances
outside the control of the Sponsor, Distributor or transfer agent
make it, for all practical purposes, not feasible to process
creations of baskets;
|
|
|
●
|
there
is a possibility that any or all of the Benchmark Component Futures
Contracts of the Fund on the ICE Futures from which the NAV of the
Fund is calculated will be priced at a daily price limit
restriction; or
|
|
|
●
|
if, in
the sole discretion of the Sponsor, the execution of such an order
would not be in the best interest of the Fund or its
Shareholders.
|
None of
the Sponsor, Distributor or transfer agent will be liable for the
rejection of any purchase order or Creation Basket
Deposit.
43
Redemption Procedures
The
procedures by which an Authorized Purchaser can redeem one or more
baskets mirror the procedures for the creation of
baskets. On any business day, an Authorized Purchaser
may place an order with the transfer agent to redeem one or more
baskets. Redemption orders must be placed by 12:00 p.m.
(EST) or the close of regular trading on the New York Stock
Exchange, whichever is earlier. A redemption order so
received will be effective on the date it is received in
satisfactory form by the Distributor. The redemption
procedures allow Authorized Purchasers to redeem baskets and do not
entitle an individual Shareholder to redeem any Shares in an amount
less than a Redemption Basket, or to redeem baskets other than
through an Authorized Purchaser. By placing a redemption
order, an Authorized Purchaser agrees to deliver the baskets to be
redeemed through DTC’s book-entry system to the Fund by the
end of the next business day following the effective date of the
redemption order or by the end of such later business day. Prior to
the delivery of the redemption distribution for a redemption order,
the Authorized Purchaser must also have wired to the
Sponsor’s account at the Custodian the non-refundable
transaction fee due for the redemption order. An
Authorized Purchaser may not withdraw a redemption order without
the prior consent of the Sponsor in its discretion.
Determination of Redemption Distribution
The
redemption distribution from the Fund consists of a transfer to the
redeeming Authorized Purchaser of an amount of cash, cash
equivalents and/or commodity futures that is in the same proportion
to the total assets of the Fund (net of estimated accrued but
unpaid fees, expenses and other liabilities) on the date the order
to redeem is properly received as the number of Shares to be
redeemed under the redemption order is in proportion to the total
number of Shares outstanding on the date the order is received. The
Sponsor, directly or in consultation with the Custodian and the
Administrator, determines the requirements for cash, cash
equivalents and/or commodity futures, including the remaining
maturities of the cash equivalents and cash, that may be included
in distributions to redeem baskets. If cash equivalents are to be
included in a redemption distribution for orders placed on a given
business day, the Custodian and Administrator will publish an
estimate of the redemption distribution composition as of the
beginning of such day.
Delivery of Redemption Distribution
The
redemption distribution due from a Fund will be delivered to the
Authorized Purchaser on the Redemption Settlement Date if the
Fund’s DTC account has been credited with the baskets to be
redeemed. If the Fund’s DTC account has not been
credited with all of the baskets to be redeemed by the end of such
date, the redemption distribution will be delivered to the extent
of whole baskets received. Any remainder of the
redemption distribution will be delivered on the next business day
after the Redemption Settlement Date to the extent of remaining
whole baskets received. Pursuant to information from the
Sponsor, the Custodian will also be authorized to deliver the
redemption distribution notwithstanding that the baskets to be
redeemed are not credited to the Fund’s DTC account by noon
(EST) on the Redemption Settlement Date if the Authorized Purchaser
has collateralized its obligation to deliver the baskets through
DTC’s book-entry system on such terms as the Sponsor may from
time to time determine.
Suspension or Rejection of Redemption Orders
The
Sponsor may, in its discretion, suspend the right of redemption, or
postpone the redemption settlement date, (1) for any period during
which the NYSE Arca or ICE Futures is closed other than customary
weekend or holiday closings, or trading on the NYSE Arca or ICE
Futures is suspended or restricted, (2) for any period during which
an emergency exists as a result of which delivery, disposal or
evaluation of cash equivalents is not reasonably practicable, (3)
for such other period as the Sponsor determines to be necessary for
the protection of the Shareholders, (4) if there is a possibility
that any or all of the Benchmark Component Futures Contracts of the
Fund on the ICE Futures from which the NAV of the Fund is
calculated will be priced at a daily price limit restriction, or
(5) if, in the sole discretion of the Sponsor, the execution of
such an order would not be in the best interest of the Fund or its
Shareholders. For example, the Sponsor may determine
that it is necessary to suspend redemptions to allow for the
orderly liquidation of the Fund’s assets at an appropriate
value to fund a redemption. If the Sponsor has
difficulty liquidating the Fund’s positions, e.g., because of
a market disruption event in the futures markets or an
unanticipated delay in the liquidation of a position in an over the
counter contract, it may be appropriate to suspend redemptions
until such time as such circumstances are
rectified. None of the Sponsor, the Distributor, or the
transfer agent will be liable to any person or in any way for any
loss or damages that may result from any such suspension or
postponement.
Redemption orders
must be made in whole baskets. The Sponsor will reject a redemption
order if the order is not in proper form as described in the
Authorized Purchaser Agreement or if the fulfillment of the order,
in the opinion of its counsel, might be unlawful. The
Sponsor may also reject a redemption order if the number of Shares
being redeemed would reduce the remaining outstanding Shares to
50,000 Shares (i.e., two baskets of 25,000 Shares each) or less,
unless the Sponsor has reason to believe that the placer of the
redemption order does in fact possess all the outstanding Shares
and can deliver them.
44
Creation and Redemption Transaction Fees
To
compensate for expenses in connection with the creation and
redemption of baskets, an Authorized Purchaser is required to pay a
transaction fee of $250 per order to the Custodian. The
transaction fees may be reduced, increased or otherwise changed by
the Sponsor.
Tax Responsibility
Authorized
Purchasers are responsible for any transfer tax, sales or use tax,
stamp tax, recording tax, value added tax or similar tax or
governmental charge applicable to the creation or redemption of
baskets, regardless of whether or not such tax or charge is imposed
directly on the Authorized Purchaser, and agree to indemnify the
Sponsor and the Fund if they are required by law to pay any such
tax, together with any applicable penalties, additions to tax and
interest thereon.
As
noted, the Fund will create and redeem Shares from time to time,
but only in one or more Creation Baskets or Redemption
Baskets. The creation and redemption of baskets are only
made in exchange for delivery to the Fund or the distribution by
the Fund of the amount of cash, cash equivalents, and/or commodity
futures equal to the aggregate NAV of the number of Shares included
in the baskets being created or redeemed determined on the day the
order to create or redeem baskets is properly
received.
As
discussed above, Authorized Purchasers are the only persons that
may place orders to create and redeem
baskets. Authorized Purchasers must be registered
broker-dealers or other securities market participants, such as
banks and other financial institutions that are not required to
register as broker-dealers to engage in securities
transactions. An Authorized Purchaser is under no
obligation to create or redeem baskets, and an Authorized Purchaser
is under no obligation to offer to the public Shares of any baskets
it does create. Authorized Purchasers that do offer to
the public Shares from the baskets they create will do so at per
Share offering prices that are expected to reflect, among other
factors, the trading price of the Shares on the NYSE Arca, the NAV
of the Shares at the time the Authorized Purchaser purchased the
Creation Baskets, the NAV of the Shares at the time of the offer of
the Shares to the public, the supply of and demand for Shares at
the time of sale, and the liquidity of the sugar interest
markets. The prices of Shares offered by Authorized
Purchasers are expected to fall between the Fund’s NAV and
the trading price of the Shares on the NYSE Arca at the time of
sale. Shares initially comprising the same basket but
offered by Authorized Purchasers to the public at different times
may have different offering prices. An order for one or
more baskets may be placed by an Authorized Purchaser on behalf of
multiple clients. Shares are expected to trade in the
secondary market on the NYSE Arca. Shares may trade in
the secondary market at prices that are lower or higher relative to
their NAV per Share. The amount of the discount or
premium in the trading price relative to the NAV per Share may be
influenced by various factors, including the number of investors
who seek to purchase or sell Shares in the secondary market and the
liquidity of the sugar interest markets. While the
Shares trade on the NYSE Arca until 4:00 p.m. (EST), liquidity in
the markets for sugar interests may be reduced after the close of
the ICE Futures. As a result, during this time, trading
spreads, and the resulting premium or discount, on the Shares may
widen.
The
Sponsor causes the Fund to transfer the proceeds of the sale of
Creation Baskets to the Custodian or another financial institution
for use in trading activities and/or investment in Benchmark
Component Futures Contracts and cash and cash equivalents. Under
normal market conditions, the Sponsor invests the Fund’s
assets in Benchmark Component Futures Contracts and cash and cash
equivalents. When the Fund purchases Benchmark Component Futures
Contracts, the Fund is required to deposit with the FCM on behalf
of the exchange a portion of the value of the contract or other
interest as security to ensure payment for the obligation under the
Benchmark Component Futures Contracts at maturity. This deposit is
known as initial margin. Counterparties in transactions in over the
counter sugar interests will generally impose similar collateral
requirements on the Fund. The Sponsor invests the Fund’s
assets that remain after margin and collateral is posted in cash
and cash equivalents. Subject to these margin and collateral
requirements, the Sponsor has sole authority to determine the
percentage of assets that will be:
|
|
●
|
held as
margin or collateral with FCMs or other custodian;
|
|
|
●
|
used
for other investments; and
|
|
|
●
|
held in
bank accounts to pay current obligations and as
reserves.
|
45
In
general, the Fund expects that it will be required to post
approximately 4-6% of the notional amount of a Benchmark Component
Futures Contracts as initial margin when entering into such
Benchmark Component Futures Contracts. Ongoing margin and
collateral payments will generally be required for both
exchange-traded and over the counter sugar interests based on
changes in the value of the sugar interests. Furthermore, ongoing
collateral requirements with respect to over the counter sugar
interests are negotiated by the parties, and may be affected by
overall market volatility, volatility of the underlying commodity
or index, the ability of the counterparty to hedge its exposure
under the sugar interest, and each party’s creditworthiness.
In light of the differing requirements for initial payments under
exchange-traded and over the counter sugar interests and the
fluctuating nature of ongoing margin and collateral payments, it is
not possible to estimate what portion of the Fund’s assets
will be posted as margin or collateral at any given time. Cash and
cash equivalents held by the Fund constitute reserves that are
available to meet ongoing margin and collateral requirements. All
interest or other income is used for the Fund’s
benefit.
An FCM,
counterparty, government agency or commodity exchange could
increase margin or collateral requirements applicable to the Fund
to hold trading positions at any time. Moreover, margin
is merely a security deposit and has no bearing on the profit or
loss potential for any positions held. Further, under recently
adopted CFTC rules, the Fund may be obligated to post both initial
and variation margin with respect to swaps (and options that
qualify as swaps) and traded over-the -counter, and, where
applicable, on SEFs.
The
approximate 4-6% of the Fund’s assets held by the FCM are
held in segregation pursuant to the CEA and CFTC
regulations.
The
following paragraphs are a summary of certain provisions of the
Trust Agreement. The following discussion is qualified in its
entirety by reference to the Trust Agreement.
Authority of the Sponsor
The
Sponsor is generally authorized to perform all acts deemed
necessary to carry out the purposes of the Trust and to conduct the
business of the Trust. The Trust and the Fund will continue to
exist until terminated in accordance with the Trust
Agreement.
The Sponsor’s Obligations
In
addition to the duties imposed by the Delaware Trust Statute, under
the Trust Agreement the Sponsor has obligations as a Sponsor of the
Trust, which include, among others, responsibility for certain
organizational and operational requirements of the Trust, as well
as fiduciary responsibility for the safekeeping and use of the
Trust’s assets, whether or not in the Sponsor’s
immediate possession or control.
To the
extent that, at law (common or statutory) or in equity, the Sponsor
has duties (including fiduciary duties) and liabilities relating
thereto to the Trust, the Fund, the Shareholders or to any other
person, the Sponsor will not be liable to the Trust, the Fund, the
Shareholders or to any other person for its good faith reliance on
the provisions of the Trust Agreement or this prospectus unless
such reliance constitutes gross negligence or willful misconduct on
the part of the Sponsor. The provisions of the Trust Agreement, to
the extent they restrict or eliminate the duties and liabilities of
the Sponsor otherwise existing at law or in equity, replace such
other duties and liabilities of the Sponsor.
46
Liability and Indemnification
Under
the Trust Agreement, the Sponsor, the Trustee and their respective
Affiliates (collectively, “Covered Persons”) shall have
no liability to the Trust, the Fund, or to any Shareholder for any
loss suffered by the Trust or the Fund which arises out of any
action or inaction of such Covered Person if such Covered Person,
in good faith, determined that such course of conduct was in the
best interest of the Trust or the Fund and such course of conduct
did not constitute gross negligence or willful misconduct of such
Covered Person. Subject to the foregoing, neither the Sponsor nor
any other Covered Person shall be personally liable for the return
or repayment of all or any portion of the capital or profits of any
Shareholder or assignee thereof, it being expressly agreed that any
such return of capital or profits made pursuant to the Trust
Agreement shall be made solely from the assets of the applicable
Teucrium Fund without any rights of contribution from the Sponsor
or any other Covered Person. A Covered Person shall not be liable
for the conduct or willful misconduct of any administrator or other
delegate selected by the Sponsor with reasonable care, provided,
however, that the Trustee and its Affiliates shall not, under any
circumstances be liable for the conduct or willful misconduct of
any administrator or other delegate or any other person selected by
the Sponsor to provide services to the Trust.
The
Trust Agreement also provides that the Sponsor shall be indemnified
by the Trust (or by a series separately to the extent the matter in
question relates to a single series or disproportionately affects a
specific series in relation to other series) against any losses,
judgments, liabilities, expenses and amounts paid in settlement of
any claims sustained by it in connection with its activities for
the Trust, provided that (i) the Sponsor was acting on behalf of or
performing services for the Trust and has determined, in good
faith, that such course of conduct was in the best interests of the
Trust and such liability or loss was not the result of
gross negligence,
willful misconduct, or a breach of the Trust Agreement on the part
of the Sponsor and (ii) any such indemnification will only be
recoverable from the assets of the applicable series. The
Sponsor’s rights to indemnification permitted under the Trust
Agreement shall not be affected by the dissolution or other
cessation to exist of the Sponsor, or the withdrawal, adjudication
of bankruptcy or insolvency of the Sponsor, or the filing of a
voluntary or involuntary petition in bankruptcy under Title 11 of
the Bankruptcy Code by or against the Sponsor.
Notwithstanding the
above, the Sponsor shall not be indemnified for any losses,
liabilities or expenses arising from or out of an alleged violation
of U.S. federal or state securities laws unless (i) there has been
a successful adjudication on the merits of each count involving
alleged securities law violations as to the particular indemnitee
and the court approves the indemnification of such expenses
(including, without limitation, litigation costs), (ii) such claims
have been dismissed with prejudice on the merits by a court of
competent jurisdiction as to the particular indemnitee and the
court approves the indemnification of such expenses (including,
without limitation, litigation costs), or (iii) a court of
competent jurisdiction approves a settlement of the claims against
a particular indemnitee and finds that indemnification of the
settlement and related costs should be made.
The
payment of any indemnification shall be allocated, as appropriate,
among the Trust’s series. The Trust and its series shall not
incur the cost of that portion of any insurance which insures any
party against any liability, the indemnification of which is
prohibited under the Trust Agreement.
