The
information in this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed with the Securities
and Exchange Commission is effective. This prospectus is not an offer to sell
these securities and it is not soliciting an offer to buy these securities in
any jurisdiction where the offer or sale is not permitted.
Subject
to Completion
Preliminary
Prospectus dated September 7, 2022
Hashdex
Bitcoin Futures ETF
Hashdex Bitcoin Futures
ETF (the “Fund” or “DEFI”) is designed to provide investors with a means to gain
price exposure to the bitcoin market. The Fund issues Shares (“Shares”) that
trade on the NYSE Arca stock exchange (“NYSE Arca”) under the symbol “DEFI.”
Shares can be purchased and sold by investors through their broker-dealer. Under
its current investment objective, the Fund will not hold, purchase, or otherwise
own any bitcoin. Purchasing Shares of the Fund is subject to the risks of
bitcoin as well as the additional risks of investing in the Fund.
The Fund’s investment
objective is for changes in the Shares’ NAV to reflect the daily changes of the
price of the Hashdex U.S. Bitcoin Futures Fund Benchmark (the “Benchmark”), less
expenses from the Fund’s operations. The Benchmark is currently the average of
the closing settlement prices for the first to expire and second to expire
bitcoin futures contracts (“Bitcoin Futures Contracts”) listed on the Chicago
Mercantile Exchange Inc. (“CME”). The Bitcoin Futures Contracts that at any
given time make up the Benchmark are referred to hereinafter as the “Benchmark
Component Futures Contracts.” Under normal market conditions, the Fund invests
in Benchmark Component Futures Contracts and cash and cash equivalents. Because
the Fund’s investment objective is to track the price of the Benchmark by
investing in Benchmark Futures Contracts rather than bitcoin, changes in the
price of the Shares will vary from changes in the spot price of
bitcoin.
An investment in the Fund
is subject to the risks of an investment in futures contracts, which are complex
instruments that are often subject to a high degree of price variability.
Because the price of Bitcoin Futures Contracts is linked to the price of
bitcoin, an investment in the Fund may be riskier than other exchange-traded
products that do not hold financial instruments related to bitcoin and may not
be suitable for all investors. In addition, Bitcoin Futures Contracts may
experience pronounced and swift price changes. Accordingly, there is a potential
for movement in the price of Shares between the time an investor places an order
to purchase or sell with its broker-dealer and the time of the actual purchase
or sale resulting from the price volatility of Bitcoin Futures
Contracts.
Investing
in the Fund involves significant risks. See “What Are the Risk Factors Involved
with an Investment in the Fund?” beginning on page 14. The Fund is not a mutual
fund registered under the Investment Company Act of 1940, and Fund shareholder
will not be afforded the protections associated with ownership of shares in a
registered investment company. See “The Fund is
not a registered investment company, so you do not have the protections of the
Investment Company Act of 1940” on page 20.
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.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION (“SEC”) NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES OFFERED IN THIS
PROSPECTUS OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Fund is a series of
the Teucrium Commodity Trust (the “Trust”). Shareholders have no voting rights
with respect to the Trust or the Fund except as expressly provided in the
Trust’s Fifth Amended and Restated Declaration of Trust and Trust Agreement (the
“Trust Agreement”). 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. Toroso Investments, LLC
(“Toroso”), Tidal ETF Services LLC (“Tidal”) and Victory Capital Management Inc.
(“Victory Capital”) “(the “Marketing Agents”) assist the Fund and the Sponsor
with certain functions and duties relating to distribution and marketing, which
include the following: marketing, sales strategy, and distribution related
services. Hashdex Asset Management Ltd. (“Hashdex”) will serve as the Fund’s
Digital Asset Adviser and will assist the Sponsor and Marketing Agents with
research and investment analysis regarding bitcoin and bitcoin markets for use
in the marketing of the Fund. Hashdex will also provide the Fund with branding,
marketing services including, but not limited to, the issuance of press
releases, preparation of website data content, holding promotional webinars and
engaging in promotional activities through social media outlets. Hashdex has no
role in maintaining, calculating or publishing the Benchmark. Hashdex also has
no responsibility for the investment or management of the Fund’s investment
portfolio or for the overall performance or operation of the Fund.
The Marketing Agents,
Digital Asset Advisor and Sponsor have entered into an agreement (the “Support
Agreement”) that sets forth the terms and conditions applicable to the launch,
marketing, promotion, development, and ongoing operation of the Fund, as well
the respective rights in profits and obligations for expenses. Additionally, the
Parties believe that it would further certain of their long-term business goals
to transfer sponsorship of the Fund from the Sponsor to Toroso. Specifically,
Hashdex and Toroso have experience in the digital asset and exchange-traded fund
industry, and seek to offer a bitcoin futures based fund as part of their
long-term business goals. The Parties believe that the Sponsor is best
positioned for the initial establishment and operation of the Fund, given the
Sponsor’s experience in forming and operating similarly structured
exchanged-traded products registered under the Securities Act of 1933 (the “1933
Act”). Accordingly, the Sponsor is responsible for the initial creation and
operation of the Fund. Then, when Hashdex and Toroso have the necessary
experience and resources to operate the Fund, the eventual transfer to Toroso
will effectuate Hashdex and Toroso’s long-term business goals. The Parties do
not believe that the long-term business goals will have any impact on a
shareholder’s investment in the Fund.
Accordingly, the Support
Agreement provides that the Parties expect that Toroso will use commercially
reasonable efforts to organize a new Delaware statutory trust (the “New Trust”)
and a new series thereof (the “New Fund”) and enter into an agreement pursuant
to which, among other things, the assets of the Fund will be transferred to the
New Fund as a series of the New Trust. The Trust's Declaration of Trust permits
the Sponsor, without a Shareholder vote, to transfer the assets of the Fund to
the New Fund. The transfer is not expected to materially modify the rights of
Fund shareholders. There is no timeline for this transaction. The transaction
may require registration under the 1933 Act, or an exemption from such
registration, an amendment to the Fund’s existing listing standards and receipt
of other regulatory approvals. The Fund and the New Fund will file current
reports on Form 8-K including a press release notifying shareholders that the
definitive transaction has been consummated.
While investors will
purchase and sell Shares through their broker-dealer, the Fund continuously
offers creation baskets consisting of 10,000 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 Bitcoin 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. The initial Authorized Purchaser is a statutory
underwriter of the Fund’s Shares. It is expected that on the effective date, the
initial Authorized Purchaser will purchase one or more initial Creation Baskets
of 10,000 Shares at a per Share price of $25.00. The initial offering price of
$25.00 was set as an appropriate and convenient price that would facilitate
secondary market trading of Shares. The Shares of the Fund acquired by the
Sponsor in connection with its initial capital contribution were purchased at a
price of $25.00 per Share. An Authorized Purchaser is under no obligation to
purchase Shares. This is intended to be a continuous offering that will
terminate on September [●],
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.
The Fund is a commodity
pool and the Sponsor 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”).
This prospectus is in two
parts: a disclosure document and a statement of additional information. These
parts are bound together, and both contain important information.
The date of this
prospectus is September [●], 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 40 AND A STATEMENT
OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO RECOVER THE AMOUNT
OF YOUR INITIAL INVESTMENT, AT PAGE 11.
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 9 AND THE “RISK FACTORS”
SECTION BEGINNING ON PAGE 14.
TABLE
OF CONTENTS
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 14, 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
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 an initial price of $25.00, is
$0.23 or 0.92% of the selling price. For more information, see “Breakeven
Analysis” below.
The
Fund’s Investment Objective
The Fund is a commodity
pool that issues Shares that may be purchased and sold on NYSE Arca. The Fund’s
investment objective is for changes in the Shares’ NAV to reflect the daily
changes of the price of the Benchmark, less expenses from the Fund’s operations.
Under normal market conditions, the Fund invests in Benchmark Component Futures
Contracts and cash and cash equivalents. Because the Fund’s investment objective
is to track the price of the Benchmark by investing in Benchmark Futures
Contracts rather than bitcoin, changes in the price of the Shares will vary from
changes in the spot price of bitcoin. The NYSE Arca rule under which the Shares
will be listed and traded prevents the Fund from utilizing leverage. 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 CME’s main pricing mechanism is open.
Bitcoin is a digital asset
or cryptocurrency that is a unit of account on the “Bitcoin Network,” an open
source, decentralized peer-to-peer computer network. The ownership and operation
of bitcoin is determined by purchasers in the Bitcoin Network. The Bitcoin
Network connects computers that run publicly accessible, or open source,
software that follows the rules and procedures governing the Bitcoin Network.
This is commonly referred to as the Bitcoin Protocol. Bitcoin may be held, may
be used to purchase goods and services or may be exchanged for fiat currency. No
single entity owns or operates the Bitcoin Network, and the value of bitcoin is
not backed by any government, corporation or other entity. Instead the value of
bitcoin is determined in part by the supply and demand in markets created to
facilitate the trading of bitcoin. Public key cryptography protects the
ownership and transaction records for bitcoin. Because the source code for the
Bitcoin Network is open source, anyone can contribute to its development. At
this time, the ultimate supply of bitcoin is finite and limited to 21 million
“coins” with the number of bitcoin available increasing gradually as new bitcoin
supplies are mined until the 21 million current protocol cap is reached. The
following factors, among others, may affect the price and market for bitcoin:
The Fund does not invest directly in
bitcoin.
● |
How widely bitcoin
is adopted, including the use of bitcoin as a payment.
|
● |
The regulatory
environment for cryptocurrencies, which continues to evolve in the U.S.,
and which may delay, impede, or restrict the adoption or use of
bitcoin. |
● |
Speculative activity
in the market for bitcoin, including by holders of large amounts of
bitcoin, which may increase
volatility. |
● |
Cyberattacks,
including the risk that malicious actors will exploit flaws in the code or
structure of bitcoin, control the blockchain, steal information or cause
disruptions to the internet. |
● |
Rewards for mining
bitcoin are designed to decline over time, which may lessen the incentive
for miners to process and confirm transactions on the Bitcoin
Network. |
● |
The open-source
nature of the Bitcoin Network may result in forks, or changes to the
underlying code of bitcoin that result in the creation of new, separate
digital assets. |
● |
Fraud, manipulation,
security failure or operational problems at bitcoin exchanges that result
in a decline in adoption or acceptance of
bitcoin. |
● |
Scalability as the
use of bitcoin expands to a greater number of
users. |
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 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/1471824/000165495419004865/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 Fund intends to be treated as a
partnership for U.S. federal income tax purposes.
The Benchmark currently is
the average of the closing settlement prices for the first to expire and second
to expire bitcoin futures contracts (“Bitcoin Futures Contracts”) listed on the
CME. These futures contracts are the Benchmark Component Futures Contracts. The
CME currently offers two Bitcoin Futures Contracts, one contract representing 5
bitcoin (“BTC Contracts”) and another contract representing 0.10 bitcoin (“MBT
Contracts”). The Fund will invest in BTC Contracts and MBT Contracts to the
extent necessary to achieve maximum exposure to the bitcoin futures market.
Because the Fund’s investment objective is to track the price of the Benchmark
by investing in Benchmark Futures Contracts rather than bitcoin, changes in the
price of the Shares will vary from changes in the spot price of bitcoin. The
Fund will purchase MBT Contracts only if the Fund has proceeds remaining from
the sale of a Creation Basket that are less than the price of a BTC contract.
BTC and MBT will count toward an aggregate position limit.
BTC Contracts began
trading on the CME Globex trading platform on December 15, 2017 under the CME
ClearPort ticker symbol “BTC” and are cash settled in U.S. dollars. MBT
Contracts began trading on the CME Globex trading platform on May 3, 2021 under
the CME ClearPort ticker symbol “MBT” and are also cash settled in U.S. dollars.
The daily settlement prices for MBT Contracts are derived directly from the
settlements in the BTC Contracts. BTC Contracts and MBT Contracts each trade six
consecutive monthly contracts plus two additional December contract months (if
the 6 consecutive months include December, only one additional December contract
month is listed).
Because BTC Contracts and
MBT Contracts are exchange-listed, they allow investors to gain price exposure
to bitcoin without having to hold the underlying cryptocurrency. Like a futures
contract on a commodity or stock index, BTC Contracts and MBT Contracts provide
a means for investors to hedge investment positions or speculate on the future
price of the bitcoin market.
CME Bitcoin Futures
Contracts are cash-settled and based on the CME CF Bitcoin Reference Rate (BRR)
and CME CF Bitcoin Real-Time Index (BRTI). The BRR is a daily reference rate of
the U.S. dollar price of one bitcoin calculated daily as of 4:00 p.m. London
time. It is calculated based on the bitcoin trading activity on specified
constituent bitcoin exchanges during a calculation window between 3:00 p.m. and
4:00 p.m. London time, which currently include Bitstamp, Coinbase, Gemini, itBit
Kraken and LMAX Digital. BRTI is a real time index of the U.S. dollar price of
one bitcoin, published once per second, 24 hours per day, 7 days per week, and
365 days per year. The CME launched the BRR and BRTI on November 14,
2016.
The CME selects
constituent exchanges for the BRR on the basis of the following criteria, which
each exchange must demonstrate that it continues to fulfil on an ongoing
basis:
●
The exchange has policies
to ensure fair and transparent market conditions at all times and has processes
in place to identify and impede illegal, unfair or manipulative trading
practices.
●
The exchange does not
impose undue barriers to entry or restrictions on market participants, and
utilizing the venue does not expose market participants to undue credit risk,
operational risk, legal risk or other risks.
●
The exchange complies with
applicable law and regulation, including, but not limited to capital markets
regulations, money transmission regulations, client money custody regulations,
know-your-client (KYC) regulations and anti-money-laundering (AML)
regulations.
●
The exchange cooperates
with inquiries and investigations of regulators and the administrator upon
request and has to execute data sharing agreements with the
CME.
Should the average daily contribution of a
constituent exchange fall below 3%, then the continued inclusion of the venue as
a constituent exchange is assessed.
Qualifying transactions from the
constituent exchanges that take place during the one-hour calculation window are
added to a list, with the trade price and size for each transaction recorded.
The one-hour calculation is partitioned into twelve intervals of five minutes
each, and for each partition, the volume-weighted median trade price is
calculated from the trade prices and sizes of relevant transactions. (A
volume-weighted median differs from a standard median in that a weighting
factor, in this case trade size, is factored into the calculation.) The BRR is
the equally-weighted average of the volume-weighted medians of all twelve
partitions.
The
Fund’s Investment Strategies
The Fund seeks to achieve
its investment objective by investing in Benchmark Component Futures Contracts.
Under normal market conditions, the Fund expects that the Fund’s assets will be
invested in Benchmark Component Futures Contracts and in cash and cash
equivalents, such as short-term Treasury bills, money market funds, and demand
deposit accounts. The term “normal market conditions” includes, but is not
limited to, the absence of: trading halts in the applicable financial markets
generally; operational issues (e.g., systems failure) causing dissemination of
inaccurate market information; or force majeure type events such as natural or
man-made disaster, act of God, armed conflict, act of terrorism, riot or labor
disruption or any similar intervening circumstance.
The Sponsor created and
maintains the Benchmark and ICE Data Indices, LLC will publish the Benchmark.
ICE Data Indices, LLC disseminates the intraday indicative value (also referred
to in this prospectus as "approximate net asset value") of the Fund's Shares
through the facilities of Consolidated Tape Association's Consolidated Quotation
High Speed Lines (also known as the "CTA/QC High Speed Lines"). ICE Data
Indices, LLC will make the Benchmark information available through online
information services, such as Yahoo Finance, Bloomberg and Reuters. The
Benchmark will only include BTC Contracts.
The Fund's futures
contract positions will be rolled on a monthly basis by closing out the first to
expire contracts prior to their final settlement date and then entering into the
third to expire contracts which will become the new second to expire -
maintaining an equal weight of 50% first to expire and 50% second to expire. A
first to expire contract is the contract with the nearest expiration date. A
second to expire contract follows the first - it is the contract that will
expire second in line after the first contract has expired. For example, when a
first to expire contract expires, the second to expire contract becomes the
first to expire contract.
Fund rolling will take
place on the market business day preceding the last trading day of the first to
expire contract. The last trading day of the first to expire contact is
currently defined as the last business Friday of each month. By way of example,
as of the date of this prospectus the Fund’s futures contract positions will be
entered and exited according to the roll schedule below. For example, on August
15, 2022, if the fund held 100 futures contracts, 50 contracts would be expiring
in August 2022 and 50 contracts would be expiring in September
2022.
Hashdex
Bitcoin Futures ETF (DEFI) – Roll Schedule Aug 2022 – Dec
2022
|
Roll
Date |
Contract
Expiring
(Exiting
Position) |
New
Contract
(Entering
Position) |
|
First
to Expire Contract
(Resulting
Position) |
Second
to Expire Contract
(Resulting
Position) |
8/28/2022 |
August
(BTCQ2) |
October
(BTCV2) |
|
September
(BTCU2) |
October
(BTCV2) |
9/29/2022 |
September
(BTCU2) |
November
(BTCX2) |
|
October
(BTCV2) |
November
(BTCX2) |
10/27/2022 |
October
(BTCV2 |
December
(BTCZ2) |
|
November
(BTCX2) |
December
(BTCZ2) |
11/23/2022 |
November
(BTCX2) |
January
(BTCF3) |
|
December
(BTCZ2) |
January
(BTCF3) |
12/29/2022 |
December
(BTCZ2) |
February
(BTCG3) |
|
January
(BTCF3) |
February
(BTCG3) |
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. The design of
the Fund’s Benchmark is such that the Benchmark Component Futures Contracts will
change on a monthly basis, with the contracts with the shortest maturity being
replaced with contracts with a longer maturity. Sometimes the Fund will have to
pay more for longer maturity contracts to replace existing shorter maturity
contracts about to expire. This situation is known as “contango” in the futures
markets. In the event of a prolonged period of contango, and absent the impact
of rising or falling bitcoin prices, this could have a negative impact on the
Fund’s NAV and total return, which in turn may have a negative impact on your
investment in the Fund. By way of example, during the period from 1/1/2019 to
6/30/2022, the market for Bitcoin Component Futures Contracts were in contango
approximately 90% of the time, which resulted in an average annual negative roll
yield of approximately 7%. If the futures market is in a state of backwardation
(i.e., when the price of bitcoin in the future is to be less than the current
price), the Fund will buy later to expire contracts for a lower price than the
soon to expire contracts that it sells.
Consistent with applicable
provisions of the Trust Agreement and Delaware law, the Fund has broad authority
to make changes to the Fund’s operations. The Fund may change its investment
objective, Benchmark, or investment strategies and Shareholders of the Fund will
not have any rights with respect to these changes. 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 the Benchmark Component Futures Contracts 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 Component Futures Contracts. The Fund would,
among other things, 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.”
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 bitcoin
market in a cost-effective manner. The Sponsor endeavors to place the Fund’s
trades in Benchmark Component Futures Contracts and otherwise manage the Fund’s
investments so that the Fund’s average daily tracking error against the
Benchmark will be less than 10 percent over any period of 30 trading days.
However, the Fund incurs certain expenses in connection with its operations,
which cause imperfect correlation between changes in the Fund’s NAV and changes
in the Benchmark because the Benchmark does not reflect expenses or income. As a
result, investors may incur a partial or complete loss of their investment even
when the performance of the Benchmark is positive.
Investors may purchase and
sell Shares through their broker-dealers. However, the Fund creates and redeems
Shares only in blocks called Creation Baskets and Redemption Baskets,
respectively, and only Authorized Purchasers may purchase or redeem Creation
Baskets or Redemption Baskets. An Authorized Purchaser is under no obligation to
create or redeem baskets, and an Authorized Purchaser is under no obligation to
offer to the public Shares of any baskets it does create. Baskets are generally
created when there is a demand for Shares, including, but not limited to, when
the market price per Share is at (or perceived to be at) a premium to the NAV
per Share. Similarly, baskets are generally redeemed when the market price per
Share is at (or perceived to be at) a discount to the NAV per Share. Retail
investors seeking to purchase or sell Shares on any day are expected to affect
such transactions in the secondary market, on the NYSE Arca, at the market price
per Share, rather than in connection with the creation or redemption of
baskets.
The Sponsor believes that
by investing in Benchmark Component Futures Contracts, the Fund’s net asset
value (“NAV”) will closely track the Benchmark. The Sponsor also believes that
because of market arbitrage opportunities, the market price at which investors
will purchase and sell Shares through their broker-dealer will closely track the
Fund’s NAV. The Sponsor believes that the net effect of these relationships is
that the Fund’s market price on the NYSE Arca at which investors purchase and
sell Shares will closely track the bitcoin market, as measured by the
Benchmark.
The CFTC and U.S.
designated contract markets, such as the CME, have established position limits
and accountability levels on the maximum net long or net short Bitcoin Futures
Contracts that the Fund may hold, own or control. The current CME established
position limit level for investments in BTC Contracts for the spot month is
4,000 contracts. A position accountability level of 5,000 contracts will be
applied to positions in single months outside the spot month and in all months
combined. The MBT Contracts have a spot month limit of 200,000 contracts and a
position accountability level of 250,000 contracts. Open positions in MBT
Contracts will count as 1/50 of a BTC Contract for the purposes of determining
the aggregate position limit. Accountability levels are not fixed ceilings but
rather thresholds above which the exchange may exercise greater scrutiny and
control over an investor, including limiting the Fund to holding no more Bitcoin
Futures Contracts than the amount established by the accountability levels. The
potential for the Fund to reach position or accountability limits will depend on
if and how quickly the Fund’s net assets increase.
In addition to position
limits and accountability limits, the CME and other exchanges have set dynamic
price fluctuation limits on Bitcoin Futures Contracts. The dynamic price limit
functionality under the special price fluctuation limits mechanism assigns a
price limit variant which equals a percentage of the prior trading day’s
settlement price, or a price deemed appropriate. During the trading day, the
dynamic variant is utilized in continuous rolling 60-minute look-back periods to
establish dynamic upper and lower price fluctuation limits. Once the dynamic
price fluctuation limit has been reached in a particular Bitcoin Futures
Contract, no trades may be made at a price beyond that limit. The CME has
adopted daily dynamic price fluctuation limit functionality effective March 11,
2019, specifically, Rule 589 which is found in the following link: https://www.cmegroup.com/content/dam/cmegroup/notices/ser/2019/03/SER-8351.pdf.
When a Bitcoin Futures Contract has closed at its daily price fluctuation limit,
that limit price will be the daily settlement price that the CME publishes. The
Fund will use the published settlement price to price its Shares on that day. If
the CME halted trading in Bitcoin Futures Contracts for other reasons, including
if trading were halted for an entire trading day or several trading days, the
Fund would value its Bitcoin Futures Contracts by using the settlement price
that the CME publishes.
Position limits,
accountability limits and dynamic price fluctuation limits may limit the Fund’s
ability to invest the proceeds of Creation Baskets in Bitcoin Futures Contracts.
As a result, when the Fund offers to sell Creation Baskets it may be limited in
its ability to invest in Bitcoin Futures Contracts, including the Benchmark
Component Futures Contracts. The Fund may hold larger amounts of cash and cash
equivalents, which will impair the Fund’s ability to meet its investment
objective of tracking the Benchmark.
There is a minimum number
of baskets and associated Shares specified for the Fund. If the Fund experiences
redemptions that cause 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 five baskets. The minimum level of Shares specified
for the Fund is subject to change.
The Sponsor maintains a
public website on behalf of the Fund, http://hashdex-etfs.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 10,000 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 Bitcoin Futures Contracts traded on the CME. The Fund expressly disclaims any
association with the CME or endorsement of the Fund by such exchange and
acknowledges that “CME” is a registered trademark of such exchange.
Voting
Rights
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).
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
Trust, 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. In addition, Fund
shareholders holding Shares representing seventy-five percent (75%) of the
outstanding Shares of the Trust, 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.
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 in the “What Are the Risk
Factors Involved with an Investment in the Fund?” section, beginning on page
14.
