The information in this prospectus
is not complete and may be changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any jurisdiction where the
offer or sale is not permitted.
Subject to
Completion
Preliminary
Prospectus dated March 4, 2022
Teucrium Wheat Fund
23,375,000 Shares
Teucrium Wheat Fund
(the “Fund” or “Us” or “We” or “WEAT”) is designed to provide investors with a
cost-effective means to gain price exposure to the wheat market for future
delivery. The Fund issues shares (“Shares”) that trade on the NYSE Arca stock
exchange (“NYSE Arca”) under the symbol “WEAT” and that can be purchased and
sold by investors through their broker-dealer. The Fund’s investment objective
is for changes in the Shares’ NAV to reflect the daily changes of the price of
wheat for future delivery, as measured by the Fund’s Benchmark (as defined
below). Under normal market conditions, the Fund invests in wheat futures
contracts and cash and cash equivalents. The sponsor to the Fund is Teucrium
Trading, LLC (the “Sponsor”), which receives a management fee. The principal
office address and telephone number of both the Fund and the Sponsor is Three
Main Street, Suite 215, Burlington, Vermont 05401 and (802)
540-0019.
While most investors
will purchase and sell Shares through their broker-dealer, the Fund continuously
offers creation baskets consisting of 25,000 Shares (“Creation Baskets”) at
their net asset value (“NAV”) to certain parties who have entered into an
agreement with the Sponsor (“Authorized Purchasers”). Authorized Purchasers, in
turn, may sell such Shares, which are listed on NYSE Arca, to the public at
per-Share offering prices that are expected to reflect, among other factors, the
trading price of the Shares on the NYSE Arca, the NAV of the Fund at the time
the Authorized Purchaser purchased the Creation Baskets and the NAV at the time
of the offer of the Shares to the public, the supply of and demand for Shares at
the time of sale, and the liquidity of the markets for wheat futures contracts
in which the Fund invests. A list of the Fund’s Authorized Purchasers as of the
date of this Prospectus can be found under “Plan of Distribution – Distributor and Authorized Purchasers,” on
page 41. The prices of Shares offered by Authorized Purchasers are expected to
fall between the Fund’s NAV and the trading price of the Shares on the NYSE Arca
at the time of sale. The Fund’s Shares may trade in the secondary market on the
NYSE Arca at prices that are lower or higher than their NAV per
Share.
This is a best
efforts offering; the distributor, Foreside Fund Services, LLC (the
“Distributor”), is not required to sell any specific number or dollar amount of
Shares but will use its best efforts to sell Shares. An Authorized Purchaser is
under no obligation to purchase Shares. This is intended to be a continuous
offering that will terminate on [______], 2025 unless suspended or terminated at
any earlier time for certain reasons specified in this prospectus or unless
extended as permitted under the rules of the Securities Act of 1933. See
“Prospectus Summary – The Shares” and “Creation and Redemption of Shares –
Rejection of Purchase Orders” below.
Investing in the Fund involves
significant risks. See “What Are the Risk Factors Involved with an Investment in
the Fund?” beginning on page 5. The Fund is not a mutual fund registered under
the Investment Company Act of 1940 and is not subject to regulation under such
Act.
NEITHER THE SECURITIES AND EXCHANGE
COMMISSION (“SEC”) NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR
DISAPPROVED OF THE SECURITIES OFFERED IN THIS PROSPECTUS OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Teucrium Wheat Fund
is a commodity pool and Teucrium Trading, LLC is a commodity pool operator
subject to regulation by the Commodity Futures Trading Commission and the
National Futures Association under the Commodity Exchange Act
(“CEA”).
THE COMMODITY FUTURES TRADING
COMMISSION HAS NOT PASSED UPON THE MERITS OF PARTICIPATING IN THIS POOL NOR HAS
THE COMMISSION PASSED ON THE ADEQUACY OR ACCURACY OF THIS DISCLOSURE
DOCUMENT.
This prospectus is in two parts: a
disclosure document and a statement of additional information. These parts are
bound together, and both contain important information.
Thank
you for your interest in the Teucrium Wheat Fund.
The date of this
prospectus is [________], 2022.
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 36 AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY
TO BREAK EVEN, THAT IS, TO RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, AT
PAGE 3.
THIS BRIEF STATEMENT CANNOT DISCLOSE
ALL THE RISKS AND OTHER FACTORS NECESSARY TO EVALUATE YOUR PARTICIPATION IN THIS
COMMODITY POOL. THEREFORE, BEFORE YOU DECIDE TO PARTICIPATE IN THIS COMMODITY
POOL, YOU SHOULD CAREFULLY STUDY THIS DISCLOSURE DOCUMENT, INCLUDING A
DESCRIPTION OF THE PRINCIPAL RISK FACTORS OF THIS INVESTMENT, AT PAGE
2.
YOU SHOULD ALSO BE AWARE THAT THIS
COMMODITY POOL MAY TRADE FOREIGN FUTURES OR OPTIONS CONTRACTS. TRANSACTIONS ON
MARKETS LOCATED OUTSIDE THE UNITED STATES, INCLUDING MARKETS FORMALLY LINKED TO
A UNITED STATES MARKET, MAY BE SUBJECT TO REGULATIONS WHICH OFFER DIFFERENT OR
DIMINISHED PROTECTION TO THE POOL AND ITS PARTICIPANTS. FURTHER, UNITED STATES
REGULATORY AUTHORITIES MAY BE UNABLE TO COMPEL THE ENFORCEMENT OF THE RULES OF
REGULATORY AUTHORITIES OR MARKETS IN NONUNITED 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 WHEAT
FUND
TABLE OF CONTENTS
|
|
PART ONE – DISCLOSURE
DOCUMENT |
|
PROSPECTUS
SUMMARY |
1 |
Principal
Offices of the Fund and the Sponsor |
1 |
Breakeven
Point |
1 |
Operation of
the Fund |
1 |
Principal
Investment Risks of an Investment in the Fund |
2 |
Determination
of NAV |
3 |
Defined
Terms |
3 |
Breakeven
Analysis |
3 |
The
Offering |
4 |
WHAT ARE THE
RISK FACTORS INVOLVED WITH AN INVESTMENT IN THE
FUND? |
5 |
Risks
Associated with Investing Directly or Indirectly in
Wheat |
5 |
The Fund’s
Operating Risks |
8 |
Risk of
Leverage and Volatility |
19 |
Over the
counter Contract Risk |
19 |
Risk of Trading
in International Markets |
20 |
Tax
Risk |
21 |
THE
OFFERING |
23 |
The Fund in
General |
23 |
The
Sponsor |
23 |
Prior
Performance of the Fund |
27 |
The
Trustee |
29 |
Operation of
the Fund |
29 |
Futures
Contracts |
32 |
Over the
counter Derivatives |
34 |
The Fund’s
Investments in Cash and Cash Equivalents |
34 |
Other Trading
Policies of the Fund |
34 |
Benchmark
Performance |
35 |
The Wheat
Market |
36 |
The Fund’s
Service Providers |
36 |
Form of
Shares |
40 |
Transfer of
Shares |
40 |
Inter-Series
Limitation on Liability |
41 |
Plan of
Distribution |
41 |
Calculating
NAV |
42 |
Creation and
Redemption of Shares |
43 |
Secondary
Market Transactions |
46 |
Use of
Proceeds |
47 |
The Trust
Agreement |
47 |
The Sponsor Has
Conflicts of Interest |
50 |
Interests of
Named Experts and Counsel |
51 |
Provisions of
Federal and State Securities Laws |
51 |
Books and
Records |
51 |
Statements,
Filings, and Reports to Shareholders |
51 |
Fiscal
Year |
52 |
Governing
Law |
52 |
Security
Ownership of Principal Shareholders and Management |
52 |
Legal
Matters |
52 |
Privacy
Policy |
53 |
U.S. Federal
Income Tax Considerations |
54 |
Investment by
ERISA Accounts |
64 |
INCORPORATION
BY REFERENCE OF CERTAIN INFORMATION |
68 |
INFORMATION YOU
SHOULD KNOW |
69 |
WHERE YOU CAN
FIND MORE INFORMATION |
70 |
STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS |
71 |
APPENDIX A -
Glossary of Defined Terms |
72 |
|
|
PART TWO – STATEMENT OF
ADDITIONAL INFORMATION |
76 |
|
|
|
|
|
|
PROSPECTUS
SUMMARY
This is only a summary of the
prospectus and, while it contains material information about the Fund and its
Shares, it does not contain or summarize all of the information about the Fund
and the Shares contained in this prospectus that is material and/or which may be
important to you. You should read this entire prospectus, including “What Are
the Risk Factors Involved with an Investment in the Fund?” beginning on page 5,
before making an investment decision about the Shares. In addition, this
prospectus includes a statement of additional information that follows and is
bound together with the primary disclosure document. Both the primary disclosure
document and the statement of additional information contain important
information.
Principal Offices of the Fund and the
Sponsor
The Fund is a series
of Teucrium Commodity Trust (the “Trust”). The principal offices of the Sponsor,
the Trust and the Fund are located at Three Main Street, Suite 215, Burlington,
Vermont 05401. The telephone number is (802) 540-0019.
Breakeven Point
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 $8.76 (the NAV
per Share as of February 28, 2022), is $0.10 or 1.14% of the selling price. For
more information, see “Breakeven Analysis” below.
Operation of the
Fund
The Fund is a
commodity pool that issues Shares that may be purchased and sold on NYSE Arca.
The investment objective of the Fund is to have the daily changes in the Shares’
NAV reflect the daily changes of the price of wheat for future delivery, as
measured by a benchmark (the “Benchmark”) as described below. The Benchmark for
the Fund is the Teucrium Wheat Index (“TWEAT”). Under normal market conditions,
the Fund invests in wheat futures contracts and cash and cash equivalents. The
Fund is organized as a series of the Trust, a Delaware statutory trust organized
on September 11, 2009. The Trust and the Fund operate pursuant to the Trust’s
Fifth Amended and Restated Declaration of Trust and Trust Agreement (the “Trust
Agreement”), dated April 26, 2019. The Trust Agreement may be found on the SEC’s
EDGAR filing database at https://www.sec.gov/Archives/edgar/data/1471824/000165495419004852/ex31.htm.
The Fund was formed and is managed and controlled by the Sponsor, a limited
liability company formed in Delaware on July 28, 2009. The Sponsor is registered
as a commodity pool operator (“CPO”) and a commodity trading adviser (“CTA”)
with the Commodity Futures Trading Commission (“CFTC”) and is a member of the
National Futures Association (“NFA”).
The investment
objective of the Fund is to have the daily changes in the NAV of the Fund’s
Shares reflect the daily changes in the wheat market for future delivery as
measured by the Benchmark. The Benchmark is a weighted average of the closing
settlement prices for three futures contracts for wheat (“Wheat Futures
Contracts”) that are traded on the Chicago Board of Trade (“CBOT”). The three
Wheat Futures Contracts that at any given time make up the Benchmark are
referred to herein as the “Benchmark Component Futures
Contracts.”
The Fund seeks to
achieve its investment objective by investing in Benchmark Component Futures
Contracts. Under normal market conditions, the Fund expects that 100% of the
Fund’s assets will be invested in Benchmark Component Futures Contracts and in
cash and cash equivalents. The Fund reserves the right to invest in swap
agreements, forward contracts and options, a brief description of which may be
found in “Appendix A – “Glossary of Defined Terms.”
Consistent with
applicable provisions of the Trust Agreement and Delaware law, the Fund has
broad authority to make changes to the Fund’s operations. Consistent with this
authority, the Fund, in its sole discretion and without shareholder approval or
advance notice, may change its investment objective, Benchmark, or investment
strategies. The Fund has no current intention to make any such change, and any
change is subject to applicable regulatory requirements, including, but not
limited to, any requirement to amend applicable listing rules of the
NYSE.
The reasons for and
circumstances that may trigger any such changes may vary widely and cannot be
predicted. However, by way of example, the Fund may change the term structure or
underlying components of the Benchmark in furtherance of the Fund’s investment
objective of tracking the price of wheat for future delivery if, due to market
conditions, a potential or actual imposition of position limits by the CFTC or
futures exchange rules, or the imposition of risk mitigation measures by a
futures commission merchant restricts the ability of the Fund to invest in the
current Benchmark Futures Contracts. The Fund would file a current report on
Form 8-K and a prospectus supplement to describe any such change and the
effective date of the change. Shareholders may modify their holdings of the
Fund’s shares in response to any change by purchasing or selling Fund shares
through their broker-dealer.
The Fund invests in
Benchmark Component Futures Contracts to the fullest extent possible without
being leveraged or unable to satisfy its expected current or potential margin or
collateral obligations with respect to its investments in Benchmark Component
Futures Contracts. After fulfilling such margin and collateral requirements, the
Fund invests the remainder of its proceeds from the sale of baskets in short
term financial instruments of the type commonly known as “cash and cash
equivalents.” Cash and cash equivalents may include short-term Treasury bills,
money market funds, demand deposit accounts, and commercial
paper.
The Sponsor employs a
“neutral” investment strategy intended to track the changes in the Benchmark
regardless of whether the Benchmark goes up or goes down. The Fund’s “neutral”
investment strategy is designed to permit investors generally to purchase and
sell the Fund’s Shares for the purpose of investing indirectly in the wheat
market in a cost-effective manner. The Sponsor endeavors to place the Fund’s
trades in Benchmark Component Futures Contracts and otherwise manage the Fund’s
investments so that the Fund’s average daily tracking error against the
Benchmark will be less than 10 percent over any period of 30 trading days.
However, the Fund incurs certain expenses in connection with its operations,
which cause imperfect correlation between changes in the Fund’s NAV and changes
in the Benchmark because the Benchmark does not reflect expenses or income. As a
result, investors may incur a partial or complete loss of their investment even
when the performance of the Benchmark is
positive.
Investors may
purchase and sell Shares through their broker-dealers. However, the Fund creates
and redeems Shares only in blocks called “Creation Baskets” and “Redemption
Baskets,” respectively, and only Authorized Purchasers may purchase or redeem
Creation Baskets or Redemption Baskets. An Authorized Purchaser is under no
obligation to create or redeem baskets, and an Authorized Purchaser is under no
obligation to offer to the public Shares of any baskets it does create. Baskets
are generally created when there is a demand for Shares, including, but not
limited to, when the market price per share is at (or perceived to be at) a
premium to the NAV per Share. Similarly, baskets are generally redeemed when the
market price per share is at (or perceived to be at) a discount to the NAV per
Share. Retail investors seeking to purchase or sell Shares on any day are
expected to effect such transactions in the secondary market, on the NYSE Arca,
at the market price per share, rather than in connection with the creation or
redemption of baskets.
The Sponsor believes
that by investing in Benchmark Component Futures Contracts, the Fund’s net asset
value (“NAV”) will closely track the Benchmark. The Sponsor also believes that
because of market arbitrage opportunities, the market price at which investors
will purchase and sell Shares through their broker-dealer will closely track the
Fund’s NAV. The Sponsor believes that the net effect of these relationships is
that the Fund’s market price on the NYSE Arca at which investors purchase and
sell Shares will closely track the wheat market for future delivery, as measured
by the Benchmark.
The Sponsor maintains
a public website on behalf of the Fund, www.teucrium.com,
which contains information about the Trust, the Fund, and the
Shares.
Note to Secondary Market Investors: Except when aggregated in Redemption Baskets, Shares
are not individually redeemable. Shares can be directly purchased from the Fund
only in Creation Baskets, and only by Authorized Purchasers. Each Creation
Basket consists of 25,000 Shares and therefore requires a significant financial
commitment to purchase. Accordingly, investors who do not have such resources or
who are not Authorized Purchasers should be aware that some of the information
contained in this prospectus, including information about purchases and
redemptions of Shares directly with the Fund, is only relevant to Authorized
Purchasers. There is no guarantee that Shares will trade at prices that are at
or near the per-Share NAV. When buying or selling Shares on the secondary market
through a broker, most investors incur customary brokerage commissions and
charges.
As
noted, the Fund invests in Wheat 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.
Principal Investment Risks of an
Investment in the Fund
An investment in the
Fund involves a degree of risk and you could incur a partial or total loss of
your investment in the Fund Some of the risks you may face are summarized below.
A more extensive discussion of these risks appears beginning on page
5.
●
Unlike mutual funds,
commodity pools and other investment pools that manage their investments so as
to realize income and gains for distribution to their investors, the Fund
generally does not distribute dividends to holders of Fund Shares
(“Shareholders”). You should not invest in the Fund if you will need cash
distributions from the Fund to pay taxes on your share of income and gains of
the Fund, if any, or for other purposes.
●
Investors may choose
to use the Fund as a means of investing indirectly in wheat, and there are risks
involved in this investment strategy. The risks and hazards that are inherent in
wheat production may cause the price of wheat to fluctuate
widely.
●
Only an Authorized
Purchaser may engage in creation or redemption transactions with the Fund. The
Fund has a limited number of institutions that act as Authorized Purchasers. To
the extent that these institutions exit the business or are unable or unwilling
to proceed with creation and/or redemption orders with respect to the Fund, Fund
Shares may, particularly in times of market stress, trade at a discount to the
NAV per Share and possibly face trading halts and/or
delisting.
●
The price
relationship between the near month Wheat 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 wheat price indices. In some cases, the near month contract’s
price is lower than later expiring contracts’ prices (a situation known as
“contango” in the futures markets). In the event of a prolonged period of
contango, and absent the impact of rising or falling 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.
●
You will have no
rights to participate in the management of the Fund and will have to rely on the
duties and judgment of the Sponsor to manage the
Fund.
●
The Fund pays fees
and expenses that are incurred regardless of whether it is
profitable.
●
The Fund seeks to
have the changes in its Shares’ NAV track changes in the Benchmark, rather than
profit from speculative trading of Wheat Futures Contracts or from the use of
leverage (i.e., the Sponsor manages the Fund so that the aggregate value of the
Fund’s exposure to losses from its investments in Benchmark Component Futures
Contracts at any time will not exceed the value of the Fund’s assets). There is
no assurance that the Sponsor will successfully implement this investment
strategy, and if the Fund becomes leveraged, you could lose all or substantially
all of your investment if the Fund’s trading positions suddenly turn
unprofitable.
●
In addition to
Benchmark Component Futures Contracts, the Fund reserves the right to invest in
other wheat interests. To the extent that these other wheat interests are
contracts individually negotiated between their parties, they may not be as
liquid as Benchmark Component Futures Contracts and will expose the Fund to
credit risk that its counterparty may not be able to satisfy its obligations to
the Fund.
●
The regulation of
commodity interest transactions in the United States has historically been
comprehensive and is a rapidly changing area of law and is subject to ongoing
modification by governmental and judicial action. Future U.S. or foreign
regulatory changes may alter the nature of an investment in the Fund, or the
ability of the Fund to continue to implement its investment
strategy.
●
Failures or breaches
of the electronic systems of the Fund, the Sponsor, or third parties or other
events such as the recent COVID-19 pandemic have the ability to cause
disruptions and negatively impact the Fund’s business operations, potentially
resulting in financial losses to the Fund and its
shareholders.
●
War and other
geopolitical events in eastern Europe, including but not limited to Russia and
Ukraine, may cause volatility in commodity prices including energy and grain
prices, due to the region’s importance to these markets, potential impacts to
global transportation and shipping, and other supply chain disruptions. These
events are unpredictable and may lead to extended periods of price
volatility.
For additional risks,
see “What Are the Risk Factors Involved with an Investment in the
Fund?”
Determination of
NAV
The Fund’s NAV is
determined as of the earlier of the close of the New York Stock Exchange or 4:00
p.m. (EST) on each day that the NYSE Arca is open for
trading.
Defined Terms
For a glossary of
defined terms, see Appendix A.
Breakeven
Analysis
The breakeven
analysis set forth below is a hypothetical illustration of the approximate
dollar returns and percentage returns for the redemption value of a single share
to equal the amount invested twelve months after the investment is made. For
purposes of this breakeven analysis, an initial selling price of $8.76 per
share, which equals the NAV per share at the close of trading February 28, 2022,
is assumed. The breakeven analysis is an approximation only and assumes a
constant month-end Net Asset Value. In order for a hypothetical investment in
shares to breakeven over the next 12 months, assuming a selling price of $8.76
per share, the investment would have to generate a 1.14% or $0.10
return.
|
|
|
|
Assumed initial
selling price per share (1) |
$8.76 |
Management Fee
(1.00%) (2) |
$0.09 |
Estimated
Brokerage Commissions (3) |
$0.01 |
Other Fund Fees
and Expenses (4)
(5) |
$0.07 |
Interest and
Other Income (0.76%) (6) |
$(0.07) |
Amount of
trading income (loss) required for the redemption value at the end of one
year to equal the selling price of the share |
$0.10 |
Percentage of
initial selling price per share (7) |
1.14% |
(1) In order to show how a
hypothetical investment in shares would break even over the next 12 months, this
breakeven analysis uses an assumed initial selling price of $8.76per share, which
is based on the NAV per share of WEAT at the close of trading on February 28,
2022. Investors should note that, because WEAT’S NAV changes on a daily basis,
the breakeven amount on any given day could be higher or lower than the amount
reflected here.
(2) The Fund is obligated to
pay the Sponsor a management fee at the annual rate of 1.00% of the Fund’s
average daily net assets, payable monthly. The Sponsor can elect to waive the
payment of the fee in any amount at its sole discretion, at any time and from
time to time, in order to reduce the Fund’s expenses or for any other
purpose.
(3) Reflects estimated
brokerage commissions and fees for Wheat Futures Contract purchase or sale and
reflected on a per trade basis. The estimated fee is based on the actual
brokerage commissions and trading fees paid for the year ending December 31,
2021.
(4) In connection with orders
to create or redeem baskets, Authorized Purchasers will pay a transaction fee in
the amount of $250 per order. Because these transaction fees are de minimis in
amount, are paid to the Fund’s custodian, U.S. Bank, N.A. (the “Custodian”) and
charged on a transaction-by-transaction basis (and not on a Basket by Basket
basis), and are borne by the Authorized Participants, they have not been
included in the Breakeven Table. See “Creation
and Redemption Transaction Fees,” page 46.
(5) Other Fund Fees and
Expenses are an estimate based on an allocation to the Fund of the total
estimated expenses anticipated to be incurred by the Trust on behalf of the
Fund, net of any expenses or management fee waived by the Sponsor, and include:
Professional fees (primarily legal, auditing and tax-preparation related costs);
Custodian and Administrator fees and expenses, Distribution and Marketing fees
(primarily fees paid to the Distributor, costs related to regulatory compliance
activities and other costs related to the trading activities of the Fund);
Business Permits and Licenses; General and Administrative expenses (primarily
insurance and printing), and Other Expenses. The expenses presented are based on
estimated expenses for the current fiscal year, and do not represent the maximum
amounts payable under the contracts with third-party service providers, as
discussed below in the section of this disclosure document entitled “Contractual
Fees and Compensation Arrangements with the Sponsor and Third-Party Service
Providers.” The cost of these fixed or estimated fees has been calculated
assuming that the Fund has $131.5 million in assets, which was the approximate
amount of assets as of February 28, 2022. The Sponsor can elect to pay (or waive
reimbursement for) certain fees or expenses that would generally be paid by the
Fund, although it has no contractual obligation to do so. Any election to pay or
waive reimbursement for fees and expenses that would generally be paid by the
Fund can be changed at the discretion of the Sponsor.
(6) The Fund seeks to earn
interest and other income in high credit quality, short-duration instruments or
deposits associated with the pool’s cash management strategy that may be used to
offset expenses. These investments may include, but are not limited to,
short-term Treasury Securities, demand deposits, money market funds and
investments in commercial paper. Management estimates that the blended interest
rate will be 0.76% based on the current interest rate environment and outlook as
of February 28, 2022. The actual rate may vary and not all assets of the Fund
will earn interest.
(7) This represents the
estimated approximate percentage for the redemption value of a hypothetical
initial investment in a single share to equal the amount invested twelve months
after the investment was made. The estimated approximate percentage of selling
price before waived expenses is 1.48% or $0.13 per share, based on the Fund
assets, net asset value per share and shares outstanding as of February 28,
2022. The fees waived by the Sponsor is an estimate, can be applied to any
expense related to the Fund, and may be terminated at any time at the discretion
of the Sponsor.
The Offering
Offering |
The Fund’s Shares are listed on
the NYSE Arca and investors may purchase and sell Shares through their
broker-dealer. The Fund only offers Creation Baskets consisting of 25,000
Shares through the Distributor to Authorized Purchasers. Authorized
Purchasers may purchase Creation Baskets consisting of 25,000 Shares at
the Fund’s NAV. |
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Use of
Proceeds |
The Sponsor applies substantially all of the Fund’s
assets toward investing in Benchmark Component Futures
Contracts, cash, and cash equivalents. The
Sponsor deposits a portion of the Fund’s net assets with its futures
commission merchant (“FCM”) or other financial institutions to be used to
meet its current or potential margin or collateral requirements in
connection with its investment in Benchmark Component Futures
Contracts. The Fund uses only cash and cash
equivalents to satisfy these requirements. The Sponsor expects that all
entities that will hold or trade the Fund’s assets will be based in the
United States and will be subject to United States regulations. The
Sponsor believes that approximately 4-6% of the Fund’s assets will
normally be committed as margin for Benchmark Component Futures
Contracts. However, from time to time, the
percentage of assets committed as margin/collateral may be substantially
more, or less, than such range. The remaining portion of the Fund’s assets
is held in cash or cash equivalents. All interest or other income earned
on these investments is retained for the Fund’s
benefit. |
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NYSE Arca
Symbol |
“WEAT” |
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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, which is paid to the Custodian. Authorized
Purchasers are not required to sell any specific number or dollar amount
of Shares. The per share price of Shares offered in Creation Baskets is
the total NAV of the Fund calculated as of the close of the NYSE Arca on
that day, divided by the number of issued and outstanding
Shares. |
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InterSeries 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, U.S. Bancorp Fund Services, LLC, doing
business as U.S. Bank Global Fund Services (“Global Fund Services”), the
Fund’s “Administrator” calculates the NAV of
the Fund’s Shares as of the earlier of 4:00 p.m. (EST) or the close of the
New York Stock Exchange each day. ICE Data Indices, LLC calculates an
approximate net asset value every 15 seconds throughout each day that the
Fund’s Shares are traded on the NYSE Arca for as long as the CBOT’s main
pricing mechanism is open. |
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Fund
Expenses |
The Fund pays the Sponsor a management fee at an
annual rate of 1.00% of the Fund’s average daily net assets. The Fund is
also responsible for other ongoing fees, costs and expenses of its
operations, including (i) brokerage and other fees and commissions
incurred in connection with the trading activities of the Fund; (ii)
expenses incurred in connection with registering additional Shares of the
Fund or offering Shares of the Fund; (iii) the routine expenses associated
with the preparation and, if required, the printing and mailing of
monthly, quarterly, annual and other reports required by applicable U.S.
federal and state regulatory authorities, Trust meetings and preparing,
printing and mailing proxy statements to Shareholders; (iv) the payment of
any distributions related to redemption of Shares; (v) payment for routine
services of the Trustee, legal counsel and independent accountants; (vi)
payment for routine accounting, bookkeeping, custody and transfer agency
services, whether performed by an outside service provider or by
Affiliates of the Sponsor; (vii) postage and insurance; (viii) costs and
expenses associated with investor relations and services; (ix) costs of
preparation of all federal, state, local and foreign tax returns and any
taxes payable on the income, assets or operations of the Fund; (x) payment
for marketing services; and (xi) extraordinary expenses (including, but
not limited to, legal claims and liabilities and litigation costs and any
indemnification related thereto). The estimated
amount of fees and expenses that are anticipated to be incurred in a
single Share during the first twelve (12) months of ownership is $0.10 or
1.14% of the selling price. The total estimated fees and expenses are
expressed as a percentage of the net asset value as of February 28, 2022.
These fees and expenses are net of any expenses or management fees waived
by the Sponsor. The Sponsor may, in its discretion, pay or reimburse the
Fund for, or waive a portion of its management fee to offset, expenses
that would otherwise be borne by the Fund. |
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General expenses of the Trust
will be allocated among the existing Teucrium Funds and any future series
of the Trust as determined by the Sponsor in its discretion. The Trust may
be required to indemnify the Sponsor, and the Trust and/or the Sponsor may
be required to indemnify the Trustee, Distributor or Administrator, under
certain circumstances. |
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Termination
Events |
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. |
Authorized
Purchasers |
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 41. 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. |
WHAT ARE THE RISK FACTORS INVOLVED
WITH AN INVESTMENT IN THE FUND?
You should consider carefully the
risks described below before making an investment decision. You should also
refer to the other information included in this prospectus, and the Fund’s and
the Trust’s financial statements and the related notes incorporated by reference
herein. See “Incorporation by Reference of Certain
Information.”
Risks Associated with Investing
Directly or Indirectly in Wheat
Investing in
Benchmark Component Futures Contracts subjects the Fund to the risks of the
wheat 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 wheat market because it invests in Benchmark
Component Futures Contracts. The risks and hazards that are inherent in the
wheat market may cause the price of wheat and the Fund’s Shares to fluctuate
widely and you could incur a partial or total loss of your investment in the
Fund.
●
The price and
availability of wheat is influenced by economic and industry conditions,
including but not limited to supply and demand factors such as: crop disease,
weed control, water availability, various planting, growing, or harvesting
problems, severe weather conditions such as drought, floods, or frost that are
difficult to anticipate and which cannot be controlled. Demand for food products
made from wheat flour is affected by changes in consumer tastes, national,
regional and local economic conditions, and demographic trends. More
specifically, demand for such food products in the United States is relatively
unaffected by changes in wheat prices or disposable income but is closely tied
to tastes and preferences. Export demand for wheat fluctuates yearly, based
largely on crop yields in the importing
countries.
●
Wheat 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, wheat 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. Wheat 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 wheat may cause risk to an investor because of the possibility
that Share prices will be depressed because of the wheat harvest cycle. In the
United States, the market for winter wheat, the type of wheat upon which CBOT
Wheat Futures Contracts are based, is generally at its lowest point, and wheat
prices are generally lowest, shortly before and during the harvest (in the
spring or early summer), due to the high supply of wheat in the market.
Conversely, winter wheat prices are generally highest in the fall or early
winter, when the wheat harvested that year has largely been sold and used. 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 fall
and early winter). 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, Wheat Futures Contracts expiring in the
spring.
An investment in
the Fund is subject to correlation risk. Your return on an investment in the
Fund may differ from the return of the Benchmark, changes in the Fund’s NAV and
the spot price of wheat.
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 wheat. Depending on certain
factors associated with each of these correlations which are discussed in more
detail below, you could incur a partial or total loss of your investment in the
Fund.
The Benchmark is
not designed to correlate with the spot price of wheat, and this could cause the
changes in the price of the Shares to substantially vary from the changes in the
spot price of wheat. Therefore, you may not be able to effectively use the Fund
to hedge against wheat related losses or to indirectly invest in
wheat.
The Benchmark
Component Futures Contracts reflect the price of wheat for future delivery, not
the current spot price of wheat, so at best the correlation between changes in
such Wheat Futures Contracts and the spot price of wheat will be only
approximate. Weak correlation between the Benchmark and the spot price of wheat
may result from the typical seasonal fluctuations in wheat prices discussed
above. Imperfect correlation may also result from speculation in Benchmark
Component Futures Contracts, technical factors in the trading of Benchmark
Component Futures Contracts and expected inflation in the economy as a whole. If
there is a weak correlation between the Benchmark and the spot price of wheat,
then the price of Shares may not accurately track the spot price of wheat, and
you may not be able to effectively use the Fund as a way to hedge the risk of
losses in your wheat related transactions or as a way to indirectly invest in
wheat.
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 wheat related losses or as a way to indirectly invest in
wheat.
The Sponsor endeavors
to invest the Fund’s assets as fully as possible in Benchmark Component Futures
Contracts so that the changes in the NAV closely correlate with the changes in
the Benchmark. However, changes in the Fund’s NAV may not correlate with the
changes in the Benchmark for various reasons, including those set forth
below.
The Fund incurs
certain expenses in connection with its operations and holds most of its assets
in income producing, short-term financial instruments for margin and other
liquidity purposes and to meet redemptions that may be necessary on an ongoing
basis. These expenses and income cause imperfect correlation between changes in
the Fund’s NAV and changes in the Benchmark.
The Sponsor may not
be able to invest the Fund’s assets in Benchmark Component Futures Contracts
having an aggregate notional amount exactly equal to the Fund’s NAV. As a
standardized contract, a single Wheat Futures Contract is for a specified amount
of wheat, 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 $375,000 for the
sale of a Creation Basket and that the value (i.e., the notional amount) of a
Wheat Futures Contract is $32,500, the Fund could only enter into 11 Wheat
Futures Contracts with an aggregate value of $357,500). While the Fund may be
better able to achieve the exact amount of exposure to the wheat market through
the use of over the counter other wheat interests, there is no assurance that
the Sponsor will be able to continually adjust the Fund’s exposure to such other
wheat interests to maintain such exact exposure. Any amounts not invested in
Benchmark Component Futures Contracts are held in cash and cash
equivalents.