Expenses incurred
in defending a threatened or pending action, suit or proceeding
against the Sponsor shall be paid by the Trust in advance of the
final disposition of such action, suit or proceeding, if (i) the
legal action relates to the performance of duties or services by
the Sponsor on behalf of the Trust; (ii) the legal action is
initiated by a party other than the Trust; and (iii) the Sponsor
undertakes to repay the advanced funds with interest to the Trust
in cases in which it is not entitled to
indemnification.
The
Trust Agreement provides that the Sponsor and the Trust shall
indemnify the Trustee and its successors, assigns, legal
representatives, officers, directors, shareholders, employees,
agents and servants (the “Trustee Indemnified Parties”)
against any liabilities, obligations, losses, damages, penalties,
taxes (excluding any taxes on the compensation received for
services as Trustee or on indemnity payments received), claims,
actions, suits, costs, expenses or disbursements which may be
imposed on a Trustee Indemnified Party relating to or arising out
of the formation, operation or termination of the Trust, the
execution, delivery and performance of any other agreements to
which the Trust is a party, or the action or inaction of the
Trustee under the Trust Agreement or any other agreement, except
for expenses resulting from the gross negligence or willful
misconduct of a Trustee Indemnified Party. Further, certain
officers of the Sponsor are insured against liability for certain
errors or omissions which an officer may incur or that may arise
out of his or her capacity as such.
In the
event the Trust is made a party to any claim, dispute, demand or
litigation or otherwise incurs any liability or expense as a result
of or in connection with any Shareholder’s (or
assignee’s) obligations or liabilities unrelated to the Trust
business, such Shareholder (or assignees cumulatively) is required
under the Trust Agreement to indemnify the Trust for all such
liability and expense incurred, including attorneys’ and
accountants’ fees.
47
Withdrawal of the Sponsor
The
Sponsor may withdraw voluntarily as the Sponsor of the Trust only
upon ninety (90) days’ prior written notice to the holders of
the Trust’s outstanding shares and the Trustee. If
the withdrawing Sponsor is the last remaining Sponsor, shareholders
holding a majority (over 50%) of the outstanding shares of the
Teucrium Funds, voting together as a single class (not including
shares acquired by the Sponsor through its initial capital
contribution) may vote to elect a successor Sponsor. The
successor Sponsor will continue the business of the
Trust. Shareholders have no right to remove the
Sponsor.
In the
event of withdrawal, the Sponsor is entitled to a redemption of the
shares it acquired through its initial capital contribution to any
of the series of the Trust at their NAV per Share. If
the Sponsor withdraws and a successor Sponsor is named, the
withdrawing Sponsor shall pay all expenses as a result of its
withdrawal.
Meetings
Meetings of the
Trust’s shareholders may be called by the Sponsor and will be
called by it upon the written request of Shareholders holding at
least 25% of the outstanding Shares of the Trust or the Fund, as
applicable (not including Shares acquired by the Sponsor through
its initial capital contribution). The Sponsor shall deposit in the
United States mail or electronically transmit written notice to all
Shareholders of the Fund of the meeting and the purpose of the
meeting, which shall be held on a date not less than 30 nor more
than 60 days after the date of mailing of such notice, at a
reasonable time and place. Where the meeting is called upon the
written request of the shareholders of the Fund, or any other
Teucrium Fund, as applicable, such written notice shall be mailed
or transmitted not more than 45 days after such written request for
a meeting was received by the Sponsor.
Voting Rights
Shareholders have
no voting rights with respect to the Trust or the Fund except as
expressly provided in the Trust Agreement. The Trust Agreement
provides that shareholders representing at least a majority (over
50%) of the outstanding shares of the Teucrium Funds voting
together as a single class (excluding shares acquired by the
Sponsor in connection with its initial capital contribution to any
Trust series) may vote to (i) continue the Trust by electing a
successor Sponsor as described above, and (ii) approve amendments
to the Trust Agreement that impair the right to surrender
Redemption Baskets for redemption. (Trustee consent to any
amendment to the Trust Agreement is required if the Trustee
reasonably believes that such amendment adversely affects any of
its rights, duties or liabilities.) In addition, shareholders
holding shares representing seventy-five percent (75%) of the
outstanding shares of the Teucrium Funds, voting together as a
single class (excluding shares acquired by the Sponsor in
connection with its initial capital contribution to any Trust
series) may vote to dissolve the Trust upon not less than ninety
(90) days’ notice to the Sponsor.
Limited Liability of Shareholders
Shareholders shall
be entitled to the same limitation of personal liability extended
to stockholders of private corporations for profit organized under
the general corporation law of Delaware, and no Shareholder shall
be liable for claims against, or debts of the Trust or the Fund in
excess of his share of the Fund’s assets. The Trust or the
Fund shall not make a claim against a Shareholder with respect to
amounts distributed to such Shareholder or amounts received by such
Shareholder upon redemption unless, under Delaware law, such
Shareholder is liable to repay such amount.
The
Trust or the Fund shall indemnify to the full extent permitted by
law and the Trust Agreement each Shareholder (excluding the Sponsor
to the extent of its ownership of any Shares acquired through its
initial capital contribution) against any claims of liability
asserted against such Shareholder solely because of its ownership
of Shares (other than for taxes on income from Shares for which
such Shareholder is liable).
The
Trust Agreement provides that every written note, bond, contract,
instrument, certificate or undertaking made or issued by or on
behalf of the Fund shall give notice to the effect that the
obligations of such instrument are not binding upon the
Shareholders individually but are binding only upon the assets and
property of the Fund.
48
The Sponsor Has Conflicts of Interest
There
are present and potential future conflicts of interest in the
Trust’s structure and operation you should consider before
you purchase Shares. The Sponsor may use this notice of conflicts
as a defense against any claim or other proceeding
made.
The
Sponsor’s principals, officers, and employees, do not devote
their time exclusively to the Funds. Notwithstanding obligations
and expectations related to the management of the Sponsor, the
Sponsor’s principals, officers and employees may be
directors, officers or employees of other entities, and may manage
assets of other entities, including the other Teucrium Funds,
through the Sponsor or otherwise. As a result, the principals could
have a conflict between responsibilities to the Fund on the one
hand and to those other entities on the other.
The
Sponsor and its principals, officers and employees may trade
securities, futures and related contracts for their own accounts,
creating the potential for preferential treatment of their own
accounts. Shareholders will not be permitted to inspect the trading
records of such persons or any written policies of the Sponsor
related to such trading. A conflict of interest may exist if their
trades are in the same markets and at approximately the same times
as the trades for the Fund. A potential conflict also may occur
when the Sponsor’s principals trade their accounts more
aggressively or take positions in their accounts which are
opposite, or ahead of, the positions taken by the
Fund.
The
Sponsor has sole current authority to manage the investments and
operations of the Fund, and this may allow it to act in a way that
furthers its own interests which may create a conflict with your
best interests, including the authority of the Sponsor to allocate
expenses to and between the Teucrium Funds. Shareholders have very
limited voting rights with respect to the Fund, which will limit
the ability to influence matters such as amendment of the Trust
Agreement, change in the Fund’s basic investment policies, or
dissolution of the Fund or the Trust.
The
Sponsor serves as the Sponsor to the Teucrium Funds and may in the
future serve as the Sponsor or investment adviser to commodity
pools other than the Teucrium Funds. The Sponsor may have a
conflict to the extent that its trading decisions for the Fund may
be influenced by the effect they would have on the other pools it
manages. In addition, the Sponsor may be required to indemnify the
officers and directors of the other pools, if the need for
indemnification arises. This potential indemnification will cause
the Sponsor’s assets to decrease. If the Sponsor’s
other sources of income are not sufficient to compensate for the
indemnification, it could cease operations, which could in turn
result in Fund losses and/or termination of the Fund.
If the
Sponsor acquires knowledge of a potential transaction or
arrangement that may be an opportunity for the Fund, it shall have
no duty to offer such opportunity to the Fund. The Sponsor will not
be liable to the Fund or the Shareholders for breach of any
fiduciary or other duty if the Sponsor pursues such opportunity or
directs it to another person or does not communicate such
opportunity to the Fund, and is not required to share income or
profits derived from such business ventures with the
Fund.
The
Trust Agreement provides that whenever a conflict of interest
exists between the Sponsor or any of its Affiliates, on the one
hand, and the Trust, any shareholder of a Trust series, or any
other person, on the other hand, the Sponsor shall resolve such
conflict of interest, take such action or provide such terms,
considering in each case the relative interest of each party
(including its own interest) to such conflict, agreement,
transaction or situation and the benefits and burdens relating to
such interests, any customary or accepted industry practices, and
any applicable generally accepted accounting practices or
principles. In the absence of bad faith by the Sponsor, the
resolution, action or terms so made, taken or provided by the
Sponsor shall not constitute a breach of the Trust Agreement or any
other agreement contemplated therein or of any duty or obligation
of the Sponsor at law or in equity or otherwise.
No
expert hired by the Fund to give advice on the preparation of this
offering document has been hired on a contingent fee
basis, nor do any of them have any present or future
expectation of interest in the Sponsor, Distributor, Authorized
Purchasers, Custodian/Administrator or other service providers to
the Fund.
49
This
offering is made pursuant to federal and state securities
laws. The SEC and state securities agencies take the
position that indemnification of the Sponsor that arises out of an
alleged violation of such laws is prohibited unless certain
conditions are met. Those conditions require that no
indemnification of the Sponsor or any underwriter for the Fund may
be made in respect of any losses, liabilities or expenses arising
from or out of an alleged violation of federal or state securities
laws unless: (i) there has been a successful
adjudication on the merits of each count involving alleged
securities law violations as to the party seeking indemnification
and the court approves the indemnification; (ii) such claim has
been dismissed with prejudice on the merits by a court of competent
jurisdiction as to the party seeking indemnification; or (iii) a
court of competent jurisdiction approves a settlement of the claims
against the party seeking indemnification and finds that
indemnification of the settlement and related costs should be made,
provided that, before seeking such approval, the Sponsor or other
indemnitee must apprise the court of the position held by
regulatory agencies against such indemnification.
The Trust keeps its books of record and account
at its office located at Three Main Street,
Suite 215, Burlington, VT 05401, or at the offices of the Administrator, U.S.
Bancorp Fund Services, LLC, doing business as U.S. Bank Global Fund
Services located at 777 E. Wisconsin Ave, Milwaukee, Wisconsin
53202, or such office, including of an administrative agent, as it
may subsequently designate upon notice. The books of account
of the Fund are open to inspection by any Shareholder (or any duly
constituted designee of a Shareholder) at all times during the
usual business hours of the Fund upon reasonable advance notice to
the extent such access is required under CFTC rules and
regulations. In addition, the Trust keeps a copy of the Trust
Agreement on file in its office which will be available for
inspection by any Shareholder at all times during its usual
business hours upon reasonable advance notice.
The
Trust will furnish to DTC Participants for distribution to
Shareholders annual reports (as of the end of each fiscal year) for
the Fund as are required to be provided to Shareholders by the CFTC
and the NFA. These annual reports will contain financial
statements prepared by the Sponsor and audited by an independent
registered public accounting firm designated by the
Sponsor. The Trust will also post monthly reports to the
Fund’s website (www.teucrium.com). These
monthly reports will contain certain unaudited financial
information regarding the Fund, including the Fund’s
NAV. The Sponsor will furnish to the Shareholders other
reports or information which the Sponsor, in its discretion,
determines to be necessary or appropriate. In addition,
under SEC rules the Trust will be required to file quarterly and
annual reports for the Fund with the SEC, which need not be sent to
Shareholders but will be publicly available through the
SEC. The Trust will post the same information that would
otherwise be provided in the Trust’s CFTC, NFA and SEC
reports on the Fund’s website: www.teucrium.com.
The
accountants’ report on its audit of the Fund’s
financial statements will be furnished by the Trust to Shareholders
upon request. The Trust will file such tax returns, and prepare,
disseminate and file such tax reports for the Fund as it is advised
by its counsel or accountants are from time to time required by any
applicable statute, rule or regulation and will make such tax
elections for the Fund as it deems advisable.
PricewaterhouseCoopers
(“PwC”), 2001 Ross Avenue, Suite 1800, Dallas, Texas
75201-2997, will provide tax information in accordance with the
Code and applicable U.S. Treasury Regulations. Persons treated as
middlemen for purposes of these regulations may obtain tax
information regarding the Fund from PwC or from the Fund’s
website, www.teucrium.com.
Fiscal Year
The
fiscal year of the Fund is the calendar year.
50
Governing Law
The
rights of the Sponsor, the Trust, the Fund, DTC (as registered
owner of the Fund’s global certificate for Shares) and the
Shareholders are governed by the laws of the State of Delaware,
except with respect to causes of action for violations of U.S.
federal or state securities laws. The Trust Agreement and the
effect of every provision thereof shall control over any contrary
or limiting statutory or common law of the State of Delaware, other
than the Delaware Trust Statute.
Security Ownership of Principal Shareholders and
Management
The
following table sets forth information with respect to each person
or entity known to own beneficially more than 5% of the outstanding
shares of CANE as of December 31, 2019, based on information known
to the Sponsor.
|
(1)
Title of Class
|
(2)
Name and Address of Beneficial Owner
|
(3)
Amount and Nature of Beneficial Ownership
|
(4)
Percent of Class
|
|
CANE
|
Korea
Securities Depository,
Seoul
KS
|
181,234
common units (1)
|
10.36%
|
(1)
These individuals and entities have not filed any public reports
with the SEC.
The
following table sets forth information regarding the beneficial
ownership of shares of CANE by the executive officers of the
Sponsor as of June 30, 2020. Except as listed, no other
executive officer of the Sponsor is a beneficial owner of shares of
the Fund.
|
(1)
Title
of Class
|
(2)
Name
of Beneficial Owner
|
(3)
Amount
and nature of Beneficial Ownership
|
(4)
Percent
of Class
|
|
CANE
|
Sal
Gilbertie
|
500
common units
|
*
|
*Less
than 1%.
Legal Matters
Litigation and Claims
Within
the past 10 years of the date of this prospectus, there have been
no material administrative, civil or criminal actions against the
Sponsor, the Trust or the Fund, or any principal or affiliate of
any of them. This includes any actions pending, on
appeal, concluded, threatened, or otherwise known to
them.
Legal Opinion
[
] has been retained to advise the Trust and the Sponsor with
respect to the Shares being offered hereby and has passed upon the
validity of the Shares being issued hereunder. [
] has also provided the Sponsor
with its opinion with respect to federal income tax matters
addressed below in “U.S. Federal Income Tax
Considerations..”
51
Experts
The
financial statements of the Trust and the Fund, and
management’s assessment of the effectiveness of internal
control over financial reporting of the Trust and the Fund
incorporated by reference in this prospectus and elsewhere in the
registration statement have been so incorporated by reference in
reliance upon the reports of [
], independent registered public accountants, upon the
authority of said firm as experts in accounting and
auditing.
Privacy Policy
The
following discussion is qualified in its entirety by reference to
the privacy policy. A copy of the privacy policy is available at
www.teucrium.com.
The
Sponsor, the Trust, and the Teucrium Funds have adopted a privacy
policy relating to the collection, maintenance, and use of
nonpublic personal information about the Teucrium Funds’
current and former investors, as required under federal law.
Federal law gives investors the
right to limit some but not all sharing of their nonpublic personal
information. Federal law also requires the Sponsor to tell
investors how it collects, shares, and protects such nonpublic
personal information.
Collection of Nonpublic Personal Information
The
Sponsor may collect or have access to nonpublic personal
information about current and former Fund investors for certain
purposes relating to the operation of the Funds. This information
may include information received from investors, such as their
name, social security number, telephone number, and address, and
information about investors’ holdings and transactions in
shares of the Teucrium Funds.