● |
The Fund has no
operating history, so there is no performance history to serve as a basis
for you to evaluate an investment in the Fund. In addition, the Fund may
not be successful in implementing its investment objective or may fail to
attract sufficient assets. |
● |
Bitcoin and Bitcoin
Futures Contracts are a relatively new asset class and bitcoin is subject
to rapid changes, uncertainty and regulation that may adversely affect the
value of the bitcoin futures or the nature of an investment in the Fund
and may adversely affect the ability of the Fund to buy and sell Bitcoin
Futures Contracts or achieve its investment
objective. |
● |
Historically,
bitcoin and Bitcoin Futures Contracts have been subject to significant
price volatility. The price of Bitcoin Futures Contracts may differ
significantly from the spot price of
bitcoin. |
● |
The market for
Bitcoin Futures Contracts is less developed than older, more established
futures markets (such as corn or wheat futures) and may be more volatile
and less liquid. |
● |
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 bitcoin, and there
are risks involved in this investment strategy. The risks and hazards that
are inherent in the market for bitcoin may cause the price of bitcoin and
Bitcoin Futures Contracts 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 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. |
● |
In some cases, the
near month Bitcoin Futures Contract’s price will be lower than the next
month’s contract 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 bitcoin 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. By way of example,
during the period from 1/1/2019 to 6/30/2022, the market for Bitcoin
Component Futures Contracts were in contango approximately 90% of the
time, which resulted in an average annual negative roll yield of
approximately 7%. |
● |
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 seeks to
have changes in its Shares’ NAV track changes in the Benchmark, rather
than profit from speculative trading of Bitcoin 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). |
● |
Bitcoin and other
cryptocurrencies are a new and developing asset class subject to both
developmental and regulatory uncertainty. 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. |
● |
The Fund is subject
to position limits, accountability limits and dynamic price fluctuation
limits that could limit the Fund’s ability to invest the proceeds of
Creation Baskets in Bitcoin Futures Contracts. Position limits,
accountability limits and dynamic price fluctuation limits may cause
tracking error or may impair the Fund’s ability to meet its investment
objective of tracking the
Benchmark. |
● |
War and other
geopolitical events in Eastern Europe, including but not limited to Russia
and Ukraine, may cause volatility in bitcoin prices. These events are
unpredictable and may lead to extended periods of price
volatility. |
● |
The Fund currently
has two futures commission merchants (“FCMs”) through which it buys and
sells futures contracts. Volatility in the bitcoin futures market may lead
one or both of the Fund’s FCMs to impose risk mitigation procedures that
could limit the Fund’s investment in Bitcoin Futures Contracts beyond the
accountability and position limits imposed by the CME futures contract
exchange as discussed herein. An FCM could impose a financial ceiling on
initial margin that could change and become more or less restrictive on
the Fund’s activities depending upon a variety of conditions beyond the
Sponsor’s control. If the Fund’s other current FCM were to impose position
limits, or if any other FCM with which the Fund establishes a relationship
in the future were to impose position limits, the Fund’s ability to meet
its investment objective could be negatively impacted. The Fund continues
to monitor and manage its existing relationships with its FCMs and will
continue to seek additional relationships with FCMs as
needed. |
● |
The occurrence of a
severe weather event, natural disaster, terrorist attack, geopolitical
event, 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. For example, in late February 2022, Russia invaded Ukraine,
significantly amplifying already existing geopolitical tensions among
Russia and other countries in the region and in the West. The responses of
countries and political bodies to Russia’s actions, the larger overarching
tensions, and Ukraine’s military response and the potential for wider
conflict may increase financial market volatility generally, have severe
adverse effects on regional and global economic markets, and cause
volatility in the price of bitcoin, bitcoin futures and the Share price of
the Fund. |
● |
The ability of
Authorized Purchasers to create or redeem Shares may be suspended for
several reasons, including but not limited to the Fund voluntarily
imposing such restrictions. A suspension in the ability of Authorized
Purchasers to create or redeem Shares would have no impact on the Fund’s
investment objective – the Fund would continue to seek to track its
benchmark. However, with respect to the impact of a suspension on the
price of Fund Shares in the secondary market, investors may have to pay a
higher price to buy Shares and receive a lower price when they sell their
Shares. This “spread” may continue to widen the longer the suspension
lasts. |
● |
Market
fraud and/or manipulation and other fraudulent trading practices such as
the intentional dissemination of false or misleading information (e.g.,
false rumors) can, among other things, lead to a disruption of the orderly
functioning of bitcoin and Bitcoin Futures Contract markets, significant
market volatility, and cause the value of Bitcoin Futures Contracts to
fluctuate quickly and without warning. Depending on the timing of an
investor’s purchases and sales of the Fund’s Shares, these pricing
anomalies could cause the investor to incur
losses. |
● |
The Sponsor, Hashdex
and the Marketing Agents have entered into a “support agreement” that,
among other things, reflects the intention of the Parties to transition
some or all of Teucrium’s obligations to Toroso, Tidal, Hashdex, and/or
Victory Capital on a time schedule to be mutually agreed. The Sponsor will
remain the sole sponsor of the Fund until all necessary regulatory
approvals have been received. There can be no assurance that the
transferee parties are capable of continuing to manage the Fund so as to
achieve its investment objective. |
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. (ET) on each day that the NYSE Arca is open for trading.
Defined
Terms
For a glossary of defined
terms, see Appendix A.
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 $25.00 per Share, 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 $25.00 per Share, the
investment would have to generate a 0.92% or $0.23 return. The numbers in the
chart below have been rounded to the nearest 0.01.
|
|
|
|
Assumed initial
selling price per Share (1) |
$25.00 |
Management Fee
(0.94%) (2) |
$0.24 |
Estimated Brokerage
Commissions and Fees (3) |
$0.18 |
Other Fund Fees and
Expenses (4) |
$0.00 |
Interest and Other
Income (1.50%) (5) |
$(0.19) |
Amount of trading
income (loss) required for the redemption value at the end of one year to
equal the selling price of the Share |
$0.23 |
Percentage of
initial selling price per Share (6) |
0.92% |
(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
$25.00 per Share. Investors should note that, because ‘DEFI’s NAV will
change on a daily basis, the breakeven amount on any given day could be
higher or lower than the amount reflected
here. |
(2) |
From the Management
Fee, the Sponsor pays all of the routine operational, administrative and
other ordinary expenses of each Fund, generally as determined by the
Sponsor, including but not limited to, fees and expenses of the
Administrator, Custodian, Distributor, Transfer Agent, licensors,
accounting and audit fees and expenses, tax preparation expenses, legal
fees, ongoing SEC registration fees, individual Schedule K-1 preparation
and mailing fees, and report preparation and mailing expenses. These fees
and expenses are not included in the breakeven table because they are paid
for by the Sponsor through the proceeds from the Management
Fee. |
(3) |
Reflects estimated
brokerage commissions and fees for Bitcoin Futures Contract purchase or
sale and reflected on a per trade basis. The actual amount of brokerage
commissions and trading fees to be incurred will vary based upon the
trading frequency of the Fund. The Sponsor may elect to pay or waive a
portion of these fees. The Fund may elect to waive fees in order to reduce
the Fund’s expenses. |
(4)
|
The Fund pays all of
its non-recurring and unusual fees and expenses, if any, as determined by
the Sponsor. Non-recurring and unusual fees and expenses are unexpected or
unusual in nature, such as legal claims and liabilities and litigation
costs or indemnification or other unanticipated expenses. Extraordinary
fees and expenses also include material expenses which are not currently
anticipated obligations of the Fund. Routine operational, administrative
and other ordinary expenses are not deemed extraordinary
expenses.
|
(5) |
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, and money market funds. Management estimates that the blended
interest rate will be 1.50% for assets not held in initial margin, based
on the current interest rate environment and outlook as of July 31, 2022.
The actual rate may vary and not all assets of the Fund will earn
interest. |
(6) |
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 is 0.92% or $0.23 per
Share. |
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 10,000 Shares through the Distributor to Authorized
Purchasers. Authorized Purchasers may purchase Creation Baskets consisting
of 10,000 Shares at the Fund’s NAV. |
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 32% 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 due to, among others, price volatility caused by changes in the
fundamentals of the underlying bitcoin cryptocurrency markets resulting in
increased margin requirements by the exchange. 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. |
Creation and
Redemption |
Authorized
Purchasers pay a $300 fee per order to create Creation Baskets, and a $300
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. |
Inter-Series
Limitation on Liability |
While the Fund will
be one of six 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 would be
enforceable only against the assets of that series, and not against any
other series or the Trust generally or any of their respective assets. The
assets of the Fund and any other series will include only those funds and
other assets that are paid to, held by or distributed to the series on
account of and for the benefit of that series, including, without
limitation, amounts delivered to the Trust for the purchase of Shares in a
series. |
Registration
Clearance and Settlement |
Individual
certificates 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) purchasers in DTC such as banks, brokers,
dealers and trust companies, (2) those who maintain, either directly or
indirectly, a custodial relationship with a DTC purchaser, and (3) those
who hold interests in the Shares through DTC purchasers or indirect
purchasers, in each case who satisfy the requirements for transfers of
Shares. DTC purchasers acting on behalf of investors holding Shares
through such DTC purchasers’ 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 purchasers’ securities
accounts following confirmation of receipt of
payment. |
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. (ET) or the close of the New
York Stock Exchange each day. ICE Data Indices, LLC calculates and
disseminates 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 CME’s main pricing mechanism is
open. |
Fund
Expenses |
The Fund pays the
Sponsor a Management Fee, monthly in arrears, in an amount equal to 0.94%
per annum of the daily NAV of the Fund. The Management Fee is paid in
consideration of the Sponsor’s services related to the management of the
Fund’s business and affairs, including the provision of commodity futures
trading advisory services. The Fund pays all of its respective brokerage
commissions, including applicable exchange fees, NFA fees and give-up
fees, and other transaction related fees and expenses charged in
connection with trading activities for the Fund’s investments in CFTC
regulated investments. The Fund bears other transaction costs related to
the FCM capital requirements on a monthly basis. The Sponsor pays all of
the routine operational, administrative and other ordinary expenses of the
Fund, generally as determined by the Sponsor, including but not limited
to, fees and expenses of the Administrator, Custodian, Distributor,
Transfer Agent, licensors, accounting and audit fees and expenses, tax
preparation expenses, legal fees, ongoing SEC registration fees,
individual Schedule K-1 preparation and mailing fees, and report
preparation and mailing expenses. The Fund pays all of its non-recurring
and unusual fees and expenses, if any, as determined by the Sponsor.
Non-recurring and unusual fees and expenses are unexpected or unusual in
nature, such as legal claims and liabilities and litigation costs or
indemnification or other unanticipated expenses. Extraordinary fees and
expenses also include material expenses which are not currently
anticipated obligations of the Fund. Routine operational, administrative
and other ordinary expenses are not deemed extraordinary expenses. 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
$0.23 or 0.92% of the selling price. The total estimated fees and expenses
are expressed as a percentage of an estimated $2,500,000 million in
assets.
The Sponsor,
Marketing Agents and Digital Asset Advisor will bear the costs and
expenses related to the initial offer and sale of Shares, including
registration fees paid or to be paid to the SEC, Financial Industry
Regulatory Authority (“FINRA”) or any other regulatory body or
self-regulatory organization. None of the costs and expenses related to
the initial offer and sale of Shares, which are expected to total
approximately $270,000, are chargeable to the Fund, and the Sponsor,
Marketing Agents, and Digital Asset Advisor may not recover any of these
costs and expenses from the Fund. Total fees to be paid by the Fund are
currently estimated to be approximately 0.92% of the daily net assets of
the Fund for the twelve-month period after issuance, though this amount
may change in future years.
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.
|
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 purchasers, such
as banks and other financial institutions, which are not required to
register as broker-dealers to engage in securities transactions, and (2)
DTC purchasers. To become an Authorized Purchaser, a person must enter
into an Authorized Purchaser Agreement with the
Sponsor. |
Conflicts of
Interest |
There are present
and potential future conflicts of interest related to the Trust’s
structure and operation that you should consider before you purchase
Shares. These include, among others, conflicts related to the Sponsor
serving as the Sponsor to the other Teucrium Funds and to commodity pools
other than the Teucrium Funds in the future. A description of such
conflicts of interest can be found under “The Sponsor Has Conflicts of
Interest” on page 48. |
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 in Bitcoin
Further
Development and Acceptance of Bitcoin and the Bitcoin Network Is
Uncertain.
The further development
and acceptance of the Bitcoin Network, which is part of a new and rapidly
changing industry, is subject to a variety of factors that are difficult to
evaluate. The slowing, stopping or reversing of the development or acceptance of
the Bitcoin Network may adversely affect the price of bitcoin and therefore
cause the Fund to suffer losses. Regulatory changes or actions may alter the
nature of an investment in bitcoin or restrict the use of bitcoin or the
operations of the Bitcoin Network or venues on which bitcoin trades in a manner
that adversely affects the price of bitcoin and, therefore, the Fund’s Bitcoin
Futures Contracts. Bitcoin generally operates without central authority (such as
a bank) and is not backed by any government. Bitcoin is not legal tender and
federal, state and/or foreign governments may restrict the use and exchange of
bitcoin, and regulation in the United States is still developing. For example,
it may become difficult or illegal to acquire, hold, sell or use bitcoin in one
or more countries, which could adversely impact the price of bitcoin, and
therefore the value of the Fund’s Bitcoin Futures Contracts.
“Forks”
in Bitcoin Network Could Have Adverse Effects.
From time to time,
developers of the bitcoin network suggest changes to the bitcoin software. If a
sufficient number of users and miners elect not to adopt the changes, a new
digital asset, operating on the earlier version of the bitcoin software, may be
created. This is often referred to as a “fork.”
In August 2017, bitcoin
“forked” into bitcoin and a new digital asset, bitcoin cash, as a result of a
several-year dispute over how to increase the rate of transactions that the
Bitcoin network can process. Since then, bitcoin has been forked numerous times
to launch new digital assets, such as bitcoin gold, bitcoin silver and bitcoin
diamond. Additional hard forks of the Bitcoin blockchain could adversely affect
the market for Bitcoin Futures in which the Fund invests and, therefore, an
investment in the Fund. A substantial giveaway of bitcoin (sometimes referred to
as an “air drop”) may also result in significant and unexpected declines in the
value of bitcoin, Bitcoin Futures Contracts, and the Fund.
Rewards
for mining bitcoin are designed to decline over time, which may lessen the
incentive for miners to process and confirm transactions on the Bitcoin
Network.
Transactions in bitcoin
are processed by miners who are primarily compensated by receiving newly issued
bitcoin as a reward for successfully solving cryptological puzzles according to
a payment schedule that declines over time (in some instances, miners are also
compensated through voluntary fees paid by Bitcoin Network participants). If
this compensation is not sufficient to incentivize miners to process
transactions, the confirmation process for transactions, which acts as security
for the Bitcoin Network, may become slower and the Bitcoin Network may become
more vulnerable. These and similar events may have a significant adverse effect
on the price and liquidity of bitcoin and the value of an investment in the
Fund.
The
Bitcoin Network may face scalability challenges as it expands to a greater
number of users.
As with other digital
asset networks, the Bitcoin Network faces significant scaling challenges because
public blockchains generally face a tradeoff between security and scalability. A
decentralized network is less susceptible to manipulation or capture if more
participants, or “nodes,” are involved in the processing and maintenance of such
network. However, a greater number of nodes decreases the network’s efficiency
in processing transactions and may result in increased settlement times.
Increased settlement times could discourage certain uses for bitcoin (for
example, micropayments), and could reduce demand for and price of bitcoin, which
could adversely impact the value of an investment in the Fund.
Bitcoin
Markets Are Susceptible To Extreme Price Fluctuations, Theft, Loss and
Destruction.
The market price of
bitcoin has been subject to extreme fluctuations. If bitcoin markets continue to
be subject to sharp fluctuations, the Fund’s Shareholders may experience losses.
Similar to fiat currencies (i.e., a currency that is backed by a central bank or
a national, supra-national or quasi-national organization), bitcoin is
susceptible to theft, loss and destruction. Accordingly, the Fund’s Bitcoin
Futures are also susceptible to these risks. Cybersecurity risks of the Bitcoin
Protocol and of entities that custody or facilitate the transfers or trading of
bitcoin could result in a loss of public confidence in bitcoin, a decline in the
value of bitcoin and, as a result, adversely impact the Fund’s Bitcoin Futures
Contracts.
Bitcoin
Ownership is Concentrated in a Small Number of Holders Referred to as
‘Whales.’
A significant portion of
bitcoin is held by a small number of holders who have the ability to affect the
price of bitcoin and who are sometimes referred to as “whales.” Because bitcoin
is lightly regulated, bitcoin whales have the ability, alone or in coordination,
to manipulate the price of bitcoin by restricting or expanding the supply of
bitcoin. Activities of bitcoin whales that reduce user confidence in bitcoin,
the Bitcoin Network or the fairness of bitcoin trading venues, or that affect
the price of bitcoin, could have a negative impact on the value of an investment
in the Fund.
Bitcoin
Exchanges Are Unregulated and May Be More Exposed to Fraud and
Failure.
Bitcoin exchanges and
other trading venues on which bitcoin trades are relatively new and, in most
cases, largely unregulated and may therefore be more exposed to fraud and
failure than established, regulated exchanges for securities, derivatives and
other currencies. The Fund’s indirect investment in bitcoin remains subject to
volatility experienced by the bitcoin exchanges and other bitcoin trading
venues. Such volatility can adversely affect an investment in the Fund. Bitcoin
exchanges have in the past stopped and may in the future stop operating or
permanently shut down due to fraud, cybersecurity issues, manipulation,
technical glitches, hackers or malware, which may also affect the price of
bitcoin and thus the Fund’s indirect investment in bitcoin. Fraud and failure
related to such bitcoin exchanges could result in a loss of public confidence in
bitcoin and a decline in the value of bitcoin, which could adversely impact the
adoption of bitcoin or acceptance of bitcoin and cause a decline in value of the
Fund’s Bitcoin Futures Contracts.
Networked
Systems Are Vulnerable to Attacks.
All networked systems are
vulnerable to various kinds of attacks. As with any computer network, the
Bitcoin network contains certain flaws. For example, the Bitcoin network is
currently vulnerable to a “51% attack” where, if a mining pool were to gain
control of more than 50% of the “hash” rate, or the amount of computing and
process power being contributed to the network through mining, a malicious actor
would be able to gain full control of the network and the ability to manipulate
the blockchain. A significant portion of bitcoin is held by a small number of
holders sometimes referred to as “whales.” These holders have the ability to
manipulate the price of bitcoin.
Cybersecurity
Risk.
As a digital asset,
bitcoin is subject to cybersecurity risks, including the risk that malicious
actors will exploit flaws in its code or structure that will allow them to,
among other things, steal bitcoin held by others, control the blockchain, steal
personally identifying information, or issue significant amounts of bitcoin in
contravention of the Bitcoin Protocols. The occurrence of any of these events is
likely to have a significant adverse impact on the price and liquidity of
bitcoin and Bitcoin Futures Contracts and therefore the value of an investment
in the Fund. Additionally, the Bitcoin network’s functionality relies on the
Internet. A significant disruption of Internet connectivity affecting large
numbers of users or geographic areas could impede the functionality of the
Bitcoin network. Any technical disruptions or regulatory limitations that affect
Internet access may have an adverse effect on the Bitcoin network, the price of
bitcoin and Bitcoin Futures Contracts, and the value of an investment in the
Fund.
Limited
Adoption and Ability to Use Bitcoin to Purchase Goods.
Currently, there is
relatively limited use of bitcoin in the retail and commercial marketplace in
comparison to relatively extensive use as a store of value, thus contributing to
price volatility that could adversely affect the Fund’s Bitcoin Futures
Contracts. Bitcoin is not currently a form of legal tender in the United States
and has only recently become selectively accepted as a means of payment for
goods and services by some retail and commercial outlets, and the use of bitcoin
by consumers to pay such retail and commercial outlets remains limited. Banks
and other established financial institutions may refuse to process funds for
bitcoin transactions; process wire transfers to or from bitcoin trading venues,
bitcoin-related companies or service providers; or maintain accounts for persons
or entities transacting in bitcoin or providing bitcoin-related services. In
addition, some taxing jurisdictions, including the U.S., treat the use of
bitcoin as a medium of exchange for goods and services to be a taxable sale of
bitcoin, which could discourage the use of bitcoin as a medium of exchange,
especially for a holder of bitcoin that has appreciated in value.
Risks
to Bitcoin from Other parts of the Cryptocurrency Market.
The price of bitcoin and
the bitcoin market generally may be adversely impacted by developments in other
parts of the cryptocurrency market. The acceptance of bitcoin and cryptocurrency
generally depends on a number of factors, including adverse developments in the
cryptocurrency market that could impact investor confidence. For example,
“stablecoins” have been developed to enhance the value of cryptocurrency to be
used like fiat currency in transactions in goods and services. Adverse
developments such as the recent “depegging”: of the TerraUSD stablecoin may
undermine confidence in the cryptocurrency markets generally and cause decreases
in the price of cryptocurrencies such as bitcoin.
Hacking
Risk of Theft of Private Keys.
Due to the nature of
private keys, bitcoin transactions are irrevocable and stolen or incorrectly
transferred bitcoin may be irretrievable, and as a result, any incorrectly
executed bitcoin transactions could adversely affect the price and liquidity of
bitcoin, which may indirectly affect the price and liquidity of the Bitcoin
Futures Contracts.
Environmental
risks from bitcoin mining.
Bitcoin mining currently
requires computing hardware that consumes large amounts of electricity. By way
of electrical power generation, many bitcoin miners rely on fossil fuels to
power their operations. Public perception of the impact of bitcoin mining on
climate change may reduce demand for bitcoin and increase the likelihood of
regulation that limits bitcoin mining or restricts energy usage by bitcoin
miners. Such events could have an impact on the price of bitcoin, bitcoin
futures, and the performance of the Fund.
Risks
Associated with Investing in Bitcoin Futures Contracts
Investing
in Bitcoin Futures Contracts subjects the Fund to the Risks of the Bitcoin
Market.
The Fund is subject to the
risks and hazards of the bitcoin market because it invests in Bitcoin Futures
Contracts listed on the CME. The risks and hazards that are inherent in the
bitcoin market may cause the price of bitcoin and the Fund’s Shares to fluctuate
widely and you could incur a partial or total loss of your investment in the
Fund. The prices of bitcoin and bitcoin futures contracts have historically been
highly volatile. The value of the Fund’s investments in bitcoin futures – and
therefore the value of an investment in the Fund – could decline significantly
and without warning, including to zero. If you are not prepared to accept
significant and unexpected changes in the value of the Fund and the possibility
that you could lose your entire investment in the Fund you should not invest in
the Fund.
The
Bitcoin Futures Contracts listed on the CME are a relatively new type of futures
contract that may be less developed than other, more established futures
markets.
The Bitcoin Futures
Contracts listed on the CME are a relatively new type of futures contract that
may be less developed than more established futures markets (such as the futures
markets for corn or wheat). Accordingly, although BTC Contracts have traded on
the CME since December 2017 and MBT Contracts have traded on the CME since May
2021 and the market for exchange listed Bitcoin Futures Contracts has grown
since inception, the market for Bitcoin Futures Contracts may be riskier, less
liquid, more volatile and more vulnerable to economic, market, industry,
regulatory and other changes than more established futures contracts. The
liquidity of the market for BTC Contracts and MBT Contracts will depend on,
among other things, the supply and demand for Bitcoin Futures Contracts,
speculative interest in the market for Bitcoin Futures Contracts and the
potential ability to hedge against the price of bitcoin with Bitcoin Futures
Contracts.
An
investment in the Fund is subject to the risks of an investment in futures
contracts.
An investment in the Fund
is subject to the risks of an investment in futures contracts, which are complex
instruments that are often subject to a high degree of price variability.
Because the price of Bitcoin Futures Contracts is linked to the price of
bitcoin, an investment in the Fund may be riskier than other exchange-traded
products that do not hold financial instruments related to bitcoin and may not
be suitable for all investors.
Futures
contracts are subject to inherent leverage risk because they are typically
secured by margin deposits representing a small percentage of a futures
contract’s entire market value.
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 entire market value. This feature creates the potential for
commodity pools to “leverage” their assets by purchasing or selling futures
contracts with an aggregate notional amount in excess of the commodity pool’s
assets. While futures contracts are generally subject to leverage risk, the NYSE
Arca rule under which the Fund’s Shares will be listed and traded prevents the
Fund from utilizing leverage.
Pricing
anomalies in the bitcoin futures market could cause losses.
Market
fraud and/or manipulation and other fraudulent trading practices such as the
intentional dissemination of false or misleading information (e.g., false
rumors) can, among other things, lead to a disruption of the orderly functioning
of markets, significant market volatility, and cause the value of bitcoin
futures to fluctuate quickly and without warning. Depending on the timing of an
investor’s purchases and sales of the Fund’s Shares, these pricing anomalies
could case the investor to incur losses.
Risks
of Government Regulation.
The Financial Industry
Regulatory Authority (“FINRA”) issued a notice on March 8, 2022 seeking comment
on measures that could prevent or restrict investors from buying a broad range
of public securities and products designated as “complex products” – which could
include each Exchange Traded Product offered by the Sponsor. The ultimate
impact, if any, of these measures remain unclear. However, if regulations are
adopted, they could, among other things, prevent or restrict investors’ ability
to buy the Fund.
