Filed
Pursuant to Rule 424(b)(3)
Registration No.
333-210010
Teucrium Corn
Fund
13,925,000
Shares
Teucrium Corn Fund (the
“Fund” or “Us” or “We”) is a
commodity pool that is a series of Teucrium Commodity Trust
(“Trust”), a Delaware statutory trust. The Fund
issues common units representing fractional undivided beneficial
interests in such Fund, called “Shares.” The Fund
continuously offers creation baskets consisting of 25,000 Shares
(“Creation Baskets”) at their net asset value
(“NAV”) to “Authorized Purchasers” (as
defined below). Authorized Purchasers, in turn, may offer to
the public Shares of any baskets they create. Authorized
Purchasers sell such Shares, which are listed on the NYSE Arca
exchange (“NYSE Arca”), to the public at per-Share
offering prices that are expected to reflect, among other factors,
the trading price of the Shares on the NYSE Arca, the NAV of the
Fund at the time the Authorized Purchaser purchased the Creation
Baskets and the NAV at the time of the offer of the Shares to the
public, the supply of and demand for Shares at the time of sale,
and the liquidity of the markets for corn interests in which the
Fund invests. A list of the Fund’s Authorized
Purchasers as of the date of this Prospectus can be found under
“Plan of Distribution – Distributor and Authorized
Purchasers,” on page 49. The prices of Shares offered
by Authorized Purchasers are expected to fall between the
Fund’s NAV and the trading price of the Shares on the NYSE
Arca at the time of sale. The Fund’s Shares may trade
in the secondary market on the NYSE Arca at prices that are lower
or higher than their NAV per Share. Fund Shares are listed on
the NYSE Arca under the symbol
“CORN.”
The Fund’s sponsor is
Teucrium Trading, LLC (the “Sponsor”). The
investment objective of the Fund is to have the daily changes in
percentage terms of the Fund’s NAV per Share reflect the
daily changes in percentage terms of a weighted average of the
closing settlement prices for three corn futures
contracts.
This is a best efforts offering;
the distributor, Foreside Fund Services, LLC (the
“Distributor”), is not required to sell any specific
number or dollar amount of Shares, but will use its best efforts to
sell Shares. An Authorized Purchaser is under no obligation to
purchase Shares. This is intended to be a continuous offering that
will terminate on April 30, 2019, unless suspended or terminated at
any earlier time for certain reasons specified in this prospectus
or unless extended as permitted under the rules under the
Securities Act of 1933. See “Prospectus Summary –
The Shares” and “Creation and Redemption of Shares
– Rejection of Purchase Orders”
below.
Investing in
the Fund involves significant risks. See “What Are the
Risk Factors Involved with an Investment in the Fund?”
beginning on page 15. The Fund is not a mutual fund
registered under the Investment Company Act of 1940 and is not
subject to regulation under such Act.
NEITHER THE
SECURITIES AND EXCHANGE COMMISSION (“SEC”) NOR ANY
STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE
SECURITIES OFFERED IN THIS PROSPECTUS, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE COMMODITY
FUTURES TRADING COMMISSION HAS NOT PASSED UPON THE MERITS OF
PARTICIPATING IN THIS POOL NOR HAS THE COMMISSION PASSED ON THE
ADEQUACY OR ACCURACY OF THIS DISCLOSURE
DOCUMENT.
This prospectus
is in two parts: a disclosure document and a statement of
additional information. These parts are bound together, and both
contain important information.
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Per
share
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Per
Basket
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Price of the
Shares[1]
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$17.17
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$429,250
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[1] Based on closing
net asset value on January 31, 2018. The price will vary based on
net asset value in effect on a particular day. No commissions
or discounts are paid to Authorized Purchasers in connection with
the sale of Creation Baskets. The Sponsor pays certain fees
to the Distributor. See “The Offering – Plan of
Distribution” on page 49.
The date of this prospectus is
April 30, 2018
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 48 AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK
EVEN, THAT IS, TO RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, AT
PAGE 12.
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 10.
YOU SHOULD ALSO
BE AWARE THAT THIS COMMODITY POOL MAY TRADE FOREIGN
FUTURES OR OPTIONS CONTRACTS. TRANSACTIONS ON MARKETS LOCATED
OUTSIDE THE UNITED STATES, INCLUDING MARKETS FORMALLY LINKED TO A
UNITED STATES MARKET, MAY BE SUBJECT TO REGULATIONS WHICH OFFER
DIFFERENT OR DIMINISHED PROTECTION TO THE POOL AND ITS
PARTICIPANTS. FURTHER, UNITED STATES REGULATORY AUTHORITIES
MAY BE UNABLE TO COMPEL THE ENFORCEMENT OF THE RULES OF REGULATORY
AUTHORITIES OR MARKETS IN NON-UNITED STATES JURISDICTIONS WHERE
TRANSACTIONS FOR THE POOL MAY BE EFFECTED.
SWAPS
TRANSACTIONS, LIKE OTHER FINANCIAL TRANSACTIONS, INVOLVE A VARIETY
OF SIGNIFICANT RISKS. THE SPECIFIC RISKS PRESENTED BY A PARTICULAR
SWAP TRANSACTION NECESSARILY DEPEND UPON THE TERMS OF THE
TRANSACTION AND YOUR CIRCUMSTANCES. IN GENERAL, HOWEVER, ALL SWAPS
TRANSACTIONS INVOLVE SOME COMBINATION OF MARKET RISK, CREDIT RISK,
COUNTERPARTY CREDIT RISK, FUNDING RISK, LIQUIDITY RISK, AND
OPERATIONAL RISK.
HIGHLY
CUSTOMIZED SWAPS TRANSACTIONS IN PARTICULAR MAY INCREASE LIQUIDITY
RISK, WHICH MAY RESULT IN A SUSPENSION OF REDEMPTIONS. HIGHLY
LEVERAGED TRANSACTIONS MAY EXPERIENCE SUBSTANTIAL GAINS OR LOSSES
IN VALUE AS A RESULT OF RELATIVELY SMALL CHANGES IN THE VALUE OR
LEVEL OF AN UNDERLYING OR RELATED MARKET
FACTOR.
IN EVALUATING
THE RISKS AND CONTRACTUAL OBLIGATIONS ASSOCIATED WITH A PARTICULAR
SWAP TRANSACTION, IT IS IMPORTANT TO CONSIDER THAT A SWAP
TRANSACTION MAY BE MODIFIED OR TERMINATED ONLY BY MUTUAL CONSENT OF
THE ORIGINAL PARTIES AND SUBJECT TO AGREEMENT ON INDIVIDUALLY
NEGOTIATED TERMS. THEREFORE, IT MAY NOT BE POSSIBLE FOR THE
COMMODITY POOL OPERATOR TO MODIFY, TERMINATE, OR OFFSET THE POOL'S
OBLIGATIONS OR THE POOL'S EXPOSURE TO THE RISKS ASSOCIATED WITH A
TRANSACTION PRIOR TO ITS SCHEDULED TERMINATION
DATE.
TEUCRIUM CORN
FUND
TABLE OF
CONTENTS
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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.
5
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 15, 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 principal office of the Trust
and the Fund is located at 115 Christina Landing Drive Unit 2004,
Wilmington, DE 19801. The telephone number is (302)
543-5977. The Sponsor’s principal office is also
located at 115 Christina Landing Drive Unit 2004, Wilmington, DE
19801, and its telephone number is also (302)
543-5977.
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 $17.17 (the NAV per Share as of
January 31, 2018), is $0.30 or 1.75% of the selling price.
For more information, see “Breakeven Analysis”
below.
Teucrium Corn Fund (the
“Fund” or “Us” or “We”), is a
commodity pool that issues Shares that may be purchased and sold on
the NYSE Arca. The Fund is a series of the Teucrium Commodity
Trust (“Trust”), a Delaware statutory trust organized
on September 11, 2009. The Fund is one of five series of the
Trust (collectively, the “Teucrium Funds”); each series
operates as a separate commodity pool. Additional series of
the Trust may be created in the future. The Trust and the
Fund operate pursuant to the Trust’s Third Amended and
Restated Declaration of Trust and Trust Agreement (the “Trust
Agreement”). The Fund was formed and is managed and
controlled by the Sponsor, Teucrium Trading, LLC. The Sponsor is a
limited liability company formed in Delaware on July 28, 2009 that
is registered as a commodity pool operator (“CPO”) with
the Commodity Futures Trading Commission (“CFTC”) and
is a member of the National Futures Association
(“NFA”). The Sponsor registered as a
Commodity Trading Advisor (“CTA”) with the CFTC
effective September 8, 2017.
The investment objective of the
Fund is to have the daily changes in percentage terms of the
Shares’ NAV reflect the daily changes in percentage terms of
a weighted average of the closing settlement prices for three
futures contracts for corn (“Corn Futures Contracts”)
that are traded on the Chicago Board of Trade
(“CBOT”):
CORN Benchmark
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CBOT Corn Futures Contract
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Weighting
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Second to
expire
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35%
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Third to
expire
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30%
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December following
the third to expire
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35%
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(This weighted average of the
three referenced Corn Futures Contracts is referred to herein as
the “Benchmark,” and the three Corn Futures Contracts
that at any given time make up the Benchmark are referred to herein
as the “Benchmark Component Futures
Contracts.”)
The Fund seeks to achieve its
investment objective by investing under normal market conditions in
Benchmark Component Futures Contracts or, in certain circumstances,
in other Corn Futures Contracts traded on the CBOT or on foreign
exchanges. In addition, and to a limited extent, the
Fund also may invest in exchange-traded options on Corn Futures
Contracts in furtherance of the Fund's investment
objective. Once position limits in Corn Futures
Contracts are applicable, the Fund’s intention is to invest
in contracts and instruments such as cash settled options, forward
contracts, and other over-the-counter transactions that are based
on the price of corn or Corn Futures Contracts (collectively,
“Other Corn Interests,” and together with Corn Futures
Contracts, “Corn Interests”). See “The
Offering – Futures Contracts” below. By
utilizing certain or all of these investments, the Sponsor will
endeavor to cause the Fund’s performance to closely track
that of the Benchmark. The Sponsor expects to manage the
Fund’s investments directly, although it has been authorized
by the Trust to retain, establish the terms of retention for, and
terminate third-party commodity trading advisors to provide such
management. The Sponsor is also authorized to select
futures commission merchants (“FCMs”) to execute the
Fund’s transactions in Corn Futures
Contracts.
Corn Futures Contracts traded on
the CBOT expire on a specified day in five different months:
March, May, July, September and December. For example, in
terms of the Benchmark, in June of a given year the next-to-expire
or “spot month” Corn Futures Contract will expire in
July of that year, and the Benchmark Component Futures Contracts
will be the contracts expiring in September of that year (the
second-to-expire contract), December of that year (the
third-to-expire contract), and December of the following
year. As another example, in November of a given year the
Benchmark Component Futures Contracts will be the contracts
expiring in March, May and December of the following
year.
6
The Fund seeks to achieve its
investment objective primarily by investing in Corn Interests such
that daily changes in the Fund’s NAV are expected to closely
track the changes in the Benchmark. The Fund’s
positions in Corn Interests are changed or “rolled” on
a regular basis in order to track the changing nature of the
Benchmark. For example, five times a year (on the date on
which a Corn Futures Contract expires), the second-to-expire Corn
Futures Contract will become the next-to-expire Corn Futures
Contract and will no longer be a Benchmark Component Futures
Contract, and the Fund’s investments will have to be changed
accordingly. In order that the Fund’s trading does not
signal potential market movements and to make it more difficult for
third parties to profit by trading ahead based on such expected
market movements, the Fund’s investments may not be rolled
entirely on that day, but rather may be rolled over a period of
several days.
The Fund posts on its website
(www.teucriumcornfund.com)
the roll dates and the contracts into which it will roll for the
entire upcoming calendar year. This information is updated at the
beginning of the calendar year and as needed throughout the
year.
The Fund incurs certain expenses
in connection with its operations, and holds most of its assets in
income-producing, short-term securities for margin and other
liquidity purposes and to meet redemptions that may be necessary on
an ongoing basis. These expenses and income cause imperfect
correlation between changes in the Fund’s NAV and changes in
the Benchmark, because the Benchmark does not reflect expenses or
income. Investors should be aware that because the Fund
incurs certain expenses on an ongoing basis, they may incur a
partial or complete loss of their investment even when the
performance of the Benchmark is positive.
In seeking to achieve the
Fund’s investment objective of tracking the Benchmark, the
Sponsor may for certain reasons cause the Fund to enter into or
hold Corn Futures Contracts other than the Benchmark Component
Futures Contracts and/or Other Corn Interests. Other Corn Interests
that do not have standardized terms and are not exchange-traded,
referred to as “over-the-counter” Corn Interests, can
generally be structured as the parties to the Corn Interest
contract desire. Therefore, the Fund might enter into
multiple over-the-counter Other Corn Interests intended to
replicate the performance of each of the three Benchmark Component
Futures Contracts, or a single over-the-counter Other Corn 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 Other Corn Interest, the performance of the
Other Corn Interest will necessarily correlate with the performance
of the Benchmark or the applicable Benchmark Component Futures
Contract. The Fund might also enter into or hold Corn
Interests other than Benchmark Component Futures Contracts to
facilitate effective trading, consistent with the discussion of the
Fund’s “roll” strategy in the preceding
paragraph. In addition, the Fund might enter into or hold
Corn Interests that would be expected to alleviate overall
deviation between the Fund’s performance and that of the
Benchmark that may result from certain market and trading
inefficiencies or other reasons. By utilizing certain or all
of the investments described above, the Sponsor endeavors to cause
the Fund’s performance to closely track that of the
Benchmark.
The Fund invests in Corn Interests
to the fullest extent possible without being leveraged or unable to
satisfy its expected current or potential margin or collateral
obligations with respect to its investments in Corn
Interests. After fulfilling such margin and collateral
requirements, the Fund invests the remainder of its proceeds from
the sale of baskets in cash equivalents, including money-market
funds and investment grade commercial paper, and/or merely hold
such assets in cash in interest-bearing
accounts. Therefore, the focus of the Sponsor in
managing the Fund is investing in Corn Interests and cash and/or
cash equivalents. The Fund earns interest income from
the cash equivalents that it purchases and on the cash it holds at
financial institutions.
The Sponsor endeavors to place the
Fund’s trades in Corn Interests and otherwise manage the
Fund’s investments so that the Fund’s average daily
tracking error against the Benchmark will be less than 10 percent
over any period of 30 trading days. More specifically, the
Sponsor endeavors to manage the Fund so that A will be within
plus/minus 10 percent of B, where:
● A is the average daily change in
the Fund’s NAV for any period of 30 successive valuation
days, i.e., any trading day as of which the Fund calculates its
NAV, and
● B is the average daily change in
the Benchmark over the same period.
The Sponsor believes that market
arbitrage opportunities will cause the Fund’s Share price on
the NYSE Arca to track the Fund’s NAV per Share. The
Sponsor believes that the net effect of this expected relationship
and the expected relationship described above between the
Fund’s NAV and the Benchmark will be that the changes in the
price of the Fund’s Shares on the NYSE Arca will track, in
percentage terms, changes in the Benchmark. This relationship
may be affected by various market factors, including but not
limited to, the number of shares of the Fund outstanding and the
liquidity of the underlying holdings.
7
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 corn market in a cost-effective
manner. Such investors may include participants in the corn
industry and other industries seeking to hedge the risk of losses
in their corn-related transactions, as well as investors seeking
exposure to the corn market. Accordingly, depending on the
investment objective of an individual investor, the risks generally
associated with investing in the corn market and/or the risks
involved in hedging may exist. In addition, an investment in
the Fund involves the risks that the changes in the price of the
Fund’s Shares will not accurately track the changes in the
Benchmark, and that changes in the Benchmark will not closely
correlate with changes in the price of corn on the spot
market. Furthermore, as noted above, the Fund may also elect
to invest in cash and/or cash equivalents to meet its current or
potential margin or collateral requirements with respect to its
investments in Corn Interests and to invest cash not required to be
used as margin or collateral. The Fund does not expect there
to be any meaningful correlation between the performance of the
Fund’s investments in cash and/or cash equivalents and the
changes in the price of corn or Corn Interests. While the
level of interest earned on or the market price of these
investments may in some respects correlate to changes in the price
of corn, 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 corn. The Sponsor does not intend to operate the
Fund in a fashion such that its per share NAV will equal, in dollar
terms, the spot price of a bushel or other unit of corn or the
price of any particular Corn Futures Contract.
The Fund creates and redeems
Shares only in blocks called Creation Baskets and Redemption
Baskets, respectively. Only Authorized Purchasers may
purchase or redeem Creation Baskets or Redemption Baskets. An
Authorized Purchaser is under no obligation to create or redeem
baskets, and an Authorized Purchaser is under no obligation to
offer to the public Shares of any baskets it does create.
Baskets are generally created when there is a demand for Shares,
including, but not limited to, when the market price per share is
at (or perceived to be at) a premium to the NAV per Share.
Similarly, baskets are generally redeemed when the market price per
share is at (or perceived to be at) a discount to the NAV per
Share. Retail investors seeking to purchase or sell Shares on
any day are expected to effect such transactions in the secondary
market, on the NYSE Arca, at the market price per share, rather
than in connection with the creation or redemption of
baskets. There are a minimum number of baskets and associated
shares specified for the Fund. Once the minimum number of baskets
is reached, there can be no more basket redemptions until there has
been a creation basket. In such case, market makers may be less
willing to purchase Shares from investors in the secondary market,
which may in turn limit the ability of shareholders of the Fund to
sell their Shares in the secondary market. As of January 31, 2018
these minimum levels for the Fund are 50,000 shares representing 2
baskets.
All proceeds from the sale of
Creation Baskets will be invested as quickly as practicable in the
investments described in this prospectus. The Fund’s
cash and investments are held through the Fund’s Custodian,
in accounts with the Fund’s commodity futures brokers, in
demand deposits with highly-rated financial institutions, in
investment grade commercial paper, or in collateral accounts with
respect to over-the-counter Corn Interests. There is no
stated maximum time period for the Fund’s operations and the
Fund will continue until all Shares are redeemed or the Fund is
liquidated pursuant to the terms of the Trust
Agreement.
There is no specified limit on the
maximum number of Creation Baskets that can be sold. At some point,
however, applicable position limits on Corn Futures Contracts or
Other Corn Interests may practically limit the number of Creation
Baskets that will be sold if the Sponsor determines that the other
investment alternatives available to the Fund at that time will not
enable it to meet its stated investment
objective.
Shares may also be purchased and
sold by individuals and entities that are not Authorized Purchasers
in smaller increments than Creation Baskets on the NYSE Arca.
However, these transactions are effected at bid and ask prices
established by specialist firm(s). Like any listed security,
Shares of the Fund can be purchased and sold at any time a
secondary market is open.
In managing the Fund’s
assets, the Sponsor does not use a technical trading system that
automatically issues buy and sell orders. Instead, each time
one or more baskets are purchased or redeemed, the Sponsor will
purchase or sell Corn Interests with an aggregate market value that
approximates the amount of cash received or paid upon the purchase
or redemption of the basket(s).
Note to Secondary Market Investors:
Shares can be directly purchased from the Fund only in Creation
Baskets, and only by Authorized Purchasers. Each Creation
Basket consists of 25,000 Shares and therefore requires a
significant financial commitment to purchase. Accordingly,
investors who do not have such resources or who are not Authorized
Purchasers should be aware that some of the information contained
in this prospectus, including information about purchases and
redemptions of Shares directly with the Fund, is only relevant to
Authorized Purchasers. Shares are listed and traded on the
NYSE Arca under the ticker symbol “CORN” and may be
purchased and sold as individual Shares. Individuals
interested in purchasing Shares in the secondary market should
contact their broker. Shares purchased or sold through a
broker may be subject to commissions.
Except when
aggregated in Redemption Baskets, Shares are not redeemable
securities. There is no guarantee that Shares will trade at prices
that are at or near the per-Share NAV. There are a minimum number
of baskets and associated shares specified for the Fund. Once the
minimum number of baskets is reached, there can be no more
redemptions until there has been a creation basket. As of January
31, 2018 these minimum levels for the Fund are 50,000 shares
representing 2 baskets.
8
The Shares are registered as
securities under the Securities Act of 1933 (the “1933
Act”) and the Securities Exchange Act of 1934 (the
“Exchange Act”) and do not provide dividend rights or
conversion rights and there are no sinking funds. The Shares
may only be redeemed when aggregated in Redemption Baskets as
discussed under “Creation and Redemption of Shares” and
holders of Fund Shares (“Shareholders”) generally do
not have voting rights as discussed under “The Trust
Agreement – Voting Rights” below. Cumulative
voting is neither permitted nor required and there are no
preemptive rights. The Trust Agreement provides that, upon
liquidation of the Fund, its assets will be distributed pro rata to
the Shareholders based upon the number of Shares held. Each
Shareholder will receive its share of the assets in cash or in
kind, and the proportion of such share that is received in cash may
vary from Shareholder to Shareholder, as the Sponsor in its sole
discretion may decide.
The offering of Shares under this
prospectus is a continuous offering under Rule 415 of the 1933 Act
and will terminate on April 30, 2019 unless it is extended beyond
such date as permitted by applicable rules under the 1933
Act. The offering will terminate before such date or before
the end of any extension period if all of the registered Shares
have been sold. However, the Sponsor expects to cause the
Trust to file one or more additional registration statements as
necessary to permit additional Shares to be registered and offered
on an uninterrupted basis. This offering may also be
suspended or terminated at any time for certain specified reasons,
including if and when suitable investments for the Fund are not
available or practicable. See “Creation and Redemption
of Shares –Rejection of Purchase Orders” below.
As discussed above, the minimum purchase requirement for Authorized
Purchasers is a Creation Basket, which consists of 25,000
Shares. The Fund does not require a minimum purchase amount
for investors who purchase Shares from Authorized Purchasers.
There are no arrangements to place funds in an escrow, trust, or
similar account.
A brief description of the
principal types of Corn Interests in which the Fund may invest is
set forth below.
● A futures contract is an
exchange-traded contract traded with standard terms that calls for
the delivery of a specified quantity of a commodity at a specified
price, on a specified date and at a specified location.
Typically, a futures contract is traded out or rolled on an
exchange before delivery or receipt of the underlying commodity is
required.
● A swap agreement is a bilateral
contract to exchange a periodic stream of payments determined by
reference to a notional amount, with payment typically made between
the parties on a net basis. For instance, in the case of corn
swap, the Fund may be obligated to pay a fixed price per bushel of
corn 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 corn prices, the price of a specified Corn Futures Contract, or
the average price of a group of Corn Futures Contracts such as the
Benchmark (times the same notional number of bushels). As is
the case with futures, swaps are financial contracts and are
typically settled financially between counterparties. Unlike
futures, however, swaps may or may not trade on an exchange and,
therefore, they may be less liquid, may be more expensive, and may
take longer to settle or trade out of.
The Fund may also invest to a
lesser extent in the following types of Corn Interests
(“Other Corn Interests”):
● A forward contract
(“Forward”) is an over-the-counter bilateral contract
for the purchase or sale of a specified quantity of a commodity at
a specified price, on a specified date and at a specified location.
Forwards are almost always settled by delivery of the underlying
commodity. Although not impossible, it is unusual to settle a
Forward financially; therefore, Forwards are generally
illiquid.
● An option on a futures contract, a
swap agreement, forward contract or a commodity on the spot market
gives the buyer of the option the right, but not the obligation, to
buy or sell a futures contract, swap agreement, forward contract or
commodity, as applicable, at a specified price on or before a
specified date. The seller, or writer, of the option is
obligated to take a position in the underlying interest at a
specified price opposite to the option buyer if the option is
exercised. Options on futures contracts, like the future
contracts to which they relate, are standardized contracts traded
on an exchange and are regulated like futures contracts, while all
other options (except for spot options) are considered swaps and
are regulated as swaps.
Unlike exchange-traded contracts,
over-the-counter contracts expose the Fund to the credit risk of
the other party to the contract. (As discussed below,
exchange-traded contracts may expose the Fund to the risk of the
clearing broker’s and/or the exchange clearing
house(s)’ bankruptcy.) The Sponsor does not currently
intend to purchase and sell corn in the “spot market”
for the Fund. Spot market transactions are cash transactions
in which the buyer and seller agree to the immediate purchase and
sale of a commodity, usually with a two-day settlement
period. In addition, the Sponsor does not currently intend
that the Fund will enter into or hold spot month Corn Futures
Contracts, except that spot month contracts that were formerly
second-to-expire contracts may be held for a brief period until
they can be disposed of in accordance with the Fund’s roll
strategy.
9
Although the Fund has the ability
to trade over-the-counter contracts and swaps, the Sponsor
anticipates that 100% of the Fund’s assets will be used to
trade futures.
A more detailed description of
Corn Interests and other aspects of the corn and Corn Interest
markets can be found later in this prospectus.
As noted, the
Fund invests in Corn Futures Contracts, including those traded on
the CBOT or its affiliates. The Fund expressly disclaims any
association with the CBOT or endorsement of the Fund by such
exchange and acknowledges that “CBOT” and
“Chicago Board of Trade” are registered trademarks of
such exchange.
An investment in the Fund involves
a degree of risk. Some of the risks you may face are
summarized below. A more extensive discussion of these risks
appears beginning on page 15.
● Unlike mutual funds, commodity
pools and other investment pools that manage their investments so
as to realize income and gains for distribution to their investors,
the Fund generally does not distribute dividends to
Shareholders. You should not invest in the Fund if you will
need cash distributions from the Fund to pay taxes on your share of
income and gains of the Fund, if any, or for other
purposes.
● Investors may choose to use the
Fund as a means of investing indirectly in corn, and there are
risks involved in such investments. The risks and hazards
that are inherent in corn production may cause the price of corn to
fluctuate widely. Price movements for corn are influenced by,
among other things: weather conditions, crop failure,
production decisions, governmental policies, changing demand, the
corn harvest cycle, and various economic and monetary events.
Corn production is also subject to U.S. federal, state and local
regulations that materially affect operations.
● To the extent that investors use
the Fund as a means of investing indirectly in corn, there is the
risk that the changes in the price of the Fund’s Shares on
the NYSE Arca will not closely track the changes in spot price of
corn. This could happen if the price of Shares traded on the
NYSE Arca does not correlate closely with the Fund’s NAV; the
changes in the Fund’s NAV do not correlate closely with
changes in the Benchmark; or the changes in the Benchmark do not
correlate closely with changes in the cash or spot price of
corn. This is a risk because if these correlations are not
sufficiently close, then investors may not be able to use the Fund
as a cost-effective way to invest indirectly in corn or as a hedge
against the risk of loss in corn-related
transactions.
● Only an Authorized Purchaser may
engage in creation or redemption transactions with the Fund.
The Fund has a limited number of institutions that act as
Authorized Purchasers. To the extent that these institutions
exit the business or are unable or unwilling to proceed with
creation and/or redemption orders with respect to the Fund, and no
Authorized Purchaser is able or willing to step forward to create
or redeem shares of the Fund, Fund Shares may, particularly in
times of market stress, trade at a discount to the NAV per Share
and possibly face trading halts and/or delisting. In
addition, a decision by a market maker or lead market maker to step
away from activities for the Fund, particularly in times of market
stress, could adversely affect liquidity, the spread between the
bid and ask quotes for the Fund’s Shares, and potentially the
price of the Shares. The Sponsor can make no guarantees that
participation by Authorized Purchasers or market makers will
continue.
● The price relationship between the
near month Corn 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 corn price indices.
In cases in which the near month contract’s price is lower
than later-expiring contracts’ prices (a situation known as
“contango” in the futures markets), then absent the
impact of the overall movement in corn prices the value of the
Benchmark Component Futures Contracts would tend to decline as they
approach expiration which could cause the Benchmark Component
Futures Contracts, and therefore the Fund’s total return, to
track lower. In cases in which the near month
contract’s price is higher than later-expiring
contracts’ prices (a situation known as
“backwardation” in the futures markets), then absent
the impact of the overall movement in corn prices the value of the
Benchmark Component Futures Contracts would tend to rise as they
approach expiration. In the event of a prolonged period of
contango, and absent the impact of rising or falling wheat 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.
10
● Investors, including those who
directly participate in the corn market, may choose to use the Fund
as a vehicle to hedge against the risk of loss and there are risks
involved in hedging activities. While hedging can provide
protection against an adverse movement in market prices, it can
also preclude a hedger’s opportunity to benefit from a
favorable market movement.
● The structure and operation of the
Fund may involve conflicts of interest. For example, a
conflict may arise because the Sponsor and its principals and
affiliates may trade for themselves. In addition, the Sponsor
has sole current authority to manage the investments and operations
of the Fund, including the authority of the Sponsor to allocate
expenses to and between the Teucrium Funds and the interests of the
Sponsor may conflict with the Shareholders’ best
interests.
● 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 in percentage terms track changes in the
Benchmark in percentage terms, rather than profit from speculative
trading of Corn Interests. The Sponsor therefore endeavors to
manage the Fund so that the Fund’s assets are, unlike those
of many other commodity pools, not leveraged (i.e., so that the
aggregate value of the Fund’s exposure to losses from its
investments in Corn Interests at any time will not exceed the value
of the Fund’s assets). There is no assurance that the
Sponsor will successfully implement this investment strategy.
If the Sponsor permits the Fund to become leveraged, you could lose
all or substantially all of your investment if the Fund’s
trading positions suddenly turn unprofitable. These movements
in price may be the result of factors outside of the
Sponsor’s control and may not be anticipated by the
Sponsor.
● The Fund may invest in Other Corn
Interests. To the extent that these Other Corn Interests are
contracts individually negotiated between their parties, they may
not be as liquid as Corn 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 futures markets,
futures contracts, and futures exchanges has historically been
comprehensive. The CFTC and the exchanges are authorized to take
extraordinary actions in the event of a market emergency including,
for example, the retroactive implementation of speculative position
limits, increased margin requirements, the establishment of daily
price limits and the suspension of trading on an exchange or a
trading facility.
● The regulation of commodity
interest transactions in the United States is a rapidly changing
area of law and is subject to ongoing modification by governmental
and judicial action. Considerable regulatory attention has been
focused on non-traditional investment pools that are publicly
distributed in the United States and that use trading in futures
and options as an investment strategy and not for hedging or price
discovery purposes, therefore altering traditional participation in
futures and swaps markets. There is a possibility of future
regulatory changes within the United States altering, perhaps to a
material extent, the nature of an investment in the Fund, or the
ability of the Fund to continue to implement its investment
strategy. In addition, various national governments outside of the
United States have expressed concern regarding the disruptive
effects of speculative trading in the commodities markets and the
need to regulate the derivatives markets in general. The effect of
any future regulatory change on the Fund is impossible to predict
but could be substantial and adverse.
● Failures or breaches of the
electronic systems of the Fund, the Sponsor, the Custodian, or the
Fund’s other service providers, market makers, Authorized
Purchasers, NYSE Arca, exchanges on which Corn Futures Contracts or
Other Corn Interests are traded or cleared, or counterparties to
financial transactions with the Fund, have the ability to cause
disruptions and negatively impact the Fund’s business
operations, potentially resulting in financial losses to the Fund
and its shareholders. While the Fund has established business
continuity plans and risk management systems seeking to address
system breaches or failures, there are inherent limitations in such
plans and systems. Furthermore, the Fund cannot control the cyber
security plans and systems of the Custodian, Administrator or the
Fund’s other service providers, market makers, Authorized
Purchasers, NYSE Arca, exchanges on which Corn Futures Contracts or
Other Corn Interests are traded or cleared, or
counterparties.
For additional risks, see
“What Are the Risk Factors Involved with an Investment in the
Fund?”
The Fund’s NAV is determined
as of the earlier of the close of the New York Stock Exchange or
4:00 p.m. New York time on each day that the NYSE Arca is open for
trading.
For a glossary of defined terms,
see Appendix A.
11
The breakeven analysis below
indicates the approximate dollar returns and percentage returns
required for the redemption value of the selling the hypothetical
initial investment in a single Share, assuming a selling price of
$17.17 (the NAV per Share as of January 31, 2018), to equal the
amount invested twelve months after the investment was made.
This breakeven analysis refers to the redemption of baskets by
Authorized Purchasers and is not related to any gains an individual
investor would have to achieve in order to break even. The
breakeven analysis is an approximation only.
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Assumed selling price per
Share
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$17.17
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Sponsor’s Fee
(1.00%)(1)
|
$0.17
|
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Creation Basket Fee(2)
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$0.01
|
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Estimated Brokerage Fees
(3)
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$0.01
|
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Other Fund Fees and
Expenses(4)
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$0.44
|
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Interest Income (1.90%)
(5)
|
$(0.33)
|
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Amount of trading income (loss)
required for the redemption value at the end of one year to equal
the selling price of the
Share
|
$0.30
|
|
Percentage of selling price
per Share(6)
|
1.75%
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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)
Authorized Purchasers are required to pay a Creation Basket fee of
$250 for each order they place to create one or more baskets.
An order must be at least one basket, which is 25,000 Shares.
This breakeven analysis assumes a hypothetical investment in a
single Share so the Creation Basket fee is $.01
($250/25,000).
(3)
This amount is based on the actual brokerage fees for the Fund
calculated on an annualized basis. The Fund currently pays $4.50
per Corn Futures Contract purchase or sale (rounded to $0.01 in
this table based on fees accrued to the Fund for the year ended
December 31, 2017).
(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
sponsor fee waived by the Sponsor, and include: Professional fees
(primarily legal, auditing and tax-preparation related costs);
Custodian and Administrator fees and expenses, Distribution and
Marketing fees (primarily fees paid to the Distributor, costs
related to regulatory compliance activities and other costs related
to the trading activities of the Fund); Business Permits and
Licenses; General and Administrative expenses (primarily insurance
and printing), and Other Expenses. The expenses presented are
based on estimated expenses for the current fiscal year, and do not
represent the maximum amounts payable under the contracts with
third-party service providers, as discussed below in the section of
this disclosure document entitled “Contractual Fees and
Compensation Arrangements with the Sponsor and Third-Party Service
Providers.” The per-share cost of these fixed or
estimated fees has been calculated assuming that the Fund has $70.4
million in assets, which was the approximate amount of assets as of
January 31, 2018. 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 earns interest on funds it deposits at financial
institutions and the Custodian, and on commercial paper; it
estimates that the interest rate will be 1.90% based on the
interest rate currently earned on available cash balances as of
February 28, 2018. 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 per share net of any expenses or Sponsor fees waived by the
Sponsor. The estimated approximate percentage of selling
price per share before waived expenses or Sponsor fees is 2.08%
based on the Fund assets, net asset value per share and shares
outstanding as of January 31, 2018. Such waiver may be
terminated at any time at the sole discretion of the
Sponsor.
12
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Offering
|
The Fund 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. The Shares trade on the NYSE
Arca.
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Use of
Proceeds
|
The Sponsor
applies substantially all of the Fund’s assets toward
investing in Corn Interests, cash and/or cash equivalents.
The Sponsor deposits a portion of the Fund’s net assets with
the FCM or other custodians to be used to meet its current or
potential margin or collateral requirements in connection with its
investment in Corn Interests. The Fund uses only cash and/or
cash equivalents to satisfy these requirements. The Sponsor
expects that all entities that will hold or trade the Fund’s
assets will be based in the United States and will be subject to
United States regulations. The Sponsor believes that
approximately 3-5% of the Fund’s assets will normally be
committed as margin for Corn Futures Contracts and Other Corn
Interests. However, from time to time, the percentage of
assets committed as margin/collateral may be substantially more, or
less, than such range. The remaining portion of the
Fund’s assets is held as cash or cash equivalents. All
interest income earned on these investments is retained for the
Fund’s benefit.