Use and Disclosure of Nonpublic Personal Information
The
Sponsor does not sell nonpublic personal information to any third
parties. The Sponsor primarily uses investors’ nonpublic
personal information to complete financial transactions that may be
requested. The Sponsor may disclose investors’ nonpublic
personal information to third parties under specific circumstances
described in the privacy policy. These circumstances include, among
others, information needed to complete financial transactions,
information released at the direction of an investor, and certain
information requested by courts, regulators, law enforcement, or
tax authorities. Investors may not opt out of these
disclosures.
Investors’
nonpublic personal information, particularly information about
investors’ holdings and transactions in shares of the
Teucrium Funds, may be shared between and amongst the Sponsor and
the Teucrium Funds. An investor
cannot opt-out of the sharing of nonpublic personal information
between and amongst the Sponsor and the Teucrium Funds.
However, the Sponsor and the Teucrium Funds will not use this
information for any cross-marketing purposes. In other words, all investors will be treated
as having “opted out” of receiving marketing
solicitations from Teucrium Funds other than the Teucrium Fund(s)
in which it invests.
Protection of Nonpublic Personal Information
As
described in the privacy policy, the Sponsor takes safeguards to
protect investors’ nonpublic personal information, which
include, among others, restricting access to such information,
requiring third parties to follow appropriate standards of security
and confidentiality, and maintaining physical, technical,
administrative, and procedural safeguards.
52
Teucrium’s
Website is hosted in the United States and any data provided to
Teucrium is stored in the United States. If you choose to provide
Personal Data from regions outside of the United States, then by
your submission of such data, you acknowledge and agree that: (a)
you are transferring your personal information outside of those
regions to the United States voluntarily and with consent; (b) the
laws and regulations of the United States shall govern your use of
the provision of your information, which laws and regulations may
differ from those of your country of residence; and (c) you permit
your personal information to be used for the purposes herein and in
the Privacy Policy above.
U.S. Federal Income Tax Considerations
The
following discussion summarizes the material U.S. federal income
tax consequences of the purchase, ownership and disposition of
Shares of the Fund and the U.S. federal income tax treatment of the
Fund. Except where noted otherwise, it deals only with the tax
consequences relating to Shares held as capital assets by U.S.
Shareholders (as defined below) who are not subject to special tax
treatment. For example, in general it does not address the tax
consequences, such as, but not limited to dealers in securities or
currencies or commodities, traders in securities or dealers or
traders in commodities that elect to use a mark to market method of
accounting, financial institutions, tax-exempt entities (except as
discussed below), insurance companies, persons holding Shares as a
part of a position in a “straddle” or as part of a
“hedging,” “conversion” or other integrated
transaction for federal income tax purposes, persons with
“applicable financial statements" within the meaning of
Section 451(b) of the Internal Revenue Code of 1986, as amended
(the “Code”), or holders of Shares whose
“functional currency” is not the U.S. dollar.
Furthermore, the discussion below is based on the provisions of the
Code, and regulations (“Treasury Regulations”), rulings
and judicial decisions thereunder as of the date hereof, and such
authorities may be repealed, revoked or modified (possibly with
retroactive effect) so as to result in U.S. federal income tax
consequences different from those discussed below.
The
Sponsor has received the opinion of Vedder Price, counsel to the
Trust, that the material U.S. federal income tax consequences to
the Fund and to U.S. Shareholders and Non-U.S. Shareholders (as
defined below) will be as described in the following paragraphs. In
rendering its opinion, Vedder Price has relied on the facts and
assumptions described in this prospectus as well as certain factual
representations made by the Trust, the Fund, and the Sponsor. This
opinion is not binding on the Internal Revenue Service (the "IRS")
and is not a guarantee of the results. No ruling has been requested
from the IRS with respect to any matter affecting the Fund or
prospective investors, and the IRS may disagree with the tax
positions taken by the Trust. If the IRS were to challenge the
Trust’s tax positions in litigation, they might not be
sustained by the courts.
As used
herein, the term “U.S. Shareholder” means a Shareholder
that is, for United States federal income tax purposes, (i) a
citizen or resident of the United States, (ii) a corporation
created or organized in or under the laws of the United States or
any political subdivision thereof, (iii) an estate the income of
which is subject to United States federal income taxation
regardless of its source or (iv) a trust that (a) is subject to the
supervision of a court within the United States and the control of
one or more United States persons as described in section
7701(a)(30) of the Code, or (b) has a valid election in effect
under applicable Treasury Regulations to be treated as a United
States person. A “Non-U.S. Shareholder” is a holder
that is not a U.S. Shareholder. If a partnership or other entity or
arrangement treated as a partnership holds our Shares, the tax
treatment of a partner will generally depend upon the status of the
partner and the activities of the partnership. If you are a partner
of a partnership holding our Shares, the discussion below may not
be applicable to you and you should consult your own tax advisor
regarding the tax consequences of acquiring, owning and disposing
of Shares.
EACH
PROSPECTIVE INVESTOR IS ADVISED TO CONSULT ITS OWN TAX ADVISOR
REGARDING THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF AN INVESTMENT
IN SHARES, AS WELL AS ANY APPLICABLE STATE, LOCAL OR FOREIGN TAX
CONSEQUENCES, IN LIGHT OF ITS PARTICULAR
CIRCUMSTANCES.
Tax Classification of the Trust and the Fund
The
Trust is organized and will be operated as a statutory trust in
accordance with the provisions of the Trust Agreement and
applicable Delaware law. Notwithstanding the Trust’s status
as a statutory trust and the Fund’s status as a series of the
Trust, due to the nature of its activities the Fund will be treated
as a partnership rather than a trust for U.S. federal income tax
purposes. In addition, the trading of Shares on the NYSE Arca will
cause the Fund to be classified as a “publicly traded
partnership” for federal income tax purposes. Under the Code,
a publicly traded partnership is generally taxable as a
corporation. In the case of an entity (such as the Fund) not
registered under the Investment Company Act of 1940 as amended, and
not meeting certain other conditions, however, an exception to this
general rule applies if at least 90% of the entity’s gross
income is “qualifying income” for each taxable year of
its existence (the “qualifying income exception”). For
this purpose, qualifying income is defined as including, in
pertinent part, interest (other than from a financial business),
dividends, and gains from the sale or disposition of capital assets
held for the production of interest or dividends. In the case of a
partnership of which a principal activity is the buying and selling
of commodities other than as inventory or of futures, forwards and
options with respect to commodities, “qualifying
income” also includes income and gains from commodities and
from such futures, forwards, options, and, provided the partnership
is a trader or investor with respect to such assets, swaps and
other notional principal contracts with respect to commodities. The
Trust and the Sponsor have represented the following to Vedder
Price:
53
|
|
●
|
at
least 90% of the Fund’s gross income for each taxable year
will constitute “qualifying income” within the meaning
of Code section 7704 (as described above);
|
|
|
●
|
the
Fund is organized and will be operated in accordance with its
governing documents and applicable law; and
|
|
|
●
|
the
Fund has not elected, and will not elect, to be classified as a
corporation for U.S. federal income tax purposes.
|
Based
in part on these representations, Vedder Price is of the opinion
that the Fund will be treated as a partnership that it is not
taxable as a corporation for U.S. federal income tax purposes. The
Fund’s taxation as a partnership rather than a corporation
will require the Sponsor to conduct the Fund’s business
activities in such a manner that it satisfies the requirements of
the qualifying income exception on a continuing basis. No
assurances can be given that the Fund’s operations for any
given year will produce income that satisfies these requirements.
Vedder Price will not review the Fund’s ongoing compliance
with these requirements and will have no obligation to advise the
Trust, the Fund or the Fund’s Shareholders in the event of
any subsequent change in the facts, representations or applicable
law relied upon in reaching its opinion.
If the
Fund failed to satisfy the qualifying income exception in any year,
other than a failure that is determined by the IRS to be
inadvertent and that is cured within a reasonable time after
discovery (in which case, as a condition of relief, the Fund could
be required to pay the government amounts determined by the IRS),
the Fund would be taxable as a corporation for federal income tax
purposes and would pay federal income tax on its income at regular
corporate rates. In that event, Shareholders would not report their
share of the Fund’s income or loss on their tax returns.
Distributions by the Fund (if any) would be treated as dividend
income to the Shareholders to the extent of the Fund’s
current and accumulated earnings and profits, then treated as a
tax-free return of capital to the extent of the Shareholder’s
basis in the Shares (and will reduce the basis), and, to the extent
it exceeds a Shareholder’s basis in such Shares, as capital
gain for Shareholders who hold their Shares as capital assets.
Accordingly, if the Fund were to be taxable as a corporation, it
would likely have a material adverse effect on the economic return
from an investment in the Fund and on the value of the
Shares.
The
remainder of this summary assumes that the Fund is classified for
federal income tax purposes as a partnership that it is not taxable
as a corporation.
U.S. Shareholders
Tax Consequences of Ownership of Shares
Taxation of the Fund’s Income. No
U.S. federal income tax is paid by the Fund on its income. Instead,
the Fund files annual partnership returns, and each U.S.
Shareholder is required to report on its U.S. federal income tax
return its allocable share of the income, gain, loss, deductions
and credits reflected on such returns. If the Fund recognizes
income, including interest on cash equivalents and net capital
gains from cash settlement of Benchmark Component Futures Contracts
for a taxable year, Shareholders must report their share of these
items even though the Fund makes no distributions of cash or
property during the taxable year. Consequently, a Shareholder may
be taxable on income or gain recognized by the Fund but receive no
cash distribution with which to pay the resulting tax liability or
may receive a distribution that is insufficient to pay such
liability. Because the Sponsor currently does not intend to make
distributions, it is likely that a U.S. Shareholder that realizes
net income or gain with respect to Shares for a taxable year will
be required to pay any resulting tax from sources other than Fund
distributions. Additionally, individuals with modified adjusted
gross income in excess of $200,000 ($250,000 in the case of married
individuals filing jointly) and certain estates and trusts are
subject to an additional 3.8% tax on their “net investment
income,” which generally includes net income from interest,
dividends, annuities, royalties, and rents, and net capital gains
(other than certain amounts earned from trades or businesses). Also
included as income subject to the additional 3.8% tax is income
from businesses involved in the trading of financial instruments or
commodities.
54
Monthly Conventions for Allocations of the
Fund’s Profit and Loss and Capital Account
Restatements. Under Code section 704, the determination of a
partner’s distributive share of any item of income, gain,
loss, deduction or credit is governed by the applicable
organizational document unless the allocation provided by such
document lacks “substantial economic effect.” An
allocation that lacks substantial economic effect nonetheless will
be respected if it is in accordance with the partners’
interests in the partnership, determined by considering all facts
and circumstances relating to the economic arrangements among the
partners. Subject to the possible exception for certain conventions
to be used by the Fund as discussed below, allocations pursuant to
the Trust Agreement should be considered as having substantial
economic effect or being in accordance with Shareholders’
interests in the Fund.
In
situations where a partner’s interest in a partnership is
redeemed or sold during a taxable year, the Code generally requires
that partnership tax items for the year be allocated to the partner
using either an interim closing of the books or a daily proration
method. The Fund intends to allocate tax items using an interim
closing of the book’s method under which income, gains,
losses and deductions will be determined on a monthly basis, taking
into account the Fund’s accrued income and deductions and
gains and losses (both realized and unrealized) for the month. The
tax items for each month during a taxable year will then be
allocated among the holders of Shares in proportion to the number
of Shares owned by them as of the close of trading on the last
trading day of the preceding month (the “monthly allocation
convention”).
Under
the monthly allocation convention, an investor who disposes of a
Share during the current month will be treated as disposing of the
Share as of the end of the last day of the calendar month. For
example, an investor who buys a Share on April 10 of a year and
sells it on May 20 of the same year will be allocated all of the
tax items attributable to May (because it is deemed to hold the
Share through the last day of May) but none of those attributable
to April. The tax items attributable to that Share for April will
be allocated to the person who held the Share as of the close of
trading on the last trading day of March. Under the monthly
allocation convention, an investor who purchases and sells a Share
during the same month, and therefore does not hold (and is not
deemed to hold) the Share at the close of the last trading day of
either that month or the previous month, will receive no
allocations with respect to that Share for any period. Accordingly,
investors may receive no allocations with respect to Shares that
they actually held or may receive allocations with respect to
Shares attributable to periods that they did not actually hold the
Shares.
By
investing in Shares, a U.S. Shareholder agrees that, in the absence
of new legislation, regulatory or administrative guidance, or
judicial rulings to the contrary, it will file its U.S. income tax
returns in a manner that is consistent with the monthly allocation
convention as described above and with the IRS Schedule K-1 or any
successor form provided to Shareholders by the Fund or the
Trust.
For any
month in which a Creation Basket is issued or a Redemption Basket
is redeemed, the Fund will credit or debit the “book”
capital accounts of existing Shareholders with the amount of any
unrealized gain or loss, respectively, on Fund assets. For this
purpose, unrealized gain or loss will be computed based on the
lowest NAV of the Fund’s assets during the month in which
Shares are issued or redeemed, which may be different than the
value of the assets on the date of an issuance or redemption. The
capital accounts as adjusted in this manner will be used in making
tax allocations intended to account for differences between the tax
basis and fair market value of property owned by the Fund at the
time new Shares are issued or outstanding Shares are redeemed
(so-called “reverse Code section 704(c) allocations”).
The intended effect of these adjustments is to equitably allocate
among Shareholders any unrealized appreciation or depreciation in
the Fund’s assets existing at the time of a contribution or
redemption for book and tax purposes.
The
conventions used by the Fund, as noted above, in making tax
allocations may cause a Shareholder to be allocated more or less
income or loss for U.S. federal income tax purposes than its
proportionate share of the economic income or loss realized by the
Fund during the period it held its Shares. This mismatch between
taxable and economic income or loss in some cases may be temporary,
reversing itself in a later year when the Shares are sold, but
could be permanent. As one example, a Shareholder could be
allocated income accruing after it sold its Shares, resulting in an
increase in the basis of the Shares (see “Tax Basis of Shares”, below). In
connection with the disposition of the Shares, the additional basis
might produce a capital loss the deduction of which may be limited
(see “Limitations on
Deductibility of Losses and Certain Expenses”,
below).
55
Section 754 election. The Fund has made
the election permitted by section 754 of the Code, which election
is irrevocable without the consent of the IRS. The effect of this
election is that when a secondary market sale of Shares occurs, the
Fund adjusts the purchaser’s proportionate share of the tax
basis of the Fund’s assets to fair market value, as reflected
in the price paid for the Shares, as if the purchaser had directly
acquired an interest in the Fund’s assets. The section 754
election is intended to eliminate disparities between a
partner’s basis in its partnership interest and its share of
the tax basis of the partnership’s assets, so that the
partner’s allocable share of taxable gain or loss on a
disposition of an asset will correspond to its share of the
appreciation or depreciation in the value of the asset since it
acquired its interest. Depending on the price paid for Shares and
the tax basis of the Fund’s assets at the time of the
purchase, the effect of the section 754 election on a purchaser of
Shares may be favorable or unfavorable. In order to make the
appropriate basis adjustments in a cost-effective manner, the Fund
will use certain simplifying conventions and assumptions. In
particular, the Fund will obtain information regarding secondary
market transactions in its Shares and use this information to
adjust the Shareholders’ indirect basis in the Fund’s
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 Sugar Futures Contracts will qualify as
“section 1256 contracts” under the Code. Some other
sugar 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.
Commodity swaps will most likely not qualify as section 1256
contracts. If a commodity swap is not taxable as a section 1256
contract, any gain or loss on the swap will be recognized at the
time of disposition or termination as long-term or short-term
capital gain or loss depending on the holding period of the swap in
the Fund’s hands.