Correlation
Risk
The
Benchmark is not designed to correlate with the spot price of bitcoin, and this
could cause the changes in the price of the Shares to substantially vary from
the changes in the spot price of bitcoin. Therefore, you may not be able to
effectively use the Fund to hedge against bitcoin related losses or to
indirectly invest in bitcoin.
The correlation between
changes in such Bitcoin Futures Contracts and the spot price of bitcoin will be
only approximate. Weak correlation between the Benchmark and the spot price of
bitcoin may result from the factors discussed above. Imperfect correlation may
also result from speculation in Benchmark Component Futures Contracts, and/or
technical or other factors that may influence the trading of Benchmark Component
Futures Contracts. If there is a weak correlation between the Benchmark and the
spot price of bitcoin, then the price of Shares may not accurately track the
spot price of bitcoin and you may not be able to effectively use the Fund as a
way to hedge the risk of losses in your bitcoin related transactions or as a way
to indirectly invest in bitcoin.
Moreover, while there is a
spot bitcoin index calculated by the CME that is based on price feeds from
certain designated bitcoin spot market exchanges, the Fund will generally not
directly price off of this index. This is because the Fund will roll its futures
holdings prior to settlement of the expiring contract and intends to never carry
futures positions all the way to cash settlement (the only date that the BTC
Contracts and MBT Contracts settle to the CME spot price index). The Fund will
only price off of Bitcoin Futures Contracts volume-weighted average price (VWAP)
daily settlement price, which might cause the Fund’s NAV to differ from spot
bitcoin prices.
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 bitcoin related losses or as a way to indirectly
invest in bitcoin.
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. To the extent these expenses are not covered by the Management Fee, and
income from short-term financial instruments may cause imperfect correlation
between changes in the Fund’s NAV and changes in the Benchmark. Differences
between returns based on the price of bitcoin and an investment in the Fund may
also be attributable to additional costs related to futures investing and other
fund expenses.
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 BTC Contract is for a specified amount of bitcoin, 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 might not invest the
entire proceeds from the purchase of the Creation Basket in such futures
contracts. (As an example, assume that a Creation Basket is sold by the Fund,
and that the Fund’s closing NAV per Share is $25.00. In that case, the Fund
would receive $250,000 in proceeds from the sale of the Creation Basket ($25.00
NAV per Share multiplied by 10,000 Shares and ignoring the Creation Basket fee
of $300). 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 $188,175 (or otherwise not a round number), the Fund would be
unable to buy an exact number of BTC Contracts with an aggregate market value
equal to $250,000. In this case, the Fund would be able to purchase 1 BTC Contract with an aggregate market
value of approximately $188,175 and 16 MBT Contracts at $3,750 with an aggregate
market value of approximately $60,000, bringing the aggregate value of proceeds
to $248,175.) Any amounts not invested in Benchmark Component Futures Contracts
are held in cash and cash equivalents.
The Benchmark Component
Futures Contracts reflect the price of bitcoin for future delivery, not the
current spot price of bitcoin, so at best the correlation between changes in
such Bitcoin Futures Contracts and the spot price of bitcoin will be only
approximate. Weak correlation between the Benchmark and the spot price of
bitcoin may result from fluctuations in bitcoin 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 bitcoin, then the
price of Shares may not accurately track the spot price of bitcoin and you may
not be able to effectively use the Fund as a way to hedge the risk of losses in
your bitcoin related transactions or as a way to indirectly invest in
bitcoin.
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 bitcoin market. On the other
hand, if the Fund’s NAV is equal to 100.9 times the value of a single Bitcoin
Futures Contract, it can purchase 100 such contracts, resulting in 99.1%
exposure.
There may be significant
volatility in the market for Bitcoin Futures Contracts. This volatility, in
turn, may make it more difficult for Authorized Purchasers and other market
purchasers to be able to identify a reliable price for Bitcoin Futures
Contracts. Without reliable prices, Authorized Purchasers and other market
purchasers may reduce their role in the market arbitrage process or “step away”
from these activities. This, in turn, might inhibit the effectiveness of the
arbitrage process in maintaining the relationship between the underlying value
of the Fund’s Bitcoin Futures Contracts and the Fund’s market price. This
reduced effectiveness could result in Fund Shares trading at a price which
differs materially from NAV and also in greater than normal intraday bid/ask
spreads for Fund Shares.
Position
limits, accountability levels and dynamic 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
bitcoin related losses or as a way to indirectly invest in bitcoin.
The CFTC and U.S.
designated contract markets, such as the CME, have established position limits
and accountability levels on the maximum net long or net short BTC Contracts
that the Fund may hold, own or control. Spot position limits are set at 4,000
contracts. A position accountability level of 5,000 contracts will be applied to
positions in single months outside the spot month and in all months combined.
The MBT Contracts have a spot month limit of 200,000 contracts and a position
accountability level of 250,000 contracts. Accountability levels are not fixed
ceilings but rather thresholds above which the exchange may exercise greater
scrutiny and control over an investor, including limiting the Fund to holding no
more Bitcoin Futures Contracts than the amount established by the accountability
level. The potential for the Fund to reach position or accountability limits
will depend on if and how quickly the Fund’s net assets increase.
In addition to position
limits and accountability limits, the CME places daily price fluctuation limits
on Bitcoin Futures Contracts that represent the maximum daily price range
permitted for a contract. Once a price fluctuation limit has been reached, no
trades may be made at a price beyond that limit. Under the price fluctuation
mechanism that was initially put into place when Bitcoin Futures Contracts were
launched on the CME in December 2017, price fluctuation limits were triggered
116 times. In March 2019, the CME adopted a dynamic price fluctuation mechanism.
This mechanism assigns an initial opening price fluctuation limit equal to a
percentage of the prior trading day’s settlement price (or a different price if
deemed more appropriate), which then moves with the market throughout the day.
Since dynamic price fluctuation limits were introduced, price limits have been
triggered 89 times and there has been one "hard limit move." A hard limit move
is when the price of Bitcoin Futures Contracts exceeds a price limit that
defines the minimum/maximum price to which such Bitcoin Futures Contracts can
move for the given trade date. If the hard limit is reached, trade matching will
not occur at prices above the maximum price or below the minimum
price.
Position limits,
accountability limits and dynamic price fluctuation limits may limit the Fund’s
ability to invest the proceeds of Creation Baskets in Bitcoin Futures Contracts.
As result, when the Fund sells Creation Baskets it may be limited in its ability
to invest in Bitcoin Futures Contracts, including the Benchmark Component
Futures Contracts. In such case, the Fund may hold larger amounts of cash and
cash equivalents, which will impair the Fund’s ability to meet its investment
objective of tracking the Benchmark.
Price fluctuation limits
may contribute to a lack of liquidity and have a negative impact on Fund
performance. During periods of market illiquidity, including periods of market
disruption and volatility, it may be difficult or impossible for the Fund to buy
or sell futures at desired prices or at all.
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 cost of
electricity, regulation, market disruptions, cyber-attacks and political events
may have a larger impact on bitcoin and bitcoin 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 bitcoin 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.
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 bitcoin related losses or
indirectly invest in bitcoin.
Futures
Commission Merchant Risks
The
Fund Has Two Futures Commission Merchants.
The Fund currently has two
futures commission merchants (“FCMs”) through which it buys and sells futures
contracts. Volatility in the bitcoin futures market may lead one or both of the
Fund’s FCMs to impose risk mitigation procedures that could limit the Fund’s
investment in Bitcoin Futures Contracts beyond the accountability and position
limits imposed by the CME futures contract exchange as discussed herein. An FCM
could impose a financial ceiling on initial margin that could change and become
more or less restrictive on the Fund’s activities depending upon a variety of
conditions beyond the Sponsor’s control. If the Fund’s FCMs were to impose
position limits, or if any other FCM with which the Fund establishes a
relationship in the future were to impose position limits, the Fund’s ability to
meet its investment objective could be negatively impacted. The Fund continues
to monitor and manage its existing relationships with its FCMs and will continue
to seek additional relationships with FCMs as needed.
Risks
Associated With the Fund’s Investment In Cash and Cash Equivalents
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 bitcoin. 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.
Risk
Related To Lack of Liquidity
Certain
of the Fund’s Investments Could Be Illiquid, Which Could Cause Large Losses to
Investors at any Time or from Time to Time.
If the Fund’s ability to
obtain exposure to Bitcoin Futures Contracts in accordance with its investment
objective is disrupted for any reason including, because of limited liquidity in
the bitcoin futures market, a disruption to the bitcoin futures market, or as a
result of margin requirements or position limits imposed by the Fund’s futures
commission merchants, the CME, or the CFTC, the Fund may not be able to achieve
its investment objective and may experience significant losses. Any disruption
in the Fund’s ability to obtain exposure to Bitcoin Futures Contracts will cause
the Fund’s performance to deviate from the performance of Bitcoin Futures
Contracts. In addition, the Fund might grow to a size where a lack of liquidity
in the futures market meant that the Fund could not sell enough futures
contracts to honor redemption requests. For further information regarding the
impact if suspending redemptions, see “Suspension or Rejection of Redemption” on
page 45.
A market disruption, such
as a government taking regulatory or other actions that disrupt the market in
bitcoin, 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.
The
Fund and Other Funds with Similar Investment Strategies May Try To Exit
Positions at the Same Time.
If the Fund and other
funds with similar investment strategies try to exit their Bitcoin Futures
Contract positions at the same time, such a mass exit could have detrimental
effect on price and liquidity, and you could incur losses in your investment in
Shares of the Fund.
Hedging
Risk
If the
nature of the purchasers in the futures market shifts such that bitcoin
purchasers are the predominant hedgers in the market, the Fund might have to
reinvest at higher futures prices or choose other bitcoin
interests.
The changing nature of the
purchasers in the bitcoin market will influence whether bitcoin futures prices
are above or below the expected future spot price. Holders of bitcoin will
typically seek to hedge against falling bitcoin prices by selling Bitcoin
Futures Contracts. Therefore, if holders of bitcoin become the predominant
hedgers in the futures market, prices of Bitcoin Futures Contracts will
typically be below expected future spot prices. Conversely, if the predominant
hedgers in the futures market are the holders of bitcoin who purchase Bitcoin
Futures Contracts to hedge against a rise in prices, prices of Bitcoin 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 Bitcoin Futures
Contract that is no longer a Benchmark Component Futures Contract and purchase a
new Bitcoin Futures Contract or to sell a Bitcoin Futures Contract to meet
redemption requests.
The
price relationship between the Benchmark Component Futures Contracts at any
point in time and the Bitcoin 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
bitcoin price indices.
The design of the Fund’s
Benchmark is such that the Benchmark Component Futures Contracts will change on
a monthly basis, and the Fund’s investments may be rolled periodically to
reflect the changing composition of the Benchmark. In the event of a bitcoin
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 bitcoin 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 may be selling more
expensive contracts and buying less expensive ones on an ongoing basis.
Conversely, in the event of a bitcoin 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
bitcoin 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 may 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 bitcoin.
In the event of a prolonged period of contango, and absent the impact of rising
or falling bitcoin 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.
The design of the Fund’s
Benchmark is such that the Benchmark Component Futures Contracts will change on
a monthly basis, with the contracts with the shortest maturity being replaced
with contracts with a longer maturity. Sometimes the Fund will have to pay more
for longer maturity contracts to replace existing shorter maturity contracts
about to expire. This situation is known as “contango” in the futures markets.
In the event of a prolonged period of contango, and absent the impact of rising
or falling bitcoin prices, this could have a negative impact on the Fund’s NAV
and total return, which in turn may have a negative impact on your investment in
the Fund. By way of example, during the period from 1/1/2019 to 6/30/2022, the
market for Bitcoin Component Futures Contracts were in contango approximately
90% of the time, which resulted in an average annual negative roll yield of
approximately 7%.
If the futures market is
in contango (i.e., when the price of bitcoin in the future is to be more than
the current price), the Fund will buy later to expire contracts for a higher
price than the soon to expire contracts that it sells. All other things being
equal, a situation involving prolonged periods of contango may adversely impact
the returns of the Fund.
Regulatory
Risk
Lack
of Regulation of the Bitcoin Market.
Bitcoin, the Bitcoin
Network and the bitcoin trading venues are relatively new and, in most cases,
largely unregulated. As a result of this lack of regulation, individuals, or
groups may engage in insider trading, fraud or market manipulation with respect
to bitcoin. Such manipulation could cause investors in bitcoin to lose money,
possibly the entire value of their investments. Over the past several years, a
number of bitcoin trading venues have been closed due to fraud, failure or
security breaches. The nature of the assets held at bitcoin trading venues make
them appealing targets for hackers and a number of bitcoin trading venues have
been victims of cybercrimes and other fraudulent activity. These activities have
caused significant, in some cases total, losses for bitcoin investors. Investors
in bitcoin may have little or no recourse should such theft, fraud or
manipulation occur. There is no central registry showing which individuals or
entities own bitcoin or the quantity of bitcoin that is owned by any particular
person or entity. There are no regulations in place that would prevent a large
holder of bitcoin or a group of holders from selling their bitcoins, which could
depress the price of bitcoin, or otherwise attempting to manipulate the price of
bitcoin or the Bitcoin Network. Events that reduce user confidence in bitcoin,
the Bitcoin Network and the fairness of bitcoin trading venues could have a
negative impact on the price of bitcoin and the value of an investment in the
Fund.
Risk
of Illicit Activities.
As bitcoins have grown in
both popularity and market size, the U.S. Congress and a number of U.S. federal
and state agencies (including the Financial Crimes Enforcement Network of the
U.S. Department of the Treasury (“FinCEN”), SEC, CFTC, the Financial Industry
Regulatory Authority, Inc. (“FINRA”), the Consumer Financial Protection Bureau
(“CFPB”), the Department of Justice, the Department of Homeland Security, the
Federal Bureau of Investigation, the IRS, and state financial institution
regulators) have been examining the Bitcoin Network, bitcoin users and the
Bitcoin Exchange Market, with particular focus on the extent to which bitcoins
can be used to launder the proceeds of illegal activities or fund criminal or
terrorist enterprises and the safety and soundness of exchanges or other service
providers that hold bitcoins for users. The imposition of stricter governmental
regulation of the bitcoin market may adversely impact the activities of the
Fund, for example, by reducing the liquidity of the bitcoin
markets.
Regulation
of futures markets, futures contracts and futures exchanges is extensive and
constantly changing; future regulatory developments are impossible to predict
but may significantly and adversely affect the Fund. This risk is especially
heightened for cryptocurrency derivatives and cryptocurrencies.
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 dynamic price limits and the suspension of
trading on an exchange or trading facility.
The regulation of bitcoin
interest and crypto derivatives transactions in the United States is a rapidly
changing area of law and is subject to ongoing modification by governmental and
judicial action. Congress enacted the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the “Dodd-Frank Act”) in 2010. As the Dodd-Frank Act continues
to be implemented by the CFTC and the SEC, there is a possibility of future
regulatory changes within the United States altering, perhaps to a material
extent, the nature of an investment in the Fund, or the ability for the Fund to
continue to implement its investment strategy. In addition, various national
governments outside of the United States have expressed concern regarding the
disruptive effects of speculative trading in the commodities and crypto
derivatives 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.
The regulation of
cryptocurrency derivatives and cryptocurrencies continues to evolve.
Inconsistent, changing and sometimes conflicting regulations may make it more
difficult for Bitcoin businesses to provide services, which may slow the
adoption of the Bitcoin economy and may impede consumer adoption of Bitcoin.
Future regulatory changes may materially alter the ability to buy and sell
Bitcoin and Bitcoin futures or could impact the ability of the Fund to achieve
its investment objective. This may alter the nature of an investment in the Fund
or the ability of the Fund to continue to operate as planned.
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 applicable
provisions of the Trust Agreement and Delaware law, the Fund has broad authority
to make changes to the Fund’s operations. The Fund may change its investment
objective, Benchmark, or investment strategies and Shareholders of the Fund will
not have any rights with respect to these changes. Changes are 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 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 expressly provided by that statute, including
provisions preventing Fund insiders from managing the Fund to their benefit and
to the detriment of Fund Shareholders; provisions preventing the Fund from
issuing securities having inequitable or discriminatory provisions; provisions
preventing Fund management by irresponsible persons; provisions preventing the
use of unsound or misleading methods of computing Fund earnings and asset value;
provisions prohibiting suspension of redemptions (except under limited
circumstances); provisions limiting fund leverage; provisions imposing a
fiduciary duty on fund managers with respect to receipt of compensation for
services; and provisions preventing changes in the Fund's character without the
consent of Fund Shareholders.
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.
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.
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 Sponsor pays the fees, costs, and expenses
of the Fund. If the Sponsor and the Fund are unable to raise sufficient funds so
that the expenses are reasonable in relation to the Fund’s 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
Sponsor 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.
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.
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 lower than the current rate estimated 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 positions. Under normal
circumstances, the NAV reflects the quoted CME 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, when a bitcoin futures contract
has closed at its price fluctuation limit the Fund will use the daily CME
settlement price for the determination of NAV.
Purchases
or redemptions of creation units in cash may cause the Fund to incur certain
costs or recognize gains or losses.
Purchases and redemptions
of creation units will be transacted in cash rather than ‘in-kind’ where
creation units are purchased and redeemed in exchange for underlying constituent
securities. Purchases of creation baskets with cash may cause the Fund to incur
certain costs including brokerage commissions and redemptions of creation
baskets with cash may result in the recognition of gains or losses that the Fund
might not have incurred if it had made redemptions in-kind.
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
0.94% 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
purchasers 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 purchaser 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 five baskets. The minimum level of Shares specified
for the Fund is subject to change. (The current number of Shares outstanding
will be posted daily on our website, http://hashdex-etfs.com/.)
The
postponement, suspension or rejection of purchase or redemption orders could
adversely affect a Shareholder redeeming their Shares in the Fund.
The postponement,
suspension or rejection of creation or redemption orders may adversely affect an
investment in the Shares of the Fund. To the extent orders are suspended or
rejected, the arbitrage mechanism resulting from the process through which
Authorized Purchasers create and redeem Shares directly with the Fund may fail
to closely link the price of the Shares to the value of the underlying Bitcoin
Futures Contracts, as measured using the Benchmark. If this is the case, the
liquidity of the Shares may decline, and the price of the Shares may fluctuate
independently of the Benchmark and may fall.
There are no limitations
on the Sponsor’s discretion to postpone, suspend or reject purchase or
redemption orders under the Securities Act, NYSE Arca rules, or SEC listing
orders permitting the listing and trading of the fund’s Shares on NYSE Arca. In
addition, Shareholders of the Fund will not have the protections provided in
this regard that are applicable to funds regulated under the Investment Company
Act of 1940.
Investors
may not be able to buy or sell Shares of the Fund through their current
brokerages.
Because of volatility and
other risks associated with bitcoin-related investments, brokerage firms may
limit or not permit trading in such investments. Because of current or future
brokerage policies regarding bitcoin-linked securities, investors could have
difficulty selling Shares through their brokerage and potentially face
restrictions when or how they could trade their Shares.
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 bitcoin 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 bitcoin 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.
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
cryptocurrency derivative 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.
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 who buy the Fund’s Shares at a market price that is a
premium to NAV face a risk of loss if the market price of their Shares
subsequently converges with NAV per Share. 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 by the NYSE
Arca 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.
Such market conditions or other reasons may include when there is significant
news directly related to the Fund that, in NYSE Arca’s view or per existing NYSE
Arca rules, requires a trading halt, such as when the Sponsor announces news
relating to changes/disruptions in the Fund’s create/redeem process during
market trading hours. In addition, market conditions that would result in
trading halts may also include extraordinary market volatility that trigger
rules requiring trading to be halted for a specified period based on a specified
market decline. NYSE Arca might also halt trading if there is insufficient
trading in BTC or MBT Contracts. 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.
A
Pause in Bitcoin Futures Contracts May lead To Gaps Between Prices in Spot and
Futures Markets.
On May 19, 2021, the CME
Group temporarily paused trading of bitcoin futures after the bitcoin futures
market opened to a large price gap between the derivatives and the underlying
crypto asset that triggered CME circuit breakers. Due to the misaligned trading
periods between spot and futures markets, such gaps, which can be positive or
negative, have the potential to frequently exist and, when CME circuit breakers
limit the trading in bitcoin futures markets, bid/ask spreads in Shares of the
Fund trading on the NYSE ARCA may be significantly wider than when bitcoin
futures markets are trading without restrictions, which may adversely impact
your ability to buy or sell Shares in the Fund at a particular
price.
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.
The
Fund is newly formed and may not be successful in implementing its investment
objective or attracting sufficient assets.
The Fund is a new fund,
with a limited or no operating history and a small asset base. There can be no
assurance that the Fund will grow to or maintain a viable size. Due to the
Fund’s small asset base, the Fund’s portfolio transaction costs and any costs
that are not paid by the Sponsor pursuant to the Management Fee, may be
relatively higher than those of a fund with a larger asset base. To the extent
that the Fund does not grow to or maintain a viable size, it may be liquidated,
and the expenses, timing and tax consequences of such liquidation may not be
favorable to some Shareholders. In this regard, as of the date of this
prospectus there are three bitcoin futures-based ETFs. The first fund launched
has obtained significantly more assets than the other two. To the extent that
this "first mover" advantage continues to favor the first fund launched, this
might constrain the Fund's growth.
Sponsoring
the Fund will be the Sponsor’s first experience in the crypto asset
markets.
There are risks related to
the Sponsor’s lack of experience in the crypto asset markets, particularly with
respect to marketing the Fund. To address this risk, the Sponsor has entered
into the Support Agreement discussed above, under which Hashdex and Victory
Capital will provide crypto asset related marketing services. To the extent that
the Fund does not grow to or maintain a viable size, it may be liquidated, and
the expenses, timing and tax consequences of such liquidation may not be
favorable to some Shareholders.
Existing
or future bitcoin futures based ETFs may have significantly lower management
fees, which may impede the growth of the Fund.
Existing and future
bitcoin futures based ETFs may have fees that are significantly lower than the
Fund's. To the extent that the Fund has relatively higher fees than other such
funds, this could impede growth of the Fund, possibly result in a lower NAV per
Share, and otherwise pose a material risk to investors.
There
are risks related to the Support Agreement and the planned transfer of
operations to new management.
There are risks related to
the Support Agreement and the planned transfer of operations to new management.
Among other things, following the transfer of operations to Toroso, Toroso may
not manage the Fund as effectively as the Sponsor. In addition, because a
timeline for the transfer has not yet been determined, it is not known when the
transfer of management will occur.
The
Market for Bitcoin Futures-Based ETFs May Reach Saturation
The market for bitcoin
futures-based ETFs like the Fund may reach a point where there is little or no
additional investor demand. If this happens, there can be no assurance that the
Fund will grow to or maintain a viable size. Due to the Fund’s small asset base,
certain of the Fund’s expenses and its portfolio transaction costs may be higher
than those of a fund with a larger asset base. To the extent that the Fund does
not grow to or maintain a viable size, it may be liquidated, and the expenses,
timing and tax consequences of such liquidation may not be favorable to some
Shareholders.
Potential
Conflicts of Interest
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.
The
Sponsor’s principals, officers or employees may trade securities and futures and
related contracts for their own accounts.
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.
Shareholder
Voting Rights and Liability
Shareholders
have only very limited voting rights and generally will not have the power to
replace the Sponsor. Shareholders will not participate in the management of the
Fund and do not control the Sponsor so they will not have influence over basic
matters that affect the Fund.
Shareholders will have
very limited voting rights with respect to the Fund’s affairs. Shareholders may
elect a replacement sponsor only if the current Sponsor resigns voluntarily or
loses its corporate charter. Shareholders will not be permitted to participate
in the management or control of the Fund or the conduct of its business.
Shareholders must therefore rely upon the duties and judgment of the Sponsor to
manage the Fund’s affairs.
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.
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
Fund does not expect to make cash distributions.
The Sponsor intends to
re-invest any income and realized gains of the Fund in additional Benchmark
Component Futures Contracts or cash and cash equivalents rather than
distributing cash to Shareholders. Therefore, unlike mutual funds, commodity
pools or other investment pools that generally distribute income and gains to
their investors, the Fund generally will not distribute cash to Shareholders.
You should not invest in the Fund if you will need cash distributions from the
Fund to pay taxes on your Share of income and gains of the Fund, if any, or for
any other reason. Although the Fund does not intend to make cash distributions,
it reserves the right to do so in the Sponsor’s sole discretion, in certain
situations, including for example, if the income earned from its investments
held directly or posted as margin may reach levels that merit distribution,
e.g., at levels where such income is not necessary to support its underlying
investments in Benchmark Component Futures Contracts and investors adversely
react to being taxed on such income without receiving distributions that could
be used to pay such tax. Cash distributions may be made in these and similar
instances.