As Fund assets
increase, there may be more or less correlation. On the one hand, as the Fund
grows it should be able to invest in Benchmark Component Futures Contracts with
a notional amount that is closer on a percentage basis to the Fund’s NAV. For
example, if the Fund’s NAV is equal to 4.9 times the value of a single futures
contract, it can purchase only four futures contracts, which would cause only
81.6% of the Fund’s assets to be exposed to the wheat market. On the other hand,
if the Fund’s NAV is equal to 100.9 times the value of a single Wheat 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 Wheat 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 wheat
interests not subject to these position limits or accountability levels. To the
extent that the Fund invests in other wheat interests, the correlation between
the Fund’s NAV and the Benchmark may be lower. In certain circumstances,
position limits or accountability levels could limit the number of Creation
Baskets that will be sold.
If changes in the
Fund’s NAV do not correlate with changes in the Benchmark, then investing in the
Fund may not be an effective way to hedge against wheat related losses or
indirectly invest in wheat.
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 wheat related losses or
to indirectly invest in wheat.
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 wheat, even if the Fund’s NAV was closely
tracking movements in the spot price of wheat. If this occurs, you may not be
able to effectively use the Fund to hedge the risk of losses in your wheat
related transactions or to indirectly invest in wheat.
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 wheat. 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 wheat
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 wheat 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 wheat production or exports, or in another major export, can
also make it difficult to liquidate a position. Unexpected market illiquidity
may cause major losses to investors at any time or from time to time. In
addition, the Fund does not intend at this time to establish a credit facility,
which would provide an additional source of liquidity, but instead will rely
only on the cash and cash equivalents that it holds to meet its liquidity needs.
The anticipated value of the positions in Benchmark Component Futures Contracts
that the Sponsor will acquire or enter into for the Fund increases the risk of
illiquidity. Because Benchmark Component Futures Contracts may be illiquid, the
Fund’s holdings may be more difficult to liquidate at favorable prices in
periods of illiquid markets and losses may be incurred during the period in
which positions are being liquidated.
If the nature of
the participants in the futures market shifts such that wheat purchasers are the
predominant hedgers in the market, the Fund might have to reinvest at higher
futures prices or choose other wheat interests.
The changing nature
of the participants in the wheat market will influence whether futures prices
are above or below the expected future spot price. Wheat producers will
typically seek to hedge against falling wheat prices by selling Wheat Futures
Contracts. Therefore, if wheat producers become the predominant hedgers in the
futures market, prices of Wheat Futures Contracts will typically be below
expected future spot prices. Conversely, if the predominant hedgers in the
futures market are the purchasers of the wheat who purchase Wheat Futures
Contracts to hedge against a rise in prices, prices of Wheat 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 Wheat Futures
Contract that is no longer a Benchmark Component Futures Contract and purchase a
new Wheat Futures Contract or to sell a Wheat Futures Contract to meet
redemption requests.
Storage costs
could impact the value of the Benchmark Component Futures
Contracts.
Storage costs
associated with purchasing wheat could result in costs and other liabilities
that could impact the value of Wheat Futures Contracts or certain other wheat
interests. Storage costs include the time value of money invested in wheat as a
physical commodity plus the actual costs of storing the wheat less any benefits
from ownership of wheat that are not obtained by the holder of a futures
contract. In general, Wheat 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 wheat while the Fund holds Wheat
Interests, the value of the Benchmark Component Futures Contracts, and therefore
the Fund’s NAV, may change as well.
The price
relationship between the Benchmark Component Futures Contracts at any point in
time and the Wheat 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 wheat price
indices.
The design of the
Fund’s Benchmark is such that the Benchmark Component Futures Contracts will
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 Wheat 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 wheat 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 wheat
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 wheat 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
wheat 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 wheat. 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.
Regulation of the
commodity interests and commodity markets is extensive and constantly changing.
future regulatory developments are impossible to predict but may significantly
and adversely affect the Fund.
The regulation of
futures markets, futures contracts and futures exchanges has historically been
comprehensive. The CFTC and the exchanges are authorized to take extraordinary
actions in the event of a market emergency including, for example, the
retroactive implementation of speculative position limits, increased margin
requirements, the establishment of daily price limits and the suspension of
trading on an exchange or trading facility.
The regulation of
commodity interest transactions in the United States is a rapidly changing area
of law and is subject to ongoing modification by governmental and judicial
action. Congress enacted the DoddFrank Wall Street Reform and Consumer
Protection Act (the “DoddFrank Act”) in 2010 As the DoddFrank Act
continues to be implemented by the CFTC and the SEC, there is a possibility of
future regulatory changes within the United States altering, perhaps to a
material extent, the nature of an investment in the Fund, or the ability for the
Fund to continue to implement its investment strategy. In addition, various
national governments outside of the United States have expressed concern
regarding the disruptive effects of speculative trading in the commodities
markets and the need to regulate the derivatives markets in general. The effect
of any future regulatory change on the Fund is impossible to predict but could
be substantial and adverse.
If you are
investing in the Fund for purposes of hedging, you might be subject to several
risks unique to the Fund, and the Fund may not be appropriate for hedging
purposes. The Fund was not designed for hedging purposes; those using the Fund
as a hedge of any kind do so exclusively at their own risk.
An investment in
the Fund may provide you little or no diversification benefits. Thus, in a
declining market, the Fund may have no gains to offset your losses from other
investments, and you may suffer losses on your investment in the Fund at the
same time you incur losses with respect to other asset
classes.
It cannot be
predicted to what extent the performance of Benchmark Component Futures
Contracts will or will not correlate to the performance of other broader asset
classes such as stocks and bonds. If the Fund’s performance were to move more
directly with the financial markets, you will obtain little or no
diversification benefits from an investment in the Shares. In such a case, the
Fund may have no gains to offset your losses from other investments, and you may
suffer losses on your investment in the Fund at the same time you incur losses
with respect to other investments.
Variables such as
drought, floods, weather, embargoes, market disruptions, tariffs and other
political events may have a larger impact on wheat and wheat 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 wheat and prices of other financial assets such as stocks
and bonds are negatively correlated. In the absence of negative correlation, the
Fund cannot be expected to be automatically profitable during unfavorable
periods for the stock market, or vice versa.
The Fund’s Operating
Risks
The Fund may
change its investment objective, Benchmark or investment strategies at any time
without shareholder approval or advance notice.
Consistent with its
authority under the Trust Agreement and Delaware law, the Fund, in its sole
discretion and without shareholder approval or advance notice, may change the
Fund’s investment objective, Benchmark or investment strategies, subject to
applicable regulatory requirements, including, but not limited to, any
requirement to amend applicable listing rules of the NYSE. The reasons for and
circumstances that may trigger any such changes may vary widely and cannot be
predicted. By way of example, the Fund may change the term structure or
underlying components of the Benchmark in furtherance of the Fund’s investment
objective of tracking the price of corn for future delivery if, due to market
conditions, a potential or actual imposition of position limits by the CFTC or
futures exchange rules, or the imposition of risk mitigation measures by a
futures commission merchant restricts the ability of the Fund to invest in the
current Benchmark Futures Contracts. Shareholders may experience losses on their
investments in the Fund as a result of such changes.
The Fund is not a
registered investment company, so you do not have the protections of the
Investment Company Act of 1940.
The Fund is not an
investment company subject to the Investment Company Act of 1940. Accordingly,
you do not have the protections afforded by that statute, which, for example,
requires investment companies to have a board of directors with a majority of
disinterested directors and regulates the relationship between the investment
company and its investment manager.
The Sponsor is
leanly staffed and relies heavily on key personnel to manage trading
activities.
In managing and
directing the day to day activities and affairs of the Fund, the Sponsor relies
almost entirely on a small number of individuals, including Mr. Sal Gilbertie,
Mr. Steve Kahler and Ms. Cory Mullen-Rusin. If Mr. Gilbertie, Mr. Kahler or Ms.
Mullen-Rusin were to leave or be unable to carry out their present
responsibilities, it may have an adverse effect on the management of the Fund.
To the extent that the Sponsor establishes additional commodity pools, even
greater demands will be placed on these individuals.
The Sponsor has
limited capital and may be unable to continue to manage the Fund if it sustains
continued losses.
The Sponsor was
formed for the purpose of managing the Trust, including the Fund, the other
Teucrium Funds, and any other series of the Trust that may be formed in the
future, and has been provided with capital primarily by its principals and a
small number of outside investors. If the Sponsor operates at a loss for an
extended period, its capital will be depleted, and it may be unable to obtain
additional financing necessary to continue its operations. If the Sponsor were
unable to continue to provide services to the Fund, the Fund would be terminated
if a replacement sponsor could not be found. Any expenses related to the
operation of the Fund would need to be paid by the Fund at the time of
termination.
Position limits,
accountability levels and daily price fluctuation limits set by the CFTC and the
exchanges have the potential to cause tracking error, which could cause the
price of Shares to substantially vary from the Benchmark and prevent you from
being able to effectively use the Fund as a way to hedge against wheat related
losses or as a way to indirectly invest in wheat.
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 Wheat
Futures Contracts are 1,200 spot month contracts and 19,300 contracts 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 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.
On December 16, 2016,
as mandated by the Dodd-Frank Act, the CFTC adopted a final rule that aggregate
all positions, for purposes of position limits; such positions include futures
contracts, futures-equivalent positions, over the counter swaps and options
(i.e., contracts that are not traded on exchanges). These aggregation
requirements became effective on February 14, 2017 and could limit the Fund’s
ability to establish positions in commodity over the counter instruments if the
assets of the Fund were to grow substantially.
As published in the
January 14, 2021 Federal Register, the Commodity Futures Trading Commission
(CFTC) voted to approve a final rule (Final Rule) regarding position limits for
certain futures contracts and economically equivalent swaps. The Final Rule
ends a decade of rulemaking activity in which the CFTC proposed, amended, and
re-proposed its position limit rules and aggregation standards for speculative
positions due to certain amendments to the Commodity Exchange Act (CEA) by the
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank
Act). In the Final Rule, the CFTC confirmed that federal speculative position
limits are necessary for 25 core referenced futures contracts and for any
futures contracts and options on futures contracts that are linked to those
contracts. The 25 core referenced futures contracts include the nine
“legacy” agricultural contracts that are currently subject to federal position
limits and 16 additional non-legacy contracts. The Final Rule became effective
on March 15, 2021, but a number of the requirements in the Final Rule have a
general compliance date of January 1, 2022, and later compliance date of January
1, 2023 with respect to swaps-related requirements and the elimination of
previously granted risk management exemptions. The Final Rule became effective
on March 15, 2021, but a number of the requirements in the Final Rule have a
general compliance date of January 1, 2022, and later compliance date of January
1, 2023 with respect to swaps-related requirements and the elimination of
previously granted risk management exemptions.
There
are technical and fundamental risks inherent in the trading system the Sponsor
intends to employ.
The Sponsor’s trading
system is quantitative in nature, and it is possible that the Sponsor may make
errors. Any errors or imperfections in the Sponsor’s trading system’s
quantitative models, or in the data on which they are based, could adversely
affect the Sponsor’s effective use of such trading systems. It is not possible
or practicable for the Sponsor’s trading system to factor all relevant,
available data into quantitative systems and/or trading decision. There is no
guarantee that the Sponsor will use any specific data or type of data in making
trading decisions on behalf of the Fund, nor is there any guarantee that the
data actually utilized in making trading decisions on behalf of the Fund will be
the most accurate data or free from errors. In addition, it is possible that a
computer or software program may malfunction and cause an error in
computation.
The Fund and the
Sponsor may have conflicts of interest, which may cause them to favor their own
interests to your detriment.
The Fund and the
Sponsor may have inherent conflicts to the extent the Sponsor attempts to
maintain the Fund’s asset size in order to preserve its fee income and this may
not always be consistent with the Fund’s objective of having the value of its
Shares’ NAV track changes in the Benchmark. The Sponsor’s officers and employees
do not devote their time exclusively to the Fund. These persons may be
directors, officers or employees of other entities. They could have a conflict
between their responsibilities to the Fund and to those other
entities.
In addition, the
Sponsor’s principals, officers or employees may trade securities and futures and
related contracts for their own accounts. A conflict of interest may exist if
their trades are in the same markets and occur at the same time as the Fund
trades using the clearing broker to be used by the Fund. A potential conflict
also may occur if the Sponsor’s principals, officers or employees trade their
accounts more aggressively or take positions in their accounts that are
opposite, or ahead of, the positions taken by the Fund.
The Sponsor has sole
current authority to manage the investments and operations of the Fund, and this
may allow it to act in a way that furthers its own interests and in conflict
with your best interests, including the authority of the Sponsor to allocate
expenses to and between the Funds. Shareholders have very limited voting rights,
which will limit the ability to influence matters such as amendment of the Trust
Agreement, changes in the Fund’s basic investment policies, dissolution of the
Fund, or the sale or distribution of the Fund’s assets.
Shareholders have
only very limited voting rights and generally will not have the power to replace
the Sponsor. Shareholders will not participate in the management of the Fund and
do not control the Sponsor so they will not have influence over basic matters
that affect the Fund.
Shareholders will
have very limited voting rights with respect to the Fund’s affairs. Shareholders
may elect a replacement sponsor only if the current Sponsor resigns voluntarily
or loses its corporate charter. Shareholders will not be permitted to
participate in the management or control of the Fund or the conduct of its
business. Furthermore, any voting rights on shares held by the Fund will be
exercised by the Sponsor, generally without seeking advice or voting
instructions from Fund Shareholders. Shareholders must therefore rely upon the
duties and judgment of the Sponsor to manage the Fund’s
affairs.
The Sponsor may
manage a large amount of assets, and this could affect the Fund’s ability to
trade profitably.
Increases in assets
under management may affect trading decisions. While the Fund’s assets are
currently at manageable levels, the Sponsor does not intend to limit the amount
of Fund assets. The more assets the Sponsor manages, the more difficult it may
be for it to trade profitably because of the difficulty of trading larger
positions without adversely affecting prices and performance and of managing
risk associated with larger positions.
The liability of
the Sponsor and the Trustee are limited, and the value of the Shares will be
adversely affected if the Fund is required to indemnify the Trustee or the
Sponsor.
Under the Trust
Agreement, the Trustee and the Sponsor are not liable, and have the right to be
indemnified, for any liability or expense incurred absent gross negligence or
willful misconduct on the part of the Trustee or Sponsor, as the case may be.
That means the Sponsor may require the assets of the Fund to be sold in order to
cover losses or liability suffered by the Sponsor or by the Trustee. Any sale of
that kind would reduce the NAV of the Fund and the value of its
Shares.
Although the
Shares of the Fund are limited liability investments, certain circumstances such
as bankruptcy could increase a Shareholder’s liability.
The Shares of the
Fund are limited liability investments. Shareholders may not lose more than the
amount that they invest plus any profits recognized on their investment.
However, Shareholders could be required, as a matter of bankruptcy law, to
return to the estate of the Fund any distribution they received at a time when
the Fund was in fact insolvent or that was made in violation of its Trust
Agreement.
You cannot be
assured of the Sponsor’s continued services, and discontinuance may be
detrimental to the Fund.
You cannot be assured
that the Sponsor will be willing or able to continue to service the Fund for any
length of time. The Sponsor was formed for the purpose of sponsoring the Fund
and other commodity pools and has limited financial resources and no significant
source of income apart from its management fees from such commodity pools to
support its continued service for the Fund. If the Sponsor discontinues its
activities on behalf of the Fund or another series of the Trust, the Fund may be
adversely affected. If the Sponsor’s registrations with the CFTC or memberships
in the NFA were revoked or suspended, the Sponsor would no longer be able to
provide services to the Fund.
The Fund could
terminate at any time and cause the liquidation and potential loss of your
investment and could upset the overall maturity and timing of your investment
portfolio.
The Fund may
terminate at any time, regardless of whether the Fund has incurred losses,
subject to the terms of the Trust Agreement. For example, the dissolution or
resignation of the Sponsor would cause the Trust to terminate unless
shareholders holding a majority of the outstanding shares of the Trust, voting
together as a single class, elect within 90 days of the event to continue the
Trust and appoint a successor Sponsor. In addition, the Sponsor may terminate
the Fund if it determines that the Fund’s aggregate net assets in relation to
its operating expenses make the continued operation of the Fund unreasonable or
imprudent. As of the date of this prospectus, the Fund pays the fees, costs, and
expenses of its operations. If the Sponsor and the Fund are unable to raise
sufficient funds so that the Fund’s expenses are reasonable in relation to its
NAV, the Fund may be forced to terminate, and investors may lose all or part of
their investment. Any expenses related to the operation of the Fund would need
to be paid by the Fund at the time of termination.
However, no level of
losses will require the Sponsor to terminate the Fund. The Fund’s termination
would result in the liquidation of its investments and the distribution of its
remaining assets to the Shareholders on a pro rata basis in accordance with
their Shares, and the Fund could incur losses in liquidating its investments in
connection with a termination. Termination could also negatively affect the
overall maturity and timing of your investment portfolio.
As a Shareholder,
you will not have the rights enjoyed by investors in certain other types of
entities.
As interests in
separate series of a Delaware statutory trust, the Shares do not involve the
rights normally associated with the ownership of shares of a corporation
(including, for example, the right to bring shareholder oppression and
derivative actions). In addition, the Shares have limited voting and
distribution rights (for example, Shareholders do not have the right to elect
directors, as the Trust does not have a board of directors, and generally will
not receive regular distributions of the net income and capital gains earned by
the Fund). The Fund is also not subject to certain investor protection
provisions of the Sarbanes Oxley Act of 2002 and the NYSE Arca governance rules
(for example, audit committee requirements).
A court could
potentially conclude that the assets and liabilities of the Fund are not
segregated from those of another series of the Trust, thereby potentially
exposing assets in the Fund to the liabilities of another
series.
The Fund is a series
of a Delaware statutory trust and not itself a legal entity separate from the
other Teucrium Funds. The Delaware Statutory Trust Act provides that if certain
provisions are included in the formation and governing documents of a statutory
trust organized in series and if separate and distinct records are maintained
for any series and the assets associated with that series are held in separate
and distinct records and are accounted for in such separate and distinct records
separately from the other assets of the statutory trust, or any series thereof,
then the debts, liabilities, obligations and expenses incurred by a particular
series are enforceable against the assets of such series only, and not against
the assets of the statutory trust generally or any other series thereof.
Conversely, none of the debts, liabilities, obligations and expenses incurred
with respect to any other series thereof is enforceable against the assets of
such series. The Sponsor is not aware of any court case that has interpreted
this inter-series limitation on liability or provided any guidance as to what is
required for compliance. The Sponsor intends to maintain separate and distinct
records for the Fund and account for the Fund separately from any other Trust
series, but it is possible a court could conclude that the methods used do not
satisfy the Delaware Statutory Trust Act, which would potentially expose assets
in the Fund to the liabilities of one or more of the Teucrium Funds and/or any
other Trust series created in the future.
The Sponsor and
the Trustee are not obligated to prosecute any action, suit or other proceeding
in respect of any Fund property.
Neither the Sponsor
nor the Trustee is obligated to, although each may in its respective discretion,
prosecute any action, suit or other proceeding in respect of any Fund property.
The Trust Agreement does not confer upon Shareholders the right to prosecute any
such action, suit or other proceeding.
The Fund does not
expect to make cash distributions.
The Sponsor intends
to reinvest any income and realized gains of the Fund in additional
Benchmark Component Futures Contracts or cash and cash equivalents rather than
distributing cash to Shareholders. Therefore, unlike mutual funds, commodity
pools or other investment pools that generally distribute income and gains to
their investors, the Fund generally will not distribute cash to Shareholders.
You should not invest in the Fund if you will need cash distributions from the
Fund to pay taxes on your share of income and gains of the Fund, if any, or for
any other reason. Although the Fund does not intend to make cash distributions,
it reserves the right to do so in the Sponsor’s sole discretion, in certain
situations, including for example, if the income earned from its investments
held directly or posted as margin may reach levels that merit distribution,
e.g., at levels where such income is not necessary to support its underlying
investments in Benchmark Component Futures Contracts and investors adversely
react to being taxed on such income without receiving distributions that could
be used to pay such tax. Cash distributions may be made in these and similar
instances.
There is a risk
that the Fund will not have sufficient total net assets to compensate for the
fees and expenses that it must pay and as such the expense ratio of the Fund may
be higher than that filed in this document.
The Fund pays
management fees at an annual rate of 1.00% of its average net assets, brokerage
commissions and various other expenses from its ongoing operations (e.g., fees
of the Administrator, Trustee and Distributor), resulting in a total estimated
expense ratio of approximately 1.48% of net assets. These fees and expenses must
be paid in all events, regardless of the Fund’s total net
assets.
The Fund may
incur higher fees and expenses upon renewing existing or entering into new
contractual relationships.
The arrangements
between clearing brokers and counterparties on the one hand and the Fund on the
other generally are terminable by the clearing brokers or counterparty upon
notice to the Fund. In addition, the agreements between the Fund and its
third-party service providers, such as the Distributor and the Custodian, are
generally terminable at specified intervals. Upon termination, the Sponsor may
be required to renegotiate or make other arrangements for obtaining similar
services if the Fund intends to continue to operate. Comparable services from
another party may not be available, or even if available, these services may not
be available on the terms as favorable as those of the expired or terminated
arrangements.
The Fund may
experience a higher breakeven if interest rates decline.
The Fund seeks to
earn interest on cash balances available for investment. If actual interest
rates earned were to continue to fall and if the Sponsor were not able to waive
expenses sufficient to cover the deficit, the breakeven estimated by the Fund in
this prospectus could be higher.
The Fund is not
actively managed.
The Fund is not
actively managed and is designed to track a benchmark, regardless of whether the
price of the Benchmark Component Futures Contracts is flat, declining or rising.
As a result, the Fund may sustain losses that may have been avoidable if the
Fund was actively managed.
The Net Asset
Value calculation of the Fund may be overstated or understated due to the
valuation method employed when a settlement price is not available on the date
of net asset value calculation.
The Fund’s NAV
includes, in part, any unrealized profits or losses on open swap agreements,
futures or forward contracts. Under normal circumstances, the NAV reflects the
quoted 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, which may
result in losses.
Fund assets may
be depleted if investment performance does not exceed fees.
In addition to
certain fees paid to the Fund’s service providers, the Fund pays the Sponsor a
fee of 1.00% of asset under management per annum, regardless of Fund
performance. Over time, the Fund’s assets could be depleted if investment
performance does not exceed such fees.
The liquidity of
the Shares may be affected by the withdrawal from participation of Authorized
Purchasers, market makers, or other significant secondary-market participants
which could adversely affect the market price of the Shares.
Only an Authorized
Purchaser may engage in creation or redemption transactions directly with the
Fund. The Fund has a limited number of institutions that act as Authorized
Purchasers. To the extent that these institutions exit the business or are
unable to proceed with creation and/or redemption orders with respect to the
Fund and no other Authorized Purchaser is able to step forward to create or
redeem Creation Units, Fund shares may trade at a discount to NAV and possibly
face trading halts and/or delisting. In addition, a decision by a market maker,
lead market maker, or other large investor, to cease activities for the Fund or
a decision by a secondary market participant to sell a significant number of the
Fund’s Shares could adversely affect liquidity, the spread between the bid and
ask quotes, and potentially the price of the Shares. The Sponsor can make no
guarantees that participation by Authorized Purchasers or market makers will
continue.
If a minimum
number of Shares is outstanding, market makers may be less willing to purchase
Shares in the secondary market which may limit your ability to sell
Shares.
There is a minimum
number of baskets and associated Shares specified for the Fund. If the Fund
experienced redemptions that caused the number of Shares outstanding to decrease
to the minimum level of Shares required to be outstanding, until the minimum
number of Shares is again exceeded through the purchase of a new Creation
Basket, there can be no more redemptions by an Authorized Purchaser. In such
case, market makers may be less willing to purchase Shares from investors in the
secondary market, which may in turn limit the ability of Shareholders of the
Fund to sell their Shares in the secondary market. These minimum levels for the
Fund are 50,000 Shares representing two baskets. The minimum level of Shares
specified for the Fund is subject to change. As of February 28, 2022, there were
15,025,004 Shares outstanding. (The current number of Shares outstanding is
posted daily on our website, www.teucrium.com.)
The postponement,
suspension or rejection of redemption orders could adversely affect a
shareholder redeeming their Shares in the Fund.
The resulting delay
of any postponement, suspension or rejection may adversely affect the value of
the Shareholders’ redemption proceeds if the NAV of the Fund declines during the
period of delay.
The failure or
bankruptcy of a clearing broker could result in substantial losses for the Fund;
the clearing broker could be subject to proceedings that impair its ability to
execute the Fund’s trades.
Under CFTC
regulations, a clearing broker with respect to the Fund’s exchange traded wheat
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 wheat interests are
traded.
From time to time,
the clearing brokers may be subject to legal or regulatory proceedings in the
ordinary course of their business. A clearing broker’s involvement in costly or
time-consuming legal proceedings may divert financial resources or personnel
away from the clearing broker’s trading operations, which could impair the
clearing broker’s ability to successfully execute and clear the Fund’s
trades.
The failure or
insolvency of the Fund’s Custodian or other financial institution in which the
Fund has deposits could result in a substantial loss of the Fund’s
assets.
As
noted above, the vast majority of the Fund’s assets are held in cash and cash
equivalents with the Custodian, and other financial institutions, if applicable.
The insolvency of the Custodian, and any financial institution in which the Fund
holds cash and cash equivalents could result in a complete loss of the Fund’s
assets.
Third parties may
infringe upon or otherwise violate intellectual property rights or assert that
the Sponsor has infringed or otherwise violated their intellectual property
rights, which may result in significant costs, litigation, and diverted
attention of Sponsor’s management.
Third parties may
assert that the Sponsor has infringed or otherwise violated their intellectual
property rights. Third parties may independently develop business methods,
trademarks or proprietary software and other technology similar to that of the
Sponsor and claim that the Sponsor has violated their intellectual property
rights, including their copyrights, trademark rights, trade names, trade secrets
and patent rights. As a result, the Sponsor may have to litigate in the future
to determine the validity and scope of other parties’ proprietary rights or
defend itself against claims that it has infringed or otherwise violated other
parties’ rights. Any litigation of this type, even if the Sponsor is successful
and regardless of the merits, may result in significant costs, divert resources
from the Fund, or require the Sponsor to change its proprietary software and
other technology or enter into royalty or licensing
agreements.
On December 17, 2013,
the Sponsor was issued a patent on certain business methods and procedures used
with respect to the Fund. The patent protects the valuation engine which
calculates asset values of futures contracts corresponding to the Fund benchmark
in a locked position. A U.S. government maintenance fee is paid every three and
one-half years from the issue date. The Sponsor paid the maintenance fee in
2021. The Sponsor utilizes certain proprietary software. Any unauthorized use of
such proprietary software, business methods and/or procedures could adversely
affect the competitive advantage of the Sponsor or the Fund and/or require the
Sponsor to take legal action to protect its rights.
The Fund may
experience substantial losses on transactions if the computer or communications
system fails.
The Fund’s trading
activities depend on the integrity and performance of the computer and
communications systems supporting them. Extraordinary transaction volume,
hardware or software failure, power or telecommunications failure, a natural
disaster, cyber-attack or other catastrophe could cause the computer systems to
operate at an unacceptably slow speed or even fail. Any significant degradation
or failure of the systems that the Sponsor uses to gather and analyze
information, enter orders, process data, monitor risk levels and otherwise
engage in trading activities may result in substantial losses on transactions,
liability to other parties, lost profit opportunities, damages to the Sponsor’s
and Fund’s reputations, increased operational expenses and diversion of
technical resources.
If the computer
and communications systems are not upgraded when necessary, the Fund’s financial
condition could be harmed.
The development of
complex computer and communications systems and new technologies may render the
existing computer and communications systems supporting the Fund’s trading
activities obsolete. In addition, these computer and communications systems must
be compatible with those of third parties, such as the systems of exchanges,
clearing brokers and the executing brokers. As a result, if these third parties
upgrade their systems, the Sponsor will need to make corresponding upgrades to
effectively continue its trading activities. The Sponsor may have limited
financial resources for these upgrades or other technological changes. The
Fund’s future success may depend on the Sponsor’s ability to respond to changing
technologies on a timely and cost-effective basis.
The Fund depends
on the reliable performance of the computer and communications systems of third
parties, such as brokers and futures exchanges, and may experience substantial
losses on transactions if they fail.
The Fund depends on
the proper and timely function of complex computer and communications systems
maintained and operated by the futures exchanges, brokers and other data
providers that the Sponsor uses to conduct trading activities. Failure or
inadequate performance of any of these systems could adversely affect the
Sponsor’s ability to complete transactions, including its ability to close out
positions, and result in lost profit opportunities and significant losses on
commodity interest transactions. This could have a material adverse effect on
revenues and materially reduce the Fund’s available capital. For example,
unavailability of price quotations from third parties may make it difficult or
impossible for the Sponsor to conduct trading activities so that the Fund will
closely track the Benchmark. Unavailability of records from brokerage firms may
make it difficult or impossible for the Sponsor to accurately determine which
transactions have been executed or the details, including price and time, of any
transaction executed. This unavailability of information also may make it
difficult or impossible for the Sponsor to reconcile its records of transactions
with those of another party or to accomplish settlement of executed
transactions.
The occurrence of
a severe weather event, natural disaster, terrorist attack, geopolitical events,
outbreak or public health emergency as declared by the World Health
Organization, the continuation or expansion of war or other hostilities, or a
prolonged government shutdown may have significant adverse effects on the Fund
and its investments and alter current assumptions and
expectations.
The operations of the
Fund, the exchanges, brokers and counterparties with which the Fund does
business, and the markets in which the Fund does business could be severely
disrupted in the event of a severe weather event, natural disaster, major
terrorist attack, cyber-attack, data breach, outbreak or public health emergency
as declared by the World Health Organization (such as the spread of the novel
coronavirus known as COVID-19), or the continuation or expansion of war or other
hostilities.
War and other
geopolitical events in eastern Europe, including but not limited to Russia and
Ukraine, may cause volatility in commodity prices including energy and grain
prices, due to the region’s importance to these markets, potential impacts to
global transportation and shipping, and other supply chain disruptions. These
events are unpredictable and may lead to extended periods of price
volatility.
Global terrorist
attacks, anti-terrorism initiatives, and political unrest, as well as the
adverse impact the COVID-19 pandemic has had on the global and U.S. markets and
economy, continue to fuel concerns. For example, the COVID-19 pandemic may
continue to adversely impact the level of services currently provided by the
U.S. government, could weaken the U.S. economy, interfere with the commodities
markets that rely upon data published by U.S. federal government agencies, and
prevent the Funds from receiving necessary regulatory review or approvals. The
types of events discussed above, including the COVID-19 pandemic, are highly
disruptive to economies and markets and have recently led, and may continue to
lead, to increased market volatility and significant market
losses.
More generally, a
climate of uncertainty and panic, including the contagion of the COVID-19 virus
and other infectious viruses or diseases, may adversely affect global, regional,
and local economies and reduce the availability of potential investment
opportunities, and increases the difficulty of performing due diligence and
modeling market conditions, potentially reducing the accuracy of financial
projections. Under these circumstances, the Fund may have difficulty achieving
its investment objective which may adversely impact performance. Further, such
events can be highly disruptive to economies and markets, significantly disrupt
the operations of individual companies (including, but not limited to, the
Fund’s Sponsor and third party service providers), sectors, industries, markets,
securities and commodity exchanges, currencies, interest and inflation rates,
credit ratings, investor sentiment, and other factors affecting the value of the
Fund’s investments. These factors could cause substantial market volatility,
exchange trading suspensions and closures that could impact the ability of the
Fund to complete redemptions and otherwise affect Fund performance and Fund
trading in the secondary market. A widespread crisis may also affect the global
economy in ways that cannot necessarily be foreseen at the current time. How
long such events will last and whether they will continue or recur cannot be
predicted. Impacts from these events could have significant impact on the Fund’s
performance, resulting in losses to your investment. The current and future
global economic impact may cause the underlying assumptions and expectations of
the Fund to become outdated quickly or inaccurate, resulting in significant
losses.
Failures or
breaches of electronic systems could disrupt the Fund’s trading activity and
materially affect the Fund’s profitability.
Failures or breaches
of the electronic systems of the Fund, the Sponsor, the Custodian or other
financial institutions in which the Fund invests, or the Fund’s other service
providers, market makers, Authorized Purchasers, NYSE Arca, exchanges on which
Wheat Futures Contracts or other wheat interests are traded or cleared, or
counterparties have the ability to cause disruptions and negatively impact the
Fund’s business operations, potentially resulting in financial losses to the
Fund and its shareholders. Such failures or breaches may include intentional
cyber-attacks that may result in an unauthorized party gaining access to
electronic systems in order to misappropriate the Fund’s assets or sensitive
information. While the Fund has established business continuity plans and risk
management systems seeking to address system breaches or failures, there are
inherent limitations in such plans and systems. Furthermore, the Fund cannot
control the cyber security plans and systems of the Custodian or other financial
institutions in which the Fund invests, or the Fund’s other service providers,
market makers, Authorized Purchasers, NYSE Arca, exchanges on which Wheat
Futures Contracts or other wheat interests are traded or cleared, or
counterparties.