Foreign
exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currency-denominated debt
securities, certain futures contracts, forward contracts, options
and similar investments denominated in a foreign currency, and
payables or receivables denominated in a foreign currency are
subject to section 988 of the Code, which generally causes such
gain and loss to be treated as ordinary income or loss. To the
extent the Fund hold foreign investments, it may be subject to
withholding and other taxes imposed by foreign countries. Tax
treaties between certain countries and the United States may reduce
or eliminate such taxes. Because the amount of the Fund’s
investments in various countries will change from time to time, it
is not possible to determine the effective rate of such taxes in
advance.
Limitations on Deductibility of Losses and
Certain Expenses. A number of different provisions of the
Code may defer or disallow the deduction of losses or expenses
allocated to Shareholders by the Fund, including but not limited to
those described below.
A
Shareholder’s deduction of its allocable share of any loss of
the Fund is limited to the lesser of (1) the tax basis in its
Shares or (2) in the case of a Shareholder that is an individual or
a closely held corporation, the amount which the Shareholder is
considered to have “at risk” with respect to the
Fund’s activities. In general, the amount at risk initially
will be a Shareholder’s invested capital. Losses in excess of
the amount at risk must be deferred until years in which the Fund
generates additional taxable income against which to offset such
carryover losses or until additional capital is placed at
risk.
Individuals and
other non-corporate taxpayers are permitted to deduct capital
losses only to the extent of their capital gains for the taxable
year plus $3,000 of other income. Unused capital losses can be
carried forward and used in future years, subject to these same
limitations. In addition, an individual taxpayer may elect to carry
back net losses on section 1256 contracts to each of the three
preceding years and use them to offset section 1256 contract gains
in those years, subject to certain limitations. Corporate taxpayers
generally may deduct capital losses only to the extent of capital
gains, subject to special carryback and carryforward
rules.
56
The
deduction for expenses incurred by non-corporate taxpayers
constituting “miscellaneous itemized deductions,”
generally including investment-related expenses (other than
interest and certain other specified expenses), is suspended for
taxable years beginning after December 31, 2017 and before January
1, 2026. During these taxable years, non-corporate taxpayers will
not be able to deduct miscellaneous itemized deductions. Provided
the suspension is not extended, for taxable years ending on or
after January 1, 2026, miscellaneous itemized deductions are
deductible only to the extent they exceed 2% of the
taxpayer’s adjusted gross income for the year. Although the
matter is not free from doubt, we believe management fees the Fund
pays to the Sponsor and other expenses of the Fund constitute
investment-related expenses subject to this miscellaneous itemized
deduction limitation, rather than expenses incurred in connection
with a trade or business and will report these expenses consistent
with that interpretation. For taxable years beginning on or after
January 1, 2026, the Code imposes additional limitations on the
amount of certain itemized deductions allowable to individuals with
adjusted gross income in excess of certain amounts by reducing the
otherwise allowable portion of such deductions by an amount equal
to the lesser of:
●
3% of the individual’s adjusted gross income in excess of
certain threshold amounts; or
●
80% of the amount of certain itemized deductions otherwise
allowable for the taxable year.
Non-corporate
Shareholders generally may deduct “investment interest
expense” only to the extent of their “net investment
income.” Investment interest expense of a Shareholder will
generally include any interest expense accrued by the Fund and any
interest paid or accrued on direct borrowings by a Shareholder to
purchase or carry its Shares, such as interest with respect to a
margin account. Net investment income generally includes gross
income from property held for investment (including
“portfolio income” under the passive loss rules but
not, absent an election, long-term capital gains or certain
qualifying dividend income) less deductible expenses other than
interest directly connected with the production of investment
income.
If
the Fund incurs indebtedness, the Fund’s ability to deduct
interest on its indebtedness allocable to its trade or business is
limited to an amount equal to the sum of (1) the Fund’s
business interest income during the year and (2) 30% of the
Fund’s adjusted taxable income for such taxable year, subject
to the exception in the Coronavirus Aid, Relief, and Economic
Security Act ("CARES Act") discussed below. If the Fund is not
entitled to fully deduct its business interest in any taxable year,
such excess business interest expense will be allocated to each
Shareholder as excess business interest and can be carried forward
by the Shareholder to successive taxable years and used to offset
any excess taxable income allocated by the Fund to such
Shareholder. Any excess business interest expense allocated to a
Shareholder will reduce such Shareholder’s basis in its
Shares in the year of the allocation even if the expense does not
give rise to a deduction to the Shareholder in that year.
Immediately prior to a Shareholder’s disposition of its
Shares, the Shareholder’s basis will be increased by the
amount by which such basis reduction exceeds the excess interest
expense that has been deducted by such Shareholder.
For
the Fund’s taxable year beginning in 2020, the CARES Act
increases the 30% adjusted taxable income limitation to 50% unless
the Fund elects to have the 30% limitation apply. For purposes of
determining the Fund’s 50% adjusted taxable income
limitation, the Fund may elect to substitute the Fund’s 2019
adjusted taxable income for the Fund’s 2020 adjusted taxable
income, which could result in a greater business interest expense
deduction if the Fund has business interest expense. In addition,
Shareholders may treat 50% of the excess business interest
allocated to them in 2019, if any, as deductible in the
Shareholder’s first taxable year beginning in 2020 without
regard to the 2020 business interest expense limitation. The
remaining 50% of such Shareholder’s excess business interest
is carried forward and subject to the same limitations as other
taxable years.
To the
extent that the Fund allocates losses or expenses to you that must
be deferred or are disallowed as a result of these or other
limitations in the Code, you may be taxed on income in excess of
your economic income or distributions (if any) on your Shares. As
one example, you could be allocated and required to pay tax on your
share of interest income accrued by the Fund for a particular
taxable year, and in the same year be allocated a share of a
capital loss that you cannot deduct currently because you have
insufficient capital gains against which to offset the loss. As
another example, you could be allocated and required to pay tax on
your share of interest income and capital gain for a year but be
unable to deduct some or all of your share of management fees
and/or margin account interest incurred by you with respect to your
Shares. Shareholders are urged to consult their own professional
tax advisor regarding the effect of limitations under the Code on
their ability to deduct their allocable share of the Fund’s
losses and expenses.
57
Tax Basis of Shares
A
Shareholder’s tax basis in its Shares is important in
determining (1) the amount of taxable gain or loss it will realize
on the sale or other disposition of its Shares, (2) the amount of
non-taxable distributions that it may receive from the Fund, and
(3) its ability to utilize its distributive share of any losses of
the Fund on its federal income tax return. A Shareholder’s
initial tax basis of its Shares will equal its cost for the Shares
plus its share of the Fund’s liabilities (if any) at the time
of purchase. In general, a Shareholder’s “share”
of those liabilities will equal the sum of (i) the entire amount of
any otherwise nonrecourse liability of the Fund as to which the
Shareholder or certain affiliates of the Shareholder is the
creditor (a “partner nonrecourse liability”) and (ii) a
pro rata share of any nonrecourse liabilities of the Fund that are
not partner nonrecourse liabilities as to any
Shareholder.
A
Shareholder’s tax basis in its Shares generally will be (1)
increased by (a) its allocable share of the Fund’s taxable
income and gain and (b) any additional contributions by the
Shareholder to the Fund and (2) decreased (but not below zero) by
(a) its allocable share of the Fund’s tax deductions and
losses and (b) any distributions by the Fund to the Shareholder.
For this purpose, an increase in a Shareholder’s share of the
Fund’s liabilities will be treated as a contribution of cash
by the Shareholder to the Fund and a decrease in that share will be
treated as a distribution of cash by the Fund to the Shareholder.
Pursuant to certain IRS rulings, a Shareholder will be required to
maintain a single, “unified” basis in all Shares that
it owns. As a result, when a Shareholder that acquired its Shares
at different prices sells less than all of its Shares, such
Shareholder will not be entitled to specify particular Shares
(e.g., those with a higher
basis) as having been sold. Rather, it must determine its gain or
loss on the sale by using an “equitable apportionment”
method to allocate a portion of its unified basis in its Shares to
the Shares sold.
Treatment of Fund Distributions. If the
Fund makes non-liquidating distributions to Shareholders, such
distributions generally will not be taxable to the Shareholders for
federal income tax purposes except to the extent that the amount of
money distributed exceeds the Shareholder’s adjusted basis of
its interest in the Fund immediately before the distribution. Any
money distributed that is in excess of a Shareholder’s tax
basis generally will be treated as gain from the sale or exchange
of Shares. For purposes
of determining the gain recognized on a distribution from a
partnership, a marketable security distributed to a partner is
generally treated as money. This treatment, however, does not apply
to distributions to “eligible partners” of an
“investment partnership,” as those terms are defined in
the Code.
Tax Consequences of
Disposition of Shares
If a
Shareholder sells its Shares, it will recognize gain or loss equal
to the difference between the amount realized and its adjusted tax
basis for the Shares sold. A Shareholder’s amount realized
will be the sum of the cash or the fair market value of other
property received plus its share of the Fund's
liabilities.
Gain or
loss recognized by a Shareholder on the sale or exchange of Shares
held for more than one year will generally be taxable as long-term
capital gain or loss; otherwise, such gain or loss will generally
be taxable as short-term capital gain or loss. A special election
is available under the Treasury Regulations that allows
Shareholders to identify and use the actual holding periods for the
Shares sold for purposes of determining whether the gain or loss
recognized on a sale of Shares will give rise to long-term or
short-term capital gain or loss. It is expected that most
Shareholders will be eligible to elect, and generally will elect,
to identify and use the actual holding period for Shares sold. If a
Shareholder who has differing holding periods for its Shares fails
to make the election or is not able to identify the holding periods
of the Shares sold, the Shareholder will have a split holding
period in the Shares sold. Under such circumstances, a Shareholder
will be required to determine its holding period in the Shares sold
by first determining the portion of its entire interest in the Fund
that would give rise to long-term capital gain or loss if its
entire interest were sold and the portion that would give rise to
short-term capital gain or loss if the entire interest were sold.
The Shareholder would then treat each Share sold as giving rise to
long-term capital gain or loss and short-term capital gain or loss
in the same proportions as if it had sold its entire interest in
the Fund.
58
Under
Section 751 of the Code, a portion of a Shareholder’s gain or
loss from the sale of Shares (regardless of the holding period for
such Shares), will be separately computed and taxed as ordinary
income or loss to the extent attributable to “unrealized
receivables” or “inventory” owned by the Fund.
The term “unrealized receivables” includes, among other
things, market discount bonds and short-term debt instruments to
the extent such items would give rise to ordinary income if sold by
the Fund. However, the short-term capital gain on section 1256
contracts resulting from 60-40 treatment, described above, should
not be subject to this rule.
If some
or all of a Shareholder’s Shares are lent by its broker or
other agent to a third party — for example, for use by the
third party in covering a short sale — the Shareholder may be
considered as having made a taxable disposition of the loaned
Shares, in which case —
|
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●
|
the
Shareholder may recognize taxable gain or loss to the same extent
as if it had sold the Shares for cash;
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|
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|
any of
the income, gain, loss or deduction allocable to those Shares
during the period of the loan is not reportable by the Shareholder
for tax purposes; and
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●
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any
distributions the Shareholder receives with respect to the Shares
under the loan agreement will be fully taxable to the Shareholder,
most likely as ordinary income.
|
Shareholders
desiring to avoid these and other possible consequences of a deemed
disposition of their Shares should consider modifying any
applicable brokerage account agreements to prohibit the lending of
their Shares.
Other Tax Matters
Information
Reporting. The Fund provides tax information to the Shareholders
and to the IRS, as required. Shareholders of the Fund are treated
as partners for federal income tax purposes. Accordingly, the Fund
will furnish Shareholders each year, with tax information on IRS
Schedule K-1 (Form 1065), which will be used by the Shareholders in
completing their tax returns. The IRS has ruled that assignees of
partnership interests who have not been admitted to a partnership
as partners but who have the capacity to exercise substantial
dominion and control over the assigned partnership interests will
be considered partners for federal income tax purposes. On the
basis of this ruling, except as otherwise provided herein, we will
treat as a Shareholder any person whose shares are held on their
behalf by a broker or other nominee if that person has the right to
direct the nominee in the exercise of all substantive rights
attendant to the ownership of the Shares.
Persons
who hold an interest in the Fund as a nominee for another person
are required to furnish to us the following information: (1) the
name, address and taxpayer identification number of the beneficial
owner and the nominee; (2) whether the beneficial owner is (a) a
person that is not a U.S. person, (b) a foreign government, an
international organization or any wholly-owned agency or
instrumentality of either of the foregoing, or (c) a tax-exempt
entity; (3) the number and a description of Shares acquired or
transferred for the beneficial owner; and (4) certain information
including the dates of acquisitions and transfers, means of
acquisitions and transfers, and acquisition cost for purchases, as
well as the amount of net proceeds from sales. Brokers and
financial institutions are required to furnish additional
information, including whether they are U.S. persons and certain
information on Shares they acquire, hold or transfer for their own
account. A penalty of $250 per failure (as adjusted for inflation),
up to a maximum of $3,000,000 per calendar year (as adjusted for
inflation), is imposed by the Code for failure to report such
information correctly to the Fund. If the failure to furnish such
information correctly is determined to be willful, the per failure
penalty increases to $500 (as adjusted for inflation) or, if
greater, 10% of the aggregate amount of items required to be
reported, and the $3,000,000 maximum does not apply. The nominee is
required to supply the beneficial owner of the Shares with the
federal income tax information furnished by the Fund.
Partnership Audit
Procedures. The IRS may audit the federal income tax returns filed
by the Fund. Adjustments resulting from any such audit may require
a Shareholder to adjust a prior year’s tax liability and
could result in an audit of the Shareholder’s own return. Any
audit of a Shareholder’s return could result in adjustments
of non-partnership items as well as Fund items. Partnerships are
generally treated as separate entities for purposes of federal tax
audits, judicial review of administrative adjustments by the IRS,
and tax settlement proceedings. The tax treatment of partnership
items of income, gain, loss and deduction are determined at the
partnership level in a unified partnership proceeding rather than
in separate proceedings with the partners. The Code provides for
one partner to be designated as the “tax matters
partner” and to represent the partnership for purposes of
these proceedings. The Trust Agreement appoints the Sponsor as the
tax matters partner of the Fund.
59
The
Bipartisan Budget Act of 2015 adopted a new partnership-level audit
and assessment procedure for all entities treated as partnerships
for U.S. federal income tax purposes. These new rules generally
apply to partnership taxable years beginning after December 31,
2017. Under these rules, tax deficiencies (including interest and
penalties) that arise from an adjustment to partnership items
generally would be assessed and collected from the partnership
(rather than from the partners), and generally would be calculated
using maximum applicable tax rates (although such partnership level
tax may be reduced or eliminated under limited circumstances). A
narrow category of partnerships (generally, partnerships having no
more than 100 partners that consist exclusively of individuals, C
corporations, S corporations and estates) are permitted to elect
out of the new partnership-level audit rules. As an alternative to
partnership-level tax liability, a partnership may elect to furnish
adjusted Schedule K-1s to the IRS and to each person who was a
partner in the audit year, stating such partner’s share of
any partnership adjustments, and each such partner would then take
the adjustments into account on its tax returns in the year in
which it receives its adjusted Schedule K-1 (rather than by
amending their tax returns for the audited year). If the Fund were
subject to a partnership level tax as a result of these new rules,
the economic return of all Shareholders (including Shareholders
that did not own Shares in the Fund during the taxable year to
which the audit relates) may be affected.