Event
Risk
The
occurrence of a severe weather event, natural disaster, terrorist attack,
outbreak or public health emergency as declared by the World Health
Organization, the continuation or expansion of war or other hostilities, or a
prolonged government shutdown may have significant adverse effects on the Fund
and its investments and alter current assumptions and expectations.
The operations of the
Fund, the exchanges, brokers and counterparties with which the Fund does
business, and the markets in which the Fund does business could be severely
disrupted in the event of a severe weather event, natural disaster, major
terrorist attack, cyber-attack, data breach, outbreak or public health emergency
as declared by the World Health Organization (such as the recent pandemic spread
of the novel coronavirus known as COVID-19), or the continuation or expansion of
war or other hostilities. Global terrorist attacks, anti-terrorism initiatives,
and political unrest, as well as the adverse impact the COVID-19 pandemic will
have on the global and U.S. markets and economy, continue to fuel this concern.
For example, the COVID-19 pandemic may adversely impact the level of services
currently provided by the U.S. government, could weaken the U.S. economy,
interfere with the commodities markets that rely upon data published by U.S.
federal government agencies, and prevent the Fund 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 past, 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
Bitcoin Futures Contracts or other bitcoin 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 bitcoin
Futures Contracts or other bitcoin interests are traded or cleared, or
counterparties.
Risk of
Volatility
The
price of bitcoin can be volatile which could cause large fluctuations in the
price of Shares.
As discussed in more
detail above, price movements for bitcoin are influenced by, among other things,
the environment, natural or man-made disasters, governmental oversight and
regulation, demographics, economic conditions, infrastructure limitations,
existing and future technological developments, and a variety of other factors
now known and unknown, any and all of which can have an impact on the supply,
demand, and price fluctuations in the bitcoin markets. More generally,
cryptocurrency 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 purchasers. Because the Fund invests in futures contracts in a single
cryptocurrency, 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 or cryptocurrency pool.
Volatility is a
statistical measure of the dispersion of returns for a given security or market
index. Volatility represents how large an asset’s prices swing around the mean
price—it is a statistical measure of its dispersion of returns.
According to Bloomberg
from 1/1/2019 to 5/27/2022 front month Bitcoin Futures Contracts exhibited an
average implied 30-Day volatility of 67.71. The highest volatility during that
period was 134.07 on 7/25/19 and the lowest was 25.62 on 4/1/2019.
Bitcoin can be highly
volatile, for example after a 774% price increase from 1/1/2020 prices peaked in
May 2021 and front month Bitcoin Futures Contracts began to decline with a peak
to trough retracement of 47.06% by 7/20/2021. Prices then rose from that low
until 11/9/2021 resulting in a price increase of 127.58%. Front month Bitcoin
Futures Contracts prices peaked on 11/9/2021 and have since seen a retracement
of 57.05% as of 5/27/2022. Front month bitcoin futures prices have declined
54.51% since May 2021.
The table below includes
significant single day price declines since inception of the Bitcoin Futures
Contracts in December 2017 for both bitcoin (as measured by the BRR) and for
Bitcoin Futures Contracts (as measured by the front month Bitcoin Futures
Contract), including the single day price decline that occurred on September 7,
2021, followed by a brief narrative disclosure describing the significant
declines:
Date |
BTC1
Daily % Change |
BRR
Daily % Change |
Notes |
3/12/2020 |
-23.49% |
-21.89% |
The
selloff in Bitcoin futures coincided with broader financial market duress
at the onset of the COVID pandemic. |
6/27/2019 |
-21.82% |
-9.31% |
Potentially
signals near term profit taking as the front month contract gained, after
gaining approximately 22% in the prior session. |
6/13/2022 |
-20.09% |
-15.45% |
Selling
picked up after failing to hold the $30,000 level, filling the gap created
on the way up during December 2020. |
1/16/2018 |
-19.97% |
-13.50% |
Bitcoin
futures were relatively new and there was significant selling interest
early on that carried through December 2018. |
2/5/2018 |
-15.43% |
-14.16% |
Bitcoin
futures were relatively new and there was significant selling interest
early on that carried through December 2018. |
5/9/2022 |
-13.90% |
-4.85% |
After
failing to close back above $40,000 on May 4th, selling accelerated as
market participants zeroed in on $30,000 as the next potential area of
price support. |
1/21/2022 |
-10.53% |
-10.75% |
The
downtrend that began in November of 2021 showed signs of accelerating as
prices traded at their lowest levels since July of
2021. |
5/5/2022 |
-9.10% |
-0.65% |
After
failing to close back above $40,000 on May 4th, selling accelerated as
market participants appear to be testing ~$35,000 for potential
support. |
8/19/2022 |
-9.02% |
-8.70% |
Bitcoin
futures had been trending higher for much of the summer as market
participants assumed a "risk on" posture that was reflected in stock
market during the same period. However, sentiment changed to "Risk off" as
market participants began to re-think the Fed's tightening cycle, and
potential for prolonged/deeper economic slowdown. |
12/6/2021 |
-8.56% |
0.56% |
The
previous session saw front-month Bitcoin futures get rejected after
testing the 50-day moving average and reversing lower. Prices gapped lower
on 12/06. |
9/20/2021 |
-7.81% |
-7.61% |
After
advancing nearly 70% since July 20th prices began to retrace on September
7th. Yet it wasn't until 09/20 that prices tested both the 50- and 100-day
moving averages at the technical point where the 50-day was about to cross
back above the 100-day. Suggests that this selling was technical in
nature. |
9/7/2021 |
-7.75% |
-3.35% |
The
selling may have been the result of profit taking as Bitcoin futures
closed over $50,000 for the first time in the prior
session. |
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.
The
Fund could be treated as a corporation for U.S. 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
more likely than not 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 Internal Revenue Code of 1986, as amended
(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. Opinions of counsel
are not binding on the Internal Revenue Service (the “IRS”) and no assurance can
be given that the IRS or a court will agree with counsel’s opinion. Although the
Sponsor anticipates that the Fund will satisfy the “qualifying income”
requirement for all of its taxable years, that result cannot be assured. There
is very limited authority on the U.S. federal income tax treatment of bitcoin
and no direct authority on bitcoin derivatives. 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 such 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.
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. Assuming the Fund qualifies to be taxed as a partnership for U.S.
federal income tax purposes, 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 and 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 consequences for you.
The Fund intends to be
treated as a partnership for U.S. federal income tax purposes. The U.S. tax
rules pertaining to entities taxed as partnerships are complex and their
application to publicly traded partnerships such as the Fund, is in many
respects uncertain. The Fund will apply certain assumptions and conventions in
an attempt to comply with the intent of the applicable rules and to report
taxable income, gains, deductions, losses and credits in a manner that properly
reflects Shareholders’ economic gains and losses. These assumptions and
conventions may not fully comply with all aspects of the Code, and applicable
Treasury Regulations, however, and it is possible that 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.
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.
Shareholders
will receive partner information tax returns on Schedule K-1, which could
increase the complexity of tax returns.
The partner information
tax returns on Schedule K-1, which the Fund will distribute to Shareholders,
will contain information regarding the income items and expense items of the
Fund. If you have not received Schedule K-1s from other investments, you may
find that preparing your income tax returns may require additional time, or it
may be necessary for you to retain an accountant or other tax preparer, at an
additional expense to you, to assist you in the preparation of your
returns.
Shareholders
of the Fund may recognize significant amounts of ordinary income and short-term
capital gain.
Due to the investment
strategy of the Fund, the Fund may realize and pass through to Shareholders
significant amounts of ordinary income and short-term capital gains as opposed
to long-term capital gains. Ordinary income and short-term capital gains are
generally taxed at higher U.S. federal income tax rates than the preferential
U.S. federal income rates applicable to long-term capital gains.
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
Fund in General
The Fund seeks to provide
investors with a way to gain price exposure to the bitcoin market. In
furtherance of this goal, the Fund’s investment objective is for changes in the
Shares’ NAV to reflect the daily changes of the price of the Benchmark, less
expenses from the Fund’s operations. The Sponsor developed the Benchmark as a
representation of the bitcoin market. The Fund
does not invest directly in bitcoin.
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 bitcoin market, as measured by the Benchmark. However, the
Fund may not be successful in implementing its investment objective because the
Fund is newly formed and because the BTC Contracts and MBT Contracts listed on
the CME are a relatively new type of futures contract that may be less developed
than more established futures markets (such as the futures markets for corn or
wheat). The Fund will purchase MBT contracts only if the Fund has proceeds
remaining from the sale of a Creation Basket that are less than the price of a
BTC contract. BTC and MBT will count toward an aggregate position
limit.
Consistent with applicable
provisions of the Trust Agreement and Delaware law, the Fund has broad authority
to make changes to the Fund’s operations. The Fund may change its investment
objective, Benchmark, or investment strategies and Shareholders of the Fund will
not have any rights with respect to these changes. 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 the Benchmark Component Futures Contracts 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
six series that are separate operating commodity pools: the Teucrium Corn Fund,
the Teucrium Wheat Fund, the Teucrium Soybean Fund, the Teucrium Sugar Fund, the
Teucrium Agricultural Fund, and the Hashdex Bitcoin Futures ETF. 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.
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 is located at Three Main Street, Suite 215,
Burlington, Vermont 05401. The Sponsor registered as a CPO with the CFTC and
became a member of the NFA on November 10, 2009. The Sponsor registered as a
Commodity Trading Advisor (“CTA”) with the CFTC effective September 8, 2017. The
Sponsor has sponsored the Trust since 2010. Sponsoring the Fund will be the
Sponsor’s first experience in the crypto asset markets. The Sponsor’s
responsibilities are discussed in the following paragraph. Teucrium Investment
Advisors, LLC, a wholly owned subsidiary of Teucrium Trading, LLC, is a Delaware
limited liability company, which was formed on January 4, 2022. Teucrium
Investment Advisors, LLC is a U.S. SEC registered investment advisor. Teucrium
Investment Advisors, LLC was registered with the CFTC as a CPO on May 2, 2022, a
CTA on May 2, 2022, and approved as a Swap Firm on May 9, 2022. Teucrium
Investment Advisors, LLC became a member of the NFA on May 9, 2022. The Sponsor
became a listed principal of Teucrium Investment Advisors, LLC on May 20,
2022.
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. 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 has discretion to appoint one or more of its affiliates
as additional Sponsors. No person other than the Sponsor and its principals was
involved in the organization of the Trust or the Fund. The Sponsor maintains a
public website on behalf of the Fund, http://hashdex-etfs.com/, which
contains information about the Trust, the Fund, and the Shares, and oversees
certain services for the benefit of Shareholders.
The Fund pays the Sponsor
a Management Fee, monthly in arrears, in an amount equal to 0.94% per annum of
the daily NAV of the Fund. The Management Fee is paid in consideration of the
Sponsor’s services related to the management of the Fund’s business and affairs,
including the provision of commodity futures trading advisory services. The Fund
is newly organized and as of the date of this prospectus has not paid any
management fees to the Sponsor. The Sponsor pays all of the routine operational,
administrative and other ordinary expenses of each Fund, generally as determined
by the Sponsor, including but not limited to, fees and expenses of the
Administrator, Custodian, Distributor, Transfer Agent, licensors, accounting and
audit fees and expenses, tax preparation expenses, legal fees, ongoing SEC
registration fees, individual Schedule K-1 preparation and mailing fees, and
report preparation and mailing expenses. None of the costs and expenses related
to the initial registration, offer and sale of Shares, which are estimated to be
approximately $160,000, will be 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
Since the inception of the
CORN fund in 2010, the Sponsor has sponsored all of the funds of the Trust and
an ETF registered and regulated under the Investment Company Act of 1940.
Sponsoring the Fund will be the Sponsor’s first experience in the crypto asset
markets. 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
Mr. Sal Gilbertie, Mr. Dale Riker and Mr. Carl N. Miller III.
The Officers of the
Sponsor, one of whom is a Class A Member of the Sponsor, are the
following:
Mr. 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. Mr. Gilbertie is an
officer of Teucrium Investment Advisors, LLC, a wholly owned subsidiary of
Teucrium Trading, LLC effective January 21, 2022. Mr. Gilbertie was approved by
the NFA as a Principal of Teucrium Investment Advisors, LLC on April 28, 2022.
Mr. Gilbertie was registered as an associated person of Teucrium Investment
Advisors LLC on May 2, 2022. Mr. Gilbertie will generally assume the same roles
and duties held in the parent company within the subsidiary. 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 62 years old.
Ms. 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 the Sponsor 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 is an officer
of Teucrium Investment Advisors, LLC, a wholly owned subsidiary of Teucrium
Trading, LLC effective January 21, 2022. Ms. Mullen-Rusin was approved by the
NFA as a Principal of Teucrium Investment Advisors, LLC on April 28, 2022. Ms.
Mullen-Rusin will generally assume the same roles and duties held in the parent
company within the subsidiary. 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.
Mr. 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. Mr. Kahler was listed as a
Principal of the Sponsor from May 16, 2012 to September 7, 2018 and again was
listed as a Principal on October 16, 2018. 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. Mr.
Kahler is an officer of Teucrium Investment Advisors, LLC, a wholly owned
subsidiary of Teucrium Trading, LLC effective January 21, 2022. Mr. Kahler was
approved by the NFA as a Principal of Teucrium Investment Advisors, LLC on June
2, 2022. Mr. Kahler was registered as an associated person of Teucrium
Investment Advisors LLC on May 2, 2022. Mr. Kahler will generally assume the
same roles and duties held in the parent company within the subsidiary. 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,
Kahler and Ms. Mullen-Rusin are individual “principals,” as that term is defined
in CFTC Rule 3.1, of Teucrium Trading, LLC and Teucrium Investment Advisors,
LLC. These individuals are principals due to their positions and/or due to their
ownership interests in the Sponsor. GFI Group LLC is a principal under CFTC
Rules due to its ownership of certain non-voting securities of Teucrium Trading,
LLC and Teucrium Investment Advisors, LLC. NMSIC Classic LLC is a principal
under CFTC Rules due to its greater than 10% capital contribution to Teucrium
Trading, LLC. Teucrium Trading, LLC is a listed principal of Teucrium
Investments Advisors, LLC due to its 100% ownership of the entity.
Prior Performance of the Fund
THIS
POOL HAS NOT COMMENCED TRADING AND DOES NOT HAVE ANY PERFORMANCE
HISTORY.
For performance
information of the Sponsor’s other commodity pools, see “General Pool Disclosure
— Performance of the Other Commodity Pools Operated by the Commodity Pool
Operator” on page 61.
The sole Trustee of the
Trust is Wilmington Trust Company, a Delaware banking corporation. The Trustee’s
principal offices are located at 1100 North Market Street, Wilmington, Delaware
19890-0001. The Trustee is unaffiliated with the Sponsor. The Trustee’s duties
and liabilities with respect to the offering of Shares and the management of the
Trust and the Fund are limited to its express obligations under the Trust
Agreement.
The Trustee will accept
service of legal process on the Trust in the State of Delaware and will make
certain filings under the Delaware Statutory Trust Act. The Trustee does not owe
any other duties to the Trust, the Sponsor or the Shareholders. The Trustee is
permitted to resign upon at least sixty (60) days’ notice to the Sponsor. If no
successor trustee has been appointed by the Sponsor within such sixty-day
period, the Trustee may, at the expense of the Trust, petition a court to
appoint a successor. The Trust Agreement provides that the Trustee is entitled
to reasonable compensation for its services from the Sponsor or an affiliate of
the Sponsor (including the Trust), and is indemnified by the Sponsor against any
expenses it incurs relating to or arising out of the formation, operation or
termination of the Trust, or any action or inaction of the Trustee under the
Trust Agreement, except to the extent that such expenses result from the gross
negligence or willful misconduct of the Trustee. The Sponsor has the discretion
to replace the Trustee.
The Trustee has not signed
the registration statement of which this prospectus is a part and is not subject
to issuer liability under the federal securities laws for the information
contained in this prospectus and under federal securities laws with respect to
the issuance and sale of the Shares. Under such laws, neither the Trustee,
either in its capacity as Trustee or in its individual capacity, nor any
director, officer or controlling person of the Trustee is, or has any liability
as, the issuer or a director, officer or controlling person of the issuer of the
Shares.
Under the Trust Agreement,
the Trustee has delegated to the Sponsor the exclusive management and control of
all aspects of the business of the Trust and the Fund. The Trustee has no duty
or liability to supervise or monitor the performance of the Sponsor, nor does
the Trustee have any liability for the acts or omissions of the
Sponsor.
Because the Trustee has
delegated substantially all of its authority over the operation of the Trust to
the Sponsor, the Trustee itself is not registered in any capacity with the
CFTC.
Operation
of the Fund
The investment objective
of the Fund is for changes in the Shares’ NAV to reflect the daily changes of
the price of the Benchmark, less expenses from the Fund’s operations. Under
normal market conditions, the Fund expects that the Fund’s assets will be used
to invest in Bitcoin Futures Contracts and cash and cash equivalents, such as
short-term Treasury bills, money market funds, and demand deposit accounts. The
term “normal market conditions” includes, but is not limited to, the absence of:
trading halts in the applicable financial markets generally; operational issues
(e.g., systems failure) causing dissemination of inaccurate market information;
or force majeure type events such as natural or man-made disaster, act of God,
armed conflict, act of terrorism, riot or labor disruption or any similar
intervening circumstance. The NYSE Arca rule under which the Shares will be
listed and traded prevents the Fund from utilizing leverage.
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, 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, less expenses from the Fund’s operations. The
Benchmark is the average of the closing settlement prices for the first to
expire and second to expire Bitcoin futures contracts listed on the CME. The
Benchmark will roll prior the expiration of the spot month CME Bitcoin Futures.
The Benchmark is not designed to track the spot
price of bitcoin. 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 total portfolio
composition is disclosed each business day that the NYSE Arca is open for
trading on the Fund’s website at http://hashdex-etfs.com/. The website
disclosure of portfolio holdings is made daily and includes, as applicable, the
security name, market price, CUSIP, and total weight of each futures contract
month reflected as a percentage, and value of each cash and cash equivalents
held in the Fund. The Fund’s website also includes the NAV, the 4 p.m. (ET)
Bid/Ask Midpoint as reported by the NYSE Arca, the last trade price as reported
by the NYSE Arca, the Median bid-ask spread for the past 30 days, the Shares
outstanding, the Shares available for issuance. Historical premium/discount
information will be updated quarterly and daily as needed. The prospectus,
Monthly Statements of Account, Quarterly Performance of the Midpoint versus the
NAV (as required by the CFTC), and the Roll Dates, as well as Forms 10-Q, Forms
10-K, and other SEC filings for the Fund, are also posted on the website. The
Fund’s website is publicly accessible at no charge.
The Fund’s investment
objective is to provide investors with a way to gain price exposure to the
bitcoin market. The Sponsor developed the Benchmark as a representation of the
bitcoin market. 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 bitcoin market, as measured by the Benchmark.
An investment in the
Shares can potentially provide a means for diversifying an investor’s portfolio
or hedging exposure to changes in bitcoin prices. An investment in the Shares
allows both retail and institutional investors to easily gain this exposure to
the bitcoin 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 bitcoin
market. Such investors may include those seeking to hedge the risk of losses in
their bitcoin related transactions as well as investors seeking exposure to the
bitcoin market. Accordingly, depending on the investment objective of an
individual investor, the risks generally associated with investing in the
bitcoin 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 bitcoin 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 bitcoin, 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
bitcoin.
The Shares issued by the
Fund may only be purchased by Authorized Purchasers and only in blocks of 10,000
Shares called Creation Baskets. The amount of the purchase payment for a
Creation Basket is equal to the total NAV of Shares in the Creation Basket.
Similarly, only Authorized Purchasers may redeem Shares and only in blocks of
10,000 Shares called Redemption Baskets. The amount of the redemption proceeds
for a Redemption Basket is equal to the total 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 $25.00. In that case, the Fund would receive $250,000 in proceeds from the
sale of the Creation Basket ($25.00 NAV per Share multiplied by 10,000 Shares
and ignoring the Creation Basket fee of $300). 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 $188,175 (or otherwise not a round
number), the Fund would be unable to buy an exact number of Bitcoin Futures
Contracts with an aggregate market value equal to $250,000. In this case, the
Fund would be able to purchase 1 BTC Contract with an aggregate market
value of approximately $188,175 and 16 MBT Contracts (each of which represent
0.10 bitcoin) at $3,763 per contract with an aggregate market value of
approximately $60,208, bringing the aggregate value of proceeds to $248,383.
Assuming a margin requirement equal to 32% of the notional amount based on the
previous settlement price of the BTC Contracts and MBT Contracts, the Fund would
be required to deposit approximately $79,483 in cash with the FCM through which
the Bitcoin Futures Contracts were purchased. The remainder of the proceeds from
the sale of the Creation Basket, approximately $170,517, composed of the
approximately $168,900 not deposited with the FCM and the remaining $1,617 that
was unable to be invested in Bitcoin Futures Contracts, 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 Benchmark Component
Futures Contracts are cash-settled, and the Fund will not be required to take
delivery of bitcoin. Positions may also be closed out to meet orders for
Redemption Baskets, in which case the proceeds from closing the positions will
not be reinvested.
Futures contracts are
agreements between two parties that are executed on a designated contract market
(“DCM”), i.e., a commodity futures exchange, and that are cleared and margined
through a derivatives clearing organization (“DCO”), i.e., a clearing house.
Bitcoin Futures Contacts are financially settled, which means that one party
agrees to buy a commodity such as bitcoin from the other party at a later date
at a price and quantity agreed upon when the contract is made, but instead of
taking physical delivery of the commodity at such later date, settlement occurs
in a dollar amount that is equivalent to the amount of bitcoin agreed to in the
contract. 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 financial settlement 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
cryptocurrency 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 bitcoin cryptocurrency 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, the Fund intends to hold
only long positions in bitcoin futures contracts and intends to roll its CME
Bitcoin Futures Contracts prior to expiration via sales of existing long
positions and the acquisition of new long positions as replacements for
contracts sold. Futures contracts are typically traded on futures exchanges
(i.e. DCMs) such as the CME, 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.
Bitcoin
Futures Contracts
CME began offering trading
in BTC Contracts in 2017 (and in MBT Contracts in 2021). The CME needed a
transparent and readily available way to determine the price of bitcoin for its
futures contract customers. However, there are numerous exchanges on which one
can buy and sell bitcoin, and the prices of bitcoin can differ greatly from
exchange to exchange. CME wanted to use pricing information from what it
considered to be reputable bitcoin exchanges to calculate a once-a-day reference
rate of the U.S. dollar price of bitcoin.
The CME developed the CME
CF Bitcoin Reference Rate (the "BRR") to serve these purposes. Each of the BTC
and MBT contract’s final daily cash settlement is based on the BRR. It serves as
a once-a-day reference rate of the U.S. dollar price of bitcoin and is used as
the rate on which bitcoin futures contracts are cash-settled in U.S. dollars at
the close of CME daily trading. The BRR is calculated by collecting purchase and
sale transactions from specified constituent bitcoin exchanges, which currently
include Bitstamp, Coinbase, Gemini, itBit, Kraken and LMAX Digital, during a
calculation window between 3:00 p.m. and 4:00 p.m. London time. It is published
at 4:00 p.m. London time each day.
The CME selects
constituent exchanges for the BRR on the basis of the following criteria, which
each exchange must demonstrate that it continues to fulfil on an ongoing
basis:
●
The exchange has policies
to ensure fair and transparent market conditions at all times and has processes
in place to identify and impede illegal, unfair or manipulative trading
practices.
●
The exchange does not
impose undue barriers to entry or restrictions on market participants, and
utilizing the venue does not expose market participants to undue credit risk,
operational risk, legal risk or other risks.
●
The exchange complies with
applicable law and regulation, including, but not limited to capital markets
regulations, money transmission regulations, client money custody regulations,
know-your-client (KYC) regulations and anti-money-laundering (AML)
regulations.
●
The exchange cooperates
with inquiries and investigations of regulators and the administrator upon
request and has to execute data sharing agreements with the
CME.
Should the average daily contribution of a
constituent exchange fall below 3%, then the continued inclusion of the venue as
a constituent exchange is assessed.
Qualifying transactions from the
constituent exchanges that take place during the one-hour calculation window are
added to a list, with the trade price and size for each transaction recorded.
The one-hour calculation is partitioned into twelve intervals of five minutes
each, and for each partition, the volume-weighted median trade price is
calculated from the trade prices and sizes of relevant transactions. (A
volume-weighted median differs from a standard median in that a weighting
factor, in this case trade size, is factored into the calculation.) The BRR is
the equally-weighted average of the volume-weighted medians of all twelve
partitions.
Impact
of Position Limits, Accountability Levels, and Price Fluctuation
Limits.
Position Limits,
Accountability Levels, and Dynamic 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 bitcoin related losses or as a way to indirectly invest in
bitcoin.