An investment in
a Fund faces numerous risks from its shares being traded in the secondary
market, any of which may lead to the Fund’s shares trading at a premium or
discount to NAV.
Although the Fund’s
shares are listed for trading on the NYSE Arca, there can be no assurance that
an active trading market for such shares will develop or be maintained. Trading
in the Fund’s shares may be halted due to market conditions or for reasons that,
in the view of the NYSE Arca, make trading in shares inadvisable. There can be
no assurance that the requirements of the NYSE Arca necessary to maintain the
listing of the Fund will continue to be met or will remain unchanged or that the
shares will trade with any volume, or at all. The NAV of the Fund’s shares will
generally fluctuate with changes in the market value of the Fund’s portfolio
holdings. The market prices of shares will generally fluctuate in accordance
with changes in the Fund’s NAV and supply and demand of shares on the NYSE Arca.
It cannot be predicted whether the Fund’s shares will trade below at or above
their NAV. Investors buying or selling Fund shares in the secondary market will
pay brokerage commissions or other charges imposed by brokers as determined by
that broker. Brokerage commissions are often a fixed amount and may be a
significant proportional cost for investors seeking to buy or sell relatively
small amounts of shares.
The NYSE Arca may
halt trading in the Shares which would adversely impact your ability to sell
Shares.
Trading in Shares of
the Fund may be halted due to market conditions or, in light of NYSE Arca rules
and procedures, for reasons that, in view of the NYSE Arca, make trading in
Shares inadvisable. In addition, trading is subject to trading halts caused by
extraordinary market volatility pursuant to “circuit breaker” rules that require
trading to be halted for a specified period based on a specified market decline.
There can be no assurance that the requirements necessary to maintain the
listing of the Shares will continue to be met or will remain unchanged. The Fund
will be terminated if its Shares are delisted.
The lack of
active trading markets for the Shares of the Fund may result in losses on your
investment in the Fund at the time of disposition of your
Shares.
Although the Shares
of the Fund will be listed and traded on the NYSE Arca, there can be no
guarantee that an active trading market for the Shares of the Fund will be
maintained. If you need to sell your Shares at a time when no active market for
them exists, the price you receive for your Shares, assuming that you are able
to sell them, likely will be lower than what you would receive if an active
market did exist.
Risk of Leverage and
Volatility
The Fund may
become leveraged and may result in losses on all or substantially all of your
investment if the Fund’s trading positions suddenly turn
unprofitable.
Commodity pools’
trading positions in futures contracts or other commodity interests are
typically required to be secured by the deposit of margin funds that represent
only a small percentage of a futures contract’s (or other commodity interest’s)
entire market value. This feature permits commodity pools to “leverage” their
assets by purchasing or selling futures contracts (or other commodity interests)
with an aggregate notional amount in excess of the commodity pool’s assets.
While this leverage can increase a pool’s profits, relatively small adverse
movements in the price of the pool’s commodity interests can cause significant
losses to the pool. While the Sponsor does not intend to leverage the Fund’s
assets, it is not prohibited from doing so under the Trust Agreement. If the
Sponsor were to cause or permit the Fund to become leveraged, you could lose all
or substantially all of your investment if the Fund’s trading positions suddenly
turn unprofitable.
The price of
wheat can be volatile which could cause large fluctuations in the price of
Shares.
As discussed in more
detail above, price movements for wheat are influenced by, among other things,
weather conditions, crop disease, crop failure, transportation and storage
difficulties, production decisions, various planting, growing and harvesting
problems, governmental policies, various economic and monetary events, changing
demand, and seasonal fluctuations in supply. More generally, commodity prices
may be influenced by economic and monetary events such as changes in interest
rates, changes in balances of payments and trade, U.S. and international
inflation rates, currency valuations and devaluations, U.S. and international
economic events, and changes in the philosophies and emotions of market
participants. Because the Fund invests primarily in interests in a single
commodity, it is not a diversified investment vehicle, and therefore may be
subject to greater volatility than a diversified portfolio of stocks or bonds or
a more diversified commodity pool.
Over the counter Contract
Risk
Over the counter
transactions are subject to changing regulation.
A portion of the
Fund’s assets may be used to trade over the counter wheat 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
antimanipulation and antifraud provisions, forward contracts have been
executed bilaterally 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 DoddFrank Act, there is no guarantee that
such increased regulation will be effective to reduce these
risks.
The Fund will be
subject to credit risk with respect to counterparties to over the counter
contracts entered into by the Fund.
The Fund faces the
risk of non-performance by the counterparties to the over the counter contracts.
Unlike in futures contracts, the counterparty to these contracts is generally a
single bank or other financial institution, rather than a clearing organization
backed by a group of financial institutions. As a result, there will be greater
counterparty credit risk in these transactions. A counterparty may not be able
to meet its obligations to the Fund, in which case the Fund could suffer
significant losses on these contracts.
If a counterparty
becomes bankrupt or otherwise fails to perform its obligations due to financial
difficulties, the Fund may experience significant delays in obtaining any
recovery in a bankruptcy or other reorganization proceeding. During any such
period, the Fund may have difficulty in determining the value of its contracts
with the counterparty, which in turn could result in the overstatement or
understatement of the Fund’s NAV. The Fund may eventually obtain only limited
recovery or no recovery in such circumstances.
The Fund may be
subject to liquidity risk with respect to over the counter
contracts.
Over the counter
contracts may have terms that make them less marketable than Wheat Futures
Contracts. Over the counter contracts are less marketable because they are not
traded on an exchange, do not have uniform terms and conditions, and are entered
into based upon the creditworthiness of the parties and the availability of
credit support, such as collateral, and in general, they are not transferable
without the consent of the counterparty. These conditions make such contracts
less liquid than standardized futures contracts traded on a commodities exchange
and diminish the ability to realize the full value of such contracts. In
addition, even if collateral is used to reduce counterparty credit risk, sudden
changes in the value of over the counter transactions may leave a party open to
financial risk due to a counterparty default since the collateral held may not
cover a party’s exposure on the transaction in such
situations.
In general, valuing
OTC derivatives is less certain than valuing actively traded financial
instruments such as exchange traded futures contracts and securities because the
price and terms on which such OTC derivatives are entered into or can be
terminated are individually negotiated, and those prices and terms may not
reflect the best price or terms available from other sources. In addition, while
market makers and dealers generally quote indicative prices or terms for
entering into or terminating OTC contracts, they typically are not contractually
obligated to do so, particularly if they are not a party to the transaction. As
a result, it may be difficult to obtain an independent value for an outstanding
OTC derivatives transaction.
The foregoing
liquidity risks could impact adversely affect the Fund’s ability to meet its
investment objective.
In addition,
regulations adopted by global prudential regulators that are now in effect
require certain prudentially regulated entities and certain of their affiliates
and subsidiaries (including swap dealers) to include in their derivatives
contracts and certain other financial contracts, terms that delay or restrict
the rights of counterparties (such as the Funds) to terminate such contracts,
foreclose upon collateral, exercise other default rights or restrict transfers
of credit support in the event that the prudentially regulated entity and/or its
affiliates are subject to certain types of resolution or insolvency proceedings.
Similar regulations and laws have been adopted in non-US jurisdictions that may
apply to a Fund’s counterparties located in those jurisdictions. It is possible
that these new requirements, as well as potential additional related government
regulation, could adversely affect a Fund’s ability to terminate existing
derivatives contracts, exercise default rights or satisfy obligations owed to it
with collateral received under such contracts.
Risk of Trading in International
Markets
Trading in
international markets would expose the Fund to credit and regulatory
risk.
A significant portion
of the Wheat 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 nonU.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 nonU.S. laws. Similarly, the rights of market participants,
such as the Fund, in the event of the insolvency or bankruptcy of a nonU.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 near future.
In some of these
nonU.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 nonU.S. exchanges is subject to the risks presented by exchange
controls, expropriation, increased tax burdens and exposure to local economic
declines and political instability. An adverse development with respect to any
of these variables could reduce the profit or increase the loss earned on trades
in the affected international markets.
International
trading activities subject the Fund to foreign exchange
risk.
The price of any
nonU.S. wheat 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 DoddFrank 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.
Tax Risk
Please refer to “U.S.
Federal Income Tax Considerations” for information regarding the U.S. federal
income tax consequences of the purchase, ownership and disposition of
Shares.
Your tax
liability from holding Shares may exceed the amount of distributions, if any, on
your Shares.
Cash or property will
be distributed by the Fund at the sole discretion of the Sponsor, and the
Sponsor currently does not intend to make cash or other distributions with
respect to Shares. You will be required to pay U.S. federal income tax and, in
some cases, state, local, or foreign income tax, on your allocable share of the
Fund’s taxable income, without regard to whether you receive distributions or
the amount of any distributions. Therefore, the tax liability resulting from
your ownership of Shares may exceed the amount of cash or value of property (if
any) distributed.
Your allocable
share of income or loss for U.S. federal income tax purposes may differ from
your economic income or loss on your Shares.
Due to the
application of the assumptions and conventions applied by the Fund in making
allocations for U.S. federal income tax purposes and other factors, your
allocable share of the Fund’s income, gain, deduction or loss may be different
than your economic profit or loss from your Shares for a taxable year. This
difference could be temporary or permanent and, if permanent, could result in
your being taxed on amounts in excess of your economic
income.
Items of income,
gain, deduction, loss and credit with respect to Shares could be reallocated (or
for taxable years beginning after December 31, 2017, the Fund itself could be
liable for U.S. federal income tax along with any interest or penalties) if the
IRS does not accept the assumptions and conventions applied by the Fund in
allocating those items, with potential adverse tax consequences for
you.
The Fund intends to
be treated as a partnership for United States federal income tax purposes. The
U.S. tax rules pertaining to entities taxed as partnerships are complex and
their application to publicly traded partnerships such as the Fund, is in many
respects uncertain. The Fund applies certain assumptions and conventions in an
attempt to comply with the intent of the applicable rules and to report taxable
income, gains, deductions, losses and credits in a manner that properly reflects
Shareholders’ economic gains and losses. These assumptions and conventions may
not fully comply with all aspects of the Internal Revenue Code of 1986, as
amended (the “Code”), and applicable Treasury Regulations, however, and it is
possible that the U.S. Internal Revenue Service (the “IRS”) will successfully
challenge our allocation methods and require us to reallocate items of income,
gain, deduction, loss or credit in a manner that adversely affects you. If this
occurs, you may be required to file an amended tax return and to pay additional
taxes plus deficiency interest.
In addition, for
taxable years beginning after December 31, 2017, the Fund may be liable for U.S.
federal income tax on any “imputed underpayment” of tax resulting from an
adjustment as a result of an IRS audit. The amount of the imputed underpayment
generally includes increases in allocations of items of income or gains to any
investor and decreases in allocations of items of deduction, loss, or credit to
any investor without any offset for any corresponding reductions in allocations
of items of income or gain to any investor or increases in allocations of items
of deduction, loss, or credit to any investor. If the Fund is required to pay
any U.S. federal income tax on any imputed underpayment, the resulting tax
liability would reduce the net assets of the Fund and would likely have an
adverse impact on the value of the Shares. In such a case, the tax liability
would in effect be borne by Shareholders that own Shares at the time of such
assessment, which may be different persons, or persons with different ownership
percentages, than persons owning Shares for the tax year under audit. Under
certain circumstances, the Fund may be eligible to make an election to cause
Shareholders to take into account the amount of any imputed underpayment,
including any interest and penalties. The ability of a publicly traded
partnership such as the Fund to make this election is uncertain. If the election
is made, the Fund would be required to provide Shareholders who owned beneficial
interests in the Shares in the year to which the adjusted allocations relate
with a statement setting forth their proportionate shares of the adjustment
(“Adjusted K-1s”). The investors would be required to take the adjustment into
account in the taxable year in which the Adjusted K-1s are issued. For an
additional discussion please see “U.S. Federal Income Tax Considerations – Other
Tax Matters.”
If the Fund is
required to withhold tax with respect to any Non-U.S. Shareholders, all
Shareholders may bear the cost of such withholding.
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, all Shareholders may bear the economic cost of the
withholding, not just the Shareholders on whose behalf such amounts were
withheld. This could have a material impact on the value of your
Shares.
The Fund could be
treated as a corporation for federal income tax purposes, which may
substantially reduce the value of your Shares.
The Trust has
received an opinion of counsel that, under current U.S. federal income tax laws,
the Fund will be treated as a partnership that is not taxable as a corporation
for U.S. federal income tax purposes, provided that, among other things, (i) at
least 90 percent of the Fund’s annual gross income consists of “qualifying
income” as defined in the Code, (ii) the Fund is organized and operated in
accordance with its governing agreements and applicable law, and (iii) the Fund
does not elect to be taxed as a corporation for U.S. federal income tax
purposes. Although the Sponsor anticipates that the Fund has satisfied and will
continue to satisfy the “qualifying income” requirement for all of its taxable
years, that result cannot be assured. The Fund has not requested and will not
request any ruling from the IRS with respect to its classification as a
partnership not taxable as a corporation for U.S. federal income tax purposes.
If the IRS were to successfully assert that the Fund is taxable as a corporation
for U.S. federal income tax purposes in any taxable year, rather than passing
through its income, gains, losses and deductions proportionately to
Shareholders, the Fund would be subject to tax on its net income for the year at
corporate tax rates. In addition, although the Sponsor does not currently intend
to make distributions with respect to Shares, any distributions would be taxable
to Shareholders as dividend income to the extent of the Fund’s current and
accumulated earnings and profits, then treated as a tax-free return of capital
to the extent of the Shareholder’s basis in the Shares (and will reduce the
basis), and, to the extent it exceeds a Shareholder’s basis in such Shares, as
capital gain for Shareholders who hold their Shares as capital assets. Taxation
of the Fund as a corporation could materially reduce the after-tax return on an
investment in Shares and could substantially reduce the value of your
Shares.
Tax legislation
that has been or could be enacted may affect you with respect to your investment
in the Fund.
Legislative,
regulatory or administrative changes could be enacted or promulgated at any
time, either prospectively or with retroactive effect, and may adversely affect
the Fund and its Shareholders. Please consult a tax advisor regarding the
implications of an investment in Shares of the Teucrium Funds, including without
limitation the federal, state, local and foreign tax
consequences.
PROSPECTIVE
INVESTORS ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO
THE POSSIBLE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN SHARES; SUCH TAX
CONSEQUENCES MAY DIFFER IN RESPECT OF DIFFERENT INVESTORS.
THE OFFERING
The Fund in
General
The Fund’s investment
objective is to provide investors with a cost-efficient way to gain price
exposure to the wheat market for future delivery. The Sponsor developed the
Benchmark as a representation of the wheat market for future
delivery.
Under normal market
conditions, the Fund will invest in the Benchmark Component Futures Contracts
and cash and cash equivalents. The Sponsor believes that by investing in
Benchmark Component Futures Contracts, the Fund’s net asset value (“NAV”) will
closely track the Benchmark. The Sponsor also believes that because of market
arbitrage opportunities, the market price at which investors will purchase and
sell Shares through their broker-dealer will closely track the Fund’s NAV. The
Sponsor believes that the net effect of these relationships is that the Fund’s
market price on the NYSE Arca at which investors purchase and sell Shares will
closely track the wheat market for future delivery, as measured by the
Benchmark.
Consistent with
applicable provisions of the Trust Agreement and Delaware law, the Fund has
broad authority to make changes to the Fund’s operations. Consistent with this
authority, the Fund, in its sole discretion and without shareholder approval or
advance notice, may change its investment objective, Benchmark or investment
strategies. The Fund has no current intention to make any such change, and any
change is subject to applicable regulatory requirements, including, but not
limited to, any requirement to amend applicable listing rules of the
NYSE.
The reasons for and
circumstances that may trigger any such changes may vary widely and cannot be
predicted. However, by way of example, the Fund may change the term structure or
underlying components of the Benchmark in furtherance of the Fund’s investment
objective of tracking the price of corn for future delivery if, due to market
conditions, a potential or actual imposition of position limits by the CFTC or
futures exchange rules, or the imposition of risk mitigation measures by a
futures commission merchant restricts the ability of the Fund to invest in the
current Benchmark Futures Contracts. The Fund would file a current report on
Form 8-K and a prospectus supplement to describe any such change and the
effective date of the change. Shareholders may modify their holdings of the
Fund’s shares in response to any change by purchasing or selling Fund shares
through their broker-dealer.
The Fund is organized
as a series of the Teucrium Commodity Trust, a statutory trust organized under
the laws of the State of Delaware on September 11, 2009. Currently, the Trust
has five series that are separate operating commodity pools: the Teucrium Corn
Fund, the Teucrium Wheat Fund, the Teucrium Soybean Fund, the Teucrium Sugar
Fund, and the Teucrium Agricultural Fund. Additional series of the Trust may be
created in the future at the Sponsor’s discretion. The Fund maintains its main
business office at Three Main Street, Suite 215, Burlington Vermont 05401. The
Fund is a commodity pool. It operates pursuant to the terms of the Trust
Agreement, which is dated as of April 26, 2019 and grants full management
control to the Sponsor.
See “Prior
Performance of the Fund” on page 27 for more information about prior performance
of the Fund.
The Sponsor
The Sponsor of the
Trust is Teucrium Trading, LLC, a Delaware limited liability company. The
principal office of the Sponsor and the Trust are located at Three Main Street,
Suite 215, Burlington, Vermont 05401. The Sponsor registered as a CPO with the
CFTC and became a member of the NFA on November 10, 2009. The Sponsor registered
as a Commodity Trading Advisor (“CTA”) with the CFTC effective September 8,
2017.
Aside from
establishing the series of the Trust, operating those series that have commenced
offering their shares, and obtaining capital from a small number of outside
investors in order to engage in these activities, the Sponsor has not engaged in
any other business activity prior to the date of this prospectus. Under the
Trust Agreement, the Sponsor is solely responsible for management and conducts
or directs the conduct of the business of the Trust, the Fund, and any series of
the Trust that may from time to time be established and designated by the
Sponsor. The Sponsor is required to oversee the purchase and sale of Shares by
Authorized Purchasers and to manage the Fund’s investments, including to
evaluate the credit risk of FCMs and swap counterparties and to review daily
positions and margin/collateral requirements. The Sponsor has the power to enter
into agreements as may be necessary or appropriate for the offer and sale of the
Fund’s Shares and the conduct of the Trust’s activities. Accordingly, the
Sponsor is responsible for selecting the Trustee, Administrator, Distributor,
the independent registered public accounting firm of the Trust, and any legal
counsel employed by the Trust. The Sponsor is also responsible for preparing and
filing periodic reports on behalf of the Trust with the SEC and will provide any
required certification for such reports. No person other than the Sponsor and
its principals was involved in the organization of the Trust or the
Fund.
The Sponsor may
determine to engage marketing agents who will assist the Sponsor in marketing
the Shares. See “Plan of Distribution” for more information.
The Sponsor maintains
a public website on behalf of the Fund, www.teucrium.com,
which contains information about the Trust, the Fund, and the Shares, and
oversees certain services for the benefit of Shareholders.
The Sponsor has
discretion to appoint one or more of its affiliates as additional
Sponsors.
The Sponsor receives
a fee as compensation for services performed under the Trust Agreement. The
Sponsor’s fee accrues daily and is paid monthly at an annual rate of 1.00% of
the average daily net assets of the Fund. For the period from January 1, 2021
through December 31, 2021, the Fund recognized $809,682 in management fees to
the Sponsor. The Fund is also responsible for other ongoing fees, costs and
expenses of its operations, including brokerage fees, and legal, printing,
accounting, custodial, administration and transfer agency costs, although the
Sponsor bore the costs and expenses related to the registration of the Shares.
None of the costs and expenses related to the initial registration, offer and
sale of Shares, which totaled approximately $450,000, were or are chargeable to
the Fund, and the Sponsor did not and may not recover any of these costs and
expenses from the Fund.
Shareholders have no
right to elect the Sponsor on an annual or any other continuing basis or to
remove the Sponsor. If the Sponsor voluntarily withdraws, the holders of a
majority of the Trust’s outstanding Shares (excluding for purposes of such
determination Shares owned by the withdrawing Sponsor and its affiliates) may
elect its successor. Prior to withdrawing, the Sponsor must give ninety days’
written notice to the Shareholders and the Trustee.
Ownership or
“membership” interests in the Sponsor are owned by persons referred to as
“members.” The Sponsor currently has three voting or “Class A” members – Mr. Sal
Gilbertie, Mr. Dale Riker and Mr. Carl N. Miller III – and a small number of
non-voting or “Class B” members who have provided working capital to the
Sponsor. Messrs. Gilbertie and Riker each currently own 45.7% of the Sponsor’s
Class A membership interests, while Mr. Miller holds the remainder, which is
8.52%.
The Sponsor has an
information security program and policy in place. The program takes reasonable
care to look beyond the security and controls developed and implemented for the
Trust and the Funds directly to the platforms and controls in place for the key
service providers. Such review of cybersecurity and information technology plans
of key service providers are part of the Sponsor’s disaster recovery and
business continuity planning. The Sponsor provides regular training to all
employees of the Sponsor regarding cybersecurity topics, in addition to
real-time dissemination of information regarding cybersecurity matters as
needed. The information security plan is reviewed and updated as needed, but at
a minimum on an annual basis.
Management of the
Sponsor
In general, under the
Sponsor’s Amended and Restated Limited Liability Company Operating Agreement, as
amended from time to time, the Sponsor (and as a result the Trust and each Fund)
is managed by the officers of the Sponsor. The Chief Executive
Officer of the Sponsor is responsible for the overall strategic direction of the
Sponsor and has general control of its business. The Chief Investment Officer
and President of the Sponsor is primarily responsible for new investment product
development with respect to the Funds. The Chief Operating Officer has primary
responsibility for trade operations, trade execution, and portfolio activities
with respect to the Fund. The Chief Financial Officer, Chief Accounting Officer
and Chief Compliance Officer acts as the Sponsor’s principal financial and
accounting officer. Furthermore, certain fundamental actions regarding the
Sponsor, such as the removal of officers, the addition or substitution of
members, or the incurrence of liabilities other than those incurred in the
ordinary course of business and de
minimis liabilities, may not be taken without the affirmative vote of a
majority of the Class A members (which is generally defined as the affirmative
vote of Mr. Gilbertie and one of the other two Class A members). The
Sponsor has no board of directors, and the Trust has no board of directors or
officers. The three Class A members of the Sponsor are Sal Gilbertie, Dale Riker
and Carl N. Miller III.
The Officers of the
Sponsor, one of whom is a Class A Member of the Sponsor, are the
following:
Sal Gilbertie has been the
President of the Sponsor since its inception, its Chief Investment Officer since
September 2011, and its Chief Executive Officer and Secretary since September
17, 2018, and was approved by the NFA as a principal of the Sponsor on September
23, 2009 and registered as an associated person of the Sponsor on November 10,
2009. He maintains his main business office at 65 Adams Road, Easton,
Connecticut 06612. Effective July 16, 2012, Mr. Gilbertie was registered
with the NFA as the Branch Manager for this location. Since October 18,
2010, Mr. Gilbertie has been an associated person of the Distributor under the
terms of the Securities Activities and Services Agreement (“SASA”) between the
Sponsor and the Distributor. Additional information regarding the SASA can
be found in the section of this disclosure document entitled “Plan of
Distribution.” From October 2005 until December 2009, Mr. Gilbertie was
employed by Newedge USA, LLC, an FCM and broker-dealer registered with the CFTC
and the SEC, where he headed the Renewable Fuels/Energy Derivatives OTC
Execution Desk and was an active futures contract and over the counter
derivatives trader and market maker in multiple classes of commodities.
(Between January 2008 and October 2008, he also held a comparable position with
Newedge Financial, Inc., an FCM and an affiliate of Newedge USA, LLC.)
From October 1998 until October 2005, Mr. Gilbertie was principal and co-founder
of Cambial Asset Management, LLC, an adviser to two private funds that focused
on equity options, and Cambial Financing Dynamics, a private boutique investment
bank. While at Cambial Asset Management, LLC and Cambial Financing
Dynamics, Mr. Gilbertie served as principal and managed the day to day
activities of the business and the portfolio of both companies. Mr.
Gilbertie is 61 years old.
Cory Mullen-Rusin, has been
the Chief Financial Officer, Chief Accounting Officer and Chief Compliance
Officer of the Sponsor since September 17, 2018 and Ms. Mullen-Rusin has primary
responsibility for the financial management, compliance and reporting of the
Sponsor and is in charge of its books of account and accounting records, and its
accounting procedures. She maintains her main business office at Three Main
Street, Suite 215, Burlington, Vermont 05401. Ms. Mullen-Rusin was approved by
the NFA as a Principal of the Sponsor on October 8, 2018. Ms. Mullen-Rusin began
working for the Sponsor in September 2011 and worked directly with the former
CFO at Teucrium for seven years. Her responsibilities included aspects of
financial planning, financial operations, and financial reporting for the Trust
and the Sponsor. Additionally, Ms. Mullen-Rusin assisted in developing,
instituting, and monitoring the effectiveness of processes and procedures to
comply with all regulatory agency requirements. Ms. Mullen-Rusin graduated from
Boston College with a Bachelor of Arts and Science in Communications in 2009,
where she was a four-year scholarship player on the NCAA Division I Women’s
Basketball team. In 2017, she earned a Master of Business Administration
from Nichols College. Ms. Mullen-Rusin is 34 years old.
Steve Kahler, Chief Operating Officer, began working for the Sponsor
in November 2011 as Managing Director in the trading division. He became the
Chief Operating Officer on May 24, 2012 and served in that capacity through
September 6, 2018, at which time he resigned. Mr. Kahler was unemployed from
September 7, 2018 until October 10, 2018, when he was reappointed as Chief
Operating Officer. Mr. Kahler is primarily responsible for making trading and
investment decisions for the Funds, and for directing each Fund’s trades for
execution. 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 8, 2011 to September 7, 2018 and re-registered as an
Associated Person on October 5, 2018. Mr. Kahler was registered as a Branch
Manager of the Sponsor on March 16, 2012 to September 7, 2018 and was registered
again from October 5, 2018 to September 29, 2021. Prior to his employment with
the Sponsor, Mr. Kahler worked for Cargill Inc., an international producer and
marketer of food, agricultural, financial and industrial products and services,
from April 2006 until November 2011 in the Energy Division as Senior Petroleum
Trader. In October 2006 and while employed at Cargill Inc., Mr. Kahler was
approved as an Associated Person of Cargill Commodity Services Inc., a commodity
trading affiliate of Cargill Inc. from September 13, 2006 to November 9, 2011.
Mr. Kahler graduated from the University of Minnesota with a Bachelors of
Agricultural Business Administration and is 54 years
old.
Messrs. Gilbertie,
Riker, and Kahler and Ms. Mullen-Rusin are individual “principals,” as that term
is defined in CFTC Rule 3.1, of the Sponsor. These individuals are principals
due to their positions and/or due to their ownership interests in the Sponsor.
Beneficial ownership interests of the principals, if any, are shown under the
section entitled “Security Ownership of Principal Shareholders and Management”
below and any of the principals may acquire beneficial interests in the Fund in
the future. GFI Group LLC is a principal for the Sponsor under CFTC Rules due to
its ownership of certain non-voting securities of the Sponsor. NMSIC Classic LLC
is a principal of the Sponsor under CFTC Rules due to its greater than 10%
capital contribution to the Sponsor.
Market Price of
Shares
The Fund’s Shares
have traded on the NYSE Arca under the symbol “WEAT” since September 19, 2011.
The following table sets forth the range of reported high and low sales prices
of the Shares as reported on NYSE Arca for the periods indicated
below.
Fiscal Year Ended December 31,
2021: |
|
|
Quarter
Ended |
|
|
March 31,
2021 |
$6.50 |
$5.82 |
June 30,
2021 |
$7.36 |
$5.92 |
September 30,
2021 |
$7.48 |
$6.17 |
December 31,
2021 |
$8.31 |
$7.05 |
Fiscal Year Ended December 31,
2020: |
|
|
Quarter
Ended |
|
|
March 31,
2020 |
$6.01 |
$5.15 |
June 30,
2020 |
$5.77 |
$4.86 |
September 30,
2020 |
$5.75 |
$5.04 |
December 31,
2020 |
$6.19 |
$5.58 |
As of December 31,
2021, the Fund had approximately 7,976 Shareholders.
Prior Performance
of the Fund
PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS
The Teucrium Wheat
Fund commenced trading and investment operations on September 19, 2011. The
Teucrium Wheat Fund is listed on NYSE Arca and is neither: (i) a privately
offered pool pursuant to Section 4(a)(2) of the Securities Act of 1933, as
amended. (ii) a multi-advisor pool as defined in CFTC Regulation 4.10(d)(2). or
(iii) a principal protected pool as defined in CFTC Regulation
4.10(d)(3).
Units of beneficial interest
issued (from inception until February 28, 2022) |
35,475,000 |
Aggregate gross sale price for
units issued |
$318,228,838 |
Pool NAV as of February 28,
2022 |
$131,569,855 |
NAV per Share as of February
28, 2022 |
$8.76 |
Worst monthly percentage
drawdown* |
|
Worst peak to valley
drawdown** |
-80.30% / Sep 2011 – Apr
2019 |
* A drawdown is a
loss experienced by the fund over a specified period. Drawdowns are measured on
the basis of monthly returns only and do not reflect intra-month figures. The
worst monthly percentage drawdown reflects the largest single month loss
sustained over the most recent five calendar years and the current year to
date.
** The worst peak to
valley drawdown is the largest percentage decline in the NAV per unit over the
most recent five calendar years and the current year to date. This need not be a
continuous decline but can be a series of positive and negative returns. Worst
peak to valley drawdown represents the greatest percentage decline from any
month end NAV per unit that occurs without such month end NAV per unit being
equaled or exceeded as of a subsequent month end. For example, if the NAV per
unit declined by $1 in each of January and February, increased by $1 in March
and declined again by $2 in April, a “peak to valley drawdown” analysis
conducted as of the end of April would consider that “drawdown” to be continuing
and to be $3 in amount, whereas if the NAV per unit had increased by $2 in
March, the drawdown would have ended as of the end of February at the $2
level.
PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS
Rates of
Return* |
Month |
2017 |
|
2018 |
|
2019 |
|
2020 |
|
2021 |
|
2021 |
|
January |
2.90 |
% |
5.68 |
% |
1.51 |
% |
(1.87) |
% |
2.18 |
% |
(0.91) |
% |
February |
2.26 |
% |
5.85 |
% |
(11.26) |
% |
(4.81) |
% |
0.33 |
% |
19.78 |
% |
March |
(4.41) |
% |
(7.61) |
% |
(1.12) |
% |
5.87 |
% |
(5.08) |
% |
|
% |
April |
(1.73) |
% |
8.40 |
% |
(6.98) |
% |
(6.75) |
% |
18.28 |
% |
|
% |
May |
(0.29) |
% |
2.53 |
% |
14.00 |
% |
(1.01) |
% |
(6.94) |
% |
|
% |
June |
15.46 |
% |
(7.41) |
% |
2.31 |
% |
(5.49) |
% |
2.31 |
% |
|
% |
July |
(7.02) |
% |
8.95 |
% |
(7.47) |
% |
7.11 |
% |
2.75 |
% |
|
% |
August |
(11.52) |
% |
(4.18) |
% |
(6.38) |
% |
2.51 |
% |
2.12 |
% |
|
% |
September |
1.86 |
% |
(6.17) |
% |
6.57 |
% |
3.39 |
% |
(0.20) |
% |
|
% |
October |
(6.09) |
% |
(1.92) |
% |
2.21 |
% |
1.82 |
% |
6.55 |
% |
|
% |
November |
(1.30) |
% |
(1.14) |
% |
4.23 |
% |
(1.74) |
% |
0.69 |
% |
|
% |
December |
(1.64) |
% |
(1.65) |
% |
3.12 |
% |
7.65 |
% |
(2.66) |
% |
|
% |
Annual
Rate of Return |
(13.06) |
% |
(0.67) |
% |
(1.91) |
% |
5.48 |
% |
19.84 |
% |
18.69 |
%** |
* The monthly rate of
return is calculated by dividing the ending NAV for a given month by the ending
NAV for the previous month, subtracting 1 and multiplying this number by 100 to
arrive at a percentage increase or decrease.
** Not
annualized.
The Trustee
The sole Trustee of
the Trust is Wilmington Trust Company, a Delaware banking corporation. The
Trustee’s principal offices are located at 1100 North Market Street, Wilmington,
Delaware 198900001. 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 the Shares’ NAV reflect
the daily changes in the wheat market for future delivery, as measured by the
Fund’s Benchmark. The Benchmark is a weighted average of the closing settlement
prices for the Benchmark Component Futures Contracts
WEAT Benchmark
CBOT Wheat 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. Under normal market conditions, the Fund
expects that 100% of the Fund’s assets will be used to trade Wheat Futures
Contracts and invest in cash and cash equivalents. The Fund reserves the right
to invest in swap agreements, forward contracts and options, a brief description
of which may be found in “Appendix A – “Glossary of Defined
Terms.”