To
address these new rules, the Sponsor amended the Trust Agreement so
that if the Fund becomes subject to any tax as a result of any
adjustment to taxable income, gain, loss, deduction or credit for
any taxable year of the Fund (pursuant to a tax audit or
otherwise), such Shareholder (and each former Shareholder) is
obligated to indemnify the Fund and the Sponsor against any such
taxes (including any interest and penalties) to the extent such tax
(or portion thereof) is properly attributable to such Shareholder
(or former Shareholder). In addition, the Sponsor, on behalf of the
Fund, will be authorized to take any action permitted under
applicable law to avoid the assessment of any such taxes against
the Fund (including an election to issue adjusted Schedule K-1s to
the Shareholders (and/or former Shareholders) which takes such
adjustments to taxable income, gain, loss, deduction or credit into
account.
Reportable
Transaction Rules. In certain circumstances the Code and Treasury
Regulations require that the IRS be notified of transactions
through a disclosure statement attached to a taxpayer’s
United States federal income tax return. These disclosure rules may
apply to transactions irrespective of whether they are structured
to achieve particular tax benefits. They could require disclosure
by the Trust or Shareholders if a Shareholder incurs a loss in
excess of a specified threshold from a sale or redemption of its
Shares and possibly in other circumstances. While these rules
generally do not require disclosure of a loss recognized on the
disposition of an asset in which the taxpayer has a
“qualifying basis” (generally a basis equal to the
amount of cash paid by the taxpayer for such asset), they apply to
a loss recognized with respect to interests in a pass-through
entity, such as the Shares, even if the taxpayer’s basis in
such interests is equal to the amount of cash it paid. In addition,
significant monetary penalties may be imposed in connection with a
failure to comply with these reporting requirements. Investors
should consult their own tax advisor concerning the application of
these reporting requirements to their specific
situation.
Tax-Exempt
Organizations. Subject to numerous exceptions, qualified retirement
plans and individual retirement accounts, charitable organizations
and certain other organizations that otherwise are exempt from U.S.
federal income tax (collectively, “exempt
organizations”) nonetheless are subject to the tax on
unrelated business taxable income (“UBTI”). Generally,
UBTI means the gross income derived by an exempt organization from
a trade or business that it regularly carries on, the conduct of
which is not substantially related to the exercise or performance
of its exempt purpose or function, less allowable deductions
directly connected with that trade or business. If the Fund were to
regularly carry on (directly or indirectly) a trade or business
that is unrelated with respect to an exempt organization
Shareholder, then in computing its UBTI, the Shareholder must
include its share of (1) the Fund’s gross income from the
unrelated trade or business, whether or not distributed, and (2)
the Fund’s allowable deductions directly connected with that
gross income. An exempt organization that has more than one
unrelated trade or business generally must compute its UBTI
separately for each such trade or business.
UBTI
generally does not include dividends, interest, or payments with
respect to securities loans and gains from the sale of property
(other than property held for sale to customers in the ordinary
course of a trade or business). Nonetheless, income on, and gain
from the disposition of, “debt-financed property” is
UBTI. Debt-financed property generally is income-producing property
(including securities), the use of which is not substantially
related to the exempt organization’s tax-exempt purposes, and
with respect to which there is “acquisition
indebtedness” at any time during the taxable year (or, if the
property was disposed of during the taxable year, the 12-month
period ending with the disposition). Acquisition indebtedness
includes debt incurred to acquire property, debt incurred before
the acquisition of property if the debt would not have been
incurred but for the acquisition, and debt incurred subsequent to
the acquisition of property if the debt would not have been
incurred but for the acquisition and at the time of acquisition the
incurrence of debt was foreseeable. The portion of the income from
debt-financed property attributable to acquisition indebtedness is
equal to the ratio of the average outstanding principal amount of
acquisition indebtedness over the average adjusted basis of the
property for the year. The Fund currently does not anticipate that
it will borrow money to acquire investments; however, the Fund
cannot be certain that it will not borrow for such purpose in the
future, which could result in an exempt organization Shareholder
having UBTI. In addition, an exempt organization Shareholder that
incurs acquisition indebtedness to purchase its Shares in the Fund
may have UBTI.
The
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.
60
Regulated
Investment Companies. Interests in and income from “qualified
publicly traded partnerships” satisfying certain gross income
tests are treated as qualifying assets and income, respectively,
for purposes of determining eligibility for regulated investment
company (“RIC”) status. A RIC may invest up to 25% of
its assets in interests in qualified publicly traded partnerships.
The determination of whether a publicly traded partnership such as
the Fund is a qualified publicly traded partnership is made on an
annual basis. The Fund expects to be a qualified publicly traded
partnership in each of its taxable years. However, such
qualification is not assured.
Non-U.S. Shareholders
Generally, non-U.S.
persons who derive U.S. source income or gain from investing or
engaging in a U.S. business are taxable on two categories of
income. The first category consists of amounts that are fixed or
determinable, annual or periodic income, such as interest,
dividends and rent that are not connected with the operation of a
U.S. trade or business (“FDAP”). The second category is
income that is effectively connected with the conduct of a U.S.
trade or business (“ECI”). FDAP income (other than
interest that is considered “portfolio interest;” as
discussed below) is generally subject to a 30% withholding tax,
which may be reduced for certain categories of income by a treaty
between the U.S. and the recipient’s country of residence. In
contrast, ECI is generally subject to U.S. tax on a net basis at
graduated rates upon the filing of a U.S. tax return. Where a
non-U.S. person has ECI as a result of an investment in a
partnership, the ECI is currently subject to a withholding tax at a
rate of 37% for individual Shareholders and a rate of 21% for
corporate Shareholders. The tax withholding on ECI, which is the
highest tax rate under Code section 1 for non-corporate Non-U.S.
Shareholders and Code section 11(b) for corporate Non-U.S.
Shareholders, may increase in future tax years if tax rates
increase from their current levels.
Withholding on
Allocations and Distributions. The Code provides that a non-U.S.
person who is a partner in a partnership that is engaged in a U.S.
trade or business during a taxable year will also be considered to
be engaged in a U.S. trade or business during that year.
Classifying an activity by a partnership as an investment or an
operating business is a factual determination. Under certain safe
harbors in the Code, an investment fund whose activities consist of
trading in stocks, securities, or commodities for its own account
generally will not be considered to be engaged in a U.S. trade or
business unless it is a dealer is such stocks, securities, or
commodities. This safe harbor applies to investments in commodities
only if the commodities are of a kind customarily dealt in on an
organized commodity exchange and if the transaction is of a kind
customarily consummated at such place. Although the matter is not
free from doubt, the Fund believes that the activities directly
conducted by the Fund do not result in the Fund being engaged in a
trade or business within the United States. However, there can be
no assurance that the IRS would not successfully assert that the
Fund’s activities constitute a U.S. trade or
business.
In the
event that the Fund’s activities were considered to
constitute a U.S. trade or business, the Fund would be required to
withhold at the highest rate specified in Code section 1 (currently
37%) on allocations of our income to non-corporate Non-U.S.
Shareholders and the highest rate specified in Code section 11(b)
(currently 21%) on allocations of our income to corporate Non-U.S.
Shareholders, when such income is distributed. Non-U.S.
Shareholders would also be subject to a 10% withholding tax on the
consideration payable upon a sale or exchange of such Non-U.S.
Shareholder’s Shares, although the IRS has temporarily
suspended this withholding for interests in publicly traded
partnerships until regulations implementing such withholding are
issued. If recently promulgated regulations are finalized as
proposed, such regulations would provide, with respect to transfers
of publicly traded interests in publicly traded partnerships
effected through a broker, that the obligation to withhold is
imposed on the transferor’s broker. However, it is not clear
when such regulations will be finalized and if they will be
finalized in their current form. A Non-U.S. Shareholder with ECI
will generally be required to file a U.S. federal income tax
return, and the return will provide the Non-U.S. Shareholder with
the mechanism to seek a refund of any withholding in excess of such
Shareholder’s actual U.S. federal income tax liability. Any
amount withheld by the Fund will be treated as a distribution to
the Non-U.S. Shareholder to the extent possible. In some cases, the
Fund may not be able to match the economic cost of satisfying its
withholding obligations to a particular Non-U.S. Shareholder, which
may result in said cost being borne by the Fund, generally, and
accordingly, by all Shareholders.
If the
Fund is not treated as engaged in a U.S. trade or business, a
Non-U.S. Shareholder may nevertheless be treated as having FDAP
income, which would be subject to a 30% withholding tax (possibly
subject to reduction by treaty), with respect to some or all of its
distributions from the Fund or its allocable share of Fund income.
Amounts withheld on behalf of a Non-U.S. Shareholder will be
treated as being distributed to such Shareholder. If the Fund is
not able to match the economic cost of satisfying its withholding
obligation to a particular Non-U.S. Shareholder, said cost may have
to be borne by the Fund and accordingly by all
Shareholders.
61
To the
extent any interest income allocated to a Non-U.S. Shareholder that
otherwise constitutes FDAP is considered “portfolio
interest,” neither the allocation of such interest income to
the Non-U.S. Shareholder nor a subsequent distribution of such
interest income to the Non-U.S. Shareholder will be subject to
withholding, provided that the Non-U.S. Shareholder is not
otherwise engaged in a trade or business in the U.S. and provides
the Fund with a timely and properly completed and executed IRS Form
W-8BEN or other applicable form. In general, portfolio interest is
interest paid on debt obligations issued in registered form, unless
the recipient owns 10% or more of the voting power of the issuer. A
Non-U.S. Shareholder’s allocable share of interest on U.S.
bank deposits, certificates of deposit and discount obligations
with maturities from original issue of 183 days or less should also
not be subject to withholding. Generally, other interest from U.S.
sources paid to the Fund and allocable to Non-U.S. Shareholders
will be subject to withholding.
In
order for the Fund to avoid withholding on any interest income
allocable to Non-U.S. Shareholders that would qualify as portfolio
interest, it will be necessary for all Non-U.S. Shareholders to
provide the Fund with a timely and properly completed and executed
Form W-8BEN (or other applicable form).
Gain from Sale of Shares. Gain from the
sale or exchange of Shares may be taxable to a Non-U.S. Shareholder
if the Non-U.S. Shareholder is a nonresident alien individual who
is present in the U.S. for 183 days or more during the taxable
year. In such case, the nonresident alien individual may be subject
to a 30% withholding tax on the amount of such individual’s
gain.
Branch Profits Tax on Corporate Non-U.S.
Shareholders. In addition to the taxes noted above, any
Non-U.S. Shareholders that are corporations may also be subject to
an additional tax, the branch profits tax, at a rate of 30%. The
branch profits tax is imposed on a non-U.S. corporation’s
dividend equivalent amount, which generally consists of the
corporation’s after-tax earnings and profits that are
effectively connected with the corporation’s U.S. trade or
business but are not reinvested in a U.S. business. This tax may be
reduced or eliminated by an income tax treaty between the United
States and the country in which the Non-U.S. Shareholder is a
“qualified resident.”
Foreign Account Tax Compliance Act.
Legislation commonly referred to as the Foreign Account Tax
Compliance Act or "FATCA", generally imposes a 30% U.S. withholding
tax on payments of certain types of income to foreign financial
institutions that fail to enter into an agreement with the United
States Treasury to report certain required information with respect
to accounts held by U.S. persons (or held by foreign entities that
have U.S. persons as substantial owners). The types of income
subject to the withholding tax include U.S.-source interest and
dividends and the gross proceeds from the sale of any property that
could produce U.S.-source interest or dividends. Proposed Treasury
Regulations, however, generally eliminate withholding under FATCA
on gross proceeds. Taxpayers generally may rely on these proposed
Treasury Regulations until final Treasury Regulations are issued.
The information required to be reported includes the identity and
taxpayer identification number of each account holder that is a
U.S. person and transaction activity within the holder’s
account. In addition, subject to certain exceptions, this
legislation also imposes a 30% U.S. withholding tax on payments to
foreign entities that are not financial institutions unless the
foreign entity certifies that it does not have a greater than 10%
U.S. owner or provides the withholding agent with identifying
information on each greater than 10% U.S. owner. Depending on the
status of a Non-U.S. Shareholder and the status of the
intermediaries through which it holds Shares, a Non-U.S.
Shareholder could be subject to this 30% U.S. withholding tax with
respect to distributions on its Shares. Under certain
circumstances, a Non-U.S. Shareholder may be eligible for a refund
or credit of such taxes.
Prospective Non-U.S. Shareholders should consult
their own tax advisor regarding these and other tax issues unique
to Non-U.S. Shareholders.
Backup Withholding
The
Fund may be required to withhold U.S. federal income tax
(“backup withholding”) from payments to: (1) any
Shareholder who fails to furnish the Fund with his, her or its
correct taxpayer identification number or a certificate that the
Shareholder is exempt from backup withholding, and (2) any
Shareholder with respect to whom the IRS notifies the Fund that the
Shareholder is subject to backup withholding. Backup
withholding is not an additional tax and may be returned or
credited against a taxpayer’s regular federal income tax
liability if appropriate information is provided to the
IRS. The backup withholding rate is the fourth lowest
rate applicable to individuals under Code section 1(c) (currently 24%) and may
increase in future tax years.
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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, gift,
inheritance or intangible taxes that may be imposed by the various
jurisdictions in which the Fund does business or owns property or
where the Shareholders reside. Although an analysis of
those various taxes is not presented here, each prospective
Shareholder should consider their potential impact on its
investment in the Fund. It is each Shareholder’s
responsibility to file the appropriate U.S. federal, state, local,
and foreign tax returns. Vedder Price has not provided
an opinion concerning any aspects of state, local or foreign tax or
U.S. federal tax other than those U.S. federal income tax issues
discussed under the heading “U.S. Federal Income Tax
Considerations.”
Investment by ERISA Accounts
General
Most
employee benefit plans and individual retirement accounts
(“IRAs”) are subject to the Employee Retirement Income
Security Act of 1974, as amended (“ERISA”), or the
Code, or both. This section discusses certain
considerations that arise under ERISA and the Code that a fiduciary
of: (i) an employee benefit plan as defined in ERISA; (ii) a plan
as defined in Section 4975 of the Code; or (iii) any
collective investment vehicle, business trust, investment
partnership, pooled separate account or other entity the assets of
which are treated as comprised (at least in part) of “plan
assets” under the ERISA “plan assets” rules
(“plan asset entity”) who has investment discretion
should take into account before deciding to invest the plan’s
assets in the Fund. Employee benefit plans under ERISA,
plans under the Code and plan asset entities are collectively
referred to below as “plans,” and fiduciaries with
investment discretion are referred to below as “plan
fiduciaries.”
This
summary is based on the provisions of ERISA and the Code as of the
date hereof. This summary is not intended to be
complete, but only to address certain questions under ERISA and the
Code likely to be raised by your advisors. The summary
does not include state or local law.
Potential plan investors are urged to consult with their own
professional advisors concerning the appropriateness of an
investment in the Fund and the manner in which Shares should be
purchased.
Special Investment Considerations
Each
plan fiduciary must consider the facts and circumstances that are
relevant to an investment in the Fund, including the role that an
investment in the Fund would play in the plan’s overall
investment portfolio. Each plan fiduciary, before
deciding to invest in the Fund, must be satisfied that the
investment is prudent for the plan, that the investments of the
plan are diversified so as to minimize the risk of large losses,
and that an investment in the Fund complies with the terms of the
plan. The Sponsor is not undertaking to provide investment advice,
or to give advice in a fiduciary capacity, in connection with a
plan’s investment in the Fund.