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 Bitcoin Futures Contracts, it could force the Fund
to limit the number of Creation Baskets that it sells.
Price
Volatility
Despite dynamic price
limits, the price volatility of futures contracts generally has been
historically greater than that for traditional securities such as stocks and
bonds. Price volatility often is greater day to day as opposed to intra-day.
Economic factors that may cause volatility in Bitcoin Futures Contracts include
but are not limited to cost of electricity, regulation, market disruptions,
cyber-attacks, political events and existing and future technologic
developments. There are also various other factors now known and unknown, any
and all of which can have an impact on the supply, demand, and price
fluctuations in the bitcoin markets. See “Risks Associated with Investing
Directly or Indirectly in Bitcoin.” 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
bitcoin fluctuates based on a number of market factors, including demand for
bitcoin. The value of Bitcoin Futures Contracts likewise fluctuates in reaction
to a number of market factors. Because the Fund seeks to maintain its holdings
in Bitcoin Futures Contracts, the Fund must periodically “roll” futures contract
positions, closing out soon to expire contracts that will no longer be 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 bitcoin 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 bitcoin prices or
the price relationship between 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
bitcoin 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. 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. By way of example, during the period
from 1/1/2019 to 6/30/2022, the market for Bitcoin Component Futures Contracts
were in contango approximately 90% of the time, which resulted in an average
annual negative roll yield of approximately 7%.
Margin
Requirements and Marking to Market Futures Positions
“Initial margin” is an
amount of funds that must be deposited by a bitcoin 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 bitcoin 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.
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 total 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 BTC Contract with a stated or notional amount of $188,175 would
not require the Fund to pay $188,175 upon entering into the contract; rather,
only a margin deposit, approximately 32% of the notional amount based on the
previous settlement price, would be required. To secure its BTC 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, or in money-market funds. Such
remaining assets may be used to meet future margin payments that the Fund is
required to make on its BTC Contracts and/or MBT Contracts.
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 90 days 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.
Liquidity
The Fund invests only in
Bitcoin 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 or other bitcoin interests based on the spot price of
bitcoin.
Spot
Commodities
While most futures
contracts can be physically settled, the Bitcoin Futures Contracts are cash
settled.
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.
Bitcoin
Bitcoin is a digital asset
that serves as the unit of account on an open-source, decentralized,
peer-to-peer computer network. Bitcoin may be used to pay for goods and
services, stored for future use, or converted to a fiat currency. As of the date
of this prospectus, the adoption of bitcoin for these purposes has been limited.
The value of bitcoin is not backed by any government, corporation, or other
identified body.
The value of bitcoin is
determined in part by the supply of (which is limited), and demand for, bitcoin
in the markets for exchange that have been organized to facilitate the trading
of bitcoin. By design, the supply of bitcoin is limited to 21 million bitcoins.
As of the date of this prospectus, there are approximately 19 million bitcoins
in circulation.
Bitcoin is maintained on
the decentralized, open source, peer-to-peer computer network (the “Bitcoin
Network”). No single entity owns or operates the Bitcoin Network. The Bitcoin
Network is accessed through software and governs bitcoin’s creation and
movement. The source code for the Bitcoin Network, often referred to as the
Bitcoin Protocol, is open-source, and anyone can contribute to its
development.
The
Bitcoin Network
The infrastructure of the
Bitcoin Network is collectively maintained by purchasers in the Bitcoin Network,
which include miners, developers, and users. Miners validate transactions and
are currently compensated for that service in bitcoin. Developers maintain and
contribute updates to the Bitcoin Network’s source code, often referred to as
the Bitcoin Protocol. Users access the Bitcoin Network using open-source
software. Anyone can be a user, developer, or miner.
Bitcoin is “stored” on a
digital transaction ledger commonly known as a “blockchain.” A blockchain is a
type of shared and continually reconciled database, stored in a decentralized
manner on the computers of certain users of the digital asset and is protected
by cryptography. The Bitcoin Blockchain contains a record and history for each
bitcoin transaction.
New bitcoin is created by
“mining.” Miners use specialized computer software and hardware to solve a
highly complex mathematical problem presented by the Bitcoin Protocol. The first
miner to successfully solve the problem is permitted to add a block of
transactions to the Bitcoin Blockchain. The new block is then confirmed through
acceptance by a majority of users who maintain versions of the blockchain on
their individual computers. Miners that successfully add a block to the Bitcoin
Blockchain are automatically rewarded with a fixed amount of bitcoin for their
effort plus any transaction fees paid by transferors whose transactions are
recorded in the block. This reward system is the means by which new bitcoin
enter circulation and is the mechanism by which versions of the blockchain held
by users on a decentralized network are kept in consensus.
The
Bitcoin Protocol
The Bitcoin Protocol is an
open source project with no official company or group in control. Anyone can
review the underlying code and suggest changes. There are, however, a number of
individual developers that regularly contribute to a specific distribution of
bitcoin software known as the “Bitcoin Core.” Developers of the Bitcoin Core
loosely oversee the development of the source code. There are many other
compatible versions of the bitcoin software, but Bitcoin Core is the most widely
adopted and currently provides the de facto standard for the Bitcoin Protocol.
The core developers are able to access, and can alter, the Bitcoin Network
source code and, as a result, they are responsible for quasi-official releases
of updates and other changes to the Bitcoin Network’s source code.
However, because bitcoin
has no central authority, the release of updates to the Bitcoin Network’s source
code by the core developers does not guarantee that the updates will be
automatically adopted by the other purchasers. Users and miners must accept any
changes made to the source code by downloading the proposed modification and
that modification is effective only with respect to those bitcoin users and
miners who choose to download it. As a practical matter, a modification to the
source code becomes part of the Bitcoin Network only if it is accepted by
purchasers that collectively have a majority of the processing power on the
Bitcoin Network. If a modification is accepted by only a percentage of users and
miners, a division will occur such that one network will run the
pre-modification source code and the other network will run the modified source
code. Such a division is known as a “fork.”
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 0.94% per annum.
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.
Bank Global Fund Services (“Global Fund Services”), an entity affiliated with
U.S. Bank, N.A., is the registrar and transfer agent for the Fund’s Shares. In
addition, Global Fund Services also serves as Administrator for the Fund,
performing certain administrative, and accounting services, and preparing
certain SEC and CFTC reports on behalf of the Fund. The Custodian is located at
1555 North Rivercenter Drive, Suite 302, Milwaukee, Wisconsin 53212. U.S. Bank
N.A. is a nationally chartered bank, regulated by the Office of the Comptroller
of the Currency, Department of the Treasury, and is subject to regulation by the
Board of Governors of the Federal Reserve System. The principal address for
Global Fund Services is 615 East Michigan Street, Milwaukee, WI,
53202.
Distributor
The Fund employs Foreside
Fund Services, LLC as the Distributor for the Fund. 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 material. 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.
Marketing
Agents
Toroso Investments, LLC
(“Toroso”), Tidal ETF Services LLC (“Tidal”) and Victory Capital Management Inc.
(“Victory Capital”) “(the “Marketing Agents”) assist the Fund and the Sponsor
with certain functions and duties relating to distribution and marketing, which
include the following: marketing and sales strategy, and marketing and
distribution related services.
Digital
Asset Adviser
Hashdex Asset Management
Ltd. (“Hashdex” or the “Digital Asset Adviser”“) is a Cayman Islands investment
manager (and an Exempt Reporting Advisor under SEC rules) that specializes in,
among other things, the management, research, investment analysis and other
investment support services of funds and ETFs with investment strategies
involving bitcoin and other crypto assets. As Digital Asset Adviser, Hashdex is
responsible for providing the Sponsor and Marketing Agents with research and
analysis regarding bitcoin and bitcoin markets for use in the operation and
marketing of the Fund. Hashdex has no role in maintaining, calculating or
publishing the Benchmark. Hashdex also has no responsibility for the investment
or management of the Fund’s portfolio or for the overall performance or
operation of the Fund.
The Marketing Agents,
Digital Asset Advisor and Sponsor (the “Parties”) have entered into an agreement
(the “Support Agreement”) that sets forth certain terms and conditions
applicable to the launch, marketing, promotion, development, and ongoing
operation of the Fund, as well the respective rights in profits and obligations
for expenses. Hashdex and Toroso have experience in the digital asset and
exchange-traded fund industry, and seek to offer a bitcoin futures based fund as
part of their long-term business goals. The Parties believe that the Sponsor is
best positioned for the initial establishment and operation of the Fund, given
the Sponsor’s experience in forming and operating similarly structured
exchanged-traded products registered under the Securities Act of 1933 (the “1933
Act”). Accordingly, the Sponsor is responsible for the initial creation and
operation of the Fund. Then, when Hashdex and Toroso have the necessary
experience and resources to operate the Fund, the eventual transfer to Toroso
will effectuate Hashdex and Toroso’s long-term business goals. The Parties do
not believe that the long-term business goals will have any impact on a
shareholder’s investment in the Fund.
The Support Agreement
provides that the Parties expect that Toroso will use commercially reasonable
efforts to organize a new Delaware statutory trust (the “New Trust”) and a new
series thereof (the “New Fund”) and enter into an agreement pursuant to which,
among other things, the assets of the Fund (and certain other assets as
applicable) will be transferred to the New Fund as a series of the New Trust, as
successor to the Fund and the Trustee will transfer to Toroso sponsorship of the
Fund. There is no timeline for this transaction. The transaction may require
registration under the 1933 Act, or an exemption from such registration, an
amendment to the Fund’s existing listing standards and receipt of other
regulatory approvals. The Fund and the New Fund will file current reports on
Form 8-K including a press release notifying shareholders that the definitive
transaction has been consummated.
The primary
responsibilities and rights of each Party with respect to the Fund are described
below:
● |
The Support
Agreement provides that Hashdex will provide to the other Parties research
and analysis regarding bitcoin and bitcoin markets for use in the
operation and marketing of the Fund. Subject to mutual agreement of the
Parties, Victory Capital will provide sub-advisory and sales support
services for the Fund. |
● |
The Sponsor, Toroso,
Hashdex and Victory Capital are responsible for paying for all listing,
legal, and regulatory costs and expenses incurred in connection with the
regulatory process related to the launch of the Fund, including drafting
the Fund’s registration statement, exchange listing fees, and other
regulatory or service provider fees, as determined in the Support
Agreement (“Start-Up Costs”). The Fund will not be responsible for the
Start-Up Costs. Each Party is responsible for its own internal
expenses. |
● |
The Sponsor will
receive a sponsor fee, administrative fee and trading fee, which are paid
out of the proceeds from the Management Fee of the Fund (if sufficient)
and/or from Toroso and Hashdex/Victory Capital (if insufficient). After an
additional deduction of operational costs from the Management Fee, the
resulting profits or losses will be shared equally among Toroso, on the
one hand, and Hashdex and Victory Capital, on the
other.
|
Following the transfer of
the assets of the Fund to the New Fund, the primary responsibilities and rights
of each Party with respect to the New Fund are expected to be as
follows:
● |
The Sponsor’s
responsibilities as sponsor will cease. Toroso’s responsibilities as
sponsor are expected to be substantially the same as the Sponsor’s
existing responsibilities. As sponsor of the New Fund, Toroso will be
generally authorized to perform all acts deemed necessary to carry out the
purposes of the New Trust and the New Fund. Toroso is expected to be
responsible for management of the New Fund (and, as noted below, it is
anticipated that Victory Capital will provide sub-advisory services for
the New Fund). Toroso is expected to oversee the purchase and sale of
Shares by Authorized Purchasers, manage the Fund’s investments, and
evaluate the credit risk of FCMs and swap counterparties and review daily
positions and margin/collateral requirements. The Sponsor is also expected
to be responsible for selecting the service providers to the New Trust and
New Fund and preparing and filing periodic reports on behalf of the Trust
with the SEC and provide any required certification for such
reports. |
● |
Tidal will provide
fund administration and related services for the New Fund. Hashdex will
provide to Toroso research and analysis regarding bitcoin and bitcoin
markets for use in the operation and marketing of the New Fund. Victory
Capital shall provide sub-advisory and sales support services for the New
Fund. The formalization of such roles with respect to the New Fund will be
made in the format and at a time mutually agreed among the Sponsor,
Toroso, Tidal, Hashdex, and Victory Capital, taking into account the
operations of the New Fund and any applicable regulatory
requirements.
|
● |
The Sponsor will be
entitled to receive a monthly amount equal to seven (7) percent of the
Management Fee of the New Fund; provided, however, that such fee will
never be less than 0.04% of monthly average net assets of the Fund. After
an additional deduction of operational costs from the Management Fee, the
resulting profits and losses will be shared equally among Toroso, on the
one hand, and Hashdex and Victory Capital, on the other. The Management
Fee for the New Fund is not expected to
change.
|
Clearing
Brokers
StoneX Financial Inc. –
FCM (f/k/a INTL FCStone Financial Inc. - FCM Division) (“StoneX”), and Phillip
Capital Inc. (“Phillip Capital”) serve as the Fund’s clearing brokers (the
“Clearing Brokers”) to execute and clear the Fund’s futures transactions and
provide other brokerage-related services. The Clearing Brokers are each
registered as an FCM with the CFTC, are members of the National Futures
Association (“NFA”) and are clearing members of all major U.S. futures
exchanges. The Clearing Brokers are registered as broker-dealers (“BDs”) with
the U.S. Securities and Exchange Commission (“SEC”) and are each 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 the Clearing Brokers or their
principals in the past five (5) years.
Litigation
disclosure for Phillip Capital
Phillip
Capital Inc. is a registered futures commission merchant and is a member of the
NFA. Its main office is located at 141 West Jackson Blvd., Suite 1531A, Chicago,
Illinois 60604. In the normal course of its business, Phillip Capital is
involved in various legal actions incidental to its commodities business. None
of these actions are expected either individually or in aggregate to have a
material adverse impact on Phillip Capital. Except for the below, neither
Phillip Capital nor any of its principals have been the subject of any material
administrative, civil or criminal actions within the past five
years.
On
September 12, 2019, the U.S. Commodity Futures Trading Commission issued an
order settling charges against Phillip Capital for allowing cyber criminals to
breach PCI email systems, access customer information, and successfully
withdrawing $1 million in PCI customer funds. The order found that PCI failed to
disclose the cyber breach to its customers in a timely manner and that PCI
failed to supervise its employees with respect to cybersecurity policy and
procedures, a written information systems security program, and customer
disbursements. The order imposed monetary sanctions totaling $1.5 million, which
includes a civil monetary penalty of $500,000, and a $1 million in restitution.
PCI was credited the $1 million restitution based on its prompt reimbursement of
the customer funds when the fraud was discovered. The order also required PCI
to, among other things, provide reports to the Commission on its remediation
efforts.
On
June 11, 2021, pursuant to an offer of settlement in which Phillip Capital
neither admitted nor denied the rule violation upon which the penalty is based,
the Clearing House Risk Committee found that Phillip Capital violated CME Rule
980.A – Required Records and Reports. In accordance with the settlement offer,
the Committee imposed a $50,000 fine for non-current books and records due to an
issue with the firm’s middleware provider. In a related matter, the CME Group
had previously fined Phillip Capital on March 19, 2021, for its violation of
Rule 811 and 561. During the month of February 2021, Phillip Capital
inaccurately reported its open interest and large trader positions in several
instances of CME, CBT, NYMEX, and COMEX contracts due to the aforementioned
middleware issue. A fine in the amount of $5,000 was assessed against Phillip
Capital.
Litigation
disclosure for StoneX
Below is a list of
material, administrative, civil, enforcement, or criminal complaints or actions
filed against StoneX that are outstanding, and any enforcement actions or
complaints filed against StoneX in the past five years which meet the
materiality thresholds in CTFC regulations 4.24.(l) and 4.34(k).
● |
On November 14,
2017,StoneX, without admission, denial, or liability, entered into a
settlement with the Commodity Futures Trading Commission (“CFTC”). The
CFTC found that StoneX failed to have adequate compliance controls to
identify trades improperly designated as EFRPs. According to the CFTC
Order, the firm failed to determine that the EFPs at issue had the
necessary corresponding and related cash or OTC derivative position
required for EFRPs. The CFTC Order also found that the firm failed to
ensure that the EFPs at issue were documented properly. Finally, the firm
failed to ensure that its employees involved in the execution, handling,
and processing of EFRPs understood the requirements for executing,
handing, and processing valid EFRPs. StoneX, and its affiliate FCStone
Merchant Services, jointly paid a $280,000 civil monetary penalty to the
CFTC. |
● |
After a historic
move in the natural gas market in November of 2018, StoneX experienced a
number of customer deficits. StoneX soon thereafter initiated NFA
arbitrations, seeking to collect these debits, and has also been
countersued and sued in a number of these arbitrations. These accounts
were managed by Optionsellers.com, (“Optionsellers”) who is a Commodity
Trading Advisor (“CTA”) authorized by investors to act as attorney-in-fact
with exclusive trading authority over these investors’ trading accounts.
These accounts cleared through StoneX. After this significant and historic
natural gas market movement, the accounts declined below required
maintenance margin levels. StoneX’s role in managing the accounts was
limited. As a clearing firm, StoneX did not provide any investment advice,
trading advice, or recommendations to customers of Optionsellers who chose
to clear with StoneX. Instead, it simply executed and cleared trades
placed by Optionsellers on behalf of Optionsellers’ customers.
Optionsellers is a CFTC registered CTA operating under a CFTC Rule 4.7
exemption from registration. Optionsellers engaged in a strategy that
primarily involved selling options on futures products. The arbitrations
between StoneX, Optionsellers, and the Optionsellers customers are
currently ongoing. |
StoneX is subject to
litigation and regulatory enforcement in the normal course of business. Except
as discussed above, the current or pending civil litigation, administrative
proceedings, or enforcement actions in which the firm is involved are not
expected to have a material effect upon its condition, financial or otherwise.
The firm vigorously defends, as a matter of policy, civil litigation,
reparation, arbitration proceedings, and enforcement actions brought against
it.
The clearing brokers, in
their capacity as registered FCMs, will serve as the Fund’s clearing brokers
and, as such, will arrange for the execution and clearing of the Fund’s futures
and options on futures transactions. Each broker acts as clearing broker for
many other funds and individuals.
Investors should be
advised that the Clearing Brokers are not affiliated with and do not act as a
supervisor of the Fund or the Fund’s Sponsor, investment managers, members,
officers, administrators, transfer agents, registrars or organizers.
Additionally, the Clearing Brokers do not act as an underwriter or sponsor of
the offering of any Shares or interests in the Fund and have 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, the Clearing
Brokers do not provide any commodity trading advice regarding the Fund’s trading
activities. Investors should not rely upon the Clearing Brokers 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
one or both Clearing Brokers as the Fund’s clearing brokers.
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 |
0.94% of average net
assets annually |
|
|
Phillip Capital
Inc., Futures Commission Merchant and Clearing Broker |
The Fund pays
$35.00-$45.00 per Futures Contract half-turn exclusive of pass through
fees for the exchange, NFA, execution fees, and platform and exchange data
fees. |
|
|
StoneX Financial
Inc., Futures Commission Merchant and Clearing Broker |
The Fund pays
$10.00-$25.00 per Futures Contract half-turn exclusive of pass through
fees for the exchange and NFA. Additionally, if the monthly commissions
paid do not equal or exceed 20% return on the StoneX Capital Requirement
at 9.6% of Exchange Maintenance Margin, the Fund will pay a true up to
meet that return at the end of each month. |
|
|
Wilmington Trust
Company, Trustee |
$3,300 annually for
the Trust |
Other
Non-Contractual Payments by the Fund
The Fund pays the Sponsor
a Management Fee, monthly in arrears, in an amount equal to 0.94% per annum of
the daily NAV of the Fund. The Management Fee is paid in consideration of the
Sponsor’s services related to the management of the Fund’s business and affairs,
including the provision of commodity futures trading advisory services.
Purchases of creation units with cash may cause the Fund to incur certain costs
including brokerage commissions and redemptions of creation units with cash may
result in the recognition of gains or losses that the Fund might not have
incurred if it had made redemptions in-kind. The Fund pays all of its respective
brokerage commissions, including applicable exchange fees, NFA fees and give-up
fees, and other transaction related fees and expenses charged in connection with
trading activities for each Fund’s investments in CFTC regulated investments.
The Fund bears other transaction costs related to the FCM capital requirements
on a monthly basis. The Sponsor pays all of the routine operational,
administrative and other ordinary expenses of the Fund, generally as determined
by the Sponsor, including but not limited to, fees and expenses of the
Administrator, Custodian, Distributor, Transfer Agent, licensors, accounting and
audit fees and expenses, tax preparation expenses, legal fees, ongoing SEC
registration fees, individual Schedule K-1 preparation and mailing fees, and
report preparation and mailing expenses. The Fund pays all of its non-recurring
and unusual fees and expenses, if any, as determined by the Sponsor.
Non-recurring and unusual fees and expenses are unexpected or unusual in nature,
such as legal claims and liabilities and litigation costs or indemnification or
other unanticipated expenses. Extraordinary fees and expenses also include
material expenses which are not currently anticipated obligations of the Fund.
Routine operational, administrative and other ordinary expenses are not deemed
extraordinary expenses.
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 purchasers 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) purchasers in DTC such as banks, brokers, dealers and trust
companies, (2) those who maintain, either directly or indirectly, a custodial
relationship with a DTC purchaser, and (3) those who hold interests in the
Shares through DTC purchasers or Indirect purchasers, in each case who satisfy
the requirements for transfers of Shares. DTC purchasers acting on behalf of
investors holding Shares through such purchasers’ 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 purchasers’ securities accounts
following confirmation of receipt of payment.
DTC
DTC is a limited purpose
trust company organized under the laws of the State of New York and is a member
of the Federal Reserve System, a “clearing corporation” within the meaning of
the New York Uniform Commercial Code and a “clearing agency” registered pursuant
to the provisions of Section 17A of the Exchange Act. DTC holds securities for
DTC purchasers and facilitates the clearance and settlement of transactions
between DTC purchasers through electronic book-entry changes in accounts of DTC
purchasers.
Transfer
of Shares
The Shares are only
transferable through the book-entry system of DTC. Shareholders who are not DTC
purchasers may transfer their Shares through DTC by instructing the DTC
purchaser holding their Shares (or by instructing the Indirect purchaser 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 Purchasers and/or accountholders of DTC.
Because DTC can only act on behalf of DTC Purchasers, who in turn act on behalf
of Indirect Purchasers, 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 purchasers 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
purchaser or purchasers has or have given such direction.
Inter-Series
Limitation on Liability
Because the Trust was
established as a Delaware statutory trust, each Teucrium Fund and each other
series that may be established under the Trust in the future will be operated so
that it will be liable only for obligations attributable to such series and will
not be liable for obligations of any other series or affected by losses of any
other series. If any creditor or Shareholder of any particular series (such as
the Fund) asserts against the series a valid claim with respect to its
indebtedness or Shares, the creditor or Shareholder will only be able to obtain
recovery from the assets of that series and not from the assets of any other
series or the Trust generally. The assets of the Fund and any other series will
include only those funds and other assets that are paid to, held by or
distributed to the series on account of and for the benefit of that series,
including, without limitation, amounts delivered to the Trust for the purchase
of Shares in a series. This limitation on liability is referred to as the
Inter-Series Limitation on Liability. The Inter-Series Limitation on Liability
is expressly provided for under the Delaware Statutory Trust Act, which provides
that if certain conditions (as set forth in Section 3804(a)) are met, then the
debts of any particular series will be enforceable only against the assets of
such series and not against the assets of any other series or the Trust
generally. In furtherance of the Inter-Series Limitation on Liability, every
party providing services to the Trust, the Fund or the Sponsor on behalf of the
Trust or the Fund, will acknowledge and consent in writing to the Inter-Series
Limitation on Liability with respect to such party’s claims.
The existence of a Trustee
should not be taken as an indication of any additional level of management or
supervision over the Fund. Consistent with Delaware law, the Trustee acts in an
entirely passive role, delegating all authority for the management and operation
of the Fund and the Trust to the Sponsor. The Trustee does not provide custodial
services with respect to the assets of the Fund.
Buying
and Selling Shares
Most investors buy and
sell Shares of the Fund in secondary market transactions through brokers. Shares
trade on the NYSE Arca under the ticker symbol “DEFI.” 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 10,000 Shares at their NAV through the Distributor, to Authorized
Purchasers. The initial Authorized Purchaser is a statutory underwriter of the
Fund’s Shares. It is expected that on the effective date, the initial Authorized
Purchaser will purchase ten initial Creation Baskets of 10,000 Shares at a per
Share price of $25.00. The initial offering price of $25.00 was set as an
appropriate and convenient price that would facilitate secondary market trading
of Shares, and the Shares of the Fund acquired by the Sponsor in connection with
its initial capital contribution were purchased at a price of $25.00 per Share.