The Fund invests in
Benchmark Component Futures Contracts to the fullest extent possible without
being leveraged or unable to satisfy its current or potential margin or
collateral obligations with respect to its investments in Benchmark Component
Futures Contracts. After fulfilling such margin and collateral requirements, the
Fund invests the remainder of its proceeds from the sale of baskets in cash and
cash equivalents, including money market funds, investment grade commercial
paper, and/or merely holds such assets in cash in interest-bearing accounts. The
Fund seeks to earn interest and other income from the cash equivalents that it
purchases, and on the cash, it holds at financial
institutions.
The Fund seeks to
achieve its investment objective primarily by investing in Benchmark Component
Futures Contracts such that the changes in its NAV are expected to closely track
the changes in the Benchmark. The Fund’s positions in Benchmark Component
Futures Contracts are changed or “rolled” on a regular basis in order to track
the changing nature of the Benchmark. For example, five times a year (on the
date on which a Wheat Futures Contract expires), the second to expire Wheat
Futures Contract will become the next to expire Wheat Futures Contract and will
no longer be a Benchmark Component Futures Contract, and the Fund’s investments
will have to be changed accordingly. In order that the Fund’s trading does not
cause unwanted market movements and to make it more difficult for third parties
to profit by trading based on such expected market movements, the Fund’s
investments may not be rolled entirely on that day, but rather may be rolled
over a period of days.
The Fund’s total
portfolio composition is disclosed each business day that the NYSE Arca is open
for trading on the Fund’s website at www.teucrium.com. The website disclosure of
portfolio holdings is made daily and includes, as applicable, the name and value
of each commodity futures contract held and those that are pending, and the
value of cash and cash equivalents held in the Fund. The Fund’s website
also includes the NAV, the 4 p.m. Bid/Ask Midpoint as reported by the NYSE Arca,
the last trade price as reported by the NYSE Arca, the shares outstanding, the
shares available for issuance, and the shares created or redeemed on that day.
The prospectus, Monthly Statements of Account, Quarterly Performance of the
Midpoint versus the NAV (as required by the CFTC), and the Roll Dates, as well
as Forms 10-Q, Forms 10-K, and other SEC filings for the Fund, are also posted
on the website. The Fund’s website is publicly accessible at no
charge.
In seeking to achieve
the Fund’s investment objective of tracking the Benchmark, the Sponsor reserves
the right to enter into or hold Wheat Futures Contracts other than the Benchmark
Component Futures Contracts and/or other wheat interests on behalf of the Fund.
Over the counter wheat interests can generally be structured as the parties to
the contract desire. Therefore, the Fund might enter into multiple over the
counter wheat interests intended to exactly replicate the performance of each of
the three Benchmark Component Futures Contracts, or a single over the counter
wheat 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 wheat interest, the performance of the wheat 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
wheat 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 wheat interests that would be expected to alleviate
overall deviation between the Fund’s performance and that of the Benchmark that
may result from certain market and trading inefficiencies or other
reasons.
The Sponsor endeavors
to place the Fund’s trades in Benchmark Component Futures Contracts and
otherwise manage the Fund’s investments so that the Fund’s average daily
tracking error against the Benchmark is less than 10 percent over any period of
30 trading days.
The Fund’s investment
objective is to provide investors with a cost-efficient way to gain exposure to
the wheat market for future delivery. The Sponsor developed the Benchmark as a
representation of the wheat market for future delivery. Under normal market
conditions, the Fund will invest in the Benchmark Component Futures Contracts.
The Sponsor believes that by investing in Benchmark Component Futures Contracts,
the Fund’s net asset value (“NAV”) will closely track the Benchmark. The Sponsor
also believes that because of market arbitrage opportunities, the market price
at which investors will purchase and sell Shares through their broker-dealer
will closely track the Fund’s NAV. The Sponsor believes that the net effect of
these relationships is that the Fund’s market price on the NYSE Arca at which
investors purchase and sell Shares will closely track the wheat market for
future delivery, as measured by the Benchmark.
An investment in the
Shares provides a means for diversifying an investor’s portfolio or hedging
exposure to changes in wheat prices. An investment in the Shares allows both
retail and institutional investors to easily gain this exposure to the wheat
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 wheat
market in a cost-effective manner. Such investors may include participants in
the wheat industry and other industries seeking to hedge the risk of losses in
their wheat related transactions, as well as investors seeking exposure to the
wheat market. Accordingly, depending on the investment objective of an
individual investor, the risks generally associated with investing in the wheat
market and/or the risks involved in hedging may exist. In addition, the Fund
does not expect there to be any meaningful correlation between the performance
of the Fund’s investments in cash and cash equivalents and the changes in the
price of wheat or Benchmark Component Futures Contracts. While the level of
interest earned on, or the market price of, these investments may in some
respects correlate to changes in the price of wheat, 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
wheat.
The Shares issued by
the Fund may only be purchased by Authorized Purchasers and only in blocks of
25,000 Shares called Creation Baskets. The amount of the purchase payment for a
Creation Basket is equal to the aggregate NAV of Shares in the Creation Basket.
Similarly, only Authorized Purchasers may redeem Shares and only in blocks of
25,000 Shares called Redemption Baskets. The amount of the redemption proceeds
for a Redemption Basket is equal to the aggregate NAV of Shares in the
Redemption Basket. The purchase price for Creation Baskets and the redemption
price for Redemption Baskets are the actual NAV calculated at the end of the
business day when a request for a purchase or redemption is received by the
Fund. The NYSE Arca publishes an approximate NAV intra-day based on the prior
day’s NAV and the current price of the Benchmark Component Futures Contracts,
but the price of Creation Baskets and Redemption Baskets is determined based on
the actual NAV calculated at the end of each trading day.
While the Fund issues
Shares only in Creation Baskets, Shares may also be purchased and sold in much
smaller increments on the NYSE Arca. These transactions, however, are effected
at the bid and ask prices established by the specialist firm(s). Like any listed
security, Shares can be purchased and sold at any time a secondary market is
open.
The Fund’s
Investment Strategy
In managing the
Fund’s assets, the Sponsor does not use a technical trading system that
automatically issues buy and sell orders. Instead, each time one or more baskets
are purchased or redeemed, the Sponsor purchases or sells Benchmark Component
Futures Contracts with an aggregate market value that approximates the amount of
cash received or paid upon the purchase or redemption of the
basket(s).
As an example, assume
that a Creation Basket is sold by the Fund, and that the Fund’s closing NAV per
Share is $15.00. In that case, the Fund would receive $375,000 in proceeds from
the sale of the Creation Basket ($15.00 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 $32,500 (or otherwise not a
round number), the Fund would be unable to buy an exact number of Wheat Futures
Contracts with an aggregate market value equal to $375,000. Instead, the Fund
would be able to purchase 11 Benchmark Component Futures Contracts with an
aggregate market value of $357,500. Assuming a margin requirement equal to 10%
of the value of the Wheat Futures Contracts (although the actual percentage is
approximately 5%), the Fund would be required to deposit $35,750 in cash with
the FCM through which the Wheat Futures Contracts were purchased. The remainder
of the proceeds from the sale of the Creation Basket, $339,250, 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 wheat
interests purchased depend on various factors, including a judgment by the
Sponsor as to the appropriate diversification of the Fund’s investments. While
the Sponsor anticipates that under normal market conditions, a substantial
majority of the Fund’s assets will be invested in CBOT Wheat Futures Contracts
and cash and cash equivalents, the Sponsor reserves the right to enter into
other wheat interests on behalf of the Fund, including swaps in the over the
counter market.
The Sponsor does not
anticipate letting its Benchmark Component Futures Contracts expire and taking
delivery of wheat. Instead, the Sponsor will close out existing positions, e.g.,
in response to ongoing changes in the Benchmark or if it otherwise determines it
would be appropriate to do so and reinvest the proceeds in new Benchmark
Component Futures Contracts. Positions may also be closed out to meet orders for
Redemption Baskets, in which case the proceeds from closing the positions will
not be reinvested.
Futures Contracts
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 wheat 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 wheat increases and, as a
likely result of an increase in the price of wheat, the price of Wheat Futures
Contracts increases, the Fund will generally be long in the market for wheat and
will generally sell Wheat 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.
Wheat 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 wheat
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 Wheat Futures Contracts are discussed below.
Additional risks of investing in Wheat Futures Contracts are included in “What
are the Risk Factors Involved with an Investment in the
Fund?”
Impact of
Position Limits, Accountability Levels, and Price Fluctuation
Limits.
Position Limits,
Accountability Levels, and Price Fluctuation Limits may potentially cause a
tracking error between the price of the Shares and the Benchmark. This may in
turn prevent you from being able to effectively use the Fund as a way to hedge
against wheat related losses or as a way to indirectly invest in
wheat.
The Fund does not
intend to limit the size of the offering and will attempt to expose
substantially all of its proceeds to Benchmark Component Futures Contracts and
cash and cash equivalents. If the Fund encounters position limits,
accountability levels, or price fluctuation limits for Wheat Futures Contracts
on the CBOT, it may then, if permitted under applicable regulatory requirements,
purchase other wheat interests and/or Wheat Futures Contracts listed on foreign
exchanges. However, the Wheat Futures Contracts available on such foreign
exchanges may have different underlying sizes, deliveries, and prices. In
addition, the Wheat Futures Contracts available on these exchanges may be
subject to their own position limits and accountability levels. In any case,
notwithstanding the potential availability of these instruments in certain
circumstances, position limits could force the Fund to limit the number of
Creation Baskets that it sells.
Price
Volatility
Despite daily price
limits, the price volatility of futures contracts generally has been
historically greater than that for traditional securities such as stocks and
bonds. Price volatility often is greater day to day as opposed to intraday.
Economic factors that may cause volatility in Wheat Futures Contracts include
changes in interest rates. governmental, agricultural, trade, fiscal, monetary
and exchange control programs and policies; weather and climate conditions;
changing supply and demand relationships; changes in balances of payments and
trade; U.S. and international rates of inflation; currency devaluations and
revaluations; U.S. and international political and economic events; global trade
disruption due to outbreaks or public health emergency as declared by the World
Health Organization; and changes in philosophies and emotions of market
participants. Because the Fund invests a significant portion of its assets in
futures contracts, the assets of the Fund, and therefore the price of the Fund’s
Shares, may be subject to greater volatility than traditional
securities.
Term Structure of
Futures Contracts and the Impact on Total Return
Over time, the price
of wheat fluctuates based on a number of market factors, including demand for
wheat relative to its supply. The value of Wheat Futures Contracts likewise
fluctuates in reaction to a number of market factors. Because the Fund seeks to
maintain its holdings in Wheat Futures Contracts with a roughly constant
expiration profile and not take delivery of the wheat, the Fund must
periodically “roll” futures contract positions, closing out soon to expire
contracts that are no longer part of the Benchmark and entering into subsequent
to expire contracts. One factor determining the total return from investing in
futures contracts is the price relationship between soon to expire contracts and
later to expire contracts.
If the futures market
is in a state of backwardation (i.e., when the price of wheat 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 wheat 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 wheat 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 wheat 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 wheat market and the wheat harvest cycle. All other things
being equal, a situation involving prolonged periods of contango may adversely
impact the returns of the Fund; conversely a situation involving prolonged
periods of backwardation may positively impact the returns of the
Fund.
Margin
Requirements and Marking to Market Futures Positions
“Initial margin” is
an amount of funds that must be deposited by a commodity interest trader with
the trader’s broker to initiate an open position in futures contracts. A margin
deposit is like a cash performance bond. It helps assure the trader’s
performance of the futures contracts that he or she purchases or sells. Futures
contracts are customarily bought and sold on initial margin that represents a
small percentage of the aggregate purchase or sales price of the contract. The
amount of margin required in connection with a particular futures contract is
set by the exchange on which the contract is traded. Brokerage firms, such as
the Fund’s clearing broker, carrying accounts for traders in commodity interest
contracts may require higher amounts of margin as a matter of policy to further
protect themselves.
Futures contracts are
marked to market at the end of each trading day and the margin required with
respect to such contracts is adjusted accordingly. This process of marking
to market is designed to prevent losses from accumulating in any
futures account. Therefore, if the Fund’s futures positions have declined in
value, the Fund may be required to post “variation margin” to cover this
decline. Alternatively, if the Fund’s futures positions have increased in value,
this increase will be credited to the Fund’s account.
Over the counter
Derivatives
Under normal market
conditions, the Fund expects that 100% of the Fund’s assets will be used to
trade futures and invest in cash and cash equivalents; however, the Fund has the
ability to trade over the counter contracts and swaps. A description of such
over the counter derivatives is included the statement of additional information
that is part of this prospectus under the heading “Over the counter
Derivatives.”
The Fund’s Investments in Cash and
Cash Equivalents
The Fund seeks to
have the aggregate “notional” amount of the Benchmark Component Futures
Contracts it holds approximate at all times the Fund’s aggregate NAV. At any
given time, however, most of the Fund’s investments are in cash and cash
equivalents that support the Fund’s positions in Benchmark Component Futures
Contracts. For example, the purchase of a Wheat Futures Contract with a stated
or notional amount of $10 million would not require the Fund to pay $10 million
upon entering into the contract; rather, only a margin deposit, approximately
4-6% of the notional amount, would be required. To secure its Wheat Futures
Contract obligations, the Fund would deposit the required margin with the FCM
and would separately hold its remaining assets through its Custodian or other
financial institution in cash and cash equivalents, specifically in demand
deposits, in short-term Treasury Securities held by the FCM, in money-market
funds or in commercial paper. Such remaining assets may be used to meet future
margin payments that the Fund is required to make on its Wheat Futures
Contracts. Other wheat 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 wheat interests are also held in cash and cash
equivalents.
The Fund earns
interest and other income from the cash equivalents that it purchases, and on
the cash, it holds through the Custodian or other financial institutions. The
earned interest and other income increase the Fund’s NAV. The Fund applies the
earned interest and other income to the acquisition of additional investments or
uses it to pay its expenses. When the Fund reinvests the earned interest and
other income, it makes investments that are consistent with its investment
objectives.
Any cash equivalent
invested in by the Fund will have a remaining maturity of less than 3 months at
the time of investment or will be subject to a demand feature that enables that
Fund to sell the security within that time period at approximately the
security’s face value (plus accrued interest). Any cash equivalents invested in
by the Fund will be or will be deemed by the Sponsor to be of investment grade
credit quality.
Other Trading Policies of the
Fund
Exchange for
Related Position
An “exchange for
related position” (“EFRP”) can be used by the Fund as a technique to facilitate
the exchanging of a futures hedge position against a creation or redemption
order, and thus the Fund may use an EFRP transaction in connection with the
creation and redemption of shares. The market specialist/market maker that is
the ultimate purchaser or seller of shares in connection with the creation or
redemption basket, respectively, agrees to sell or purchase a corresponding
offsetting shares or futures position which is then settled on the same business
day as a cleared futures transaction by the FCMs. The Fund will become subject
to the credit risk of the market specialist/market maker until the EFRP is
settled within the business day, which is typically 7 hours or less. The Fund
reports all activity related to EFRP transactions under the procedures and
guidelines of the CFTC and the exchanges on which the futures are
traded.
EFRPs are subject to
specific rules of the CME and CFTC guidance. It is likely that EFRP mechanisms
will significantly change in the future which may make it uneconomical or
impossible from a regulatory perspective for the Fund to utilize these
mechanisms.
Options on
Futures Contracts
An option on a
futures contract gives the buyer of the option the right, but not the
obligation, to buy or sell a futures contract at a specified price on or before
a specified date. The option buyer deposits the purchase price or “premium” for
the option with his broker, and the money goes to the option seller. Regardless
of how much the market swings, the most an option buyer can lose is the option
premium and the commissions and fees associated with the transaction. However,
the buyer will typically lose the premium if the exercise price of the option is
above (in the case of an option to buy or “call” option) or below (in the case
of an option to sell or “put” option) the market value at the time of exercise.
Option sellers, on the other hand, face risks similar to participants in the
futures markets. For example, since the seller of a call option is assigned a
short futures position if the option is exercised, his risk is the same as
someone who initially sold a futures contract. Because no one can predict
exactly how the market will move, the option seller posts margin to demonstrate
his ability to meet any potential contractual obligations.
In addition to Wheat
Futures Contracts, there are also a number of options on Wheat 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 Wheat Futures Contracts in
pursuing its investment objective, except that it will not sell call options
when it does not own the underlying Wheat Futures Contract. The Fund would make
use of options on Wheat Futures Contracts if, in the opinion of the Sponsor,
such an approach would cause the Fund to track its Benchmark more closely or if
it would lead to an overall lower cost of trading to achieve a given level of
economic exposure to movements in wheat prices.
Liquidity
The Fund invests only
in Wheat 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 wheat
interests based on the spot price of wheat.
Leverage
The Sponsor endeavors
to have the value of the Fund’s cash and cash equivalents, whether held by the
Fund or posted as margin or collateral, at all times approximate the aggregate
market value of its obligations under the Fund’s Benchmark Component Futures
Contracts. Commodity pools’ trading positions in futures contracts are typically
required to be secured by the deposit of margin funds that represent only a
small percentage of a futures contract’s (or other commodity interest’s) entire
market value.
Borrowings
The Fund does not
intend to nor foresee the need to borrow money or establish credit lines. The
Fund maintains cash and cash equivalents, either held by the Fund or posted as
margin or collateral, with a value that at all times approximates the aggregate
market value of its obligations under Benchmark Component Futures Contracts. The
Fund meets its liquidity needs in the normal course of business from the
proceeds of the sale of its investments or from the cash and cash equivalents
that it intends to hold at all times.
Benchmark
Performance
The chart below shows
the percent change in the NAV per share for the Fund, the market price of the
Fund shares, represented by the closing price of the Fund on the NYSE Arca, and
the Benchmark for five specific periods. The Benchmark does not reflect any
impact of expenses, which would generally reduce the Fund’s NAV, or interest
income, which would generally increase the NAV. The actual results for the NAV
include the impacts of both expenses and interest income.
Teucrium Wheat Fund
Performance as of
12/31/2021
|
|
|
|
|
|
NAV |
4.43% |
19.84% |
7.46% |
1.38% |
-11.18% |
Price |
4.38% |
19.39% |
7.61% |
1.44% |
-11.17% |
Benchmark
(TWEAT) |
4.89% |
22.04% |
9.29% |
3.27% |
-7.84% |
The Wheat Market
Wheat is used to
produce flour, the key ingredient for breads, pasta, crackers and many other
food products, as well as several industrial products such as starches and
adhesives. Wheat by-products are used in livestock feeds. The United States
Department of Agriculture (“USDA”) publishes weekly, monthly, quarterly and
annual updates for U.S. domestic and worldwide wheat production and consumption,
and for other grains such as soybeans and corn. These reports are available on
the USDA’s website, www.usda.gov, at no charge. For more information about the
Wheat Market, please see the statement of additional information that is part of
this prospectus under the heading “The Wheat Market.”
The Fund’s Service
Providers
Contractual
Arrangements with the Sponsor and Third-Party Service
Providers
Sponsor
The Sponsor is
responsible for investing the assets of the Fund in accordance with the
objectives and policies of the Fund. In addition, the Sponsor arranges for one
or more third parties to provide administrative, custodial, accounting, transfer
agency and other necessary services to the Fund. For these third-party services,
the Fund pays the fees set forth in the table below entitled “Contractual Fees
and Compensation Arrangements with the Sponsor and Third-Party Service
Providers.” For the Sponsor’s services, the Fund is contractually obligated to
pay a monthly management fee to the Sponsor, based on average daily net assets,
at a rate equal to 1.00% per annum. The Sponsor can elect to waive the payment
of this fee in any amount at its sole discretion, at any time and from time to
time, in order to reduce the Fund’s expenses or for any other
purpose.
Custodian,
Registrar, Transfer Agent, Fund Accountant, and Fund
Administrator
In its capacity as
the Fund’s custodian, the Custodian, currently U.S. Bank, N.A., holds the Fund’s
securities, cash and/or cash equivalents pursuant to a custodial agreement. U.S.
Bancorp Fund Services, LLC, doing business as U.S. Bank Global Fund Services
(“Global Fund Services”), an entity affiliated with U.S. Bank, N.A., is the
registrar and transfer agent for the Fund’s Shares. In addition, Global Fund
Services also serves as Administrator for the Fund, performing certain
administrative, accounting services, and preparing certain SEC and CFTC reports
on behalf of the Fund. The Custodian is located at 1555 North Rivercenter Drive,
Suite 302, Milwaukee, Wisconsin 53212. U.S. Bank N.A. is a nationally chartered
bank, regulated by the Office of the Comptroller of the Currency, Department of
the Treasury, and is subject to regulation by the Board of Governors of the
Federal Reserve System. The principal address for Global Fund Services is 615
East Michigan Street, Milwaukee, WI, 53202.
Distributor
The Fund employs
Foreside Fund Services, LLC as the Distributor for the Fund. Pursuant to a
Consulting Services Agreement, Foreside Consulting Services, LLC, performs
certain consulting support services for the Trust’s Sponsor, Teucrium Trading,
LLC. Additionally, Foreside Distributors, LLC performs certain distribution
consulting services pursuant to a Distribution Consulting Agreement with the
Trust’s Sponsor, Teucrium Trading, LLC.
The Distribution
Services Agreement among the Distributor, the Sponsor, and the Trust calls for
the Distributor to work with the Custodian in connection with the receipt and
processing of orders for Creation Baskets and Redemption Baskets and the review
and approval of all Fund sales literature and advertising materials. The
Distributor and the Sponsor have also entered into a Securities Activities and
Service Agreement (the “SASA”) under which certain employees and officers of the
Sponsor are licensed as registered representatives or registered principals of
the Distributor, under “FINRA” rules (“Registered Representatives”). As
Registered Representatives of the Distributor, these persons are permitted to
engage in certain marketing activities for the Fund that they would otherwise
not be permitted to engage in. Under the SASA, the Sponsor is obligated to
ensure that such marketing activities comply with applicable law and are
permitted by the SASA and the Distributor’s internal
procedures.
The Distributor’s
principal business address is Three Canal Plaza, Suite 100, Portland, Maine
04101. The Distributor is a broker-dealer registered with the U.S. Securities
and Exchange Commission (“SEC”) and a member of FINRA.
Clearing
Broker
E D & F Man
Capital Markets, Inc. (“E D & F Man”) serves as the Fund’s clearing broker
to execute and clear the Fund’s futures and provide other brokerage related
services. E D & F Man is registered as an FCM with the CFTC, is a member of
the National Futures Association (“NFA”) and is a clearing member of all major
U.S. futures exchanges. E D & F Man’s Designated Self-Regulatory
Organization is the Chicago Mercantile Exchange Inc. (www.cmegroup.com). E D
& F Man is also registered as a broker-dealer (“BD”) with the U.S.
Securities and Exchange Commission (“SEC”) and is a member of the Financial
Industry Regulatory Authority, Inc. (“FINRA”).
Except as indicated
below, there have been no material civil, administrative, or criminal
proceedings pending, on appeal, or concluded against E D & F Man Capital
Markets Inc. or its principals in the past five (5) years.
United
States District Court for the Southern District of New York, Civil Action No.
19-CV-8217
In a private
litigation, plaintiffs allege, among other things, that E D & F Man made
certain fraudulent misrepresentations to them that they relied upon in
connection with a futures account carried by the firm in its capacity as a
futures commission merchant. The plaintiffs allege claims of common law fraud,
negligence, breach of fiduciary duty, breach of contract, breach of the duty of
good faith and fair dealing and misrepresentation/omission and seek compensatory
damages of approximately $2,029,659 plus interest, costs, attorneys’ fees and
punitive damages. E D & F ManFirm filed an Amended Answer and a Counterclaim
in which the firm denies the substantive allegations against it and asserted a
counterclaim for breach of contract, indemnification and legal fees. On June 30,
2021, E D & F Man received the Opinion and Order in which the judge ruled
against the plaintiffs and in favor of the firm. Judgment was entered in favor
of the firm in the amount of $1,762,266.57, plus prejudgment interest and
attorney’s fees and costs. On September 29, 2021, E D & F Man received an
Opinion and Order in which the judge awarded the firm $1,402,234.32 in
attorneys’ fees and costs.
For a list of
concluded actions, please go to http://www.nfa.futures.org/basicnet/welcome.aspx. This link will take you to the Welcome Page of
the NFA’s Background Affiliation Status Information Center(“BASIC”). At this
page, there is a box where you can enter the NFA ID of E D & F Man Capital
Markets Inc. (0002613) and then click “Go”. You will be transferred to the NFA’s
information specific to E D & F Man Capital Markets Inc. Under the heading
“Regulatory Actions,” click “details” and you will be directed to the full list
of regulatory actions brought by the CFTC and exchanges.
E D & F Man, in
its capacity as a registered FCM, will serve as the Fund's clearing broker and,
as such, will arrange for the execution and clearing of the Fund's futures and
options on futures transactions. E D & F Man acts as clearing broker for
many other funds and individuals.
The investor should
be advised that E D & F Man is not affiliated with and does not act as a
supervisor of the Fund or the Fund's Sponsor, investment managers, members,
officers, administrators, transfer agents, registrars or organizers.
Additionally, E D & F Man is not acting as an underwriter or sponsor of the
offering of any shares or interests in the Fund and has not passed upon the
adequacy of this prospectus, the merits of participating in this offering or on
the accuracy of the information contained herein.
Additionally, E D
& F Man does not provide any commodity trading advice regarding the Fund's
trading activities. Investors should not rely upon E D & F Man in deciding
whether to invest in the Fund or retain their interests in the Fund. Investors
should also note that the Fund may select additional clearing brokers or replace
E D & F Man as the Fund's clearing broker.
Payments to
Certain Third Parties
The Sponsor employs
Thales Capital Partners LLC (“Thales”) for distribution and solicitation-related
services. Thales is registered as a broker-dealer with the SEC and is a member
of the Financial Industry Regulatory Authority (FINRA) and SIPC. Thales receives
a quarterly fee of $18,750 or 0.10% of new assets raised in referred accounts
for distribution and solicitation-related services. This fee based on new assets
raised is determined by an agreed upon level of assets at the time of signing
the contract.
Commodity Trading
Advisor
Currently, the
Sponsor does not employ commodity trading advisors. If, in the future, the
Sponsor does employ commodity trading advisors, it will choose each advisor
based on arm’s length negotiations and will consider the advisor’s experience,
fees, and reputation.
Contractual Fees
and Compensation Arrangements with the Sponsor and Third Party Service
Providers
Service
Provider |
Compensation Paid by the
Fund
|
Teucrium
Trading, LLC, Sponsor |
1.00% of
average net assets annually
|
U.S. Bank N.A.,
Custodian
U.S. Bancorp
Fund Services, LLC,
doing business
as U.S. Bank Global Fund Services, Transfer Agent, Fund Accountant and
Fund Administrator |
For custody
services: 0.0075% of average gross assets up to $1 billion, and .0050% of
average gross assets over $1 billion, annually, plus certain
per-transaction charges
For Transfer
Agency, Fund Accounting and Fund Administration services, based on the
total assets for all the Teucrium Funds in the Trust: 0.05% of average
gross assets on the first $500 million, 0.04% on the next $500 million,
0.03% on the next $2 billion and 0.02% on the balance over $3 billion
annually
A combined
minimum annual fee of $47,000 for custody, transfer agency, accounting and
administrative services is assessed per Fund.
|
Foreside Fund
Services, LLC, Distributor |
Subject to a
maximum of $625,812 for the Trust for the two-year period of May 1, 2021
to May 1, 2023 (the “two year offering period”), the Distributor receives:
0.01% of the Fund’s average daily net assets, and an aggregate annual fee
of $100,000 for all Teucrium Funds. For the two year offering period, the
Distributor also receives expense reimbursements for sales and advertising
review fees subject to a maximum of $6,000 per fund.
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. For the two year offering period, the Distributor will
not exceed $78,000 for all Teucrium Funds and will receive reimbursements
relating to the registration, continuing education and other
administrative expenses of the Registered Representatives for each
offering, not to exceed $54,000 for all Teucrium
Funds. |
|
|
E D & F Man
Capital Markets, Inc., Futures Commission Merchant and Clearing
Broker
|
$4.50 per Wheat
Futures Contract half-turn |
Wilmington
Trust Company, Trustee |
$3,300 annually
for the Trust
|
Employees of
the Sponsor Registered with the Distributor (the “Registered
Representatives”) |
For
non-marketing services to all Teucrium Funds, approximately $132,350 and,
for marketing and wholesaling purposes, approximately $397,050. These
amounts include expenses that will be reimbursed to the Registered
Representatives for continuing education, travel, and other expenses
related to their activities for the
Fund. |
Other
Non-Contractual Payments by the Fund
The Fund pays for all
brokerage fees, taxes and other expenses, including licensing fees for the use
of intellectual property, registration or other fees paid to the SEC, FINRA, or
any other regulatory agency in connection with the offer and sale of subsequent
Shares after its initial registration and all legal, accounting, printing and
other expenses associated therewith. The Fund also pays its portion of the fees
and expenses for services directly attributable to the Fund such as accounting,
financial reporting, regulatory compliance and trading activities, which the
Sponsor elected not to outsource. Certain aggregate expenses common to all
Teucrium Funds within the Trust are allocated by the Sponsor to the respective
funds based on activity drivers deemed most appropriate by the Sponsor for such
expenses, including but not limited to relative assets under management and
creation order activity. These aggregate common expenses include, but are not
limited to, legal, auditing, accounting and financial reporting,
tax-preparation, regulatory compliance, trading activities, and insurance costs,
as well as fees paid to the Distributor. A portion of these aggregate common
expenses are related to the Sponsor or related parties of principals of the
Sponsor; these are necessary services to the Teucrium Funds, which are primarily
the cost of performing certain accounting and financial reporting, regulatory
compliance, and trading activities that are directly attributable to the Fund
and are included, primarily, in distribution and marketing
fees.
|
Year
Ended
December 31,
2021 |
Year
Ended
December 31,
2020 |
Year
Ended
December 31,
2019 |
Recognized Related Party
Transactions |
$478,989 |
$503,823 |
$557,131 |
Waived Related Party
Transactions |
$134,898 |
$27,789 |
$2,500 |
The Sponsor can elect
to pay (or waive reimbursement for) certain fees or expenses that would
generally be paid for by the Fund, although it has no contractual obligation to
do so. Any election to pay or waive reimbursement for fees that would generally
be paid by the Fund, can be changed at the discretion of the Sponsor. All
asset-based fees and expenses are calculated on the prior day's net
assets
The contractual and
noncontractual 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 3.
|
|
Professional Fees1 |
$0.02 |
Distribution and Marketing Fees2 |
0.04 |
Custodian Fees and Expenses3 |
0.01 |
General and Administrative Fees4 |
- |
Business Permits and
Licenses |
- |
Other
Expenses |
- |
Total Other
Fund Fees and Expenses |
$0.07 |
(1) Professional fees consist of primarily, but
not entirely, legal, auditing and tax preparation related
costs.
(2) Distribution and marketing fees consist of
primarily, but not entirely, fees paid to the Distributor (Foreside Fund
Services, LLC), costs related to regulatory compliance activities, costs related
to marketing and solicitation services, and other costs related to the trading
activities of the Fund.
(3) Custodian and
Administrator fees consist of fees to the Administrator and the Custodian for
accounting, transfer agent and custodian activities.
(4) General and
Administrative fees consist of primarily, but not entirely, insurance and
printing costs.
Asset-based fees are
calculated on a daily basis (accrued at 1/365 of the applicable percentage of
NAV on that day) and paid on a monthly basis. NAV is calculated by taking the
current market value of the Fund’s total assets and subtracting any
liabilities.
Form of Shares
Registered
Form
Shares are issued in
registered form in accordance with the Trust Agreement. Global Fund Services has
been appointed registrar and transfer agent for the purpose of transferring
Shares in certificated form. Global Fund Services keeps a record of all
Shareholders and holders of the Shares in certificated form in the registry
(“Register”). The Sponsor recognizes transfers of Shares in certificated form
only if done in accordance with the Trust Agreement. The beneficial interests in
such Shares are held in book-entry form through participants and/or
accountholders in DTC.
Book
Entry
Individual
certificates are not issued for the Shares. Instead, Shares are represented by
one or more global certificates, which are deposited by the Administrator with
DTC and registered in the name of Cede & Co., as nominee for DTC. The global
certificates evidence all of the Shares outstanding at any time. Shareholders
are limited to (1) participants in DTC such as banks, brokers, dealers and trust
companies (“DTC Participants”), (2) those who maintain, either directly or
indirectly, a custodial relationship with a DTC Participant (“Indirect
Participants”), and (3) those who hold interests in the Shares through DTC
Participants or Indirect Participants, in each case who satisfy the requirements
for transfers of Shares. DTC Participants acting on behalf of investors holding
Shares through such participants’ accounts in DTC will follow the delivery
practice applicable to securities eligible for DTC’s Same-Day Funds Settlement
System. Shares are credited to DTC Participants’ securities accounts following
confirmation of receipt of payment.