The Fund and Plan Assets
A
regulation issued under ERISA contains rules for determining when
an investment by a plan in an equity interest of a statutory trust
will result in the underlying assets of the statutory trust being
deemed plan assets for purposes of ERISA and Section 4975 of the
Code. Those rules provide that assets of a statutory
trust will not be plan assets of a plan that purchases an equity
interest in the statutory trust if the equity interest purchased is
a publicly offered security. If the underlying assets of
a statutory trust are considered to be assets of any plan for
purposes of ERISA or Section 4975 of the Code, the operations of
that trust would be subject to and, in some cases, limited by the
provisions of ERISA and Section 4975 of the Code.
63
The
publicly offered security exception described above applies if the
equity interest is a security that is:
(1)
freely transferable (determined based on the relevant facts and
circumstances);
(2)
part of a class of securities that is widely held (meaning that the
class of securities is owned by 100 or
more investors independent of the issuer and of each other);
and
(3)
either (a) part of a class of securities registered under Section
12(b) or 12(g) of the Exchange Act or (b)
sold to the plan as part of a public offering pursuant to an
effective registration statement under the 1933 Act and the class
of which such security is a part is registered under
the Exchange Act within 120 days (or such later time as may be
allowed by the SEC) after the end of the fiscal year of the issuer
in which the offering of such security
occurred.
The
plan asset regulations under ERISA state that the determination of
whether a security is freely transferable is to be made based on
all the relevant facts and circumstances. In the case of
a security that is part of an offering in which the minimum
investment is $10,000 or less, the following requirements, alone or
in combination, ordinarily will not affect a finding that the
security is freely transferable: (1) a requirement that no transfer
or assignment of the security or rights relating to the security be
made that would violate any federal or state law; and (2) a
requirement that no transfer or assignment be made without advance
written notice given to the entity that issued the
security.
The
Sponsor believes that the conditions described above are satisfied
with respect to the Shares. The Sponsor believes that
the Shares therefore constitute publicly offered securities, and
the underlying assets of the Fund should not be considered to
constitute plan assets of any plan that purchases
Shares.
Prohibited Transactions
ERISA
and the Code generally prohibit certain transactions involving a
plan and persons who have certain specified relationships to the
plan. In general, Shares may not be purchased with the
assets of a plan if the Sponsor, the clearing brokers, the trading
advisors (if any), or any of their affiliates, agents or employees
either:
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●
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exercise
any discretionary authority or discretionary control with respect
to management of the plan;
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exercise
any authority or control with respect to management or disposition
of the assets of the plan;
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render
investment advice for a fee or other compensation, direct or
indirect, with respect to any moneys or other property of the
plan;
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have
any authority or responsibility to render investment advice with
respect to any monies or other property of the plan;
or
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have
any discretionary authority or discretionary responsibility in the
administration of the plan.
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Also, a
prohibited transaction may occur under ERISA or the Code when
circumstances indicate that (1) the investment in Shares is made or
retained for the purpose of avoiding application of the fiduciary
standards of ERISA, (2) the investment in Shares constitutes an
arrangement under which the Fund is expected to engage in
transactions that would otherwise be prohibited if entered into
directly by the plan purchasing the Shares, (3) the investing plan,
by itself, has the authority or influence to cause the Fund to
engage in such transactions, or (4) a person who is prohibited from
transacting with the investing plan may, but only with the aid of
certain of its affiliates and the investing plan, cause the Fund to
engage in such transactions with such person.
Special IRA Rules
IRAs
are not subject to ERISA’s fiduciary standards, but are
subject to their own rules, including the prohibited transaction
rules of Section 4975 of the Code, which generally mirror
ERISA’s prohibited transaction rules. For example,
IRAs are subject to special custody rules and must maintain a
qualifying IRA custodial arrangement separate and distinct from the
Fund and its custodial arrangement. If a separate
qualifying custodial arrangement is not maintained, an investment
in the Shares will be treated as a distribution from the
IRA. Second, IRAs are prohibited from investing in
certain commingled investments, and the Sponsor makes no
representation regarding whether an investment in Shares is an
inappropriate commingled investment for an IRA. Third,
in applying the prohibited transaction provisions of Section 4975
of the Code, in addition to the rules summarized above, the
individual for whose benefit the IRA is maintained is also treated
as the creator of the IRA. For example, if the owner or
beneficiary of an IRA enters into any transaction, arrangement, or
agreement involving the assets of his or her IRA to benefit the IRA
owner or beneficiary (or his or her relatives or business
affiliates) personally, or with the understanding that such benefit
will occur, directly or indirectly, such transaction could give
rise to a prohibited transaction that is not exempted by any
available exemption. Moreover, in the case of an IRA,
the consequences of a non-exempt prohibited transaction are that
the IRA’s assets will be treated as if they were distributed,
causing immediate taxation of the assets (including any early
distribution penalty tax applicable under Section 72 of the Code),
in addition to any other fines or penalties that may
apply.
64
Exempt Plans
Certain
employee benefit plans may be governmental plans or church
plans. Governmental plans and church plans are generally
not subject to ERISA, nor do the prohibited transaction provisions
described above apply to them. These plans are, however,
subject to prohibitions against certain related-party transactions
under Section 503 of the Code, which are similar to the prohibited
transaction rules described above. In addition, the
fiduciary of any governmental or church plan must consider any
applicable state or local laws and any restrictions and duties of
common law imposed upon the plan.
No view
is expressed as to whether an investment in the Fund (and any
continued investment in the Fund), or the operation and
administration of the fund, is appropriate or permissible for any
governmental plan or church plan under Code Section 503, or under
any state, county, local or other law relating to that type of
plan.
Allowing
an investment in the Fund is not to be construed as a
representation by the Trust, the Fund, the Sponsor, any trading
advisor, any clearing broker, the Distributor or legal counsel or
other advisors to such parties or any other party that this
investment meets some or all of the relevant legal requirements
with respect to investments by any particular plan or that this
investment is appropriate for any such particular
plan. The person with investment discretion should
consult with the plan’s attorney and financial advisors as to
the propriety of an investment in the Fund in light of the
circumstances of the particular plan, current tax law and
ERISA.
65
INCORPORATION BY REFERENCE OF CERTAIN
INFORMATION
We are
a reporting company and file annual, quarterly and current reports
and other information with the SEC. The rules of the SEC allow us
to “incorporate by reference” information that we file
with them, which means that we can disclose important information
to you by referring you to those documents. The information
incorporated by reference is an important part of this prospectus.
This prospectus incorporates by reference the documents set forth
below that have been previously filed with the SEC and any future
filings that we make with the SEC under Section 13(a), 13(c), 14
and 15(d) of the Securities Exchange Act of 1934 (in each case
other than those documents or portions of those documents not
deemed to have been filed in accordance with SEC rules) between the
date of this prospectus and the termination of the offering of the
securities to be issued under the registration
statement:
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● our Annual Report
on Form 10-K for the fiscal year ended December 31, 2019, filed
with the SEC on March 11, 2020; and
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● our Quarterly
Reports on Form 10-Q for the quarterly periods ended March 31, 2020
and June 30, 2020, filed with the SEC on May 8, 2020 and August 7,
2020, respectively.
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Any
statement contained in a document incorporated by reference in this
prospectus shall be deemed to be modified or superseded for
purposes of this prospectus to the extent that a statement
contained in this prospectus or in any other subsequently filed
document that also is or is deemed to be incorporated by reference
in this prospectus modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as
so modified or superseded, to constitute a part of this
prospectus.
We will
provide to each person to whom a prospectus is delivered, including
any beneficial owner, a copy of any document incorporated by
reference in the prospectus (excluding any exhibits to those
documents unless the exhibit is specifically incorporated by
reference as an exhibit in that document) at no cost, upon written
or oral request at the following address or telephone
number:
Teucrium Sugar
Fund
Attention: Cory
Mullen-Rusin
Three
Main Street, Suite 215
Burlington, VT
05401
(802)
540-0019
Our
Internet website is www.teucrium.com. We make our electronic
filings with the SEC, including our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to these reports available on our website free of charge
as soon as practicable after we file or furnish them with the SEC.
The information contained on our website is not incorporated by
reference in this prospectus and should not be considered a part of
this prospectus.
66
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.
67
WHERE YOU CAN FIND MORE INFORMATION
The
Trust has filed on behalf of the Fund a registration statement with
the SEC under the 1933 Act. This prospectus does not
contain all of the information set forth in the registration
statement (including the exhibits to the registration statement),
parts of which have been omitted in accordance with the rules and
regulations of the SEC. For further information about
the Trust, the Fund or the Shares, please refer to the registration
statement, which you may inspect online at www.sec.gov.
Information about the Trust, the Fund and the Shares can also be
obtained from the Fund’s website, which is www.teucrium.com. The
Fund’s website address is only provided here as a convenience
to you and the information contained on or connected to the website
is not part of this prospectus or the registration statement of
which this prospectus is part. The Trust is subject to
the informational requirements of the Exchange Act and will file
certain reports and other information with the SEC under the
Exchange Act. The Sponsor will file an updated
prospectus annually for the Fund pursuant to the 1933
Act. The reports and other information can be inspected
online at www.sec.gov, which is the
Internet site maintained by the SEC that contains reports, proxy
and information statements and other information regarding issuers
that file electronically with the SEC.
68
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.
69
APPENDIX A
Glossary
of Defined Terms
In this
prospectus, each of the following terms have the meanings set forth
after such term:
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Administrator: U.S. Bancorp Fund
Services, LLC, doing business as U.S. Bank Global Fund
Services
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Authorized Purchaser: One that purchases or redeems Creation Baskets or
Redemption Baskets, respectively, from or to the
Fund.
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Benchmark: A
weighted average of the closing settlement prices for three Sugar
Futures Contracts, specifically futures contracts on Sugar No. 11,
that are traded on ICE Futures: (1) the second to expire ICE
Futures Sugar Futures Contract, weighted 35%, (2) the third to
expire ICE Futures Sugar Futures Contract, weighted 30%, and (3)
the ICE Futures Sugar Futures Contract expiring in the March
following the expiration month of the third to expire contract,
weighted 35%.
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Benchmark Component Futures Contracts: The three Sugar Futures Contracts that
at any given time make up the Benchmark.
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Business Day: Any
day other than a day when any of the NYSE Arca, ICE Futures, or the
New York Stock Exchange is closed for regular
trading.
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CFTC: Commodity
Futures Trading Commission, an independent federal agency with the
mandate to regulate commodity futures and options in the United
States.
Code: Internal Revenue Code of
1986, as amended.
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Commodity Pool: An
enterprise in which several individuals contribute funds in order
to trade futures contracts or options on futures contracts
collectively.
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Commodity Pool Operator or CPO: Any person engaged in a business which is of the
nature of an investment trust, syndicate, or similar enterprise,
and who, in connection therewith, solicits, accepts, or receives
from others, funds, securities, or property, either directly or
through capital contributions, the sale of stock or other forms of
securities, or otherwise, for the purpose of trading in any swap or
commodity for future delivery or commodity option on or subject to
the rules of any contract market.
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Creation Basket: A
block of 25,000 Shares used by the Fund to issue
Shares.
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Custodian: U.S.
Bank, N.A.
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Distributor: Foreside Fund
Services, LLC.
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DTC: The Depository
Trust Company. DTC will act as the securities depository
for the Shares.
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70
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DTC Participant: An
entity that has an account with DTC.
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Exchange Act: The
Securities Exchange Act of 1934.
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Exchange for Related Position: A privately negotiated and simultaneous exchange
of a futures contract position for a swap or other over the counter
instrument on the corresponding commodity.
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FINRA: Financial
Industry Regulatory Authority.
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Forward Contract: an over the counter bilateral contract for
the purchase or sale of a specified quantity of a commodity at a
specified price, on a specified date and at a specified location.
Forwards are almost always settled by delivery of the underlying
commodity. Although not impossible, it is unusual to settle a
Forward financially; therefore, Forwards are generally
illiquid.
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Futures Contract: an exchange-traded contract traded with
standard terms that calls for the delivery of a specified quantity
of a commodity at a specified price, on a specified date and at a
specified location. Typically, a futures contract is traded out or
rolled on an exchange before delivery or receipt of the underlying
commodity is required.
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ICE Futures: The
primary exchange on which Sugar Futures Contracts are traded in the
U.S. The Fund expressly disclaims any association with
or endorsement of the Fund by ICE Futures and acknowledges that
“ICE Futures” and “ICE Futures US” are
registered trademarks of such exchange.
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Indirect Participants: Banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a DTC
Participant, either directly or indirectly.
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Limited Liability Company (LLC): A type of business ownership combining several
features of corporation and partnership
structures.
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Margin: The amount
of equity required for an investment in futures
contracts.
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NAV: Net Asset Value
of the Fund.
New York Mercantile Exchange (NYMEX): An exchange on which Sugar Futures Contracts are
traded in the U.S. The Fund expressly disclaims any
association with or endorsement of the Fund by the NYMEX and
acknowledges that “New York Mercantile Exchange” and
“NYMEX” are registered trademarks of such
exchange.
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NFA: National
Futures Association.
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NSCC: National
Securities Clearing Corporation.
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1933 Act: The
Securities Act of 1933.
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71
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Option: The right,
but not the obligation, to buy or sell a futures contract, swap
agreement, forward contract or commodity, as applicable, at a
specified price on or before a specified date.
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Over the counter Derivative: A financial contract, whose value is designed to
track the return on stocks, bonds, currencies, commodities, or some
other benchmark, that is traded over the counter or off organized
exchanges.
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Redemption Basket: A
block of 25,000 Shares used by the Fund to redeem
Shares.
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SEC: Securities and
Exchange Commission.
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Secondary Market: The stock exchanges and the over the counter
market. Securities are first issued as a primary offering to the
public. When the securities are traded from that first holder to
another, the issues trade in these secondary
markets.
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Shareholders: Holders of Shares.
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Shares: Common units
representing fractional undivided beneficial interests in the
Fund.
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Sponsor: Teucrium
Trading, LLC, a Delaware limited liability company, which is
registered as a Commodity Pool Operator, who controls the
investments and other decisions of the Fund.
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Spot Contract: A
cash market transaction in which the buyer and seller agree to the
immediate purchase and sale of a commodity, usually with a two-day
settlement.
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Sugar Futures Contracts: Futures contracts for sugar that are traded on ICE
Futures, the NYMEX, or foreign exchanges.
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Sugar No. 11 Futures Contracts: Futures contracts that are traded on
ICE Futures and NYMEX for the physical delivery of raw cane sugar,
delivered to the receiver’s vessel at a specified port within
the country of origin of the sugar.
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Swap Agreement: An
over the counter derivative that generally involves an exchange of
a stream of payments between the contracting parties based on a
notional amount and a specified index.
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Tracking Error: Possibility that the daily NAV of the Fund will
not track the Benchmark.
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Trust Agreement: The
Fifth Amended and Restated Declaration of Trust and Trust Agreement
of the Trust effective as of April 26, 2019.
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Valuation Day: Any
day as of which the Fund calculates its NAV.
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You: The owner of
Shares
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72
STATEMENT
OF ADDITIONAL INFORMATION
TEUCRIUM
SUGAR FUND
This
statement of additional information is the second part of a
two-part document. The first part is the Fund’s
disclosure document. The disclosure document and this
statement of additional information are bound together, and both
parts contain important information. This statement of
additional information should be read in conjunction with the
disclosure document. To obtain a copy of the disclosure
document without charge, call the Fund at (802) 540-0019. Before
you decide whether to invest, you should read the entire prospectus
carefully and consider the risk factors beginning on page
7.
This
statement of additional information and accompanying disclosure
document are both dated September 21, 2020.