All Authorized Purchasers pay a $300 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.
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 purchasers 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 purchaser
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.
Investors are cautioned
that they might not be able to buy or sell Shares of the Fund through their
current brokerages. Moreover, even if an investor were able to purchase Shares
through their current brokerage, that brokerage might decide to stop trading in
bitcoin-linked securities and the investor would potentially face restrictions
on when and or how they could trade their existing bitcoin
position.
The Sponsor expects that
any broker-dealers selling Shares will be members of FINRA. Investors intending
to create or redeem baskets through Authorized Purchasers in transactions not
involving a broker-dealer registered in such investor’s state of domicile or
residence should consult their legal advisor regarding applicable broker-dealer
regulatory requirements under the state securities laws prior to such creation
or redemption.
While the Authorized
Purchasers may be indemnified by the Sponsor, they will not be entitled to
receive a discount or commission from the Trust or the Sponsor for their
purchases of Creation Baskets.
The Fund’s NAV per Share
is calculated by:
● |
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 the NAV as of the earlier of the close of the New
York Stock Exchange or 4:00 p.m. (ET). The NAV for a particular trading day is
released after 4:15 p.m. (ET).
In determining the value
of Bitcoin Futures Contracts, the Administrator uses the settlement price for
the Benchmark Component Futures Contracts, as reported on the CME. CME Group
staff determines the daily settlements for the Benchmark Component Futures
Contracts based on trading activity on CME Globex exchange between 14:59:00 and
15:00:00 Central Time (CT), the settlement period, except that the “fair value”
of Bitcoin Futures Contracts (as described in more detail below) may be used
when Bitcoin 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. (ET), in
accordance with the current Services Agreement between the Administrator and the
Trust. NAV includes any unrealized profit or loss on open bitcoin interests and
any other credit or debit accruing to the Fund but unpaid or not received by the
Fund.
The fair value of a
bitcoin interest is determined by the Sponsor in good faith and in a manner that
assesses the bitcoin interest’s value based on a consideration of all available
facts and all available information on the valuation date. When a Bitcoin
Futures Contract has closed at its daily price fluctuation limit, that limit
price will be the daily settlement price that the CME publishes. The Fund will
use the published settlement price to price its Shares on that day. If the CME
halted trading in Bitcoin Futures Contracts for other reasons, including if
trading were halted for an entire trading day or several trading days, the Fund
would value its Bitcoin Futures Contracts by using the settlement price that the
CME publishes.
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 bitcoin interests during the trading day. Changes in the
value of cash equivalents are not included in the calculation of indicative
value. For this and other reasons, the indicative fund value disseminated during
NYSE Arca trading hours should not be viewed as an actual real time update of
the NAV. NAV is calculated only once at the end of each trading
day.
The indicative fund value
is disseminated on a per Share basis every 15 seconds during regular NYSE Arca
trading hours of 9:30 a.m. (ET) to 4:00 p.m. (ET). The trading hours for the CME
can be found at: https://www.cmegroup.com/education/bitcoin/cme-bitcoin-futures-frequently-asked-questions.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 on-line
information services such as Bloomberg and Reuters.
Dissemination of the
indicative fund value provides additional information that is not otherwise
available to the public and is useful to investors and market professionals in
connection with the trading of Fund Shares on the NYSE Arca. Investors and
market professionals are able throughout the trading day to compare the market
price of the Fund and the indicative fund value. If the market price of Fund
Shares diverges significantly from the indicative fund value, market
professionals may have an incentive to execute arbitrage trades. For example, if
the Fund appears to be trading at a discount compared to the indicative fund
value, a market professional could buy Fund Shares on the NYSE Arca, aggregate
them into Redemption Baskets, and receive the NAV of such Shares by redeeming
them to the Trust provided that there is not a minimum number of Shares
outstanding for the Fund. Such arbitrage trades can tighten the tracking between
the market price of the Fund and the indicative fund value.
Creation and Redemption of Shares
The Fund creates and
redeems Shares from time to time, but only in one or more Creation Baskets or
Redemption Baskets. To the extent creations and redemptions involve the exchange
of cash and cash equivalents, the Fund may incur certain costs including
brokerage costs or recognize gains or losses that it might not have incurred if
the transaction were made in-kind. 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 purchasers,
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 purchasers. 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 and cash equivalents 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 $300 to the Custodian for each creation order they
place and a fee of $300 per order for redemptions, which is a nominal fee.
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
bitcoin and the bitcoin interest markets. Some Authorized Purchasers or their
affiliates may from time to time buy or sell bitcoin or bitcoin 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 its
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, the CME, or the New York Stock Exchange is
closed for regular trading. Purchase orders must be placed by 3:00 p.m. (ET) 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 and/or cash equivalents
with the Fund, as described below. Prior to the delivery of baskets for a
purchase order, the Authorized Purchaser must also have wired to the Sponsor the
non-refundable transaction fee due for the purchase order. Authorized Purchasers
may not withdraw a purchase order without the prior consent of the Sponsor in
its discretion.
Determination
of Required Deposits
The total deposit required
to create each basket (“Creation Basket Deposit”) is the amount of cash and/or
cash equivalents 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
and/or cash equivalents, 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 and cash equivalents 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 3:00 p.m., (ET), but the total payment required to
create a basket during the continuous offering period will not be determined
until 4:00 p.m., (ET), 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 CME from which the NAV of the Fund is calculated will
be priced at a dynamic 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 3:00 p.m. (ET) or the close of regular trading on the
New York Stock Exchange, whichever is earlier. A redemption order so received
will be effective on the date it is received in satisfactory form by the
Distributor. The redemption procedures allow Authorized Purchasers to redeem
baskets and do not entitle an individual Shareholder to redeem any Shares in an
amount less than a Redemption Basket, or to redeem baskets other than through an
Authorized Purchaser. By placing a redemption order, an Authorized Purchaser
agrees to deliver the baskets to be redeemed through DTC’s book-entry system to
the Fund by the end of the next business day following the effective date of the
redemption order or by the end of such later business day. Prior to the delivery
of the redemption distribution for a redemption order, the Authorized Purchaser
must also have wired to the Sponsor’s account at the Custodian the
non-refundable transaction fee due for the redemption order. An Authorized
Purchaser may not withdraw a redemption order without the prior consent of the
Sponsor in its discretion.
Determination
of Redemption Distribution
The redemption
distribution from the Fund consists of a transfer to the redeeming Authorized
Purchaser of an amount of cash and/or cash equivalents 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 and/or cash
equivalents, 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 noon
(ET) 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 CME is closed
other than customary weekend or holiday closings, or trading on the NYSE Arca or
CME 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 CME 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, 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 below 50,000 Shares
(i.e., five baskets of 10,000 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 $300 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 and cash equivalents equal to the total 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 purchasers, 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 bitcoin 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 bitcoin
interest markets. While the Shares trade on the NYSE Arca until 4:00 p.m. (ET),
liquidity in the markets for bitcoin interests may be reduced after the close of
the CME. As a result, during this time, trading spreads, and the resulting
premium or discount, on the Shares may widen.
The Sponsor causes the
Fund to transfer the proceeds of the sale of Creation Baskets to the Custodian
or another financial institution for use in trading activities and/or investment
in Benchmark Component Futures Contracts and cash and cash equivalents. Under
normal market conditions, the Sponsor invests the Fund’s assets in Benchmark
Component Futures Contracts and cash and cash equivalents. When the Fund
purchases Benchmark Component Futures Contracts, the Fund is required to deposit
with the FCM on behalf of the exchange a portion of the value of the contract or
other interest as security to ensure payment for the obligation under the
Benchmark Component Futures Contracts at maturity. This deposit is known as
initial margin. The Sponsor invests the Fund’s assets that remain after margin
and collateral is posted in cash and cash equivalents. Subject to these margin
and collateral requirements, the Sponsor has sole authority to determine the
percentage of assets that will be:
●
|
held as margin or
collateral with FCMs or other custodian; |
●
|
used for other
investments; and |
●
|
held in bank
accounts to pay current obligations and as
reserves. |
In general, the Fund
expects that it will be required to post approximately 32% of the previous day
settlement price of a Benchmark Component Futures Contracts as initial margin.
Ongoing margin and collateral payments will generally be required for
exchange-traded bitcoin interests based on changes in the value of the bitcoin
interests. In light of the differing requirements for initial payments under
exchange-traded bitcoin 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 exchange could increase margin or collateral requirements
applicable to the Fund to hold trading positions at any time. Moreover, margin
is merely a security deposit and has no bearing on the profit or loss potential
for any positions held.
The approximate 8-10% 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 (excluding any taxes on the
compensation received for services as Sponsor or on indemnity payments
received), 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 Fund.
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.
The Sponsor might have a
potential future conflict of interest if the Sponsor, a new sponsor, or
sub-adviser were to register as a broker-dealer or become affiliated with a
broker-dealer. In such case, the Sponsor, new sponsor, or sub-adviser, as the
case may be, would develop and implement appropriate procedures designed to
prevent the use and dissemination of material non-public information regarding
the Fund’s holdings.
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.
Ownership
or Beneficial Interest in the Fund
As of the date of this
prospectus, the Sponsor owns four (4) Shares of the Fund. As of the date of this
Prospectus, none of the principals of the Sponsor have an ownership interest in
the Fund.
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
annual reports (as of the end of each fiscal year) for the Fund to DTC
purchasers for distribution to Shareholders, as 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 (http://hashdex-etfs.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: http://hashdex-etfs.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”) 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, http://hashdex-etfs.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.
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. The claims for declaratory
relief and for return of property have since been dismissed.
On June 28, 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”).
The Court ordered Mr. Riker’s newly filed Delaware action consolidated with the
Gilbertie case. As a result, on
September 7, 2021, Dale Riker and Barbara Riker filed their answers to the Gilbertie complaint, and the claims in the
Riker case were re-filed as
counterclaims in the Gilbertie case,
along with claims by Barbara Riker, 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 asserted 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 and the
individual plaintiffs/counterclaim-defendants moved to dismiss the Rikers’
claims.
On April 6, 2022, the
Court announced its decision on the motion to dismiss in an oral ruling, which
was subsequently implemented in a written order dated April 18, 2022. The Court
dismissed all of the Rikers’ counterclaims, except for a portion of one count
alleging breach of contract against Messrs. Gilbertie and Miller. All of the
dismissals were with prejudice, with the exception of the dismissal of Mr.
Riker’s claim against Mr. Gilbertie that sought specific performance of an
alleged agreement for Mr. Gilbertie to purchase Mr. Riker’s equity in the
Company. The Court dismissed that claim without prejudice. On April 25, 2022,
Mr. Riker filed a motion for reconsideration of the Court’s dismissal of his
derivative claims for breach of contract against Mr. Gilbertie and for unjust
enrichment against Mr. Gilbertie, Mr. Miller, Mr. Kahler, and Ms. Mullen-Rusin,
both of which concern the Company’s advancement of legal fees on behalf of those
individuals. On May 11, 2022, the Court denied Mr. Riker’s motion for
reconsideration. On May 2, 2022, the Rikers filed an amended counterclaim, which
reasserted the claim against Mr. Gilbertie that the Court had dismissed without
prejudice.
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
Vedder Price, P.C.
(“Vedder Price”) has been retained to advise the Trust and the Sponsor with
respect to the Shares being offered hereby and has passed upon the validity of
the Shares being issued hereunder. Vedder Price has also provided the Sponsor
with its opinion with respect to U.S. federal income tax matters addressed below
in “U.S. Federal Income Tax Considerations.”
Experts
The financial statements
of the Trust incorporated by reference in this prospectus and elsewhere in the
registration statement have been so incorporated by reference in reliance upon
the reports of Grant Thornton LLP (“Grant Thornton”), independent registered
public accountants, upon the authority of said firm as experts in accounting and
auditing. The financial statement of the Fund included in this prospectus and
elsewhere in the registration statement has been so included in reliance upon
the report of Grant Thornton, 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.
The Sponsor’s Website is
hosted in the United States and any data provided to the Sponsor 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 U.S.
federal income 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, regulated
investment companies (except as discussed below), 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 U.S. federal income tax purposes, persons with
“applicable financial statements” within the meaning of section 451(b) of the
Internal Revenue Code of 1986, as amended (the “Code”), or holders of Shares
whose “functional currency” is not the U.S. dollar. Furthermore, the discussion
below is based on the provisions of the Code, and regulations (“Treasury
Regulations”), rulings and judicial decisions thereunder as of the date hereof,
and such authorities may be repealed, revoked or modified (possibly with
retroactive effect) so as to result in U.S. federal income tax consequences
different from those discussed below.
The Sponsor has received
the opinion of Vedder Price, counsel to the Trust, that the material U.S.
federal income tax consequences to the Fund and to U.S. Shareholders and
Non-U.S. Shareholders (as defined below) will be as described in the following
paragraphs. In rendering its opinion, Vedder Price has relied on the facts and
assumptions described in this prospectus as well as certain factual
representations made by the Trust, the Fund, and the Sponsor. This opinion is
not binding on the Internal Revenue Service (the “IRS”) and will not be a
guarantee of the results. No ruling has been requested from the IRS with respect
to any matter affecting the Fund or prospective investors, and the IRS may
disagree with the tax positions taken by the Trust. If the IRS were to challenge
the Trust’s tax positions in litigation, they might not be sustained by the
courts. No statutory, administrative or judicial authority directly addresses
the treatment of the Shares or instruments similar to the Shares for U.S.
federal income tax purposes. As a result, the Trust cannot assure investors that
the IRS or the courts will agree with the tax consequences described herein. A
different treatment from that described below could adversely affect the amount,
timing and character of income, gain or loss in respect of an investment in the
Shares and could adversely affect the value of the Shares.
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 United States, (ii) a corporation
created or organized in or under the laws of the United States or any political
subdivision thereof, (iii) an estate the income of which is subject to 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 United States and the control
of one or more United States persons as described in section 7701(a)(30) of the
Code, or (b) has a valid election in effect under applicable Treasury
Regulations to be treated as a United States person. A “Non-U.S. Shareholder” is
a holder that is not a U.S. Shareholder. If a partnership or other entity or
arrangement treated as a partnership holds our Shares, the tax treatment of a
partner will generally depend upon the status of the partner and the activities
of the partnership. If you are a partner of a partnership holding our Shares,
the discussion below may not be applicable to you and you should consult your
own tax advisor regarding the tax consequences of acquiring, owning and
disposing of Shares.
EACH PROSPECTIVE INVESTOR
IS ADVISED TO CONSULT ITS OWN TAX ADVISOR REGARDING THE U.S. FEDERAL INCOME TAX
CONSEQUENCES OF AN INVESTMENT IN SHARES, AS WELL AS ANY APPLICABLE STATE, LOCAL
OR FOREIGN TAX CONSEQUENCES, IN LIGHT OF ITS PARTICULAR
CIRCUMSTANCES.
Tax
Classification of the Trust and the Fund
The Trust is organized and
will be operated as a statutory trust in accordance with the provisions of the
Trust Agreement and applicable Delaware law. Notwithstanding the Trust’s status
as a statutory trust and the Fund’s status as a series of the Trust, due to the
nature of its activities the Fund will not be classified as a trust for U.S.
federal income tax purposes, but rather will be classified as a partnership for
such purposes. The trading of Shares on the NYSE Arca will cause the Fund to be
classified as a “publicly traded partnership” for U.S. federal income tax
purposes. Under section 7704 of the Code, a publicly traded partnership is
generally taxable as a corporation. In the case of an entity not registered
under the Investment Company Act of 1940 as amended, (such as the Fund) 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.
There is very limited
authority on the U.S. federal income tax treatment of bitcoin and no direct
authority on bitcoin derivatives, such as Bitcoin Futures Contracts. Vedder
Price is of the opinion that Bitcoin Futures Contracts more likely than not will
be considered futures with respect to commodities for purposes of the qualifying
income exception under section 7704 of the Code. Based on the opinion of Vedder
Price and a CFTC determination that treats bitcoin as a commodity under the CEA,
the Fund intends to take the position that Bitcoin Futures Contracts consist of
futures on commodities for purposes of the qualifying income exception under
section 7704 of the Code. Shareholders should be aware that the Fund’s position
is not binding on the IRS, and no assurance can be given that the IRS will not
challenge the Fund’s position, or that the IRS or a court will not ultimately
reach a contrary conclusion, which would result in the material adverse
consequences to Shareholders and the Fund discussed below.
The Trust and the Sponsor
have represented the following to Vedder Price:
● |
assuming Bitcoin
Futures Contracts consist of futures on commodities for purposes of the
qualifying income exception under section 7704(d) of the Code, 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 more likely than
not 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 U.S. federal income tax purposes and would pay U.S.
federal income tax on its income at regular corporate tax 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 U.S. 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% tax 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 intends to make
the election permitted by section 754 of the Code, which election is irrevocable
without the consent of the IRS. The effect of this election is that when a
secondary market sale of Shares occurs, the Fund adjusts the purchaser’s
proportionate share of the tax basis of the Fund’s assets to fair market value,
as reflected in the price paid for the Shares, as if the purchaser had directly
acquired an interest in the Fund’s assets. The section 754 election is intended
to eliminate disparities between a partner’s basis in its partnership interest
and its share of the tax basis of the partnership’s assets, so that the
partner’s allocable share of taxable gain or loss on a disposition of an asset
will correspond to its share of the appreciation or depreciation in the value of
the asset since it acquired its interest. Depending on the price paid for Shares
and the tax basis of the Fund’s assets at the time of the purchase, the effect
of the section 754 election on a purchaser of Shares may be favorable or
unfavorable. In order to make the appropriate basis adjustments in a
cost-effective manner, the Fund will use certain simplifying conventions and
assumptions. In particular, the Fund will obtain information regarding secondary
market transactions in its Shares and use this information to adjust the
Shareholders’ indirect basis in the Fund’s assets. It is possible the IRS could
successfully assert that the conventions and assumptions applied are improper
and require different basis adjustments to be made, which could adversely affect
some Shareholders.
Section 1256 Contracts. Under the Code,
special rules apply to instruments constituting “section 1256 contracts.” A
section 1256 contract is defined as including, in relevant part: (1) a futures
contract that is traded on or subject to the rules of a national securities
exchange which is registered with the SEC, a domestic board of trade designated
as a contract market by the CFTC, or any other board of trade or exchange
designated by the Secretary of the Treasury (a “qualified board or exchange”),
and with respect to which the amount required to be deposited and the amount
that may be withdrawn depends on a system of “marking to market”; and (2) a
non-equity option traded on or subject to the rules of a qualified board or
exchange. Section 1256 contracts held at the end of each taxable year are
treated as if they were sold for their fair market value on the last business
day of the taxable year (i.e., are
“marked to market”). In addition, any gain or loss realized from a disposition,
termination or marking to market of a section 1256 contract is treated as
long-term capital gain or loss to the extent of 60% thereof, and as short-term
capital gain or loss to the extent of 40% thereof, without regard to the actual
holding period (“60-40 treatment”).
The Sponsor expects that
many of the Fund’s Bitcoin Futures Contracts will qualify as “section 1256
contracts” under the Code. Some other bitcoin interests that are cleared through
a qualified board or exchange will also constitute section 1256 contracts. Any
gain or loss recognized as a result of the disposition, termination or marking
to market of the Fund’s section 1256 contracts will be subject to 60-40
treatment and allocated to Shareholders in accordance with the monthly
allocation convention. Commodity swaps will most likely not qualify as section
1256 contracts. If a commodity swap is not taxable as a section 1256 contract,
any gain or loss on the swap will be recognized at the time of disposition or
termination as long-term or short-term capital gain or loss depending on the
holding period of the swap in the Fund’s hands.
Foreign exchange gains and
losses realized by the Fund in connection with certain transactions involving
foreign currency-denominated debt securities, certain futures contracts, forward
contracts, options and similar investments denominated in a foreign currency,
and payables or receivables denominated in a foreign currency are subject to
section 988 of the Code, which generally causes such gain and loss to be treated
as ordinary income or loss. To the extent the Fund hold foreign investments, it
may be subject to withholding and other taxes imposed by foreign countries. Tax
treaties between certain countries and the United States may reduce or eliminate
such taxes. Because the amount of the Fund’s investments in various countries
will change from time to time, it is not possible to determine the effective
rate of such taxes in advance.
Limitations on Deductibility of Losses and Certain
Expenses. A number of different provisions of the Code may defer or
disallow the deduction of losses or expenses allocated to Shareholders by the
Fund, including but not limited to those described below.
A Shareholder’s deduction
of its allocable share of any loss of the Fund is limited to the lesser of (1)
the tax basis in its Shares or (2) in the case of a Shareholder that is an
individual or a closely held corporation, the amount which the Shareholder is
considered to have “at risk” with respect to the Fund’s activities. In general,
the amount at risk initially will be a Shareholder’s invested capital. Losses in
excess of the amount at risk must be deferred until years in which the Fund
generates additional taxable income against which to offset such carryover
losses or until additional capital is placed at risk.
Individuals and other
non-corporate taxpayers are permitted to deduct capital losses only to the
extent of their capital gains for the taxable year plus $3,000 of other income.
Unused capital losses can be carried forward and used in future years, subject
to these same limitations. In addition, an individual taxpayer may elect to
carry back net losses on section 1256 contracts to each of the three preceding
years and use them to offset section 1256 contract gains in those years, subject
to certain limitations. Corporate taxpayers generally may deduct capital losses
only to the extent of capital gains, subject to special carryback and
carryforward rules.
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 will
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 allocable is limited to an
amount equal to the sum of (1) the Fund’s business interest income during the
year and (2) 30% of the Fund’s adjusted taxable income for such taxable year. If
the Fund is not entitled to fully deduct its business interest in any taxable
year, such excess business interest expense will be allocated to each
Shareholder as excess business interest and can be carried forward by the
Shareholder to successive taxable years and used to offset any excess taxable
income allocated by the Fund to such Shareholder. Any excess business interest
expense allocated to a Shareholder will reduce such Shareholder’s basis in its
Shares in the year of the allocation even if the expense does not give rise to a
deduction to the Shareholder in that year. Immediately prior to a Shareholder’s
disposition of its Shares, the Shareholder’s basis will be increased by the
amount by which such basis reduction exceeds the excess interest expense that
has been deducted by such Shareholder.
To the extent that the
Fund allocates losses or expenses to you that must be deferred or are disallowed
as a result of these or other limitations in the Code, you may be taxed on
income in excess of your economic income or distributions (if any) on your
Shares. As one example, you could be allocated and required to pay tax on your
share of interest income accrued by the Fund for a particular taxable year, and
in the same year be allocated a share of a capital loss that you cannot deduct
currently because you have insufficient capital gains against which to offset
the loss. As another example, you could be allocated and required to pay tax on
your share of interest income and capital gain for a year but be unable to
deduct some or all of your share of management fees and/or margin account
interest incurred by you with respect to your Shares. Shareholders are urged to
consult their own tax advisor regarding the effect of limitations under the Code
on their ability to deduct their allocable share of the Fund’s losses and
expenses.
Tax
Basis of Shares
A Shareholder’s tax basis
in its Shares is important in determining (1) the amount of taxable gain or loss
it will realize on the sale or other disposition of its Shares, (2) the amount
of non-taxable distributions that it may receive from the Fund, and (3) its
ability to utilize its distributive share of any losses of the Fund on its U.S.
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 U.S. federal income tax
purposes except to the extent that the amount of money distributed exceeds the
Shareholder’s adjusted basis of its interest in the Fund immediately before the
distribution. Any money distributed that is in excess of a Shareholder’s tax
basis generally will be treated as gain from the sale or exchange of Shares. For
purposes of determining the gain recognized on a distribution from a
partnership, a marketable security distributed to a partner is generally treated
as money. This treatment, however, does not apply to distributions to “eligible
partners” of an “investment partnership,” as those terms are defined in the
Code.
Tax
Consequences of Disposition of Shares
If a Shareholder sells its
Shares, it will recognize gain or loss equal to the difference between the
amount realized and its adjusted tax basis for the Shares sold. A Shareholder’s
amount realized will be the sum of the cash or the fair market value of other
property received plus its share of the Fund’s liabilities.
Gain or loss recognized by
a Shareholder on the sale or exchange of Shares held for more than one year will
generally be taxable as long-term capital gain or loss; otherwise, such gain or
loss will generally be taxable as short-term capital gain or loss. A special
election is available under the Treasury Regulations that allows Shareholders to
identify and use the actual holding periods for the Shares sold for purposes of
determining whether the gain or loss recognized on a sale of Shares will give
rise to long-term or short-term capital gain or loss. It is expected that most
Shareholders will be eligible to elect, and generally will elect, to identify
and use the actual holding period for Shares sold. If a Shareholder who has
differing holding periods for its Shares fails to make the election or is not
able to identify the holding periods of the Shares sold, the Shareholder will
have a split holding period in the Shares sold. Under such circumstances, a
Shareholder will be required to determine its holding period in the Shares sold
by first determining the portion of its entire interest in the Fund that would
give rise to long-term capital gain or loss if its entire interest were sold and
the portion that would give rise to short-term capital gain or loss if the
entire interest were sold. The Shareholder would then treat each Share sold as
giving rise to long-term capital gain or loss and short-term capital gain or
loss in the same proportions as if it had sold its entire interest in the
Fund.