DTC
DTC is a limited
purpose trust company organized under the laws of the State of New York and is a
member of the Federal Reserve System, a “clearing corporation” within the
meaning of the New York Uniform Commercial Code and a “clearing agency”
registered pursuant to the provisions of Section 17A of the Securities Exchange
Act of 1934 the ("Exchange Act”). DTC holds securities for DTC Participants and
facilitates the clearance and settlement of transactions between DTC
Participants through electronic book-entry changes in accounts of DTC
Participants.
Transfer of
Shares
The Shares are only
transferable through the book-entry system of DTC. Shareholders who are not DTC
Participants may transfer their Shares through DTC by instructing the DTC
Participant holding their Shares (or by instructing the Indirect Participant or
other entity through which their Shares are held) to transfer the Shares.
Transfers are made in accordance with standard securities industry
practice.
Transfers of
interests in Shares with DTC are made in accordance with the usual rules and
operating procedures of DTC and the nature of the transfer. DTC has established
procedures to facilitate transfers among the participants and/or accountholders
of DTC. Because DTC can only act on behalf of DTC Participants, who in turn act
on behalf of Indirect Participants, the ability of a person or entity having an
interest in a global certificate to pledge such interest to persons or entities
that do not participate in DTC, or otherwise take actions in respect of such
interest, may be affected by the lack of a certificate or other definitive
document representing such interest.
DTC has advised us
that it will take any action permitted to be taken by a Shareholder (including,
without limitation, the presentation of a global certificate for exchange) only
at the direction of one or more DTC Participants in whose account with DTC
interests in global certificates are credited and only in respect of such
portion of the aggregate principal amount of the global certificate as to which
such DTC Participant or Participants has or have given such
direction.
InterSeries 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 InterSeries Limitation on Liability. The
InterSeries 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
InterSeries 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 InterSeries Limitation on
Liability with respect to such party’s claims.
The existence of a
Trustee should not be taken as an indication of any additional level of
management or supervision over the Fund. Consistent with Delaware law, the
Trustee acts in an entirely passive role, delegating all authority for the
management and operation of the Fund and the Trust to the Sponsor. The Trustee
does not provide custodial services with respect to the assets of the
Fund.
Plan of
Distribution
Buying and
Selling Shares
Most investors buy
and sell Shares of the Fund in secondary market transactions through brokers.
Shares trade on the NYSE Arca under the ticker symbol “WEAT.” Shares are bought
and sold throughout the trading day like other publicly traded securities. When
buying or selling Shares through a broker, most investors incur customary
brokerage commissions and charges. Investors are encouraged to review the terms
of their brokerage account for details on applicable charges and, as discussed
below under “U.S. Federal Income Tax Considerations,” any provisions authorizing
the broker to borrow Shares held on your behalf.
Distributor and
Authorized Purchasers
The offering of the
Fund’s Shares is a best efforts offering. The Fund continuously offers Creation
Baskets consisting of 25,000 Shares at their NAV through the Distributor to
Authorized Purchasers. Deutsche Bank Securities, Inc. was the initial Authorized
Purchaser. The initial Authorized Purchaser purchased two Creation Baskets of
50,000 Shares each at a per Share price of $25.00 on September 18, 2011. All
Authorized Purchasers pay a $250 fee for each Creation Basket
order.
The following
entities have entered into Authorized Purchaser Agreements with respect to the
Fund: J.P. Morgan Securities LLC; Merrill Lynch Professional Clearing Corp.;
Goldman Sachs & Co.; Citadel Securities, LLC; and Virtu Americas LLC.
Effective October 16, 2020, Deutsche Bank Securities Inc. terminated their
agreement as an Authorized Purchaser for the Fund.
Because new Shares
can be created and issued on an ongoing basis, at any point during the life of
the Fund, a “distribution,” as such term is used in the 1933 Act, will be
occurring. Authorized Purchasers, other broker-dealers and other persons are
cautioned that some of their activities may result in their being deemed
participants in a distribution in a manner that would render them statutory
underwriters and subject them to the prospectus delivery and liability
provisions of the 1933 Act. For example, an Authorized Purchaser, other
broker-dealer firm or its client will be deemed a statutory underwriter if it
purchases a basket from the Fund, breaks the basket down into the constituent
Shares and sells the Shares to its customers. or if it chooses to couple the
creation of a supply of new Shares with an active selling effort involving
solicitation of secondary market demand for the Shares. In contrast, Authorized
Purchasers may engage in secondary market or other transactions in Shares that
would not be deemed “underwriting.” For example, an Authorized Purchaser may act
in the capacity of a broker or dealer with respect to Shares that were
previously distributed by other Authorized Purchasers. A determination of
whether a particular market participant is an underwriter must take into account
all the facts and circumstances pertaining to the activities of the
broker-dealer or its client in the particular case, and the examples mentioned
above should not be considered a complete description of all the activities that
would lead to designation as an underwriter and subject them to the prospectus
delivery and liability provisions of the 1933 Act.
Dealers who are
neither Authorized Purchasers nor “underwriters” but are nonetheless
participating in a distribution (as contrasted to ordinary secondary trading
transactions), and thus dealing with Shares that are part of an “unsold
allotment” within the meaning of Section 4(a)(3)(C) of the 1933 Act, would be
unable to take advantage of the prospectus delivery exemption provided by
Section 4(a)(3) of the 1933 Act.
The Sponsor expects
that any broker-dealers selling Shares will be members of FINRA. Investors
intending to create or redeem baskets through Authorized Purchasers in
transactions not involving a broker dealer registered in such investor’s
state of domicile or residence should consult their legal advisor regarding
applicable broker-dealer regulatory requirements under the state securities laws
prior to such creation or redemption.
While the Sponsor may
indemnify the Authorized Purchasers, they will not be entitled to receive a
discount or commission from the Trust or the Sponsor for their purchases of
Creation Baskets.
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.
Global Fund Services,
in its capacity as the “Administrator,” calculates the NAV of the Fund once each
trading day. It calculates NAV as of the earlier of the close of the New York
Stock Exchange or 4:00 p.m. (EST). The NAV for a particular trading day is
released after 4:15 p.m. (EST).
For purposes of
determining the value of Wheat Futures Contracts, the Administrator uses the
CBOT closing price, except that the “fair value” of Wheat Futures Contracts (as
described in more detail below) may be used when Wheat Futures Contracts close
at their price fluctuation limit for the day. The Administrator determines the
value of all other Fund investments as of the earlier of the close of the New
York Stock Exchange or 4:00 p.m. (EST), in accordance with the current Services
Agreement between the Administrator and the Trust. The value of over the counter
wheat interests is determined based on the value of the commodity or Futures
Contract underlying such wheat 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 wheat interest. NAV includes
any unrealized profit or loss on open wheat interests and any other credit or
debit accruing to the Fund but unpaid or not received by the
Fund.
The fair value of a
wheat interest is determined by the Sponsor in good faith and in a manner that
assesses the wheat interest’s value based on a consideration of all available
facts and all available information on the valuation date. When a Wheat Futures
Contract has closed at its price fluctuation limit, the fair value determination
attempts to estimate the price at which such Wheat 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 wheat interests trading in the over the counter
market. The fair value of a wheat interest may not reflect such security’s
market value or the amount that the Fund might reasonably expect to receive for
the wheat interest upon its current sale.
In addition, in order
to provide updated information relating to the Fund for use by investors and
market professionals, ICE Data Indices, LLC calculates and disseminates
throughout the trading day an updated “indicative fund value.” The indicative
fund value is calculated by using the prior day’s closing NAV per Share of the
Fund as a base and updating that value throughout the trading day to reflect
changes in the value of the Fund’s wheat interests during the trading day.
Changes in the value of cash and cash equivalents are not included in the
calculation of indicative value. For this and other reasons, the indicative fund
value disseminated during NYSE Arca trading hours should not be viewed as an
actual real time update of the NAV. NAV is calculated only once at the end of
each trading day.
The indicative fund
value is disseminated on a per Share basis every 15 seconds during regular NYSE
Arca trading hours of 9:30 a.m. (EST)
to 4:00 p.m. (EST). The normal trading hours for Wheat 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 Wheat
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/commoditieshours.html.
ICE Data Indices, LLC
disseminates the indicative fund value through the facilities of CTA/CQ High
Speed Lines. In addition, the indicative fund value is available through
online information services such as Bloomberg and
Reuters.
Dissemination of the
indicative fund value provides additional information that is not otherwise
available to the public and is useful to investors and market professionals in
connection with the trading of Fund Shares on the NYSE Arca. Investors and
market professionals are able throughout the trading day to compare the market
price of the Fund and the indicative fund value. If the market price of Fund
Shares diverges significantly from the indicative fund value, market
professionals may have an incentive to execute arbitrage trades. For example, if
the Fund appears to be trading at a discount compared to the indicative fund
value, a market professional could buy Fund Shares on the NYSE Arca, aggregate
them into Redemption Baskets, and receive the NAV of such Shares by redeeming
them to the Trust, provided that there is not a minimum number of shares
outstanding for the Fund. Such arbitrage trades can tighten the tracking between
the market price of the Fund and the indicative fund value.
Creation and Redemption of
Shares
The Fund creates and
redeems Shares from time to time, but only in one or more Creation Baskets or
Redemption Baskets. The creation and redemption of baskets are only made in
exchange for delivery to the Fund or the distribution by the Fund of the amount
of cash, cash equivalents and/or commodity futures equal to the combined NAV of
the number of Shares included in the baskets being created or redeemed
determined as of 4:00 p.m. (EST) on the day the order to create or redeem
baskets is properly received.
Authorized Purchasers
are the only persons that may place orders to create and redeem baskets.
Authorized Purchasers must be (1) either registered broker dealers or other
securities market participants, such as banks and other financial institutions,
which are not required to register as broker-dealers to engage in securities
transactions as described below, and (2) DTC Participants. To become an
Authorized Purchaser, a person must enter into an Authorized Purchaser Agreement
with the Sponsor. The Authorized Purchaser Agreement provides the procedures for
the creation and redemption of baskets and for the delivery of the cash, cash
equivalents and/or commodity futures required for such creations and
redemptions. The Authorized Purchaser Agreement and the related procedures
attached thereto may be amended by the Sponsor without the consent of any
Shareholder, and the related procedures may generally be amended by the Sponsor
without the consent of the Authorized Purchaser. Authorized Purchasers pay a
transaction fee of $250 to the Custodian for each creation order they place and
a fee of $250 per order for redemptions. Authorized Purchasers who make deposits
with the Fund in exchange for baskets receive no fees, commissions or other form
of compensation or inducement of any kind from either the Trust or the Sponsor,
and no such person will have any obligation or responsibility to the Trust or
the Sponsor to effect any sale or resale of Shares.
Certain Authorized
Purchasers are expected to be capable of participating directly in the physical
wheat and the wheat interest markets. Some Authorized Purchasers or their
affiliates may from time to time buy or sell wheat or wheat interests and may
profit in these instances.
Each Authorized
Purchaser will be required to be registered as a broker-dealer under the
Exchange Act and a member in good standing with FINRA or be exempt from being or
otherwise not required to be registered as a broker-dealer or a member of FINRA
and will be qualified to act as a broker or dealer in the states or other
jurisdictions where the nature of its business so requires. Certain Authorized
Purchasers may also be regulated under federal and state banking laws and
regulations. Each Authorized Purchaser has its own set of rules and procedures,
internal controls and information barriers it deems appropriate in light of its
own regulatory regime.
Under the Authorized
Purchaser Agreement, the Sponsor has agreed to indemnify the Authorized
Purchasers against certain liabilities, including liabilities under the 1933
Act, and to contribute to the payments the Authorized Purchasers may be required
to make in respect of those liabilities.
The following
description of the procedures for the creation and redemption of baskets is only
a summary and an investor should refer to the relevant provisions of the Trust
Agreement and the form of Authorized Purchaser Agreement for more detail, each
of which has been incorporated by reference as an exhibit to the registration
statement of which this prospectus is a part. See “Where You Can Find More
Information” for information about where you can obtain the registration
statement.
Creation
Procedures
On any business day,
an Authorized Purchaser may place an order with Global Fund Services in their
capacity as the transfer agent to create one or more baskets. For purposes of
processing purchase and redemption orders, a “business day” means any day other
than a day when any of the NYSE Arca, CBOT or the New York Stock Exchange is
closed for regular trading. Purchase orders must be placed by 1:15 p.m. (EST) or
the close of regular trading on the New York Stock Exchange, whichever is
earlier. The day on which the Distributor receives a valid purchase order is
referred to as the purchase order date.
By placing a purchase
order, an Authorized Purchaser agrees to deposit cash, cash equivalents,
commodity futures and/or a combination thereof with the Fund, as described
below. Prior to the delivery of baskets for a purchase order, the Authorized
Purchaser must also have wired to the Sponsor the nonrefundable transaction
fee due for the purchase order. Authorized Purchasers may not withdraw a
purchase order without the prior consent of the Sponsor in its
discretion.
Determination of
Required Deposits
The total deposit
required to create each basket (“Creation Basket Deposit”) is the amount of
cash, cash equivalents and/or commodity futures that is in the same proportion
to the total assets of the Fund (net of estimated accrued but unpaid fees,
expenses and other liabilities) on the purchase order date as the number of
Shares to be created under the purchase order is in proportion to the total
number of Shares outstanding on the purchase order date. The Sponsor determines,
directly in its sole discretion or in consultation with the Custodian and the
Administrator, the requirements for cash, cash equivalents and/or commodity
futures including the remaining maturities of the cash equivalents, which 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., (EST), but the total payment
required to create a basket during the continuous offering period will not be
determined until 4:00 p.m., (EST), on the date the purchase order is received,
Authorized Purchasers will not know the total amount of the payment required to
create a basket at the time they submit an irrevocable purchase order for the
basket. The Fund’s NAV and the total amount of the payment required to create a
basket could rise or fall substantially between the time an irrevocable purchase
order is submitted and the time the amount of the purchase price in respect
thereof is determined.
Rejection of
Purchase Orders
The Sponsor acting by
itself or through the Distributor or transfer agent may reject a purchase order
or a Creation Basket Deposit if:
●
it determines that,
due to position limits or otherwise, investment alternatives that will enable
the Fund to meet its investment objective are not available or practicable at
that time;
●
it determines that
the purchase order or the Creation Basket Deposit is not in proper
form;
●
it believes that
acceptance of the purchase order or the Creation Basket Deposit would have
adverse tax consequences to the Fund or its
Shareholders;
●
the acceptance or
receipt of the Creation Basket Deposit would, in the opinion of counsel to the
Sponsor, be unlawful;
●
circumstances outside
the control of the Sponsor, Distributor or transfer agent make it, for all
practical purposes, not feasible to process creations of
baskets;
●
there is a
possibility that any or all of the Benchmark Component Futures Contracts of the
Fund on the 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.
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. (EST) or the close of
regular trading on the New York Stock Exchange, whichever is earlier. A
redemption order so received will be effective on the date it is received in
satisfactory form by the Distributor. The redemption procedures allow Authorized
Purchasers to redeem baskets and do not entitle an individual Shareholder to
redeem any Shares in an amount less than a Redemption Basket, or to redeem
baskets other than through an Authorized Purchaser. By placing a redemption
order, an Authorized Purchaser agrees to deliver the baskets to be redeemed
through DTC’s book-entry system to the Fund by the end of the next business day
following the effective date of the redemption order or by the end of such later
business day. Prior to the delivery of the redemption distribution for a
redemption order, the Authorized Purchaser must also have wired to the Sponsor’s
account at the Custodian the nonrefundable transaction fee due for the
redemption order. An Authorized Purchaser may not withdraw a redemption order
without the prior consent of the Sponsor in its discretion.
Determination of
Redemption Distribution
The redemption
distribution from the Fund consists of a transfer to the redeeming Authorized
Purchaser of an amount of cash, cash equivalents and/or commodity futures that
is in the same proportion to the total assets of the Fund (net of estimated
accrued but unpaid fees, expenses and other liabilities) on the date the order
to redeem is properly received as the number of Shares to be redeemed under the
redemption order is in proportion to the total number of Shares outstanding on
the date the order is received. The Sponsor, directly or in consultation with
the Custodian and the Administrator, determines the requirements for cash, cash
equivalents and/or commodity futures, including the remaining maturities of the
cash equivalents and cash, which may be included in distributions to redeem
baskets. If cash equivalents are to be included in a redemption distribution for
orders placed on a given business day, the Custodian and Administrator will
publish an estimate of the redemption distribution composition as of the
beginning of such day.
Delivery of
Redemption Distribution
The redemption
distribution due from a Fund will be delivered to the Authorized Purchaser on
the Redemption Settlement Date if the Fund’s DTC account has been credited with
the baskets to be redeemed. If the Fund’s DTC account has not been credited with
all of the baskets to be redeemed by the end of such date, the redemption
distribution will be delivered to the extent of whole baskets received. Any
remainder of the redemption distribution will be delivered on the next business
day after the Redemption Settlement Date to the extent of remaining whole
baskets received. Pursuant to information from the Sponsor, the Custodian will
also be authorized to deliver the redemption distribution notwithstanding that
the baskets to be redeemed are not credited to the Fund’s DTC account by 1:15
p.m. (EST) on the Redemption Settlement Date if the Authorized Purchaser has
collateralized its obligation to deliver the baskets through DTC’s book-entry
system on such terms as the Sponsor may from time to time
determine.
Suspension or
Rejection of Redemption Orders
The Sponsor may, in
its discretion, suspend the right of redemption, or postpone the redemption
settlement date, (1) for any period during which the NYSE Arca or 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 of the
Fund and can deliver them.
Creation and
Redemption Transaction Fees
To compensate for
expenses in connection with the creation and redemption of baskets, an
Authorized Purchaser is required to pay a transaction fee of $250 per order to
the Custodian. The transaction fees may be reduced, increased or otherwise
changed by the Sponsor.
Tax
Responsibility
Authorized Purchasers
are responsible for any transfer tax, sales or use tax, stamp tax, recording
tax, value added tax or similar tax or governmental charge applicable to the
creation or redemption of baskets, regardless of whether or not such tax or
charge is imposed directly on the Authorized Purchaser, and agree to indemnify
the Sponsor and the Fund if they are required by law to pay any such tax,
together with any applicable penalties, additions to tax and interest
thereon.
Secondary Market
Transactions
As noted, the Fund
will create and redeem Shares from time to time, but only in one or more
Creation Baskets or Redemption Baskets. The creation and redemption of baskets
are only made in exchange for delivery to the Fund or the distribution by the
Fund of the amount of cash, cash equivalents and/or commodity futures equal to
the aggregate NAV of the number of Shares included in the baskets being created
or redeemed determined on the day the order to create or redeem baskets is
properly received.
As discussed above,
Authorized Purchasers are the only persons that may place orders to create and
redeem baskets. Authorized Purchasers must be registered broker-dealers or other
securities market participants, such as banks and other financial institutions
that are not required to register as broker-dealers to engage in securities
transactions. An Authorized Purchaser is under no obligation to create or redeem
baskets, and an Authorized Purchaser is under no obligation to offer to the
public Shares of any baskets it does create. Authorized Purchasers that do offer
to the public Shares from the baskets they create will do so at per Share
offering prices that are expected to reflect, among other factors, the trading
price of the Shares on the NYSE Arca, the NAV of the Shares at the time the
Authorized Purchaser purchased the Creation Baskets, the NAV of the Shares at
the time of the offer of the Shares to the public, the supply of and demand for
Shares at the time of sale, and the liquidity of the wheat 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 wheat interest markets.
While the Shares trade on the NYSE Arca until 4:00 p.m. (EST), liquidity in the
markets for Wheat 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.
Use of Proceeds
The Sponsor causes
the Fund to transfer the proceeds of the sale of Creation Baskets to the
Custodian or another financial institution for use in trading activities and/or
investment in Benchmark Component Futures Contracts and cash and cash
equivalents. Under normal market conditions, the Sponsor invests the Fund’s
assets in Benchmark Component Futures Contracts and cash and cash equivalents.
When the Fund purchases Benchmark Component Futures Contracts, the Fund is
required to deposit with the FCM on behalf of the exchange a portion of the
value of the contract or other interest as security to ensure payment for the
obligation under the Benchmark Component Futures Contracts at maturity. This
deposit is known as initial margin. Counterparties in transactions in over the
counter wheat interests will generally impose similar collateral requirements on
the Fund. The Sponsor invests the Fund’s assets that remain after margin and
collateral is posted in cash and cash equivalents. Subject to these margin and
collateral requirements, the Sponsor has sole authority to determine the
percentage of assets that will be:
● |
held as margin
or collateral with the FCM or other custodian. |
● |
used for other
investments; and |
● |
held in bank
accounts to pay current obligations and as
reserves. |
In general, the Fund
expects that it will be required to post approximately 4-6% of the notional
amount of a Benchmark Component Futures Contracts as initial margin when
entering into such Benchmark Component Futures Contracts. Ongoing margin and
collateral payments will generally be required for both exchange-traded and over
the counter wheat interests based on changes in the value of the wheat
interests. Furthermore, ongoing collateral requirements with respect to over the
counter wheat 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 wheat interest, and
each party’s creditworthiness. In light of the differing requirements for
initial payments under exchange-traded and over the counter wheat interests and
the fluctuating nature of ongoing margin and collateral payments, it is not
possible to estimate what portion of the Fund’s assets will be posted as margin
or collateral at any given time. Cash and cash equivalents held by the Fund
constitute reserves that are available to meet ongoing margin and collateral
requirements. All interest or other income is used for the Fund’s
benefit.
An FCM, counterparty,
government agency or commodity exchange could increase margin or collateral
requirements applicable to the Fund to hold trading positions at any time.
Moreover, margin is merely a security deposit and has no bearing on the profit
or loss potential for any positions held. Further, under recently adopted CFTC
rules, the Fund may be obligated to post both initial and variation margin with
respect to swaps (and options that qualify as swaps) and traded over the
counter, and, where applicable, on SEFs.
The approximate 4-6%
of the Fund’s assets held by the FCM are held in segregation pursuant to the CEA
and CFTC regulations.
The Trust
Agreement
The following
paragraphs are a summary of certain provisions of the Trust Agreement. The
following discussion is qualified in its entirety by reference to the Trust
Agreement.
Authority of the
Sponsor
The Sponsor is
generally authorized to perform all acts deemed necessary to carry out the
purposes of the Trust and to conduct the business of the Trust. The Trust and
the Fund will continue to exist until terminated in accordance with the Trust
Agreement.
The Sponsor’s
Obligations
In addition to the
duties imposed by the Delaware Trust Statute, under the Trust Agreement the
Sponsor has obligations as a Sponsor of the Trust, which include, among others,
responsibility for certain organizational and operational requirements of the
Trust, as well as fiduciary responsibility for the safekeeping and use of the
Trust’s assets, whether or not in the Sponsor’s immediate possession or
control.
To the extent that,
at law (common or statutory) or in equity, the Sponsor has duties (including
fiduciary duties) and liabilities relating thereto to the Trust, the Fund, the
Shareholders or to any other person, the Sponsor will not be liable to the
Trust, the Fund, the Shareholders or to any other person for its good faith
reliance on the provisions of the Trust Agreement or this prospectus unless such
reliance constitutes gross negligence or willful misconduct on the part of the
Sponsor. The provisions of the Trust Agreement, to the extent they restrict or
eliminate the duties and liabilities of the Sponsor otherwise existing at law or
in equity, replace such other duties and liabilities of the
Sponsor.
Liability and
Indemnification
Under the Trust
Agreement, the Sponsor, the Trustee and their respective Affiliates
(collectively, “Covered Persons”) shall have no liability to the Trust, the
Fund, or to any Shareholder for any loss suffered by the Trust or the Fund which
arises out of any action or inaction of such Covered Person if such Covered
Person, in good faith, determined that such course of conduct was in the best
interest of the Trust or the Fund and such course of conduct did not constitute
gross negligence or willful misconduct of such Covered Person. Subject to the
foregoing, neither the Sponsor nor any other Covered Person shall be personally
liable for the return or repayment of all or any portion of the capital or
profits of any Shareholder or assignee thereof, it being expressly agreed that
any such return of capital or profits made pursuant to the Trust Agreement shall
be made solely from the assets of the applicable Teucrium Fund without any
rights of contribution from the Sponsor or any other Covered Person. A Covered
Person shall not be liable for the conduct or willful misconduct of any
administrator or other delegate selected by the Sponsor with reasonable care,
provided, however, that the Trustee and its Affiliates shall not, under any
circumstances be liable for the conduct or willful misconduct of any
administrator or other delegate or any other person selected by the Sponsor to
provide services to the Trust.
The Trust Agreement
also provides that the Sponsor shall be indemnified by the Trust (or by a series
separately to the extent the matter in question relates to a single series or
disproportionately affects a specific series in relation to other series)
against any losses, judgments, liabilities, expenses and amounts paid in
settlement of any claims sustained by it in connection with its activities for
the Trust, provided that (i) the Sponsor was acting on behalf of or performing
services for the Trust and has determined, in good faith, that such course of
conduct was in the best interests of the Trust and such liability or loss was
not the result of gross negligence,
willful misconduct, or a breach of the Trust Agreement on the part of the
Sponsor and (ii) any such indemnification will only be recoverable from the
assets of the applicable series. The Sponsor’s rights to indemnification
permitted under the Trust Agreement shall not be affected by the dissolution or
other cessation to exist of the Sponsor, or the withdrawal, adjudication of
bankruptcy or insolvency of the Sponsor, or the filing of a voluntary or
involuntary petition in bankruptcy under Title 11 of the Bankruptcy Code by or
against the Sponsor.
Notwithstanding the
above, the Sponsor shall not be indemnified for any losses, liabilities or
expenses arising from or out of an alleged violation of U.S. federal or state
securities laws unless (i) there has been a successful adjudication on the
merits of each count involving alleged securities law violations as to the
particular indemnitee and the court approves the indemnification of such
expenses (including, without limitation, litigation costs), (ii) such claims
have been dismissed with prejudice on the merits by a court of competent
jurisdiction as to the particular indemnitee and the court approves the
indemnification of such expenses (including, without limitation, litigation
costs), or (iii) a court of competent jurisdiction approves a settlement of the
claims against a particular indemnitee and finds that indemnification of the
settlement and related costs should be made.
The payment of any
indemnification shall be allocated, as appropriate, among the Trust’s series.
The Trust and its series shall not incur the cost of that portion of any
insurance which insures any party against any liability, the indemnification of
which is prohibited under the Trust Agreement.
Expenses incurred in
defending a threatened or pending action, suit or proceeding against the Sponsor
shall be paid by the Trust in advance of the final disposition of such action,
suit or proceeding, if (i) the legal action relates to the performance of duties
or services by the Sponsor on behalf of the Trust; (ii) the legal action is
initiated by a party other than the Trust; and (iii) the Sponsor undertakes to
repay the advanced funds with interest to the Trust in cases in which it is not
entitled to indemnification.
The Trust Agreement
provides that the Sponsor and the Trust shall indemnify the Trustee and its
successors, assigns, legal representatives, officers, directors, shareholders,
employees, agents and servants (the “Trustee Indemnified Parties”) against any
liabilities, obligations, losses, damages, penalties, taxes (excluding any taxes
on the compensation received for services as Trustee or on indemnity payments
received), claims, actions, suits, costs, expenses or disbursements which may be
imposed on a Trustee Indemnified Party relating to or arising out of the
formation, operation or termination of the Trust, the execution, delivery and
performance of any other agreements to which the Trust is a party, or the action
or inaction of the Trustee under the Trust Agreement or any other agreement,
except for expenses resulting from the gross negligence or willful misconduct of
a Trustee Indemnified Party. Further, certain officers of the Sponsor are
insured against liability for certain errors or omissions which an officer may
incur or that may arise out of his or her capacity as such.
In the event the
Trust is made a party to any claim, dispute, demand or litigation or otherwise
incurs any liability or expense as a result of or in connection with any
Shareholder’s (or assignee’s) obligations or liabilities unrelated to the Trust
business, such Shareholder (or assignees cumulatively) is required under the
Trust Agreement to indemnify the Trust for all such liability and expense
incurred, including attorneys’ and accountants’ fees.
Withdrawal of the
Sponsor
The Sponsor may
withdraw voluntarily as the Sponsor of the Trust only upon ninety (90) days’
prior written notice to the holders of the Trust’s outstanding shares and the
Trustee. If the withdrawing Sponsor is the last remaining Sponsor, shareholders
holding a majority (over 50%) of the outstanding shares of the Teucrium Funds,
voting together as a single class (not including shares acquired by the Sponsor
through its initial capital contribution) may vote to elect a successor Sponsor.
The successor Sponsor will continue the business of the Trust. Shareholders have
no right to remove the Sponsor.
In the event of
withdrawal, the Sponsor is entitled to a redemption of the shares it acquired
through its initial capital contribution to any of the series of the Trust at
their NAV per Share. If the Sponsor withdraws and a successor Sponsor is named,
the withdrawing Sponsor shall pay all expenses as a result of its
withdrawal.
Meetings
Meetings of the
Trust’s shareholders may be called by the Sponsor and will be called by it upon
the written request of Shareholders holding at least 25% of the outstanding
Shares of the Trust or the Fund, as applicable (not including Shares acquired by
the Sponsor through its initial capital contribution). The Sponsor shall deposit
in the United States mail or electronically transmit written notice to all
Shareholders of the Fund of the meeting and the purpose of the meeting, which
shall be held on a date not less than 30 nor more than 60 days after the date of
mailing of such notice, at a reasonable time and place. Where the meeting is
called upon the written request of the shareholders of the Fund, or any other
Teucrium Fund, as applicable, such written notice shall be mailed or transmitted
not more than 45 days after such written request for a meeting was received by
the Sponsor.
Voting
Rights
Shareholders have no
voting rights with respect to the Trust or the Fund except as expressly provided
in the Trust Agreement. The Trust Agreement provides that shareholders
representing at least a majority (over 50%) of the outstanding shares of the
Teucrium Funds voting together as a single class (excluding shares acquired by
the Sponsor in connection with its initial capital contribution to any Trust
series) may vote to (i) continue the Trust by electing a successor Sponsor as
described above, and (ii) approve amendments to the Trust Agreement that impair
the right to surrender Redemption Baskets for redemption. (Trustee consent to
any amendment to the Trust Agreement is required if the Trustee reasonably
believes that such amendment adversely affects any of its rights, duties or
liabilities.) In addition, shareholders holding shares representing seventy-five
percent (75%) of the outstanding shares of the Teucrium Funds, voting together
as a single class (excluding shares acquired by the Sponsor in connection with
its initial capital contribution to any Trust series) may vote to dissolve the
Trust upon not less than ninety (90) days’ notice to the
Sponsor.
Limited Liability
of Shareholders
Shareholders shall be
entitled to the same limitation of personal liability extended to stockholders
of private corporations for profit organized under the general corporation law
of Delaware, and no Shareholder shall be liable for claims against, or debts of
the Trust or the Fund in excess of his share of the Fund’s assets. The Trust or
the Fund shall not make a claim against a Shareholder with respect to amounts
distributed to such Shareholder or amounts received by such Shareholder upon
redemption unless, under Delaware law, such Shareholder is liable to repay such
amount.
The Trust or the Fund
shall indemnify to the full extent permitted by law and the Trust Agreement each
Shareholder (excluding the Sponsor to the extent of its ownership of any Shares
acquired through its initial capital contribution) against any claims of
liability asserted against such Shareholder solely because of its ownership of
Shares (other than for taxes on income from Shares for which such Shareholder is
liable).
The Trust Agreement
provides that every written note, bond, contract, instrument, certificate or
undertaking made or issued by or on behalf of the Fund shall give notice to the
effect that the obligations of such instrument are not binding upon the
Shareholders individually but are binding only upon the assets and property of
the Fund.
The Sponsor Has Conflicts of
Interest
There are present and
potential future conflicts of interest in the Trust’s structure and operation
you should consider before you purchase Shares. The Sponsor may use this notice
of conflicts as a defense against any claim or other proceeding
made.
The Sponsor’s
principals, officers and employees, do not devote their time exclusively to the
Funds. Notwithstanding obligations and expectations related to the management of
the Sponsor, the Sponsor’s principals, officers and employees may be directors,
officers or employees of other entities, and may manage assets of other
entities, including the other Teucrium Funds, through the Sponsor or otherwise.
As a result, the principals could have a conflict between responsibilities to
the Fund on the one hand and to those other entities on the
other.
The Sponsor and its
principals, officers and employees may trade securities, futures and related
contracts for their own accounts, creating the potential for preferential
treatment of their own accounts. Shareholders will not be permitted to inspect
the trading records of such persons, or any written policies of the Sponsor
related to such trading. A conflict of interest may exist if their trades are in
the same markets and at approximately the same times as the trades for the Fund.
A potential conflict also may occur when the Sponsor’s principals trade their
accounts more aggressively or take positions in their accounts which are
opposite, or ahead of, the positions taken by the Fund.