73
TEUCRIUM SUGAR
FUND
TABLE
OF CONTENTS
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Page
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The Sugar
Market
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75
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Over the counter
Derivatives
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76
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Commodity Market
Participants
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77
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Regulation
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77
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Potential
Advantages of Investment
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80
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Fund
Performance
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81
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74
Sugarcane,
on average, accounts for nearly 80% of the world’s sugar
production, while sugar beets account for the remainder of the
world’s sugar production. Sugar manufacturers use
sugar
beets and sugarcane as the raw material from which refined sugar
(sucrose) for industrial and consumer use is produced. Sugar is
produced in various forms, including granulated, powdered, liquid,
brown, and molasses. The food industry (in particular, producers of
baked goods, beverages, cereal, confections, and dairy products)
uses sugar and sugarcane molasses to make sugar containing food
products. Sugar beet pulp and molasses products are used as animal
feed ingredients. Ethanol is an important byproduct of sugarcane
processing. Additionally, the material that remains after sugarcane
is processed is used to manufacture paper, cardboard, and
“environmentally friendly” eating
utensils.
The
Sugar No. 11 Futures Contract is the world benchmark contract for
raw sugar trading. This contract prices the physical delivery of
raw cane sugar, delivered to the receiver’s vessel at a
specified port within the country of origin of the sugar. Sugar No.
11 Futures Contracts trade on ICE Futures US and the NYMEX in units
of 112,000 pounds.
The
United States Department of Agriculture (“USDA”)
publishes two major reports annually on U.S. domestic and worldwide
sugar production and consumption. These are usually released in
November and May. In addition, the USDA publishes periodic, but not
as comprehensive, reports on sugar monthly. These reports are
available on the USDA’s website, www.usda.gov, at no charge.
The USDA’s May 2020 report forecasts for 2020/21 an increase
in global production of 188 Million due to higher production in
Brazil, India, and Thailand. Brazil and India are essentially tied
as top producers. Brazil’s production is forecast to rebound
to 39.5 million with January-March weather improving the sugarcane
harvest. Low gasoline prices are expected to drastically change the
dynamics for the Brazilian sugar/ethanol industry, negatively
affecting the ethanol industry and significantly increasing sugar
production.
75
If the
futures market is in a state of backwardation (i.e., when the price
of sugar in the future is expected to be less than the current
price), the Fund will buy later to expire contracts for a lower
price than the sooner to expire contracts that it sells.
Hypothetically, and assuming no changes to either prevailing sugar
prices or the price relationship between immediate delivery, soon
to expire contracts and later to expire contracts, the value of a
contract will rise as it approaches expiration. If the futures
market is in contango, the Fund will buy later to expire contracts
for a higher price than the sooner to expire contracts that it
sells. Hypothetically, and assuming no other changes to either
prevailing sugar prices or the price relationship between the spot
price, soon to expire contracts and later to expire contracts, the
value of a contract will fall as it approaches expiration.
Historically, the sugar futures markets have experienced periods of
both contango and backwardation. Frequently, whether contango or
backwardation exists is a function, among other factors, of the
seasonality of the sugar market and the sugar harvest cycle. All
other things being equal, a situation involving prolonged periods
of contango may adversely impact the returns of the Funds;
conversely a situation involving prolonged periods of backwardation
may positively impact the returns of the Funds.
Futures
contracts may be either bought or sold long or short. The U.S
Commodity Futures Trading Commission weekly releases the
“Commitment of Traders” (COT) report, which depicts the
open interest as well as long and short positions in the market.
Market participants may use this report to gauge market
sentiment.
Over the counter Derivatives
In
addition to futures contracts, options on futures contracts,
derivative contracts that are tied to various commodities,
including sugar, are entered into outside of public exchanges.
These “over the counter” contracts are entered into
between two parties in private contracts, or on a recently formed
swap execution facility (“SEF”) for standardized swaps.
Unlike Sugar Futures Contracts, which are guaranteed by a clearing
organization, each party to an over the counter derivative contract
bears the credit risk of the other party (unless such over the
counter swap is cleared through a DCO), i.e., the risk that the
other party will not be able to perform its obligations under its
contract.
Some
over the counter derivatives contracts contain relatively
standardized terms and conditions and are available from a wide
range of participants. Others have highly customized terms and
conditions and are not as widely available. While the Fund may
enter into these more customized contracts, the Fund will only
enter into over the counter contracts containing certain terms and
conditions, as discussed further below, that are designed to
minimize the credit risk to which the Fund will be subject and only
if the terms and conditions of the contract are consistent with
achieving the Fund’s investment objective of tracking the
Benchmark. The over the counter contracts that the Fund may enter
into will take the form of either forward contracts, swaps or
options.
A
forward contract is a contractual obligation to purchase or sell a
specified quantity of a commodity at or before a specified date in
the future at a specified price and, therefore, is economically
similar to a futures contract except that, unlike a futures
contract it cannot be financially settled (i.e., one must intend to
make or take delivery of a commodity under a forward contract).
Unlike futures contracts, however, forward contracts are typically
privately negotiated or are traded in the over the counter markets.
Forward contracts for a given commodity are generally available for
various amounts and maturities and are subject to individual
negotiation between the parties involved. Moreover, generally there
is no direct means of offsetting or closing out a forward contract
by taking an offsetting position as one would a futures contract on
a U.S. exchange. If a trader desires to close out a forward
contract position, he generally will establish an opposite position
in the contract but will settle and recognize the profit or loss on
both positions simultaneously on the delivery date. Thus, unlike in
the futures contract market where a trader who has offset positions
will recognize profit or loss immediately, in the forward market a
trader with a position that has been offset at a profit will
generally not receive such profit until the delivery date, and
likewise a trader with a position that has been offset at a loss
will generally not have to pay money until the delivery date.
However, in some very limited instances such contracts may provide
a right of look out that will allow for the receipt of profit and
payment for losses prior to the delivery date.
An over
the counter swap agreement is a bilateral contract to exchange a
periodic stream of payments determined by reference to a notional
amount, with payment typically made between the parties on a net
basis. For instance, in the case of a sugar swap, the Fund may be
obligated to pay a fixed price per bushel of sugar multiplied by a
notional number of bushels and be entitled to receive an amount per
bushel equal to the current value of an index of sugar prices, the
price of a specified Sugar Futures Contract, or the average price
of a group of Sugar Futures Contracts such as the Benchmark (times
the same notional number of bushels. Each party to the swap is
subject to the credit risk of the other party. The Fund only enters
into over the counter swaps on a net basis, where the two payment
streams are netted out on a daily basis, with the parties receiving
or paying, as the case may be, only the net amount of the two
payments. Swaps do not generally involve the delivery of underlying
assets or principal and are therefore financially settled.
Accordingly, the Fund’s risk of loss with respect to an over
the counter swap generally is limited to the net amount of payments
that the counterparty is contractually obligated to make less any
collateral deposits the Fund is holding.
To
reduce the credit risk that arises in connection with over the
counter contracts, the Fund generally enters into an agreement with
each counterparty based on the Master Agreement published by the
International Swaps and Derivatives Association, Inc. that provides
for the netting of the Fund’s overall exposure to its
counterparty and for daily payments based on the marked to market
value of the contract.
The
creditworthiness of each potential counterparty will be assessed by
the Sponsor. The Sponsor assesses or reviews, as appropriate, the
creditworthiness of each potential or existing counterparty to an
over the counter contract pursuant to guidelines approved by the
Sponsor. The creditworthiness of existing counterparties will be
reviewed periodically by the Sponsor. The Sponsor’s
President, Chief Investment Officer, and Chief Executive Officer
has over 25 years of experience in over the counter derivatives
trading, including the counterparty creditworthiness analysis
inherent therein. There is no guarantee that the Sponsor’s
creditworthiness analysis will be successful and that
counterparties selected for Fund transactions will not default on
their contractual obligations.
76
The
Fund also may require that a counterparty be highly rated and/or
provide collateral or other credit support. The Sponsor on behalf
of the Fund may enter into over the counter contracts with various
types of counterparties, including: (a) entities registered as swap
dealers (“SD”) or major swap participants
(“MSP”), or (b) any other entities that qualify as
eligible contract participants (“ECP”).
After
the enactment of the Dodd-Frank Act, swaps (and options that are
regulated as swaps) are subject to the CFTC’s exclusive
jurisdiction and are regulated as rigorously as futures. Generally,
however, if a swap is entered into with an SD or MSP, such
counterparty will conduct all necessary compliance with respect to
swaps and options under the Dodd-Frank Act.
Commodity Market Participants
The two
broad classes of persons who trade commodities are hedgers and
speculators. Hedgers include financial institutions that
manage or deal in interest rate-sensitive instruments, foreign
currencies or stock portfolios, and commercial market participants,
such as farmers and manufacturers, that market or process
commodities. Hedging is a protective procedure designed
to effectively lock in prices that would otherwise change due to an
adverse movement in the price of the underlying commodity, such as
the adverse price movement between the time a merchandiser or
processor enters into a contract to buy or sell a raw or processed
commodity at a certain price and the time he must perform the
contract. For example, if a hedger contracts to
physically sell the commodity at a future date, he may
simultaneously buy a futures or forward contract for the necessary
equivalent quantity of the commodity. At the time for
performance of the physical contract, the hedger may accept
delivery under his futures contract and sell the commodity quantity
as required by the physical contract or he may buy the actual
commodity, sell it under the physical contract and close out his
futures contract position by making an offsetting
sale.
The
Commodity Interest markets enable the hedger to shift the risk of
price fluctuations. The usual objective of the hedger is
to protect the profit that he expects to earn from farming,
merchandising, or processing operations rather than to profit from
his trading. However, at times the impetus for a hedge
transaction may result in part from speculative objectives and
hedgers can end up paying higher prices than they would have if
they did not enter into a Commodity Interest transaction if current
market prices are lower than the locked-in price.
Unlike
the hedger, the speculator generally expects neither to make nor
take delivery of the underlying commodity. Instead, the
speculator risks his capital with the hope of making profits from
price fluctuations in the commodities. The speculator
is, in effect, the risk bearer who assumes the risks that the
hedger seeks to avoid. Speculators rarely make or take
delivery of the underlying commodity; rather they attempt to close
out their positions prior to the delivery date. A
speculator who takes a long position generally will make a profit
if the price of the underlying commodity goes up and incur a loss
if the price of the underlying commodity goes down, while a
speculator who takes a short position generally will make a profit
if the price of the underlying commodity goes down and incur a loss
if the price of the underlying commodity goes up.
Regulation
The
regulation of futures markets, futures contracts, and futures
exchanges has historically been comprehensive. The CFTC and the
exchanges are authorized to take extraordinary actions in the event
of a market emergency including, for example, the retroactive
implementation of speculative position limits, increased margin
requirements, the establishment of daily price limits and the
suspension of trading on an exchange or trading
facility.
Pursuant to
authority in the CEA, the NFA has been formed and registered with
the CFTC as a registered futures association. At the present
time, the NFA is the only SRO for commodity interest professionals,
other than futures exchanges. The CFTC has delegated to the
NFA responsibility for the registration of CPOs and FCMs and their
respective associated persons. The Sponsor and the
Fund’s clearing broker are members of the NFA. As such,
they will be subject to NFA standards relating to fair trade
practices, financial condition and consumer
protection. The NFA also arbitrates disputes
between members and their customers and conducts registration and
fitness screening of applicants for membership and audits of its
existing members. Neither the Trust nor the Teucrium Funds
are required to become a member of the NFA. The regulation of
commodity interest transactions in the United States is a rapidly
changing area of law and is subject to ongoing modification by
governmental and judicial action. Considerable regulatory attention
has been focused on non-traditional investment pools that are
publicly distributed in the United States. There is a possibility
of future regulatory changes within the United States altering,
perhaps to a material extent, the nature of an investment in the
Fund, or the ability of a Fund to continue to implement its
investment strategy. In addition, various national governments
outside of the United States have expressed concern regarding the
disruptive effects of speculative trading in the commodities
markets and the need to regulate the derivatives markets in
general. The effect of any future regulatory change on the Teucrium
Funds is impossible to predict but could be substantial and
adverse.
77
The
CFTC possesses exclusive jurisdiction to regulate the activities of
commodity pool operators and commodity trading advisors with
respect to "commodity interests," such as futures and swaps and
options, and has adopted regulations with respect to the activities
of those persons and/or entities. Under the Commodity
Exchange Act (“CEA”), a registered commodity pool
operator, such as the Sponsor, is required to make annual filings
with the CFTC and the NFA describing its organization, capital
structure, management and controlling persons. In addition,
the CEA authorizes the CFTC to require and review books and records
of, and documents prepared by, registered commodity pool
operators. Pursuant to this authority, the CFTC requires
commodity pool operators to keep accurate, current and orderly
records for each pool that they operate. The CFTC may suspend
the registration of a commodity pool operator (1) if the CFTC finds
that the operator’s trading practices tend to disrupt orderly
market conditions, (2) if any controlling person of the operator is
subject to an order of the CFTC denying such person trading
privileges on any exchange, and (3) in certain other
circumstances. Suspension, restriction or termination of the
Sponsor’s registration as a commodity pool operator would
prevent it, until that registration were to be reinstated, from
managing the Fund, and might result in the termination of the Fund
if a successor sponsor is not elected pursuant to the Trust
Agreement. Neither the Trust nor the Fund is required to be
registered with the CFTC in any capacity.
The
Fund’s investors are afforded prescribed rights for
reparations under the CEA. Investors may also be able to
maintain a private right of action for violations of the CEA.
The CFTC has adopted rules implementing the reparation provisions
of the CEA, which provide that any person may file a complaint for
a reparations award with the CFTC for violation of the CEA against
a floor broker or an FCM, introducing broker, commodity trading
advisor, CPO, and their respective associated persons.
The
regulations of the CFTC and the NFA prohibit any representation by
a person registered with the CFTC or by any member of the NFA, that
registration with the CFTC, or membership in the NFA, in any
respect indicates that the CFTC or the NFA has approved or endorsed
that person or that person’s trading program or
objectives. The registrations and memberships of the parties
described in this summary must not be considered as constituting
any such approval or endorsement. Likewise, no futures
exchange has given or will give any similar approval or
endorsement.
Trading
venues in the United States are subject to varying degrees of
regulation under the CEA depending on whether such exchange is a
designated contract market (i.e. a futures exchange) or a swap
execution facility. Clearing organizations are also subject to the
CEA and the rules and regulations adopted thereunder as
administered by the CFTC. The CFTC’s function is to implement
the CEA’s objectives of preventing price manipulation and
excessive speculation and promoting orderly and efficient commodity
interest markets. In addition, the various exchanges and clearing
organizations themselves as SROs exercise regulatory and
supervisory authority over their member firms.
The
Dodd-Frank Wall Street Reform and Consumer Protection Act (the
“Dodd-Frank Act”) was enacted in response to the
economic crisis of 2008 and 2009 and it significantly altered the
regulatory regime to which the securities and commodities markets
are subject. To date, the CFTC has issued proposed or final
versions of almost all of the rules it is required to promulgate
under the Dodd-Frank Act, and it continues to issue proposed
versions of additional rules that it has authority to promulgate.
Provisions of the new law include the requirement that position
limits be established on a wide range of commodity interests,
including agricultural, energy, and metal-based commodity futures
contracts, options on such futures contracts and uncleared swaps
that are economically equivalent to such futures contracts and
options (“Reference Contracts”); new registration and
recordkeeping requirements for swap market participants; capital
and margin requirements for “swap dealers” and
“major swap participants,” as determined by the new law
and applicable regulations; reporting of all swap transactions to
swap data repositories; and the mandatory use of clearinghouse
mechanisms for sufficiently standardized swap transactions that
were historically entered into in the over the counter market, but
are now designated as subject to the clearing requirement; and
margin requirements for over the counter swaps that are not subject
to the clearing requirements.