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|
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|
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NYSE Arca
Symbol
|
“CORN”
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Creation and
Redemption
|
Authorized
Purchasers pay a $250 fee per order to create Creation Baskets, and
a $250 fee per order for Redemption Baskets. Authorized
Purchasers are not required to sell any specific number or dollar
amount of Shares. The per share price of Shares offered in
Creation Baskets is the total NAV of the Fund calculated as of the
close of the NYSE Arca on that day, divided by the number of issued
and outstanding Shares.
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Inter-Series
Limitation on
Liability
|
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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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, the Fund’s administrator,
U.S. Bancorp Fund Services, LLC (the “Administrator”)
calculates the NAV of the Fund’s Shares as of the earlier of
4:00 p.m. New York time or the close of the New York Stock Exchange
each day. NYSE Arca 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 CBOT’s main
pricing mechanism is open.
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13
|
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
investors relations and services; (ix) costs of preparation of all
federal, state, local and foreign tax returns and any taxes payable
on the income, assets or operations of the Fund; and (x)
extraordinary expenses (including, but not limited to, legal claims
and liabilities and litigation costs and any indemnification
related thereto). The Sponsor bore the costs and expenses related to
the initial offer and sale of Shares, including registration fees
paid or to be paid to the SEC, the Financial Industry Regulatory
Authority (“FINRA”) or any other regulatory body or
self-regulatory organization (“SRO”). None of the
costs and expenses related to the initial offer and sale of Shares,
which totaled approximately $644,850, were or are chargeable to the
Fund, and the Sponsor did not and may not recover any of these
costs and expenses from the Fund. Total fees to be paid by the Fund
are currently estimated to be approximately 1.75% of the daily net
assets of the Fund for the twelve-month period ending April 30,
2019, though this amount may change in future years. The
Sponsor may, in its discretion, pay or reimburse the Fund for, or
waive a portion of its management fee to offset, expenses that
would otherwise be borne by the Fund.
|
|
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|
|
General expenses
of the Trust will be allocated among the existing Teucrium Funds
and any future series of the Trust as determined by the Sponsor in
its discretion. The Trust may be required to indemnify the
Sponsor, and the Trust and/or the Sponsor may be required to
indemnify the Trustee, Distributor or Administrator, under certain
circumstances.
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Termination
Events
|
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
|
A list of Authorized Purchasers is available from the
Distributor. Authorized Purchasers must be (1) registered
broker-dealers or other securities market participants, such as
banks and other financial institutions, that are not required to
register as broker-dealers to engage in securities transactions,
and (2) DTC Participants. To become an Authorized Purchaser,
a person must enter into an Authorized Purchaser Agreement with the
Sponsor.
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14
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 Corn Interests subjects the Fund to the risks of the
corn 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 corn market because it invests in Corn
Interests. The risks and hazards that are inherent in the
corn market may cause the price of corn to fluctuate widely.
If the changes in percentage terms of the Fund’s Shares
accurately track the percentage changes in the Benchmark or the
spot price of corn, then the price of its Shares will fluctuate
accordingly.
● The price and availability of corn
is influenced by economic and industry conditions, including but
not limited to supply and demand factors such as: crop disease and
infestation (including, but not limited to, Leaf Blight, Ear Rot
and Root Rot); transportation difficulties; various planting,
growing, or harvesting problems; and severe weather conditions
(particularly during the spring planting season and the fall
harvest) such as drought, floods, or frost that are difficult to
anticipate and which cannot be controlled. Demand for corn in
the United States to produce ethanol has also been a
significant factor affecting the price of corn. In turn,
demand for ethanol has tended to increase when the price of
gasoline has increased, and has been significantly affected by
United States governmental policies designed to encourage the
production of ethanol. Recent changes in government policy
have the potential to reduce the demand for ethanol over the next
several years. Additionally, demand for corn is
affected by changes in consumer tastes, national, regional and
local economic conditions, and demographic trends. Finally,
because corn is often used as an ingredient in livestock feed,
demand for corn is subject to risks associated with the outbreak of
livestock disease.
● Corn production is subject to
United States federal, state, and local 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, the availability and competitiveness of feedstocks as raw
materials, and industry profitability. Additionally, corn
production is affected by laws and regulations relating to, but not
limited to, the sourcing, transporting, storing, and processing of
agricultural raw materials as well as the transporting, storing and
distributing of related agricultural products. U.S. corn
producers also must comply with various environmental laws and
regulations, such as those regulating the use of certain
pesticides, and local laws that regulate the production of
genetically modified crops. In addition, international trade
disputes can adversely affect agricultural commodity trade flows by
limiting or disrupting trade between countries or
regions.
● Seasonal fluctuations in the price
of corn may cause risk to an investor because of the possibility
that Share prices will be depressed because of the corn harvest
cycle. In the United States, the corn market is normally at
its weakest point, and corn prices are lowest, shortly before and
during the harvest (between September and November), due to the
high supply of corn in the market. Conversely, corn prices
are generally highest during the winter and spring (between
December and May), when farmer-owned corn has largely been sold and
used. Seasonal corn market peaks generally occur around
February or March. These normal market conditions are,
however, often influenced by weather patterns, and domestic and
global economic conditions, among others factors, and any specific
year may not necessarily follow the traditional seasonal
fluctuations described above. In the futures market, these seasonal
fluctuations are typically reflected in contracts expiring in the
relevant season (e.g., contracts expiring during the harvest season
are typically priced lower than contracts expiring in the winter
and spring). 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, Corn
Futures Contracts expiring in the fall.
An investment in the Fund is subject to correlation risk. Your
return on an investment in the Fund may differ from the return of
the Benchmark and depending on certain factors discussed below, you
could incur a partial or total loss of your
investment.
There is a risk that changes in
the price of Shares on the NYSE Arca will not correlate with
changes in the Fund’s NAV; that changes in the NAV will not
correlate with changes in the price of the Benchmark; and/or
changes in the price of the Benchmark will not correlate with
changes in the spot price of corn. 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.
15
The Benchmark is not designed to correlate exactly with the spot
price of corn and this could cause the changes in the price of the
Shares to substantially vary from the changes in the spot price of
corn. Therefore, you may not be able to effectively use the
Fund to hedge against corn-related losses or to indirectly invest
in corn.
The Benchmark Component Futures
Contracts reflect the price of corn for future delivery, not the
current spot price of corn, so at best the correlation between
changes in such Corn Futures Contracts and the spot price of corn
will be only approximate. Weak correlation between the
Benchmark and the spot price of corn may result from the typical
seasonal fluctuations in corn prices discussed above.
Imperfect correlation may also result from speculation in Corn
Interests, technical factors in the trading of Corn 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 corn, then the price of Shares may not accurately track
the spot price of corn and you may not be able to effectively use
the Fund as a way to hedge the risk of losses in your corn-related
transactions or as a way to indirectly invest in
corn.
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
corn-related losses or as a way to indirectly invest in
corn.
The Sponsor endeavors to invest
the Fund’s assets as fully as possible in Corn Interests so
that the changes in percentage terms in the NAV closely correlate
with the changes in percentage terms in the Benchmark.
However, changes in the Fund’s NAV may not correlate with the
changes in the Benchmark for various reasons, including those set
forth below:
The Fund does not intend to invest
only in the Benchmark Component Futures Contracts. While its
investments in Corn Futures Contracts other than the Benchmark
Component Futures Contracts and Other Corn Interests would be for
the purpose of causing the Fund’s performance to track that
of the Benchmark most effectively and efficiently, the performance
of these Corn Interests may not correlate well with the performance
of the Benchmark Component Futures Contracts, resulting in a
greater potential for error in tracking price changes in those
futures contracts. Additionally, if the trading market for
Corn Futures Contracts is suspended or closed, the Fund may not be
able to purchase these investments at the last reported price for
such investments.
The Fund incurs certain expenses
in connection with its operations, and holds most of its assets in
income-producing, short-term securities for margin and other
liquidity purposes and to meet redemptions that may be necessary on
an ongoing basis. These expenses and income cause imperfect
correlation between changes in the Fund’s NAV and changes in
the Benchmark.
The Sponsor may not be able to
invest the Fund’s assets in Corn Interests having an
aggregate notional amount exactly equal to the Fund’s
NAV. As a standardized contract, a single Corn Futures
Contract is for a specified amount of corn, 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 $625,000 for the sale of a Creation
Basket and that the value (i.e., the notional amount) of a Corn
Futures Contract is $20,050, the Fund could only enter into 31 Corn
Futures Contracts with an aggregate value of $621,550). While the
Fund may be better able to achieve the exact amount of exposure to
the corn market through the use of over-the-counter Other Corn
Interests, there is no assurance that the Sponsor will be able to
continually adjust the Fund’s exposure to such Other Corn
Interests to maintain such exact exposure. Furthermore, as
noted above, the use of Other Corn Interests may itself result in
imperfect correlation with the Benchmark. Any amounts not
invested in Corn Interests are held in cash and/or 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 Corn 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 corn market.
On the other hand, if the Fund’s NAV is equal to 100.9 times
the value of a single Corn 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 Corn Futures Contracts due to position limits imposed by
the CFTC or position limits or accountability levels imposed by the
relevant exchanges. In these instances, the Fund would likely
invest to a greater extent in Corn Interests not subject to these
position limits or accountability levels. To the extent that
the Fund invests in Other Corn 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.
16
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 corn-related
losses or indirectly invest in corn.
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 corn-related
losses or to indirectly invest in corn.
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 corn, even
if the Fund’s NAV was closely tracking movements in the spot
price of corn. If this occurs, you may not be able to
effectively use the Fund to hedge the risk of losses in your
corn-related transactions or to indirectly invest in
corn.
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 corn. The value of cash equivalents
held by the Fund generally moves inversely with movements in
interest rates. The prices of longer maturity securities
are subject to greater market fluctuations as a result of changes
in interest rates. While the short-term nature of the
Fund’s investments in cash equivalents should minimize the
interest rate risk to which the Fund is subject, it is possible
that the cash equivalents held by the Fund will decline in
value.
Certain of the Fund’s investments could be illiquid, which
could cause large losses to investors at any time or from time to
time.
The Fund may not always be able to
liquidate its positions in its investments at the desired price for
reasons including, among others, insufficient trading volume,
limits imposed by exchanges or other regulatory organizations, or
lack of liquidity. As to futures contracts, it may be
difficult to execute a trade at a specific price when there is a
relatively small volume of buy and sell orders in a market.
Limits imposed by futures exchanges or other regulatory
organizations, such as accountability levels, position limits and
price fluctuation limits, may contribute to a lack of liquidity
with respect to some exchange-traded Corn 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 Corn 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 corn production or exports, or in another
major export, can also make it difficult to liquidate a
position. Unexpected market illiquidity may cause major
losses to investors at any time or from time to time. In
addition, the Fund does not intend at this time to establish a
credit facility, which would provide an additional source of
liquidity, but instead will rely only on the cash and/or cash
equivalents that it holds to meet its liquidity needs. The
anticipated large value of the positions in Corn Interests that the
Sponsor will acquire or enter into for the Fund increases the risk
of illiquidity. Because Corn Interests may be illiquid, the
Fund’s holdings may be more difficult to liquidate at
favorable prices in periods of illiquid markets and losses may be
incurred during the period in which positions are being
liquidated.
If the nature of the participants in the futures market shifts such
that corn purchasers are the predominant hedgers in the market, the
Fund might have to reinvest at higher futures prices or choose
Other Corn Interests.
The changing nature of the
participants in the corn market will influence whether futures
prices are above or below the expected future spot price.
Corn producers will typically seek to hedge against falling corn
prices by selling Corn Futures Contracts. Therefore, if corn
producers become the predominant hedgers in the futures market,
prices of Corn Futures Contracts will typically be below expected
future spot prices. Conversely, if the predominant hedgers in
the futures market are the purchasers of the corn who purchase Corn
Futures Contracts to hedge against a rise in prices, prices of Corn
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 Corn Futures Contract that is no longer a
Benchmark Component Futures Contract and purchase a new Corn
Futures Contract or to sell a Corn Futures Contract to meet
redemption requests.
17
While the Fund does not intend to take physical delivery of corn
under its Corn Interests, the possibility of physical delivery
impacts the value of the contracts.
While it is not the current
intention of the Fund to take physical delivery of corn under its
Corn Interests, Corn Futures Contracts are traditionally
physically-deliverable contracts, and, unless a portion was not
traded out of or rolled, it is possible to take or make delivery
under these and some Other Corn Interests. Storage costs
associated with purchasing corn could result in costs and other
liabilities that could impact the value of Corn Futures Contracts
or certain Other Corn Interests. Storage costs include the
time value of money invested in corn as a physical commodity plus
the actual costs of storing the corn less any benefits from
ownership of corn that are not obtained by the holder of a futures
contract. In general, Corn 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) includes storage costs. To the extent that these
storage costs change for corn while the Fund holds Corn Interests,
the value of the Corn Interests, and therefore the Fund’s
NAV, may change as well.
The price relationship between the Benchmark Component Futures
Contracts at any point in time and the Corn 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 corn price
indices.
The design of the Fund’s
Benchmark is such that the Benchmark Component Futures Contracts
change five 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 Corn
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 corn 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 corn 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 corn
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 corn 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 corn. In the event of a
prolonged period of contango, and absent the impact of rising or
falling corn prices, this could have a significant negative impact
on the Fund’s NAV and total return, and you could incur a
partial or total loss of your investment in the
Fund.
Regulation of the commodity interests and commodity markets is
extensive and constantly changing; future regulatory developments
are impossible to predict but may significantly and adversely
affect the Fund.
The regulation of futures markets,
futures contracts and futures exchanges has historically been
comprehensive. The CFTC and the exchanges are authorized to take
extraordinary actions in the event of a market emergency including,
for example, the retroactive implementation of speculative position
limits, increased margin requirements, the establishment of daily
price limits and the suspension of trading on an exchange or
trading facility.
The regulation of commodity
interest transactions in the United States is a rapidly changing
area of law and is subject to ongoing modification by governmental
and judicial action. Subsequent to the enactment of the Dodd-Frank
Wall Street Reform and Consumer Protection Act (the
“Dodd-Frank Act”) in 2010, swap agreements became fully
regulated by the CFTC under the amended Commodity Exchange Act and
the CFTC’s regulations thereunder. Considerable regulatory
attention has been focused on non-traditional investment pools that
are publicly distributed in the United States. As the Dodd-Frank
Act continues to be implemented by the CFTC and the SEC, there is a
possibility of future regulatory changes within the United States
altering, perhaps to a material extent, the nature of an investment
in the Teucrium Funds, or the ability of a Fund to continue to
implement its investment strategy. In addition, various national
governments outside of the United States have expressed concern
regarding the disruptive effects of speculative trading in the
commodities markets and the need to regulate the derivatives
markets in general. The effect of any future regulatory change on
the Fund is impossible to predict but could be substantial and
adverse.
Further, President Donald J. Trump
has promised and issued several executive orders intended to
relieve the financial burden created by the Dodd-Frank Act,
although these executive orders only set forth several general
principles to be followed by the federal agencies and do not
mandate the wholesale repeal of the Dodd-Frank Act. The scope of
the effect that passage of new financial reform legislation could
have on U.S. securities, derivatives and commodities markets is not
clear at this time because each federal regulatory agency would
have to promulgate new regulations to implement such legislation.
These regulatory changes may affect the continued operation of the
Teucrium Funds. For additional information regarding recent
regulatory developments that may impact the Teucrium Funds or the
Trust, refer to the section entitled “Regulation” of
the Statement of Additional Information.
18
If you are investing in the Fund for purposes of hedging, you might
be subject to several risks, including the possibility of losing
the benefit of favorable market movements.
Producers and commercial users of
corn may use the Fund as a vehicle to hedge the risk of losses in
their corn-related transactions. There are several risks in
connection with using the Fund as a hedging device. While
hedging can provide protection against an adverse movement in
market prices, it can also preclude a hedger’s opportunity to
benefit from a favorable market movement. For instance, in a
hedging transaction the hedger may be a user of a commodity
concerned that the hedged commodity will increase in price, but
must recognize the risk that the price may instead decline.
If this happens, the hedger will have lost the benefit of being
able to purchase the commodity at the lower price because the
hedging transaction will result in a loss that would offset (at
least in part) this benefit. Thus, the hedger foregoes the
opportunity to profit from favorable price movements. In
addition, if the hedge is not a perfect one, the hedger can lose on
the hedging transaction and not realize an offsetting gain in the
value of the underlying item being hedged.
When using Corn Interests as a
hedging technique, at best, the correlation between changes in
prices of futures contracts and of the items being hedged can be
only approximate. The degree of imperfection of correlation depends
upon circumstances such as: variations in speculative
markets, demand for futures and for corn products, technical
influences in futures trading, and differences between anticipated
costs being hedged and the instruments underlying the standard
futures contracts available for trading. Even a
well-conceived hedge may be unsuccessful to some degree because of
unexpected market behavior as well as the expenses associated with
creating the hedge.
In addition, using an investment
in the Fund as a hedge for changes in food costs generally may not
be successful because changes in the price of corn may vary
substantially from changes in the prices of other food
products. In addition, the price of corn and the Fund’s
NAV would not reflect the refining, transportation, and other costs
that are specific to the hedger.
An investment in the Fund may provide you little or no
diversification benefits. Thus, in a declining market, the
Fund may have no gains to offset your losses from other
investments, and you may suffer losses on your investment in the
Fund at the same time you incur losses with respect to other asset
classes.
We cannot predict to what extent
the performance of Corn Interests will or will not correlate to the
performance of other broader asset classes such as stocks and
bonds. If the Fund’s performance were to move more
directly with the financial markets, you will obtain little or no
diversification benefits from an investment in the Shares. In such
a case, the Fund may have no gains to offset your losses from other
investments, and you may suffer losses on your investment in the
Fund at the same time you incur losses with respect to other
investments.
Variables such as drought, floods,
weather, embargoes, tariffs and other political events may have a
larger impact on corn and Corn 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 corn 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 has limited experience operating commodity
pools.
While certain of the Sponsor’s principals and employees have
experience with investing in Corn Interests and other commodity
interests, the Sponsor was formed for the purpose of sponsoring the
Trust and serving as the Teucrium Funds’ commodity pool
operator and has limited experience operating commodity
pools. The Sponsor currently sponsors five Teucrium Funds,
all of which have commenced operations as of the date hereof, but
none of the Teucrium Funds had commenced operations prior to June
9, 2010.
19
In light of this limited
experience, each of the Teucrium Funds has limited past performance
available for your review. Furthermore, the past performance
of the other Teucrium Funds will not necessarily reflect their
future performance or the future performance of this Fund. If
the experience of the Sponsor and its management is not adequate or
suitable, the operation and performance of the Fund may be
adversely affected.
The Sponsor is leanly staffed and relies heavily on key personnel
to manage trading activities.
In managing and directing the
day-to-day activities and affairs of the Fund, the Sponsor relies
almost entirely on a small number of individuals, including Mr. Sal
Gilbertie, Mr. Dale Riker, Mr. Steve Kahler and Ms. Barbara
Riker. If Mr. Gilbertie, Mr. Riker, Mr. Kahler or Ms. Riker
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 and the other
Teucrium Funds, and any other series of the Trust that may be
formed in the future, and has been provided with capital primarily
by its principals and a small number of outside investors. If
the Sponsor operates at a loss for an extended period, its capital
will be depleted and it may be unable to obtain additional
financing necessary to continue its operations. If the
Sponsor were unable to continue to provide services to the Fund,
the Fund would be terminated if a replacement sponsor could not be
found. Any expenses related to the operation of the Fund would need
to be paid by the Fund at the time of
termination.
Position limits, accountability levels and daily price fluctuation
limits set by the CFTC and the exchanges have the potential to
cause tracking error, which could cause the price of Shares to
substantially vary from the Benchmark and prevent you from being
able to effectively use the Fund as a way to hedge against
corn-related losses or as a way to indirectly invest in
corn.
The CFTC and U.S. designated
contract markets, such as the CBOT, may establish position limits
on the maximum net long or net short futures contracts in commodity
interests that any person or group of persons under common trading
control (other than as a hedge, which an investment by the Fund is
not) may hold, own or control. For example, the current
position limit for investments at any one time in the Corn Futures
Contracts are 600 spot month contracts, 33,000 contracts expiring
in any other single month, and 33,000 total for all months.
These position limits are fixed ceilings that the Fund would not be
able to exceed without specific CFTC
authorization.
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.
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.
20
There are no independent advisers representing Fund
investors.
The Sponsor has consulted with legal counsel, accountants and other
advisers regarding the formation and operation of the Trust and
Fund. No counsel has been appointed to represent you in
connection with the offering of Shares. Accordingly, you
should consult your own legal, tax and financial advisers regarding
the desirability of an investment in the
Shares.
There are technical and fundamental risks inherent in the trading
system the Sponsor intends to employ.
The Sponsor’s trading system
is quantitative in nature and it is possible that the Sponsor may
make errors. Any errors or imperfections in the Sponsor’s
trading system’s quantitative models, or in the data on which
they are based, could adversely affect the Sponsor’s
effective use of such trading systems. It is not possible or
practicable for the Sponsor’s trading system to factor all
relevant, available data into quantitative systems and/or trading
decision. There is no guarantee that the Sponsor will use any
specific data or type of data in making trading decisions on behalf
of the Fund, nor is there any guarantee that the data actually
utilized in making trading decisions on behalf of the Fund will be
the most accurate data or free from errors. In addition, it is
possible that a computer or software program may malfunction and
cause an error in computation.
The Fund and the Sponsor may have conflicts of interest, which may
cause them to favor their own interests to your
detriment.
The Fund and the Sponsor may have
inherent conflicts to the extent the Sponsor attempts to maintain
the Fund’s asset size in order to preserve its fee income and
this may not always be consistent with the Fund’s objective
of having the value of its Shares’ NAV track changes in the
Benchmark. The Sponsor’s officers and employees do not
devote their time exclusively to the Fund. These persons may
be directors, officers or employees of other entities. They
could have a conflict between their responsibilities to the Fund
and to those other entities.
In addition, the Sponsor’s
principals, officers or employees may trade securities and futures
and related contracts for their own accounts. A conflict of
interest may exist if their trades are in the same markets and
occur at the same time as the Fund trades using the clearing broker
to be used by the Fund. A potential conflict also may occur
if the Sponsor’s principals, officers or employees trade
their accounts more aggressively or take positions in their
accounts that are opposite, or ahead of, the positions taken by the
Fund.
The Sponsor has sole current
authority to manage the investments and operations of the Fund, and
this may allow it to act in a way that furthers its own interests
and in conflict with your best interests, including the authority
of the Sponsor to allocate expenses to and between the Teucrium
Funds. Shareholders have very limited voting rights, which
will limit the ability to influence matters such as amendment of
the Trust Agreement, changes in the Fund’s basic investment
policies, dissolution of the Fund, or the sale or distribution of
the Fund’s assets.
Shareholders have only very limited voting rights and generally
will not have the power to replace the Sponsor. Shareholders
will not participate in the management of the Fund and do not
control the Sponsor so they will not have influence over basic
matters that affect the Fund.
Shareholders will have very
limited voting rights with respect to the Fund’s
affairs. Shareholders may elect a replacement Sponsor only if
the current Sponsor resigns voluntarily or loses its corporate
charter. Shareholders will not be permitted to participate in
the management or control of the Fund or the conduct of its
business. Shareholders must therefore rely upon the duties
and judgment of the Sponsor to manage the Fund’s
affairs.
The Sponsor may manage a large amount of assets and this could
affect the Fund’s ability to trade
profitably.
Increases in assets under
management may affect trading decisions. While the
Fund’s assets are currently at manageable levels, the Sponsor
does not intend to limit the amount of Fund assets. The more
assets the Sponsor manages, the more difficult it may be for it to
trade profitably because of the difficulty of trading larger
positions without adversely affecting prices and performance and of
managing risk associated with larger positions.
The liability of the Sponsor and the Trustee are limited, and the
value of the Shares will be adversely affected if the Fund is
required to indemnify the Trustee or the
Sponsor.
Under the Trust Agreement, the
Trustee and the Sponsor are not liable, and have the right to be
indemnified, for any liability or expense incurred absent gross
negligence or willful misconduct on the part of the Trustee or
Sponsor, as the case may be. That means the Sponsor may
require the assets of the Fund to be sold in order to cover losses
or liability suffered by the Sponsor or by the Trustee. Any
sale of that kind would reduce the NAV of the Fund and the value of
its Shares.
Although the Shares of the Fund are limited liability investments,
certain circumstances such as bankruptcy could increase a
Shareholder’s liability.
The Shares of the Fund are limited
liability investments; Shareholders may not lose more than the
amount that they invest plus any profits recognized on their
investment. However, Shareholders could be required, as a
matter of bankruptcy law, to return to the estate of the Fund any
distribution they received at a time when the Fund was in fact
insolvent or in violation of its Trust
Agreement.
21
You cannot be assured of the Sponsor’s continued services,
and discontinuance may be detrimental to the
Fund.
You cannot be assured that the
Sponsor will be willing or able to continue to service the Fund for
any length of time. The Sponsor was formed for the purpose of
sponsoring the Fund and other commodity pools, and has limited
financial resources and no significant source of income apart from
its management fees from such commodity pools to support its
continued service for the Fund. If the Sponsor discontinues
its activities on behalf of the Fund or another series of the
Trust, the Fund may be adversely affected. If the
Sponsor’s registrations with the CFTC or memberships in the
NFA were revoked or suspended, the Sponsor would no longer be able
to provide services to the Fund.
The Fund could terminate at any time and cause the liquidation and
potential loss of your investment and could upset the overall
maturity and timing of your investment
portfolio.
The Fund may terminate at any
time, regardless of whether the Fund has incurred losses, subject
to the terms of the Trust Agreement. For example, the
dissolution or resignation of the Sponsor would cause the Trust to
terminate unless shareholders holding a majority of the outstanding
shares of the Trust, voting together as a single class, elect
within 90 days of the event to continue the Trust and appoint a
successor Sponsor. In addition, the Sponsor may terminate the
Fund if it determines that the Fund’s aggregate net assets in
relation to its operating expenses make the continued operation of
the Fund unreasonable or imprudent. As of the date of this
prospectus, the Fund pays the fees, costs and expenses of its
operations. If the Sponsor and the Fund are unable to raise
sufficient funds so that the Fund’s expenses are reasonable
in relation to its NAV, the Fund may be forced to terminate and
investors may lose all or part of their investment. Any
expenses related to the operation of the Fund would need to be paid
by the Fund at the time of termination.
However, no level of losses will
require the Sponsor to terminate the Fund. The Fund’s
termination would result in the liquidation of its investments and
the distribution of its remaining assets to the Shareholders on a
pro rata basis in accordance with their Shares, and the Fund could
incur losses in liquidating its investments in connection with a
termination. Termination could also negatively affect the
overall maturity and timing of your investment
portfolio.
As a Shareholder, you will not have the rights enjoyed by investors
in certain other types of entities.
As interests in separate series of
a Delaware statutory trust, the Shares do not involve the rights
normally associated with the ownership of shares of a corporation
(including, for example, the right to bring shareholder oppression
and derivative actions). In addition, the Shares have limited
voting and distribution rights (for example, Shareholders do not
have the right to elect directors, as the Trust does not have a
board of directors, and generally will not receive regular
distributions of the net income and capital gains earned by the
Fund). The Fund is also not subject to certain investor
protection provisions of the Sarbanes Oxley Act of 2002 and the
NYSE Arca governance rules (for example, audit committee
requirements).
A court could potentially conclude that the assets and liabilities
of the Fund are not segregated from those of another series of the
Trust, thereby potentially exposing assets in the Fund to the
liabilities of another series.
The Fund is a series of a Delaware
statutory trust and not itself a legal entity separate from the
other Teucrium Funds. The Delaware Statutory Trust Act
provides that if certain provisions are included in the formation
and governing documents of a statutory trust organized in series
and if separate and distinct records are maintained for any series
and the assets associated with that series are held in separate and
distinct records and are accounted for in such separate and
distinct records separately from the other assets of the statutory
trust, or any series thereof, then the debts, liabilities,
obligations and expenses incurred by a particular series are
enforceable against the assets of such series only, and not against
the assets of the statutory trust generally or any other series
thereof. Conversely, none of the debts, liabilities,
obligations and expenses incurred with respect to any other series
thereof is enforceable against the assets of such series. The
Sponsor is not aware of any court case that has interpreted this
inter-series limitation on liability or provided any guidance as to
what is required for compliance. The Sponsor intends to
maintain separate and distinct records for the Fund and account for
the Fund separately from any other Trust series, but it is possible
a court could conclude that the methods used do not satisfy the
Delaware Statutory Trust Act, which would potentially expose assets
in the Fund to the liabilities of one or more of the Teucrium Funds
and/or any other Trust series created in the
future.
The Sponsor and the Trustee are not obligated to prosecute any
action, suit or other proceeding in respect of any Fund
property.
Neither the Sponsor nor the
Trustee is obligated to, although each may in its respective
discretion, prosecute any action, suit or other proceeding in
respect of any Fund property. The Trust Agreement does not
confer upon Shareholders the right to prosecute any such action,
suit or other proceeding.
The Fund does not expect to make cash
distributions.
The Sponsor intends to re-invest
any income and realized gains of the Fund in additional Corn
Interests rather than distributing cash to Shareholders.
Therefore, unlike mutual funds, commodity pools or other investment
pools that generally distribute income and gains to their
investors, the Fund generally will not distribute cash to
Shareholders. You should not invest in the Fund if you will
need cash distributions from the Fund to pay taxes on your share of
income and gains of the Fund, if any, or for any other
reason. Although the Fund does not intend to make cash
distributions, it reserves the right to do so in the
Sponsor’s sole discretion, in certain situations, including
for example, if the income earned from its investments held
directly or posted as margin may reach levels that merit
distribution, e.g., at levels where such income is not necessary to
support its underlying investments in Corn Interests and investors
adversely react to being taxed on such income without receiving
distributions that could be used to pay such tax. Cash
distributions may be made in these and similar
instances.
22
There is a risk that the Fund will not have sufficient total net
assets to compensate for the fees and expenses that it must pay and
as such the expense ratio of the Fund may be higher than that filed
in this document.
The Fund pays management fees at
an annual rate of 1.00% of its average net assets, brokerage
charges and various other expenses of its ongoing operations (e.g.,
fees of the Administrator, Trustee and Distributor), resulting in a
total estimated expense ratio of approximately 1.75% of net assets.
These fees and expenses must be paid in all events, regardless of
the Fund’s total net assets.
If this offering of Shares does not raise sufficient funds to make
the Fund’s future operations viable, the Fund may be forced
to terminate and investors may lose all or part of their
investment.
All of the expenses relating to
the Fund incurred prior to the commencement of operations (June 9,
2010) were paid by the Sponsor. These payments by the Sponsor
were designed to allow the Fund the ability to commence the public
offering of its Shares. As of the date of this prospectus,
the Fund pays the fees, costs and expenses of its operations.
If the Sponsor and the Fund are unable to raise sufficient funds so
that the Fund’s expenses are reasonable in relation to its
NAV, the Fund may be forced to terminate and investors may lose all
or part of their investment. Any expenses related to the operation
of the Fund would need to be paid by the Fund at the time of
termination.
The Fund may incur higher fees and expenses upon renewing existing
or entering into new contractual relationships.
The arrangements between clearing
brokers and counterparties on the one hand and the Fund on the
other generally are terminable by the clearing brokers or
counterparty upon notice to the Fund. In addition, the
agreements between the Fund and its third-party service providers,
such as the Distributor and the Custodian, are generally terminable
at specified intervals. Upon termination, the Sponsor may be
required to renegotiate or make other arrangements for obtaining
similar services if the Fund intends to continue to operate.
Comparable services from another party may not be available, or
even if available, these services may not be available on the terms
as favorable as those of the expired or terminated
arrangements.
The
Fund may experience a higher breakeven if interest rates
decline.
The Fund earns interest on cash
balances available for investment. If actual interest rates earned
were to fall, the breakeven estimated by the Fund in this
prospectus could be higher, if the Sponsor were not able to waive
expenses sufficient to cover the deficit.
The Fund may miss certain trading opportunities because it will not
receive the benefit of the expertise of independent trading
advisors.
The Sponsor does not employ
trading advisors for the Fund; however, it reserves the right to
employ them in the future. The only advisor to the Fund is
the Sponsor. A lack of independent trading advisors may be
disadvantageous to the Fund because it will not receive the benefit
of their independent expertise.
The Net Asset Value calculation of the Fund may be overstated or
understated due to the valuation method employed when a settlement
price is not available on the date of net asset value
calculation.
The Fund’s NAV includes, in
part, any unrealized profits or losses on open swap agreements,
futures or forward contracts. Under normal circumstances, the NAV
reflects the quoted CBOT 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.
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 or lead market maker, 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.
23
If a minimum number of Shares is outstanding, market makers may be
less willing to purchase Shares in the secondary market which may
limit your ability to sell Shares.
There is a minimum number of
baskets and associated Shares specified for the Fund. If the Fund
experienced redemptions that caused the number of Shares
outstanding to decrease to the minimum level of Shares required to
be outstanding, until the minimum number of Shares is again
exceeded through the purchase of a new Creation Basket, there can
be no more redemptions by an Authorized Purchaser. In such case,
market makers may be less willing to purchase Shares from investors
in the secondary market, which may in turn limit the ability of
Shareholders of the Fund to sell their Shares in the secondary
market. As of January 31, 2018, these minimum levels for the Fund
are 50,000 Shares representing two baskets. The minimum level of
Shares specified for the Fund is subject to change. As of January
31, 2018, there were 4,100,004 Shares outstanding. (The current
number of Shares outstanding is posted daily on our website,
www.teucriumcornfund.com.)
You may be adversely affected by redemption orders that are subject
to postponement, suspension or rejection under certain
circumstances.
The Trust may, in its discretion,
suspend the right to redeem Shares of the Fund or postpone the
redemption settlement date: (1) for any period during which an
applicable exchange is closed other than customary weekend or
holiday closing, or trading is suspended or restricted; (2) for any
period during which an emergency exists as a result of which
delivery, disposal or evaluation of the Fund’s assets is not
reasonably practicable; (3) for such other period as the Sponsor
determines to be necessary for the protection of Shareholders; (4)
if there is a possibility that any or all of the Benchmark
Component Futures Contracts of the Fund on the CBOT from which the
NAV of the Fund is calculated will be priced at a daily price limit
restriction; or (5) if, in the sole discretion of the Sponsor, the
execution of such an order would not be in the best interest of the
Fund or its Shareholders. In addition, the Trust will reject
a redemption order if the order is not in proper form as described
in the agreement with the Authorized Purchaser or if the
fulfillment of the order, in the opinion of its counsel, might be
unlawful. The Sponsor may also reject a redemption order if
the number of Shares being redeemed would reduce the remaining
outstanding Shares to 50,000 Shares (i.e., two baskets of 25,000
Shares each) or less, unless the Sponsor has reason to believe that
the placer of the redemption order does in fact possess all the
outstanding Shares of the Fund and can deliver them. Any such
postponement, suspension or rejection could adversely affect a
redeeming Shareholder. For example, the resulting delay may
adversely affect the value of the Shareholder’s redemption
proceeds if the NAV of the Fund declines during the period of
delay. The Trust Agreement provides that the Sponsor and its
designees will not be liable for any loss or damage that may result
from any such suspension or postponement.
Any postponement, suspension or
rejection of a redemption order could adversely affect a redeeming
Shareholder. For example, the resulting delay may adversely
affect the value of a Shareholder’s redemption proceeds if
the NAV of the Fund declines during the period of delay. The
Trust Agreement provides that the Sponsor and its designees will
not be liable for any loss or damage that may result from any such
suspension or postponement.
The failure or bankruptcy of a clearing broker could result in
substantial losses for the Fund; the clearing broker could be
subject to proceedings that impair its ability to execute the
Fund’s trades.