The Sponsor has sole
current authority to manage the investments and operations of the Fund, and this
may allow it to act in a way that furthers its own interests which may create a
conflict with your best interests, including the authority of the Sponsor to
allocate expenses to and between the Teucrium Funds. Shareholders have very
limited voting rights with respect to the Fund, which will limit the ability to
influence matters such as amendment of the Trust Agreement, change in the Fund’s
basic investment policies, or dissolution of the Fund or the
Trust.
The Sponsor serves as
the Sponsor to the Teucrium Funds and may in the future serve as the Sponsor or
investment adviser to commodity pools other than the Teucrium Funds. The Sponsor
may have a conflict to the extent that its trading decisions for the Fund may be
influenced by the effect they would have on the other pools it manages. In
addition, the Sponsor may be required to indemnify the officers and directors of
the other pools, if the need for indemnification arises. This potential
indemnification will cause the Sponsor’s assets to decrease. If the Sponsor’s
other sources of income are not sufficient to compensate for the
indemnification, it could cease operations, which could in turn result in Fund
losses and/or termination of the Fund.
In addition, the
Sponsor may be required to indemnify the officers and directors of the other
pools, if the need for indemnification arises. This potential indemnification
will cause the Sponsor’s assets to decrease. If the Sponsor’s other sources of
income are not sufficient to compensate for the indemnification, it could cease
operations, which could in turn result in Fund losses and/or termination of the
Fund.
If the Sponsor
acquires knowledge of a potential transaction or arrangement that may be an
opportunity for the Fund, it shall have no duty to offer such opportunity to the
Fund. The Sponsor will not be liable to the Fund or the Shareholders for breach
of any fiduciary or other duty if the Sponsor pursues such opportunity or
directs it to another person or does not communicate such opportunity to the
Fund and is not required to share income or profits derived from such business
ventures with the Fund.
Resolution of
Conflicts Procedures
The Trust Agreement
provides that whenever a conflict of interest exists between the Sponsor or any
of its Affiliates, on the one hand, and the Trust, any shareholder of a Trust
series, or any other person, on the other hand, the Sponsor shall resolve such
conflict of interest, take such action or provide such terms, considering in
each case the relative interest of each party (including its own interest) to
such conflict, agreement, transaction or situation and the benefits and burdens
relating to such interests, any customary or accepted industry practices, and
any applicable generally accepted accounting practices or principles. In the
absence of bad faith by the Sponsor, the resolution, action or terms so made,
taken or provided by the Sponsor shall not constitute a breach of the Trust
Agreement or any other agreement contemplated therein or of any duty or
obligation of the Sponsor at law or in equity or otherwise.
Interests of Named Experts and
Counsel
No expert hired by
the Fund to give advice on the preparation of this offering document has been
hired on a contingent fee basis, nor do any of them have any present or future
expectation of interest in the Sponsor, Distributor, Authorized Purchasers,
Custodian/Administrator or other service providers to the
Fund.
Provisions of Federal and State
Securities Laws
This offering is made
pursuant to federal and state securities laws. The SEC and state securities
agencies take the position that indemnification of the Sponsor that arises out
of an alleged violation of such laws is prohibited unless certain conditions are
met. Those conditions require that no indemnification of the Sponsor or any
underwriter for the Fund may be made in respect of any losses, liabilities or
expenses arising from or out of an alleged violation of federal or state
securities laws unless: (i) there has been a successful adjudication on the
merits of each count involving alleged securities law violations as to the party
seeking indemnification and the court approves the indemnification. (ii) such
claim has been dismissed with prejudice on the merits by a court of competent
jurisdiction as to the party seeking indemnification. or (iii) a court of
competent jurisdiction approves a settlement of the claims against the party
seeking indemnification and finds that indemnification of the settlement and
related costs should be made, provided that, before seeking such approval, the
Sponsor or other indemnitee must apprise the court of the position held by
regulatory agencies against such indemnification.
Books and Records
The Trust keeps its
books of record and account at its office located at Three Main Street, Suite
215, Burlington, VT 05401 or at the offices of the Administrator, U.S. Bancorp,
Fund Services, LLC, doing business as U.S. Bank Global Fund Services, located at
777 E. Wisconsin Ave, Milwaukee, Wisconsin 53202, or such office, including of
an administrative agent, as it may subsequently designate upon notice. The books
of account of the Fund are open to inspection by any Shareholder (or any duly
constituted designee of a Shareholder) at all times during the usual business
hours of the Fund upon reasonable advance notice to the extent such access is
required under CFTC rules and regulations. In addition, the Trust keeps a copy
of the Trust Agreement on file in its office which will be available for
inspection by any Shareholder at all times during its usual business hours upon
reasonable advance notice.
Statements, Filings, and Reports to
Shareholders
The Trust will
furnish to DTC Participants for distribution to Shareholders annual reports (as
of the end of each fiscal year) for the Fund as are required to be provided to
Shareholders by the CFTC and the NFA. These annual reports will contain
financial statements prepared by the Sponsor and audited by an independent
registered public accounting firm designated by the Sponsor. The Trust will also
post monthly reports to the Fund’s website (www.teucrium.com).
These monthly reports will contain certain unaudited financial information
regarding the Fund, including the Fund’s NAV. The Sponsor will furnish to the
Shareholders other reports or information which the Sponsor, in its discretion,
determines to be necessary or appropriate. In addition, under SEC rules the
Trust will be required to file quarterly and annual reports for the Fund with
the SEC, which need not be sent to Shareholders but will be publicly available
through the SEC. The Trust will post the same information that would otherwise
be provided in the Trust’s CFTC, NFA and SEC reports on the Fund’s website www.teucrium.com.
The accountants’
report on its audit of the Fund’s financial statements will be furnished by the
Trust to Shareholders upon request. The Trust will file such tax returns, and
prepare, disseminate and file such tax reports for the Fund as it is advised by
its counsel or accountants are from time to time required by any applicable
statute, rule or regulation and will make such tax elections for the Fund as it
deems advisable.
PricewaterhouseCoopers (“PwC”), 2001 Ross Avenue, Suite
1800, Dallas, Texas 75201-2997, will provide tax information in accordance with
the Code and applicable U.S. Treasury Regulations. Persons treated as
intermediaries for purposes of these regulations may obtain tax information
regarding the Fund from PwC or from the Fund’s website, www.teucrium.com.
Fiscal Year
The fiscal year of
the Fund is the calendar year.
Governing Law
The rights of the
Sponsor, the Trust, the Fund, DTC (as registered owner of the Fund’s global
certificate for Shares) and the Shareholders are governed by the laws of the
State of Delaware, except with respect to causes of action for violations of
U.S. federal or state securities laws. The Trust Agreement and the effect of
every provision thereof shall control over any contrary or limiting statutory or
common law of the State of Delaware, other than the Delaware Trust
Statute.
Security Ownership of Principal
Shareholders and Management
As of December 31,
2021, the he Fund is not aware of any 5% holder of its
Shares.
On February 28, 2022,
Sal Gilbertie disposed of 200 shares of WEAT. On March 1, 2022 no Class A
members and officers of the Fund owned any Shares
beneficially.
Legal Matters
Litigation and
Claims
On November 30, 2020, certain officers and
members of Teucrium Trading, LLC (the “Sponsor”), along with the Sponsor, filed
a Verified Complaint (as amended through the Amended Verified Complaint filed on
February 18, 2021) (the “Gilbertie complaint”) in the Delaware Court of
Chancery, C.A. No. 2020-1018-AGB. The Gilbertie complaint asserts various claims
against Dale Riker, the Sponsor’s former Chief Executive Officer and Barbara
Riker, the Sponsor’s former Chief Financial Officer and Chief Compliance
Officer. Sal Gilbertie v. Dale
Riker, et al., C.A. No.
2020-1018-AGB (Del. Ch.) (the “Gilbertie case”)
Among other things, the Gilbertie
complaint responded to and addressed certain allegations that Mr. Riker had made
in a draft complaint that he threatened to file (and subsequently did file) in
New York Supreme Court. See Dale Riker v. Sal
Gilbertie, et al., No. 656794-2020 (N.Y. Sup. Ct.). On April 22, 2021,
the Supreme Court of the State of New York, New York County dismissed Mr.
Riker’s case without prejudice to the case being refiled after the conclusion of
the Gilbertie case in Delaware Chancery
Court. See Dale Riker, et al. v. Teucrium
Trading, LLC et al, Decision + Order on Motions, No. 6567943-2020 (N.Y.
Sup. Ct) (Apr. 22, 2021).
The Gilbertie complaint asserts claims for
a declaration concerning the effects of the final order and judgment in an
earlier books and records action; for a declaration concerning Mr. Riker’s
allegation that Mr. Gilbertie had entered into an agreement to purchase Mr.
Riker’s equity in the Sponsor; for an order compelling the return of property
from Mr. Riker; for a declaration concerning Mr. Riker’s allegations that the
Sponsor and certain of the plaintiffs had improperly removed him as an officer
and caused purportedly false financial information to be published; for breach
of Ms. Riker’s separation agreement with the Sponsor; for tortious interference
by Mr. Riker with Ms. Riker’s separation agreement; for a declaration concerning
the releases that had been provided to Ms. Riker through her separation
agreement; for breach of the Sponsor’s Operating Agreement by Mr. Riker; and for
breach of fiduciary duty by Mr. Riker.
On June 29, 2021, Dale Riker, individually
and derivatively on behalf of the Sponsor, filed a new suit in the Court of
Chancery of the State of Delaware against the Sponsor’s officers and certain of
the Sponsor’s Class A Members. See Dale Riker
v. Salvatore Gilbertie et al., C.A. No. 2021-0561-LWW. (the “Riker case”). On September 7, 2021, Dale Riker
and Barbara Riker filed their answers to the Gilbertie complaint. As a result of the Court
having ordered the consolidation of the Gilbertie case and Riker case, the claims in the Riker case were re-filed as counterclaims in
the Gilbertie case, which accompanied
the Rikers’ answers. The now-consolidated Gilbertie case and the Riker case is captioned Sal Gilbertie, Cory Mullen-Rusin, Steve Kahler, Carl
Miller III, and Teucrium Trading LLC v. Dale Riker and Barbara Riker,
C.A. No. 2020-1018-LWW.
Through their counterclaims, the Rikers
assert direct and derivative claims for breach of fiduciary duty, breach of
contract, declaratory relief, specific performance, unjust enrichment, fraud,
and conspiracy to commit fraud. The Sponsor intends to pursue its claims and
defend vigorously against the Rikers’ counterclaims in
Delaware.
Except as described above, within the past
10 years of the date of this prospectus, there have been no material
administrative, civil or criminal actions against the Sponsor, the Trust or the
Fund, or any principal or affiliate of any of them. This includes any actions
pending, on appeal, concluded, threatened, or otherwise known to
them.
Legal
Opinion
[_________________]
has been retained to advise the Trust and the Sponsor with respect to the Shares
being offered hereby and has passed upon the validity of the Shares being issued
hereunder. [______________] has also provided the Sponsor with its opinion with
respect to federal income tax matters addressed below in “U.S. Federal Income
Tax Considerations.”
Experts
The financial
statements of the Trust and the Fund incorporated by reference in this
prospectus and elsewhere in the registration statement have been so incorporated
by reference in reliance upon the report of [_____________], independent
registered public accountants, upon the authority of said firm as experts in
accounting and auditing.
Privacy Policy
The following
discussion is qualified in its entirety by reference to the privacy policy. A
copy of the privacy policy is available at www.teucrium.com.
The Sponsor, the
Trust, and the Teucrium Funds have adopted a privacy policy relating to the
collection, maintenance, and use of nonpublic personal information about the
Teucrium Funds’ current and former investors, as required under federal law.
Federal law gives investors the right to limit
some but not all sharing of their nonpublic personal information. Federal law
also requires the Sponsor to tell investors how it collects, shares, and
protects such nonpublic personal information.
Collection of
Nonpublic Personal Information
The Sponsor may
collect or have access to nonpublic personal information about current and
former Fund investors for certain purposes relating to the operation of the
Funds. This information may include information received from investors, such as
their name, social security number, telephone number, and address, and
information about investors’ holdings and transactions in shares of the Teucrium
Funds.
Use and
Disclosure of Nonpublic Personal Information
The Sponsor does not
sell nonpublic personal information to any third parties. The Sponsor primarily
uses investors’ nonpublic personal information to complete financial
transactions that may be requested. The Sponsor may disclose investors’
nonpublic personal information to third parties under specific circumstances
described in the privacy policy. These circumstances include, among others,
information needed to complete financial transactions, information released at
the direction of an investor, and certain information requested by courts,
regulators, law enforcement, or tax authorities. Investors may not opt out of
these disclosures.
Investors’ nonpublic
personal information, particularly information about investors’ holdings and
transactions in shares of the Teucrium Funds, may be shared between and amongst
the Sponsor and the Teucrium Funds. An investor
cannot opt-out of the sharing of nonpublic personal information between and
amongst the Sponsor and the Teucrium Funds. However, the Sponsor and the
Teucrium Funds will not use this information for any cross-marketing purposes.
In other words, all investors will be treated as
having “opted out” of receiving marketing solicitations from Teucrium Funds
other than the Teucrium Fund(s) in which it invests.
Protection of
Nonpublic Personal Information
As described in the
privacy policy, the Sponsor takes safeguards to protect investors’ nonpublic
personal information, which include, among others, restricting access to such
information, requiring third parties to follow appropriate standards of security
and confidentiality, and maintaining physical, technical, administrative, and
procedural safeguards.
Teucrium’s Website is
hosted in the United States and any data provided to Teucrium is stored in the
United States. If you choose to provide Personal Data from regions outside of
the United States, then by your submission of such data, you acknowledge and
agree that: (a) you are transferring your personal information outside of those
regions to the United States voluntarily and with consent; (b) the laws and
regulations of the United States shall govern your use of the provision of your
information, which laws and regulations may differ from those of your country of
residence; and (c) you permit your personal information to be used for the
purposes herein and in the Privacy Policy above.
U.S. Federal Income Tax
Considerations
The following
discussion summarizes the material U.S. federal income tax consequences of the
purchase, ownership and disposition of Shares of the Fund and the U.S. federal
income tax treatment of the Fund. Except where noted otherwise, it deals only
with the tax consequences relating to Shares held as capital assets by U.S.
Shareholders (as defined below) who are not subject to special tax treatment.
For example, in general it does not address the tax consequences, such as, but
not limited to dealers in securities or currencies or commodities, traders in
securities or dealers or traders in commodities that elect to use a mark to
market method of accounting, financial institutions, tax-exempt entities (except
as discussed below), insurance companies, persons holding Shares as a part of a
position in a “straddle” or as part of a “hedging,” “conversion” or other
integrated transaction for federal income tax purposes, persons with “applicable
financial statements” within the meaning of Section 451(b) of Code or holders of
Shares whose “functional currency” is not the U.S. dollar. Furthermore, the
discussion below is based on the provisions of the Code, and regulations
(“Treasury Regulations”), rulings and judicial decisions thereunder as of the
date hereof, and such authorities may be repealed, revoked or modified (possibly
with retroactive effect) so as to result in U.S. federal income tax consequences
different from those discussed below.
The Sponsor has
received the opinion of Vedder Price, counsel to the Trust, that the material
U.S. federal income tax consequences to the Fund and to U.S. Shareholders and
Non-U.S. Shareholders (as defined below) will be as described in the following
paragraphs. In rendering its opinion, Vedder Price has relied on the facts and
assumptions described in this prospectus as well as certain factual
representations made by the Trust, the Fund, and the Sponsor. This opinion is
not binding on the Internal Revenue Service (the "IRS") and is not a guarantee
of the results. No ruling has been requested from the IRS with respect to any
matter affecting the Fund or prospective investors. The IRS may disagree with
the tax positions taken by the Trust and if the IRS were to challenge the
Trust’s tax positions in litigation, they might not be sustained by the
courts.
As used herein, the
term “U.S. Shareholder” means a Shareholder that is, for U.S. federal income tax
purposes, (i) a citizen or resident of the U.S., (ii) a corporation created or
organized in or under the laws of the United States or any political subdivision
thereof, (iii) an estate the income of which is subject to U.S. federal income
taxation regardless of its source or (iv) a trust that (a) is subject to the
supervision of a court within the U.S. and the control of one or more United
States persons as described in section 7701(a)(30) of the Code, or (b) has a
valid election in effect under applicable Treasury Regulations to be treated as
a United States person. A “Non-U.S. Shareholder” is a holder that is not a U.S.
Shareholder. If a partnership or other entity or arrangement treated as a
partnership holds our Shares, the tax treatment of a partner will generally
depend upon the status of the partner and the activities of the partnership. If
you are a partner of a partnership holding our Shares, the discussion below may
not be applicable to you and you should consult your own tax advisor regarding
the tax consequences of acquiring, owning and disposing of
Shares.
EACH PROSPECTIVE
INVESTOR IS ADVISED TO CONSULT ITS OWN TAX ADVISOR REGARDING THE U.S. FEDERAL
INCOME TAX CONSEQUENCES OF AN INVESTMENT IN SHARES, AS WELL AS ANY APPLICABLE
STATE, LOCAL OR FOREIGN TAX CONSEQUENCES, IN LIGHT OF ITS PARTICULAR
CIRCUMSTANCES.
Tax
Classification of the Trust and the Fund
The Trust is
organized and will be operated as a statutory trust in accordance with the
provisions of the Trust Agreement and applicable Delaware law. Notwithstanding
the Trust’s status as a statutory trust and the Fund’s status as a series of the
Trust, due to the nature of its activities the Fund will be treated as a
partnership rather than a trust for U.S. federal income tax purposes. In
addition, the trading of Shares on the NYSE Arca will cause the Fund to be
classified as a “publicly traded partnership” for federal income tax purposes.
Under the Code, a publicly traded partnership is generally taxable as a
corporation. In the case of an entity (such as the Fund) not registered under
the Investment Company Act of 1940 as amended, and not meeting certain other
conditions, however, an exception to this general rule applies if at least 90%
of the entity’s gross income is “qualifying income” for each taxable year of its
existence (the “qualifying income exception”). For this purpose, qualifying
income is defined as including, in pertinent part, interest (other than from a
financial business), dividends, and gains from the sale or disposition of
capital assets held for the production of interest or dividends. In the case of
a partnership of which a principal activity is the buying and selling of
commodities other than as inventory or of futures, forwards and options with
respect to commodities, “qualifying income” also includes income and gains from
commodities and from such futures, forwards, options, and provided the
partnership is a trader or investor with respect to such assets, swaps and other
notional principal contracts with respect to commodities. The Trust and the
Sponsor have represented the following to Vedder Price:
●
at least 90% of the
Fund’s gross income for each taxable year will constitute “qualifying income”
within the meaning of Code section 7704 (as described
above);
●
the Fund is organized
and will be operated in accordance with its governing documents and applicable
law; and
●
the Fund has not
elected, and will not elect, to be classified as a corporation for U.S. federal
income tax purposes.
Based in part on
these representations, Vedder Price is of the opinion that the Fund will be
treated as a partnership that it is not taxable as a corporation for U.S.
federal income tax purposes. The Fund’s taxation as a partnership rather than a
corporation will require the Sponsor to conduct the Fund’s business activities
in such a manner that it satisfies the requirements of the qualifying income
exception on a continuing basis. No assurances can be given that the Fund’s
operations for any given year will produce income that satisfies these
requirements. Vedder Price will not review the Fund’s ongoing compliance with
these requirements and will have no obligation to advise the Trust, the Fund or
the Fund’s Shareholders in the event of any subsequent change in the facts,
representations or applicable law relied upon in reaching its
opinion.
If the Fund failed to
satisfy the qualifying income exception in any year, other than a failure that
is determined by the IRS to be inadvertent and that is cured within a reasonable
time after discovery (in which case, as a condition of relief, the Fund could be
required to pay the government amounts determined by the IRS), the Fund would be
taxable as a corporation for federal income tax purposes and would pay federal
income tax on its income at regular corporate rates. In that event, Shareholders
would not report their share of the Fund’s income or loss on their tax returns.
Distributions by the Fund (if any) would be treated as dividend income to the
Shareholders to the extent of the Fund’s current and accumulated earnings and
profits, then treated as a tax-free return of capital to the extent of the
Shareholder’s basis in the Shares (and will reduce the basis), and, to the
extent it exceeds a Shareholder’s basis in such Shares, as capital gain for
Shareholders who hold their Shares as capital assets. Accordingly, if the Fund
were to be taxable as a corporation, it would likely have a material adverse
effect on the economic return from an investment in the Fund and on the value of
the Shares.
The remainder of this
summary assumes that the Fund is classified for federal income tax purposes as a
partnership that it is not taxable as a corporation.
U.S.
Shareholders
Tax Consequences
of Ownership of Shares
Taxation of the Fund’s Income. No U.S. federal
income tax is paid by the Fund on its income. Instead, the Fund files annual
partnership returns, and each U.S. Shareholder is required to report on its U.S.
federal income tax return its allocable share of the income, gain, loss,
deductions and credits reflected on such partnership returns. If the Fund
recognizes income, including interest on cash equivalents and net capital gains
from cash settlement of Benchmark Component Futures Contracts for a taxable
year, Shareholders must report their share of these items even though the Fund
makes no distributions of cash or property during the taxable year.
Consequently, a Shareholder may be taxable on income or gain recognized by the
Fund but receive no cash distribution with which to pay the resulting tax
liability or may receive a distribution that is insufficient to pay such
liability. Because the Sponsor currently does not intend to make distributions,
it is likely that a U.S. Shareholder that realizes net income or gain with
respect to Shares for a taxable year will be required to pay any resulting tax
from sources other than Fund distributions. Additionally, individuals with
modified adjusted gross income in excess of $200,000 ($250,000 in the case of
married individuals filing jointly) and certain estates and trusts are subject
to an additional 3.8% tax on their “net investment income,” which generally
includes net income from interest, dividends, annuities, royalties, and rents,
and net capital gains (other than certain amounts earned from trades or
businesses). Also included as income subject to the additional 3.8% tax is
income from businesses involved in the trading of financial instruments or
commodities. Shareholders subject to this provision may be required to pay this
3.8% surtax on interest income and capital gains allocated to them by the
Fund.
Monthly Conventions for Allocations of the Fund’s
Profit and Loss and Capital Account Restatements. Under Code section 704,
the determination of a partner’s distributive share of any item of income, gain,
loss, deduction or credit is governed by the applicable organizational document
unless the allocation provided by such document lacks “substantial economic
effect.” An allocation that lacks substantial economic effect nonetheless will
be respected if it is in accordance with the partners’ interests in the
partnership, determined by considering all facts and circumstances relating to
the economic arrangements among the partners. Subject to the possible exception
for certain conventions to be used by the Fund as discussed below, allocations
pursuant to the Trust Agreement should be considered as having substantial
economic effect or being in accordance with Shareholders’ interests in the
Fund.
In situations where a
partner’s interest in a partnership is redeemed or sold during a taxable year,
the Code generally requires that partnership tax items for the year be allocated
to the partner using either an interim closing of the books or a daily proration
method. The Fund intends to allocate tax items using an interim closing of the
book’s method under which income, gains, losses and deductions will be
determined on a monthly basis, taking into account the Fund’s accrued income and
deductions and gains and losses (both realized and unrealized) for the month.
The tax items for each month during a taxable year will then be allocated among
the holders of Shares in proportion to the number of Shares owned by them as of
the close of trading on the last trading day of the preceding month (the
“monthly allocation convention”).
Under the monthly
allocation convention, an investor who disposes of a Share during the current
month will be treated as disposing of the Share as of the end of the last day of
the calendar month. For example, an investor who buys a Share on April 10 of a
year and sells it on May 20 of the same year will be allocated all of the tax
items attributable to May (because it is deemed to hold the Share through the
last day of May) but none of those attributable to April. The tax items
attributable to that Share for April will be allocated to the person who held
the Share as of the close of trading on the last trading day of March. Under the
monthly allocation convention, an investor who purchases and sells a Share
during the same month, and therefore does not hold (and is not deemed to hold)
the Share at the close of the last trading day of either that month or the
previous month, will receive no allocations with respect to that Share for any
period. Accordingly, investors may receive no allocations with respect to Shares
that they actually held or may receive allocations with respect to Shares
attributable to periods that they did not actually hold the
Shares.
By investing in
Shares, a U.S. Shareholder agrees that, in the absence of new legislation,
regulatory or administrative guidance, or judicial rulings to the contrary, it
will file its U.S. income tax returns in a manner that is consistent with the
monthly allocation convention as described above and with the IRS Schedule K-1
or any successor form provided to Shareholders by the Fund or the
Trust.
For any month in
which a Creation Basket is issued or a Redemption Basket is redeemed, the Fund
will credit or debit the “book” capital accounts of existing Shareholders with
the amount of any unrealized gain or loss, respectively, on Fund assets. For
this purpose, the Fund will use a convention whereby unrealized gain or loss
will be computed based on the lowest NAV of the Fund’s assets during the month
in which Shares are issued or redeemed, which may be different than the value of
the assets on the date of an issuance or redemption. The capital accounts as
adjusted in this manner will be used in making tax allocations intended to
account for differences between the tax basis and fair market value of property
owned by the Fund at the time new Shares are issued or outstanding Shares are
redeemed (so-called “reverse Code section 704(c) allocations”). The intended
effect of these adjustments is to equitably allocate among Shareholders any
unrealized appreciation or depreciation in the Fund’s assets existing at the
time of a contribution or redemption for book and tax
purposes.
The conventions used
by the Fund, as noted above, in making tax allocations may cause a Shareholder
to be allocated more or less income or loss for U.S. federal income tax purposes
than its proportionate share of the economic income or loss realized by the Fund
during the period it held its Shares. This mismatch between taxable and economic
income or loss in some cases may be temporary, reversing itself in a later year
when the Shares are sold, but could be permanent. As one example, a Shareholder
could be allocated income accruing after it sold its Shares, resulting in an
increase in the basis of the Shares (see “Tax
Basis of Shares,” below). In connection with the disposition of the
Shares, the additional basis might produce a capital loss the deduction of which
may be limited (see “Limitations on
Deductibility of Losses and Certain Expenses,”
below).
Section 754 election. The Fund has made the
election permitted by Code section 754 (a “section 754 election”) which election
is irrevocable without the consent of the IRS. The effect of this election is
that when a secondary market sale of Shares occurs, the Fund adjusts the
purchaser’s proportionate share of the tax basis of the Fund’s assets to fair
market value, as reflected in the price paid for the Shares, as if the purchaser
had made a direct acquisition of an interest in the Fund’s assets. The section
754 election is intended to eliminate disparities between a partner’s basis in
its partnership interest and its share of the tax basis of the partnership’s
assets, so that the partner’s allocable share of taxable gain or loss on a
disposition of an asset will correspond to the partner’s share of the
appreciation or depreciation in the value of the asset since the partner
acquired its interest. Depending on the price paid for Shares and the tax basis
of the Fund’s assets at the time of the purchase, the effect of the section 754
election on a purchaser of Shares may be favorable or unfavorable. In order to
make the appropriate basis adjustments in a cost-effective manner, the Fund will
use certain simplifying conventions and assumptions. In particular, the Fund
will obtain information regarding secondary market transactions in its Shares
and use this information to adjust the Shareholders’ indirect basis in the
Fund’s assets. It is possible the IRS could be successful in asserting that the
conventions and assumptions applied are improper and require different basis
adjustments to be made, which could adversely affect some
Shareholders.
Section 1256 Contracts. Under the Code,
special rules apply to instruments constituting “section 1256 contracts.”
Section 1256 requires that such instruments held at the end of a taxable year be
treated as if they were sold for their fair market value on the last business
day of the taxable year (i.e., “marked
to market”). Moreover, any gain or loss realized from a disposition,
termination or marking-to-market of section 1256 contracts is treated as
long-term capital gain or loss to the extent of 60% thereof, and as short-term
capital gain or loss to the extent of 40% thereof, without regard to the actual
holding period (“60-40 Treatment”). The term “section 1256 contract”
generally includes, in relevant part: (1) a ”regulated futures
contract,” defined as a contract (a) that is traded on or subject to the rules
of a national securities exchange that is registered with the SEC, a domestic
board of trade designated as a contract market by the CFTC, or any other board
of trade or exchange designated by the Secretary of the Treasury (a “qualified
board or exchange”), and (b) with respect to which the amount required to be
deposited and the amount that may be withdrawn depends on a system of “marking
to market”; and (2) a non-equity option traded on or subject to the rules of a
qualified board or exchange.
Many of the Fund’s
Wheat Futures Contracts will qualify as “section 1256 contracts” under the Code,
as will some other wheat interests that are cleared through a qualified board or
exchange. Any gain or loss recognized with respect to section 1256 contracts
will be subject to the 60-40 treatment and will be allocated to Shareholders in
accordance with the monthly allocation convention. Commodity swaps will most
likely not qualify as section 1256 contracts. If a commodity swap is not taxable
as a section 1256 contract, any gain or loss on the swap will be recognized at
the time of disposition or termination as long-term or short-term capital gain
or loss depending on the holding period of the swap in the Fund’s
hands.
Foreign exchange
gains and losses realized by the Fund in connection with certain transactions
involving foreign currency-denominated debt securities, certain futures
contracts, forward contracts, options and similar investments denominated in a
foreign currency, and payables or receivables denominated in a foreign currency
are subject to section 988 of the Code, which generally causes such gain and
loss to be treated as ordinary income or loss. To the extent the Fund hold
foreign investments, it may be subject to withholding and other taxes imposed by
foreign countries. Tax treaties between certain countries and the United States
may reduce or eliminate such taxes. Because the amount of the Fund’s investments
in various countries will change from time to time, it is not possible to
determine the effective rate of such taxes in advance.
Limitations on Deductibility of Losses and Certain
Expenses. A number of different provisions of the Code may defer or
disallow the deduction of losses or expenses allocated to Shareholders by the
Fund, including but not limited to those described below.
A Shareholder’s
deduction of its allocable share of any loss of the Fund is limited to the
lesser of (1) the tax basis in its Shares or (2) in the case of a Shareholder
that is an individual or a closely held corporation, the amount which the
Shareholder is considered to have “at risk” with respect to the Fund’s
activities. In general, the amount at risk initially will be a Shareholder’s
invested capital. Losses in excess of the amount at risk must be deferred until
years in which the Fund generates additional taxable income against which to
offset such carryover losses or until additional capital is placed at
risk.
Individuals and other
non-corporate taxpayers are permitted to deduct capital losses only to the
extent of their capital gains for the taxable year plus $3,000 of other income.
Unused capital losses can be carried forward and used in future years, subject
to these same limitations. In addition, an individual taxpayer may elect to
carry back net losses on section 1256 contracts to each of the three preceding
years and use them to offset section 1256 contract gains in those years, subject
to certain limitations. Corporate taxpayers generally may deduct capital losses
only to the extent of capital gains, subject to special carryback and
carryforward rules.
The deduction for
expenses incurred by non-corporate taxpayers constituting “miscellaneous
itemized deductions,” generally including investment-related expenses (other
than interest and certain other specified expenses), is suspended for taxable
years beginning after December 31, 2017 and before January 1, 2026. During these
taxable years, non-corporate taxpayers will not be able to deduct miscellaneous
itemized deductions. Provided the suspension is not extended, for taxable years
ending on or after January 1, 2026, miscellaneous itemized deductions are
deductible only to the extent they exceed 2% of the taxpayer’s adjusted gross
income for the year. Although the matter is not free from doubt, we believe
management fees the Fund pays to the Sponsor and other expenses of the Fund
constitute investment-related expenses subject to this miscellaneous itemized
deduction limitation, rather than expenses incurred in connection with a trade
or business and will report these expenses consistent with that interpretation.
For taxable years beginning on or after January 1, 2026, the Code imposes
additional limitations on the amount of certain itemized deductions allowable to
individuals with adjusted gross income in excess of certain amounts by reducing
the otherwise allowable portion of such deductions by an amount equal to the
lesser of:
● 3% of the
individual’s adjusted gross income in excess of certain threshold amounts;
or
● 80% of the amount
of certain itemized deductions otherwise allowable for the taxable
year.
Non-corporate
Shareholders generally may deduct “investment interest expense” only to the
extent of their “net investment income.” Investment interest expense of a
Shareholder will generally include any interest expense accrued by the Fund and
any interest paid or accrued on direct borrowings by a Shareholder to purchase
or carry its Shares, such as interest with respect to a margin account. Net
investment income generally includes gross income from property held for
investment (including “portfolio income” under the passive loss rules but not,
absent an election, long-term capital gains or certain qualifying dividend
income) less, deductible expenses other than interest directly connected with
the production of investment income.
If
the Fund incurs indebtedness that is treated as allocable to a trade or
business, the Fund’s ability to deduct interest on such indebtedness is limited
to an amount equal to the sum of (1) the Fund’s business interest income during
the year and (2) 30% of the Fund’s adjusted taxable income for such taxable
year. If the Fund is not entitled to fully deduct its business interest in any
taxable year, such excess business interest expense will be allocated to each
Shareholder as excess business interest and can be carried forward by the
Shareholder to successive taxable years and used to offset any excess taxable
income allocated by the Fund to such Shareholder. Any excess business interest
expense allocated to a Shareholder will reduce such Shareholder’s basis in its
Shares in the year of the allocation even if the expense does not give rise to a
deduction to the Shareholder in that year. Immediately prior to a Shareholder’s
disposition of its Shares, the Shareholder’s basis will be increased by the
amount by which such basis reduction exceeds the excess interest expense that
has been deducted by such Shareholder.