In
addition, considerable regulatory attention has recently been
focused on non-traditional publicly distributed investment pools
such as the Fund. Furthermore, various national governments have
expressed concern regarding the disruptive effects of speculative
trading in certain commodity markets and the need to regulate the
derivatives markets in general. The effect of any future regulatory
change on the Teucrium Funds is impossible to predict but could be
substantial and adverse.
The
Dodd-Frank Act was intended to reduce systemic risks that may have
contributed to the 2008/2009 financial crisis. Since the first
draft of what became the Dodd-Frank Act, supporters and opponents
have debated the scope of the legislation. As the Administrations
of the U.S. change, the interpretation and implementation will
change along with them. Nevertheless, regulatory reform of any kind
may have a significant impact on U.S. regulated entities.
Position Limits, Aggregation Limits, Price Fluctuation
Limits
The
CFTC and US futures exchanges impose limits on the maximum net long
or net short speculative positions that any person may hold or
control in any particular futures or options contracts traded on US
futures exchanges. For example, the CFTC currently imposes
speculative position limits on a number of agricultural commodities
(e.g., corn, oats, wheat, soybeans and cotton) and US futures
exchanges currently impose speculative position limits on many
other commodities. A Fund could be required to liquidate positions
it holds in order to comply with position limits or may not be able
to fully implement trading instructions generated by its trading
models, in order to comply with position limits. Any such
liquidation or limited implementation could result in substantial
costs to a Fund.
78
The
Dodd-Frank Act significantly expanded the CFTC’s authority to
impose position limits with respect to futures contracts and
options on futures contracts, swaps that are economically
equivalent to futures or options on futures, and swaps that are
traded on a regulated exchange and certain swaps that perform a
significant price discovery function. On December 16, 2016, the
CFTC issued a final rule to amend part 150 of the CFTC’s
regulations with respect to the policy for aggregation under the
CFTC’s position limits regime for futures and option
contracts on nine agricultural commodities (“the Aggregation
Requirements”). This final rule addressed the circumstances
under which market participants would be required to aggregate all
their positions, for purposes of the position limits, of all
positions in Reference Contracts of the 9 agricultural commodities
held by a single entity and its affiliates, regardless of whether
such positions exist on US futures exchanges, non-US futures
exchanges, or in over the counter swaps. An affiliate of a market
participant is defined as two or more persons acting pursuant to an
express or implied agreement or understanding. The Aggregation
Requirements became effective on February 14, 2017. On August 10,
2017, the CFTC issued a No-Action Relief Letter No. 17-37 to
clarify several provisions under Regulation 150.4, regarding
position aggregation filing requirements of market participants.
The Sponsor does not anticipate that this order will have an impact
on the ability of a Fund to meet its respective investment
objectives.
The
aggregate position limits currently in place under the current
position limits and the Aggregation Requirements are as follows for
each of the commodities traded by the Fund:
|
Commodity
Future
|
Spot
Month Position Limit
|
All
Month Aggregate Position Limit
|
|
sugar
|
5,000
contracts
|
Only
Accountability Limits
|
The CFTC has attempted to exercise authority to
enact additional and more restricted speculative position limits
with respect to futures and options on futures on so-called
“exempt commodities” (which includes most energy and
metals contracts) and with respect to agricultural commodities, but
those proposed limits were vacated by a United States District
Court. The CFTC has once again attempted to enact additional and
more restrictive limits. On January 30, 2020, the CFTC proposed a
rule which is intended to replace the CFTC’s current rules on
position limits. The proposed rules would establish position limits
with respect to 25 “core referenced futures contracts,”
identified as the most liquid, physically settled exchange-traded
futures contracts. The 25 contracts include the nine
“legacy” agricultural futures contracts that are
currently subject to CFTC position limits, seven additional
agricultural futures contracts, five metals futures contracts and
four energy futures contracts. With certain exceptions,
cash-settled futures contracts that are directly or indirectly
linked to the to the price of the physically settled contract or
the underlying commodity and economically equivalent swaps, as
defined, also would be subject to the proposed position limits. The
proposed rule, if adopted, could impact the Fund. For a discussion
generally regarding the risks that position limits may pose for the
Fund, see the risk factor in “WHAT ARE THE RISK
FACTORS INVOLVED WITH AN INVESTMENT IN THE FUND” regarding
position limits, accountability levels and daily price fluctuation
limits.
With
the exception of the nine legacy agricultural contracts, the
CFTC’s position limits would apply only in the spot month.
These limits would generally be set at 25 percent of the
deliverable supply, but may be higher or lower for certain
contracts. With respect to the non-legacy contracts, the rule would
require the relevant exchange on which the contracts are traded to
adopt either position limits or position accountability
levels.
The
proposed rules also would expand the current list of enumerated
bona fide hedges to include, for example, hedges of anticipated
merchandizing. To provide market participants with greater
flexibility on managing their business risks, the proposal also
provides guidance on whether and when market participants are
permitted to measure risk on a gross basis rather than a net basis.
However, firms will be required to measure risk on a consistent
basis. Enumerated hedges are self-effectuating. That is, no prior
approval would be required from the CFTC, although a market
participant would be required to obtain approval from the relevant
exchange. Self-effectuating hedge exemptions also would be
available for other transactions such as spreads and pass-through
swaps as approved by exchanges. With respect to non-enumerated
hedge exemptions, a market participant would be required to file a
request to exceed the position limit with the relevant exchange. If
the exchange grants the request for a non-enumerated hedge
exemption, the exchange will forward its decision to the CFTC for
review. The exemption will be deemed granted provided the CFTC does
not intervene during a 10-day review period. The market participant
would not be permitted to exceed the applicable position limit
until the 10-day review period lapses. Importantly, the CFTC may
act solely through its commissioners and not through staff. In
terms of process changes, the CFTC is proposing to eliminate Form
204 cash positions report and the cash information reported under
Form 304. Comments on the proposed rule must be submitted no later
than 90 days after approval of the proposal by the CFTC (i.e.,
April 29, 2020). The CFTC does not intend to extend the comment
period.
It is
unknown at this time the effect that such passage, adoption or
modification will have, positively or negatively, on our industry
or on a Fund. The size or duration of positions available to a Fund
may be severely limited. Pursuant to the CFTC’s and the
exchanges’ aggregation requirements, all accounts owned or
managed by the Sponsor are likely to be combined for speculative
position limits purposes. The Funds could be required to liquidate
positions it holds in order to comply with such limits, or may not
be able to fully implement trading instructions generated by its
trading models, in order to comply with such limits. Any such
liquidation or limited implementation could result in substantial
costs to a Fund.
These
new regulations and the resulting increased costs and regulatory
oversight requirements may result in market participants being
required or deciding to limit their trading activities, which could
lead to decreased market liquidity and increased market volatility.
In addition, transaction costs incurred by market participants are
likely to be higher due to the increased costs of compliance with
the new regulations. These consequences could adversely affect a
Fund’s returns.
79
Margin for OTC Uncleared Swaps
During
2015 and 2016, the CFTC and the US bank prudential regulators
completed their rulemakings under the Dodd-Frank Act on margin for
uncleared over the counter swaps (and option agreements that
qualify as swaps). Margin requirements went into effect for the
largest swap entities in September 2016 and went into effect for
financial end users in March 2017. Under these regulations, swap
dealers (such as sell-side counterparties to swaps), major swap
participants, and financial end users (such as buy-side
counterparties to swaps who are not physical traders) are required
in most instances, to post and collect initial and variation
margin, depending on the regulatory classification of their
counterparty. European and Asian regulators are also implementing
similar regulations, which were scheduled to become effective on
the same dates as the US-promulgated rules. As a result of these
requirements, additional capital will be required to be committed
to the margin accounts to support transactions involving uncleared
over the counter swaps and, consequently, these transactions may
become more expensive. While the Fund currently does not generally
engage in uncleared over the counter swaps, to the extent they do
so in the future, the additional margin required to be posted could
adversely impact the profitability (if any) to the Fund from
entering into these transactions.
FCMs
The CEA
requires all FCMs, such as the Teucrium Funds’ clearing
brokers, to meet and maintain specified fitness and financial
requirements, to segregate customer funds from proprietary funds
and account separately for all customers’ funds and
positions, and to maintain specified books and records open to
inspection by the staff of the CFTC. The CFTC has similar authority
over introducing brokers, or persons who solicit or accept orders
for commodity interest trades but who do not accept margin deposits
for the execution of trades. The CEA authorizes the CFTC to
regulate trading by FCMs and by their officers and directors,
permits the CFTC to require action by exchanges in the event of
market emergencies, and establishes an administrative procedure
under which customers may institute complaints for damages arising
from alleged violations of the CEA. The CEA also gives the states
powers to enforce its provisions and the regulations of the
CFTC.
On
November 14, 2013, the CFTC published final regulations that
require enhanced customer protections, risk management programs,
internal monitoring and controls, capital and liquidity standards,
customer disclosures and auditing and examination programs for
FCMs. The rules are intended to afford greater assurances to market
participants that customer segregated funds and secured amounts are
protected, customers are provided with appropriate notice of the
risks of futures trading and of the FCMs with which they may choose
to do business, FCMs are monitoring and managing risks in a robust
manner, the capital and liquidity of FCMs are strengthened to
safeguard the continued operations and the auditing and examination
programs of the CFTC and the SROs are monitoring the activities of
FCMs in a thorough manner.
Potential Advantages of Investment
Interest Income and Expense
Unlike
some alternative investment funds, the Fund does not borrow money
in order to obtain leverage, so the Fund does not incur any
interest expense. Rather, the Fund’s margin
deposits, and cash reserves are maintained in cash and cash
equivalents and interest is generally earned on available assets,
which include unrealized profits credited to the Fund’s
accounts
80
Fund Performance
The
following graph sets forth the historical performance of the Fund
from commencement of operations on September 19, 2011 until July
31, 2020.
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE
RESULTS.
81
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)
|
$11,701
|
|
NYSE Arca Listing
Fee (actual)
|
n/a
|
|
FINRA filing fees
(actual)
|
n/a
|
|
Blue Sky
expenses
|
n/a
|
|
Auditor’s
fees and expenses
|
$5,000
|
|
Legal fees and
expenses
|
$3,000
|
|
Printing
expenses
|
$3,000
|
|
Miscellaneous
expenses
|
n/a
|
|
Total
|
$22,701
|
|
Item 14.
|
Indemnification of Directors and Officers.
|
The
Trust’s Fifth Amended and Restated 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 or the applicable series of 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 theSponsor on behalf of the Trust or a series 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 or the applicable series of the Trust in
cases in which it is not entitled to indemnification under the
Trust Agreement.
82
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 or a series of 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 or the applicable series of 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.
83
|
Item 16
|
Exhibits and Financial Statement Schedules.
|
(a)
Exhibits
|
|
||
|
|
||
|
|
5.1
|
Opinion
of [_____] relating to the legality of the Shares.*
|
|
|
8.1
|
Opinion
of [_____] with respect to federal income tax
consequences.*
|
|
|
||
|
|
||
|
|
||
|
|
||
|
|
||
|
|
||
|
|
||
|
|
||
|
|
||
|
|
||
|
|
||
|
|
23.1
|
Consents
of [_____].*
|
|
|
23.2
|
Consent
of [_____], Independent Registered Public Accounting
Firm.*
|
|
|
* To be
filed by amendment.
(1)
Previously filed as Exhibit 3.1 to Pre-Effective Amendment No. 2 to
Registrant’s Registration Statement on Form S-1 (333-230626),
filed on April 26, 2019 and incorporated by reference
herein.
(2)
Previously filed as Exhibit 3.2 to Registrant’s Registration
Statement on Form S-1 (333-162033), filed on September 21, 2009 and
incorporated by reference herein.
84
(3)
Previously filed as Exhibit 10.2(1) to the Registrant’s
Current Report on Form 8-K for the Teucrium Corn Fund (File No.
001-34765), filed on November 1, 2011 and incorporated by reference
herein.
(4)
Previously filed as Exhibit 10.2(2) to the Registrant’s
Current Report on Form 8-K for the Teucrium Corn Fund (File No.
001-34765), filed on November 1, 2011 and incorporated by reference
herein.
(5)
Previously filed as Exhibit 10.2(3) to the Registrant’s
Current Report on Form 8-K for the Teucrium Corn Fund (File No.
001-34756), filed on November 1, 2011 and incorporated by reference
herein.
(6)
Previously filed as like-numbered exhibit to Pre-Effective
Amendment No. 1 to Registrant’s Registration Statement on
Form S-1 (333-187463), filed on April 26, 2013 and incorporated by
reference herein.
(7)
Previously filed as Exhibit 10.9 to Registrant’s Registration
Statement on Form S-1 (File No. 333-201953) filed on February 9,
2015 and incorporated by reference herein.
(8)
Previously filed as Exhibit 10.8 to the Registrant’s Annual
Report on Form 10-K for the year ended December 31, 2015, filed on
March 15, 2016, and incorporated by reference herein.
(9)
Previously filed as Exhibit 10.9 to the Registrant’s Annual
Report on Form 10-K for the year ended December 31, 2015, filed on
March 15, 2016, and incorporated by reference herein.
(10)
Previously filed as Exhibit 10.10 to the Registrant’s Annual
Report on Form 10-K for the year ended December 31, 2015, filed on
March 15, 2016, and incorporated by reference herein.
(11)
Previously filed as Exhibit 10.11 to the Registrant’s Annual
Report on Form 10-K for the year ended December 31, 2015, filed on
March 15, 2016, and incorporated by reference herein.
(12)
Previously filed as Exhibit 10.6 to Post-Effective Amendment No. 1
to Registrant’s Registration Statement on Form S-1
(333-162033) filed on October 22, 2010 and incorporated by
reference herein.
85
(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) The
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.
Provided, however,
that paragraphs (a)(1)(i), (ii), and (iii) of this section do not
apply if the registration statement is on Form S-1, Form S-3, Form
SF-3 or Form F-3 and the information required to be included in a
post-effective amendment by those paragraphs is contained in
reports filed with or furnished to the Commission by the registrant
pursuant to section 13 or section 15(d) of the Securities Exchange
Act of 1934 that are incorporated by reference in the registration
statement, or, as to a registration statement on Form S-3, is
contained in a form of prospectus filed pursuant to §
230.424(b) that is part of 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, 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, 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:
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(i) Any
preliminary prospectus or prospectus of the undersigned registrant
relating to the offering required to be filed pursuant to Rule
424;
(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.
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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, thereunto duly authorized,
in the city of Burlington, State of Vermont, on September 2,
2020.
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Teucrium Commodity Trust
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By:
Teucrium Trading, LLC, Sponsor
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By:
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/s/ Sal
Gilbertie
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Date:
September 2, 2020
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Sal
Gilbertie
Principal
Executive Officer, Secretary and Member
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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 as indicated. The document may be
executed by signatories hereto on any number of counterparts, all
of which shall constitute one and the same instrument. The
undersigned members and officers of Teucrium Trading, LLC, the
sponsor of Teucrium Commodity Trust, hereby constitute and appoint
Sal Gilbertie, Cory Mullen Rusin and Steve Kahler and eachof 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, as amended, 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.
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Signature
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Title
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Date
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/s/ Sal
Gilbertie
Sal
Gilbertie
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President/Chief
Executive Officer/Chief Investment Officer/Member of the
Sponsor
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September
2, 2020
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/s/
Cory Mullen-Rusin
Cory
Mullen-Rusin
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Chief
Financial Officer/Chief Accounting Officer/Chief Compliance
Officer/Principal Financial Officer
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September
2, 2020
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/s/
Steve Kahler
Steve
Kahler
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Chief
Operating Officer
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September
2, 2020
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88
Exhibit Index
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