Under CFTC regulations, a clearing
broker with respect to the Fund’s exchange-traded Corn
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 Corn 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/or cash equivalents
with the Custodian, other financial institutions, or in commercial
paper with a maturity date of 90 days or less. The insolvency of
the Custodian, any financial institution in which the Fund has
demand deposits, or a commercial paper issuer could result in a
complete loss of the Fund’s assets. The Fund currently has
cash and or cash equivalents at the Custodian, Rabobank, N.A,
Mascoma Savings Bank and Morgan Stanley, and commercial
paper.
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.
24
The Sponsor has a patent on
certain business methods and procedures used with respect to the
Fund. The Sponsor utilizes certain proprietary software. Any
unauthorized use of such proprietary software, business methods
and/or procedures could adversely affect the competitive advantage
of the Sponsor or the Fund and/or require the Sponsor to take legal
action to protect its rights.
The success of the Fund depends on the ability of the Sponsor to
accurately implement its trading strategies, and any failure to do
so could subject the Fund to losses on such
transactions.
The Sponsor’s trading
strategy is quantitative in nature and it is possible that the
Sponsor will make errors in its implementation. The execution
of the quantitative strategy is subject to human error, such as
incorrect inputs into the Sponsor’s computer systems and
incorrect information provided to the Fund’s clearing
brokers. In addition, it is possible that a computer or
software program may malfunction and cause an error in
computation. Any failure, inaccuracy or delay in executing
the Fund’s transactions could affect its ability to achieve
its investment objective. It could also result in decisions
to undertake transactions based on inaccurate or incomplete
information. This could cause substantial losses on
transactions. The Sponsor is not required to reimburse the Fund for
any costs associated with an error in the placement or execution of
a trade in commodity future interests.
The
Fund may experience substantial losses on transactions if the
computer or communications system fails.
The Fund’s trading
activities depend on the integrity and performance of the computer
and communications systems supporting them. Extraordinary
transaction volume, hardware or software failure, power or
telecommunications failure, a natural disaster, cyber attack or
other catastrophe could cause the computer systems to operate at an
unacceptably slow speed or even fail. Any significant
degradation or failure of the systems that the Sponsor uses to
gather and analyze information, enter orders, process data, monitor
risk levels and otherwise engage in trading activities may result
in substantial losses on transactions, liability to other parties,
lost profit opportunities, damages to the Sponsor’s and
Fund’s reputations, increased operational expenses and
diversion of technical resources.
If the computer and communications systems are not upgraded when
necessary, the Fund’s financial condition could be
harmed.
The development of complex
computer and communications systems and new technologies may render
the existing computer and communications systems supporting the
Fund’s trading activities obsolete. In addition, these
computer and communications systems must be compatible with those
of third parties, such as the systems of exchanges, clearing
brokers and the executing brokers. As a result, if these
third parties upgrade their systems, the Sponsor will need to make
corresponding upgrades to effectively continue its trading
activities. The Sponsor may have limited financial resources for
these upgrades or other technological changes. The Fund’s
future success may depend on the Sponsor’s ability to respond
to changing technologies on a timely and cost-effective
basis.
The Fund depends on the reliable performance of the computer and
communications systems of third parties, such as brokers and
futures exchanges, and may experience substantial losses on
transactions if they fail.
The Fund depends on the proper and
timely function of complex computer and communications systems
maintained and operated by the futures exchanges, brokers and other
data providers that the Sponsor uses to conduct trading
activities. Failure or inadequate performance of any of these
systems could adversely affect the Sponsor’s ability to
complete transactions, including its ability to close out
positions, and result in lost profit opportunities and significant
losses on commodity interest transactions. This could have a
material adverse effect on revenues and materially reduce the
Fund’s available capital. For example, unavailability
of price quotations from third parties may make it difficult or
impossible for the Sponsor to conduct trading activities so that
the Fund will closely track the Benchmark. Unavailability of
records from brokerage firms may make it difficult or impossible
for the Sponsor to accurately determine which transactions have
been executed or the details, including price and time, of any
transaction executed. This unavailability of information also
may make it difficult or impossible for the Sponsor to reconcile
its records of transactions with those of another party or to
accomplish settlement of executed transactions.
The occurrence of a severe weather event, natural disaster,
terrorist attack, or the outbreak, continuation or expansion of war
or other hostilities could disrupt the Fund’s trading
activity and materially affect the Fund’s
profitability.
The operations of the Fund, the
exchanges, brokers and counterparties with which the Fund does
business, and the markets in which the Fund does business could be
severely disrupted in the event of a severe weather event, natural
disaster, major terrorist attack, data breach or the outbreak,
continuation or expansion of war or other hostilities. Global
terrorist attacks, anti-terrorism initiatives, and political unrest
continue to fuel this concern.
25
Failures or breaches of electronic systems could disrupt the
Fund’s trading activity and materially affect the
Fund’s profitability.
Failures or breaches of the
electronic systems of the Fund, the Sponsor, the Custodian or
mutual funds or other financial institutions in which the Fund
invests, or the Fund’s other service providers, market
makers, Authorized Purchasers, NYSE Arca, exchanges on which
Futures Contracts or Other Commodity Interests are traded or
cleared, or counterparties have the ability to cause disruptions
and negatively impact the Fund’s business operations,
potentially resulting in financial losses to the Fund and its
shareholders. While the Fund has established business continuity
plans and risk management systems seeking to address system
breaches or failures, there are inherent limitations in such plans
and systems. Furthermore, the Fund cannot control the cyber
security plans and systems of the Custodian or mutual funds or
other financial institutions in which the Fund invests, or the
Fund’s other service providers, market makers, Authorized
Purchasers, NYSE Arca, exchanges on which Futures Contracts or
Other Commodity Interests are traded or cleared, or
counterparties.
An investment in a Fund faces numerous risks from its shares being
traded in the secondary market, any of which may lead to the
Fund’s shares trading at a premium or discount to
NAV.
Although the Fund’s shares
are listed for trading on the NYSE Arca, there can be no assurance
that an active trading market for such shares will develop or be
maintained. Trading in the Fund’s shares may be halted
due to market conditions or for reasons that, in the view of the
NYSE Arca, make trading in shares inadvisable. There can be
no assurance that the requirements of the NYSE Arca necessary to
maintain the listing of the Fund will continue to be met or will
remain unchanged or that the shares will trade with any volume, or
at all. The NAV of the Fund’s shares will generally fluctuate
with changes in the market value of the Fund’s portfolio
holdings. The market prices of shares will generally
fluctuate in accordance with changes in the Fund’s NAV and
supply and demand of shares on the NYSE Arca. It cannot be
predicted whether a Fund 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.
If the Sponsor causes or permits the Fund to become leveraged, you
could lose all or substantially all of your investment if the
Fund’s trading positions suddenly turn
unprofitable.
Commodity pools’ trading
positions in futures contracts or other commodity interests are
typically required to be secured by the deposit of margin funds
that represent only a small percentage of a futures
contract’s (or other commodity interest’s) entire
market value. This feature permits commodity pools to
“leverage” their assets by purchasing or selling
futures contracts (or other commodity interests) with an aggregate
notional amount in excess of the commodity pool’s
assets. While this leverage can increase a pool’s
profits, relatively small adverse movements in the price of the
pool’s commodity interests can cause significant losses to
the pool. While the Sponsor does not intend to leverage the
Fund’s assets, it is not prohibited from doing so under the
Trust Agreement. If the Sponsor was to cause or permit the
Fund to become leveraged, you could lose all or substantially all
of your investment if the Fund’s trading positions suddenly
turn unprofitable.
The price of corn can be volatile which could cause large
fluctuations in the price of Shares.
As discussed in more detail above,
price movements for corn are influenced by, among other things,
weather conditions, crop disease, transportation and storage
difficulties, various planting, growing and harvesting problems,
governmental policies, changing demand, and seasonal fluctuations
in supply. More generally, commodity prices may be influenced
by economic and monetary events such as changes in interest rates,
changes in balances of payments and trade, U.S. and international
inflation rates, currency valuations and devaluations, U.S. and
international economic events, and changes in the philosophies and
emotions of market participants. Because the Fund invests
primarily in interests in a single commodity, it is not a
diversified investment vehicle, and therefore may be subject to
greater volatility than a diversified portfolio of stocks or bonds
or a more diversified commodity pool.
26
Over-the-counter transactions are subject to changing
regulation.
A portion of the Fund’s
assets may be used to trade over-the-counter Corn Interests, such
as forward contracts or swaps. The markets for
over-the-counter contracts will continue to rely upon the integrity
of market participants in lieu of the additional regulation imposed
by the CFTC on participants in the futures markets. To date, the
forward markets have been largely unregulated, except for
anti-manipulation and anti-fraud provisions, forward contracts have
been executed bi-laterally and, in general historically, forward
contracts have not been cleared or guaranteed by a third party.
While increased regulation of over-the-counter Commodity Interests
is likely to result from changes that are required to be
effectuated by the Dodd-Frank Act, there is no guarantee that such
increased regulation will be effective to reduce these
risks.
The Fund will be subject to credit risk with respect to
counterparties to over-the-counter contracts entered into by the
Fund.
The Fund faces the risk of
non-performance by the counterparties to the over-the-counter
contracts. Unlike in futures contracts, the counterparty to these
contracts is generally a single bank or other financial
institution, rather than a clearing organization backed by a group
of financial institutions. As a result, there will be greater
counterparty credit risk in these transactions. A
counterparty may not be able to meet its obligations to the Fund,
in which case the Fund could suffer significant losses on these
contracts.
If a counterparty becomes bankrupt
or otherwise fails to perform its obligations due to financial
difficulties, the Fund may experience significant delays in
obtaining any recovery in a bankruptcy or other reorganization
proceeding. During any such period, the Fund may have
difficulty in determining the value of its contracts with the
counterparty, which in turn could result in the overstatement or
understatement of the Fund’s NAV. The Fund may
eventually obtain only limited recovery or no recovery in such
circumstances.
The Fund may be subject to liquidity risk with respect to its
over-the-counter contracts.
Over-the-counter contracts may
have terms that make them less marketable than Corn 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.
Trading in international markets would expose the Fund to credit
and regulatory risk.
A significant portion of the Corn
Futures Contracts entered into by the Fund are traded on United
States exchanges including the CBOT. 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.
27
International trading activities subject the Fund to foreign
exchange risk.
The price of any non-U.S. Corn
Interest and, therefore, the potential profit and loss on such
investment, may be affected by any variance in the foreign exchange
rate between the time the order is placed and the time it is
liquidated, offset or exercised. However, a portion of the
trades for the Fund may take place in markets and on exchanges
outside of the U.S. Some non-U.S. markets present risks because
they are not subject to the same degree of regulation as their U.S.
counterparts. As a result, changes in the value of the local
currency relative to the U.S. dollar may cause losses to the Fund
even if the contract is profitable.
The CFTC’s implementation of
its regulations under the Dodd-Frank Act may further affect the
Fund’s ability to enter into foreign exchange contracts and
to hedge its exposure to foreign exchange
losses.
The Fund’s international trading could expose it to losses
resulting from non-U.S. exchanges that are less developed or less
reliable than United States exchanges.
Some non-U.S. exchanges also may
be in a more developmental stage so that prior price histories may
not be indicative of current price dynamics. In addition, the
Fund may not have the same access to certain positions on foreign
trading exchanges as do local traders, and the historical market
data on which the Sponsor bases its strategies may not be as
reliable or accessible as it is for U.S.
exchanges.
Please refer to “U.S.
Federal Income Tax Considerations” for information regarding
the U.S. federal income tax consequences of the purchase, ownership
and disposition of Shares.
Your tax liability from holding Shares may exceed the amount of
distributions, if any, on your Shares.
Cash or property will be
distributed by the Fund at the sole discretion of the Sponsor, and
the Sponsor currently does not intend to make cash or other
distributions with respect to Shares. You will be required to
pay U.S. federal income tax and, in some cases, state, local, or
foreign income tax, on your allocable share of the Fund’s
taxable income, without regard to whether you receive distributions
or the amount of any distributions. Therefore, the tax
liability resulting from your ownership of Shares may exceed the
amount of cash or value of property (if any)
distributed.
Your allocable share of income or loss for U.S. federal income tax
purposes may differ from your economic income or loss on your
Shares.
Due to the application of the
assumptions and conventions applied by the Fund in making
allocations for U.S. federal income tax purposes and other factors,
your allocable share of the Fund’s income, gain, deduction or
loss may be different than your economic profit or loss from your
Shares for a taxable year. This difference could be temporary
or permanent and, if permanent, could result in your being taxed on
amounts in excess of your economic income.
Items of income, gain, deduction, loss and credit with respect to
Shares could be reallocated (or for taxable years after December
31, 2017, the Fund itself could be liable for U.S. federal income
tax along with any interest or penalties) if the IRS does not
accept the assumptions and conventions applied by the Fund in
allocating those items, with potential adverse tax consequences for
you.
The Fund is treated as a
partnership for United States federal income tax
purposes. The U.S. tax rules pertaining to entities
taxed as partnerships are complex and their application to publicly
traded partnerships such as the Fund is in many respects
uncertain. The Fund applies certain assumptions and
conventions in an attempt to comply with the intent of the
applicable rules and to report taxable income, gains, deductions,
losses and credits in a manner that properly reflects
Shareholders’ economic gains and losses. These
assumptions and conventions may not fully comply with all aspects
of the Internal Revenue Code of 1986, as amended (the
“Code”), and applicable Treasury Regulations, however,
and it is possible that the U.S. Internal Revenue Service (the
“IRS”) will successfully challenge our allocation
methods and require us to reallocate items of income, gain,
deduction, loss or credit in a manner that adversely affects
you. If this occurs, you may be required to file an
amended tax return and to pay additional taxes plus deficiency
interest.
28
In addition, for taxable years
beginning after December 31, 2017, the Fund may be liable for U.S.
federal income tax on any “imputed understatement” of
tax resulting from an adjustment as a result of an IRS audit. The
amount of the imputed understatement generally includes increases
in allocations of items of income or gains to any investor and
decreases in allocations of items of deduction, loss, or credit to
any investor without any offset for any corresponding reductions in
allocations of items of income or gain to any investor or increases
in allocations of items of deduction, loss, or credit to any
investor. If the Fund is required to pay any U.S. federal income
taxes on any imputed understatement, the resulting tax liability
would reduce the net assets of the Fund and would likely have an
adverse impact on the value of the Shares. In such a case, the tax
liability would in effect be borne by Shareholders that own shares
at the time of such assessment, which may be different persons, or
persons with different ownership percentages, 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 understatement,
including any interest and penalties. The ability of a publicly
traded partnership such as the Fund to make this election is
uncertain. If the election is made, the Fund would be required to
provide Shareholders who owned beneficial interests in the Shares
in the year to which the adjusted allocations relate with a
statement setting forth their proportionate shares of the
adjustment (“Adjusted K-1s”). The investors would be
required to take the adjustment into account in the taxable year in
which the Adjusted K-1s are issued. For an additional discussion
please see “U.S. Federal Income Tax Considerations –
Other Tax Matters.”
If the Fund is required to withhold tax with respect to any
Non-U.S. Shareholders, the cost of such withholding may be borne by
all Shareholders.
Under certain circumstances, the
Fund may be required to pay withholding tax with respect to
allocations to Non-U.S. Shareholders. Although the Trust Agreement
provides that any such withholding will be treated as being
distributed to the Non-U.S. Shareholder, the Fund may not be able
to cause the economic cost of such withholding to be borne by the
Non-U.S. Shareholder on whose behalf such amounts were withheld
since the Fund does not intend to make any distributions. Under
such circumstances, the economic cost of the withholding may be
borne by all Shareholders, not just the Shareholders on whose
behalf such amounts were withheld. This could have a material
impact on the value of your Shares.
The Fund could be treated as a corporation for federal income tax
purposes, which may substantially reduce the value of your
Shares.
The Trust has received an opinion
of counsel that, under current U.S. federal income tax laws, the
Fund will be treated as a partnership that is not taxable as a
corporation for U.S. federal income tax purposes, provided that (i)
at least 90 percent of the Fund’s annual gross income
consists of “qualifying income” as defined in the Code,
(ii) the Fund is organized and operated in accordance with its
governing agreements and applicable law, and (iii) the Fund does
not elect to be taxed as a corporation for federal income tax
purposes. Although the Sponsor anticipates that the Fund
has satisfied and will continue to satisfy the “qualifying
income” requirement for all of its taxable years, that result
cannot be assured. The Fund has not requested and will
not request any ruling from the IRS with respect to its
classification as a partnership not taxable as a corporation for
federal income tax purposes. If the IRS were to
successfully assert that the Fund is taxable as a corporation for
federal income tax purposes in any taxable year, rather than
passing through its income, gains, losses and deductions
proportionately to Shareholders, the Fund would be subject to tax
on its net income for the year at corporate tax
rates. In addition, although the Sponsor does not
currently intend to make distributions with respect to Shares, any
distributions would be taxable to Shareholders as dividend income
to the extent of the Fund’s current and accumulated earning
and profit. Taxation of the Fund as a corporation could
materially reduce the after-tax return on an investment in Shares
and could substantially reduce the value of your
Shares.
Tax
legislation that has been or could be enacted may affect you with
respect to your investment in the Fund.
Legislative, regulatory or
administrative changes could be enacted or promulgated at any time,
either prospectively or with retroactive effect, and may adversely
affect the Fund and its Shareholders. Tax legislation informally
known as the Tax Cuts and Jobs Act of 2017 (the “2017 Tax
Cuts and Jobs Act”) was signed into law on December 22, 2017,
generally effective for taxable years beginning on or after January
1, 2018. In addition to modifying income tax rates for individuals
and corporations, the 2017 Tax Cuts and Jobs Act made certain
changes to the tax treatment for passthrough entities, such
as the Fund. Please consult a tax advisor regarding the
implications of the 2017 Tax Cuts and Jobs Act on an investment in
Shares of the Teucrium Funds.
PROSPECTIVE INVESTORS ARE STRONGLY URGED TO CONSULT THEIR OWN TAX
ADVISORS WITH RESPECT TO THE POSSIBLE TAX CONSEQUENCES TO THEM OF
AN INVESTMENT IN SHARES; SUCH TAX CONSEQUENCES MAY DIFFER IN
RESPECT OF DIFFERENT INVESTORS.
29
The Fund is a series of the Trust,
a statutory trust organized under the laws of the State of Delaware
on September 11, 2009. Currently, the Trust has five series
that are separate operating commodity pools: the Teucrium Corn
Fund, 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 115 Christina Landing Drive Unit 2004,
Wilmington, DE 19801. The Fund is a commodity pool. It
operates pursuant to the terms of the Trust Agreement, which is
dated as of October 21, 2010 and grants full management control to
the Sponsor.
The Fund is publicly traded, and
seeks to have the daily changes in percentage terms of the
Shares’ NAV reflect the daily changes in percentage terms of
the price of corn for future delivery, as measured by the
Benchmark. The Fund invests in a mixture of listed Corn
Futures Contracts, Other Corn Interests, cash and cash
equivalents.
See “Prior Performance of
the Fund” on page 33 for more information about prior
performance of the Fund.
The Sponsor of the Trust is
Teucrium Trading, LLC, a Delaware limited liability company.
The principal office of the Sponsor and the Trust are located at
115 Christina Landing Drive Unit 2004, Wilmington, DE 19801.
The Sponsor registered as a CPO with the CFTC and became a member
of the NFA on November 10, 2009. The Sponsor also
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 the management and conducts or directs the
conduct of the business of the Trust, the Fund, and any series of
the Trust that may from time to time be established and designated
by the Sponsor. The Sponsor is required to oversee the
purchase and sale of Shares by Authorized Purchasers and to manage
the Fund’s investments, including to evaluate the credit risk
of FCMs and swap counterparties and to review daily positions and
margin/collateral requirements. The Sponsor has the power to
enter into agreements as may be necessary or appropriate for the
offer and sale of the Fund’s Shares and the conduct of the
Trust’s activities. Accordingly, the Sponsor is
responsible for selecting the Trustee, Administrator, Distributor,
the independent registered public accounting firm of the Trust, and
any legal counsel employed by the Trust. The Sponsor is also
responsible for preparing and filing periodic reports on behalf of
the Trust with the SEC and will provide any required certification
for such reports. No person other than the Sponsor and its
principals was involved in the organization of the Trust or the
Fund.
The Sponsor may determine to
engage marketing agents who will assist the Sponsor in marketing
the Shares. See “Plan of Distribution” for more
information.
The Sponsor maintains a public
website on behalf of the Fund, www.teucriumcornfund.com, which
contains information about the Trust, the Fund, and the Shares, and
oversees certain services for the benefit of
Shareholders.
The Sponsor has discretion to
appoint one or more of its affiliates as additional
Sponsors.
The Sponsor receives a fee as
compensation for services performed under the Trust
Agreement. The Sponsor’s fee accrues daily and is paid
monthly at an annual rate of 1.00% of the average daily net assets
of the Fund. For the period from January 1, 2017 through
December 31, 2017, the Fund recognized $682,674 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 $644,850, 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.
30
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 less than
10%.
The Sponsor has an information
technology plan (the “IT Plan”) in place which is part
of the internal controls of the Trust and the Fund. The IT Plan is
tested by both the management of the Sponsor and by the independent
external auditor as a part of their internal control audit over the
financial reporting of the Trust and the Fund. The IT Plan also
takes reasonable care to look beyond the controls developed and
implemented for the Trust and the Fund directly to the platforms
and controls in place for the key service providers. Such review of
the IT plans of key service providers is part of the
Sponsor’s disaster recovery and business continuity planning.
The Sponsor provides regular training to all employees of the
Sponsor regarding cybersecurity topics, in addition to real-time
dissemination of information regarding cybersecurity matters as
needed. The IT plan is reviewed and updated as needed, but at a
minimum on an annual basis.
Management of the Sponsor
In general, under the
Sponsor’s Amended and Restated Limited Liability Company
Operating Agreement, as amended from time to time, the Sponsor (and
as a result the Trust and the 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 will have 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 Fund and
each of the Teucrium Funds. The Chief Operating Officer has assumed
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,
which position includes the functions previously performed by the
Treasurer of the Sponsor, and administers the Sponsor’s
regulatory compliance programs. 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, two
of whom are also Class A members of the Sponsor, are the
following:
Sal Gilbertie has
been the President of the Sponsor since its inception and its Chief
Investment Officer since September 2011, was approved by the NFA as
a principal of the Sponsor on September 23, 2009, and was
registered as an associated person of the Sponsor on November 10,
2009. He maintains his main business office at 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 57 years
old.
Dale Riker has been
the Secretary of the Sponsor since January 2010, and its Chief
Executive Officer since September 2011, was approved by the NFA as
a principal of the Sponsor on October 29, 2009, and was registered
as an associated person of the Sponsor on February 17, 2010. He
maintains his main business office at 115 Christina Landing Drive
Unit 2004, Wilmington, DE 19801 and is responsible for the overall
strategic direction of the Sponsor and has general control of its
business. Mr. Riker was Treasurer of the Sponsor from its inception
until September 2011. From February 2005 to December 2012, Mr.
Riker was the President of Cambial Emerging Markets LLC, a
consulting company specializing in emerging market equity
investment. As President of Cambial Emerging Markets LLC, Mr. Riker
had responsibility for business strategy, planning and operations.
From July 1996 to February 2005, Mr. Riker was a private investor.
Mr. Riker is married to the Chief Financial Officer, Chief
Accounting Officer and Chief Compliance Officer of the Sponsor,
Barbara Riker. Mr. Riker is 60 years old.
31
Barbara Riker began
working for the Sponsor in July 2010 providing accounting and
compliance support. She has been the Chief Financial Officer, Chief
Accounting Officer and Chief Compliance Officer for Teucrium since
September 2011, was approved by the NFA as a principal of the
Sponsor on October 19, 2011, and has a background in finance,
accounting, investor relations, corporate communications and
operations. She maintains her main business office at 115 Christina
Landing Drive Unit 2004, Wilmington, DE 19801. From September 1980
to February 1993, Ms. Riker worked in various financial capacities
for Pacific Telesis Group, the California-based Regional Bell
Operating Company, and its predecessors. In February 1993, with the
spin-off of AirTouch Communications from Pacific Telesis Group, Ms.
Riker was selected to lead the Investor Relations team for the
global mobile phone operator. In her capacity as Executive Director
– Investor Relations and Corporate Communications from
February 1993 to June 1995, AirTouch completed its initial public
offering and was launched as an independent publicly-traded
company. In June 1995, she was named Chief Financial Officer of
AirTouch International and, in addition to her other duties, served
on the board of several of the firm’s joint ventures, both
private and public, across Europe. In June 1997, Ms. Riker moved
into an operations capacity as the District General Manager for
AirTouch Paging’s San Francisco operations. In February 1998
she was named Vice President and General Manager of AirTouch
Cellular for Arizona and New Mexico. Ms. Riker retired in July
1999, coincident with the purchase of AirTouch by Vodafone PLC and
remained retired until she began working for the Sponsor. Ms. Riker
graduated with a Bachelor of Science in Business Administration
from Cal State – East Bay in 1980. Ms. Riker is married to
the Chief Executive Officer of the Sponsor, Dale Riker. Ms. Riker
is 60 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 has primary responsibility
for the Trade Operations for the Teucrium 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. 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 in 1992 and is 50 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. Riker are individual “principals,” as
that term is defined in CFTC Rule 3.1, of the Sponsor. These
individuals are principals due to their positions and/or due to
their ownership interests in the Sponsor. Beneficial ownership
interests of the principals, if any, are shown under the section
entitled “Security Ownership of Principal Shareholders and
Management” below and any of the principals may acquire
beneficial interests in the Fund in the future. GFI Group LLC is a
principal for the Sponsor under CFTC Rules due to its ownership of
certain non-voting securities of the Sponsor.
Market Price of Shares
The Fund’s Shares have
traded on the NYSE Arca under the symbol “CORN” since
June 9, 2010. 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, 2017
|
High
|
Low
|
|
Quarter
Ended
|
|
|
|
March 31,
2017
|
$ 20.09
|
$ 18.54
|
|
June 30,
2017
|
$ 19.74
|
$ 18.29
|
|
September 30,
2017
|
$ 20.05
|
$ 17.13
|
|
December 31,
2017
|
$ 17.6
|
$ 16.57
|
|
Fiscal Year Ended December 31, 2016
|
High
|
Low
|
|
Quarter
Ended
|
|
|
|
March 31,
2016
|
$ 21.89
|
$ 20.00
|
|
June 30,
2016
|
$ 23.65
|
$ 19.98
|
|
September 30,
2016
|
$ 20.67
|
$ 17.69
|
|
December 31,
2016
|
$ 19.75
|
$ 18.44
|
As of December 31, 2017, the Fund
had approximately 6,050 Shareholders.
32
Prior Performance of the Fund
PERFORMANCE
DATA FOR THE FUND
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE
RESULTS
The Teucrium Corn Fund commenced
trading and investment operations on June 9, 2010. The
Fund is listed on NYSE Arca and is neither: (i) a privately offered
pool pursuant to Section 4(a)(2) of the Securities Act of 1933, as
amended; (ii) a multi-advisor pool as defined in CFTC Regulation
4.10(d)(2); or (iii) a principal-protected pool as defined in CFTC
Regulation 4.10(d)(3).
|
Units of
beneficial interest issued (from inception until January 31,
2018)
|
15,900,004
|
|
Aggregate gross
sale price for units issued
|
$484,392,915
|
|
NAV per Share as
of January 31, 2018
|
$17.17
|
|
Pool NAV as of
January 31, 2018
|
$70,382,545
|
|
Worst monthly
percentage draw-down*
|
(12.00) %
|
|
July
2014
|
|
|
Worst
peak-to-valley draw-down**
|
(67.07) %
|
|
August 2012 -
December 2017
|
|
* A draw-down is a loss
experienced by the fund over a specified period. Draw-downs
are measured on the basis of monthly returns only and do not
reflect intra-month figures. The worst monthly percentage
draw-down reflects the largest single month loss sustained over the
most recent five calendar years and the current
year-to-date.
** The worst peak-to-valley
draw-down is the largest percentage decline in the NAV per unit
over the most recent five calendar years and the current
year-to-date. This need not be a continuous decline, but can
be a series of positive and negative returns. Worst peak-to-valley
draw-down represents the greatest percentage decline from any
month-end NAV per unit that occurs without such month-end NAV per
unit being equaled or exceeded as of a subsequent month-end.
For example, if the NAV per unit declined by $1 in each of January
and February, increased by $1 in March and declined again by $2 in
April, a “peak-to-valley drawdown” analysis conducted
as of the end of April would consider that “drawdown”
to be continuing and to be $3 in amount, whereas if the NAV per
unit had increased by $2 in March, the drawdown would have ended as
of the end of February at the $2 level.
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE
RESULTS
|
|
Rates of Return*
|
|||||||||||
|
Month
|
2013
|
|
2014
|
|
2015
|
|
2016
|
|
2017
|
|
2018
|
|
|
January
|
2.48
|
%
|
0.65
|
%
|
(6.24)
|
%
|
2.64
|
%
|
2.24
|
%
|
2.51
|
%
|
|
February
|
(6.29)
|
%
|
4.73
|
%
|
3.73
|
%
|
(5.32)
|
%
|
1.56
|
|
2.74
|
|
|
March
|
(3.71)
|
%
|
7.03
|
%
|
(4.40)
|
%
|
(2.13)
|
%
|
(2.36)
|
|
1.98
|
|
|
April
|
1.17
|
%
|
2.02
|
%
|
(4.89)
|
%
|
8.32
|
%
|
(1.37)
|
|
|
|
|
May
|
2.51
|
%
|
(10.32)
|
%
|
(3.99)
|
%
|
1.28
|
%
|
1.23
|
|
|
|
|
June
|
(8.98)
|
%
|
(6.77)
|
%
|
14.51
|
%
|
(8.17)
|
%
|
0.58
|
|
|
|
|
July
|
(6.30)
|
%
|
(12.00)
|
%
|
(10.66)
|
%
|
(6.78)
|
%
|
(1.36)
|
|
|
|
|
August
|
0.50
|
%
|
(1.00)
|
%
|
(0.95)
|
%
|
(6.43)
|
%
|
(6.00)
|
|
|
|
|
September
|
(8.21)
|
%
|
(11.25)
|
%
|
2.79
|
%
|
5.47
|
%
|
(0.56)
|
|
|
|
|
October
|
(3.53)
|
%
|
15.44
|
%
|
(1.87)
|
%
|
3.96
|
%
|
(2.27)
|
|
|
|
|
November
|
(3.85)
|
%
|
(0.49)
|
%
|
(4.68)
|
%
|
(3.60)
|
%
|
(1.28)
|
|
|
|
|
December
|
(1.25)
|
%
|
1.64
|
%
|
(3.59)
|
%
|
0.11
|
%
|
(1.35)
|
|
|
|
|
Annual Rate of
Return
|
(30.90)
|
%
|
(13.12)
|
%
|
(20.25)
|
%
|
(11.59)
|
%
|
(10.76)
|
|
7.40
|
%
|
*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.
33
The sole Trustee of the Trust is Wilmington Trust Company, a
Delaware banking corporation. The Trustee’s principal
offices are located at 1100 North Market Street, Wilmington,
Delaware 19890-0001. The Trustee is unaffiliated with the
Sponsor. The Trustee’s duties and liabilities with
respect to the offering of Shares and the management of the Trust
and the Fund are limited to its express obligations under the Trust
Agreement.
The Trustee will accept service of
legal process on the Trust in the State of Delaware and will make
certain filings under the Delaware Statutory Trust Act. The
Trustee does not owe any other duties to the Trust, the Sponsor or
the Shareholders. The Trustee is permitted to resign upon at
least sixty (60) days’ notice to the Sponsor. If no
successor trustee has been appointed by the Sponsor within such
sixty-day period, the Trustee may, at the expense of the Trust,
petition a court to appoint a successor. The Trust Agreement
provides that the Trustee is entitled to reasonable compensation
for its services from the Sponsor or an affiliate of the Sponsor
(including the Trust), and is indemnified by the Sponsor against
any expenses it incurs relating to or arising out of the formation,
operation or termination of the Trust, or any action or inaction of
the Trustee under the Trust Agreement, except to the extent that
such expenses result from the gross negligence or willful
misconduct of the Trustee. The Sponsor has the discretion to
replace the Trustee.
The Trustee has not signed the
registration statement of which this prospectus is a part, and is
not subject to issuer liability under the federal securities laws
for the information contained in this prospectus and under federal
securities laws with respect to the issuance and sale of the
Shares. Under such laws, neither the Trustee, either in its
capacity as Trustee or in its individual capacity, nor any
director, officer or controlling person of the Trustee is, or has
any liability as, the issuer or a director, officer or controlling
person of the issuer of the Shares.
Under the Trust Agreement, the
Trustee has delegated to the Sponsor the exclusive management and
control of all aspects of the business of the Trust and the
Fund. The Trustee has no duty or liability to supervise or
monitor the performance of the Sponsor, nor does the Trustee have
any liability for the acts or omissions of the
Sponsor.
Because the Trustee has delegated
substantially all of its authority over the operation of the Trust
to the Sponsor, the Trustee itself is not registered in any
capacity with the CFTC.
Operation
of the Fund
The investment objective of the
Fund is to have the daily changes in percentage terms of the
Shares’ NAV reflect the daily changes in percentage terms of
a weighted average of the closing settlement prices for three Corn
Futures Contracts that are traded on the CBOT:
CORN
Benchmark
|
CBOT Corn Futures Contract
|
Weighting
|
|
Second to
expire
|
35%
|
|
Third to
expire
|
30%
|
|
December following
the third to expire
|
35%
|
The Fund seeks to achieve its
investment objective by investing under normal market conditions in
Benchmark Component Futures Contracts or, in certain circumstances,
in other Corn Futures Contracts traded on the CBOT or on foreign
exchanges. In addition, and to a limited extent, the Fund
also may invest in exchange-traded options on Corn Futures
Contracts in furtherance of the Fund’s investment
objective. Once position limits in Corn Futures Contracts are
applicable, the Fund’s intention is to invest first in Other
Corn Interests. See “The Offering – Futures
Contracts” below. By utilizing certain or all of these
investments, the Sponsor endeavors to cause the Fund’s
performance to closely track that of the
Benchmark.
The Fund invests in Corn Interests
to the fullest extent possible without being leveraged or unable to
satisfy its current or potential margin or collateral obligations
with respect to its investments in Corn Interests. After
fulfilling such margin and collateral requirements, the Fund
invests the remainder of its proceeds from the sale of baskets in
cash equivalents, including money-market funds and investment grade
commercial paper, and/or merely hold such assets in cash in
interest-bearing accounts. Therefore, the focus of the
Sponsor in managing the Fund is investing in Corn Interests and
cash and/or cash equivalents. The Fund earns interest
income from the cash equivalents that it purchases and on the cash
it holds at financial institutions.
34
The Sponsor expects to manage the
Fund’s investments directly, although it has been authorized
by the Trust to retain, establish the terms of retention for, and
terminate third-party commodity trading advisors to provide such
management. The Sponsor has substantial discretion in
managing the Fund’s investments consistent with meeting its
investment objective of tracking the Benchmark, including the
discretion: (1) to choose whether to invest in the Benchmark
Component Futures Contracts or other Corn Futures Contracts or
Other Corn Interests with similar investment characteristics; (2)
to choose when to “roll” the Fund’s positions in
Corn Interests as described below, and (3) to manage the
Fund’s investments in cash and cash
equivalents.
The Fund seeks to achieve its
investment objective primarily by investing in Corn Interests such
that the changes in its NAV are expected to closely track the
changes in the Benchmark. The Fund’s positions in Corn
Interests are changed or “rolled” on a regular basis in
order to track the changing nature of the Benchmark. For
example, five times a year (on the date on which a Corn Futures
Contract expires), the second-to-expire Corn Futures Contract will
become the next-to-expire Corn Futures Contract and will no longer
be a Benchmark Component Futures Contract, and the Fund’s
investments will have to be changed accordingly. In order
that the Fund’s trading does not cause unwanted market
movements and to make it more difficult for third parties to profit
by trading based on such expected market movements, the
Fund’s investments may not be rolled entirely on that day,
but rather may be rolled over a period of
days.
The Fund posts on its website
(www.teucriumcornfund.com)
the roll dates and the contracts into which it will roll for the
entire upcoming calendar year. This information is updated at the
beginning of the calendar year and as needed throughout the
year.
The Sponsor does not intend to
operate the Fund in a fashion such that its per Share NAV will
equal, in dollar terms, the spot price of a bushel or other unit of
soybeans or the price of any particular Corn Futures
Contract.
In seeking to achieve the
Fund’s investment objective of tracking the Benchmark, the
Sponsor may for certain reasons cause the Fund to enter into or
hold Corn Futures Contracts other than the Benchmark Component
Futures Contracts and/or Other Corn Interests. Over-the-counter
Corn Interests can generally be structured as the parties to the
contract desire. Therefore, the Fund might enter into multiple
over-the-counter Corn Interests intended to exactly replicate the
performance of each of the three Benchmark Component Futures
Contracts, or a single over-the-counter Corn 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
Corn Interest, the performance of the Corn 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 Corn 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
Corn Interests that would be expected to alleviate overall
deviation between the Fund’s performance and that of the
Benchmark that may result from certain market and trading
inefficiencies or other reasons. By utilizing certain or all
of the investments described above, the Sponsor endeavors to cause
the Fund’s performance to closely track that of the
Benchmark.
The Sponsor endeavors to place the
Fund’s trades in Corn Interests and otherwise manage the
Fund’s investments so that the Fund’s average daily
tracking error against the Benchmark is less than 10 percent over
any period of 30 trading days. More specifically, the Sponsor
endeavors to manage the Fund so that A will be within plus/minus 10
percent of B, where:
● A is the average daily change in
the Fund’s NAV for any period of 30 successive valuation
days; i.e., any trading day as of which the Fund calculates its
NAV, and
● B is the average daily change in
the price of the Benchmark over the same
period.
35
The Sponsor believes that market
arbitrage opportunities cause daily changes in the Fund’s
Share price on the NYSE Arca to track daily changes in the
Fund’s NAV per Share. The Sponsor believes that the net
effect of this expected relationship and the expected relationship
described above between the Fund’s NAV and the Benchmark will
be that daily changes in the price of the Fund’s Shares on
the NYSE Arca will track daily changes in the Benchmark. This
relationship may be affected by various market factors, including
but not limited to, the number of shares of the Fund outstanding
and the liquidity of the underlying holdings. While the Benchmark
is composed of Futures Contracts and is therefore a measure of the
price of corn for future delivery, there is nonetheless expected to
be a reasonable degree of correlation between the Benchmark and the
cash or spot price of corn. These relationships are illustrated in
the following diagram:
An investment in the Shares
provides a means for diversifying an investor’s portfolio or
hedging exposure to changes in corn prices. An investment in
the Shares allows both retail and institutional investors to easily
gain this exposure to the corn 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 corn market in a cost-effective manner.
Such investors may include participants in the corn industry and
other industries seeking to hedge the risk of losses in their
corn-related transactions, as well as investors seeking exposure to
the corn market. Accordingly, depending on the investment
objective of an individual investor, the risks generally associated
with investing in the corn market and/or the risks involved in
hedging may exist. In addition, an investment in the Fund
involves the risk that the changes in the price of the Fund’s
Shares will not accurately track the changes in the Benchmark, and
that changes in the Benchmark will not closely correlate with
changes in the price of corn on the spot market. Furthermore,
as noted above, the Fund may also elect to invest in cash and/or
cash equivalents to meet its current or potential margin or
collateral requirements with respect to its investments in Corn
Interests and to invest cash not required to be used as margin or
collateral. The Fund does not expect there to be any
meaningful correlation between the performance of the Fund’s
investments in cash and/or cash equivalents and the changes in the
price of corn or Corn Interests. While the level of interest
earned on, or the market price of, these investments may in some
respects correlate to changes in the price of corn, this
correlation is not anticipated as part of the Fund’s efforts
to meet its objective. This and certain risk factors
discussed in this prospectus may cause a lack of correlation
between changes in the Fund’s NAV and changes in the price of
sugar. The Sponsor does not intend to operate the Fund
in a fashion such that its per Share NAV will equal, in dollar
terms, the spot price of a bushel or other unit of corn the price
of any particular Corn Futures Contract.
36
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.teucriumcornfund.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.
The Shares issued by the Fund may
only be purchased by Authorized Purchasers and only in blocks of
25,000 Shares called Creation Baskets. The amount of the
purchase payment for a Creation Basket is equal to the aggregate
NAV of Shares in the Creation Basket. Similarly, only
Authorized Purchasers may redeem Shares and only in blocks of
25,000 Shares called Redemption Baskets. The amount of the
redemption proceeds for a Redemption Basket is equal to the
aggregate NAV of Shares in the Redemption Basket. The
purchase price for Creation Baskets and the redemption price for
Redemption Baskets are the actual NAV calculated at the end of the
business day when a request for a purchase or redemption is
received by the Fund. The NYSE Arca publishes an approximate
NAV intra-day based on the prior day’s NAV and the current
price of the Benchmark Component Futures Contracts, but the price
of Creation Baskets and Redemption Baskets is determined based on
the actual NAV calculated at the end of each trading
day.
While the Fund issues Shares only
in Creation Baskets, Shares may also be purchased and sold in much
smaller increments on the NYSE Arca. These transactions,
however, are effected at the bid and ask prices established by the
specialist firm(s). Like any listed security, Shares can be
purchased and sold at any time a secondary market is
open.
The Fund’s Investment Strategy
In managing the Fund’s
assets, the Sponsor does not use a technical trading system that
automatically issues buy and sell orders. Instead, each time
one or more baskets are purchased or redeemed, the Sponsor
purchases or sells Corn Interests with an aggregate market value
that approximates the amount of cash received or paid upon the
purchase or redemption of the basket(s).
As an example, assume that a
Creation Basket is sold by the Fund, and that the Fund’s
closing NAV per Share is $25.00. In that case, the Fund would
receive $625,000 in proceeds from the sale of the Creation Basket
($25.00 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 $20,050 (or otherwise not a round number), the Fund
would be unable to buy an exact number of Corn Futures Contracts
with an aggregate market value equal to $625,000. Instead,
the Fund would be able to purchase 31 Benchmark Component Futures
Contracts with an aggregate market value of $621,550.
Assuming a margin requirement equal to 10% of the value of the Corn
Futures Contracts (although the actual percentage is approximately
5%), the Fund would be required to deposit $62,155 in cash with the
FCM through which the Corn Futures Contracts were purchased.
The remainder of the proceeds from the sale of the Creation Basket,
$559,395, 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 Corn Interests
purchased depend on various factors, including a judgment by the
Sponsor as to the appropriate diversification of the Fund’s
investments. While the Sponsor anticipates that a substantial
majority of the Fund’s assets will be invested in CBOT Corn
Futures Contracts for various reasons, including the ability to
enter into the precise amount of exposure to the corn market and
position limits on Corn Futures Contracts, the Fund will also
invest in Other Corn Interests, including swaps in the
over-the-counter market to a potentially significant
degree.
The Sponsor does not anticipate
letting its Corn Futures Contracts expire and taking delivery of
corn. 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 Corn Interests. Positions may also be
closed out to meet orders for Redemption Baskets, in which case the
proceeds from closing the positions will not be
reinvested.
37
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 corn 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 corn increases and, as a likely result
of an increase in the price of corn, the price of Corn Futures
Contracts increase, the Fund will generally be long in the market
for corn, and will generally sell Corn Futures Contracts only to
close out existing long positions.
Futures contracts are typically
traded on futures exchanges (i.e., DCMs), such as the CBOT, which
provide centralized market facilities in which multiple persons may
trade contracts. Members of a particular futures exchange and
the trades executed on such exchange are subject to the rules of
that exchange. Futures exchanges and their related clearing
organizations (i.e., DCOs) are given reasonable latitude in
promulgating rules and regulations to control and regulate their
members.
Trades on a futures exchange are
generally cleared by the DCO, which provides services designed to
mutualize or transfer the credit risk arising from the trading of
contracts on an exchange. The clearing organization
effectively becomes the other party to the trade, and each clearing
member party to the trade looks only to the clearing organization
for performance.
Corn Futures Contracts are traded
on the CBOT (which is part of the CME Group) in units of 5,000
bushels. Generally, futures contracts traded on the CBOT 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 corn 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 Corn Futures Contracts are discussed
below. Additional risks of investing in Corn Futures
Contracts are included in “What are the Risk Factors Involved
with an Investment in the Fund?”
Impact of Position Limits, Accountability Levels, and Price
Fluctuation Limits.
All of these limits may
potentially cause a tracking error between the price of the Shares
and the Benchmark. This may in turn prevent you from being
able to effectively use the Fund as a way to hedge against
corn-related losses or as a way to indirectly invest in
corn.
The Fund does not intend to limit
the size of the offering and will attempt to expose substantially
all of its proceeds to the corn market utilizing Corn
Interests. If the Fund encounters position limits,
accountability levels, or price fluctuation limits for Corn Futures
Contracts on the CBOT, it may then, if permitted under applicable
regulatory requirements, purchase Other Corn Interests and/or Corn
Futures Contracts listed on foreign exchanges. However, the
Corn Futures Contracts available on such foreign exchanges may have
different underlying sizes, deliveries, and prices. In
addition, the Corn 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.
38
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 Corn Futures Contracts include: changes in
interest rates; governmental, agricultural, trade, fiscal, monetary
and exchange control programs and policies; weather and climate
conditions; changing supply and demand relationships; changes in
balances of payments and trade; U.S. and international rates of
inflation; currency devaluations and revaluations; U.S. and
international political and economic events; and changes in
philosophies and emotions of market participants. Because the
Fund invests a significant portion of its assets in futures
contracts, the assets of the Fund, and therefore the price of the
Fund’s Shares, may be subject to greater volatility than
traditional securities.
Term Structure of Futures Contracts and the Impact on Total
Return
Several factors determine the
total return from investing in futures contracts. Because the
Fund must periodically “roll” futures contract
positions, closing out soon-to-expire contracts that are no longer
part of the Benchmark and entering into subsequent-to-expire
contracts, one such factor is the price relationship between
soon-to-expire contracts and later-to-expire contracts. For
example, if market conditions are such that the prices of
soon-to-expire contracts are higher than later-to-expire contracts
(a situation referred to as “backwardation” in the
futures market), then absent a change in the market, the price of
contracts will rise as they approach expiration. Conversely,
if the price of soon-to-expire contracts is lower than
later-to-expire contracts (a situation referred to as
“contango” in the futures market), then absent a change
in the market, the price of contracts will decline as they approach
expiration.
Over time, the price of corn
fluctuates based on a number of market factors, including demand
for corn relative to its supply. The value of Corn Futures
Contracts likewise fluctuates in reaction to a number of market
factors. If investors seek to maintain their holdings in Corn
Futures Contracts with a roughly constant expiration profile and
not take delivery of the corn, they must on an ongoing basis sell
their current positions as they approach expiration and invest in
later-to-expire contracts.
If the futures market is in a
state of backwardation (i.e., when the price of corn 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 corn prices or the price
relationship between the spot price, soon-to-expire contracts and
later-to-expire contracts, the value of a contract will rise as it
approaches expiration, increasing the Fund’s total return
(ignoring the impact of commission costs and the interest earned on
cash and/or cash equivalents).
If the futures market is in
contango, the Fund will buy later-to-expire contracts for a higher
price than the sooner-to-expire contracts that it sells.
Hypothetically, and assuming no other changes to either prevailing
corn prices or the price relationship between the spot price,
soon-to-expire contracts and later-to-expire contracts, the value
of a contract will fall as it approaches expiration, decreasing the
Fund’s total return (ignoring the impact of commission costs
and the interest earned on cash and/or cash
equivalents).
Historically, the corn 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 corn market and the corn harvest cycle, as discussed
above.
Margin Requirements and Marking-to-Market Futures
Positions
“Initial margin” is an
amount of funds that must be deposited by a commodity interest
trader with the trader’s broker to initiate an open position
in futures contracts. A margin deposit is like a cash
performance bond. It helps assure the trader’s
performance of the futures contracts that he or she purchases or
sells. Futures contracts are customarily bought and sold on
initial margin that represents a small percentage of the aggregate
purchase or sales price of the contract. The amount of margin
required in connection with a particular futures contract is set by
the exchange on which the contract is traded. Brokerage
firms, such as the Fund’s clearing broker, carrying accounts
for traders in commodity interest contracts may require higher
amounts of margin as a matter of policy to further protect
themselves.
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.
In addition to futures contracts,
options on futures contracts, derivative contracts that are tied to
various commodities, including corn, 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 Corn
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.
39
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 corn swap, the Fund may be obligated to
pay a fixed price per bushel of corn 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 corn prices, the price of
a specified Corn Futures Contract, or the average price of a group
of Corn 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 and
Chief Investment Officer has over 25 years of experience in
over-the-counter derivatives trading, including the counterparty
creditworthiness analysis inherent therein, and the Sponsor’s
Chief Executive Officer, through his prior experience as a Chief
Financial Officer and Treasurer, has extensive experience
evaluating the creditworthiness of business partners and
counterparties to commercial and derivative contracts.
Notwithstanding this experience, there is no guarantee that the
Sponsor’s creditworthiness analysis will be successful and
that counterparties selected for Fund transactions will not default
on their contractual obligations.
The Fund also may require that a
counterparty be highly rated and/or provide collateral or other
credit support. The Sponsor on behalf of the Fund may enter
into over-the-counter contracts with various types of
counterparties, including: (a) 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.
40
See the information presented in
the “Results of Operations” on page 58 of this
prospectus.
Corn is currently
the most widely produced livestock feed grain in the United States.
The two largest demands of the United States’ corn crop are
used in livestock feed and ethanol production. Corn is also
processed into food and industrial products, including starch,
sweeteners, corn oil, beverages and industrial alcohol. The United
States Department of Agriculture (“USDA”) publishes
weekly, monthly, quarterly and annual updates for U.S. domestic and
worldwide corn production and consumption, and for other grains
such as soybeans and wheat which can be used in some cases as a
substitute for corn. These reports are available on the
USDA’s website, www.usda.gov, at no
charge.
The United States
is the world’s leading producer and exporter of corn. For the
Crop Year 201718, the United States Department of Agriculture
(“USDA”) estimates that the U.S. will produce
approximately 36% of all the corn globally, of which about 13% will
be exported. For 20172018, based on the January 2018 USDA
reports, global consumption of 1,067 Million Metric Tons (MMT) is
expected to be slightly higher than global production of 1,045 MMT.
If the global supply of corn exceeds global demand, this may have
an adverse impact on the price of corn. Besides the United States,
other principal world corn exporters include Argentina, Brazil and
the former Soviet Union nations known as the FSU12 which
includes the Ukraine. Major importer nations include Mexico, Japan,
the European Union (EU), South Korea, Egypt and parts of Southeast
Asia. China’s production at 216 MMT is approximately 11% less
than its domestic usage.
According to the
USDA, global corn consumption has increased just over 446% from
crop year 1960/1961 to 2017/2018 as demonstrated by the graph below
and is projected to continue to grow in upcoming years. Consumption
growth is the result of a combination of many factors including: 1)
global population growth, which, according to the U.S. Census
Department, is estimated to increase by approximately 82.5 million
people in the 201718 timeframe and reach 9.4 billion by 2050.
2) a growing global middle class which is increasing the demand for
protein and meat based products globally and most
significantly in developing countries. and 3) increased use of
biofuels, including ethanol in the United States. Based on
USDA estimates as of October 12, 2017, for each person added to the
population, there needs to be an additional 5.6 bushels of corn,
1.7 bushels of soybeans and 3.7 bushels of wheat
produced.
While global
consumption of corn has increased over the 1960/19612017/2018
period, so has production, driven by increases in acres planted and
yield per acre. However, according to the USDA and United Nations,
future growth in planted acres and yield may be inhibited by
lowerproductive land, and lack of infrastructure and
transportation. In addition, agricultural crops such as corn are
highly weatherdependent for yield and therefore susceptible
to changing weather patterns. In addition, given the current
production/consumption patterns, nearly 100% of all corn produced
globally is consumed which leaves minimal excess inventory if
production issues arise.
41
The price per
bushel of corn in the United States is primarily a function of both
U.S. and global production, as well as U.S. and global demand. The
graph below shows the USDA published price per bushel by month for
the period January 2007 to November 2017.
On January 12,
2018, the USDA released its monthly World Agricultural Supply and
Demand Estimates (WASDE) for the Crop Year 201718. The
exhibit below provides a summary of historical and current
information for United States corn production.
42
Standard Corn
Futures Contracts trade on the CBOT in units of 5,000 bushels,
although 1,000 bushels “mini-corn” Corn Futures
Contracts also trade. Three grades of corn are deliverable under
CBOT Corn Futures Contracts: Number 1 yellow, which may be
delivered at 1.5 cents over the contract price. Number 2 yellow,
which may be delivered at the contract price. and Number 3 yellow,
which may be delivered at 1.5 cents under the contract price for
all contract months prior to March 2019 or may be delivered between
2 and 4 cents per bushel under the contract price for all contract
months commencing with March 2019 and beyond. There are five months
each year in which CBOT Corn Futures Contracts expire: March, May,
July, September and December.
If the futures
market is in a state of backwardation (i.e., when the price of corn
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
corn 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 corn 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 corn 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 corn market and the corn harvest
cycle. All other things being equal, a situation involving
prolonged periods of contango may adversely impact the returns of
the Fund. conversely a situation involving prolonged periods of
backwardation may positively impact the returns of the
Fund.
The Fund seeks to have the
aggregate “notional” amount of the Corn Interests it
holds approximate at all times the Fund’s aggregate
NAV. At any given time, however, most of the Fund’s
investments are in cash and cash equivalents that support the
Fund’s positions in Corn Interests. For example, the
purchase of a Corn Futures Contract with a stated or notional
amount of $10 million would not require the Fund to pay $10 million
upon entering into the contract; rather, only a margin deposit,
approximately 5% of the notional amount, would be required.
To secure its Corn Futures Contract obligations, the Fund would
deposit the required margin with the FCM and would separately hold
its remaining assets through its cash and/or cash equivalents in
demand deposits in a highly-rated financial institutions,
money-market funds or commercial paper. Such remaining assets
may be used to meet future margin payments that the Fund is
required to make on its Corn Futures Contracts. Other Corn
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 Corn Interests are also
held in cash and/or cash equivalents.
The Fund earns interest income
from the cash equivalents that it purchases and on the cash it
holds through the Custodian or other financial
institutions. The earned interest income increases the
Fund’s NAV. The Fund applies the earned interest
income to the acquisition of additional investments or uses it to
pay its expenses. When the Fund reinvests the earned
interest income, it makes investments that are consistent with its
investment objectives.
Any cash equivalent invested in by
the Fund will have a remaining maturity of less than 3 months at
the time of investment, or will be subject to a demand feature that
enables that Fund to sell the security within that time period at
approximately the security’s face value (plus accrued
interest). Any cash equivalents invested in by the Fund
will be or will be deemed by the Sponsor to be of investment-credit
quality.
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.
43
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. 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 Corn Futures
Contracts, there are also a number of options on Corn Futures
Contracts listed on the CBOT. 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 Corn Futures Contracts in pursuing its
investment objective, except that it will not sell call options
when it does not own the underlying Corn Futures Contract.
The Fund would make use of options on Corn 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 corn prices.
Liquidity
The Fund invests only in Corn
Futures Contracts that, in the opinion of the Sponsor, are traded
in sufficient volume to permit the ready taking and liquidation of
positions in these financial interests and in over-the-counter
Commodity Interests that, in the opinion of the Sponsor, may be
readily liquidated with the original counterparty or through a
third party assuming the Fund’s position.
Spot Commodities
While most futures contracts can
be physically settled, the Fund does not intend to take or make
physical delivery. However, the Fund may from time to time
trade in Other Corn Interests based on the spot price of
corn.
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 Corn Interests. Commodity pools’ trading
positions in futures contracts are typically required to be secured
by the deposit of margin funds that represent only a small
percentage of a futures contract’s (or other commodity
interest’s) entire market value. While the Sponsor does
not intend to leverage the Fund’s assets, it is not
prohibited from doing so under the Trust
Agreement.
Borrowings
The Fund does not intend to nor
foresee the need to borrow money or establish credit lines.
The Fund maintains 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 Corn Interests.
44
Pyramiding
The Fund does not and will not
employ the technique, commonly known as pyramiding, in which the
speculator uses unrealized profits on existing positions as
variation margin for the purchase or sale of additional positions
in the same or another commodity interest.
Contractual Arrangements with the Sponsor and Third-Party Service
Providers
The Sponsor is responsible for
investing the assets of the Fund in accordance with the objectives
and policies of the Fund. In addition, the Sponsor arranges for one
or more third parties to provide administrative, custodial,
accounting, transfer agency and other necessary services to the
Fund. For these services, the Fund is contractually obligated to
pay a monthly management fee to the Sponsor, based on average daily
net assets, at a rate equal to 1.00% per annum. The Sponsor can
elect to waive the payment of this fee in any amount at its sole
discretion, at any time and from time to time, in order to reduce
the Fund’s expenses or for any other
purpose.
In its capacity as the
Fund’s custodian, the Custodian, currently U.S. Bank, N.A.,
holds the Fund’s securities, cash and/or cash equivalents
pursuant to a custodial agreement. U.S. Bancorp Fund
Services, LLC (“USBFS”), an entity affiliated with U.S.
Bank, N.A., is the registrar and transfer agent for the
Fund’s Shares. In addition, USBFS also serves as
Administrator for the Fund, performing certain administrative and
accounting services and preparing certain SEC and CFTC reports on
behalf of the Fund. For these services, the Fund pays fees to
the Custodian and USBFS set forth in the table entitled
“Contractual Fees and Compensation Arrangements with the
Sponsor and Third-Party Service
Providers.”
The Custodian is located at 1555
North RiverCenter Drive, Suite 302, Milwaukee, Wisconsin
53212. U.S. Bank N.A. is a nationally chartered bank,
regulated by the Office of the Comptroller of the Currency,
Department of the Treasury, and is subject to regulation by the
Board of Governors of the Federal Reserve System. The principal
address for USBFS is 615 East Michigan Street, Milwaukee, WI,
53202.
The Fund employs Foreside Fund
Services, LLC as the Distributor for the Fund. The Distributor
receives, for its services as distributor for the Fund, a fee which
is set forth in the table entitled “Contractual Fees and
Compensation Arrangements with the Sponsor and Third-Party Service
Providers.”
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.
45
Currently, ED&F Man Capital Markets, Inc.
(“ED&F Man”) serves as the Fund’s clearing
broker to execute and clear the Fund’s futures and provide
other brokerage-related services. ED&F Man is registered as a
futures commission merchant (“FCM”) with the U.S.
Commodity Futures Trading Commission (“CFTC”) and is a
member of the National Futures Association
(“NFA”). ED&F Man is also registered as a
broker/dealer with the U.S. Securities and Exchange Commission and
is a member of FINRA. ED&F Man is a clearing member of
ICE Futures U.S., Inc., Chicago Board of Trade, Chicago Mercantile
Exchange, New York Mercantile Exchange, and all other major United
States commodity exchanges.
There have been no material civil,
administrative, or criminal proceedings pending, on appeal, or
concluded against ED&F Man or its principals in the past five
(5) years. For a
list of concluded actions, please go to http://www.nfa.futures.org/basicnet/welcome.aspx.
This link will take you to the Welcome Page of the NFA’s
Background Affiliation Status Information Center
(“BASIC”). At this page, there is a box where you can
enter the NFA ID of ED&F Man Capital Markets Inc. (0002613) and
then click “Go”. You will be transferred to the
NFA’s information specific to ED&F Man Capital Markets
Inc. Under the heading “Regulatory Actions”, click
“details” and you will be directed to the full list of
regulatory actions brought by the CFTC and
exchanges.
ED&F Man, in its capacity as a
registered FCM, will serve as the Fund's clearing broker and, as
such, will arrange for the execution and clearing of the Fund's
futures and options on futures transactions. ED&F Man
acts as clearing broker for many other funds and
individuals.
The investor should be advised that ED&F Man is not affiliated
with and does not act as a supervisor of the Fund or the Fund's
Sponsor, investment managers, members, officers, administrators,
transfer agents, registrars or organizers. Additionally,
ED&F Man is not acting as an underwriter or sponsor of the
offering of any shares or interests in the Fund and has not passed
upon the adequacy of this prospectus, the merits of participating
in this offering or on the accuracy of the information contained
herein.
Additionally, ED&F Man does not provide any commodity trading
advice regarding the Fund's trading activities. Investors
should not rely upon ED&F Man in deciding whether to invest in
the Fund or retain their interests in the Fund. Investors
should also note that the Fund may select additional clearing
brokers or replace ED&F Man as the Fund's clearing
broker.
Currently, the Sponsor does not
employ commodity trading advisors. If, in the future, the
Sponsor does employ commodity trading advisors, it will choose each
advisor based on arm’s-length negotiations and will consider
the advisor’s experience, fees, and
reputation.
46
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,
Transfer Agent, Fund Accountant and Fund
Administrator
|
For custody services:
0.0075% of average gross assets up to $1 billion, and .0050% of
average gross assets over $1 billion, annually, plus certain
per-transaction charges
For Transfer Agency, Fund
Accounting and Fund Administration services, based on the total
assets for all the Teucrium Funds in the Trust: 0.06% of
average gross assets on the first $250 million, 0.05% on the next
$250 million, 0.04% on the next $500 million and 0.03% on the
balance over $1 billion annually
A combined minimum annual fee of
$64,500 for custody, transfer agency, accounting and administrative
services is assessed per Fund.
|
|
Foreside Fund Services, LLC,
Distributor
|
The Distributor receives a fee of
0.01% of the Fund’s average daily net assets and an aggregate
annual fee of $100,000 for all Teucrium Funds, along with certain
expense reimbursements. Expense reimbursements consist of
issuer costs for sales and advertising review fees and will not
exceed $6,000 for the two year period of May 1, 2018 to April 30,
2020 (the “two year offering period”). The fees which
will be paid to the Distributor by the Fund for distribution
services will not exceed $175,000 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 $30,000 for
the two year offering period. In addition, the Distributor receives
certain expense reimbursements relating to the registration,
continuing education and other administrative expenses of the
Registered Representatives in relation to the Teucrium Funds.
The expense reimbursements for this offering will not exceed
$20,000 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 $205,000. The total expenses that
will be reimbursed to the Distributor over the two year offering
period for all of its services will not exceed $26,000, $6,000 of
which are issuer costs for sales and advertising
materials.
|
|
ED&F Man Capital Markets,
Inc., Futures Commission Merchant and Clearing
Broker
|
$4.50 per Corn 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, $600,000 and, for marketing and wholesaling purposes,
$160,000. 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 $110,000 will be paid by the Sponsor, the
rest by the Fund. Registered Representatives will also
receive continuing education valued at a maximum of $3,000 for the
two year offering period.
|
Other Non-Contractual Payments by the Fund
The Fund pays for all brokerage
fees, taxes and other expenses, including licensing fees for the
use of intellectual property, registration or other fees paid to
the SEC, FINRA, formerly the National Association of Securities
Dealers, or any other regulatory agency in connection with the
offer and sale of subsequent Shares after its initial registration
and all legal, accounting, printing and other expenses associated
therewith. The Fund also pays its portion of the fees and expenses
for services directly attributable to the Fund such as accounting,
financial reporting, regulatory compliance and trading activities,
which the Sponsor elected not to outsource. Certain aggregate
expenses common to all Teucrium Funds within the Trust are
allocated by the Sponsor to the respective funds based on activity
drivers deemed most appropriate by the Sponsor for such expenses,
including but not limited to relative assets under management and
creation and redeem 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. For the period ended
December 31, such expenses totaled $998,194 in 2017, $936,695 in
2016, and $1,034,163 in 2015; of these amounts, $215,815 in 2017,
$275,884 in 2016, and $20,000 in 2015 were waived by the Sponsor.
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.
47
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
12.
|
Professional Fees1
|
$0.18
|
|
Distribution and Marketing Fees2
|
0.18
|
|
Custodian Fees and Expenses3
|
0.04
|
|
General
and Administrative Fees4
|
0.03
|
|
Business Permits and
Licenses
|
0.01
|
|
Other
Expenses
|
0.01
|
|
Total Other Fund Fees
and Expenses
|
$0.44
|
(1) Professional fees consist of
primarily, but not entirely, legal, auditing and tax-preparation
related costs.
(2) Distribution and marketing
fees consist of primarily, but not entirely, fees paid to the
Distributor (Foreside Fund Services, LLC), costs related to
regulatory compliance activities and other costs related to the
trading activities of the Fund.
(3) Custodian and Administrator
fees consist of fees to the Administrator and the Custodian for
accounting, transfer agent and custodian
activities.
(4) General and Administrative
fees consist of primarily, but not entirely, insurance and printing
costs.
Asset-based fees are calculated on
a daily basis (accrued at 1/365 of the applicable percentage of NAV
on that day) and paid on a monthly basis. NAV is calculated
by taking the current market value of the Fund’s total assets
and subtracting any liabilities.
Form of
Shares
Registered Form
Shares are issued in registered
form in accordance with the Trust Agreement. USBFS has been
appointed registrar and transfer agent for the purpose of
transferring Shares in certificated form. USBFS keeps a
record of all Shareholders and holders of the Shares in
certificated form in the registry (“Register”).
The Sponsor recognizes transfers of Shares in certificated form
only if done in accordance with the Trust Agreement. The
beneficial interests in such Shares are held in book-entry form
through participants and/or accountholders in
DTC.
Book Entry
Individual certificates are not
issued for the Shares. Instead, Shares are represented by one
or more global certificates, which are deposited by the
Administrator with DTC and registered in the name of Cede &
Co., as nominee for DTC. The global certificates evidence all
of the Shares outstanding at any time. Shareholders are
limited to (1) participants in DTC such as banks, brokers, dealers
and trust companies (“DTC Participants”), (2) those who
maintain, either directly or indirectly, a custodial relationship
with a DTC Participant (“Indirect Participants”), and
(3) those who hold interests in the Shares through DTC Participants
or Indirect Participants, in each case who satisfy the requirements
for transfers of Shares. DTC Participants acting on behalf of
investors holding Shares through such participants’ accounts
in DTC will follow the delivery practice applicable to securities
eligible for DTC’s Same-Day Funds Settlement System.
Shares are credited to DTC Participants’ securities accounts
following confirmation of receipt of payment.
DTC
DTC has advised us as
follows: It is a limited purpose trust company organized
under the laws of the State of New York and is a member of the
Federal Reserve System, a “clearing corporation” within
the meaning of the New York Uniform Commercial Code and a
“clearing agency” registered pursuant to the provisions
of Section 17A of the Exchange Act. DTC holds securities for
DTC Participants and facilitates the clearance and settlement of
transactions between DTC Participants through electronic book-entry
changes in accounts of DTC Participants.
The Shares are only transferable
through the book-entry system of DTC. Shareholders who are
not DTC Participants may transfer their Shares through DTC by
instructing the DTC Participant holding their Shares (or by
instructing the Indirect Participant or other entity through which
their Shares are held) to transfer the Shares. Transfers are
made in accordance with standard securities industry
practice.
48
Transfers of interests in Shares
with DTC are made in accordance with the usual rules and operating
procedures of DTC and the nature of the transfer. DTC has
established procedures to facilitate transfers among the
participants and/or accountholders of DTC. Because DTC can
only act on behalf of DTC Participants, who in turn act on behalf
of Indirect Participants, the ability of a person or entity having
an interest in a global certificate to pledge such interest to
persons or entities that do not participate in DTC, or otherwise
take actions in respect of such interest, may be affected by the
lack of a certificate or other definitive document representing
such interest.
DTC has advised us that it will
take any action permitted to be taken by a Shareholder (including,
without limitation, the presentation of a global certificate for
exchange) only at the direction of one or more DTC Participants in
whose account with DTC interests in global certificates are
credited and only in respect of such portion of the aggregate
principal amount of the global certificate as to which such DTC
Participant or Participants has or have given such
direction.
Inter-Series Limitation on
Liability
Because the Trust was established
as a Delaware statutory trust, each Teucrium Fund and each other
series that may be established under the Trust in the future will
be operated so that it will be liable only for obligations
attributable to such series and will not be liable for obligations
of any other series or affected by losses of any other
series. If any creditor or shareholder of any particular
series (such as the Fund) asserts against the series a valid claim
with respect to its indebtedness or shares, the creditor or
shareholder will only be able to obtain recovery from the assets of
that series and not from the assets of any other series or the
Trust generally. The assets of the Fund and any other series
will include only those funds and other assets that are paid to,
held by or distributed to the series on account of and for the
benefit of that series, including, without limitation, amounts
delivered to the Trust for the purchase of shares in a
series. This limitation on liability is referred to as the
Inter-Series Limitation on Liability. The Inter-Series
Limitation on Liability is expressly provided for under the
Delaware Statutory Trust Act, which provides that if certain
conditions (as set forth in Section 3804(a)) are met, then the
debts of any particular series will be enforceable only against the
assets of such series and not against the assets of any other
series or the Trust generally. In furtherance of the
Inter-Series Limitation on Liability, every party providing
services to the Trust, the Fund or the Sponsor on behalf of the
Trust or the Fund, will acknowledge and consent in writing to the
Inter-Series Limitation on Liability with respect to such
party’s claims.
The existence of a Trustee should
not be taken as an indication of any additional level of management
or supervision over the Fund. Consistent with Delaware law,
the Trustee acts in an entirely passive role, delegating all
authority for the management and operation of the Fund and the
Trust to the Sponsor. The Trustee does not provide custodial
services with respect to the assets of the
Fund.
Buying and Selling Shares
Most investors buy and sell Shares
of the Fund in secondary market transactions through brokers.
Shares trade on the NYSE Arca under the ticker symbol
“CORN.” 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. Merrill Lynch Professional Clearing
Corp. was the initial Authorized Purchaser. The initial
Authorized Purchaser purchased two Creation Baskets of 100,000
Shares each at a per Share price of $25.00 on June 8, 2010.
All Authorized Purchasers pay a $250 fee for each Creation Basket
order.
The Sponsor and the Trust are
parties to an Amended and Restated Distribution Services Agreement
dated as of November 17, 2010 (the “Distribution
Agreement”), which amended and restated in its entirety a
Distribution Services Agreement between the Sponsor, the Trust, and
Foreside Fund Services, LLC (the “Distributor”) dated
as of October 15, 2010. Pursuant to the Distribution
Agreement the Distributor, together with USBFS, is required to
provide services in connection with the receipt and processing of
orders for Creation Baskets and Redemption baskets of units of the
funds that are series of the Trust, including the
Fund.
The Distribution Agreement, as
amended, remains in full force and effect between the parties. The
Distribution Agreement was most recently amended on December 10,
2014 and was previously amended on May 25, 2011, October 1, 2011,
and April 22, 2014. The first amendment to the Distribution
Agreement, dated May 25, 2011, provided for the application of the
agreement to additional series of the Trust and revised the fee
schedule, including the specific fees and expenses allocable to the
Fund and each of the funds that are series of the
Trust.
The second amendment and third
amendments revised the fee schedule between the parties, including
the specific fees and expenses allocable to the Fund and each
Teucrium Fund. The fourth amendment eliminated the two series
of the Trust which ceased operations on December 21,
2014.
The Distributor receives a fee at an annual rate of 0.01% of each
Teucrium Fund’s average daily net assets calculated and
billed monthly, and an annual aggregate fee of $100,000 for all
Teucrium Funds for which the Distributor serves as such. The
fee to be paid to the Distributor will not exceed $175,000 for the
two year offering period. The Distributor also receives
certain expense reimbursements for its filing of sales and
advertising material on behalf of the Fund. These expense
reimbursements are issuer costs and will not exceed $6,000 for the
two year offering period.
49
The Sponsor and the Distributor are also parties to a Securities
Activities and Services Agreement, as amended from time to time
(the “SASA”), pursuant to which certain employees and
officers of the Sponsor are licensed as Registered Representatives
or registered principals of the Distributor under FINRA rules. As
Registered Representatives of the Distributor, these persons are
permitted to engage in certain marketing activities for the Fund
that they would otherwise not be permitted to engage in. Under the
SASA, the Distributor receives compensation for its activities on
behalf of the Teucrium Funds which will not exceed $30,000 for the
two year offering period, as well as certain expense reimbursements
relating to the registration, continuing education and other
administrative expenses of the Registered Representatives in
relation to the Teucrium Funds, which will not exceed $20,000 for
the two year offering period. The Registered Representatives will
also be paid non-transaction based compensation for certain
non-marketing related services provided to the Fund. This
amount will not exceed $600,000 over the two year offering
period. Registered Representatives will also be paid for
marketing and wholesaling services to the Fund. This amount
will not exceed $160,000 over the two year offering period.
Of these amounts, the Sponsor will pay $110,000. The
remainder will be paid by the Fund. Registered
Representatives will also receive continuing education valued at a
maximum of $3,000 for the two year offering
period.
In no event may the aggregate
compensation from any source payable to underwriters,
broker-dealers, or affiliates thereof for distribution-related
services in connection with this offering exceed ten percent (10%)
of the gross proceeds of this offering.
The offering of baskets is being
made in compliance with Conduct Rule 2310 of FINRA.
Accordingly, Authorized Purchasers will not make any sales to any
account over which they have discretionary authority without the
prior written approval of a purchaser of
Shares.
The per share price of Shares
offered in Creation Baskets on any day is the total NAV of the Fund
calculated shortly after the close of the NYSE Arca on that day
divided by the number of issued and outstanding Shares. An
Authorized Purchaser is not required to sell any specific number or
dollar amount of Shares.
By executing an Authorized
Purchaser Agreement, an Authorized Purchaser becomes part of the
group of parties eligible to purchase baskets from, and put baskets
for redemption to, the Fund. An Authorized Purchaser is under
no obligation to create or redeem baskets or to offer to the public
Shares of any baskets it does create. If an Authorized
Purchaser sells Shares that it has created to the public, it will
be expected to sell them at per-Share offering prices that are
expected to reflect, among other factors, the trading price of the
Shares on the NYSE Arca, the NAV of the Fund at the time the
Authorized Purchaser purchased the Creation Baskets and the NAV at
the time of the offer of the Shares to the public, the supply of
and demand for Shares at the time of sale, and the liquidity of the
Corn Interest markets. The prices of Shares offered by
Authorized Purchasers are expected to fall between the Fund’s
NAV and the trading price of the Shares on the NYSE Arca at the
time of sale.
The following entities have
entered into Authorized Purchaser Agreements with respect to the
Fund: Deutsche Bank Securities Inc.; J.P. Morgan Securities LLC;
Merrill Lynch Professional Clearing Corp.; Goldman Sachs & Co.;
Citadel Securities LLC; and Virtu Financial BD
LLC.
Because new Shares can be created
and issued on an ongoing basis, at any point during the life of the
Fund, a “distribution,” as such term is used in the
1933 Act, will be occurring. Authorized Purchasers, other
broker-dealers and other persons are cautioned that some of their
activities may result in their being deemed participants in a
distribution in a manner that would render them statutory
underwriters and subject them to the prospectus-delivery and
liability provisions of the 1933 Act. For example, an
Authorized Purchaser, other broker-dealer firm or its client will
be deemed a statutory underwriter if it purchases a basket from the
Fund, breaks the basket down into the constituent Shares and sells
the Shares to its customers; or if it chooses to couple the
creation of a supply of new Shares with an active selling effort
involving solicitation of secondary market demand for the
Shares. In contrast, Authorized Purchasers may engage in
secondary market or other transactions in Shares that would not be
deemed “underwriting.” For example, an Authorized
Purchaser may act in the capacity of a broker or dealer with
respect to Shares that were previously distributed by other
Authorized Purchasers. A determination of whether a
particular market participant is an underwriter must take into
account all the facts and circumstances pertaining to the
activities of the broker-dealer or its client in the particular
case, and the examples mentioned above should not be considered a
complete description of all the activities that would lead to
designation as an underwriter and subject them to the
prospectus-delivery and liability provisions of the 1933
Act.
Dealers who are neither Authorized
Purchasers nor “underwriters” but are nonetheless
participating in a distribution (as contrasted to ordinary
secondary trading transactions), and thus dealing with Shares that
are part of an “unsold allotment” within the meaning of
Section 4(a)(3)(C) of the 1933 Act, would be unable to take
advantage of the prospectus-delivery exemption provided by Section
4(a)(3) of the 1933 Act.
The Sponsor expects that any
broker-dealers selling Shares will be members of FINRA.
Investors intending to create or redeem baskets through Authorized
Purchasers in transactions not involving a broker-dealer registered
in such investor’s state of domicile or residence should
consult their legal advisor regarding applicable broker-dealer
regulatory requirements under the state securities laws prior to
such creation or redemption.
50
While the Authorized Purchasers
may be indemnified by the Sponsor, they will not be entitled to
receive a discount or commission from the Trust or the Sponsor for
their purchases of Creation Baskets.
The Flow of
Shares
Calculating NAV
The Fund’s NAV 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.
|
USBFS, in its capacity as the
“Administrator”, calculates the NAV of the Fund once
each trading day. It calculates NAV as of the earlier of the
close of the New York Stock Exchange or 4:00 p.m. New York
time. The NAV for a particular trading day is released after
4:15 p.m. New York time.
In determining the value of Corn
Futures Contracts, the Administrator uses the CBOT closing price,
except that the “fair value” of Corn Futures Contracts
(as described in more detail below) may be used when Corn Futures
Contracts close at their price fluctuation limit for the day.
The Administrator determines the value of all other Fund
investments as of the earlier of the close of the New York Stock
Exchange or 4:00 p.m. New York time, in accordance with the current
Services Agreement between the Administrator and the Trust.
The value of over-the-counter Corn Interests is determined based on
the value of the commodity or Futures Contract underlying such Corn
Interest, except that a fair value may be determined if the Sponsor
believes that the Fund is subject to significant credit risk
relating to the counterparty to such Corn Interest. NAV
includes any unrealized profit or loss on open Corn Interests and
any other credit or debit accruing to the Fund but unpaid or not
received by the Fund.
The fair value of a Corn Interest
shall be determined by the Sponsor in good faith and in a manner
that assesses the Corn Interest’s value based on a
consideration of all available facts and all available information
on the valuation date. When a Corn Futures Contract has
closed at its price fluctuation limit, the fair value determination
attempts to estimate the price at which such Corn 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 Corn Interests trading in the over-the-counter
market. The fair value of a Corn Interest may not reflect
such security’s market value or the amount that the Fund
might reasonably expect to receive for the Corn Interest upon its
current sale.
In addition, in order to provide
updated information relating to the Fund for use by investors and
market professionals, NYSE Arca calculates and disseminates
throughout the trading day an updated “indicative fund
value.” The indicative fund value is calculated by
using the prior day’s closing NAV per Share of the Fund as a
base and updating that value throughout the trading day to reflect
changes in the value of the Fund’s Corn 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.
51
The indicative fund value is
disseminated on a per Share basis every 15 seconds during regular
NYSE Arca trading hours of 9:30 a.m. New York time to 4:00 p.m. New
York time. The normal trading hours for Corn Futures Contracts on
the CBOT are generally shorter than those of the NYSE Arca.
This means that there is a gap in time at the beginning and the end
of each day during which the Fund’s Shares are traded on the
NYSE Arca, but real-time CBOT trading prices for Corn 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 CBOT can be found at http://www.cmegroup.com/trading_hours/commodities-hours.html.
The NYSE Arca disseminates the
indicative fund value through the facilities of CTA/CQ High Speed
Lines. In addition, the indicative fund value is published on
the NYSE Arca’s website and is available through on-line
information services such as Bloomberg and
Reuters.
Dissemination of the indicative
fund value provides additional information that is not otherwise
available to the public and is useful to investors and market
professionals in connection with the trading of Fund Shares on the
NYSE Arca. Investors and market professionals are able
throughout the trading day to compare the market price of the Fund
and the indicative fund value. If the market price of Fund
Shares diverges significantly from the indicative fund value,
market professionals may have an incentive to execute arbitrage
trades. For example, if the Fund appears to be trading at a
discount compared to the indicative fund value, a market
professional could buy Fund Shares on the NYSE Arca, aggregate them
into Redemption Baskets, and receive the NAV of such Shares by
redeeming them to the Trust, provided that there is not a minimum
number of shares outstanding for the Fund. Such arbitrage
trades can tighten the tracking between the market price of the
Fund and the indicative fund value.
Creation
and Redemption of Shares
The Fund creates and redeems
Shares from time to time, but only in one or more Creation Baskets
or Redemption Baskets. The creation and redemption of baskets
are only made in exchange for delivery to the Fund or the
distribution by the Fund of the amount of cash, cash equivalents
and/or commodity futures equal to the combined NAV of the number of
Shares included in the baskets being created or redeemed determined
as of 4:00 p.m. New York time on the day the order to create or
redeem baskets is properly received.
Authorized Purchasers are the only
persons that may place orders to create and redeem baskets.
Authorized Purchasers must be (1) either registered broker-dealers
or other securities market participants, such as banks and other
financial institutions, that are not required to register as
broker-dealers to engage in securities transactions as described
below, and (2) DTC Participants. To become an Authorized
Purchaser, a person must enter into an Authorized Purchaser
Agreement with the Sponsor. The Authorized Purchaser
Agreement provides the procedures for the creation and redemption
of baskets and for the delivery of the cash, cash equivalents
and/or commodity futures required for such creations and
redemptions. The Authorized Purchaser Agreement and the
related procedures attached thereto may be amended by the Sponsor
without the consent of any Shareholder, and the related procedures
may generally be amended by the Sponsor without the consent of the
Authorized Purchaser. Authorized Purchasers pay a transaction fee
of $250 to the Sponsor for each creation order they place and a fee
of $250 per order for redemptions. Authorized Purchasers who
make deposits with the Fund in exchange for baskets receive no
fees, commissions or other form of compensation or inducement of
any kind from either the Trust or the Sponsor, and no such person
will have any obligation or responsibility to the Trust or the
Sponsor to effect any sale or resale of Shares.
Certain Authorized Purchasers are
expected to be capable of participating directly in the physical
corn and the Corn Interest markets. Some Authorized
Purchasers or their affiliates may from time to time buy or sell
corn or Corn 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.
52
Creation Procedures
On any business day, an Authorized
Purchaser may place an order with USBFS in their capacity as the
transfer agent to create one or more baskets. For purposes of
processing purchase and redemption orders, a “business
day” means any day other than a day when any of the NYSE
Arca, CBOT or the New York Stock Exchange is closed for regular
trading. Purchase orders must be placed by 1:15 p.m. New York
time or the close of regular trading on the New York Stock
Exchange, whichever is earlier. The day on which the
Distributor receives a valid purchase order is referred to as the
purchase order date.
By placing a purchase order, an
Authorized Purchaser agrees to deposit cash, cash equivalents,
commodity futures and/or a combination thereof with the Fund, as
described below. Prior to the delivery of baskets for a
purchase order, the Authorized Purchaser must also have wired to
the Sponsor the non-refundable transaction fee due for the purchase
order. Authorized Purchasers may not withdraw a purchase
order without the prior consent of the Sponsor in its
discretion.
Determination of Required Deposits
The total deposit required to
create each basket (“Creation Basket Deposit”) is the
amount of cash, cash equivalents and/or commodity futures that is
in the same proportion to the total assets of the Fund (net of
estimated accrued but unpaid fees, expenses and other liabilities)
on the purchase order date as the number of Shares to be created
under the purchase order is in proportion to the total number of
Shares outstanding on the purchase order date. The
Sponsor determines, directly in its sole discretion or in
consultation with the Custodian and the Administrator, the
requirements for cash, cash equivalents and/or commodity futures
that may be included in deposits to create baskets. If
cash equivalents are to be included in a Creation Basket Deposit
for orders placed on a given business day, the Administrator will
publish an estimate of the Creation Basket Deposit requirements at
the beginning of such day.
Delivery of Required Deposits
An Authorized Purchaser who places
a purchase order is responsible for transferring to the
Fund’s account with the Custodian the required amount of
cash, cash equivalents and/or commodity futures by the end of the
next business day following the purchase order date or by the end
of such later business day, not to exceed three business days after
the purchase order date, as agreed to between the Authorized
Purchaser and the Custodian when the purchase order is placed (the
“Purchase Settlement Date”). Upon receipt of
the deposit amount, the Custodian directs DTC to credit the number
of baskets ordered to the Authorized Purchaser’s DTC account
on the Purchase Settlement Date.
Because orders to purchase baskets
must be placed by 1:15 p.m., New York time, but the total payment
required to create a basket during the continuous offering period
will not be determined until 4:00 p.m., New York time, on the date
the purchase order is received, Authorized Purchasers will not know
the total amount of the payment required to create a basket at the
time they submit an irrevocable purchase order for the
basket. The Fund’s NAV and the total amount of the
payment required to create a basket could rise or fall
substantially between the time an irrevocable purchase order is
submitted and the time the amount of the purchase price in respect
thereof is determined.
Rejection of Purchase Orders
The Sponsor acting by itself or
through the Distributor or transfer agent may reject a purchase
order or a Creation Basket Deposit if:
● it determines that, due to
position limits or otherwise, investment alternatives that will
enable the Fund to meet its investment objective are not available
or practicable at that time;
● it determines that the purchase
order or the Creation Basket Deposit is not in proper
form;
● it believes that acceptance of the
purchase order or the Creation Basket Deposit would have adverse
tax consequences to the Fund or its
Shareholders;
● the acceptance or receipt of the
Creation Basket Deposit would, in the opinion of counsel to the
Sponsor, be unlawful;
● circumstances outside the control
of the Sponsor, Distributor or transfer agent make it, for all
practical purposes, not feasible to process creations of
baskets;
● there is a possibility that any or
all of the Benchmark Component Futures Contracts of the Fund on the
CBOT 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.
53
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 1:15 p.m. New York time or the close of regular trading
on the New York Stock Exchange, whichever is earlier. A
redemption order so received will be effective on the date it is
received in satisfactory form by the Distributor. The
redemption procedures allow Authorized Purchasers to redeem baskets
and do not entitle an individual Shareholder to redeem any Shares
in an amount less than a Redemption Basket, or to redeem baskets
other than through an Authorized Purchaser. By placing a
redemption order, an Authorized Purchaser agrees to deliver the
baskets to be redeemed through DTC’s book-entry system to the
Fund by the end of the next business day following the effective
date of the redemption order or by the end of such later business
day, not to exceed three business days after the effective date of
the redemption order, as agreed to between the Authorized Purchaser
and the transfer agent, when the redemption order is placed (the
“Redemption Settlement Date”). Prior to the
delivery of the redemption distribution for a redemption order, the
Authorized Purchaser must also have wired to the Sponsor’s
account at the Custodian the non-refundable transaction fee due for
the redemption order. An Authorized Purchaser may not
withdraw a redemption order without the prior consent of the
Sponsor in its discretion.
Determination of Redemption Distribution
The redemption distribution from
the Fund consists of a transfer to the redeeming Authorized
Purchaser of an amount of cash, cash equivalents and/or commodity
futures that is in the same proportion to the total assets of the
Fund (net of estimated accrued but unpaid fees, expenses and other
liabilities) on the date the order to redeem is properly received
as the number of Shares to be redeemed under the redemption order
is in proportion to the total number of Shares outstanding on the
date the order is received. The Sponsor, directly or in
consultation with the Custodian and the Administrator, determines
the requirements for cash, cash equivalents and/or commodity
futures, including the remaining maturities of the cash equivalents
and proportions of cash equivalents and cash, that may be included
in distributions to redeem baskets. If cash
equivalents are to be included in a redemption distribution for
orders placed on a given business day, the Custodian and the
Administrator will publish an estimate of the redemption
distribution composition as of the beginning of such
day.
Delivery of Redemption Distribution
The redemption distribution due
from the Fund will be delivered to the Authorized Purchaser on the
Redemption Settlement Date if the Fund’s DTC account has been
credited with the baskets to be redeemed. If the Fund’s
DTC account has not been credited with all of the baskets to be
redeemed by the end of such date, the redemption distribution will
be delivered to the extent of whole baskets received. Any
remainder of the redemption distribution will be delivered on the
next business day after the Redemption Settlement Date to the
extent of remaining whole baskets received if the Sponsor receives
the fee applicable to the extension of the Redemption Settlement
Date which the Sponsor may, from time to time, determine and the
remaining baskets to be redeemed are credited to the Fund’s
DTC account on such next business day. Any further
outstanding amount of the redemption order shall be
cancelled. Pursuant to information from the Sponsor, the
Custodian will also be authorized to deliver the redemption
distribution notwithstanding that the baskets to be redeemed are
not credited to the Fund’s DTC account by 1:15 p.m. New York
time on the Redemption Settlement Date if the Authorized Purchaser
has collateralized its obligation to deliver the baskets through
DTC’s book entry-system on such terms as the Sponsor may from
time to time determine.
Suspension or Rejection of Redemption Orders
The Sponsor may, in its
discretion, suspend the right of redemption, or postpone the
redemption settlement date, (1) for any period during which the
NYSE Arca or CBOT is closed other than customary weekend or holiday
closings, or trading on the NYSE Arca or CBOT is suspended or
restricted, (2) for any period during which an emergency exists as
a result of which delivery, disposal or evaluation of cash
equivalents is not reasonably practicable, (3) for such other
period as the Sponsor determines to be necessary for the protection
of the Shareholders, (4) if there is a possibility that any or all
of the Benchmark Component Futures Contracts of the Fund on the
CBOT from which the NAV of the Fund is calculated will be priced at
a daily price limit restriction, or (5) if, in the sole discretion
of the Sponsor, the execution of such an order would not be in the
best interest of the Fund or its Shareholders. For example,
the Sponsor may determine that it is necessary to suspend
redemptions to allow for the orderly liquidation of the
Fund’s assets at an appropriate value to fund a
redemption. If the Sponsor has difficulty liquidating the
Fund’s positions, e.g., because of a market disruption event
in the futures markets or an unanticipated delay in the liquidation
of a position in an over-the-counter contract, it may be
appropriate to suspend redemptions until such time as such
circumstances are rectified. None of the Sponsor, the
Distributor, or the transfer agent will be liable to any person or
in any way for any loss or damages that may result from any such
suspension or postponement.
Redemption orders must be made in
whole baskets. The Sponsor will reject a redemption order if the
order is not in proper form as described in the Authorized
Purchaser Agreement or if the fulfillment of the order, in the
opinion of its counsel, might be
unlawful.
The Sponsor may also reject a
redemption order if the number of Shares being redeemed would
reduce the remaining outstanding Shares to 50,000 Shares (i.e., two
baskets of 25,000 Shares each) or less, unless the Sponsor has
reason to believe that the placer of the redemption order does in
fact possess all the outstanding Shares and can deliver
them.
54
Creation and Redemption Transaction Fees
To compensate the Sponsor for its
expenses in connection with the creation and redemption of baskets,
an Authorized Purchaser is required to pay a transaction fee to the
Sponsor of $250 per order. The transaction fees may be
reduced, increased or otherwise changed by the
Sponsor.
Tax Responsibility
Authorized Purchasers are
responsible for any transfer tax, sales or use tax, stamp tax,
recording tax, value added tax or similar tax or governmental
charge applicable to the creation or redemption of baskets,
regardless of whether or not such tax or charge is imposed directly
on the Authorized Purchaser, and agree to indemnify the Sponsor and
the Fund if they are required by law to pay any such tax, together
with any applicable penalties, additions to tax and interest
thereon.
Secondary Market
Transactions
As noted, the Fund will create and
redeem Shares from time to time, but only in one or more Creation
Baskets or Redemption Baskets. The creation and redemption of
baskets are only made in exchange for delivery to the Fund or the
distribution by the Fund of the amount of 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 Corn Interest markets.
The prices of Shares offered by Authorized Purchasers are expected
to fall between the Fund’s NAV and the trading price of the
Shares on the NYSE Arca at the time of sale. 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 Corn Interest
markets. While the Shares trade on the NYSE Arca until 4:00
p.m. New York time, liquidity in the markets for Corn Interests may
be reduced after the close of the CBOT. As a result, during
this time, trading spreads, and the resulting premium or discount,
on the Shares may widen.
The Sponsor causes the Fund to
transfer the proceeds of the sale of Creation Baskets to the
Custodian or another custodian for use in trading activities.
The Sponsor invests the Fund’s assets in Corn Futures
Contracts, and
Other Corn Interests, cash and cash equivalents. When the
Fund purchases Corn Futures Contracts and certain Other Corn
Interests that are exchange-traded, the Fund is required to deposit
with the FCM on behalf of the exchange a portion of the value of
the contract or other interest as security to ensure payment for
the obligation under the Corn Interests at maturity. This
deposit is known as initial margin. Counterparties in
transactions in over-the-counter Corn Interests will generally
impose similar collateral requirements on the Fund. The
Sponsor invests the Fund’s assets that remain after margin
and collateral is posted in cash and/or cash equivalents.
Subject to these margin and collateral requirements, the Sponsor
has sole authority to determine the percentage of assets that will
be:
55
● held as margin or collateral with
the FCM or other custodians;
● used for other investments;
and
● held in bank accounts to pay
current obligations and as reserves.
In general, the Fund expects that
it will be required to post approximately 5% of the notional amount
of a Corn Interest as initial margin when entering into such Corn
Interest. Ongoing margin and collateral payments will
generally be required for both exchange-traded and over-the-counter
Corn Interests based on changes in the value of the Corn
Interests. Furthermore, ongoing collateral requirements with
respect to over-the-counter Corn 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 Corn Interest, and
each party’s creditworthiness. In light of the
differing requirements for initial payments under exchange-traded
and over-the-counter Corn Interests and the fluctuating nature of
ongoing margin and collateral payments, it is not possible to
estimate what portion of the Fund’s assets will be posted as
margin or collateral at any given time. The cash and cash
equivalents held by the Fund constitute reserves that are available
to meet ongoing margin and collateral requirements. All
interest income is used for the Fund’s
benefit.
An FCM, counterparty, government
agency or commodity exchange could increase margin or collateral
requirements applicable to the Fund to hold trading positions at
any time. Moreover, margin is merely a security deposit and
has no bearing on the profit or loss potential for any positions
held. Further, under recently adopted CFTC rules, the Fund may be
obligated to post both initial and variation margin with respect to
swaps (and options that qualify as swaps) and traded
over-the-counter, and, where applicable, on
SEFs.
The approximate 5% of the
Fund’s assets held by the FCM are held in segregation
pursuant to the CEA and CFTC regulations.
Critical Accounting Policies
Preparation of the financial
statements and related disclosures in conformity with U.S.
generally-accepted accounting principles (“GAAP”)
requires the application of appropriate accounting rules and
guidance, as well as the use of estimates, and requires management
to make estimates and assumptions that affect the reported amounts
of assets and liabilities, revenue and expense and related
disclosure of contingent assets and liabilities during the
reporting period of the combined financial statements and
accompanying notes. The Trust’s application of these policies
involves judgments and actual results may differ from the estimates
used.
The Sponsor has determined that
the valuation of Commodity Interests that are not traded on a U.S.
or internationally recognized futures exchange (such as swaps and
other over-the-counter contracts) involves a critical accounting
policy. The values which are used by the teucrium Funds for futures
contracts will be provided by the commodity broker who will use
market prices when available, while over-the-counter contracts will
be valued based on the present value of estimated future cash flows
that would be received from or paid to a third party in settlement
of these derivative contracts prior to their delivery date. Values
will be determined on a daily basis.
Commodity futures contracts held
by the Fund are recorded on the trade date. All such transactions
are recorded on the identified cost basis and marked to market
daily. Unrealized appreciation or depreciation on commodity futures
contracts are reflected in the statement of operations as the
difference between the original contract amount and the fair market
value as of the last business day of the year or as of the last
date of the financial statements. Changes in the appreciation or
depreciation between periods are reflected in the statement of
operations. Interest on cash equivalents and deposits with the FCM
are recognized on the accrual basis. The Fund earns interest on
funds held at the custodian and at other financial institutions at
prevailing market rates for such investments.
Cash and cash equivalents are cash
held at financial institutions in demand-deposit accounts or
highly-liquid investments with original maturity dates of three
months or less at inception. The Fund reports cash equivalents in
the statements of assets and liabilities at market value, or at
carrying amounts that approximate fair value, because of their
highly-liquid nature and short-term maturities. The Fund has a
substantial portion of its assets on deposit with banks. Assets
deposited with financial institutions may, at times, exceed
federally insured limits.
56
The use of fair value to measure
financial instruments, with related unrealized gains or losses
recognized in earnings in each period is fundamental to the
Trust’s financial statements. In accordance with GAAP, fair
value is defined as the price that would be received to sell an
asset or paid to transfer a liability (i.e., the “exit
price”) in an orderly transaction between market participants
at the measurement date.
In determining fair value, the
Trust uses various valuation approaches. In accordance with GAAP, a
fair value hierarchy for inputs is used in measuring fair value
that maximizes the use of observable inputs and minimizes the use
of unobservable inputs by requiring that the most observable inputs
be used when available. Observable inputs are those that market
participants would use in pricing the asset or liability based on
market data obtained from sources independent of the Trust.
Unobservable inputs reflect the Trust’s assumptions about the
inputs market participants would use in pricing the asset or
liability developed based on the best information available in the
circumstances. The fair value hierarchy is categorized into three
levels: a) Level 1 -
Valuations based on unadjusted quoted prices in active markets for
identical assets or liabilities that the Trust has the ability to
access. Valuation adjustments and block discounts are not applied
to Level 1 securities and financial instruments. Since valuations
are based on quoted prices that are readily and regularly available
in an active market, valuation of these securities and financial
instruments does not entail a significant degree of judgment, b)
Level 2 - Valuations based
on quoted prices in markets that are not active or for which all
significant inputs are observable, either directly or indirectly,
and c) Level 3 - Valuations
based on inputs that are unobservable and significant to the
overall fair value measurement. See the notes within the financial
statements for further information.
The Fund and the Trust record
their derivative activities at fair value. Gains and losses from
derivative contracts are included in the statement of operations.
Derivative contracts include futures contracts related to commodity
prices. Futures, which are listed on a national securities
exchange, such as the CBOT or the New York Mercantile Exchange
(“NYMEX”), or reported on another national market, are
generally categorized in Level 1 of the fair value hierarchy. OTC
derivatives contracts (such as forward and swap contracts) which
may be valued using models, depending on whether significant inputs
are observable or unobservable, are categorized in Levels 2 or 3 of
the fair value hierarchy.
Brokerage commissions on all open
commodity futures contracts are accrued on a full-turn
basis.
Margin is the minimum amount of
funds that must be deposited by a commodity interest trader with
the trader’s broker to initiate and maintain an open position
in futures contracts. A margin deposit acts to assure the
trader’s performance of the futures contracts purchased or
sold. Futures contracts are customarily bought and sold on initial
margin that represents a very small percentage of the aggregate
purchase or sales price of the contract. Because of such low margin
requirements, price fluctuations occurring in the futures markets
may create profits and losses that, in relation to the amount
invested, are greater than are customary in other forms of
investment or speculation. As discussed below, adverse price
changes in the futures contract may result in margin requirements
that greatly exceed the initial margin. In addition, the amount of
margin required in connection with a particular futures contract is
set from time to time by the exchange on which the contract is
traded and may be modified from time to time by the exchange during
the term of the contract. Brokerage firms, such as the Teucrium
Funds’ clearing brokers, carrying accounts for traders in
commodity interest contracts generally require higher amounts of
margin as a matter of policy to further protect themselves.
Over-the-counter trading generally involves the extension of credit
between counterparties, so the counterparties may agree to require
the posting of collateral by one or both parties to address credit
exposure.
When a trader purchases an option,
there is no margin requirement; however, the option premium must be
paid in full. When a trader sells an option, on the other hand, he
or she is required to deposit margin in an amount determined by the
margin requirements established for the underlying interest and, in
addition, an amount substantially equal to the current premium for
the option. The margin requirements imposed on the selling of
options, although adjusted to reflect the probability that
out-of-the-money options will not be exercised, can in fact be
higher than those imposed in dealing in the futures markets
directly. Complicated margin requirements apply to spreads and
conversions, which are complex trading strategies in which a trader
acquires a mixture of options positions and positions in the
underlying interest.
Ongoing or
“maintenance” margin requirements are computed each day
by a trader’s clearing broker. When the market value of a
particular open futures contract changes to a point where the
margin on deposit does not satisfy maintenance margin requirements,
a margin call is made by the broker. If the margin call is not met
within a reasonable time, the broker may close out the
trader’s position. With respect to the Teucrium Funds’
trading, the Teucrium Funds (and not its shareholders personally)
are subject to margin calls.
Finally, many major U.S. exchanges
have passed certain cross margining arrangements involving
procedures pursuant to which the futures and options positions held
in an account would, in the case of some accounts, be aggregated,
and margin requirements would be assessed on a portfolio basis,
measuring the total risk of the combined
positions.
For federal income tax purposes,
the Fund will be treated as a partnership. Therefore, the Fund does
not record a provision for income taxes because the partners report
their share of the Fund’s income or loss on their income tax
returns. The financial statements reflect the Fund’s
transactions without adjustment, if any, required for income tax
purposes.
57
For commercial paper, the Teucrium
Funds use the effective interest method for calculating the actual
interest rate in a period based on the amount of a financial
instrument's book value at the beginning of the accounting period.
Accretion on these investments are recognized on the effective
interest method in U.S. dollars and recognized in cash equivalents.
All discounts on purchase prices of debt securities are accreted
over the life of the respective security.
Results of Operations
The Teucrium Corn
Fund commenced investment operations on June 9, 2010. The
investment objective of the Corn Fund is to have the daily changes
in percentage terms of the Shares’ NAV reflect the daily
changes in percentage terms of a weighted average of the closing
settlement prices for three futures contracts for corn (“Corn
Futures Contracts”) that are traded on the Chicago Board of
Trade (“CBOT”), specifically (1) the second
to expire CBOT Corn Futures Contract, weighted 35%, (2) the
third to expire CBOT Corn Futures Contract, weighted 30%, and
(3) the CBOT Corn Futures Contract expiring in the December
following the expiration month of the third to expire
contract, weighted 35%. On December 31, 2017, the Corn Fund held a
total of 3,509 CBOT Corn Futures contracts with a notional value of
$64,903,800. Of these, $1,060 contracts had an asset fair value of
$120,487, while 2,449 contracts had a liability fair value of
$1,962,050. The weighting of the notional value of the contracts
was weighted as follows: (1) 35% to the MAY18 contracts, the
second to expire CBOT Corn Futures Contract, (2) 30% to
JUL18 CBOT contracts, the third to expire CBOT Corn
Futures Contract, and (3) 35% to DEC18 CBOT contracts, the CBOT
Corn Futures Contract expiring in the December following the
expiration month of the third to expire
contract.
The
benchmark for the Fund is the Teucrium Corn Index (TCORN) which is
defined as: A weighted average of daily changes in the closing
settlement prices of (1) the second to expire Corn
Futures Contract traded on the CBOT, weighted 35%, (2) the third
to expire CBOT Corn Futures Contract, weighted 30%, and
(3) the CBOT Corn Futures Contract expiring in the December
following the expiration month of third to expire
contract, weighted 35%. To convert to an index, 100 is set to $25,
the opening day price of CORN.
The chart below
shows the percent change in the NAV per share for the Fund, the
market price of the Fund shares, represented by the closing price
of the Fund on the NYSE Arca or the midpoint of the 4 pm bid
and ask if no closing price is available, and TCORN for two
periods. One period is December 31, 2016 compared to December
31, 2017. The second period is from the commencement of
operations to December 31, 2017. The Benchmark does not reflect any
impact of expenses, which would generally reduce the Fund’s
NAV, or interest income, which would generally increase the NAV.
The actual results for the NAV do include the impacts of both
expenses and interest income.
|
Period
|
Change
in NAV per share
|
Change
in Market Price
|
Change
in the Benchmark (TCORN)
|
|
December 31, 2016 to
December
31,
2017
|
10.78%
|
10.38%
|
8.47%
|
|
June 10, 2010 to
December 31,
2017
|
35.20%
|
34.99%
|
10.67%
|
For the Year Ended December 31, 2017 Compared to the Years Ended
December 31, 2016 and 2015
On December 31,
2017, the Fund had 3,875,004 shares outstanding and net assets of
$64,901,479. This is in comparison to 3,900,004 shares outstanding
and net assets of $73,213,541 on December 31, 2016 and 2,875,004
shares outstanding with net assets of $61,056,223 on December 31,
2015. Shares outstanding decreased by 25,000 or 1% for the period
of 2017 when compared to 2016. This slight decrease was, in the
opinion of management, due to the slight increase in global ending
stocks for 2017/18 compared to the 2016/17 crop year. Ending stocks
is the amount of corn that will available at the end of the crop
year, given the estimated beginning stocks, productions and usage.
In total, the Fund issued 1,325,000 shares and purchased 1,350,000
shares, in 2017, as part of creation and redemption baskets. For
the period 2017 compared to 2015, there was an increase in shares
outstanding of 1,000,000 or 35%. In total, in 2016, the Fund issued
2,875,000 shares and purchased 1,850,000 shares as part of creation
and redemption baskets.
58
Total net assets
for the Fund were $64,901,479 on December 31, 2017, compared to
$73,213,541 on December 31, 2016 and $61,056,223 on December 31,
2015. The Net Asset Values (“NAV”) per share related to
these balances were $16.75, $18.77 and $21.24 respectively. When
comparing December 31, 2017 with 2016, there was a decrease in
total net assets of 11%, driven by a decrease in the NAV per share
of ($2.02) or 11%. When comparing December 31, 2017 with 2015,
there was an increase in total net assets of 6%, driven by a
combination of an increase in the number of shares outstanding of
1,000,000 or 35% and a change in the NAV per share which decreased
by ($4.49) or 21%. The closing prices per share for 2017, 2016 and
2015, as reported by the NYSE Arca, were $16.77, $18.71 and $21.22,
respectively. The change from December 31, 2017 over prior years
was a 10% decrease from 2016 and a 21% decrease from
2015.
The graph below
shows the actual shares outstanding, total net assets (or AUM) and
net asset value per share (NAV per share) for the Fund from
inception to December 31, 2017 and serves to illustrate the
relative changes of these components.
The total loss for
the year ended December 31, 2017 was ($5,205,716) resulting
primarily from the net change in realized loss on commodity futures
contracts totaling ($5,603,513), and by a net change in unrealized
depreciation of commodity futures contracts of ($380,763). Total
loss was ($6,594,484) in 2016, and ($14,047,008) in 2015. Realized
gain or loss on trading of commodity futures contracts is a
function of: 1) the change in the price of the particular contracts
sold as part of a “roll” in contracts as the nearest to
expire contracts are exchanged for the appropriate contact given
the investment objective of the fund, 2) the change in the price of
particular contracts sold in relation to redemption of shares, 3)
the gain or loss associated with rebalancing trades which are made
to ensure conformance to the benchmark and 4) the number of
contracts held and then sold for either circumstance
aforementioned. Unrealized gain or loss on trading of commodity
futures contracts is a function of the change in the price of
contracts held on the final date of the period versus the purchase
price for each contract and the number of contracts held in each
contract month. The Sponsor has a static benchmark as described
above and trades futures contracts to adhere to that benchmark and
to adjust for the creation or redemption of
shares.
Interest income
for year ended December 31, 2017, 2016, and 2015, respectively, was
$778,560, $396,679, and $146,905. This increase year
over year was the result of the Sponsor investing, at times,
a portion of the available cash for the Fund in alternative
demand deposit savings accounts beginning in the second
quarter of 2015, these accounts had higher overnight deposit rates.
More recently, effective October 3, 2017, the Fund invested in
investment grade commercial paper with maturities of ninety days or
less. Both investments provided a higher rate than were available
in money market products that had been utilized solely in the past.
In addition, effective in December 2015, December 2016 and March,
June and December 2017, interest rates paid on cash balances of the
Fund increased in light of the increases in the Federal Funds rate.
These higher levels of interest rates are expected to continue in
2018, absent any decreases in the Federal Funds
rate.
On August 17, 2015 (the
“Conversion Date”), U.S. Bank N.A. replaced The Bank of
New York Mellon as the Custodian for the Funds. In addition,
effective on the Conversion Date, U.S. Bancorp Fund Services, LLC
(“USBFS”), a wholly owned subsidiary of U.S. Bank,
commenced serving as administrator for the Fund, performing certain
administrative and accounting services and preparing certain SEC
reports on behalf of the Funds, and also became the registrar and
transfer agent for each Fund’s Shares. For such services,
U.S. Bank and USBFS will receive an asset-based fee, subject to a
minimum annual fee.
59
The Sponsor stated in the Forms
10-Q filed on August 10, 2015 and November 9, 2015, in addition to
other documents filed with the Securities and Exchange Commission,
that it did not anticipate any material change to the expenses for
any Fund, net of expenses waived by the Sponsor, as a result of the
servicing conversion to USBFS. Given this conversion, the Sponsor
has, for the year-ended December 31, 2015, reflected an expense,
before and after fees waived by the Sponsor, for fees associated
with Custodian, Fund Administration and Transfer Agent services
(“Custodian Fees”) that have or will be paid to the
Bank of New York Mellon by a Fund or by the Sponsor on behalf of a
Fund.
Total expenses
gross of expenses waived by the Sponsor (“Total
expenses”) for 2017 were $2,918,936. total expenses for 2016
were $3,411,916 and $3,232,532 in 2015. This represents a
($492,980) or 14% decrease for 2017 over 2016 and an ($313,596) or
10% decrease for 2017 over 2015. The decrease for 2017 over 2016
was driven by: 1) a ($415,753) or 40% decrease in professional fees
related to auditing, legal and tax preparation fees. and 2) a
($36,509) or 5% decrease in management fee paid to the Sponsor as a
result of lower average net assets. 3) a ($29,465) or 16% decrease
in custodian fees and expenses. 4) a ($17,398) or 12% decrease in
general and administrative expenses. and 5) a ($17,025) or 18%
decrease in brokerage commissions due to a decrease in contracts
purchased and rolled. These decreases were offset partially by: 1)
a $16,139 or 1% increase in distribution and marketing fees. and 2)
a $8,364 or 50% increase in business permits and licenses. The
decreases in operating expenses were due to expense controls under
taken by the Sponsor and lower average net asset balance relative
to the other Funds.
The decrease for
2017 over 2015 was driven by a decrease in all expense categories
except brokerage commissions, which increased by $38,450 or 93% due
to a increase in contracts purchased and rolled. The decreases
were: 1) a ($97,134) or 12% in the management fee paid to the
Sponsor as a result of lower average net assets. 2) a ($112,269) or
15% decrease in professional fees related to auditing, legal and
tax preparation fees. 3) a ($22,573) or 2% decrease in distribution
and marketing fees. 4) a ($33,277) or 18% in custodian fees and
expenses. 5) a ($1,601) or 6% decrease in business permits and
licenses. 6) a ($80,956) or 39% decrease in general and
administrative expenses. and 7) a ($4,236) or 9% decrease in other
expenses. The decreases in operating expenses were due to expense
controls under taken by the Sponsor and lower average net asset
balance relative to the other Funds. The total expense ratio gross
of expenses waived by the Sponsor for these years was 4.28% in
2017, 4.74% in 2016, and 4.15% in 2015. The management fee is
calculated at an annual rate of 1% of the Fund’s daily
average net assets.
The Sponsor has
the ability to elect to pay certain expenses on behalf of the Fund
or waive the management fee. This election is subject to change by
the Sponsor, at its discretion. For the year ended December 31,
2017, the Sponsor waived fees of $409,562. the Sponsor has
determined that no reimbursement will be sought in future periods
for those expenses which have been waived for the year. The Sponsor
permanently waived $442,333 of expenses in 2016 and $96,068 in
2015.
Total expenses net
of expenses waived by the Sponsor and reimbursement to the Sponsor
for previously waived expenses (“Total expenses, net”)
for 2017, 2016 and 2015 were $2,509,374, $2,969,583, and $3,136,464
respectively. The total expense ratio net of expenses waived by the
Sponsor periods was 3.68% in 2017, 4.13% in 2016 and 4.03% in 2015.
Net investment loss, which includes the impact of expenses and
interest income, was 2.54% in 2017, 3.58% in 2016, and 3.84% in
2015.
Other than the
management fee to the Sponsor and the brokerage commissions, most
of the expenses incurred by the Fund are associated with the day
to day operation of the Fund and the necessary
functions related to regulatory compliance. These are generally
based on contracts, which extend for some period of time and up to
one year, or commitments regardless of the level of assets under
management. The structure of the Fund and the nature of the
expenses are such that as total net assets grow, there is a
scalability of expenses that may allow the total expense ratio to
be reduced. However, if total net assets for the Fund fall, the
total expense ratio of the Fund will increase unless additional
reductions are made by the Sponsor to the daily expense accrual.
The Sponsor can elect to adjust the daily expense accruals at its
discretion based on market conditions and other Fund
considerations.
Net cash used in
the Fund’s operating activities during the year was
($5,335,851) in 2017, ($9,759,190) in 2016 and ($17,532,410) in
2015. In 2017, proceeds from the sale of shares were $25,173,968 in
2017, representing 1,325,000 shares while payments for redemptions
were $25,770,940, representing 1,350,000 shares. In 2016, proceeds
from the sale of shares were $57,591,933, representing 2,875,000
shares while payments for redemptions were $35,870,548,
representing 1,850,000 shares. In 2015, proceeds from the sale of
shares were $8,538,198, representing 350,000 shares while payments
for redemptions were $38,758,010, representing 1,550,000
shares.
The seasonality
patterns for corn futures prices are impacted by a variety of
factors. These include, but are not limited to, the harvest in the
fall, the planting conditions in the spring, and the weather
throughout the critical germination and growing periods. Prices for
corn futures are affected by the availability and demand for
substitute agricultural commodities, including soybeans and wheat,
and the demand for corn as an additive for fuel, through the
production of ethanol. The price of corn futures contracts is also
influenced by global economic conditions, including the demand for
exports to other countries. Such factors will impact the
performance of the Fund and the results of operations on an ongoing
basis. The Sponsor cannot predict the impact of such
factors.
60
Benchmark
Performance
As noted above, the Sponsor
endeavors to place the Fund’s trades in Corn Interests and
otherwise manage the Fund’s investments so that the
Fund’s average daily tracking error against the Benchmark
will be less than 10 percent over any period of 30 trading
days. More specifically, the Sponsor will endeavor to manage
the Fund so that A will be within plus/minus 10 percent of B,
where:
● A is the average daily change in
the Fund’s NAV for any period of 30 successive valuation
days, i.e., any trading day as of which the Fund calculates its
NAV, and
● B is the average daily change in
the Benchmark over the same period.
During the period from January 1,
2017 through December 31, 2017, the average daily change in the
Fund’s NAV was within plus/minus 10 percent of the average
daily change in the Fund’s Benchmark.
Liquidity and Capital Resources
The Fund does not make use of
borrowings or other lines of credit to meet its obligations. The
Fund meets its liquidity needs in the normal course of business
from the proceeds of the sale of its investments or from the cash
and/or cash equivalents that it intends to hold at all times. The
Fund’s liquidity needs include: redeeming Shares, providing
margin deposits for existing futures contracts or the purchase of
additional futures contracts, posting collateral for
over-the-counter Corn Interests, and payment of expenses,
summarized below under “Contractual
Obligations.”
All of the Fund’s source of
capital is derived from the offering of Shares to Authorized
Purchasers. Authorized Purchasers may then subsequently
redeem such Shares. The Fund in turn allocates its net assets
to commodities trading. A significant portion of the NAV is
held in cash and/or cash equivalents, which is used as margin for
the Fund’s trading in commodities. The percentage that
cash equivalents bear to the total net assets will vary from period
to period as the market values of the Fund’s Corn Interests
change. The balance of the net assets is held in the
Fund’s commodity trading account. Interest earned on
interest-bearing assets of the Fund is paid to the
Fund.
The investments of the Fund in
Corn Interests may be subject to periods of illiquidity because of
market conditions, regulatory considerations and other
reasons. For example, the CBOT limits the fluctuations in
Corn Futures Contract prices during a single day by regulations
referred to as “daily limits.” During a single
day, no trades may be executed at prices beyond the daily
limit. Once the price of a Corn Futures Contract has
increased or decreased by an amount equal to the daily limit,
positions in the contracts can neither be taken nor liquidated
unless the traders are willing to effect trades at or within the
limit. Such market conditions could prevent the Fund from
promptly liquidating a position in Corn Futures
Contracts.
Beginning in the quarter-ended
June 30, 2015, the Sponsor invested a portion of the available cash
for the Teucrium Funds in alternative demand-deposit savings
accounts; as of January 31, 2018, the Sponsor has cash deposits
Rabobank, N.A., a U.S. chartered bank headquartered in Roseville,
CA, and Mascoma Savings Bank, headquartered in White River
Junction, VT. These accounts have higher overnight
deposit rates than were available in the money market products at
the Custodians that had been utilized solely in the past. In
addition, the Fund has established an account at Morgan Stanley so
that the Fund may invest in commercial paper rated at the date of
purchase “Prime-1” or “Prime-2” by
Moody’s and/or “A-1” or “A-2” by
S&P, or if unrated, of comparable quality as determined by the
Sponsor. Commercial paper represents short-term unsecured
promissory notes issued in bearer form by banks or bank holding
companies, corporations and finance companies. The duration until
maturity of such commercial paper held by the Fund will not exceed
ninety days.
Market Risk
Trading in Corn Interests such as
Corn Futures Contracts involves the Fund entering into contractual
commitments to purchase or sell specific amounts of corn at a
specified date in the future. The gross or face amount of the
contracts significantly exceeds the future cash requirements of the
Fund since the Fund typically closes out any open
positions prior to the contractual expiration date. As a
result, the Fund’s market risk is the risk of loss arising
from the decline in value of the contracts, not from the need to
make delivery under the contracts. The Fund considers the
“fair value” of derivative instruments to be the
unrealized gain or loss on the contracts. The market risk
associated with the commitment by the Fund to purchase a specific
commodity is limited to the aggregate face amount of the contracts
held.
The exposure of the Fund to market
risk depends on a number of factors including the markets for corn,
the volatility of interest rates and foreign exchange rates, the
liquidity of the Corn Interest markets and the relationships among
the contracts held by the Fund. The limited experience of the
Sponsor in trading Corn Interests in a manner that tracks changes
in the Benchmark, as well as
drastic market events, could ultimately lead to substantial losses
for shareholders.
61
Credit Risk
When the Fund enters into Corn
Interests, it is exposed to the credit risk that the counterparty
will not be able to meet its obligations. For purposes of
credit risk, the counterparty for the Corn Futures Contracts traded
on the CBOT is the clearinghouse associated with the CBOT. In
general, clearinghouses are backed by their members who may be
required to share in the financial burden resulting from the
nonperformance of one of their members, which should significantly
reduce credit risk. Some foreign exchanges are not backed by
their clearinghouse members but may be backed by a consortium of
banks or other financial institutions. Unlike in the case of
exchange-traded futures contracts, the counterparty to an
over-the-counter Corn Interest contract is generally a single bank
or other financial institution such as an SD. As a result,
there is greater counterparty credit risk in over-the-counter
transactions. There can be no assurance that any
counterparty, clearing house, or their financial backers will
satisfy their obligations to the Fund.
The Fund may engage in off
exchange transactions broadly called an “exchange for related
position” (“EFRP”) transaction. For purposes of
the Dodd-Frank Act and related CFTC rules, an EFRP transaction is
treated as a “swap.” An “exchange for related
position” (“EFRP”) can be used by the Fund as a
technique to facilitate the exchanging of a futures hedge position
against a creation or redemption order, and thus the Fund or an
Underlying Fund may use an EFRP transaction in connection with the
creation and redemption of shares. The market specialist/market
maker that is the ultimate purchaser or seller of shares in
connection with the creation or redemption basket, respectively,
agrees to sell or purchase a corresponding offsetting shares or
futures position which is then settled on the same business day as
a cleared futures transaction by the FCMs. The Fund will become
subject to the credit risk of the market specialist/market maker
until the EFRP is settled within the business day, which is
typically 7 hours or less. The Fund reports all activity related to
EFRP transactions under the procedures and guidelines of the CFTC
and the exchanges on which the futures are
traded.
The Sponsor attempts to manage the
credit risk of the Fund by following certain trading limitations
and policies. In particular, the Fund intends to post margin
and collateral and/or hold liquid assets that will be equal to
approximately the face amount of the Corn Interests it holds.
The Sponsor has implemented procedures that include, but are not
limited to, executing and clearing trades and entering into
over-the-counter transactions only with parties it deems
creditworthy and/or requiring the posting of collateral by such
parties for the benefit of the Fund to limit its credit
exposure.
The Fund will generally retain
cash positions of approximately 95% of total net assets; this
balance represents the total net assets less the initial margin
requirements held by the FCM. These cash assets are either: 1)
deposited by the Sponsor in demand deposit accounts of financial
institutions which are rated in the highest short-term rating
category by a nationally recognized statistical rating organization
or deemed by the Sponsor to be of comparable quality; 2) invested
in commercial paper; or 3) held in a money-market fund which is
deemed to be a cash equivalent under the most recent SEC
definition.
Off Balance Sheet Financing
As of the date of this prospectus,
neither the Trust nor the Fund has any loan guarantees, credit
support or other off-balance sheet arrangements of any kind other
than agreements entered into in the normal course of business,
which may include indemnification provisions relating to certain
risks service providers undertake in performing services which are
in the best interests of the Fund. While the Fund’s
exposure under these indemnification provisions cannot be
estimated, they are not expected to have a material impact on the
Fund’s financial positions.
Redemption Basket Obligation
Other than as necessary to meet
the investment objective of the Fund and pay its contractual
obligations described below, the Fund requires liquidity to redeem
Redemption Baskets. The Fund intends to satisfy this
obligation through the transfer of cash of the Fund (generated, if
necessary, through the sale of cash equivalents) in an amount
proportionate to the number of Shares being redeemed, as described
above under “Redemption
Procedures.”
62
Contractual Obligations
The Fund’s primary
contractual obligations are with the Sponsor and certain other
service providers. The Sponsor, in return for its services,
is entitled to a management fee calculated as a fixed percentage of
the Fund’s NAV, currently 1.00% of its average net
assets. The Fund also is responsible for all ongoing fees,
costs and expenses of its operation, including (i) brokerage and
other fees and commissions incurred in connection with the trading
activities of the Fund; (ii) expenses incurred in connection with
registering additional Shares of the Fund or offering Shares of the
Fund after the time any Shares have begun trading on NYSE Arca;
(iii) the routine expenses associated with the preparation and, if
required, the printing and mailing of monthly, quarterly, annual
and other reports required by applicable U.S. federal and state
regulatory authorities, Trust meetings and preparing, printing and
mailing proxy statements to Shareholders; (iv) the payment of any
distributions related to redemption of Shares; (v) payment for
routine services of the Trustee, legal counsel and independent
accountants; (vi) payment for routine accounting, bookkeeping,
custody and transfer agency services, whether performed by an
outside service provider or by Affiliates of the Sponsor; (vii)
postage and insurance; (viii) costs and expenses associated with
client relations and services; (ix) costs of preparation of all
federal, state, local and foreign tax returns and any taxes payable
on the income, assets or operations of the Fund; and (x)
extraordinary expenses (including, but not limited to, legal claims
and liabilities and litigation costs and any indemnification
related thereto).
While the Sponsor has agreed to
pay registration fees to the SEC, FINRA and any other regulatory
agency in connection with the offer and sale of the Shares offered
through this prospectus, the legal, printing, accounting and other
expenses associated with such registrations, and the initial fee of
$5,000 for listing the Shares on the NYSE Arca, the Fund will be
responsible for any registration fees and related expenses incurred
in connection with any future offer and sale of Shares of the Fund
in excess of those offered through this
prospectus.
The Fund pays its own brokerage
and other transaction costs. The Fund pays fees to FCMs in
connection with its transactions in futures contracts. FCM
fees are estimated to be minimal annually for the Fund. In
general, transaction costs on over-the-counter Corn Interests and
on other short-term securities are embedded in the purchase or sale
price of the instrument being purchased or sold, and may not
readily be estimated. Other expenses to be paid by the Fund,
including but not limited to the fees paid to the Custodian,
Administrator and Distributor with respect to the Fund, are
estimated to be 2.59% for the twelve-month period ending April 30,
2019, though this amount may change in future years. The
Sponsor may, in its discretion, pay or reimburse the Fund for, or
waive a portion of its management fee to offset, expenses that
would otherwise be borne by the Fund.
Any general expenses of the Trust
will be allocated among the Teucrium Funds and each other series
that may be established under the Trust in the future as determined
by the Sponsor in its sole and absolute discretion. The Trust
is also responsible for extraordinary expenses, including, but not
limited to, legal claims and liabilities and litigation costs and
any indemnification related thereto. The Trust and/or the
Sponsor may be required to indemnify the Trustee, Distributor or
Custodian/Administrator under certain
circumstances.
The parties cannot anticipate the
amount of payments that will be required under these arrangements
for future periods as the Fund’s NAV and trading levels to
meet their investment objectives will not be known until a future
date. These agreements are effective for a specific term
agreed upon by the parties with an option to renew, or, in some
cases, are in effect for the duration of the Fund’s
existence. The parties may terminate these agreements earlier
for certain reasons listed in the agreements.
The following paragraphs are a
summary of certain provisions of the Trust Agreement. The following
discussion is qualified in its entirety by reference to the Trust
Agreement.
63
Authority of the Sponsor
The Sponsor is generally
authorized to perform all acts deemed necessary to carry out the
purposes of the Trust and to conduct the business of the
Trust. The Trust and the Fund will continue to exist until
terminated in accordance with the Trust Agreement. The
Sponsor’s authority includes, without limitation, the right
to take the following actions:
● To enter into, execute, deliver
and maintain contracts, agreements and any other documents as may
be in furtherance of the Trust’s purpose or necessary or
appropriate for the offer and sale of the Shares and the conduct of
Trust activities;
● To establish, maintain, deposit
into, sign checks and otherwise draw upon accounts on behalf of the
Trust with appropriate banking and savings institutions, and
execute and accept any instrument or agreement incidental to the
Trust’s business and in furtherance of its
purposes;
● To supervise the preparation and
filing of any registration statement (and supplements and
amendments thereto) for the Fund;
● To adopt, implement or amend, from
time to time, such disclosure and financial reporting, information
gathering and control policies and procedures as are necessary or
desirable to ensure compliance with applicable disclosure and
financial reporting obligations under any applicable securities
laws;
● To make any necessary
determination or decision in connection with the preparation of the
Trust’s financial statements and amendments
thereto;
● To prepare, file and distribute,
if applicable, any periodic reports or updates that may be required
under the Exchange Act, the CEA or rules and regulations
promulgated thereunder;
● To pay or authorize the payment of
distributions to the Shareholders and expenses of the
Fund;
● To make any elections on behalf of
the Trust under the Code, or any other applicable U.S. federal or
state tax law as the Sponsor shall determine to be in the best
interests of the Trust; and
● In its sole discretion, to
determine to admit an affiliate or affiliates of the Sponsor as
additional Sponsors.
64
The Sponsor’s Obligations
In addition to the duties imposed
by the Delaware Trust Statute, under the Trust Agreement the
Sponsor has the following obligations as a sponsor of the
Trust:
● Devote to the business and affairs
of the Trust such of its time as it determines in its discretion
(exercised in good faith) to be necessary for the benefit of the
Trust and the Shareholders of the Fund;
● Execute, file, record and/or
publish all certificates, statements and other documents and do any
and all other things as may be appropriate for the formation,
qualification and operation of the Trust and for the conduct of its
business in all appropriate jurisdictions;
● Appoint and remove independent
public accountants to audit the accounts of the Trust and employ
attorneys to represent the Trust;
● Use its best efforts to maintain
the status of the Trust as a statutory trust for state law purposes
and as a partnership for U.S. federal income tax
purposes;
● Invest, reinvest, hold uninvested,
sell, exchange, write options on, lease, lend and, subject to
certain limitations set forth in the Trust Agreement, pledge,
mortgage, and hypothecate the estate of the Fund in accordance with
the purposes of the Trust and any registration statement filed on
behalf of the Fund;
● Have fiduciary responsibility for
the safekeeping and use of the Trust’s assets, whether or not
in the Sponsor’s immediate possession or
control;
● Enter into and perform agreements
with each Authorized Purchaser, receive from Authorized Purchasers
and process properly submitted purchase orders, receive Creation
Basket Deposits, deliver or cause the delivery of Creation Baskets
to the Depository for the account of the Authorized Purchaser
submitting a purchase order;
● Receive from Authorized Purchasers
and process, or cause the Distributor or other Fund service
provider to process, properly submitted redemption orders, receive
from the redeeming Authorized Purchasers through the Depository,
and thereupon cancel or cause to be cancelled, Shares corresponding
to the Redemption Baskets to be redeemed;
● Interact with the Depository;
and
● Delegate duties to one or more
administrators, as the Sponsor determines.
To the extent that, at law (common
or statutory) or in equity, the Sponsor has duties (including
fiduciary duties) and liabilities relating thereto to the Trust,
the Fund, the Shareholders or to any other person, the Sponsor will
not be liable to the Trust, the Fund, the Shareholders or to any
other person for its good faith reliance on the provisions of the
Trust Agreement or this prospectus unless such reliance constitutes
gross negligence or willful misconduct on the part of the
Sponsor.
Liability and Indemnification
Under the Trust Agreement, the
Sponsor, the Trustee and their respective Affiliates (collectively,
“Covered Persons”) shall have no liability to the
Trust, the Fund, or to any Shareholder for any loss suffered by the
Trust or the Fund which arises out of any action or inaction of
such Covered Person if such Covered Person, in good faith,
determined that such course of conduct was in the best interest of
the Trust or the Fund and such course of conduct did not constitute
gross negligence or willful misconduct of such Covered Person.
Subject to the foregoing, neither the Sponsor nor any other Covered
Person shall be personally liable for the return or repayment of
all or any portion of the capital or profits of any Shareholder or
assignee thereof, it being expressly agreed that any such return of
capital or profits made pursuant to the Trust Agreement shall be
made solely from the assets of the applicable Teucrium Fund without
any rights of contribution from the Sponsor or any other Covered
Person. A Covered Person shall not be liable for the
conduct or willful misconduct of any administrator or other
delegatee selected by the Sponsor with reasonable care, provided,
however, that the Trustee and its Affiliates shall not, under any
circumstances be liable for the conduct or willful misconduct of
any administrator or other delegatee or any other person selected
by the Sponsor to provide services to the
Trust.
65
To the extent that, at law (common
or statutory) or in equity, the Sponsor has duties (including
fiduciary duties) and liabilities relating to the Trust, the
Teucrium Funds, the shareholders of the Teucrium Funds, or to any
other person, the Sponsor, acting under the Trust Agreement, shall
not be liable to the Trust, the Teucrium Funds, the shareholders of
the Teucrium Funds or to any other person for its good faith
reliance on the provisions of the Trust Agreement. The
provisions of the Trust Agreement, to the extent they restrict or
eliminate the duties and liabilities of the Sponsor otherwise
existing at law or in equity, replace such other duties and
liabilities of the Sponsor.
The Trust Agreement also provides
that the Sponsor shall be indemnified by the Trust (or by a series
separately to the extent the matter in question relates to a single
series or disproportionately affects a specific series in relation
to other series) against any losses, judgments, liabilities,
expenses and amounts paid in settlement of any claims sustained by
it in connection with its activities for the Trust, provided that
(i) the Sponsor was acting on behalf of or performing services for
the Trust and has determined, in good faith, that such course of
conduct was in the best interests of the Trust and such liability
or loss was not the result of gross negligence, willful misconduct, or
a breach of the Trust Agreement on the part of the Sponsor and (ii)
any such indemnification will only be recoverable from the assets
of the applicable series. The Sponsor’s rights to
indemnification permitted under the Trust Agreement shall not be
affected by the dissolution or other cessation to exist of the
Sponsor, or the withdrawal, adjudication of bankruptcy or
insolvency of the Sponsor, or the filing of a voluntary or
involuntary petition in bankruptcy under Title 11 of the Bankruptcy
Code by or against the Sponsor.
Notwithstanding the above, the
Sponsor shall not be indemnified for any losses, liabilities or
expenses arising from or out of an alleged violation of U.S.
federal or state securities laws unless (i) there has been a
successful adjudication on the merits of each count involving
alleged securities law violations as to the particular indemnitee
and the court approves the indemnification of such expenses
(including, without limitation, litigation costs), (ii) such claims
have been dismissed with prejudice on the merits by a court of
competent jurisdiction as to the particular indemnitee and the
court approves the indemnification of such expenses (including,
without limitation, litigation costs), or (iii) a court of
competent jurisdiction approves a settlement of the claims against
a particular indemnitee and finds that indemnification of the
settlement and related costs should be made.
The payment of any indemnification
shall be allocated, as appropriate, among the Trust’s
series. The Trust and its series shall not incur the cost of
that portion of any insurance which insures any party against any
liability, the indemnification of which is prohibited under the
Trust Agreement.
Expenses incurred in defending a
threatened or pending action, suit or proceeding against the
Sponsor shall be paid by the Trust in advance of the final
disposition of such action, suit or proceeding, if (i) the legal
action relates to the performance of duties or services by the
Sponsor on behalf of the Trust; (ii) the legal action is initiated
by a party other than the Trust; and (iii) the Sponsor undertakes
to repay the advanced funds with interest to the Trust in cases in
which it is not entitled to indemnification.
The Trust Agreement provides that
the Sponsor and the Trust shall indemnify the Trustee and its
successors, assigns, legal representatives, officers, directors,
shareholders, employees, agents and servants (the “Trustee
Indemnified Parties”) against any liabilities, obligations,
losses, damages, penalties, taxes, 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.
66
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 Teucrium Funds, or
any Teucrium fund, as applicable, such written notice shall be
mailed or transmitted not more than 45 days after such written
request for a meeting was received by the Sponsor. Any notice
of meeting shall be accompanied by a description of the action to
be taken at the meeting and, if applicable, an opinion of
independent counsel as to the effect of such proposed action on the
liability of shareholders of the Teucrium Funds, or any Teucrium
fund, as applicable, for the debts of the applicable Teucrium
Fund. Shareholders may vote in person or by proxy at any such
meeting. The Sponsor shall be entitled to establish voting
and quorum requirements and other reasonable procedures for
shareholder voting. Any action required or permitted to be
taken by Shareholders by vote may be taken without a meeting by
written consent setting forth the actions so taken. Such
written consents shall be treated for all purposes as votes at a
meeting. If the vote or consent of any Shareholder to any
action of the Trust, the Fund or any Shareholder, as contemplated
by the Trust Agreement, is solicited by the Sponsor, the
solicitation shall be effected by notice to each Shareholder given
in the manner provided in accordance with the Trust
Agreement.
Voting Rights
Shareholders have very limited
voting rights. Specifically, the Trust Agreement
provides that shareholders of the Teucrium Funds holding shares
representing at least a majority (over 50%) of the outstanding
shares of the teucrium Funds voting together as a single class
(excluding shares acquired by the Sponsor in connection with its
initial capital contribution to any Trust series) may vote to (i)
continue the Trust by electing a successor Sponsor as described
above, and (ii) approve amendments to the Trust Agreement that
impair the right to surrender Redemption Baskets for
redemption. (Trustee consent to any amendment to the
Trust Agreement is required if the Trustee reasonably believes that
such amendment adversely affects any of its rights, duties or
liabilities.) In addition, shareholders of the Teucrium
Funds holding shares representing seventy-five percent (75%) of the
outstanding shares of the Teucrium Funds, voting together as a
single class (excluding shares acquired by the Sponsor in
connection with its initial capital contribution to any Trust
series) may vote to dissolve the Trust upon not less than ninety
(90) days’ notice to the Sponsor. Shareholders
have no voting rights with respect to the Trust or the Fund except
as expressly provided in the Trust Agreement.
Limited Liability of Shareholders
Shareholders shall be entitled to
the same limitation of personal liability extended to stockholders
of private corporations for profit organized under the general
corporation law of Delaware, and no Shareholder shall be liable for
claims against, or debts of the Trust or the Fund in excess of his
share of the Fund’s assets. The Trust or the Fund shall
not make a claim against a Shareholder with respect to amounts
distributed to such Shareholder or amounts received by such
Shareholder upon redemption unless, under Delaware law, such
Shareholder is liable to repay such amount.
The Trust or the Fund shall
indemnify to the full extent permitted by law and the Trust
Agreement each Shareholder (excluding the Sponsor to the extent of
its ownership of any Shares acquired through its initial capital
contribution) against any claims of liability asserted against such
Shareholder solely because of its ownership of Shares (other than
for taxes on income from Shares for which such Shareholder is
liable).
Every written note, bond,
contract, instrument, certificate or undertaking made or issued by
the Sponsor on behalf of the Trust or the Fund shall give notice to
the effect that the same was executed or made by or on behalf of
the Trust or the Fund and that the obligations of such instrument
are not binding upon the Shareholders individually but are binding
only upon the assets and property of the Fund and no recourse may
be had with respect to the personal property of a Shareholder for
satisfaction of any obligation or claim.
67
Amendments
to the Trust Agreement
Effective April 16, 2018, the
Sponsor, pursuant to its authority under the Trust Agreement, has
amended the Trust Agreement to reflect certain provisions of the
Bipartisan Budget Act of 2015 and the Tax Cuts and Jobs Act of
2017, each of which became effective on January 1, 2018. The
changes to the Trust Agreement reflect changes to partnership audit
rules under the Code and reflect certain changes to partnership
rules under the Code (see “U.S. Federal Income Tax
Classification” for additional information about the
changes to the Code.)
There are present and potential
future conflicts of interest in the Trust’s structure and
operation you should consider before you purchase Shares. The
Sponsor may use this notice of conflicts as a defense against any
claim or other proceeding made.
The Sponsor’s principals,
officers and employees, do not devote their time exclusively to the
Fund. Under the organizational documents of the Sponsor, Mr.
Sal Gilbertie and Mr. Dale Riker, in their respective capacities as
President and Chief Investment Officer of the Sponsor and Chief
Executive Officer and Secretary of the Sponsor, are obligated to
use commercially reasonable efforts to manage the Sponsor, devote
such amount of time to the Sponsor as would be consistent with
their roles in similarly placed commodity pool operators, and
remain active in managing the Sponsor until they are no longer
managing members of the Sponsor or the Sponsor dissolves. In
addition, the Sponsor expects that operating the Teucrium Funds
will generally constitute the principal and full-time business
activity of its principals, officers and employees.
Notwithstanding these obligations and expectations, the
Sponsor’s principals may be directors, officers or employees
of other entities, and may manage assets of other entities,
including the other Teucrium Funds, through the Sponsor or
otherwise. In particular, the principals could have a
conflict between their responsibilities to the Fund on the one hand
and to those other entities on the other. It is not possible to
quantify the proportion of their time that the Sponsor’s
personnel will devote to the Fund and its
management.
The Sponsor and its principals,
officers and employees may trade securities, futures and related
contracts for their own accounts, creating the potential for
preferential treatment of their own
accounts. Shareholders will not be permitted to inspect
the trading records of such persons or any written policies of the
Sponsor related to such trading. A conflict of interest
may exist if their trades are in the same markets and at
approximately the same times as the trades for the
Fund. A potential conflict also may occur when the
Sponsor’s principals trade their accounts more aggressively
or take positions in their accounts which are opposite, or ahead
of, the positions taken by the Fund.
The Sponsor has sole current
authority to manage the investments and operations of the Fund, and
this may allow it to act in a way that furthers its own interests
which may create a conflict with your best interests, including the
authority of the Sponsor to allocate expenses to and between the
Teucrium Funds. Shareholders have very limited voting rights with
respect to the Fund, which will limit the ability to influence
matters such as amendment of the Trust Agreement, change in the
Fund’s basic investment policies, or dissolution of the Fund
or the Trust.
The Sponsor serves as the Sponsor
to the Teucrium Funds, and may in the future serve as the Sponsor
or investment adviser to commodity pools other than the Teucrium
Funds. The Sponsor may have a conflict to the extent that its
trading decisions for the Fund may be influenced by the effect they
would have on the other pools it manages. In addition, the
Sponsor may be required to indemnify the officers and directors of
the other pools, if the need for indemnification arises. This
potential indemnification will cause the Sponsor’s assets to
decrease. If the Sponsor’s other sources of income are
not sufficient to compensate for the indemnification, it could
cease operations, which could in turn result in Fund losses and/or
termination of the Fund.
If the Sponsor acquires knowledge
of a potential transaction or arrangement that may be an
opportunity for the Fund, it shall have no duty to offer such
opportunity to the Fund. The Sponsor will not be liable to
the Fund or the Shareholders for breach of any fiduciary or other
duty if Sponsor pursues such opportunity or directs it to another
person or does not communicate such opportunity to the Fund.
Neither the Fund nor any Shareholder has any rights or obligations
by virtue of the Trust Agreement, the trust relationship created
thereby, or this prospectus in such business ventures or the income
or profits derived from such business ventures. The pursuit
of such business ventures, even if competitive with the activities
of the Fund, will not be deemed wrongful or
improper.
68
Resolution of Conflicts Procedures
The Trust Agreement provides that
whenever a conflict of interest exists between the Sponsor or any
of its Affiliates, on the one hand, and the Trust, any shareholder
of a Trust series, or any other person, on the other hand, the
Sponsor shall resolve such conflict of interest, take such action
or provide such terms, considering in each case the relative
interest of each party (including its own interest) to such
conflict, agreement, transaction or situation and the benefits and
burdens relating to such interests, any customary or accepted
industry practices, and any applicable generally accepted
accounting practices or principles. In the absence of
bad faith by the Sponsor, the resolution, action or terms so made,
taken or provided by the Sponsor shall not constitute a breach of
the Trust Agreement or any other agreement contemplated therein or
of any duty or obligation of the Sponsor at law or in equity or
otherwise.
The Sponsor or any affiliate
thereof may engage in or possess an interest in other
profit-seeking or business ventures of any nature or description,
independently or with others, whether or not such ventures are
competitive with the Trust and the doctrine of corporate
opportunity, or any analogous doctrine, shall not apply to the
Sponsor. If the Sponsor acquires knowledge of a
potential transaction, agreement, arrangement or other matter that
may be an opportunity for the Trust, it shall have no duty to
communicate or offer such opportunity to the Trust, and the Sponsor
shall not be liable to the Trust or to the Shareholders for breach
of any fiduciary or other duty by reason of the fact that the
Sponsor pursues or acquires for, or directs such opportunity to,
another person or does not communicate such opportunity or
information to the Trust. Neither the Trust nor any
Shareholder shall have any rights or obligations by virtue of the
Trust Agreement or the trust relationship created thereby in or to
such independent ventures or the income or profits or losses
derived therefrom, and the pursuit of such ventures, even if
competitive with the activities of the Trust, shall not be deemed
wrongful or improper. Except to the extent expressly
provided in the Trust Agreement, the Sponsor may engage or be
interested in any financial or other transaction with the Trust,
the Shareholders or any affiliate of the Trust or the
Shareholders.
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.
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 115 Christina Landing
Drive Unit 2004, Wilmington, DE 19801, or at the offices of the
Administrator, U.S. Bancorp, LLC, located at 615 East Michigan
Street, Milwaukee, Wisconsin 53202, or such office, including of an
administrative agent, as it may subsequently designate upon
notice. The books of account of the Fund are open to
inspection by any Shareholder (or any duly constituted designee of
a Shareholder) at all times during the usual business hours of the
Fund upon reasonable advance notice to the extent such access is
required under CFTC rules and regulations. In addition, the
Trust keeps a copy of the Trust Agreement on file in its office
which will be available for inspection by any Shareholder at all
times during its usual business hours upon reasonable advance
notice.
69
Analysis of Critical Accounting
Policies
The Fund’s critical
accounting policies are set forth in the financial statements that
are incorporated by reference in this prospectus prepared in
accordance with accounting principles generally accepted in the
United States of America, which require the use of certain
accounting policies that affect the amounts reported in these
financial statements, including the following: (i) Fund
trades are accounted for on a trade-date basis and marked to market
on a daily basis; (ii) the difference between the cost and market
value of Corn Interests is recorded as “change in unrealized
profit/loss” for open (unrealized) contracts, and recorded as
“realized profit/loss” when open positions are closed
out; and (iii) earned interest income, as well as the fees and
expenses of the Fund, are recorded on an accrual basis. The
Sponsor believes that all relevant accounting assumptions and
policies have been considered.
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.teucriumcornfund.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.teucriumcornfund.com.
The Sponsor is responsible for the
registration and qualification of the Shares under the federal
securities laws, federal commodities laws, and laws of any other
jurisdiction as the Sponsor may select. The Sponsor is
responsible for preparing all required reports, but has entered
into an agreement with the Administrator to prepare these reports
on the Trust’s behalf.
The accountants’ report on
its audit of the Fund’s financial statements will be
furnished by the Trust to Shareholders upon request. The
Trust will make such elections, file such tax returns, and prepare,
disseminate and file such tax reports for the Fund, as it is
advised by its counsel or accountants are from time to time
required by any applicable statute, rule or
regulation.
PricewaterhouseCoopers
(“PwC”), 2001 Ross Avenue, Suite 1800, Dallas, Texas
75201-2997, will provide tax information in accordance with 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.teucriumcornfund.com.
The fiscal year of the Fund is the
calendar year.
The rights of the Sponsor, the
Trust, the Fund, DTC (as registered owner of the Fund’s
global certificate for Shares) and the Shareholders are governed by
the laws of the State of Delaware, except with respect to causes of
action for violations of U.S. federal or state securities laws. The
Trust Agreement and the effect of every provision thereof shall
control over any contrary or limiting statutory or common law of
the State of Delaware, other than the Delaware Trust
Statute.
70
Security
Ownership of Principal Shareholders and
Management
The following table sets forth
information regarding the beneficial ownership of shares by the
executive officers of the Sponsor as of December 31, 2017.
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
|
|
CORN
|
Sal Gilbertie
|
401 common
units
|
*
|
______________________
* Less than
1%.
The Fund is not aware of any 5%
holder of its Shares.
Litigation and Claims
Within the past 10 years of the
date of this prospectus, there have been no material
administrative, civil or criminal actions against the Sponsor, the
Trust or the Fund, or any principal or affiliate of any of
them. This includes any actions pending, on appeal,
concluded, threatened, or otherwise known to
them.
Legal Opinion
Vedder Price, P.C. has been
retained to advise the Trust and the Sponsor with respect to the
Shares being offered hereby and has passed upon the validity of the
Shares being issued hereunder. Vedder Price, P.C. has
also provided the Sponsor with its opinion with respect to federal
income tax matters addressed herein under the heading “U.S.
Federal Income Tax Considerations”.
Experts
The financial statements of the
Trust and the Fund, and management’s assessment of the
effectiveness of internal control over financial reporting of the
Trust and the Fund incorporated by reference in this prospectus and
elsewhere in the registration statement have been so incorporated
by reference in reliance upon the reports of Grant Thornton LLP,
independent registered public accountants, upon the authority of
said firm as experts in accounting and
auditing.
This Privacy Policy explains the
policies of the Sponsor, a commodity pool operator registered with
the CFTC, and (i) the Trust, and (ii) each commodity pool for which
the Sponsor serves as Sponsor currently or in the future including
Teucrium Corn Fund, Teucrium Wheat Fund, Teucrium Sugar Fund, and
Teucrium Soybean Fund, and Teucrium Agricultural Fund (each of
which is a series of the Trust), relating to the collection,
maintenance, and use of nonpublic personal information about the
Teucrium Funds’ investors, as required under federal law.
Federal law gives investors the
right to limit some but not all sharing of their nonpublic personal
information. Federal law also requires the Sponsor to tell
investors how it collects, shares, and protects such nonpublic
personal information. Please read this policy carefully to
understand what the Sponsor does. This Privacy Policy
applies to the nonpublic personal information of investors who are
individuals and who obtain financial products or services from the
Sponsor, the Trust, and the Teucrium Funds primarily for personal,
family, or household purposes. This Privacy Policy applies to both
current and former Fund investors; the Sponsor will only disclose
nonpublic personal information about former investors to the same
extent as for current investors, as described
below.
71
Collection of Nonpublic Personal Information
The Sponsor may collect or have
access to nonpublic personal information about current and former
Fund investors for certain purposes relating to the operation of
the Teucrium Funds. This information may include information
received from investors, such as their name, social security
number, telephone number, and address, and information about
investors’ holdings and transactions in shares of the
Teucrium Funds.
Use and Disclosure of Nonpublic Personal
Information
The Sponsor recognizes and
respects the privacy expectation of each of the Teucrium
Funds’ investors. The Sponsor believes that the
confidentiality and protection of investors’ nonpublic
personal information is one of its fundamental responsibilities.
This means, most importantly, that the Sponsor does not sell
nonpublic personal information to any third parties. The Sponsor
primarily uses investors’ nonpublic personal information to
complete financial transactions that may be
requested.
Below are the circumstances in
which the Sponsor may disclose investors’ nonpublic personal
information to third parties; investors may not opt out of these
disclosures:
●
The
Sponsor may provide an investor’s nonpublic personal
information to non-affiliated service providers involved in
servicing and administering products and services for, or on behalf
of the Sponsor (e.g.,
accountants, compliance consultants, legal advisors,
broker-dealers, introducing brokers, futures commissions merchants,
investment companies, investment advisers, commodity trading
advisors, commodity pool operators, administrators, and
custodians). In all such cases, the Sponsor will provide the third
party with only the nonpublic personal information necessary to
carry out its assigned responsibilities and only for that
purpose.
●
The
Sponsor will release nonpublic personal information if directed by
an investor to do so. The Sponsor may also release nonpublic
personal information to persons acting in a fiduciary or
representative capacity on behalf of an
investor.
●
The
Sponsor may release an investor’s nonpublic personal
information to courts and other parties related to a subpoena or
other court, government, or SRO order or process, as authorized by
law.
●
The
Sponsor may release an investor’s nonpublic personal
information to regulators (including SROs) or governmental entities
that have made a reasonable request for such information, as
authorized by law.
●
The
Sponsor may release an investor’s nonpublic personal
information to certain governmental entities and others to prevent
money laundering, as authorized by law.
Investors’ nonpublic
personal information, particularly information about
investors’ holdings and transactions in shares of the
teucrium Funds, may be shared between and amongst the Sponsor and
the Teucrium Funds. An investor
cannot opt-out of the sharing of nonpublic personal information
between and amongst the Sponsor and the Teucrium Funds.
However, the Sponsor and the Teucrium Funds will not use this
information for any cross-marketing purposes. In other words, all investors will be treated
as having “opted out” of receiving marketing
solicitations from teucrium Funds other than the Teucrium Fund(s)
in which it invests.
72
Protection of Nonpublic Personal Information
● The Sponsor restricts access to
investors’ nonpublic personal information only to those
employees, agents, and representatives who require that information
to provide financial products and
services.
● The Sponsor requires all
employees, financial professionals, and companies providing
services on its behalf to keep investors’ nonpublic personal
information confidential.
● Third parties with whom the
Sponsor shares investor nonpublic personal information must agree
to follow appropriate standards of security and confidentiality,
which includes safeguarding such information physically,
electronically, and procedurally.
● The Sponsor maintains physical,
technical, administrative, and procedural safeguards that comply
with federal standards to protect the confidentiality and security
of investors’ nonpublic personal information including, where
applicable, its disposal.
● Employees, agents, and
representatives who have access to shareholder reports or other
correspondence containing investors’ nonpublic personal
information are required to utilize passwords on all electronic
devices used to carry out their professional
responsibilities.
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, or holders of Shares whose
“functional currency” is not the U.S.
dollar. Furthermore, the discussion below is based upon
the provisions of the Internal Revenue Code of 1986, as amended
(the “Code”), and regulations (“Treasury
Regulations”), rulings and judicial decisions thereunder as
of the date hereof, and such authorities may be repealed, revoked
or modified (possibly with retroactive effect) so as to result in
U.S. federal income tax consequences different from those discussed
below.
The Sponsor has received the
opinion of Vedder Price, P.C. (“Vedder Price”), counsel
to the Trust, that the material U.S. federal income tax
consequences to the Fund and to U.S. Shareholders and Non-U.S.
Shareholders (as defined below) will be as described in the
following paragraphs. In rendering its opinion, Vedder
Price has relied on the facts and assumptions described in this
prospectus as well as certain factual representations made by the
Trust and the Sponsor. This opinion is not binding on
the Internal Revenue Service (the “IRS”). No
ruling has been requested from the IRS with respect to any matter
affecting the Fund or prospective investors, and the IRS may
disagree with the tax positions taken by the Trust. If
the IRS were to challenge the Trust’s tax positions in
litigation, they might not be sustained by the
courts.
As used herein, the term
“U.S. Shareholder” means a Shareholder that is, for
United States federal income tax purposes, (i) a citizen or
resident of the United States, (ii) a corporation or partnership
created or organized in or under the laws of the United States or
any political subdivision thereof, (iii) an estate the income of
which is subject to United States federal income taxation
regardless of its source or (iv) a trust that (X) is subject to the
supervision of a court within the United States and the control of
one or more United States persons as described in section
7701(a)(30) of the Code, or (Y) has a valid election in effect
under applicable Treasury Regulations to be treated as a United
States person. A “Non-U.S. Shareholder” is a
holder that is not a U.S. Shareholder. If a partnership holds
our Shares, the tax treatment of a partner will generally depend
upon the status of the partner and the activities of the
partnership. If you are a partner of a partnership holding our
Shares, you should consult your own tax advisor regarding the tax
consequences.
73
EACH PROSPECTIVE INVESTOR IS
ADVISED TO CONSULT ITS OWN TAX ADVISOR REGARDING THE U.S. FEDERAL
INCOME TAX CONSEQUENCES OF AN INVESTMENT IN SHARES, AS WELL AS ANY
APPLICABLE STATE, LOCAL OR FOREIGN TAX CONSEQUENCES, IN LIGHT OF
ITS PARTICULAR CIRCUMSTANCES.
Tax Classification of the Trust and the Fund
The Trust is organized and will be
operated as a statutory trust in accordance with the provisions of
the Trust Agreement and applicable Delaware
law. Notwithstanding the Trust’s status as a
statutory trust and the Fund’s status as a series of the
Trust, due to the nature of its activities the Fund will be treated
as a partnership rather than a trust for U.S. federal income tax
purposes. In addition, the trading of Shares on the NYSE
Arca will cause the Fund to be classified as a “publicly
traded partnership” for federal income tax
purposes. Under the Code, a publicly traded partnership
is generally taxable as a corporation. In the case of an
entity (such as the Fund) not registered under the Investment
Company Act of 1940 as amended, however, an exception to this
general rule applies if at least 90% of the entity’s gross
income is “qualifying income” for each taxable year of
its existence (the “qualifying income
exception”). For this purpose, qualifying income
is defined as including, in pertinent part, interest (other than
from a financial business), dividends, and gains from the sale or
disposition of capital assets held for the production of interest
or dividends. In the case of a partnership of which a
principal activity is the buying and selling of commodities other
than as inventory or of futures, forwards and options with respect
to commodities, “qualifying income” also includes
income and gains from commodities and from futures, forwards,
options, and swaps and other notional principal contracts with
respect to commodities. The Trust and the Sponsor have
represented the following to Vedder Price:
|
|
●
|
at least 90% of the Fund’s
gross income for each taxable year will constitute
“qualifying income” within the meaning of Code section
7704 (as described above);
|
|
|
●
|
the Fund is organized and will be
operated in accordance with its governing documents and
applicable law; and
|
|
|
●
|
the Fund has not elected, and will
not elect, to be classified as a corporation for U.S. federal
income tax purposes.
|
Based in part on these
representations, Vedder Price is of the opinion that the Fund will
be treated as a partnership that it is not taxable as a corporation
for U.S. federal income tax purposes. The Fund’s
taxation as a partnership rather than a corporation will require
the Sponsor to conduct the Fund’s business activities in such
a manner that it satisfies the requirements of the qualifying
income exception on a continuing basis. No assurances can be
given that the Fund’s operations for any given year will
produce income that satisfies these requirements. Vedder
Price will not review the Fund’s ongoing compliance with
these requirements and will have no obligation to advise the Trust,
the Fund or the Fund’s Shareholders in the event of any
subsequent change in the facts, representations or applicable law
relied upon in reaching its opinion.
If the Fund failed to satisfy the
qualifying income exception in any year, other than a failure that
is determined by the IRS to be inadvertent and that is cured within
a reasonable time after discovery (in which case, as a condition of
relief, the Fund could be required to pay the government amounts
determined by the IRS), the Fund would be taxable as a corporation
for federal income tax purposes and would pay federal income tax on
its income at regular corporate rates. In that event,
Shareholders would not report their share of the Fund’s
income or loss on their tax returns. Distributions by the
Fund (if any) would be treated as dividend income to the
Shareholders to the extent of the Fund’s current and
accumulated earnings and profits. Accordingly, if the Fund
were to be taxable as a corporation, it would likely have a
material adverse effect on the economic return from an investment
in the Fund and on the value of the Shares.
The remainder of this summary
assumes that the Fund is classified for federal income tax purposes
as a partnership that it is not taxable as a
corporation.
74
U.S. Shareholders
Tax Consequences of Ownership of Shares
Taxation of the Fund’s
Income. No U.S. federal income tax is paid by the
Fund on its income. Instead, the Fund files annual
partnership returns, and each U.S. Shareholder is required to
report on its U.S. federal income tax return its allocable share of
the income, gain, loss, deductions and credits reflected on such
returns. If the Fund recognizes income in the form of
interest on cash equivalents and net capital gains from cash
settlement of Corn Interests for a taxable year, Shareholders must
report their share of these items even though the Fund makes no
distributions of cash or property during the taxable year.
Consequently, a Shareholder may be taxable on income or gain
recognized by the Fund but receive no cash distribution with which
to pay the resulting tax liability, or may receive a distribution
that is insufficient to pay such liability. Because the
Sponsor currently does not intend to make distributions, it is
likely that that a U.S. Shareholder that realizes net income or
gain with respect to Shares for a taxable year will be required to
pay any resulting tax from sources other than Fund
distributions. Additionally, individuals with
modified adjusted gross income in excess of $200,000 ($250,000 in
the case of married individuals filing jointly) and certain estates
and trusts are subject to an additional 3.8% tax on their
“net investment income,” which generally includes net
income from interest, dividends, annuities, royalties, and rents,
and net capital gains (other than certain amounts earned from
trades or businesses). Also included as income subject to the
additional 3.8% tax is income from businesses involved in the
trading of financial instruments or
commodities.
Monthly Conventions for Allocations of the
Fund’s Profit and Loss and Capital Account
Restatements. Under Code section 704, the
determination of a partner’s distributive share of any item
of income, gain, loss, deduction or credit is governed by the
applicable organizational document unless the allocation provided
by such document lacks “substantial economic
effect.” An allocation that lacks substantial economic
effect nonetheless will be respected if it is in accordance with
the partners’ interests in the partnership, determined by
taking into account all facts and circumstances relating to the
economic arrangements among the partners. Subject to the
possible exceptions noted below concerning certain conventions to
be used by the Fund, allocations pursuant to the Trust Agreement
should be considered as having substantial economic effect or being
in accordance with Shareholders’ interests in the
Fund.
In situations where a
partner’s interest in a partnership is redeemed or sold
during a taxable year, the Code generally requires that partnership
tax items for the year be allocated to the partner using either an
interim closing of the books or a daily proration method. The
Fund intends to allocate tax items using an interim closing of the
books method under which income, gains, losses and deductions will
be determined on a monthly basis, taking into account the
Fund’s accrued income and deductions and gains and losses
(both realized and unrealized) for the month. The tax items
for each month during a taxable year will then be allocated among
the holders of Shares in proportion to the number of Shares owned
by them as of the close of trading on the last trading day of the
preceding month (the “monthly allocation
convention”).
Under the monthly allocation
convention, an investor who disposes of a Share during the current
month will be treated as disposing of the Share as of the end of
the last day of the calendar month. For example, an investor
who buys a Share on April 10 of a year and sells it on May 20 of
the same year will be allocated all of the tax items attributable
to May (because it is deemed to hold the Share through the last day
of May) but none of those attributable to April. The tax
items attributable to that Share for April will be allocated to the
person who is the actual or deemed holder of the Share as of the
close of trading on the last trading day of March. Under the
monthly allocation convention, an investor who purchases and sells
a Share during the same month, and therefore does not hold (and is
not deemed to hold) the Share at the close of the last trading day
of either that month or the previous month, will receive no
allocations with respect to that Share for any period.
Accordingly, investors may receive no allocations with respect to
Shares that they actually held, or may receive allocations with
respect to Shares attributable to periods that they did not
actually hold the Shares. Investors who hold a Share on the
last trading day of the first month of the Fund’s operation
will be allocated the tax items for that month, as well as the tax
items for the following month, attributable to the
Share.
By investing in Shares, a U.S.
Shareholder agrees that, in the absence of new legislation,
regulatory or administrative guidance, or judicial rulings to the
contrary, it will file its U.S. income tax returns in a manner that
is consistent with the monthly allocation convention as described
above and with the IRS Schedule K-1 or any successor form provided
to Shareholders by the Fund or the Trust.
75
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.
As noted above, the conventions
used by the Fund in making tax allocations may cause a Shareholder
to be allocated more or less income or loss for U.S. federal income
tax purposes than its proportionate share of the economic income or
loss realized by the Fund during the period it held its
Shares. This mismatch between taxable and economic income or
loss in some cases may be temporary, reversing itself in a later
year when the Shares are sold, but could be permanent. For
example, a Shareholder could be allocated income accruing after it
sold its Shares, resulting in an increase in the basis of the
Shares (see “Tax Basis of
Shares” below). In connection with the
disposition of the Shares, the additional basis might produce a
capital loss the deduction of which may be limited (see
“Limitations on
Deductibility of Losses and Certain Expenses”
below).
Section 754 election. The Fund
intends to make the election permitted by section 754 of the Code,
which election is irrevocable without the consent of the IRS.
The effect of this election is that when a secondary market sale of
Shares occurs, the Fund adjusts the purchaser’s proportionate
share of the tax basis of the Fund’s assets to fair market
value, as reflected in the price paid for the Shares, as if the
purchaser had directly acquired an interest in the Fund’s
assets. The section 754 election is intended to eliminate
disparities between a partner’s basis in its partnership
interest and its share of the tax basis of the partnership’s
assets, so that the partner’s allocable share of taxable gain
or loss on a disposition of an asset will correspond to its share
of the appreciation or depreciation in the value of the asset since
it acquired its interest. Depending on the price paid for
Shares and the tax basis of the Fund’s assets at the time of
the purchase, the effect of the section 754 election on a purchaser
of Shares may be favorable or unfavorable. In order to make
the appropriate basis adjustments in a cost effective manner, the
Fund will use certain simplifying conventions and
assumptions. In particular, the Fund will obtain information
regarding secondary market transactions in its Shares and use this
information to make adjustments to the Shareholders’ indirect
basis in Fund assets. It is possible the IRS could
successfully assert that the conventions and assumptions applied
are improper and require different basis adjustments to be made,
which could adversely affect some Shareholders.
Section 1256 Contracts.
Under the Code, special rules apply to instruments constituting
“section 1256 contracts.” A section 1256
contract is defined as including, in relevant part: (1) a futures
contract that is traded on or subject to the rules of a national
securities exchange which is registered with the SEC, a domestic
board of trade designated as a contract market by the CFTC, or any
other board of trade or exchange designated by the Secretary of the
Treasury, and with respect to which the amount required to be
deposited and the amount that may be withdrawn depends on a system
of “marking to market”; and (2) a non-equity option
traded on or subject to the rules of a qualified board or
exchange. Section 1256 contracts held at the end of each
taxable year are treated as if they were sold for their fair market
value on the last business day of the taxable year (i.e., are “marked to
market”). In addition, any gain or loss
realized from a disposition, termination or marking-to-market of a
section 1256 contract is treated as long-term capital gain or loss
to the extent of 60% thereof, and as short-term capital gain or
loss to the extent of 40% thereof, without regard to the actual
holding period (“60-40 treatment”).
Many of the Fund’s Corn
Futures Contracts will qualify as “section 1256
contracts” under the Code. Some Other Corn 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.
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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 to offset capital gains in future years. In
addition, a non-corporate taxpayer may elect to carry back net
losses on section 1256 contracts to each of the three preceding
years and use them to offset section 1256 contract gains in those
years, subject to certain limitations. Corporate taxpayers
generally may deduct capital losses only to the extent of capital
gains, subject to special carryback and carryforward
rules.
The deduction for expenses
incurred by non-corporate taxpayers constituting
“miscellaneous itemized deductions,” generally
including investment-related expenses (other than interest and
certain other specified expenses), is suspended for taxable years
beginning after December 31, 2017 and before January 1, 2026.
During these taxable years, non-corporate taxpayers will not be
able to deduct miscellaneous itemized deductions. Provided the
suspension is extended, for taxable years ending on or after
January 1, 2026, miscellaneous itemized deductions are deductible
only to the extent they exceed 2% of the taxpayer’s adjusted
gross income for the year. Although the matter is not
free from doubt, we believe management fees the Fund pays to the
Sponsor and other expenses of the Fund constitute
investment-related expenses subject to this miscellaneous itemized
deduction limitation, rather than expenses incurred in connection
with a trade or business, and will report these expenses consistent
with that interpretation. For taxable years beginning on or after
January 1, 2026, the Code imposes additional limitations on the
amount of certain itemized deductions allowable to individuals with
adjusted gross income in excess of certain amounts by reducing the
otherwise allowable portion of such deductions by an amount equal
to the lesser of:
● 3% of the individual’s adjusted gross income in
excess of certain threshold amounts; or
● 80% of the amount of certain itemized deductions otherwise
allowable for the taxable year.
Non-corporate Shareholders
generally may deduct “investment interest expense” only
to the extent of their “net investment income.”
Investment interest expense of a Shareholder will generally include
any interest accrued by the Fund and any interest paid or accrued
on direct borrowings by a Shareholder to purchase or carry its
Shares, such as interest with respect to a margin account.
Net investment income generally includes gross income from property
held for investment (including “portfolio income” under
the passive loss rules but not, absent an election, long-term
capital gains or certain qualifying dividend income) less
deductible expenses other than interest directly connected with the
production of investment income.
If the Fund incurs indebtedness,
the Fund’s ability to deduct interest on its indebtedness
allocable to its trade or business is limited to an amount equal to
the sum of (1) the Fund’s business interest income during the
year and (2) 30% of the Fund’s adjusted taxable income for
such taxable year. If the Fund is not entitled to fully deduct its
business interest in any taxable year, such excess business
interest expense will be allocated to each Shareholder as excess
business interest and can be carried forward by the Shareholder to
successive taxable years and used to offset any excess taxable
income allocated by the Fund to such Shareholder. Any excess
business interest expense allocated to a Shareholder will reduce
such Shareholder’s basis in its Shares in the year of the
allocation even if the expense does not give rise to a deduction to
the Shareholder in that year. Immediately prior to a
Shareholder’s disposition of its Shares, the
Shareholder’s basis will be increased by the amount by which
such basis reduction exceeds the excess interest expense that has
been deducted by such Shareholder.
To the extent that the Fund
allocates losses or expenses to you that must be deferred or are
disallowed as a result of these or other limitations in the Code,
you may be taxed on income in excess of your economic income or
distributions (if any) on your Shares. As one example, you
could be allocated and required to pay tax on your share of
interest income accrued by the Fund for a particular taxable year,
and in the same year allocated a share of a capital loss that you
cannot deduct currently because you have insufficient capital gains
against which to offset the loss. As another example, you
could be allocated and required to pay tax on your share of
interest income and capital gain for a year, but be unable to
deduct some or all of your share of management fees and/or margin
account interest incurred by you with respect to your Shares.
Shareholders are urged to consult their own professional tax
advisor regarding the effect of limitations under the Code on their
ability to deduct your allocable share of the Fund’s losses
and expenses.
77
Tax Basis of Shares
A Shareholder’s tax basis in
its Shares is important in determining (1) the amount of taxable
gain or loss it will realize on the sale or other disposition of
its Shares, (2) the amount of non-taxable distributions that it may
receive from the Fund, and (3) its ability to utilize its
distributive share of any losses of the Fund on its tax
return. A Shareholder’s initial tax basis of its Shares
will equal its cost for the Shares plus its share of the
Fund’s liabilities (if any) at the time of purchase. In
general, a Shareholder’s “share” of those
liabilities will equal the sum of (i) the entire amount of any
otherwise nonrecourse liability of the Fund as to which the
Shareholder or an affiliate of the Shareholder is the creditor (a
“partner nonrecourse liability”) and (ii) a pro rata
share of any nonrecourse liabilities of the Fund that are not
partner nonrecourse liabilities as to any
Shareholder.
A Shareholder’s tax basis in
its Shares generally will be (1) increased by (a) its allocable
share of the Fund’s taxable income and gain and (b) any
additional contributions by the Shareholder to the Fund and (2)
decreased (but not below zero) by (a) its allocable share of the
Fund’s tax deductions and losses and (b) any distributions by
the Fund to the Shareholder. For this purpose, an increase in
a Shareholder’s share of the Fund’s liabilities will be
treated as a contribution of cash by the Shareholder to the Fund
and a decrease in that share will be treated as a distribution of
cash by the Fund to the Shareholder. Pursuant to certain IRS
rulings, a Shareholder will be required to maintain a single,
“unified” basis in all Shares that it owns. As a
result, when a Shareholder that acquired its Shares at different
prices sells less than all of its Shares, such Shareholder will not
be entitled to specify particular Shares (e.g., those with a higher
basis) as having been sold. Rather, it must determine its
gain or loss on the sale by using an “equitable
apportionment” method to allocate a portion of its unified
basis in its Shares to the Shares sold.
Treatment of Fund
Distributions. If the Fund makes non-liquidating
distributions to Shareholders, such distributions generally will
not be taxable to the Shareholders for federal income tax purposes
except to the extent that the sum of (i) the amount of cash and
(ii) the fair market value (subject to certain exceptions and
adjustments) of marketable securities distributed exceeds the
Shareholder’s adjusted basis of its interest in the Fund
immediately before the distribution. Any cash
distributions and such fair market value of the marketable
securities distributed that are in excess of a Shareholder’s
tax basis generally will be treated as gain from the sale or
exchange of Shares.
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
fails to make the election or is not able to identify the holding
periods of the Shares sold, the Shareholder will have a split
holding period in the Shares sold. Under such circumstances,
a Shareholder will be required to determine its holding period in
the Shares sold by first determining the portion of its entire
interest in the Fund that would give rise to long-term capital gain
or loss if its entire interest were sold and the portion that would
give rise to short-term capital gain or loss if the entire interest
were sold. The Shareholder would then treat each Share sold
as giving rise to long-term capital gain or loss and short-term
capital gain or loss in the same proportions as if it had sold its
entire interest in the Fund.
Under Section 751 of the Code, a
portion of a Shareholder’s gain or loss from the sale of
Shares (regardless of the holding period for such Shares), will be
separately computed and taxed as ordinary income or loss to the
extent attributable to “unrealized receivables” or
“inventory” owned by the Fund. The term
“unrealized receivables” includes, among other things,
market discount bonds and short-term debt instruments to the extent
such items would give rise to ordinary income if sold by the
Fund. However, the short term capital gain on section 1256
contracts resulting from 60-40 treatment, described above, should
not be subject to this rule.
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If some or all of a
Shareholder’s Shares are lent by its broker or other agent to
a third party — for example, for use by the third
party in covering a short sale — the Shareholder
may be considered as having made a taxable disposition of the
loaned Shares, in which case —
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the Shareholder may recognize
taxable gain or loss to the same extent as if it had sold the
Shares for cash;
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any of the income, gain, loss or
deduction allocable to those Shares during the period of the loan
is not reportable by the Shareholder for tax purposes;
and
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any distributions the Shareholder
receives with respect to the Shares under the loan agreement will
be fully taxable to the Shareholder, most likely as ordinary
income.
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Shareholders desiring to avoid
these and other possible consequences of a deemed disposition of
their Shares should consider modifying any applicable brokerage
account agreements to prohibit the lending of their
Shares.
Other Tax Matters
Information Reporting. The
Fund provides tax information to the Shareholders and to the IRS,
as needed. Shareholders of the Fund are treated as partners
for federal income tax purposes. Accordingly, the Fund will
furnish Shareholders each year with tax information on IRS Schedule
K-1 (Form 1065), which will be used by the Shareholders in
completing their tax returns. The IRS has ruled that
assignees of partnership interests who have not been admitted to a
partnership as partners but who have the capacity to exercise
substantial dominion and control over the assigned partnership
interests will be considered partners for federal income tax
purposes. On the basis of this ruling, except as otherwise
provided herein, we will treat as a Shareholder any person whose
shares are held on their behalf by a broker or other nominee if
that person has the right to direct the nominee in the exercise of
all substantive rights attendant to the ownership of the
Shares.
Persons who hold an interest in
the Fund as a nominee for another person are required to furnish to
us the following information: (1) the name, address and taxpayer
identification number of the beneficial owner and the nominee; (2)
whether the beneficial owner is (a) a person that is not a U.S.
person, (b) a foreign government, an international organization or
any wholly-owned agency or instrumentality of either of the
foregoing, or (c) a tax-exempt entity; (3) the number and a
description of Shares acquired or transferred for the beneficial
owner; and (4) certain information including the dates of
acquisitions and transfers, means of acquisitions and transfers,
and acquisition cost for purchases, as well as the amount of net
proceeds from sales. Brokers and financial institutions
are required to furnish additional information, including whether
they are U.S. persons and certain information on Shares they
acquire, hold or transfer for their own account. A
penalty of $250 per failure (as adjusted for inflation), up to a
maximum of $3,000,000 per calendar year (as adjusted for
inflation), is imposed by the Code for failure to report such
information correctly to the Fund. If the failure to
furnish such information correctly is determined to be willful, the
per failure penalty increases to $500 (as adjusted for inflation)
or, if greater, 10% of the aggregate amount of items required to be
reported, and the $3,000,000 maximum does not apply. The nominee is
required to supply the beneficial owner of the Shares with the
information furnished to the Fund.
Partnership Audit
Procedures. The IRS may audit the federal income
tax returns filed by the Fund. Adjustments resulting from any
such audit may require a Shareholder to adjust a prior year’s
tax liability and could result in an audit of the
Shareholder’s own return. Any audit of a
Shareholder’s return could result in adjustments of
non-partnership items as well as Fund items. Partnerships are
generally treated as separate entities for purposes of federal tax
audits, judicial review of administrative adjustments by the IRS,
and tax settlement proceedings. The tax treatment of
partnership items of income, gain, loss and deduction are
determined at the partnership level in a unified partnership
proceeding rather than in separate proceedings with the
partners. The Code provides for one partner to be designated
as the “tax matters partner” and to represent the
partnership for purposes of these proceedings. The Trust
Agreement appoints the Sponsor as the tax matters partner of the
Fund.
The Bipartisan Budget Act of 2015
adopted a new partnership-level audit and assessment procedure for
all entities treated as partnerships for U.S. federal income tax
purposes. These new rules generally apply to partnership
taxable years beginning after December 31, 2017. Under these
rules, tax deficiencies (including interest and penalties) that
arise from an adjustment to partnership items generally would be
assessed and collected from the partnership (rather than from the
partners), and generally would be calculated using maximum
applicable tax rates (although such partnership level tax may be
reduced or eliminated under limited circumstances). A narrow
category of partnerships (generally, partnerships having no more
than 100 partners that consist exclusively of individuals, C
corporations, S corporations and estates) are permitted to elect
out of the new partnership-level audit rules. As an
alternative to partnership-level tax liability, a partnership may
elect to furnish adjusted Schedule K-1s to the IRS and to each
person who was a partner in the audit year, stating such
partner’s share of any partnership adjustments, and each such
partner would then take the adjustments into account on its tax
returns in the year in which it receives its adjusted Schedule K-1
(rather than by amending their tax returns for the audited year).
If the Fund were subject to a partnership level tax as a result of
these new rules, the economic return of all Shareholders (including
Shareholders that did not own Shares in the Fund during the taxable
year to which the audit relates) may be
affected.
79
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.
UBTI generally does not include
dividends, interest, or payments with respect to securities loans
and gains from the sale of property (other than property held for
sale to customers in the ordinary course of a trade or
business). Nonetheless, income on, and gain from the
disposition of, “debt-financed property” is UBTI.
Debt-financed property generally is income-producing property
(including securities), the use of which is not substantially
related to the exempt organization’s tax-exempt purposes, and
with respect to which there is “acquisition
indebtedness” at any time during the taxable year (or, if the
property was disposed of during the taxable year, the 12-month
period ending with the disposition). Acquisition indebtedness
includes debt incurred to acquire property, debt incurred before
the acquisition of property if the debt would not have been
incurred but for the acquisition, and debt incurred subsequent to
the acquisition of property if the debt would not have been
incurred but for the acquisition and at the time of acquisition the
incurrence of debt was foreseeable. The portion of the income
from debt-financed property attributable to acquisition
indebtedness is equal to the ratio of the average outstanding
principal amount of acquisition indebtedness over the average
adjusted basis of the property for the year. The Fund
currently does not anticipate that it will borrow money to acquire
investments; however, the Fund cannot be certain that it will not
borrow for such purpose in the future. In addition, an exempt
organization Shareholder that incurs acquisition indebtedness to
purchase its Shares in the Fund may have UBTI.
The federal tax rate applicable to
an exempt organization Shareholder on its UBTI generally will be
either the corporate or trust tax rate, depending upon the
Shareholder’s form of organization. The Fund may report
to each such Shareholder information as to the portion, if any, of
the Shareholder’s income and gains from the Fund for any year
that will be treated as UBTI; the calculation of that amount is
complex, and there can be no assurance that the Fund’s
calculation of UBTI will be accepted by the IRS. An exempt
organization Shareholder will be required to make payments of
estimated federal income tax with respect to its
UBTI.
Regulated Investment
Companies. Interests in and income from
“qualified publicly traded partnerships” satisfying
certain gross income tests are treated as qualifying assets and
income, respectively, for purposes of determining eligibility for
regulated investment company (“RIC”) status. A
RIC may invest up to 25% of its assets in interests in qualified
publicly traded partnerships. The determination of whether a
publicly traded partnership such as the Fund is a qualified
publicly traded partnership is made on an annual basis. The
Fund expects to be a qualified publicly traded partnership in each
of its taxable years. However, such qualification is not
assured.
80
Non-U.S. Shareholders
Generally, non-U.S. persons who
derive U.S. source income or gain from investing or engaging in a
U.S. business are taxable on two categories of
income. The first category consists of amounts that are
fixed or determinable, annual or periodic income, such as interest,
dividends and rent that are not connected with the operation of a
U.S. trade or business (“FDAP”). The second
category is income that is effectively connected with the conduct
of a U.S. trade or business (“ECI”). FDAP
income (other than interest that is considered “portfolio
interest;” as discussed below) is generally subject to a 30%
withholding tax, which may be reduced for certain categories of
income by a treaty between the U.S. and the recipient’s
country of residence. In contrast, ECI is generally
subject to U.S. tax on a net basis at graduated rates upon the
filing of a U.S. tax return. Where a non-U.S. person has
ECI as a result of an investment in a partnership, the ECI is
currently subject to a withholding tax at a rate of 37% for
individual Shareholders and a rate of 21% for corporate
Shareholders. The tax withholding on ECI, which is the
highest tax rate under Code section 1 for non-corporate Non-U.S.
Shareholders and Code section 11(b) for corporate Non-U.S.
Shareholders, may increase in future tax years if tax rates
increase from their current levels.
Withholding on Allocations and
Distributions. The Code provides that a non-U.S.
person who is a partner in a partnership that is engaged in a U.S.
trade or business during a taxable year will also be considered to
be engaged in a U.S. trade or business during that year.
Classifying an activity by a partnership as an investment or an
operating business is a factual determination. Under certain
safe harbors in the Code, an investment fund whose activities
consist of trading in stocks, securities, or commodities for its
own account generally will not be considered to be engaged in a
U.S. trade or business unless it is a dealer is such stocks,
securities, or commodities. This safe harbor applies to
investments in commodities only if the commodities are of a kind
customarily dealt in on an organized commodity exchange and if the
transaction is of a kind customarily consummated at such
place. Although the matter is not free from doubt, the Fund
believes that the activities directly conducted by the Fund do not
result in the Fund being engaged in a trade or business within in
the United States. However, there can be no assurance that
the IRS would not successfully assert that the Fund’s
activities constitute a U.S. trade or business.
In the event that the Fund’s
activities were considered to constitute a U.S. trade or business,
the Fund would be required to withhold at the highest rate
specified in Code section 1 (currently 37%) on allocations of our
income to non-corporate Non-U.S. Shareholders and the highest rate
specified in Code section 11(b) (currently 21%) on allocations of
our income to corporate Non-U.S. Shareholders, when such income is
distributed. Non-U.S. Shareholders would also be subject
to a 10% withholding tax upon a sale or exchange of such Non U.S.
Shareholder’s Shares, although the IRS has temporarily
suspended this withholding for interests in publicly traded
partnerships until regulations implementing such withholding are
issued. A Non-U.S. Shareholder with ECI will generally be required
to file a U.S. federal income tax return, and the return will
provide the Non-U.S. Shareholder with the mechanism to seek a
refund of any withholding in excess of such Shareholder’s
actual U.S. federal income tax liability. Any amount
withheld by the Fund will be treated as a distribution to the
Non-U.S. Shareholder to the extent possible. In some
cases, the Fund may not be able to match the economic cost of
satisfying its withholding obligations to a particular Non-U.S.
Shareholder, which may result in said cost being borne by the Fund,
generally, and accordingly, by all
Shareholders.
If the Fund is not treated as
engaged in a U.S. trade or business, a Non-U.S. Shareholder may
nevertheless be treated as having FDAP income, which would be
subject to a 30% withholding tax (possibly subject to reduction by
treaty), with respect to some or all of its distributions from the
Fund or its allocable share of Fund income. Amounts withheld
on behalf of a Non-U.S. Shareholder will be treated as being
distributed to such Shareholder.
To the extent any interest income
allocated to a Non-U.S. Shareholder that otherwise constitutes FDAP
is considered “portfolio interest,” neither the
allocation of such interest income to the non-U.S. Shareholder nor
a subsequent distribution of such interest income to the non-U.S.
Shareholder will be subject to withholding, provided that the
Non-U.S. Shareholder is not otherwise engaged in a trade or
business in the U.S. and provides the Fund with a timely and
properly completed and executed IRS Form W-8BEN or other applicable
form. In general, portfolio interest is interest paid on
debt obligations issued in registered form, unless the recipient
owns 10% or more of the voting power of the issuer. A Non-U.S.
Shareholder’s allocable share of interest on U.S. bank
deposits, certificates of deposit and discount obligations with
maturities from original issue of 183 days or less should qualify
as portfolio interest. Generally, other interest from U.S. sources
paid to the Fund and allocable to Non-U.S. Shareholders will be
subject to withholding.
In order for the Fund to avoid
withholding on any interest income allocable to Non-U.S.
Shareholders that would qualify as portfolio interest, it will be
necessary for all Non-U.S. Shareholders to provide the Fund with a
timely and properly completed and executed Form W-8BEN (or other
applicable form).
Gain from Sale of
Shares. Gain from the sale or exchange of Shares
may be taxable to a Non-U.S. Shareholder if the Non-U.S.
Shareholder is a nonresident alien individual who is present in the
U.S. for 183 days or more during the taxable year. In such
case, the nonresident alien individual will be subject to a 30%
withholding tax on the amount of such individual’s
gain.
Branch Profits Tax on Corporate
Non-U.S. Shareholders. In addition to the taxes noted above, any
Non-U.S. Shareholders that are corporations may also be subject to
an additional tax, the branch profits tax, at a rate of 30%. The
branch profits tax is imposed on a non-U.S. corporation’s
dividend equivalent amount, which generally consists of the
corporation’s after-tax earnings and profits that are
effectively connected with the corporation’s U.S. trade or
business but are not reinvested in a U.S. business. This tax may be
reduced or eliminated by an income tax treaty between the United
States and the country in which the Non-U.S. Shareholder is a
“qualified resident.”
81
Foreign Account Tax Compliance Act.
Legislation commonly referred to as the Foreign Account Tax
Compliance Act or “FACTA”, generally imposes a 30% U.S.
withholding tax on payments of certain types of income to foreign
financial institutions that fail to enter into an agreement with
the United States Treasury to report certain required information
with respect to accounts held by U.S. persons (or held by foreign
entities that have U.S. persons as substantial owners). The types
of income subject to the withholding tax include U.S.-source
interest and dividends and the gross proceeds from the sale of any
property that could produce U.S.-source interest or dividends. The
information required to be reported includes the identity and
taxpayer identification number of each account holder that is a
U.S. person and transaction activity within the holder’s
account. In addition, subject to certain exceptions, this
legislation also imposes a 30% U.S. withholding tax on payments to
foreign entities that are not financial institutions unless the
foreign entity certifies that it does not have a greater than 10%
U.S. owner or provides the withholding agent with identifying
information on each greater than 10% U.S. owner. Depending on the
status of a Non-U.S. Shareholder and the status of the
intermediaries through which it holds Shares, a Non-U.S.
Shareholder could be subject to this 30% U.S. withholding tax with
respect to distributions on its Shares and proceeds from the sale
of its Shares. Under certain circumstances, a Non-U.S. Shareholder
may be eligible for a refund or credit of such
taxes.
Prospective Non-U.S. Shareholders
should consult their own tax advisor regarding these and other tax
issues unique to Non-U.S. Shareholders.
Backup Withholding
The Fund may be required to
withhold U.S. federal income tax (“backup withholding”)
from payments to: (1) any Shareholder who fails to furnish the Fund
with his, her or its correct taxpayer identification number or a
certificate that the Shareholder is exempt from backup withholding,
and (2) any Shareholder with respect to whom the IRS notifies the
Fund that the Shareholder is subject to backup withholding.
Backup withholding is not an additional tax and may be returned or
credited against a taxpayer’s regular federal income tax
liability if appropriate information is provided to the IRS. The
backup withholding rate is the fourth lowest rate applicable to
individuals under Code section 1(c) (currently 24%), and may
increase in future tax years.
Other Tax Considerations
In addition to federal income
taxes, Shareholders may be subject to other taxes, such as state
and local income taxes, unincorporated business taxes, business
franchise taxes, and estate, inheritance or intangible taxes that
may be imposed by the various jurisdictions in which the Fund does
business or owns property or where the Shareholders reside.
Although an analysis of those various taxes is not presented here,
each prospective Shareholder should consider their potential impact
on its investment in the Fund. It is each Shareholder’s
responsibility to file the appropriate U.S. federal, state, local,
and foreign tax returns. Vedder Price has not provided an
opinion concerning any aspects of state, local or foreign tax or
U.S. federal tax other than those U.S. federal income tax issues
discussed herein.
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.
82
Special Investment Considerations
Each plan fiduciary must consider
the facts and circumstances that are relevant to an investment in
the Fund, including the role that an investment in the Fund would
play in the plan’s overall investment portfolio. Each
plan fiduciary, before deciding to invest in the Fund, must be
satisfied that the investment is prudent for the plan, that the
investments of the plan are diversified so as to minimize the risk
of large losses, and that an investment in the Fund complies with
the terms of the plan. The Sponsor is not undertaking to provide
investment advice, or to give advice in a fiduciary capacity, in
connection with a plan’s investment in the
Fund.
The Fund and Plan Assets
A regulation issued under ERISA
contains rules for determining when an investment by a plan in an
equity interest of a statutory trust will result in the underlying
assets of the statutory trust being deemed plan assets for purposes
of ERISA and Section 4975 of the Code. Those rules provide
that assets of a statutory trust will not be plan assets of a plan
that purchases an equity interest in the statutory trust if the
equity interest purchased is a publicly-offered security. If
the underlying assets of a statutory trust are considered to be
assets of any plan for purposes of ERISA or Section 4975 of the
Code, the operations of that trust would be subject to and, in some
cases, limited by the provisions of ERISA and Section 4975 of the
Code.
The publicly-offered security
exception described above applies if the equity interest is a
security that is:
(1)
freely transferable (determined based on the relevant facts and
circumstances);
(2)
part of a class of securities that is widely held (meaning that the
class of securities is owned by 100 or more investors independent
of the issuer and of each other); and
(3)
either (a) part of a class of securities registered under Section
12(b) or 12(g) of the Exchange Act or (b) sold to the plan as part
of a public offering pursuant to an effective registration
statement under the 1933 Act and the class of which such security
is a part is registered under the Exchange Act within 120 days (or
such later time as may be allowed by the SEC) after the end of the
fiscal year of the issuer in which the offering of such security
occurred.
The plan asset regulations under
ERISA state that the determination of whether a security is freely
transferable is to be made based on all the relevant facts and
circumstances. In the case of a security that is part of an
offering in which the minimum investment is $10,000 or less, the
following requirements, alone or in combination, ordinarily will
not affect a finding that the security is freely transferable: (1)
a requirement that no transfer or assignment of the security or
rights relating to the security be made that would violate any
federal or state law; and (2) a requirement that no transfer or
assignment be made without advance written notice given to the
entity that issued the security.
The Sponsor believes that the
conditions described above are satisfied with respect to the
Shares. The Sponsor believes that the Shares therefore
constitute publicly-offered securities, and the underlying assets
of the Fund should not be considered to constitute plan assets of
any plan that purchases Shares.
Prohibited Transactions
ERISA and the Code generally
prohibit certain transactions involving a plan and persons who have
certain specified relationships to the plan. In general,
Shares may not be purchased with the assets of a plan if the
Sponsor, the clearing brokers, the trading advisors (if any), or
any of their affiliates, agents or employees
either:
● exercise any discretionary
authority or discretionary control with respect to management of
the plan;
● exercise any authority or control
with respect to management or disposition of the assets of the
plan;
● render investment advice for a fee
or other compensation, direct or indirect, with respect to any
moneys or other property of the plan;
● have any authority or
responsibility to render investment advice with respect to any
monies or other property of the plan; or
● have any discretionary authority
or discretionary responsibility in the administration of the
plan.
Also, a prohibited transaction may
occur under ERISA or the Code when circumstances indicate that (1)
the investment in Shares is made or retained for the purpose of
avoiding application of the fiduciary standards of ERISA, (2) the
investment in Shares constitutes an arrangement under which the
Fund is expected to engage in transactions that would otherwise be
prohibited if entered into directly by the plan purchasing the
Shares, (3) the investing plan, by itself, has the authority or
influence to cause the Fund to engage in such transactions, or (4)
a person who is prohibited from transacting with the investing plan
may, but only with the aid of certain of its affiliates and the
investing plan, cause the Fund to engage in such transactions with
such person.
83
Special IRA Rules
IRAs are not subject to
ERISA’s fiduciary standards, but are subject to their own
rules, including the prohibited transaction rules of Section 4975
of the Code, which generally mirror ERISA’s prohibited
transaction rules. For example, IRAs are subject to special
custody rules and must maintain a qualifying IRA custodial
arrangement separate and distinct from the Fund and its custodial
arrangement. If a separate qualifying custodial arrangement
is not maintained, an investment in the Shares will be treated as a
distribution from the IRA. Second, IRAs are prohibited from
investing in certain commingled investments, and the Sponsor makes
no representation regarding whether an investment in Shares is an
inappropriate commingled investment for an IRA. Third, in
applying the prohibited transaction provisions of Section 4975 of
the Code, in addition to the rules summarized above, the individual
for whose benefit the IRA is maintained is also treated as the
creator of the IRA. For example, if the owner or beneficiary
of an IRA enters into any transaction, arrangement, or agreement
involving the assets of his or her IRA to benefit the IRA
owner or beneficiary (or his or her relatives or business
affiliates) personally, or with the understanding that such benefit
will occur, directly or indirectly, such transaction could give
rise to a prohibited transaction that is not exempted by any
available exemption. Moreover, in the case of an IRA, the
consequences of a non-exempt prohibited transaction are that the
IRA’s assets will be treated as if they were distributed,
causing immediate taxation of the assets (including any early
distribution penalty tax applicable under Section 72 of the Code),
in addition to any other fines or penalties that may
apply.
Exempt
Plans
Certain employee benefit plans may
be governmental plans or church plans. Governmental plans and
church plans are generally not subject to ERISA, nor do the
prohibited transaction provisions described above apply to
them. These plans are, however, subject to prohibitions
against certain related-party transactions under Section 503 of the
Code, which are similar to the prohibited transaction rules
described above. In addition, the fiduciary of any
governmental or church plan must consider any applicable state or
local laws and any restrictions and duties of common law imposed
upon the plan.
No view is expressed as to whether
an investment in the Fund (and any continued investment in the
Fund), or the operation and administration of the fund, is
appropriate or permissible for any governmental plan or church plan
under Code Section 503, or under any state, county, local or other
law relating to that type of plan.
Allowing an
investment in the Fund is not to be construed as a representation
by the Trust, the Fund, the Sponsor, any trading advisor, any
clearing broker, the Distributor or legal counsel or other advisors
to such parties or any other party that this investment meets some
or all of the relevant legal requirements with respect to
investments by any particular plan or that this investment is
appropriate for any such particular plan. The person with
investment discretion should consult with the plan’s attorney
and financial advisors as to the propriety of an investment in the
Fund in light of the circumstances of the particular plan, current
tax law and ERISA.
84
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:
● our Annual Report on Form 10-K for
the fiscal year ended December 31, 2017, filed with the SEC on
March 16, 2018.
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 Corn
Fund
Attention: Barbara
Riker
115 Christina Landing Drive Unit
2004
Wilmington, DE
19801
(302) 543-5977
Our Internet website is
www.teucriumcornfund.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.
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.
85
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, without
charge, at the public reference facilities of the SEC at the below
address or online at www.sec.gov, or obtain at prescribed rates
from the public reference facilities of the SEC at the below
address. Information about the Trust, the Fund and the Shares
can also be obtained from the Fund’s website, which is
www.teucriumcornfund.com. The Fund’s website address is
only provided here as a convenience to you and the information
contained on or connected to the website is not part of this
prospectus or the registration statement of which this prospectus
is part. The Trust is subject to the informational
requirements of the Exchange Act and will file certain reports and
other information with the SEC under the Exchange Act. The
Sponsor will file an updated prospectus annually for the Fund
pursuant to the 1933 Act. The reports and other information
can be inspected at the public reference facilities of the SEC
located at 100 F Street, N.E., Washington, DC 20549 and online at
www.sec.gov, 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. You may also obtain copies of such material from the public
reference facilities of the SEC at 100 F Street, NE, Washington,
D.C. 20549, at prescribed rates. You may obtain more information
concerning the operation of the public reference facilities of the
SEC by calling the SEC at 1-800-SEC-0330 or visiting online at
www.sec.gov.
86
In this prospectus, each of the
following terms have the meanings set forth after such
term:
Administrator: U.S. Bancorp Fund
Services, LLC.
Authorized Purchaser: One that
purchases or redeems Creation Baskets or Redemption Baskets,
respectively, from or to the Fund.
Benchmark: A weighted average of
daily changes in the closing settlement prices of (1) the
second-to-expire Corn Futures Contract traded on the CBOT, weighted
35%, (2) the third-to-expire CBOT Corn Futures Contract, weighted
30%, and (3) the CBOT Corn Futures Contract expiring in the
December following the expiration month of third-to-expire
contract, weighted 35%.
Benchmark Component Futures
Contracts: The three Corn Futures Contracts that at
any given time make up the Benchmark.
Business Day: Any day other than a
day when any of the NYSE Arca, the CBOT or the New York Stock
Exchange is closed for regular trading.
CFTC: Commodity Futures Trading
Commission, an independent federal agency with the mandate to
regulate commodity futures and options in the United
States.
Chicago Board of Trade (CBOT): The
primary exchange on which Corn Futures Contracts are traded in the
U.S. The Fund expressly disclaims any association with the
CBOT or endorsement of the Fund by the CBOT and acknowledges that
“CBOT” and “Chicago Board of Trade” are
registered trademarks of such exchange. The CBOT is part of
the CME Group.
Code: Internal Revenue Code of 1986,
amended.
Commodity Pool: An enterprise in
which several individuals contribute funds in order to trade
futures contracts or options on futures contracts
collectively.
Commodity Pool Operator or CPO:
Any person engaged in a business which is of the nature of an
investment trust, syndicate, or similar enterprise, and who, in
connection therewith, solicits, accepts, or receives from others,
funds, securities, or property, either directly or through capital
contributions, the sale of stock or other forms of securities, or
otherwise, for the purpose of trading in any swap or commodity for
future delivery or commodity option on or subject to the rules of
any contract market.
Corn Futures Contracts: Futures
contracts for corn that are traded on the CBOT or foreign
exchanges.
Corn Interests: Corn Futures
Contract and Other Corn Interests.
Creation Basket: A block of 25,000
Shares used by the Fund to issue Shares.
Custodian: U.S. Bank,
N.A.
Distributor: Foreside Fund Services,
LLC.
DTC: The Depository Trust
Company. DTC will act as the securities depository for the
Shares.
DTC Participant: An entity that
has an account with DTC.
Exchange Act: The Securities
Exchange Act of 1934.
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.
87
FINRA: Financial Industry
Regulatory Authority, formerly the National Association of
Securities Dealers.
Indirect Participants: Banks,
brokers, dealers and trust companies that clear through or maintain
a custodial relationship with a DTC Participant, either directly or
indirectly.
Limited Liability Company (LLC): A
type of business ownership combining several features of
corporation and partnership structures.
Margin: The amount of equity
required for an investment in futures
contracts.
NAV: Net Asset Value of the
Fund.
NFA: National Futures
Association.
NSCC: National Securities Clearing
Corporation.
1933 Act: The Securities Act of
1933.
Option: The right, but not the
obligation, to buy or sell a futures contract or forward contract
at a specified price on or before a specified
date.
Other Corn Interests: Other
corn-related investments such as options on Corn Futures Contracts,
swaps agreements and forward contracts relating to corn, and
over-the-counter transactions that are based on the price of corn,
Corn Futures Contracts and indices based on the
foregoing.
Over-the-Counter Derivative: A
financial contract, whose value is designed to track the return on
stocks, bonds, currencies, commodities, or some other benchmark,
that is traded over-the-counter or off organized
exchanges.
Redemption Basket: A block of
25,000 Shares used by the Fund to redeem
Shares.
SEC: Securities and Exchange
Commission.
Secondary Market: The stock
exchanges and the over-the-counter market. Securities are first
issued as a primary offering to the public. When the securities are
traded from that first holder to another, the issues trade in these
secondary markets.
Shareholders: Holders of
Shares.
Shares: Common units representing
fractional undivided beneficial interests in the
Fund.
Sponsor: Teucrium Trading, LLC, a
Delaware limited liability company, which is registered as a
Commodity Pool Operator, who controls the investments and other
decisions of the Fund.
Spot Contract: A cash market
transaction in which the buyer and seller agree to the immediate
purchase and sale of a commodity, usually with a two-day
settlement.
Swap Agreement: An
over-the-counter derivative that generally involves an exchange of
a stream of payments between the contracting parties based on a
notional amount and a specified index.
Tracking Error: Possibility that
the daily NAV of the Fund will not track the
Benchmark.
Trust Agreement: The Second
Amended and Restated Declaration of Trust and Trust Agreement of
the Trust effective as of October 21, 2010.
Valuation Day: Any day as of which
the Fund calculates its NAV.
You: The owner of
Shares.
88
STATEMENT OF
ADDITIONAL INFORMATION
TEUCRIUM CORN
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 (302) 543-5977. Before you decide whether to invest,
you should read the entire prospectus carefully and consider the
risk factors beginning on page 15.
This statement of additional
information and accompanying disclosure document are both dated
April 30, 2018.
89
TEUCRIUM CORN
FUND
TABLE OF
CONTENTS
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The two broad classes of persons
who trade commodities are hedgers and speculators. Hedgers
include financial institutions that manage or deal in interest
rate-sensitive instruments, foreign currencies or stock portfolios,
and commercial market participants, such as farmers and
manufacturers, that market or process commodities. Hedging is
a protective procedure designed to effectively lock in prices that
would otherwise change due to an adverse movement in the price of
the underlying commodity, such as the adverse price movement
between the time a merchandiser or processor enters into a contract
to buy or sell a raw or processed commodity at a certain price and
the time he must perform the contract. For example, if a
hedger contracts to physically sell the commodity at a future date,
he may simultaneously buy a futures or forward contract for the
necessary equivalent quantity of the commodity. At the time
for performance of the physical contract, the hedger may accept
delivery under his futures contract and sell the commodity quantity
as required by the physical contract or he may buy the actual
commodity, sell it under the physical contract and close out his
futures contract position by making an offsetting
sale.
The Commodity Interest markets
enable the hedger to shift the risk of price fluctuations.
The usual objective of the hedger is to protect the profit that he
expects to earn from farming, merchandising, or processing
operations rather than to profit from his trading. However,
at times the impetus for a hedge transaction may result in part
from speculative objectives and hedgers can end up paying higher
prices than they would have if they did not enter into a Commodity
Interest transaction if current market prices are lower than the
locked-in price.
Unlike the hedger, the speculator
generally expects neither to make nor take delivery of the
underlying commodity. Instead, the speculator risks his
capital with the hope of making profits from price fluctuations in
the commodities. The speculator is, in effect, the risk
bearer who assumes the risks that the hedger seeks to avoid.
Speculators rarely make or take delivery of the underlying
commodity; rather they attempt to close out their positions prior
to the delivery date. A speculator who takes a long position
generally will make a profit if the price of the underlying
commodity goes up and incur a loss if the price of the underlying
commodity goes down, while a speculator who takes a short position
generally will make a profit if the price of the underlying
commodity goes down and incur a loss if the price of the underlying
commodity goes up.
The regulation of futures markets,
futures contracts, and futures exchanges has historically been
comprehensive. The CFTC and the exchanges are authorized to take
extraordinary actions in the event of a market emergency including,
for example, the retroactive implementation of speculative position
limits, increased margin requirements, the establishment of daily
price limits and the suspension of trading on an exchange or
trading facility.
Pursuant to authority in the CEA,
the NFA has been formed and registered with the CFTC as a
registered futures association. At the present time, the NFA
is the only SRO for commodity interest professionals, other than
futures exchanges. The CFTC has delegated to the NFA
responsibility for the registration of CPOs and FCMs and their
respective associated persons. The Sponsor and the
Fund’s clearing broker are members of the NFA. As such,
they will be subject to NFA standards relating to fair trade
practices, financial condition and consumer
protection. The NFA also arbitrates disputes
between members and their customers and conducts registration and
fitness screening of applicants for membership and audits of its
existing members. Neither the Trust nor the Teucrium Funds
are required to become a member of the NFA. The regulation of
commodity interest transactions in the United States is a rapidly
changing area of law and is subject to ongoing modification by
governmental and judicial action. Considerable regulatory attention
has been focused on non-traditional investment pools that are
publicly distributed in the United States. There is a possibility
of future regulatory changes within the United States altering,
perhaps to a material extent, the nature of an investment in the
Fund, or the ability of a Fund to continue to implement its
investment strategy. In addition, various national governments
outside of the United States have expressed concern regarding the
disruptive effects of speculative trading in the commodities
markets and the need to regulate the derivatives markets in
general. The effect of any future regulatory change on the Teucrium
Funds is impossible to predict but could be substantial and
adverse.
The CFTC possesses exclusive
jurisdiction to regulate the activities of commodity pool operators
and commodity trading advisors with respect to "commodity
interests," such as futures and swaps and options, and has adopted
regulations with respect to the activities of those persons and/or
entities. Under the Commodity Exchange Act
(“CEA”), a registered commodity pool operator, such as
the Sponsor, is required to make annual filings with the CFTC and
the NFA describing its organization, capital structure, management
and controlling persons. In addition, the CEA authorizes the
CFTC to require and review books and records of, and documents
prepared by, registered commodity pool operators. Pursuant to
this authority, the CFTC requires commodity pool operators to keep
accurate, current and orderly records for each pool that they
operate. The CFTC may suspend the registration of a commodity
pool operator (1) if the CFTC finds that the operator’s
trading practices tend to disrupt orderly market conditions, (2) if
any controlling person of the operator is subject to an order of
the CFTC denying such person trading privileges on any exchange,
and (3) in certain other circumstances. Suspension,
restriction or termination of the Sponsor’s registration as a
commodity pool operator would prevent it, until that registration
were to be reinstated, from managing the Fund, and might result in
the termination of the Fund if a successor sponsor is not elected
pursuant to the Trust Agreement. Neither the Trust nor the
Fund is required to be registered with the CFTC in any
capacity.
The Fund’s investors are
afforded prescribed rights for reparations under the CEA.
Investors may also be able to maintain a private right of action
for violations of the CEA. The CFTC has adopted rules
implementing the reparation provisions of the CEA, which provide
that any person may file a complaint for a reparations award with
the CFTC for violation of the CEA against a floor broker or an FCM,
introducing broker, commodity trading advisor, CPO, and their
respective associated persons.
91
The regulations of the CFTC and
the NFA prohibit any representation by a person registered with the
CFTC or by any member of the NFA, that registration with the CFTC,
or membership in the NFA, in any respect indicates that the CFTC or
the NFA has approved or endorsed that person or that person’s
trading program or objectives. The registrations and
memberships of the parties described in this summary must not be
considered as constituting any such approval or endorsement.
Likewise, no futures exchange has given or will give any similar
approval or endorsement.
Trading venues in the United
States are subject to varying degrees of regulation under the CEA
depending on whether such exchange is a designated contract market
(i.e. a futures exchange) or a swap execution facility. Clearing
organizations are also subject to the CEA and the rules and
regulations adopted thereunder as administered by the CFTC. The
CFTC’s function is to implement the CEA’s objectives of
preventing price manipulation and excessive speculation and
promoting orderly and efficient commodity interest markets. In
addition, the various exchanges and clearing organizations
themselves as SROs exercise regulatory and supervisory authority
over their member firms.
The Dodd-Frank Wall Street Reform
and Consumer Protection Act (the “Dodd-Frank Act”) was
enacted in response to the economic crisis of 2008 and 2009 and it
significantly altered the regulatory regime to which the securities
and commodities markets are subject. To date, the CFTC has issued
proposed or final versions of almost all of the rules it is
required to promulgate under the Dodd-Frank Act, and it continues
to issue proposed versions of additional rules that it has
authority to promulgate. Provisions of the new law include the
requirement that position limits be established on a wide range of
commodity interests, including agricultural, energy, and
metal-based commodity futures contracts, options on such futures
contracts and uncleared swaps that are economically equivalent to
such futures contracts and options (“Reference
Contracts”); new registration and recordkeeping requirements
for swap market participants; capital and margin requirements for
“swap dealers” and “major swap
participants,” as determined by the new law and applicable
regulations; reporting of all swap transactions to swap data
repositories; and the mandatory use of clearinghouse mechanisms for
sufficiently standardized swap transactions that were historically
entered into in the over-the-counter market, but are now designated
as subject to the clearing requirement; and margin requirements for
over-the-counter swaps that are not subject to the clearing
requirements.
In addition, considerable
regulatory attention has recently been focused on non-traditional
publicly distributed investment pools such as the Fund.
Furthermore, various national governments have expressed concern
regarding the disruptive effects of speculative trading in certain
commodity markets and the need to regulate the derivatives markets
in general. The effect of any future regulatory change on the
Teucrium Funds is impossible to predict, but could be substantial
and adverse.
The Dodd-Frank Act was intended to
reduce systemic risks that may have contributed to the 2008/2009
financial crisis. Since the first draft of what became the
Dodd-Frank Act, opponents have criticized the broad scope of the
legislation and, in particular, the regulations implemented by
federal agencies as a result. Since 2010, and most notably in 2015
and 2016, Republicans have proposed comprehensive legislation both
in the House and the Senate of the US Congress. These bills are
intended to pare back some of the provisions of the Dodd-Frank Act
of 2010 that critics view as overly broad, unnecessary to the
stability of the U.S. financial system, and inhibiting the growth
of the U.S. economy. Further, during the campaign and after taking
office, President Donald J. Trump has promised and issued several
executive orders intended to relieve the financial burden created
by the Dodd-Frank Act, although these executive orders only set
forth several general principles to be followed by the federal
agencies and do not mandate the wholesale repeal of the Dodd-Frank
Act. The scope of the effect that passage of new financial reform
legislation could have on U.S. securities, derivatives and
commodities markets is not clear at this time because each federal
regulatory agency would have to promulgate new regulations to
implement such legislation. Nevertheless, regulatory reform may
have a significant impact on U.S.-regulated
entities.
Position
Limits, Aggregation Limits, Price Fluctuation
Limits
On December 16, 2016, the CFTC
issued a final rule to amend part 150 of the CFTC’s
regulations with respect to the policy for aggregation under the
CFTC’s position limits regime for futures and option
contracts on nine agricultural commodities (“the Aggregation
Requirements”). This final rule addressed the circumstances
under which market participants would be required to aggregate all
their positions, for purposes of the position limits, of all
positions in Reference Contracts of the 9 agricultural commodities
held by a single entity and its affiliates, regardless of whether
such positions exist on US futures exchanges, non-US futures
exchanges, or in over-the-counter swaps. An affiliate of a
market participant is defined as two or more persons acting
pursuant to an express or implied agreement or understanding.
The Aggregation Requirements became effective on February 14, 2017.
On August 10, 2017, the CFTC issued No-Action Relief Letter No.
17-37 to clarify several provisions under regulation 150.4
regarding position aggregation filing requirements of market
participants. The Sponsor does not anticipate that this order will
have an impact on the ability of the Fund to meet its respective
investment objectives.
In addition, on December 30, 2016,
the CFTC reproposed regulations that would establish revised
specific limits on speculative positions in futures contracts,
option contracts and swaps on 25 agricultural, energy and metals
commodities (the “Proposed Position Limit
Rules”).
The Proposed Position Limit Rules
were a reproposal and the CFTC has requested comments from the
public. It remains to be seen whether the Proposed Position Limit
Rules will become effective as the CFTC has proposed, as comments
could result in modifications to the proposed limits or
implementation could be delayed for other reasons. In general, the
Proposed Position Limit Rules do not appear to have a substantial
or adverse effect on the Fund. However, if the total net assets of
the Fund were to increase significantly from current levels, the
Position Limit Rules as proposed could negatively impact the
ability of the Fund to meet its respective investment objectives
through limits that may inhibit the Sponsor’s ability to sell
additional Creation Baskets of the Fund. However, it is not
expected that the Fund will reach asset levels that would cause
these position limits to be reached in the near
future.
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In addition, the Proposed Position
Limit Rules state that the CFTC will review, and may amend, the
Position Limit Rules at a minimum every two years and more often as
deemed necessary. Such future amendments may affect the Fund, and
it may, at that time, be substantial and adverse. By way of
example, future amendments, in combination with the Position Limit
Rules, may negatively impact the ability of the Fund to meet its
respective investment objectives through limits that may inhibit
the Sponsor’s ability to sell additional Creation Baskets of
the Fund, if the total net assets of a Fund grow significantly from
current levels.
The futures exchanges, e.g. the
CME, may under the Proposed Position Limit Rules impose position
limits which are lower than those imposed by the CFTC. Such a limit
by an exchange on which the Fund trades futures contracts may
negatively and adversely impact the ability of the Fund to meet its
respective investment objectives through limits that may inhibit
the Sponsor’s ability to sell additional Creation Baskets of
the Fund. No such lower limits by an exchange are currently in
place.
The aggregate position limits
currently in place under the current position limits and the
Aggregation Requirements are as follows for each of the commodities
traded by the Fund:
|
Commodity
Future
|
Spot Month Position
Limit
|
All Month Aggregate Position
Limit
|
|
corn
|
600 contracts
|
33,000
contracts
|
The aggregate speculative position
limits currently as proposed in the Proposed Position Limit Rules
are as follows for each of the commodities traded by the
Fund:
|
Commodity
Future
|
Spot Month Position
Limit
|
All Month Aggregate Position
Limit
|
|
corn
|
600 contracts
|
62,400
contracts
|
Accountability levels differ from
position limits in that they do not represent a fixed ceiling, but
rather a threshold above which a futures exchange may exercise
greater scrutiny and control over an investor’s
positions. If the Fund were to exceed an applicable
accountability level for investments in futures contracts, the
exchange will monitor the Fund’s exposure and may ask for
further information on its activities, including the total size of
all positions, investment and trading strategy, and the extent of
liquidity resources of the Fund. If deemed necessary by the
exchange, the Fund could be ordered to reduce its aggregate net
position back to the accountability
level.
In addition to position limits and
accountability levels, the exchanges 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.
As of May 1, 2014, the CME
replaced the fixed price fluctuation limits with variable price
limits for corn. The change, which is now effective and is
described in the CME Group Special Executive Report S7038 and
can be accessed at
http://www.cmegroup.com/toolsinformation/lookups/advisories/ser/SER7038.html.
93
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.
Interest Income
Unlike some alternative investment
funds, the Fund does not borrow money in order to obtain leverage,
so the Fund does not incur any interest expense. Rather, the
Fund’s margin deposits and cash reserves are maintained in
cash and cash equivalents and interest is generally earned on
available assets, which include unrealized profits credited to the
Fund’s accounts
The following graph sets forth the
historical performance of the Fund from commencement of operations
on June 9, 2010 until January 31, 2018.
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE
RESULTS
94