To the extent that
the Fund allocates losses or expenses to a Shareholder that must be deferred or
are disallowed as a result of these or other limitations in the Code, the
Shareholder may be taxed on income in excess of your economic income or
distributions (if any) on its Shares. As one example, a Shareholder could be
allocated and required to pay tax on its share of interest income accrued by the
Fund for a particular taxable year, and in the same year be allocated a share of
a capital loss that the Shareholder cannot deduct currently because it has
insufficient capital gains against which to offset the loss. As another example,
a Shareholder could be allocated and required to pay tax on its share of
interest income and capital gains for a year but be unable to deduct some or all
of its share of Fund expenses and/or margin account interest incurred by the
Shareholder with respect to its Shares. Each Shareholder is urged to consult its
own tax advisor regarding the effect of limitations under the Code on the
ability to deduct their allocable share of the Fund’s losses and
expenses.
Tax Basis of
Shares
A Shareholder’s tax
basis in its Shares is important in determining (1) the amount of taxable gain
or loss it will realize on the sale or other disposition of its Shares, (2) the
amount of non-taxable distributions that it may receive from the Fund, and (3)
its ability to utilize its distributive share of any losses of the Fund on its
federal income tax return. A Shareholder’s initial tax basis of its Shares will
equal its cost for the Shares plus its share of the Fund’s liabilities (if any)
at the time of purchase. In general, a Shareholder’s “share” of those
liabilities will equal the sum of (i) the entire amount of any otherwise
nonrecourse liability of the Fund as to which the Shareholder or certain
affiliates of the Shareholder is the creditor (a “partner nonrecourse
liability”) and (ii) a pro rata share of any nonrecourse liabilities of the Fund
that are not partner nonrecourse liabilities as to any
Shareholder.
A Shareholder’s tax
basis in its Shares generally will be (1) increased by (a) its allocable share
of the Fund’s taxable income and gain and (b) any additional contributions by
the Shareholder to the Fund and (2) decreased (but not below zero) by (a) its
allocable share of the Fund’s tax deductions and losses and (b) any
distributions by the Fund to the Shareholder. For this purpose, an increase in a
Shareholder’s share of the Fund’s liabilities will be treated as a contribution
of cash by the Shareholder to the Fund and a decrease in that share will be
treated as a distribution of cash by the Fund to the Shareholder. Pursuant to
certain IRS rulings, a Shareholder will be required to maintain a single,
“unified” basis in all Shares that it owns. As a result, when a Shareholder that
acquired its Shares at different prices sells less than all of its Shares, such
Shareholder will not be entitled to specify particular Shares (e.g., those with a higher basis) as having
been sold. Rather, it must determine its gain or loss on the sale by using an
“equitable apportionment” method to allocate a portion of its unified basis in
its Shares to the Shares sold.
Treatment of Fund Distributions. If the Fund
makes non-liquidating distributions to Shareholders, such distributions
generally will not be taxable to the Shareholders for federal income tax
purposes except to the extent that the amount of money distributed exceeds the
Shareholder’s adjusted basis of its interest in the Fund immediately before the
distribution. Any money distributed that is in excess of a Shareholder’s tax
basis generally will be treated as gain from the sale or exchange of Shares. For
purposes of determining the gain recognized on a distribution from a
partnership, a marketable security distributed to a partner is generally treated
as money. This treatment, however, does not apply to distributions to “eligible
partners” of an “investment partnership,” as those terms are defined in the
Code.
Tax Consequences of Disposition of
Shares
If a Shareholder
sells its Shares, it will recognize gain or loss equal to the difference between
the amount realized and its adjusted tax basis for the Shares sold. A
Shareholder’s amount realized will be the sum of the cash or the fair market
value of other property received plus its share of the Fund's
liabilities.
Gain or loss
recognized by a Shareholder on the sale or exchange of Shares held for more than
one year will generally be taxable as long-term capital gain or loss; otherwise,
such gain or loss will generally be taxable as short-term capital gain or loss.
A special election is available under the Treasury Regulations that allows
Shareholders to identify and use the actual holding periods for the Shares sold
for purposes of determining whether the gain or loss recognized on a sale of
Shares will give rise to long-term or short-term capital gain or loss. It is
expected that most Shareholders will be eligible to elect, and generally will
elect, to identify and use the actual holding periods for Shares sold. If a
Shareholder who has differing holding periods for its Shares fails to make the
election or is not able to identify the holding periods of the Shares sold, the
Shareholder will have a split holding period in the Shares sold. Under such
circumstances, a Shareholder will be required to determine its holding period in
the Shares sold by first determining the portion of its entire interest in the
Fund that would give rise to long-term capital gain or loss if its entire
interest were sold and the portion that would give rise to short-term capital
gain or loss if the entire interest were sold. The Shareholder would then treat
each Share sold as giving rise to long-term capital gain or loss and short-term
capital gain or loss in the same proportions as if it had sold its entire
interest in the Fund.
Under Code section
751, a portion of a Shareholder’s gain or loss from the sale of Shares
(regardless of the holding period for such Shares), will be computed separately
and taxed as ordinary income or loss to the extent attributable to “unrealized
receivables” or “inventory” owned by the Fund. The term “unrealized receivables”
includes, among other things, market discount bonds and short-term debt
instruments to the extent that such items would give rise to ordinary income if
sold by the Fund. However, the short-term capital gain on section 1256 contracts
resulting from 60-40 Treatment, described above, should not be subject to this
rule.
If some or all of a
Shareholder’s Shares are lent by its broker or other agent to a third party —
for example, for use by the third party in covering a short sale — the
Shareholder may be considered as having made a taxable disposition of the loaned
Shares, in which case —
|
● |
the Shareholder
may recognize taxable gain or loss to the same extent as if it had sold
the Shares for cash;
|
|
● |
any of the
income, gain, loss or deduction allocable to those Shares during the
period of the loan is not reportable by the Shareholder for tax purposes;
and
|
|
● |
any
distributions the Shareholder receives with respect to the Shares under
the loan agreement will be fully taxable to the Shareholder, most likely
as ordinary income. |
Shareholders desiring
to avoid these and other possible consequences of a deemed disposition of their
Shares should consider modifying any applicable brokerage account agreements to
prohibit the lending of their Shares.
Other U.S.
Federal Income Tax Matters
Information Reporting. The Fund provides tax
information to the Shareholders and to the IRS, as required. Shareholders are
treated as partners for U.S. federal income tax purposes. Accordingly, the Fund
will furnish Shareholders each year, with tax information on IRS Schedule K-1
(Form 1065), which will be used by the Shareholders in completing their tax
returns. The IRS has ruled that assignees of partnership interests who have not
been admitted to a partnership as partners but who have the capacity to exercise
substantial dominion and control over the assigned partnership interests will be
considered partners for U.S. federal income tax purposes. On the basis of this
ruling, except as otherwise provided herein, we will treat as a Shareholder any
person whose shares are held on their behalf by a broker or other nominee if
that person has the right to direct the nominee in the exercise of all
substantive rights attendant to the ownership of the Shares.
Persons who hold an
interest in the Fund as a nominee for another person are required to furnish to
us the following information: (1) the name, address and taxpayer identification
number of the beneficial owner and the nominee; (2) whether the beneficial owner
is (a) a person that is not a U.S. person, (b) a foreign government, an
international organization or any wholly-owned agency or instrumentality of
either of the foregoing, or (c) a tax-exempt entity; (3) the number and a
description of Shares acquired or transferred for the beneficial owner; and (4)
certain information including the dates of acquisitions and transfers, means of
acquisitions and transfers, and acquisition cost for purchases, as well as the
amount of net proceeds from sales. Brokers and financial institutions are
required to furnish additional information, including whether they are U.S.
persons and certain information on Shares they acquire, hold or transfer for
their own account. A penalty of $250 per failure (as adjusted for inflation), up
to a maximum of $3,000,000 per calendar year (as adjusted for inflation), is
imposed by the Code for failure to report such information correctly to the
Fund. If the failure to furnish such information correctly is determined to be
willful, the per failure penalty increases to $500 (as adjusted for inflation)
or, if greater, 10% of the aggregate amount of items required to be reported,
and the $3,000,000 maximum does not apply. The nominee is required to supply the
beneficial owner of the Shares with the federal income tax information furnished
by the Fund.
Partnership Audit Procedures. The IRS may
audit the U.S. federal income tax returns filed by the Fund. Adjustments
resulting from any such audit may require a Shareholder to adjust a prior year’s
tax liability and could result in an audit of the Shareholder’s own return. Any
audit of a Shareholder’s return could result in adjustments of non-partnership
items as well as Fund items. Partnerships are generally treated as separate
entities for purposes of U.S. federal income tax audits, judicial review of
administrative adjustments by the IRS, and tax settlement proceedings. The tax
treatment of partnership items of income, gain, loss and deduction are
determined at the partnership level in a unified partnership proceeding rather
than in separate proceedings with the partners. The Code provides for one
partner to be designated as the “tax matters partner” and to represent the
partnership for purposes of these proceedings. The Trust Agreement appoints the
Sponsor as the tax matters partner of the Fund.
The Bipartisan Budget
Act of 2015 adopted a new partnership-level audit and assessment procedure for
all entities treated as partnerships for U.S. federal income tax purposes. These
new rules generally apply to partnership taxable years beginning after December
31, 2017. Under these rules, tax deficiencies (including interest and penalties)
that arise from an adjustment to partnership items generally would be assessed
and collected from the partnership (rather than from the partners), and
generally would be calculated using maximum applicable tax rates (although such
partnership level tax may be reduced or eliminated under limited circumstances).
A narrow category of partnerships (generally, partnerships having no more than
100 partners that consist exclusively of individuals, C corporations, S
corporations and estates) are permitted to elect out of the new
partnership-level audit rules. As an alternative to partnership-level tax
liability, a partnership may elect to furnish adjusted Schedule K-1s to the IRS
and to each person who was a partner in the audit year, stating such partner’s
share of any partnership adjustments, and each such partner would then take the
adjustments into account on its tax returns in the year in which it receives its
adjusted Schedule K-1 (rather than by amending their tax returns for the audited
year). If the Fund were subject to a partnership level tax as a result of these
new rules, the economic return of all Shareholders (including Shareholders that
did not own Shares in the Fund during the taxable year to which the audit
relates) may be affected.
To address these new
rules, the Sponsor amended the Trust Agreement so that if the Fund becomes
subject to any tax as a result of any adjustment to taxable income, gain, loss,
deduction or credit for any taxable year of the Fund (pursuant to a tax audit or
otherwise), such Shareholder (and each former Shareholder) is obligated to
indemnify the Fund and the Sponsor against any such taxes (including any
interest and penalties) to the extent such tax (or portion thereof) is properly
attributable to such Shareholder (or former Shareholder). In addition, the
Sponsor, on behalf of the Fund, will be authorized to take any action permitted
under applicable law to avoid the assessment of any such taxes against the Fund
(including an election to issue adjusted Schedule K-1s to the Shareholders
(and/or former Shareholders) which takes such adjustments to taxable income,
gain, loss, deduction or credit into account.
Reportable Transaction Rules. In certain
circumstances the Code and Treasury Regulations require that the IRS be notified
of transactions through a disclosure statement attached to a taxpayer’s U.S.
federal income tax return. These disclosure rules may apply to transactions
irrespective of whether they are structured to achieve particular tax benefits,
and they could require disclosure by the Trust or Shareholders if a Shareholder
incurs a loss in excess of a specified threshold from a sale or redemption of
its Shares and possibly in other circumstances. While these rules generally do
not require disclosure of a loss recognized on the disposition of an asset in
which the taxpayer has a “qualifying basis” (generally a basis equal to the
amount of cash paid by the taxpayer for such asset), they apply to a loss
recognized with respect to interests in a pass-through entity, such as the
Shares, even if the taxpayer’s basis in such interests is equal to the amount of
cash it paid for such interests. In addition, significant monetary penalties may
be imposed in connection with a failure to comply with these reporting
requirements. Investors should consult their own tax advisor concerning the
application of these reporting requirements to their specific
situation.
Tax-Exempt Organizations. Subject to numerous
exceptions, qualified retirement plans and individual retirement accounts,
charitable organizations and certain other organizations that otherwise are
exempt from U.S. federal income tax (collectively, “exempt organizations”)
nonetheless are subject to the tax on unrelated business taxable income
(“UBTI”). Generally, UBTI means the gross income derived by an exempt
organization from a trade or business that it regularly carries on, the conduct
of which is not substantially related to the exercise or performance of its
exempt purpose or function, less allowable deductions directly connected with
that trade or business. If the Fund were to regularly carry on (directly or
indirectly) a trade or business that is unrelated with respect to an exempt
organization Shareholder, then in computing its UBTI, the Shareholder must
include its share of (1) the Fund’s gross income from the unrelated trade or
business, whether or not distributed, and (2) the Fund’s allowable deductions
directly connected with that gross income. An exempt organization that has more
than one unrelated trade or business must compute its UBTI separately for each
such trade or business.
UBTI generally does
not include dividends, interest, or payments with respect to securities loans
and gains from the sale of property (other than property held for sale to
customers in the ordinary course of a trade or business). Nonetheless, income
on, and gain from the disposition of, “debt-financed property” is UBTI.
Debt-financed property generally is income-producing property (including
securities), the use of which is not substantially related to the exempt
organization’s tax-exempt purposes, and with respect to which there is
“acquisition indebtedness” at any time during the taxable year (or, if the
property was disposed of during the taxable year, the 12-month period ending
with the disposition). Acquisition indebtedness includes debt incurred to
acquire property, debt incurred before the acquisition of property if the debt
would not have been incurred but for the acquisition, and debt incurred
subsequent to the acquisition of property if the debt would not have been
incurred but for the acquisition and at the time of acquisition the incurrence
of debt was foreseeable. The portion of the income from debt-financed property
attributable to acquisition indebtedness is equal to the ratio of the average
outstanding principal amount of acquisition indebtedness over the average
adjusted basis of the property for the year. The Fund currently does not
anticipate that it will borrow money to acquire investments; however, the Fund
cannot be certain that it will not borrow for such purpose in the future, which
could result in an exempt organization Shareholder having UBTI. In addition, an
exempt organization Shareholder that incurs acquisition indebtedness to purchase
its Shares in the Fund may have UBTI.
The U.S. federal
income tax rate applicable to an exempt organization Shareholder on its UBTI
generally will be either the corporate or trust tax rate, depending upon the
Shareholder’s form of organization. The Fund may report to each such Shareholder
information as to the portion, if any, of the Shareholder’s income and gains
from the Fund for any year that will be treated as UBTI; the calculation of that
amount is complex, and there can be no assurance that the Fund’s calculation of
UBTI will be accepted by the IRS. An exempt organization Shareholder will be
required to make payments of estimated U.S. federal income tax with respect to
its UBTI.
Regulated Investment Companies. Interests in
and income from “qualified publicly traded partnerships” satisfying certain
gross income tests are treated as qualifying assets and income, respectively,
for purposes of determining eligibility under the Code for regulated investment
company (“RIC”) status. A RIC may invest up to 25% of its assets in interests in
qualified publicly traded partnerships. The determination of whether a publicly
traded partnership such as the Fund is a qualified publicly traded partnership
is made on an annual basis. The Fund expects to be a qualified publicly traded
partnership in each of its taxable years. However, such qualification is not
assured.
Non-U.S.
Shareholders
Generally, non-U.S.
persons who derive U.S. source income or gain from investing or engaging in a
U.S. business are taxable on two categories of income. The first category
consists of amounts that are fixed or determinable, annual or periodic income,
such as interest, dividends and rent that are not connected with the operation
of a U.S. trade or business (“FDAP”). The second category is income that is
effectively connected with the conduct of a U.S. trade or business (“ECI”). FDAP
income (other than interest that is considered “portfolio interest;” as
discussed below) is generally subject to a 30% withholding tax, which may be
reduced for certain categories of income by a treaty between the U.S. and the
recipient’s country of residence. In contrast, ECI is generally subject to U.S.
tax on a net basis at graduated rates upon the filing of a U.S. tax return.
Where a non-U.S. person has ECI as a result of an investment in a partnership,
the ECI is currently subject to a withholding tax at a rate of 37% for
individual Shareholders and a rate of 21% for corporate Shareholders. The tax
withholding on ECI, which is the highest tax rate under Code section 1 for
non-corporate Non-U.S. Shareholders and Code section 11(b) for corporate
Non-U.S. Shareholders, may increase in future tax years if tax rates increase
from their current levels.
Withholding on Allocations and Distributions.
The Code provides that a non-U.S. person who is a partner in a partnership that
is engaged in a U.S. trade or business during a taxable year will also be
considered to be engaged in a U.S. trade or business during that year.
Classifying an activity by a partnership as an investment or an operating
business is a factual determination. Under certain safe harbors in the Code, an
investment fund whose activities consist of trading in stocks, securities, or
commodities for its own account generally will not be considered to be engaged
in a U.S. trade or business unless it is a dealer is such stocks, securities, or
commodities. This safe harbor applies to investments in commodities only if the
commodities are of a kind customarily dealt in on an organized commodity
exchange and if the transaction is of a kind customarily consummated at such
place. Although the matter is not free from doubt, the Fund believes that the
activities directly conducted by the Fund do not result in the Fund being
engaged in a trade or business within the United States. However, there can be
no assurance that the IRS would not successfully assert that the Fund’s
activities constitute a U.S. trade or business.
In the event that the
Fund is considered to be engaged in a U.S. trade or business, the Fund would be
required to withhold at the highest rate specified in Code section 1 (currently
37%) on allocations of its ECI to non-corporate Non-U.S. Shareholders and the
highest rate specified in Code section 11(b) (currently 21%) on allocations of
its ECI to corporate Non-U.S. Shareholders, when such income is distributed.
Non-U.S. Shareholders would also be subject to a 10% withholding tax on the
consideration payable upon a sale or exchange of such Non-U.S. Shareholder’s
Shares, although the IRS has temporarily suspended this withholding for
interests in publicly traded partnerships until regulations implementing such
withholding are issued. If recently promulgated regulations are finalized as
proposed, such regulations would provide, with respect to transfers of publicly
traded interests in publicly traded partnerships effected through a broker, that
the obligation to withhold is imposed on the transferor’s broker. However, it is
not clear when such regulations will be finalized and if they will be finalized
in their current form. A Non-U.S. Shareholder with ECI generally will be
required to file a U.S. federal income tax return, and the return will provide
the Non-U.S. Shareholder with the mechanism to seek a refund of any withholding
in excess of such Shareholder’s actual U.S. federal income tax
liability.
Even if the Fund did
not realize ECI, a Non-U.S. Shareholder nevertheless may be treated as having
FDAP income, which would be subject to a 30% U.S. withholding tax (possibly
subject to reduction by treaty), with respect to some or all of its
distributions from the Fund or its allocable share of Fund
income.
Amounts withheld by
the Fund on behalf of a Non-U.S. Shareholder will be treated as being
distributed to such Shareholder to the extent possible. In some cases, the
Fund may not be able to match the economic cost of satisfying its withholding
obligations to a particular Non-U.S. Shareholder, which may result in that cost
being borne by the Fund, generally, and accordingly, by all Shareholders
proportionately.
To the extent any
interest income allocated to a Non-U.S. Shareholder that otherwise constitutes
FDAP is considered “portfolio interest,” neither the allocation of such interest
income to the Non-U.S. Shareholder nor a subsequent distribution of such
interest income to the Non-U.S. Shareholder will be subject to withholding,
provided that the Non-U.S. Shareholder is not otherwise engaged in a trade or
business in the U.S. and provides the Fund with a timely and properly completed
and executed IRS Form W-8BEN or other applicable form. In general, portfolio
interest is interest paid on debt obligations issued in registered form, unless
the recipient owns 10% or more of the voting power of the issuer. A Non-U.S.
Shareholder’s allocable share of interest on U.S. bank deposits, certificates of
deposit and discount obligations with maturities from original issue of 183 days
or less should also not be subject to withholding. Generally, other interest
from U.S. sources paid to the Fund and allocable to Non-U.S. Shareholders will
be subject to withholding.
In order for the Fund
to avoid withholding on any interest income allocable to Non-U.S. Shareholders
that would qualify as portfolio interest, it will be necessary for all Non-U.S.
Shareholders to provide the Fund with a timely and properly completed and
executed Form W-8BEN (or other applicable form).
Gain from Sale of Shares. Gain from the sale
or exchange of Shares may be taxable to a Non-U.S. Shareholder if the Non-U.S.
Shareholder is a nonresident alien individual who is present in the U.S. for 183
days or more during the taxable year. In such case, the nonresident alien
individual may be subject to a 30% withholding tax on the amount of such
individual’s gain.
Branch Profits Tax on Corporate Non-U.S.
Shareholders. In addition to the taxes noted above, any Non-U.S.
Shareholders that are corporations may also be subject to an additional tax, the
branch profits tax, at a rate of 30%. The branch profits tax is imposed on a
non-U.S. corporation’s dividend equivalent amount, which generally consists of
the corporation’s after-tax earnings and profits that are effectively connected
with the corporation’s U.S. trade or business but are not reinvested in a U.S.
business. This tax may be reduced or eliminated by an income tax treaty between
the United States and the country in which the Non-U.S. Shareholder is a
“qualified resident.”
Foreign Account Tax Compliance Act.
Legislation commonly referred to as the Foreign Account Tax Compliance Act or
"FATCA", generally imposes a 30% U.S. withholding tax on payments of certain
types of income to foreign financial institutions that fail to enter into an
agreement with the United States Treasury to report certain required information
with respect to accounts held by U.S. persons (or held by foreign entities that
have U.S. persons as substantial owners). The types of income subject to the
withholding tax include U.S.-source interest and dividends and the gross
proceeds from the sale of any property that could produce U.S.-source interest
or dividends. Proposed Treasury Regulations, however, generally eliminate
withholding under FATCA on gross proceeds. Taxpayers generally may rely on these
proposed Treasury Regulations until final Treasury Regulations are issued. The
information required to be reported includes the identity and taxpayer
identification number of each account holder that is a U.S. person and
transaction activity within the holder’s account. In addition, subject to
certain exceptions, this legislation also imposes a 30% U.S. withholding tax on
payments to foreign entities that are not financial institutions unless the
foreign entity certifies that it does not have a greater than 10% U.S. owner or
provides the withholding agent with identifying information on each greater than
10% U.S. owner. Depending on the status of a Non-U.S. Shareholder and the status
of the intermediaries through which it holds Shares, a Non-U.S. Shareholder
could be subject to this 30% U.S. withholding tax with respect to distributions
on its Shares. Under certain circumstances, a Non-U.S. Shareholder may be
eligible for a refund or credit of such taxes.
Prospective Non-U.S.
Shareholders should consult their own tax advisor regarding these and other tax
issues unique to Non-U.S. Shareholders.
Backup
Withholding
The Fund may be
required to withhold U.S. federal income tax (“backup withholding”) from
payments to: (1) any Shareholder who fails to furnish the Fund with his, her or
its correct taxpayer identification number or a certificate that the Shareholder
is exempt from backup withholding, and (2) any Shareholder with respect to whom
the IRS notifies the Fund that the Shareholder is subject to backup withholding.
Backup withholding is not an additional tax and may be returned or credited
against a taxpayer’s regular federal income tax liability if appropriate
information is provided to the IRS. The backup withholding rate is the fourth
lowest rate applicable to individuals under Code section 1(c) (currently 24%)
and may increase in future tax years.
Other Tax
Considerations
In addition to U.S.
federal income taxes, Shareholders may be subject to other taxes, such as state
and local income taxes, unincorporated business taxes, business franchise taxes,
and estate, gift, inheritance or intangible taxes that may be imposed by the
various jurisdictions in which the Fund does business or owns property or where
the Shareholder resides. Although an analysis of those various taxes is not
presented here, each prospective Shareholder should consider their potential
impact on its investment in the Fund. It is each Shareholder’s responsibility to
file the appropriate U.S. federal, state, local, and foreign tax returns. Vedder
Price has not provided an opinion concerning any aspects of state, local or
foreign tax or U.S. federal tax other than those U.S. federal income tax issues
discussed under the heading “U.S. Federal Income Tax
Considerations.”
Investment by ERISA
Accounts
General
Most employee benefit
plans, and individual retirement accounts (“IRAs”) are subject to the Employee
Retirement Income Security Act of 1974, as amended (“ERISA”), or the Code, or
both. This section discusses certain considerations that arise under ERISA and
the Code that a fiduciary of: (i) an employee benefit plan as defined in ERISA.
(ii) a plan as defined in Section 4975 of the Code. or (iii) any collective investment vehicle, business
trust, investment partnership, pooled separate account or other entity the
assets of which are treated as comprised (at least in part) of “plan assets”
under the ERISA “plan assets” rules (“plan asset entity”) who has investment
discretion should take into account before deciding to invest the plan’s assets
in the Fund. Employee benefit plans under ERISA, plans under the Code and plan
asset entities are collectively referred to below as “plans,” and fiduciaries
with investment discretion are referred to below as “plan
fiduciaries.”
This summary is based
on the provisions of ERISA and the Code as of the date hereof. This summary is
not intended to be complete, but only to address certain questions under ERISA
and the Code likely to be raised by your advisors. The summary does not include
state or local law.
Potential plan investors are urged to
consult with their own advisors concerning the appropriateness of an investment
in the Fund and the manner in which Shares should be
purchased.
Special
Investment Considerations
Each plan fiduciary
must consider the facts and circumstances that are relevant to an investment in
the Fund, including the role that an investment in the Fund would play in the
plan’s overall investment portfolio. Each plan fiduciary, before deciding to
invest in the Fund, must be satisfied that the investment is prudent for the
plan, that the investments of the plan are diversified so as to minimize the
risk of large losses, and that an investment in the Fund complies with the terms
of the plan. The Sponsor is not undertaking to provide investment advice, or to
give advice in a fiduciary capacity, in connection with a plan’s investment in
the Fund.
The Fund and Plan
Assets
A regulation issued
under ERISA contains rules for determining when an investment by a plan in an
equity interest of a statutory trust will result in the underlying assets of the
statutory trust being deemed plan assets for purposes of ERISA and Section 4975
of the Code. Those rules provide that assets of a statutory trust will not be
plan assets of a plan that purchases an equity interest in the statutory trust
if the equity interest purchased is a publicly offered security. If the
underlying assets of a statutory trust are considered to be assets of any plan
for purposes of ERISA or Section 4975 of the Code, the operations of that trust
would be subject to and, in some cases, limited by the provisions of ERISA and
Section 4975 of the Code.
The publicly offered
security exception described above applies if the equity interest is a security
that is:
(1) |
freely
transferable (determined based on the relevant facts and
circumstances). |
(2) |
part of a class
of securities that is widely held (meaning that the class of securities is
owned by 100 or more investors independent of the issuer and of each
other). and |
(3) |
either (a) part
of a class of securities registered under Section 12(b) or 12(g) of the
Exchange Act or (b) sold to the plan as part of a public offering pursuant
to an effective registration statement under the 1933 Act and the class of
which such security is a part is registered under the Exchange Act within
120 days (or such later time as may be allowed by the SEC) after the end
of the fiscal year of the issuer in which the offering of such security
occurred. |
The plan asset
regulations under ERISA state that the determination of whether a security is
freely transferable is to be made based on all the relevant facts and
circumstances. In the case of a security that is part of an offering in which
the minimum investment is $10,000 or less, the following requirements, alone or
in combination, ordinarily will not affect a finding that the security is freely
transferable: (1) a requirement that no transfer or assignment of the security
or rights relating to the security be made that would violate any federal or
state law; and (2) a requirement that no transfer or assignment be made without
advance written notice given to the entity that issued the
security.
The Sponsor believes
that the conditions described above are satisfied with respect to the Shares.
The Sponsor believes that the Shares therefore constitute publicly offered
securities, and the underlying assets of the Fund should not be considered to
constitute plan assets of any plan that purchases Shares.
Prohibited
Transactions
ERISA and the Code
generally prohibit certain transactions involving a plan and persons who have
certain specified relationships to the plan. In general, Shares may not be
purchased with the assets of a plan if the Sponsor, the clearing brokers, the
trading advisors (if any), or any of their affiliates, agents or employees
either:
● |
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.
Special IRA
Rules
IRAs are not subject
to ERISA’s fiduciary standards, but are subject to their own rules, including
the prohibited transaction rules of Section 4975 of the Code, which generally
mirror ERISA’s prohibited transaction rules. For example, IRAs are subject to
special custody rules and must maintain a qualifying IRA custodial arrangement
separate and distinct from the Fund and its custodial arrangement. If a separate
qualifying custodial arrangement is not maintained, an investment in the Shares
will be treated as a distribution from the IRA. Second, IRAs are prohibited from
investing in certain commingled investments, and the Sponsor makes no
representation regarding whether an investment in Shares is an inappropriate
commingled investment for an IRA. Third, in applying the prohibited transaction
provisions of Section 4975 of the Code, in addition to the rules summarized
above, the individual for whose benefit the IRA is maintained is also treated as
the creator of the IRA. For example, if the owner or beneficiary of an IRA
enters into any transaction, arrangement, or agreement involving the assets of
his or her IRA to benefit the IRA owner or beneficiary (or his or her relatives
or business affiliates) personally, or with the understanding that such benefit
will occur, directly or indirectly, such transaction could give rise to a
prohibited transaction that is not exempted by any available exemption.
Moreover, in the case of an IRA, the consequences of a non-exempt prohibited
transaction are that the IRA’s assets will be treated as if they were
distributed, causing immediate taxation of the assets (including any early
distribution penalty tax applicable under Section 72 of the Code), in addition
to any other fines or penalties that may apply.
Exempt
Plans
Certain employee
benefit plans may be governmental plans or church plans. Governmental plans and
church plans are generally not subject to ERISA, nor do the prohibited
transaction provisions described above apply to them. These plans are, however,
subject to prohibitions against certain related-party transactions under Section
503 of the Code, which are similar to the prohibited transaction rules described
above. In addition, the fiduciary of any governmental or church plan must
consider any applicable state or local laws and any restrictions and duties of
common law imposed upon the plan.
No view is expressed
as to whether an investment in the Fund (and any continued investment in the
Fund), or the operation and administration of the fund, is appropriate or
permissible for any governmental plan or church plan under Code Section 503, or
under any state, county, local or other law relating to that type of
plan.
Allowing an investment in the Fund is
not to be construed as a representation by the Trust, the Fund, the Sponsor, any
trading advisor, any clearing broker, the Distributor or legal counsel or other
advisors to such parties or any other party that this investment meets some or
all of the relevant legal requirements with respect to investments by any
particular plan or that this investment is appropriate for any such particular
plan. The person with investment discretion should consult with the plan’s
attorney and financial advisors as to the propriety of an investment in the Fund
in light of the circumstances of the particular plan, current tax law and
ERISA.
INCORPORATION BY REFERENCE OF CERTAIN
INFORMATION
We are a reporting
company and file annual, quarterly and current reports and other information
with the SEC. The rules of the SEC allow us to “incorporate by reference”
information that we file with them, which means that we can disclose important
information to you by referring you to those documents. The information
incorporated by reference is an important part of this prospectus. This
prospectus incorporates by reference the documents set forth below that have
been previously filed with the SEC and any future filings that the Trust makes
with the SEC under Section 13(a), 13(c), 14 and 15(d) of the Securities Exchange
Act of 1934 (in each case other than those documents or portions of those
documents not deemed to have been filed in accordance with SEC rules) between
the date of this prospectus and the termination of the offering of the
securities to be issued under the registration statement:
●[to be completed by pre-effective
amendment]
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 Wheat
Fund
Attention: Cory
Mullen-Rusin
Three Main Street
Suite 215
Burlington, VT
05401
(802)
540-0019
Our Internet website
is www.teucrium.com. We make our electronic filings with
the SEC, including our annual reports on Form 10K, quarterly reports on
Form 10-Q, current reports on Form 8-K and amendments to these reports available
on our website free of charge as soon as practicable after we file or furnish
them with the SEC. The information contained on our website is not incorporated
by reference in this prospectus and should not be considered a part of this
prospectus.
INFORMATION YOU SHOULD
KNOW
This prospectus
contains information you should consider when making an investment decision
about the Shares. You should rely only on the information contained in this
prospectus or any applicable prospectus supplement. None of the Trust, the Fund
or the Sponsor has authorized any person to provide you with different
information and, if anyone provides you with different or inconsistent
information, you should not rely on it. This prospectus is not an offer to sell
the Shares in any jurisdiction where the offer or sale of the Shares is not
permitted.
The information
contained in this prospectus was obtained from us and other sources believed by
us to be reliable.
You should disregard
anything we said in an earlier document that is inconsistent with what is
included in this prospectus or any applicable prospectus supplement. Where the
context requires, when we refer to this “prospectus,” we are referring to this
prospectus and (if applicable) the relevant prospectus
supplement.