Under Section 751 of the
Code, a portion of a Shareholder’s gain or loss from the sale of Shares
(regardless of the holding period for such Shares), will be separately computed
and taxed as ordinary income or loss to the extent attributable to “unrealized
receivables” or “inventory” owned by the Fund. The term “unrealized receivables”
includes, among other things, market discount bonds and short-term debt
instruments to the extent such items would give rise to ordinary income if sold
by the Fund. However, the short-term capital gain on section 1256 contracts
resulting from 60-40 treatment, described above, should not be subject to this
rule.
If some or all of a
Shareholder’s Shares are lent by its broker or other agent to a third party —
for example, for use by the third party in covering a short sale — the
Shareholder may be considered as having made a taxable disposition of the loaned
Shares, in which case —
● |
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 U.S. federal income 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 for U.S. federal income tax
purposes. |
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 of the Fund 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 U.S. federal income 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 U.S. 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. Partnerships are generally treated as separate entities for purposes of
U.S. federal tax audits, judicial review of administrative adjustments by the
IRS, and tax settlement proceedings. The tax treatment of partnership items of
income, gain, loss and deduction are determined at the partnership level in a
unified partnership proceeding rather than in separate proceedings with the
partners.
Tax deficiencies
(including interest and penalties) that arise from an adjustment to partnership
items generally are assessed and collected from the partnership (rather than
from the partners), and generally are 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 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, 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.
The Trust Agreement
provides 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) that
take such adjustments to taxable income, gain, loss, deduction or credit into
account, resulting in each such Shareholder taking those adjustments into
account on its tax returns.
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. They could require disclosure by the Trust or Shareholders if a
Shareholder incurs a loss in excess of a specified threshold from a sale or
redemption of its Shares and possibly in other circumstances. While these rules
generally do not require disclosure of a loss recognized on the disposition of
an asset in which the taxpayer has a “qualifying basis” (generally a basis equal
to the amount of cash paid by the taxpayer for such asset), they apply to a loss
recognized with respect to interests in a pass-through entity, such as the
Shares, even if the taxpayer’s basis in such interests is equal to the amount of
cash it paid. In addition, significant monetary penalties may be imposed in
connection with a failure to comply with these reporting requirements. Investors
should consult their own tax advisor concerning the application of these
reporting requirements to their specific situation.
Tax-Exempt Organizations.
Subject to numerous exceptions, qualified retirement plans and individual
retirement accounts, charitable organizations and certain other organizations
that otherwise are exempt from U.S. federal income tax (collectively, “exempt
organizations”) nonetheless are subject to the tax on unrelated business taxable
income (“UBTI”). Generally, UBTI means the gross income derived by an exempt
organization from a trade or business that it regularly carries on, the conduct
of which is not substantially related to the exercise or performance of its
exempt purpose or function, less allowable deductions directly connected with
that trade or business. If the Fund were to regularly carry on (directly or
indirectly) a trade or business that is unrelated with respect to an exempt
organization Shareholder, then in computing its UBTI, the Shareholder must
include its share of (1) the Fund’s gross income from the unrelated trade or
business, whether or not distributed, and (2) the Fund’s allowable deductions
directly connected with that gross income. An exempt organization that has more
than one unrelated trade or business generally must compute its UBTI separately
for each such trade or business.
UBTI generally does not
include dividends, interest, or payments with respect to securities loans and
gains from the sale of property (other than property held for sale to customers
in the ordinary course of a trade or business). Nonetheless, income on, and gain
from the disposition of, “debt-financed property” is UBTI. Debt-financed
property generally is income-producing property (including securities), the use
of which is not substantially related to the exempt organization’s tax-exempt
purposes, and with respect to which there is “acquisition indebtedness” at any
time during the taxable year (or, if the property was disposed of during the
taxable year, the 12-month period ending with the disposition). Acquisition
indebtedness includes debt incurred to acquire property, debt incurred before
the acquisition of property if the debt would not have been incurred but for the
acquisition, and debt incurred subsequent to the acquisition of property if the
debt would not have been incurred but for the acquisition and at the time of
acquisition the incurrence of debt was foreseeable. The portion of the income
from debt-financed property attributable to acquisition indebtedness is equal to
the ratio of the average outstanding principal amount of acquisition
indebtedness over the average adjusted basis of the property for the year. The
Fund currently does not anticipate that it will borrow money to acquire
investments; however, the Fund cannot be certain that it will not borrow for
such purpose in the future, which could result in an exempt organization
Shareholder having UBTI. In addition, an exempt organization Shareholder that
incurs acquisition indebtedness to purchase its Shares in the Fund may have
UBTI.
The 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 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. While the tax treatment of
bitcoin derivatives is not entirely clear, it is possible that the Fund may be a
qualified publicly traded partnership. However, such qualification is not
assured, and prospective RIC investors should consult a tax advisor regarding
the treatment of an investment in the Fund under current tax rules and in light
of their particular circumstances.
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 in 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. As noted above, there is limited authority on the U.S. federal income tax
treatment of bitcoin and no direct authority on bitcoin derivatives. However,
based on the CFTC treatment of bitcoin as a commodity and on the assumption that
the Fund will invest in Bitcoin Futures Contracts through the CME, the Fund
intends to take the position that investing in Bitcoin Futures Contracts falls
within the commodities trading safe harbor. Thus, the Fund anticipates that the
activities directly conducted by the Fund should not result in the Fund being
engaged in a trade or business within the United States for purposes of this
rule. However, there can be no assurance that the IRS would not successfully
assert, or that a court would not decide, that the Fund’s activities constitute
a U.S. trade or business.
In the event that the
Fund’s activities were considered to constitute a U.S. trade or business, the
Fund would be required to withhold at the highest rate specified in Code section
1 (currently 37%) on allocations of our income to non-corporate Non-U.S.
Shareholders and the highest rate specified in Code section 11(b) (currently
21%) on allocations of our income to corporate Non-U.S. Shareholders, when such
income is distributed. Non-U.S. Shareholders would also be subject to a 10%
withholding tax on the consideration payable upon a sale or exchange of such
Non-U.S. Shareholder’s Shares, although the IRS has temporarily suspended this
withholding for transfers of interests in publicly traded partnerships that
occur before January 1, 2023. Such withholding will be required on transactions
occurring on or after January 1, 2023. In the case of a transfer made through a
broker, the obligation to withhold will generally be imposed on the transferor’s
broker. A Non-U.S. Shareholder with ECI will generally be required to file a
U.S. federal income tax return, and the return will provide the Non-U.S.
Shareholder with the mechanism to seek a refund of any withholding in excess of
such Shareholder’s actual U.S. federal income tax liability. Any amount withheld
by the Fund will be treated as a distribution to the Non-U.S. Shareholder to the
extent possible. In some cases, the Fund may not be able to match the economic
cost of satisfying its withholding obligations to a particular Non-U.S.
Shareholder, which may result in said cost being borne by the Fund, generally,
and accordingly, by all Shareholders.
If the Fund is not treated
as engaged in a U.S. trade or business, a Non-U.S. Shareholder may nevertheless
be treated as having FDAP income, which would be subject to a 30% withholding
tax (possibly subject to reduction by treaty), with respect to some or all of
its distributions from the Fund or its allocable share of Fund income. Amounts
withheld on behalf of a Non-U.S. Shareholder will be treated as being
distributed to such Shareholder. If the Fund is not able to match the economic
cost of satisfying its withholding obligation to a particular Non-U.S.
Shareholder, said cost may have to be borne by the Fund and accordingly by all
Shareholders.
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 U.S. 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, a Shareholder 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 and its opinion on U.S. federal tax issues is limited to those
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) entity whose
underlying assets include “plan assets” by reason of an employee benefits plan
or other plan’s investment in the entity (“plan asset entity”) who has
investment discretion should take into account before deciding to invest the
plan’s assets in the Fund. Employee benefit plans under ERISA, plans under the
Code and plan asset entities are collectively referred to below as “plans,” and
fiduciaries with investment discretion are referred to below as “plan
fiduciaries.”
This summary is based on
the provisions of ERISA and the Code as of the date hereof. This summary is not
intended to be complete, but only to address certain questions under ERISA and
the Code likely to be raised by your advisors. The summary does not include
state or local law.
Potential plan investors
are urged to consult with their own professional advisors concerning the
appropriateness of an investment in the Fund and the manner in which Shares
should be purchased.
Special
Investment Considerations
Each plan fiduciary must
consider the facts and circumstances that are relevant to an investment in the
Fund, including the role that an investment in the Fund would play in the plan’s
overall investment portfolio. Each plan fiduciary, before deciding to invest in
the Fund, must be satisfied that the investment is prudent for the plan, that
the investments of the plan are diversified so as to minimize the risk of large
losses, and that an investment in the Fund complies with the terms of the plan.
The Sponsor is not undertaking to provide investment advice, or to give advice
in a fiduciary capacity, in connection with a plan’s investment in the
Fund.
The
Fund and Plan Assets
A regulation issued under
ERISA contains rules for determining when an investment by a plan in an equity
interest of a statutory trust will result in the underlying assets of the
statutory trust being deemed plan assets for purposes of ERISA and Section 4975
of the Code. Those rules provide that assets of a statutory trust will not be
plan assets of a plan that purchases an equity interest in the statutory trust
if the equity interest purchased is a publicly offered security. If the
underlying assets of a statutory trust are considered to be assets of any plan
for purposes of ERISA or Section 4975 of the Code, the operations of that trust
would be subject to and, in some cases, limited by the provisions of ERISA and
Section 4975 of the Code.
The publicly offered
security exception described above applies if the equity interest is a security
that is:
(1) |
freely transferable
(determined based on the relevant facts and
circumstances); |
(2) |
part of a class of
securities that is widely held (meaning that the class of securities is
owned by 100 or more investors independent of the issuer and of each
other); and |
(3) |
either (a) part of a
class of securities registered under Section 12(b) or 12(g) of the
Exchange Act or (b) sold to the plan as part of a public offering pursuant
to an effective registration statement under the 1933 Act and the class of
which such security is a part is registered under the Exchange Act within
120 days (or such later time as may be allowed by the SEC) after the end
of the fiscal year of the issuer in which the offering of such security
occurred. |
The plan asset regulations
under ERISA state that the determination of whether a security is freely
transferable is to be made based on all the relevant facts and circumstances. In
the case of a security that is part of an offering in which the minimum
investment is $10,000 or less, the following requirements, alone or in
combination, ordinarily will not affect a finding that the security is freely
transferable: (1) a requirement that no transfer or assignment of the security
or rights relating to the security be made that would violate any federal or
state law; and (2) a requirement that no transfer or assignment be made without
advance written notice given to the entity that issued the
security.
The Sponsor believes that
the conditions described above are satisfied with respect to the Shares. The
Sponsor believes that the Shares therefore constitute publicly offered
securities, and the underlying assets of the Fund should not be considered to
constitute plan assets of any plan that purchases Shares.
Prohibited
Transactions
ERISA and the Code
generally prohibit certain transactions involving a plan and persons who have
certain specified relationships to the plan. In general, Shares may not be
purchased with the assets of a plan if the Sponsor, the clearing brokers, the
trading advisors (if any), or any of their affiliates, agents or employees
either:
● |
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 U.S. federal income 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.
PERFORMANCE
OF THE OTHER COMMODITY POOLS OPERATED BY THE COMMODITY POOL
OPERATOR
All
summary performance information is as of June 30, 2022. Performance information
is set forth, in accordance with CFTC regulations, on a monthly basis for each
other commodity pool’s past five calendar years and for the year to date. No
performance information is presented with respect to the Hashdex Bitcoin Futures
ETF, which has not commenced investment operations prior to the date of this
Prospectus, and which will not begin trading until after the initial creation
units of the Fund are purchased by the initial Authorized Participant (all as
described in the “Plan of Distribution” Section of this Prospectus). The
performance of the Hashdex Bitcoin Futures ETF will be materially different from
the funds and the past performance summaries of the other funds below are
generally not representative of how the funds might perform in the future.
Teucrium Trading, LLC serves as the commodity trading advisor for two series of
the ConvexityShares Trust registrant, which commenced operations on August 15,
2022.
The monthly rate of return
for each fund presented below 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.
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.
Teucrium
Corn Fund (TICKER: CORN)
The Teucrium Corn Fund
commenced trading and investment operations on June 9, 2010. The Fund is listed
on NYSE Arca and is neither: (i) a privately offered pool pursuant to Section
4(a)(2) of the 1933 Act; (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 June 30,
2022) |
44,125,000 |
Aggregate
gross sale price for units issued |
$980,601,057 |
Pool
NAV as of June 30, 2022 |
$238,731,929 |
NAV
per Share as of June 30, 2022 |
$25.06 |
Largest
monthly percentage drawdown |
|
Worst
peak to valley drawdown |
-76.94%
/ Aug 2012 - Jul 2020 |
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
Rates
of Return |
Month |
2017 |
|
2018 |
|
2019 |
|
2020 |
|
2021 |
|
2022 |
|
January |
2.24 |
% |
2.51 |
% |
0.50 |
% |
(2.64) |
% |
8.71 |
% |
4.63 |
% |
February |
1.56 |
% |
2.74 |
% |
(3.09) |
% |
(4.44) |
% |
1.72 |
% |
8.39 |
% |
March |
(2.36) |
% |
1.98 |
% |
(3.00) |
% |
(6.11) |
% |
2.47 |
% |
11.02 |
% |
April |
(1.37) |
% |
0.94 |
% |
(1.12) |
% |
(6.81) |
% |
17.62 |
% |
10.31 |
% |
May |
1.23 |
% |
(0.77) |
% |
11.03 |
% |
0.43 |
% |
(2.07) |
% |
(5.65) |
% |
June |
0.58 |
% |
(8.82) |
% |
(1.86) |
% |
2.37 |
% |
5.72 |
% |
(11.37) |
% |
July |
(1.36) |
% |
3.41 |
% |
(3.14) |
% |
(5.48) |
% |
(6.07) |
% |
|
% |
August |
(6.00) |
% |
(4.71) |
% |
(6.86) |
% |
7.39 |
% |
(0.56) |
% |
|
% |
September |
(0.56) |
% |
(2.16) |
% |
2.87 |
% |
4.43 |
% |
1.04 |
% |
|
% |
October |
(2.27) |
% |
1.83 |
% |
(0.42) |
% |
1.84 |
% |
5.38 |
% |
|
% |
November |
(1.28) |
% |
0.37 |
% |
(4.34) |
% |
5.48 |
% |
(1.40) |
% |
|
% |
December |
(1.35) |
% |
(0.49) |
% |
2.21 |
% |
10.02 |
% |
2.63 |
% |
|
% |
Annual
Rate of Return |
(10.76) |
% |
(3.82) |
% |
(8.00) |
% |
4.83 |
% |
38.88 |
% |
16.14 |
% |
Teucrium
Soybean Fund (TICKER: SOYB)
The Teucrium Soybean Fund
commenced trading and investment operations on September 19, 2011. The Fund is
listed on NYSE Arca and is neither: (i) a privately offered pool pursuant to
Section 4(a)(2) of the 1933 Act; (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 June 30,
2022) |
15,475,000 |
Aggregate
gross sale price for units issued |
$275,006,319 |
Pool
NAV as of June 30, 2022 |
$75,109,727 |
NAV
per Share as of June 30, 2022 |
$27.07 |
Largest
monthly percentage drawdown |
|
Worst
peak to valley drawdown |
-52.02%
/ Aug 2012 - May 2020 |
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
Rates
of Return |
Month |
2017 |
|
2018 |
|
2019 |
|
2020 |
|
2021 |
|
2022 |
|
January |
1.68 |
% |
3.31 |
% |
2.16 |
% |
(7.92) |
% |
3.63 |
% |
9.30 |
% |
February |
0.52 |
% |
3.69 |
% |
(1.75) |
% |
(0.00) |
% |
4.15 |
% |
7.40 |
% |
March |
(7.13) |
% |
(0.42) |
% |
(2.89) |
% |
(4.07) |
% |
2.59 |
% |
0.11 |
% |
April |
(0.28) |
% |
(0.63) |
% |
(4.56) |
% |
(2.08) |
% |
6.16 |
% |
6.70 |
% |
May |
(3.05) |
% |
(1.43) |
% |
2.46 |
% |
(0.50) |
% |
2.17 |
% |
(1.48) |
% |
June |
3.37 |
% |
(13.03) |
% |
1.81 |
% |
2.52 |
% |
1.61 |
% |
(3.79) |
% |
July |
4.70 |
% |
4.38 |
% |
(3.35) |
% |
1.67 |
% |
(2.81) |
% |
|
% |
August |
(3.27) |
% |
(7.03) |
% |
(1.36) |
% |
5.94 |
% |
(2.57) |
% |
|
% |
September |
(2.02) |
% |
0.57 |
% |
3.45 |
% |
5.32 |
% |
(2.38) |
% |
|
% |
October |
2.73 |
% |
(1.01) |
% |
1.48 |
% |
1.81 |
% |
(0.99) |
% |
|
% |
November |
0.11 |
% |
4.47 |
% |
(5.36) |
% |
9.72 |
% |
(2.80) |
% |
|
% |
December |
(3.36) |
% |
(1.04) |
% |
6.42 |
% |
9.98 |
% |
7.59 |
% |
|
% |
Annual
Rate of Return |
(6.45) |
% |
(9.24) |
% |
(2.16) |
% |
22.98 |
% |
16.82 |
% |
18.86 |
% |
Teucrium
Sugar Fund (TICKER: CANE)
The Teucrium Sugar Fund
commenced trading and investment operations on September 19, 2011. The Fund is
listed on NYSE Arca and is neither: (i) a privately offered pool pursuant to
Section 4(a)(2) of the 1933 Act; (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 June 30,
2022) |
11,150,000 |
Aggregate
gross sale price for units issued |
$99,782,714 |
Pool
NAV as of June 30, 2022 |
$32,383,073 |
NAV
per Share as of June 30, 2022 |
$9.32 |
Largest
monthly percentage drawdown |
|
Worst
peak to valley drawdown |
-78.60%
/ Sep 2011 - Apr 2020 |
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
Rates
of Return |
Month |
2017 |
|
2018 |
|
2019 |
|
2020 |
|
2021 |
|
2022 |
|
January |
6.62 |
% |
(8.58) |
% |
6.36 |
% |
3.83 |
% |
2.81 |
% |
(3.86) |
% |
February |
(5.34) |
% |
(1.56) |
% |
0.13 |
% |
(1.68) |
% |
7.93 |
% |
(0.89) |
% |
March |
(10.14) |
% |
(5.90) |
% |
(3.05) |
% |
(23.51) |
% |
(5.73) |
% |
9.43 |
% |
April |
(5.17) |
% |
(7.48) |
% |
(1.78) |
% |
(2.76) |
% |
13.55 |
% |
(0.34) |
% |
May |
(6.89) |
% |
4.95 |
% |
(1.95) |
% |
1.25 |
% |
3.01 |
% |
2.25 |
% |
June |
(7.40) |
% |
(5.34) |
% |
1.00 |
% |
5.83 |
% |
3.17 |
% |
(4.93) |
% |
July |
7.57 |
% |
(9.84) |
% |
(1.70) |
% |
4.77 |
% |
1.25 |
% |
|
% |
August |
(3.09) |
% |
(1.89) |
% |
(7.08) |
% |
0.89 |
% |
12.51 |
% |
|
% |
September |
(6.17) |
% |
(1.63) |
% |
2.58 |
% |
0.90 |
% |
(0.97) |
% |
|
% |
October |
3.08 |
% |
15.99 |
% |
(0.87) |
% |
0.16 |
% |
(2.31) |
% |
|
% |
November |
0.82 |
% |
(2.34) |
% |
2.09 |
% |
4.00 |
% |
(3.42) |
% |
|
% |
December |
(0.10) |
% |
(5.86) |
% |
4.56 |
% |
5.64 |
% |
2.22 |
% |
|
% |
Annual
Rate of Return |
(24.52) |
% |
(27.78) |
% |
(0.48) |
% |
(4.51) |
% |
37.31 |
% |
1.01 |
% |
Teucrium
Wheat Fund (TICKER: WEAT)
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 1933 Act; (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 June 30,
2022) |
109,925,000 |
Aggregate
gross sale price for units issued |
$1,083,020,909 |
Pool
NAV as of June 30, 2022 |
$450,519,572 |
NAV
per Share as of June 30, 2022 |
$9.03 |
Largest
monthly percentage drawdown |
|
Worst
peak to valley drawdown |
-80.30%
/ Sept 2011 - Apr 2019 |
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
Rates
of Return |
Month |
2017 |
|
2018 |
|
2019 |
|
2020 |
|
2021 |
|
2022 |
|
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) |
% |
12.24 |
% |
April |
(1.73) |
% |
8.40 |
% |
(6.98) |
% |
(6.75) |
% |
18.28 |
% |
7.02 |
% |
May |
(0.29) |
% |
2.53 |
% |
14.00 |
% |
(1.01) |
% |
(6.94) |
% |
4.01 |
% |
June |
15.46 |
% |
(7.41) |
% |
2.31 |
% |
(5.49) |
% |
2.31 |
% |
(17.43) |
% |
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 |
% |
22.44 |
% |
Teucrium
Agricultural Fund (TICKER: TAGS)
The Teucrium Agricultural
Fund commenced trading and investment operations on March 28, 2012. The Teucrium
Agricultural Fund is listed on NYSE Arca and is neither: (i) a privately offered
pool pursuant to Section 4(a)(2) of the 1933 Act; (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 June 30,
2022) |
2,212,500 |
Aggregate
gross sale price for units issued |
$75,318,306 |
Pool
NAV as of June 30, 2022 |
$47,407,824 |
NAV
per Share as of June 30, 2022 |
$31.09 |
Largest
monthly percentage drawdown |
|
Worst
peak to valley drawdown |
-70.07%
/ Jul 2012 - Apr 2020 |
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
Rates
of Return |
Month |
2017 |
|
2018 |
|
2019 |
|
2020 |
|
2021 |
|
2022 |
|
January |
3.34 |
% |
0.57 |
% |
2.61 |
% |
(2.19) |
% |
4.18 |
% |
2.22 |
% |
February |
(0.29) |
% |
2.67 |
% |
(3.98) |
% |
(2.75) |
% |
3.46 |
% |
8.52 |
% |
March |
(5.97) |
% |
(2.98) |
% |
(2.60) |
% |
(7.41) |
% |
(1.53) |
% |
8.33 |
% |
April |
(2.16) |
% |
0.09 |
% |
(3.59) |
% |
(4.63) |
% |
13.71 |
% |
5.93 |
% |
May |
(2.32) |
% |
1.32 |
% |
6.17 |
% |
0.03 |
% |
(1.02) |
% |
(0.22) |
% |
June |
2.91 |
% |
(8.65) |
% |
0.85 |
% |
1.21 |
% |
3.26 |
% |
(9.38) |
% |
July |
1.00 |
% |
1.47 |
% |
(3.94) |
% |
1.99 |
% |
(1.21) |
% |
|
% |
August |
(6.47) |
% |
(4.48) |
% |
(5.42) |
% |
4.23 |
% |
2.70 |
% |
|
% |
September |
(0.72) |
% |
(2.20) |
% |
3.86 |
% |
3.50 |
% |
(0.60) |
% |
|
% |
October |
(1.27) |
% |
3.65 |
% |
0.59 |
% |
1.39 |
% |
2.16 |
% |
|
% |
November |
(0.47) |
% |
0.34 |
% |
(0.87) |
% |
4.29 |
% |
(1.70) |
% |
|
% |
December |
(1.60) |
% |
(2.31) |
% |
4.05 |
% |
8.28 |
% |
2.34 |
% |
|
% |
Annual
Rate of Return |
(13.60) |
% |
(10.64) |
% |
(3.02) |
% |
7.14 |
% |
27.85 |
% |
15.10 |
% |
INCORPORATION BY REFERENCE OF CERTAIN
INFORMATION
The Trust is a reporting
company and files annual, quarterly and current reports and other information
with the SEC. The rules of the SEC allow the Trust to “incorporate by reference”
information that the Trust files with them, which means that the Trust 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:
● |
our Annual Report on
Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC
on March 16, 2022;
|
● |
our Quarterly Report
on Form 10-Q for the quarterly period ended March 31, 2022, filed with the
SEC on May 10, 2022, and
|
● |
our Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 2022, filed with the
SEC on August 9, 2022. |
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:
Hashdex Bitcoin Futures
ETF
Attention: Cory
Mullen-Rusin
Three Main Street, Suite
215
Burlington, VT
05401
(802)
540-0019
The Trust’s Internet
website is www.teucrium.com. The Trust makes its electronic filings with the
SEC, including its annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to these reports available on the
Trust’s website free of charge as soon as practicable after we file or furnish
them with the SEC. The information contained on the Trust’s website is not
incorporated by reference in this prospectus and should not be considered a part
of this prospectus.
INFORMATION YOU SHOULD KNOW
This prospectus contains
information you should consider when making an investment decision about the
Shares. You should rely only on the information contained in this prospectus or
any applicable prospectus supplement. None of the Trust, the Fund or the Sponsor
has authorized any person to provide you with different information and, if
anyone provides you with different or inconsistent information, you should not
rely on it. This prospectus is not an offer to sell the Shares in any
jurisdiction where the offer or sale of the Shares is not
permitted.
The information contained
in this prospectus was obtained from us and other sources believed by us to be
reliable.
You should disregard
anything we said in an earlier document that is inconsistent with what is
included in this prospectus or any applicable prospectus supplement. Where the
context requires, when we refer to this “prospectus,” we are referring to this
prospectus and (if applicable) the relevant prospectus supplement.
You should not assume that
the information in this prospectus or any applicable prospectus supplement is
current as of any date other than the date on the front page of this prospectus
or the date on the front page of any applicable prospectus
supplement.
We include cross
references in this prospectus to captions in these materials where you can find
further related discussions. The table of contents tells you where to find these
captions.
WHERE
YOU CAN FIND MORE INFORMATION
The Trust has filed on
behalf of the Fund a registration statement with the SEC under the 1933 Act.
This prospectus does not contain all of the information set forth in the
registration statement (including the exhibits to the registration statement),
parts of which have been omitted in accordance with the rules and regulations of
the SEC. For further information about the Trust, the Fund or the Shares, please
refer to the registration statement, which you may inspect online at www.sec.gov. Information about the
Trust, the Fund and the Shares can also be obtained from the Fund’s website,
which is http://hashdex-etfs.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.
FINANCIAL
STATEMENTS
The financial statements
of the Trust have been incorporated into this prospectus and registration
statement as described above under “Incorporation By Reference of Certain
Information.”
The financial statements
of the Fund are set forth below.
HASHDEX
BITCOIN FUTURES ETF
INDEX
TO FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM |
To the Sponsor and
Shareholders of
Hashdex Bitcoin Futures
ETF
Opinion
on the financial statement
We have audited the
accompanying statement of assets and liabilities of Hashdex Bitcoin Futures ETF
(the “Fund”) as of May 31, 2022 and the related notes (collectively referred to
as the “financial statements”). In our opinion, the financial statements present
fairly, in all material respects, the financial position of the Fund as of May 31, 2022, in conformity with
accounting principles generally accepted in the United States of
America.
Basis
for opinion
These financial statements
are the responsibility of the Fund’s management. Our responsibility is to
express an opinion on the Fund’s financial statements based on our audit. We are
a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (“PCAOB”) and are required to be independent with respect
to the Fund in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audit in
accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error or fraud. The
Fund is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. As part of our audit we are required
to obtain an understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of the Fund’s
internal control over financial reporting. Accordingly, we express no such
opinion.
Our audit included
performing procedures to assess the risks of material misstatement of the
financial statement, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test
basis, evidence regarding the amounts and disclosures in the financial
statement. Our audit also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audit provides a
reasonable basis for our opinion.
Critical
audit matters
Critical audit matters are
matters arising from the current period audit of the financial statement that
were communicated or required to be communicated to the audit committee and
that: (1) relate to accounts or disclosures that are material to the financial
statement (2) involved especially challenging, subjective, or complex
judgements. We determined that there are no critical audit matters.
/s/ GRANT THORNTON
LLP
We have served as the
auditor of one or more of the series of Teucrium Commodity Trust since
2014.
New York, New
York
July 20, 2022
HASHDEX
BITCOIN FUTURES ETF
STATEMENT OF ASSETS AND LIABILITIES
|
May
31, 2022 |
|
|
Assets |
|
Cash |
$100 |
Total
assets |
100 |
|
|
Liabilities |
|
Total
liabilities |
$- |
|
|
Net
assets |
$100 |
|
|
Shares
outstanding |
4 |
|
|
NAV
per Share |
$25.00 |
The
accompanying notes are an integral part of these financial
statements.
NOTES TO STATEMENT OF ASSETS AND LIABILITIES
May
31, 2022
Note
1 — Organization and Business
Hashdex Bitcoin Futures ETF (the “Fund”) is a series of
Teucrium Commodity Trust (“Trust”), a Delaware statutory trust organized on
September 11, 2009. The Fund operates pursuant to the Fifth Amended and
Restated Declaration of Trust and Trust Agreement ("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/1471824/000165495419004865/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 Fund intends to be treated as a partnership for U.S. federal income tax
purposes.
On May 20,
2021, an initial registration statement was filed with the Securities and
Exchange Commission (“SEC”). As of May 31, 2022, the Sponsor was waiting for the
SEC to declare that registration statement effective.
The Fund’s investment objective is for changes in the
Shares’ NAV to reflect the daily changes of the price of the Hashdex U.S.
Bitcoin Futures Fund Benchmark (the “Benchmark”), less expenses from the Fund’s
operations. The Benchmark currently is the average of the closing
settlement prices for the first to expire and second to expire bitcoin futures
contracts (“Bitcoin Futures Contracts”) listed on the CME. These futures
contracts are the Benchmark Component Futures Contracts. The CME currently
offers two Bitcoin Futures Contracts, one contract representing 5 bitcoin (“BTC
Contracts”) and another contract representing 0.10 bitcoin (“MBT Contracts”).
The Fund will invest in BTC Contracts and MBT Contracts to the extent necessary
to achieve maximum exposure to the bitcoin futures market.
Because BTC Contracts and
MBT Contracts are exchange-listed, they allow investors to gain price exposure
to bitcoin without having to hold the underlying cryptocurrency. Like a futures
contract on a commodity or stock index, BTC Contracts and MBT Contracts provide
a means for investors to hedge investment positions or speculate on the future
price of the bitcoin market.
The Fund seeks to achieve
its investment objective by investing in Benchmark Component Futures Contracts.
Under normal market conditions, the Fund expects that the Fund’s assets will be
invested in Benchmark Component Futures Contracts and in cash and cash
equivalents, such as short-term Treasury bills, money market funds, and demand
deposit accounts. The term “normal market conditions” includes, but is not
limited to, the absence of: trading halts in the applicable financial markets
generally; operational issues (e.g., systems failure) causing dissemination of
inaccurate market information; or force majeure type events such as natural or
manmade disaster, act of God, armed conflict, act of terrorism, riot or labor
disruption or any similar intervening circumstance.
Because the Fund seeks to
maintain its holdings in Benchmark Component Futures Contracts with a roughly
constant expiration profile, the Fund’s positions are changed or “rolled” on a
regular basis in order to track the changing nature of the Benchmark by closing out soon to expire contracts prior to settlement
or on settlement date that are no longer part of the Benchmark and entering into
later 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 bitcoin in the future is expected to be
less than the current price), the Fund will buy later to expire contracts for a
lower price than the soon to expire contracts that it sells. If the futures
market is in contango, the Fund will buy later to expire contracts for a higher
price than the soon to expire contracts that it sells. 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. By way of example,
during the period from 1/1/2019 to 6/30/2022, the market for Bitcoin Component
Futures Contracts were in contango approximately 90% of the time, which resulted
in an average annual negative roll yield of approximately 7%.
Consistent with applicable
provisions of the Trust Agreement and Delaware law, the Fund has broad authority
to make changes to the Fund’s operations. The Fund may change its investment
objective, Benchmark, or investment strategies and Shareholders of the Fund will
not have any rights with respect to these changes. 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 the Benchmark Component Futures Contracts 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 Component 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.”
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 bitcoin
market in a cost-effective manner. The Sponsor endeavors to place the Fund’s
trades in Benchmark Component Futures Contracts and otherwise manage the Fund’s
investments so that the Fund’s average daily tracking error against the
Benchmark will be less than 10 percent over any period of 30 trading days.
However, the Fund incurs certain expenses in connection with its operations,
which cause imperfect correlation between changes in the Fund’s NAV and changes
in the Benchmark because the Benchmark does not reflect expenses or income. As a
result, investors may incur a partial or complete loss of their investment even
when the performance of the Benchmark is positive.
Investors may purchase and
sell Shares through their broker-dealers. However, the Fund creates and redeems
Shares only in blocks called Creation Baskets and Redemption Baskets,
respectively, and only Authorized Purchasers may purchase or redeem Creation
Baskets or Redemption Baskets. An Authorized Purchaser is under no obligation to
create or redeem baskets, and an Authorized Purchaser is under no obligation to
offer to the public Shares of any baskets it does create. Baskets are generally
created when there is a demand for Shares, including, but not limited to, when
the market price per share is at (or perceived to be at) a premium to the NAV
per Share. Similarly, baskets are generally redeemed when the market price per
share is at (or perceived to be at) a discount to the NAV per Share. Retail
investors seeking to purchase or sell Shares on any day are expected to affect
such transactions in the secondary market, on the NYSE Arca, at the market price
per share, rather than in connection with the creation or redemption of
baskets.
The Sponsor believes that
by investing in Benchmark Component Futures Contracts, the Fund’s net asset
value (“NAV”) will closely track the Benchmark. The Sponsor also believes that
because of market arbitrage opportunities, the market price at which investors
will purchase and sell Shares through their broker-dealer will closely track the
Fund’s NAV. The Sponsor believes that the net effect of these relationships is
that the Fund’s market price on the NYSE Arca at which investors purchase and
sell Shares will closely track the bitcoin market, as measured by the
Benchmark.
The CFTC and U.S.
designated contract markets, such as the CME, have established position limits
and accountability levels on the maximum net long or net short Bitcoin Futures
Contracts that the Fund may hold, own or control. The current CME established
position limit level for investments in BTC Contracts for the spot month is
4,000 contracts. A position accountability level of 5,000 contracts will be
applied to positions in single months outside the spot month and in all months
combined. The MBT Contracts have a spot month limit of 200,000 contracts and a
position accountability level of 250,000 contracts. Open positions in MBT
Contracts will count as 1/50 of a BTC Contract for the purposes of determining
the aggregate position limit. Accountability levels are not fixed ceilings but
rather thresholds above which the exchange may exercise greater scrutiny and
control over an investor, including limiting the Fund to holding no more Bitcoin
Futures Contracts than the amount established by the accountability levels. The
potential for the Fund to reach position or accountability limits will depend on
if and how quickly the Fund’s net assets increase.
In addition to position
limits and accountability limits, the CME and other exchanges have set dynamic
price fluctuation limits on Bitcoin Futures Contracts. The dynamic price limit
functionality under the special price fluctuation limits mechanism assigns a
price limit variant which equals a percentage of the prior trading day’s
settlement price, or a price deemed appropriate. During the trading day, the
dynamic variant is utilized in continuous rolling 60-minute look-back periods to
establish dynamic upper and lower price fluctuation limits. Once the dynamic
price fluctuation limit has been reached in a particular Bitcoin Futures
Contract, no trades may be made at a price beyond that limit. The CME has
adopted daily dynamic price fluctuation limit functionality effective March 11,
2019, specifically Rule 589 found in the following link:
https://www.cmegroup.com/content/dam/cmegroup/notices/ser/2019/03/SER-8351.pdf.
When a
Bitcoin Futures Contract has closed at its daily price fluctuation limit, that
limit price will be the daily settlement price that the CME publishes. The Fund
will use the published settlement price to price its Shares on that day. If the
CME halted trading in Bitcoin Futures Contracts for other reasons, including if
trading were halted for an entire trading day or several trading days, the Fund
would value its Bitcoin Futures Contracts by using the settlement price that the
CME publishes.
Volatility
in the bitcoin futures market may lead one or more of the Fund’s FCMs to impose
risk mitigation procedures that could limit the Fund’s investment in Bitcoin
Futures Contracts beyond the accountability, position and dynamic pricing limits
imposed by futures contract exchanges as discussed above.
Position limits,
accountability limits, dynamic price fluctuation limits and FCM-imposed limits
may limit the Fund’s ability to invest the proceeds of Creation Baskets in
Bitcoin Futures Contracts. As a result, when the Fund offers to sell Creation
Baskets it may be limited in its ability to invest in Bitcoin Futures Contracts,
including the Benchmark Component Futures Contracts. The Fund may hold larger
amounts of cash and cash equivalents, which will impair the Fund’s ability to
meet its investment objective of tracking the Benchmark.
The Sponsor maintains a
public website on behalf of the Fund, http://hashdex-etfs.com/,
which contains information about the Trust, the Fund, and the
Shares.
As of May
31, 2022, the Sponsor has contributed $100 to the Fund which is reflected on the
Statement of Assets and Liabilities as cash and net assets.
Income
Taxes
The Trust is organized and
will be operated as a Delaware statutory trust. For U.S. federal income tax
purposes, the Fund will be classified as a publicly traded partnership. A
publicly traded partnership is generally taxable as a corporation for U.S.
federal income tax purposes unless 90% or more of the publicly traded
partnership’s gross income for each taxable year of its existence consists of
qualifying income as defined in section 7704(d) of the Internal Revenue Code of
1986, as amended (the “Code”). Qualifying income is defined as generally
including, in pertinent part, interest (other than from a financial business),
dividends, and gains from the sale or disposition of capital assets held for the
production of interest or dividends. In the case of a partnership of which a
principal activity is the buying and selling of commodities, other than as
inventory, or of futures, forwards, and options with respect to commodities,
qualifying income also includes income and gains from commodities and from
futures, forwards, options with respect to commodities and, provided the
partnership is a trader or investor with respect to such assets, swaps and other
notional principal contracts with respect to commodities. There is very limited
authority on the U.S. federal income tax treatment of bitcoin and no direct
authority on bitcoin derivatives, such as Bitcoin Futures Contracts. Based on an
opinion received by the Sponsor from Vedder Price P.C. and a CFTC determination
that treats bitcoin as a commodity under the Commodity Exchange Act, the Fund
intends to take the position that Bitcoin Futures Contracts consist of futures
on commodities for purposes of the qualifying income exception under section
7704 of the Code. Accordingly, the Fund expects that at least 90% of the Fund’s
gross income for each taxable year will consist of qualifying income and that
the Fund will be taxed as a partnership for U.S. federal income tax purposes.
Therefore, the Fund does not record a provision for income taxes because the
shareholders report their share of the Fund’s income or loss on their income tax
returns.
The Fund is required to
determine whether a tax position is more likely than not to be sustained upon
examination by the applicable taxing authority, including resolution of any
related appeals or litigation processes, based on the technical merits of the
position. The Fund will file income tax returns in the U.S. federal jurisdiction
and may file income tax returns in various U.S. states and foreign
jurisdictions. The tax benefit recognized is measured as the largest amount of
benefit that has a greater than fifty percent likelihood of being realized upon
ultimate settlement. De-recognition of a tax benefit previously recognized
results in the Fund recording a tax liability that reduces net
assets.
The Fund recognizes
interest accrued related to unrecognized tax benefits and penalties related to
unrecognized tax benefits in income tax fees payable, if assessed.
The Fund may be subject to
potential examination by U.S. federal, U.S. state, or foreign jurisdictional
authorities in the area of income taxes. These potential examinations may
include among other things questioning the tax classification of the Fund, the
timing and amount of deductions, the nexus of income among various tax
jurisdictions, and compliance with U.S. federal, U.S. state and foreign tax
laws.
Creations
and Redemptions
Authorized Purchasers may purchase Creation Baskets
consisting of 10,000 shares from the Fund. The amount of the proceeds
required to purchase a Creation Basket will be equal to the NAV of the shares in
the Creation Basket determined as of 4:00 p.m. (ET) time on the day the order to
create the basket is received in good order.
Authorized Purchasers may redeem shares from the Fund
only in blocks of 10,000 shares called “Redemption Baskets.” The amount
of the redemption proceeds for a Redemption Basket will be equal to the NAV of
the shares in the Redemption Basket determined as of 4:00 p.m. (ET) on the day
the order to redeem the basket is received in good order.
The Fund receives or pays
the proceeds from shares sold or redeemed within three business days after the
trade date of the purchase or redemption. The amounts due from Authorized
Purchasers are reflected in the statements of assets and liabilities as capital
shares receivable. Amounts payable to Authorized Purchasers upon redemption are
reflected in the statements of assets and liabilities as payable for shares
redeemed.
There is a minimum number
of baskets and associated Shares specified for the Fund. If the Fund experiences
redemptions that cause 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 five baskets. The minimum level of Shares specified
for the Fund is subject to change.
Calculating
the Net Asset Value
The NAV of the Fund is
calculated by:
|
● |
taking the current
market value of its total assets, and |
|
● |
subtracting any
liabilities. |
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. (ET). The
NAV for a particular trading day is released after 4:15 p.m. (ET).
In determining the value
of the Futures Contracts for the Fund, the Administrator uses the closing price
on the exchange on which the commodity is traded, commonly referred to as the
settlement price. The time of settlement for such exchange is determined by that
exchange and may change from time to time. The current settlement time for the
exchange can be found at the website for the CME: https://www.cmegroup.com/trading-hours.html.
The Administrator
determines the value of all other investments for the Fund as of the earlier of
the close of the New York Stock Exchange or 4:00 p.m., (ET), in accordance with
the current Services Agreement between the Administrator and the
Trust.
For purposes of financial
statements and reports, the Sponsor will recalculate the NAV of the Fund where
necessary to reflect the “fair value” of a Futures Contract when the Futures
Contract of the Fund closes at its price fluctuation limit for the day. Treasury
Securities held by the Fund are valued by the Administrator using values
received from recognized third-party vendors (such as Reuters) and dealer
quotes. The NAV includes any unrealized profit or loss on open Commodity
Interests and any other credit or debit accruing to each Fund but unpaid or not
received by the Fund.
In addition, in order to
provide updated information relating to the Funds for use by investors and
market professionals, ICE Data Indices, LLC calculates and disseminates
throughout the trading day an updated indicative fund value for each Fund. 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 holdings during the trading day.
Changes in the value of short-term Treasury Securities and cash equivalents will
not be included in the calculation of indicative value throughout the day. 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 for
each Fund. The 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. (ET), to 4:00 p.m. (ET). The CME is generally open
for trading only during specified hours which vary by exchange and may be
adjusted by the exchange. However, the futures markets on these exchanges do not
currently operate twenty-four hours per day. In addition, there may be some
trading hours which may be limited to electronic trading only. 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, when, for example, real-time CME
trading prices for Bitcoin Futures Contracts traded on such Exchange are not
available. As a result, during those gaps there will be no update to the
indicative fund values. The most current trading hours for each exchange may be
found on the website of that exchange as listed above.
ICE Data Indices, LLC
disseminates the indicative fund value through the facilities of CTA/CQ High
Speed Lines. In addition, the indicative fund value is published on the NYSE
Arca’s website and is available through on-line information services such as
Bloomberg and Reuters.
Dissemination of the
indicative fund value provides additional information that is not otherwise
available to the public and may be 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.
Use
of Estimates
The preparation of
financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of the revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
The Sponsor has engaged
the following Service Providers:
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.
Bank Global Fund Services (“Global Fund Services”), an entity affiliated with
U.S. Bank, N.A., is the registrar and transfer agent for the Fund’s Shares. In
addition, Global Fund Services also serves as Administrator for the Fund,
performing certain administrative, and accounting services, and preparing
certain SEC and CFTC reports on behalf of the Fund. The Custodian is located at
1555 North Rivercenter Drive, Suite 302, Milwaukee, Wisconsin 53212. U.S. Bank
N.A. is a nationally chartered bank, regulated by the Office of the Comptroller
of the Currency, Department of the Treasury, and is subject to regulation by the
Board of Governors of the Federal Reserve System. The principal address for
Global Fund Services is 615 East Michigan Street, Milwaukee, WI,
53202.
Distributor
The Fund employs Foreside Fund Services,
LLC as the Distributor for the Fund. 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 material. 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.
Marketing
Agents
Toroso Investments, LLC
(“Toroso”), Tidal ETF Services LLC (“Tidal”) and Victory Capital Management Inc.
(“Victory Capital”) “(the “Marketing Agents”) assist the Fund and the Sponsor
with certain functions and duties relating to distribution and marketing, which
include the following: marketing and sales strategy, and marketing and
distribution related services.
Digital
Asset Adviser
Hashdex Asset Management
Ltd. (“Hashdex” or the “Digital Asset Adviser” “) is a Cayman Islands investment
manager (and an Exempt Reporting Advisor under SEC rules) that specializes in,
among other things, the management, research, investment analysis and other
investment support services of funds and ETFs with investment strategies
involving bitcoin and other crypto assets. As Digital Asset Adviser, Hashdex is
responsible for providing the Sponsor and Marketing Agents with research and
analysis regarding bitcoin and bitcoin markets for use in the operation and
marketing of the Fund. Hashdex has no role in maintaining, calculating or
publishing the Benchmark. Hashdex also has no responsibility for the investment
or management of the Fund’s portfolio or for the overall performance or
operation of the Fund.
Clearing
Brokers
StoneX and Phillip
Capital serve as the Fund’s clearing brokers (the “Clearing Brokers”) to execute
and clear the Fund’s futures transactions and provide other brokerage-related
services. The Clearing Brokers are each registered as an FCM with the CFTC, are
members of the National Futures Association (“NFA”) and are clearing members of
all major U.S. futures exchanges. The Clearing Brokers are registered as
broker-dealers (“BDs”) with the U.S. Securities and Exchange Commission (“SEC”)
and are each a member of the Financial Industry Regulatory Authority, Inc.
(“FINRA”).
Note
2 - Organizational and Offering Costs
Expenses incurred in
organizing the Trust and the initial offering of the Shares of the Fund,
including applicable SEC registration fees were borne directly by the Sponsor.
The total expenses incurred by the Sponsor total $164,920 for legal fees and
registration fees. The Fund will not be obligated to reimburse the
Sponsor.
Note
3 – Subsequent Events
In preparing these
financial statements, management has evaluated subsequent events through the
date of issuance of the financial statements included herein. There have been no
subsequent events that occurred during such period that would require disclosure
or would be required to be recognized in the financial statements.
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.
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: The Hashdex U.S. Bitcoin Futures
Fund Benchmark, which is the mean average of the closing settlement prices for
the first to expire and second to expire CME Bitcoin Futures
Contracts.
Benchmark Component Futures Contracts: The
Bitcoin 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, CME, 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.
Code: Internal Revenue Code of 1986, as
amended.
Commodity Pool: An enterprise in which several
individuals contribute funds in order to trade futures contracts or options on
futures contracts collectively.
Commodity Pool Operator or CPO: Any person
engaged in a business which is of the nature of an investment trust, syndicate,
or similar enterprise, and who, in connection therewith, solicits, accepts, or
receives from others, funds, securities, or property, either directly or through
capital contributions, the sale of stock or other forms of securities, or
otherwise, for the purpose of trading in any swap or commodity for future
delivery or commodity option on or subject to the rules of any contract
market.
Creation Basket: A block of 10,000 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 Purchaser: 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 is exchanged
for cash or physical, swap, over the counter instrument or other financial
instrument such as the creation or redemption of shares in a fund.
FINRA: Financial Industry Regulatory
Authority.
Futures Contract: An exchange-traded contract
traded with standard terms that calls for the delivery of a specified quantity
of a cryptocurrency 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 cryptocurrency is
required.
Indirect Purchasers: Banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a DTC purchaser, either directly or indirectly.
Limited Liability Company (LLC): A type of
business ownership combining several features of corporation and partnership
structures.
Margin: The amount of equity required for an
investment in futures contracts.
NAV: Net Asset Value of the Fund.
NFA: National Futures Association.
NSCC: National Securities Clearing
Corporation.
1933 Act: The Securities Act of
1933.
Redemption Basket: A block of 10,000 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 issued securities 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
cryptocurrency, usually with a two-day settlement.
Bitcoin Futures Contracts: Futures contracts
for bitcoin.
Swap Agreement: An over the counter derivative
that generally involves an exchange of a stream of payments between the
contracting parties based on a notional amount and a specified
index.
Tracking Error: Possibility that the daily NAV
of the Fund will not track the Benchmark.
Trust Agreement: The Fifth Amended and Restated
Declaration of Trust and Trust Agreement of the Trust effective as of April 26,
2019.
Valuation Day: Any day as of which the Fund
calculates its NAV.
You: The owner of Shares.