You should not assume
that the information in this prospectus or any applicable prospectus supplement
is current as of any date other than the date on the front page of this
prospectus or the date on the front page of any applicable prospectus
supplement.
We include cross
references in this prospectus to captions in these materials where you can find
further related discussions. The table of contents tells you where to find these
captions.
WHERE YOU CAN FIND MORE
INFORMATION
The Trust has filed
on behalf of the Fund a registration statement on Form S-1 with the SEC under
the 1933 Act. This prospectus does not contain all of the information set forth
in the registration statement (including the exhibits to the registration
statement), parts of which have been omitted in accordance with the rules and
regulations of the SEC. For further information about the Trust, the Fund or the
Shares, please refer to the registration statement, which you may inspect online
at www.sec.gov.
Information about the Trust, the Fund and the Shares can also be obtained from
the Fund’s website, which is www.teucrium.com. The
Fund’s website address is only provided here as a convenience to you and the
information contained on or connected to the website is not part of this
prospectus or the registration statement of which this prospectus is part. The
Trust is subject to the informational requirements of the Exchange Act and will
file certain reports and other information with the SEC under the Exchange Act.
The Sponsor will file an updated prospectus annually for the Fund pursuant to
the 1933 Act. The reports and other information can be inspected online at www.sec.gov which is
the Internet site maintained by the SEC that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the SEC.
STATEMENT REGARDING FORWARD-LOOKING
STATEMENTS
This prospectus
includes “forward-looking statements” which generally relate to future events or
future performance. In some cases, you can identify forward-looking statements
by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,”
“believe,” “estimate,” “predict,” “potential” or the negative of these terms or
other comparable terminology. All statements (other than statements of
historical fact) included in this prospectus that address activities, events or
developments that will or may occur in the future, including such matters as
movements in the commodities markets and indexes that track such movements, the
Fund’s operations, the Sponsor’s plans and references to the Fund’s future
success and other similar matters, are forward-looking statements. These
statements are only predictions. Actual events or results may differ materially.
These statements are based upon certain assumptions and analyses the Sponsor has
made based on its perception of historical trends, current conditions and
expected future developments, as well as other factors appropriate in the
circumstances. Whether or not actual results and developments will conform to
the Sponsor’s expectations and predictions, however, is subject to a number of
risks and uncertainties, including the special considerations discussed in this
prospectus, general economic, market and business conditions, changes in laws or
regulations, including those concerning taxes, made by governmental authorities
or regulatory bodies, and other world economic and political developments. See
“What Are the Risk Factors Involved with an Investment in the Fund?”
Consequently, all the forward-looking statements made in this prospectus are
qualified by these cautionary statements, and there can be no assurance that
actual results or developments the Sponsor anticipates will be realized or, even
if substantially realized, that they will result in the expected consequences
to, or have the expected effects on, the Fund’s operations or the value of its
Shares.
APPENDIX A
Glossary of Defined
Terms
In this prospectus,
each of the following terms have the meanings set forth after such
term:
Administrator: U.S. Bancorp Fund Services, LLC,
doing business as U.S. Bank Global Fund Services.
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 Wheat Futures
Contract traded on the CBOT, weighted 35%, (2) the third to expire CBOT Wheat
Futures Contract, weighted 30%, and (3) the CBOT Wheat Futures Contract expiring
in the December following the expiration month of third to expire contract,
weighted 35%
Benchmark Component Futures Contracts: The
three Wheat 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 Wheat 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, as
amended.
Commodity
interests: Futures Contracts, Cleared
Swaps and Other Commodity interests.
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.
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.
FINRA: Financial Industry Regulatory
Authority.
Forward Contract: an over the counter bilateral
contract for the purchase or sale of a specified quantity of a commodity at a
specified price, on a specified date and at a specified location. Forwards are
almost always settled by delivery of the underlying commodity. Although
possible, it is unusual to settle a Forward financially; therefore, Forwards are
generally illiquid.
Futures Contract: an exchange-traded contract
traded with standard terms that calls for the delivery of a specified quantity
of a commodity at a specified price, on a specified date and at a specified
location. Typically, a futures contract is traded out or rolled on an exchange
before delivery or receipt of the underlying commodity is
required.
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.
New York
Mercantile Exchange (NYMEX): An exchange on which Futures
Contracts are traded in the U.S. The Fund expressly disclaims any association
with the NYMEX or endorsement of the Fund by the NYMEX and acknowledges that
“NYMEX” and “New York Mercantile Exchange” are registered trademarks of such
exchange.
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, swap agreement, forward contract or commodity,
as applicable, at a specified price on or before a specified
date.
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 Fifth Amended and Restated
Declaration of Trust and Trust Agreement of the Trust effective as of April 26,
2019.
Valuation Day: Any day as of which the Fund
calculates its NAV.
Wheat Futures Contracts: Futures contracts for
wheat that are traded on the CBOT, the Kansas City Board of Trade, the
Minneapolis Grain Exchange, or foreign exchanges.
You: The owner of Shares.
STATEMENT OF ADDITIONAL
INFORMATION
TEUCRIUM WHEAT
FUND
This statement of
additional information is the second part of a two-part document. The first part
is the Fund’s disclosure document. The disclosure document and this statement of
additional information are bound together, and both parts contain important
information. This statement of additional information should be read in
conjunction with the disclosure document. To obtain a copy of the disclosure
document without charge, call the Fund at (802)-540-0019. Before you decide
whether to invest, you should read the entire prospectus carefully and consider
the risk factors beginning on page 5.
This statement of
additional information and accompanying disclosure document are both dated
[_______], 2022.
TEUCRIUM WHEAT
FUND
TABLE OF CONTENTS
|
|
The Wheat
Market |
78 |
Over the
counter Derivatives |
81 |
Commodity
Market Participants |
82 |
Regulation |
83 |
Potential
Advantages of Investment |
87 |
Fund
Performance |
87 |
The Wheat Market
Wheat is used to
produce flour, the key ingredient for breads, pasta, crackers and many other
food products, as well as several industrial products such as starches and
adhesives. Wheat by-products are used in livestock feeds. Wheat is the principal
food grain produced in the United States, and the United States’ output of wheat
is typically exceeded only by that of China, the European Union, Russia, and
India. The United States Department of Agriculture (“USDA”) estimates that for
2021-22, the principal global producers of wheat will be the EU, Russia,
Ukraine, China, India, the United States, Australia and Canada. The U.S.
generates approximately 6% of global production, with approximately 50% of that
being exported. For 2021-22, based on the January 12, 2022 USDA report, global
consumption of 787 MMT is estimated to be slightly higher than production of 779
MMT. If the global demand of wheat is not equal to global supply, this may have
an impact on the price of wheat. Global wheat consumption may fluctuate year
over year due to any number of reasons which may include, but is not limited to,
economic conditions, global health concerns, international trade policy. Wheat
is a staple commodity used pervasively across the globe so that any contractions
in consumption may only be temporary as has historically been the case. The USDA
publishes weekly, monthly, quarterly and annual updates for U.S. domestic and
worldwide wheat production and consumption. These reports are available on the
USDA’s website, www.usda.gov, at no charge. The outlook provided herein is from
the January 12, 2022 USDA report. This report
was issued before the occurrence of the recent developments in eastern Europe.
It cannot be predicted what impact those developments will have on the outlook
provided in the January 12, 2022 USDA report. For more information on
these developments, see “Prospectus Summary – Principal Investment Risks of an
Investment in the Fund" and "What Are the Principal Risks of Investing in the
Fund - The occurrence of a severe weather event, natural disaster, terrorist
attack, geopolitical events, outbreak or public health emergency as declared by
the World Health Organization, the continuation or expansion of war or other
hostilities, or a prolonged government shutdown may have significant adverse
effects on the Fund and its investments and alter current assumptions and
expectations."
There are several
types of wheat grown in the U.S., which are classified in terms of color,
hardness, and growing season. CBOT Wheat Futures Contracts call for delivery of
#2 soft red winter wheat, which is generally grown in the eastern third of the
United States, but other types and grades of wheat may also be delivered (Grade
#1 soft red winter wheat, Hard Red Winter, Dark Northern Spring and Northern
Spring wheat may be delivered at 3 cents premium per bushel over the contract
price and #2 soft red winter wheat, Hard Red Winter, Dark Northern Spring and
Northern Spring wheat may be delivered at the contract price.) Winter wheat is
planted in the fall and is harvested in the late spring or early summer of the
following year, while spring wheat is planted in the spring and harvested in
late summer or fall of the same year. Standard Wheat Futures Contracts trade on
the CBOT in units of 5,000 bushels, although 1,000 bushel “mini-wheat” Wheat
Futures Contracts also trade. There are five months each year in which CBOT
Wheat 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 wheat 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 wheat prices or the
price relationship between immediate delivery, soon to expire contracts and
later to expire contracts, the value of a contract will rise as it approaches
expiration. If the futures market is in contango, the Fund will buy later to
expire contracts for a higher price than the sooner to expire contracts that it
sells. Hypothetically, and assuming no other changes to either prevailing wheat
prices or the price relationship between the spot price, soon to expire
contracts and later to expire contracts, the value of a contract will fall as it
approaches expiration. Historically, the wheat 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 wheat market and the wheat 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.
Futures contracts may
be either bought or sold long or short. The U.S Commodity Futures Trading
Commission weekly releases the “Commitment of Traders” (COT) report, which
depicts the open interest as well as long and short positions in the market.
Market participants may use this report to gauge market
sentiment.
The price per bushel
of wheat 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 January
2022.
On February 9, 2022,
the USDA released its monthly World Agricultural Supply and Demand Estimates
(WASDE) for the Crop Year 2020-21. The exhibit below provides a summary of
historical and current information for United States wheat
production.
Standard Wheat
Futures Contracts trade on the CBOT in units of 5,000 bushels, although 1,000
bushel “mini-wheat” Wheat Futures Contracts also trade. There are several types
of wheat grown in the U.S., which are classified in terms of color, hardness,
and growing season. CBOT Wheat Futures Contracts call for delivery of #2 soft
red winter wheat, which is generally grown in the eastern third of the United
States, but other types and grades of wheat may also be delivered (Grade #1 soft
red winter wheat, Hard Red Winter, Dark Northern Spring and Northern Spring
wheat may be delivered at 3 cents premium per bushel over the contract price and
#2 soft red winter wheat, Hard Red Winter, Dark Northern Spring and Northern
Spring wheat may be delivered at the contract price.) Winter wheat is planted in
the fall and is harvested in the late spring or early summer of the following
year, while spring wheat is planted in the spring and harvested in late summer
or fall of the same year. There are five months each year in which CBOT Wheat
Futures Contracts expire: March, May, July, September and
December.
Over the counter
Derivatives
In addition to
futures contracts, options on futures contracts, derivative contracts that are
tied to various commodities, including wheat, 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 Wheat Futures Contracts, which are
guaranteed by a clearing organization, each party to an over the counter
derivative contract bears the credit risk of the other party (unless such over
the counter swap is cleared through a DCO), i.e., the risk that the other party will not
be able to perform its obligations under its contract.
Some over the counter
derivatives contracts contain relatively standardized terms and conditions and
are available from a wide range of participants. Others have highly customized
terms and conditions and are not as widely available. While the Fund may enter
into these more customized contracts, the Fund will only enter into over the
counter contracts containing certain terms and conditions, as discussed further
below, that are designed to minimize the credit risk to which the Fund will be
subject and only if the terms and conditions of the contract are consistent with
achieving the Fund’s investment objective of tracking the Benchmark. The
over the counter contracts that the Fund may enter into will take the
form of either forward contracts, swaps or options.
A forward contract is
a contractual obligation to purchase or sell a specified quantity of a commodity
at or before a specified date in the future at a specified price and, therefore,
is economically similar to a futures contract except that, unlike a futures
contract it cannot be financially settled (i.e., one must intend to make or take
delivery of a commodity under a forward contract). Unlike futures contracts,
however, forward contracts are typically privately negotiated or are traded in
the over the counter markets. Forward contracts for a given commodity are
generally available for various amounts and maturities and are subject to
individual negotiation between the parties involved. Moreover, generally there
is no direct means of offsetting or closing out a forward contract by taking an
offsetting position as one would a futures contract on a U.S. exchange. If a
trader desires to close out a forward contract position, he generally will
establish an opposite position in the contract but will settle and recognize the
profit or loss on both positions simultaneously on the delivery date. Thus,
unlike in the futures contract market where a trader who has offset positions
will recognize profit or loss immediately, in the forward market a trader with a
position that has been offset at a profit will generally not receive such profit
until the delivery date, and likewise a trader with a position that has been
offset at a loss will generally not have to pay money until the delivery date.
However, in some very limited instances such contracts may provide a right of
look out that will allow for the receipt of profit and payment for losses prior
to the delivery date.
An over the counter
swap agreement is a bilateral contract to exchange a periodic stream of payments
determined by reference to a notional amount, with payment typically made
between the parties on a net basis. For instance, in the case of a wheat swap,
the Fund may be obligated to pay a fixed price per bushel of wheat 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 wheat prices, the price of a specified
Wheat Futures Contract, or the average price of a group of Wheat 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 Sponsor will
assess the creditworthiness of each potential counterparty. 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 Sponsor will periodically review the creditworthiness of
existing counterparties. The Sponsor’s President, Chief Investment Officer, and
Chief Executive Officer has over 25 years of experience in over the counter
derivatives trading, including the counterparty creditworthiness analysis
inherent therein. There is no guarantee that the Sponsor’s creditworthiness
analysis will be successful and that counterparties selected for Fund
transactions will not default on their contractual
obligations.
The Fund also may
require that a counterparty be highly rated and/or provide collateral or other
credit support. The Sponsor on behalf of the Fund may enter into over the
counter contracts with various types of counterparties, including: (a) entities
registered as swap dealers (“SD”) or major swap participants (“MSP”), or (b) any
other entities that qualify as eligible contract participants
(“ECP”).
After the enactment
of the DoddFrank 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 DoddFrank Act.
Commodity Market
Participants
The two broad classes
of persons who trade commodities are hedgers and speculators. Hedgers include
financial institutions that manage or deal in interest rate-sensitive
instruments, foreign currencies or stock portfolios, and commercial market
participants, such as farmers and manufacturers, that market or process
commodities. Hedging is a protective procedure designed to effectively lock in
prices that would otherwise change due to an adverse movement in the price of
the underlying commodity, such as the adverse price movement between the time a
merchandiser or processor enters into a contract to buy or sell a raw or
processed commodity at a certain price and the time he must perform the
contract. For example, if a hedger contracts to physically sell the commodity at
a future date, he may simultaneously buy a futures or forward contract for the
necessary equivalent quantity of the commodity. At the time for performance of
the physical contract, the hedger may accept delivery under his futures contract
and sell the commodity quantity as required by the physical contract or he may
buy the actual commodity, sell it under the physical contract and close out his
futures contract position by making an offsetting sale.
The Commodity
Interest markets enable the hedger to shift the risk of price fluctuations. The
usual objective of the hedger is to protect the profit that he expects to earn
from farming, merchandising, or processing operations rather than to profit from
his trading. However, at times the impetus for a hedge transaction may result in
part from speculative objectives and hedgers can end up paying higher prices
than they would have if they did not enter into a Commodity Interest transaction
if current market prices are lower than the locked-in price.
Unlike the hedger,
the speculator generally expects neither to make nor take delivery of the
underlying commodity. Instead, the speculator risks his capital with the hope of
making profits from price fluctuations in the commodities. The speculator is, in
effect, the risk bearer who assumes the risks that the hedger seeks to avoid.
Speculators rarely make or take delivery of the underlying commodity; rather
they attempt to close out their positions prior to the delivery date. A
speculator who takes a long position generally will make a profit if the price
of the underlying commodity goes up and incur a loss if the price of the
underlying commodity goes down, while a speculator who takes a short position
generally will make a profit if the price of the underlying commodity goes down
and incur a loss if the price of the underlying commodity goes
up.
Regulation
The regulation of
futures markets, futures contracts, and futures exchanges has historically been
comprehensive. The CFTC and the exchanges are authorized to take extraordinary
actions in the event of a market emergency including, for example, the
retroactive implementation of speculative position limits, increased margin
requirements, the establishment of daily price limits and the suspension of
trading on an exchange or trading facility.
Pursuant to authority
in the CEA, the NFA has been formed and registered with the CFTC as a registered
futures association. At the present time, the NFA is the only SRO for commodity
interest professionals, other than futures exchanges. The CFTC has delegated to
the NFA responsibility for the registration of CPOs and FCMs and their
respective associated persons. The Sponsor and the Fund’s clearing broker are
members of the NFA. As such, they will be subject to NFA standards relating to
fair trade practices, financial condition and consumer protection. The NFA also
arbitrates disputes between members and their customers and conducts
registration and fitness screening of applicants for membership and audits of
its existing members. Neither the Trust nor the Teucrium Funds are required to
become a member of the NFA. The regulation of commodity interest transactions in
the United States is a rapidly changing area of law and is subject to ongoing
modification by governmental and judicial action. Considerable regulatory
attention has been focused on non-traditional investment pools that are publicly
distributed in the United States. There is a possibility of future regulatory
changes within the United States altering, perhaps to a material extent, the
nature of an investment in the Fund, or the ability of a Fund to continue to
implement its investment strategy. In addition, various national governments
outside of the United States have expressed concern regarding the disruptive
effects of speculative trading in the commodities markets and the need to
regulate the derivatives markets in general. The effect of any future regulatory
change on the Teucrium Funds is impossible to predict but could be substantial
and adverse.
The CFTC possesses
exclusive jurisdiction to regulate the activities of commodity pool operators
and commodity trading advisors with respect to "commodity interests," such as
futures, swaps, and options, and has adopted regulations with respect to the
activities of those persons and/or entities. Under the Commodity Exchange Act
(“CEA”), a registered commodity pool operator, such as the Sponsor, is required
to make annual filings with the CFTC and the NFA describing its organization,
capital structure, management and controlling persons. In addition, the CEA
authorizes the CFTC to require and review books and records of, and documents
prepared by, registered commodity pool operators. Pursuant to this authority,
the CFTC requires commodity pool operators to keep accurate, current and orderly
records for each pool that they operate. The CFTC may suspend the registration
of a commodity pool operator (1) if the CFTC finds that the operator’s trading
practices tend to disrupt orderly market conditions, (2) if any controlling
person of the operator is subject to an order of the CFTC denying such person
trading privileges on any exchange, and (3) in certain other circumstances.
Suspension, restriction or termination of the Sponsor’s registration as a
commodity pool operator would prevent it, until that registration were to be
reinstated, from managing the Fund, and might result in the termination of the
Fund if a successor sponsor is not elected pursuant to the Trust Agreement.
Neither the Trust nor the Fund is required to be registered with the CFTC in any
capacity.
The Fund’s investors
are afforded prescribed rights for reparations under the CEA. Investors may also
be able to maintain a private right of action for violations of the CEA. The
CFTC has adopted rules implementing the reparation provisions of the CEA, which
provide that any person may file a complaint for a reparations award with the
CFTC for violation of the CEA against a floor broker or an FCM, introducing
broker, commodity trading advisor, CPO, and their respective associated
persons.
The regulations of
the CFTC and the NFA prohibit any representation by a person registered with the
CFTC or by any member of the NFA, that registration with the CFTC, or membership
in the NFA, in any respect indicates that the CFTC or the NFA has approved or
endorsed that person or that person’s trading program or objectives. The
registrations and memberships of the parties described in this summary must not
be considered as constituting any such approval or endorsement. Likewise, no
futures exchange has given or will give any similar approval or
endorsement.
Trading venues in the
United States are subject to varying degrees of regulation under the CEA
depending on whether such exchange is a designated contract market (i.e., a
futures exchange) or a swap execution facility. Clearing organizations are also
subject to the CEA and the rules and regulations adopted thereunder as
administered by the CFTC. The CFTC’s function is to implement the CEA’s
objectives of preventing price manipulation and excessive speculation and
promoting orderly and efficient commodity interest markets. In addition, the
various exchanges and clearing organizations themselves as SROs exercise
regulatory and supervisory authority over their member
firms.
The Dodd-Frank Wall
Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was enacted in
response to the economic crisis of 2008 and 2009 and it significantly altered
the regulatory regime to which the securities and commodities markets are
subject. To date, the CFTC has issued proposed or final versions of almost all
of the rules it is required to promulgate under the Dodd-Frank Act, and it
continues to issue proposed versions of additional rules that it has authority
to promulgate. Provisions of the new law include the requirement that position
limits be established on a wide range of commodity interests, including
agricultural, energy, and metal-based commodity futures contracts, options on
such futures contracts and uncleared swaps that are economically equivalent to
such futures contracts and options (“Reference Contracts”); new registration and
recordkeeping requirements for swap market participants; capital and margin
requirements for “swap dealers” and “major swap participants,” as determined by
the new law and applicable regulations; reporting of all swap transactions to
swap data repositories; and the mandatory use of clearinghouse mechanisms for
sufficiently standardized swap transactions that were historically entered into
in the over the counter market, but are now designated as subject to the
clearing requirement; and margin requirements for over the counter swaps that
are not subject to the clearing requirements.
In addition,
considerable regulatory attention has recently been focused on non-traditional
publicly distributed investment pools such as the Fund. Furthermore, various
national governments have expressed concern regarding the disruptive effects of
speculative trading in certain commodity markets and the need to regulate the
derivatives markets in general. The effect of any future regulatory change on
the Teucrium Funds is impossible to predict but could be substantial and
adverse.
The Dodd-Frank Act
was intended to reduce systemic risks that may have contributed to the 2008/2009
financial crisis. Since the first draft of what became the Dodd-Frank Act,
supporters and opponents have debated the scope of the legislation. As the
Administrations of the U.S. change, the interpretation and implementation will
change along with them. Nevertheless, regulatory reform of any kind may have a
significant impact on U.S. regulated entities.
Position Limits, Aggregation Limits,
Price Fluctuation Limits
The CFTC and U.S.
futures exchanges impose limits on the maximum net long or net short speculative
positions that any person may hold or control in any particular futures or
options contracts traded on US futures exchanges. For example, the CFTC
currently imposes speculative position limits on a number of agricultural
commodities (e.g., corn, oats, wheat, soybeans and cotton) and US futures
exchanges currently impose speculative position limits on many other
commodities. A Fund could be required to liquidate positions it holds in order
to comply with position limits or may not be able to fully implement trading
instructions generated by its trading models, in order to comply with position
limits. Any such liquidation or limited implementation could result in
substantial costs to a Fund.
The Dodd-Frank Act
significantly expanded the CFTC’s authority to impose position limits with
respect to futures contracts and options on futures contracts, swaps that are
economically equivalent to futures or options on futures, and swaps that are
traded on a regulated exchange and certain swaps that perform a significant
price discovery function. On December 16, 2016, the CFTC issued a final rule to
amend part 150 of the CFTC’s regulations with respect to the policy for
aggregation under the CFTC’s position limits regime for futures and option
contracts on nine agricultural commodities (“the Aggregation Requirements”).
This final rule addressed the circumstances under which market participants
would be required to aggregate all their positions, for purposes of the position
limits, of all positions in Reference Contracts of the 9 agricultural
commodities held by a single entity and its affiliates, regardless of whether
such positions exist on US futures exchanges, non-US futures exchanges, or in
over the counter swaps. An affiliate of a market participant is defined as two
or more persons acting pursuant to an express or implied agreement or
understanding. The Aggregation Requirements became effective on February 14,
2017. On August 10, 2017, the CFTC issued a No-Action Relief Letter No. 17-37 to
clarify several provisions under Regulation 150.4, regarding position
aggregation filing requirements of market participants. The Sponsor does not
anticipate that this order will have an impact on the ability of a Fund to meet
its respective investment objectives.
As published in the
January 14, 2021 Federal Register, the Commodity Futures Trading Commission
(CFTC) voted to approve a final rule (Final Rule) regarding position limits for
certain futures contracts and economically equivalent swaps. The Final Rule
ends a decade of rulemaking activity in which the CFTC proposed, amended, and
re-proposed its position limit rules and aggregation standards for speculative
positions due to certain amendments to the Commodity Exchange Act (CEA) by the
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank
Act). In the Final Rule, the CFTC confirmed that federal speculative position
limits are necessary for 25 core referenced futures contracts and for any
futures contracts and options on futures contracts that are linked to those
contracts. The 25 core referenced futures contracts include the nine
“legacy” agricultural contracts that are currently subject to federal position
limits and 16 additional non-legacy contracts.
The aggregate
position limits currently in place under the current position limits and the
Aggregation Requirements are as follows for each of the commodities traded by
the Fund:
Commodity
Future |
Spot Month
Position Limit |
All Month
Aggregate Position Limit |
wheat |
1,200
contracts |
19,300
contracts |
The nine legacy
contracts are subject to two types of position limits: (1) a position limit that
applies in the spot month only and (2) a position limit that applies in any
single non-spot month as well as all months combined. Both types of position
limits have been updated by the Final Rule. Significantly, the new spot month
position limit is higher than or equal to current federal and exchange-set spot
month position limits. The new single non-spot month and all-months-combined
position limits are also higher than or equal to the respective current federal
and exchange-set limits. For a discussion generally regarding the risks that
position limits may pose for the Fund, see the risk factor in “WHAT ARE THE RISK
FACTORS INVOLVED WITH AN INVESTMENT IN THE FUND” regarding position limits,
accountability levels and daily price fluctuation limits.
The CFTC also adopted
federal position limits on cash-settled futures and options on futures that are
directly or indirectly linked to physically settled contracts in order to
further the statutory objective in Section 4a(a)(3)(B)(iv) of the CEA—the
deterrence and prevention of market manipulation. In taking this step, the
CFTC stated that, in the absence of position limits, an entity with positions in
both the physically delivered and cash-settled contracts may have an increased
ability and an increased incentive to manipulate one of these contracts to
benefit positions in the other contract.
To prevent evasion
through the creation of economically equivalent futures contracts that do not
directly reference the price of the core referenced futures contracts, the CFTC
determined that futures contracts and options on futures contracts that are
indirectly linked to the core referenced futures contracts will be subject to
the position limits in the same manner as the referenced futures contracts.
Futures that settle to the price of a referenced contract but not to the price
of a core referenced futures contract would be indirectly linked to the core
referenced futures contract as “economically equivalent
swaps.”
The Final Rule
clarifies the applicable standard for market participants seeking a bona fide
hedging exemption from position limits. A bona fide hedging transaction may
exceed the federal position limits only if the transaction satisfies each of the
following elements:
1.
the position
represents a substitute for transactions or positions made or to be made at a
later time in a physical marketing channel (temporary substitute
test);
2.
the position is
economically appropriate to the reduction of price risks in the conduct and
management of a commercial enterprise (economically appropriate test);
and
3.
the position arises
from the potential change in value of actual or anticipated assets, liabilities,
or services (change in value requirement).
Notably, this
definition tightens the “temporary substitute test” such that a bona fide hedge
must be connected to the production, sale, or use of a physical cash-market
commodity in all cases, rather than “normally” connected to such activities. As
noted above, this adjustment is intended to restrict market participants from
treating “risk management” positions as bona fide hedges, except for
pass-through or offset positions related to another transaction that is itself a
bona fide hedge. The Final Rule also expands the list of enumerated bona fide
hedges, which means that any market participant utilizing such a hedge need not
notify the CFTC because the enumerated bona fide hedges are
self-effectuating. However, a market participant would still need to notify
the relevant exchange if executing a bona fide hedge would exceed an exchange
set position limit.
In addition, the
Final Rule elaborates on how and when a market participant may measure risk on a
gross basis rather than on a net basis. Currently, market participants generally
may only hedge positions on a net basis. However, the Final Rule permits hedge
positions on a gross basis so long as the risk calculations are done
consistently over time and not with the intent of evading federal position
limits.
The Final Rule became
effective on March 15, 2021, but a number of the requirements in the Final Rule
have a general compliance date of January 1, 2022, and later compliance date of
January 1, 2023 with respect to swaps-related requirements and the elimination
of previously granted risk management exemptions. In particular, January 1, 2022
is the implementation date of federal speculative position limits for 16
non-legacy core referenced futures contracts and any referenced futures
contracts (other than economically equivalent swaps) relating to those 16 core
referenced futures contracts and for exchanges to establish limits and
exemptions, including collecting cash market information from market
participants in connection with bona fide hedge exemptions. January 1, 2023 is
the implementation date of federal speculative position limits for economically
equivalent swaps and for the elimination of previously granted risk management
exemptions. The CFTC also will reevaluate the ability of the exchanges to
establish and implement appropriate surveillance mechanisms with respect to
economically equivalent swaps.
It is unknown at this
time the effect that such passage, adoption or modification will have,
positively or negatively, on our industry or on a Fund. The size or duration of
positions available to a Fund may be severely limited. Pursuant to the CFTC’s
and the exchanges’ aggregation requirements, all accounts owned or managed by
the Sponsor are likely to be combined for speculative position limits purposes.
The Funds could be required to liquidate positions it holds in order to comply
with such limits or may not be able to fully implement trading instructions
generated by its trading models, in order to comply with such limits. Any such
liquidation or limited implementation could result in substantial costs to a
Fund.
These new regulations
and the resulting increased costs and regulatory oversight requirements may
result in market participants being required or deciding to limit their trading
activities, which could lead to decreased market liquidity and increased market
volatility. In addition, transaction costs incurred by market participants are
likely to be higher due to the increased costs of compliance with the new
regulations. These consequences could adversely affect a Fund’s
returns.
Accountability levels
differ from position limits in that they do not represent a fixed ceiling, but
rather a threshold above which a futures exchange may exercise greater scrutiny
and control over an investor’s positions. If a Fund were to exceed an applicable
accountability level for investments in futures contracts, the exchange will
monitor the Fund’s exposure and may ask for further information on its
activities, including the total size of all positions, investment and trading
strategy, and the extent of liquidity resources of the Fund. If deemed necessary
by the exchange, the Fund could be ordered to reduce its aggregate net position
back to the accountability level.
In addition to
position limits and accountability levels, the exchanges set daily price
fluctuation limits on futures contracts. The daily price fluctuation limit
establishes the maximum amount that the price of futures contracts may vary
either up or down from the previous day’s settlement price. Once the daily price
fluctuation limit has been reached in a particular futures contract, no trades
may be made at a price beyond that limit.
Margin for OTC Uncleared
Swaps
During 2015 and 2016,
the CFTC and the US bank prudential regulators completed their rulemakings under
the Dodd-Frank Act on margin for uncleared over the counter swaps (and option
agreements that qualify as swaps). Margin requirements went into effect for the
largest swap entities in September 2016 and went into effect for financial end
users in March 2017. Under these regulations, swap dealers (such as sell-side
counterparties to swaps), major swap participants, and financial end users (such
as buy-side counterparties to swaps who are not physical traders) are required
in most instances, to post and collect initial and variation margin, depending
on the regulatory classification of their counterparty. European and Asian
regulators are also implementing similar regulations, which were scheduled to
become effective on the same dates as the US-promulgated rules. As a result of
these requirements, additional capital will be required to be committed to the
margin accounts to support transactions involving uncleared over the counter
swaps and, consequently, these transactions may become more expensive. While the
Fund currently does not generally engage in uncleared over the counter swaps, to
the extent they do so in the future, the additional margin required to be posted
could adversely impact the profitability (if any) to the Fund from entering into
these transactions.
FCMs
The CEA requires all
FCMs, such as the Teucrium Funds’ clearing brokers, to meet and maintain
specified fitness and financial requirements, to segregate customer funds from
proprietary funds and account separately for all customers’ funds and positions,
and to maintain specified books and records open to inspection by the staff of
the CFTC. The CFTC has similar authority over introducing brokers, or persons
who solicit or accept orders for commodity interest trades but who do not accept
margin deposits for the execution of trades. The CEA authorizes the CFTC to
regulate trading by FCMs and by their officers and directors, permits the CFTC
to require action by exchanges in the event of market emergencies, and
establishes an administrative procedure under which customers may institute
complaints for damages arising from alleged violations of the CEA. The CEA also
gives the states powers to enforce its provisions and the regulations of the
CFTC.
On November 14, 2013,
the CFTC published final regulations that require enhanced customer protections,
risk management programs, internal monitoring and controls, capital and
liquidity standards, customer disclosures and auditing and examination programs
for FCMs. The rules are intended to afford greater assurances to market
participants that customer segregated funds and secured amounts are protected,
customers are provided with appropriate notice of the risks of futures trading
and of the FCMs with which they may choose to do business, FCMs are monitoring
and managing risks in a robust manner, the capital and liquidity of FCMs are
strengthened to safeguard the continued operations and the auditing and
examination programs of the CFTC and the SROs are monitoring the activities of
FCMs in a thorough manner.
Potential Advantages of
Investment
Interest Income
and Expense
Unlike some
alternative investment funds, the Fund does not borrow money in order to obtain
leverage, so the Fund does not incur any interest expense. Rather, the Fund’s
margin deposits, and cash reserves are maintained in cash and cash equivalents
and interest is generally earned on available assets, which include unrealized
profits credited to the Fund’s accounts
Fund Performance
The following graph
sets forth the historical performance of the Fund from commencement of
operations on September 19, 2011 until February 28, 2022.
PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS