ck0001683471-20230430
Teucrium
Agricultural Strategy No K-1 ETF (TILL)
Teucrium
AiLA Long-Short Agriculture Strategy ETF (OAIA)
Teucrium
AiLA Long-Short Base Metals Strategy ETF (OAIB)
Each,
a series of Listed Funds Trust
Listed
on NYSE
Arca, Inc.
STATEMENT
OF ADDITIONAL INFORMATION
August
31, 2023
This
Statement of Additional Information (the “SAI”) is not a prospectus and should
be read in conjunction with the Prospectus for the Teucrium Agricultural
Strategy No K-1 ETF (the “Agriculture Strategy No K-1 ETF”), Teucrium AiLA
Long-Short Agriculture Strategy ETF (the “Long-Short Agriculture Strategy ETF”),
and Teucrium AiLA Long-Short Base Metals Strategy ETF (the “Long-Short Base
Metals Strategy ETF”) (each, a “Fund” and, together, the “Funds”), each a series
of Listed Funds Trust (the “Trust”), dated August 31, 2023, as may be
supplemented from time to time (the “Prospectus”). Capitalized terms used in
this SAI that are not defined have the same meaning as in the Prospectus, unless
otherwise noted. A copy of the Prospectus may be obtained without charge, by
calling the Funds at 1-800-617-0004, visiting www.teucrium.com or writing to the
Funds, c/o U.S. Bank Global Fund Services, P.O. Box 701, Milwaukee,
Wisconsin 53201-0701.
The
Funds’ audited financial statements for the most recent fiscal year (when
available) are incorporated into this SAI by reference to the Funds’ most recent
Annual
Report to Shareholders
(File No. 811-23226). You may obtain a copy of the Funds’ Annual Report at no
charge by contacting the Funds at the address or phone number noted
above.
TABLE
OF CONTENTS
|
|
|
|
| |
General
Information about the Trust |
|
Additional
Information About Investment Objectives, Policies, and Related
Risks |
|
Description
of Permitted Investments |
|
Investment
Restrictions |
|
Exchange
Listing and Trading |
|
Management
of the Trust |
|
Principal
Shareholders, Control Persons, and Management Ownership |
|
Codes
of Ethics |
|
Proxy
Voting Policies |
|
Investment
Management |
|
Investment
Adviser |
|
Management
of the Subsidiaries |
|
Portfolio
Managers |
|
Distributor |
|
Administrator,
Index Receipt Agent, and Transfer Agent |
|
Custodian |
|
Legal
Counsel |
|
Independent
Registered Public Accounting Firm |
|
Portfolio
Holdings Disclosure Policies and Procedures |
|
Description
of Shares |
|
Limitation
of Trustees’ Liability |
|
Brokerage
Transactions |
|
Portfolio
Turnover Rate |
|
Book
Entry Only System |
|
Purchase
and Redemption of Creation Units |
|
Determination
of Net Asset Value |
|
Dividends
and Distributions |
|
Federal
Income Taxes |
|
Financial
Statements |
|
Appendix
A |
|
GENERAL
INFORMATION ABOUT THE TRUST
The
Trust is an open-end management investment company consisting of multiple
investment series. This SAI relates only to the Funds. The Trust was organized
as a Delaware statutory trust on August 26, 2016. The Trust is registered with
the U.S. Securities and Exchange Commission (the “SEC”) under the Investment
Company Act of 1940 (together with the rules and regulations adopted thereunder,
the “1940 Act”), as an open-end management investment company, and the offering
of each Fund’s shares (collectively, the “Shares”) is registered under the
Securities Act of 1933 (the “Securities Act”). The Trust is governed by its
Board of Trustees (the “Board”).
Teucrium
Investment Advisors, LLC (the “Adviser”) serves as investment adviser to the
Funds.
Each
Fund offers and issues Shares at their net asset value (“NAV”) only in
aggregations of a specified number of Shares (each, a “Creation Unit”). Each
Fund generally offers and issues Shares in exchange for the deposit of cash
totaling the NAV of the Creation Units. Shares are listed on the NYSE Arca, Inc.
(the “Exchange”) and trade on the Exchange at market prices that may differ from
the Shares’ NAV. Shares are also redeemable only in Creation Unit aggregations,
primarily in exchange for a specified cash payment. A Creation Unit of the
Agriculture Strategy No K-1 ETF generally consists of 12,500 Shares, and a
Creation Unit of each of the Long-Short Agriculture Strategy ETF and Long-Short
Base Metals Strategy ETF (each, an “Index Fund”) generally consists of 25,000
Shares, though this may change from time to time. As a practical matter, only
institutions or large investors purchase or redeem Creation Units. Except when
aggregated in Creation Units, Shares are not redeemable securities.
ADDITIONAL
INFORMATION ABOUT INVESTMENT OBJECTIVES, POLICIES, AND RELATED
RISKS
Each
Fund’s investment objective and principal investment strategies are described in
the Prospectus. The following information supplements, and should be read in
conjunction with, the Prospectus. For a description of certain permitted
investments, see “Description
of Permitted Investments”
in this SAI.
With
respect to each Fund’s investments, unless otherwise noted, if a percentage
limitation on investment is adhered to at the time of investment or contract, a
subsequent increase or decrease as a result of market movement or redemption
will not result in a violation of such investment limitation.
Non-Diversification
Each
Fund is classified as a non-diversified investment company under the 1940 Act. A
“non-diversified” classification means that a Fund is not limited by the 1940
Act with regard to the percentage of its total assets that may be invested in
the securities of a single issuer. This means that a Fund may invest a greater
portion of its total assets in the securities of a single issuer or a smaller
number of issuers than if it was a diversified fund. With respect to the Index
Funds, the securities of a particular issuer may constitute a greater portion of
the Index and, therefore, those securities may constitute a greater portion of a
Fund’s portfolio. This may have an adverse effect on a Fund’s performance or
subject Shares to greater price volatility than more diversified investment
companies. Moreover, in pursuing its objective, each Fund may hold the
securities of a single issuer in an amount exceeding 10% of the value of the
outstanding securities of the issuer, subject to restrictions imposed by the
Internal Revenue Code of 1986, as amended (the “Code”). In particular, as an
Index Fund’s size grows and its assets increase, it will be more likely to hold
more than 10% of the securities of a single issuer if the issuer has a
relatively small public float as compared to other components in the Index.
Although
each Fund is non-diversified for purposes of the 1940 Act, the Funds intend to
maintain the required level of diversification and otherwise conduct its
operations so as to qualify as a “regulated investment company” (“RIC”) within
the meaning of Subchapter M of the Code. Compliance with the diversification
requirements of the Code may limit the investment flexibility of the Funds and
may make it less likely that the Funds will meet their investment objectives. To
qualify as a RIC under the Code, a Fund must meet the Diversification
Requirement described in the section titled “Federal
Income Taxes”
in this SAI.
General
Risks
The
value of a Fund’s portfolio securities may fluctuate with changes in the
financial condition of an issuer or counterparty, changes in specific economic
or political conditions that affect a particular security or issuer and changes
in general economic or political conditions. An investor in a Fund could lose
money over short or long periods of time.
There
can be no guarantee that a liquid market for the securities held by a Fund will
be maintained. The existence of a liquid trading market for certain securities
may depend on whether dealers will make a market in such securities. There can
be no assurance that a market will be made or maintained or that any such market
will be or remain liquid. The price at which securities may be sold and the
value of Shares will be adversely affected if trading markets for a Fund’s
portfolio securities are limited or absent, or if bid/ask spreads are wide.
Cybersecurity
Risk. Investment
companies, such as the Funds, and their service providers may be subject to
operational and information security risks resulting from cyber-attacks.
Cyber-attacks include, among other behaviors, stealing or corrupting data
maintained online or digitally, denial of service attacks on websites, the
unauthorized release of confidential information or various other forms of
cybersecurity breaches. Cyber-attacks affecting a Fund or the Adviser,
custodian, transfer agent, intermediaries and other third-party service
providers may adversely impact a Fund. For instance, cyber-attacks may interfere
with the processing of
shareholder
transactions, impact a Fund’s ability to calculate its NAV, cause the release of
private shareholder information or confidential company information, impede
trading, subject a Fund to regulatory fines or financial losses, and cause
reputational damage. A Fund also may incur additional costs for cybersecurity
risk management purposes. Similar types of cybersecurity risks also are present
for issuers of securities in which a Fund invests, which could result in
material adverse consequences for such issuers and may cause a Fund’s
investments in such portfolio companies to lose value.
Recent
Events.
Beginning in the first quarter of 2020, financial markets in the United States
and around the world experienced extreme and in many cases unprecedented
volatility and severe losses due to the pandemic caused by COVID‑19, a novel
coronavirus. The pandemic has resulted in a wide range of social and economic
disruptions, including closed borders, voluntary or compelled quarantines of
large populations, stressed healthcare systems, reduced or prohibited domestic
or international travel, supply chain disruptions, and so-called “stay-at-home”
orders throughout much of the United States and many other countries. The
fall-out from these disruptions has included the rapid closure of businesses
deemed “non-essential” by federal, state, or local governments and rapidly
increasing unemployment, as well as greatly reduced liquidity for certain
instruments at times. Some sectors of the economy and individual issuers have
experienced particularly large losses. Such disruptions may continue for an
extended period of time or reoccur in the future to a similar or greater extent.
In response, the U.S. government and the Federal Reserve have taken
extraordinary actions to support the domestic economy and financial markets. It
is unknown how long circumstances related to the COVID-19 pandemic will persist,
whether they will reoccur in the future, whether efforts to support the economy
and financial markets will be successful, and what additional implications may
follow from the pandemic. The impact of these events and other pandemics or
epidemics in the future could adversely affect Fund performance.
Russia’s
military invasion of Ukraine in February 2022, the resulting responses by the
United States and other countries, and the potential for wider conflict could
increase volatility and uncertainty in the financial markets and adversely
affect regional and global economies. The United States and other countries have
imposed broad-ranging economic sanctions on Russia, certain Russian individuals,
banking entities and corporations, and Belarus as a response to Russia’s
invasion of Ukraine, and may impose sanctions on other countries that provide
military or economic support to Russia. The extent and duration of Russia’s
military actions and the repercussions of such actions (including any
retaliatory actions or countermeasures that may be taken by those subject to
sanctions, including cyber-attacks) are impossible to predict, but could result
in significant market disruptions, including in certain industries or sectors,
such as the oil and natural gas markets, and may negatively affect global supply
chains, inflation and global growth. These and any related events could
significantly impact a Fund’s performance and the value of an investment in a
Fund, even if the Fund does not have direct exposure to Russian issuers or
issuers in other countries affected by the invasion.
DESCRIPTION
OF PERMITTED INVESTMENTS
The
following are descriptions of the Funds’ permitted investments and investment
practices and the associated risk factors. A Fund will only invest in any of the
following instruments or engage in any of the following investment practices if
such investment or activity is consistent with that Fund’s investment objective
and permitted by the Fund’s stated investment policies.
Borrowing
Each
Fund may borrow money to the extent permitted under the 1940 Act, as such may be
interpreted or modified by regulatory authorities having jurisdiction, from time
to time. Borrowing for investment purposes is one form of leverage. Leveraging
investments, by purchasing securities with borrowed money, is a speculative
technique that increases investment risk, but also increases investment
opportunity. Because substantially all of a Fund’s assets will fluctuate in
value, whereas the interest obligations on borrowings may be fixed, the NAV per
share of the Fund will increase more when the Fund’s portfolio assets increase
in value and decrease more when the Fund’s portfolio assets decrease in value
than would otherwise be the case. Moreover, interest costs on borrowings may
fluctuate with changing market rates of interest and may partially offset or
exceed the returns on the borrowed funds. Under adverse conditions, a Fund might
have to sell portfolio securities to meet interest or principal payments at a
time when investment considerations would not favor such sales.
Each
Fund also may borrow money to facilitate management of the Fund’s portfolio by
enabling the Fund to meet redemption requests when the liquidation of portfolio
instruments would be inconvenient or disadvantageous. Such borrowing is not for
investment purposes and will be repaid by the Fund promptly. As required by the
1940 Act, a Fund must maintain continuous asset coverage (total assets,
including assets acquired with borrowed funds, less liabilities exclusive of
borrowings) of 300% of all amounts borrowed. If, at any time, the value of a
Fund’s assets should fail to meet this 300% coverage test, the Fund, within
three days (not including Sundays and holidays), will reduce the amount of the
Fund’s borrowings to the extent necessary to meet this 300% coverage
requirement. Maintenance of this percentage limitation may result in the sale of
portfolio securities at a time when investment considerations otherwise indicate
that it would be disadvantageous to do so.
Borrowing
will tend to exaggerate the effect on NAV of any increase or decrease in the
market value of the borrowing Fund’s portfolio. Money borrowed will be subject
to interest costs that may or may not be recovered by earnings on the securities
purchased. A Fund also may be required to maintain minimum average balances in
connection with a borrowing or to pay a commitment or other fee to maintain a
line of credit; either of these requirements would increase the cost of
borrowing over the stated interest rate. In addition to the foregoing, each Fund
is authorized to borrow money as a temporary measure for extraordinary or
emergency purposes
in
amounts not in excess of 5% of the value of the Fund’s total assets. Borrowings
for extraordinary or emergency purposes are not subject to the foregoing 300%
asset coverage requirement.
Debt
Securities
In
general, a debt security represents a loan of money to the issuer by the
purchaser of the security. A debt security typically has a fixed payment
schedule that obligates the issuer to pay interest to the lender and to return
the lender’s money over a certain time period. A company typically meets its
payment obligations associated with its outstanding debt securities before it
declares and pays any dividend to holders of its equity securities. Bonds, notes
and commercial paper are examples of debt securities and differ in the length of
the issuer’s principal repayment schedule, with bonds carrying the longest
repayment schedule and commercial paper the shortest.
Debt
securities are all generally subject to interest rate, credit, income and
prepayment risks and, like all investments, are subject to liquidity and market
risks to varying degrees depending upon the specific terms and type of security.
The Adviser attempts to reduce credit and market risk through diversification of
a Fund’s portfolio and ongoing credit analysis of each issuer, as well as by
monitoring economic developments, but there can be no assurance that it will be
successful at doing so.
A
Fund’s investments in debt securities may subject the Fund to the following
risks:
Credit
Risk.
Debt securities are subject to the risk of an issuer’s (or other party’s)
failure or inability to meet its obligations under the security. Multiple
parties may have obligations under a debt security. An issuer or borrower may
fail to pay principal and interest when due. A guarantor, insurer or credit
support provider may fail to provide the agreed upon protection. A counterparty
to a transaction may fail to perform its side of the bargain. An intermediary or
agent interposed between the investor and other parties may fail to perform the
terms of its service. Also, performance under a debt security may be linked to
the obligations of other persons who may fail to meet their obligations. The
credit risk associated with a debt security could increase to the extent that a
Fund’s ability to benefit fully from its investment in the security depends on
the performance by multiple parties of their respective contractual or other
obligations. The market value of a debt security is also affected by the
market’s perception of the creditworthiness of the issuer.
A
Fund may incur substantial losses on debt securities that are inaccurately
perceived to present a different amount of credit risk than they actually do by
the market, the Adviser or the rating agencies. Credit risk is generally greater
where less information is publicly available, where fewer covenants safeguard
the investors’ interests, where collateral may be impaired or inadequate, where
little legal redress or regulatory protection is available, or where a party’s
ability to meet obligations is speculative. Additionally, any inaccuracy in the
information used by the Fund to evaluate credit risk may affect the value of
securities held by a Fund.
Obligations
under debt securities held by a Fund may never be satisfied or, if satisfied,
only satisfied in part.
Some
securities are subject to risks as a result of a credit downgrade or default by
a government, or its agencies or, instrumentalities. Credit risk is a greater
concern for high-yield debt securities and debt securities of issuers whose
ability to pay interest and principal may be considered speculative. Debt
securities are typically classified as investment grade-quality (medium to
highest credit quality) or below investment grade-quality (commonly referred to
as high-yield or junk bonds). Many individual debt securities are rated by a
third-party source, such as Moody’s Investors Service (Moody’s) or Standard
& Poor’s Financial Services (S&P®), to help describe the
creditworthiness of the issuer.
Credit
Ratings Risk.
Using credit ratings to evaluate debt securities can involve certain risks. For
example, ratings assigned by the rating agencies are based upon an analysis
completed at the time of the rating of the obligor’s ability to pay interest and
repay principal. Rating agencies typically rely to a large extent on historical
data which may not accurately represent present or future circumstances. Ratings
do not purport to reflect the risk of fluctuations in market value of the debt
security and are not absolute standards of quality and only express the rating
agency’s current opinion of an obligor’s overall financial capacity to pay its
financial obligations. A credit rating is not a statement of fact or a
recommendation to purchase, sell or hold a debt obligation. Also, credit quality
can change suddenly and unexpectedly, and credit ratings may not reflect the
issuer’s current financial condition or events since the security was last
rated. Rating agencies may have a financial interest in generating business,
including from the arranger or issuer of the security that normally pays for
that rating, and providing a low rating might affect the rating agency’s
prospects for future business. While rating agencies have policies and
procedures to address this potential conflict of interest, there is a risk that
these policies will fail to prevent a conflict of interest from impacting the
rating.
Extension
Risk.
A Fund is subject to extension risk, which is the risk that the market value of
some debt securities, particularly mortgage securities and certain asset-backed
securities, may be adversely affected when bond calls or prepayments on
underlying mortgages or other assets are less or slower than anticipated.
Extension risk may result from, for example, rising interest rates or unexpected
developments in the markets for the underlying assets or mortgages. As a
consequence, the security’s effective maturity will be extended, resulting in an
increase in interest rate sensitivity to that of a longer-term instrument.
Extension risk generally increases as interest rates rise. This is because, in a
rising interest rate environment, the rate of prepayment and exercise of call or
buy-back rights generally falls and the rate of default and delayed payment
generally rises. When the maturity of an investment is extended in a rising
interest rate environment, a below-market interest rate is usually locked-in and
the value of the security reduced. This risk is greater for fixed-rate than
variable-rate debt securities.
Income
Risk. A
Fund is subject to income risk, which is the risk that the Fund’s income will
decline during periods of falling interest rates or when the Fund experiences
defaults on debt securities it holds. A Fund’s income declines when interest
rates fall because, as the Fund’s higher-yielding debt securities mature or are
prepaid, a Fund must re-invest the proceeds in debt securities that have lower,
prevailing interest rates. The amount and rate of distributions that a Fund’s
shareholders receive are affected by the income that the Fund receives from its
portfolio holdings. If the income is reduced, distributions by a Fund to
shareholders may be less.
Fluctuations
in income paid to a Fund are generally greater for variable rate debt
securities. A Fund will be deemed to receive taxable income on certain
securities which pay no cash payments until maturity, such as zero-coupon
securities. A Fund may be required to sell portfolio securities that it would
otherwise continue to hold in order to obtain sufficient cash to make the
distribution to shareholders required for U.S. tax purposes.
Inflation
Risk. The
market price of debt securities generally falls as inflation increases because
the purchasing power of the future income and repaid principal is expected to be
worth less when received by a Fund. Debt securities that pay a fixed rather than
variable interest rate are especially vulnerable to inflation risk because
variable-rate debt securities may be able to participate, over the long term, in
rising interest rates which have historically corresponded with long-term
inflationary trends.
Interest
Rate Risk.
The market value of debt securities generally varies in response to changes in
prevailing interest rates. Interest rate changes can be sudden and
unpredictable. In addition, short-term and long-term rates are not necessarily
correlated to each other as short-term rates tend to be influenced by government
monetary policy while long-term rates are market driven and may be influenced by
macroeconomic events (such as economic expansion or contraction), inflation
expectations, as well as supply and demand. During periods of declining interest
rates, the market value of debt securities generally increases. Conversely,
during periods of rising interest rates, the market value of debt securities
generally declines. This occurs because new debt securities are likely to be
issued with higher interest rates as interest rates increase, making the old or
outstanding debt securities less attractive. In general, the market prices of
long-term debt securities or securities that make little (or no) interest
payments are more sensitive to interest rate fluctuations than shorter-term debt
securities. The longer a Fund’s average weighted portfolio duration, the greater
the potential impact a change in interest rates will have on its share price.
Also, certain segments of the fixed income markets, such as high quality bonds,
tend to be more sensitive to interest rate changes than other segments, such as
lower-quality bonds.
Prepayment
Risk. Debt
securities, especially bonds that are subject to “calls,” such as asset-backed
or mortgage-backed securities, are subject to prepayment risk if their terms
allow the payment of principal and other amounts due before their stated
maturity. Amounts invested in a debt security that has been “called” or
“prepaid” will be returned to an investor holding that security before expected
by the investor. In such circumstances, the investor, such as a fund, may be
required to re-invest the proceeds it receives from the called or prepaid
security in a new security which, in periods of declining interest rates, will
typically have a lower interest rate. Prepayment risk is especially prevalent in
periods of declining interest rates and will result for other reasons, including
unexpected developments in the markets for the underlying assets or mortgages.
For example, a decline in mortgage interest rates typically initiates a period
of mortgage refinancings. When homeowners refinance their mortgages, the
investor in the underlying pool of mortgage-backed securities (such as a fund)
receives its principal back sooner than expected, and must reinvest at lower,
prevailing rates.
Securities
subject to prepayment risk are often called during a declining interest rate
environment and generally offer less potential for gains and greater price
volatility than other income-bearing securities of comparable
maturity.
Call
risk is similar to prepayment risk and results from the ability of an issuer to
call, or prepay, a debt security early. If interest rates decline enough, the
debt security’s issuer can save money by repaying its callable debt securities
and issuing new debt securities at lower interest rates.
Derivatives
Certain
derivative instruments used by a Fund may oblige the Fund to make payments or
incur additional obligations in the future. Rule 18f-4 under the 1940 Act (“Rule
18f-4”), with which funds were required to comply effective August 19, 2022,
imposes limits on the amount of leverage risk to which a fund may be exposed
through the use of such derivatives and requires the adoption of certain
derivatives risk management measures. Under Rule 18f-4, a fund’s investment in
such derivatives is limited through value-at-risk (“VaR”) testing. Specifically,
the VaR of the fund’s portfolio may not exceed 200% of the VaR of a specific
unleveraged designated reference portfolio using relative VaR testing (or 20% of
the value of the fund’s net assets using absolute VaR testing). Generally, a
fund whose derivatives exposure, including exposure obtained through the fund’s
subsidiary, exceeds 10% of its net assets is required to establish and maintain
a comprehensive derivatives risk management program, subject to oversight by a
fund’s board of trustees, and appoint a derivatives risk manager. Funds whose
derivatives exposure does not exceed 10% of their net assets may be considered
limited derivatives users and are not required to comply with all of the
conditions of Rule 18f-4, including the adoption of a derivatives risk
management program and appointment of a derivatives risk manager, though they
are required to adopt policies and procedures designed to manage derivatives
risk. It is not currently clear what impact, if any, Rule 18f-4 will have on the
availability, liquidity or performance of derivatives. To the extent a Fund’s
compliance with Rule 18f-4 changes how the Fund uses derivatives and the Adviser
oversees such use, it may adversely affect the Fund’s performance and/or
increase costs related to the Fund’s use of derivatives.
Generally,
derivatives are financial contracts whose value depends upon, or is derived
from, the value of an underlying asset, reference rate, or index, and may relate
to bonds, interest rates, currencies, commodities, and related indexes. Examples
of derivative instruments include futures contracts and options on futures
contracts.
Each
Fund will use futures contracts in connection with the implementation of its
investment strategies and in compliance with Rule 18f-4. The futures contracts
in which a Fund expects to invest are considered commodity interests and will be
held primarily in the Fund’s Subsidiary.
Futures,
Options, and Options on Futures Contracts.
A Fund may enter into U.S. or foreign futures contracts, options, and options on
futures contracts. When a Fund purchases a futures contract, it agrees to
purchase a specified underlying instrument at a specified future date. When a
Fund sells a futures contract, it agrees to sell the underlying instrument at a
specified future date. The price at which the purchase and sale will take place
is fixed when a Fund enters into the contract. Futures can be held until their
delivery dates or can be closed out before then if a liquid secondary market is
available. To the extent a Fund uses futures and options, it will do so only in
accordance with applicable requirements of the CEA and the rules
thereunder.
The
risk of loss in trading futures contracts or uncovered call options in some
strategies (e.g.,
selling uncovered stock index futures contracts) is potentially unlimited. A
Fund does not plan to use futures and options contracts in this way. The risk of
a futures position may still be large as traditionally measured due to the low
margin deposits required. In many cases, a relatively small price movement in a
futures contract may result in immediate and substantial loss or gain to the
investor relative to the size of a required margin deposit.
There
is also the risk of loss by a Fund of margin deposits in the event of bankruptcy
of a broker with whom such Fund has an open position in the futures contract or
option. The purchase of put or call options will be based upon predictions by a
Fund as to anticipated trends, which predictions could prove to be
incorrect.
The
potential for loss related to the purchase of an option on a futures contract is
limited to the premium paid for the option plus transaction costs. Because the
value of the option is fixed at the point of sale, there are no daily cash
payments by the purchaser to reflect changes in the value of the underlying
contract; however, the value of the option changes daily and that change would
be reflected in the NAV of a Fund. The potential for loss related to writing
options may be unlimited.
Although
a Fund intends to enter into futures contracts only if there is an active market
for such contracts, there is no assurance that an active market will exist for
the contracts at any particular time.
Swap
Agreements.
A Fund may utilize swap agreements in an attempt to gain exposure to the
securities in a market without actually purchasing those securities, or to hedge
a position. Swap agreements are two-party contracts entered into primarily by
institutional investors for periods ranging from a day to more than one-year. In
a standard “swap” transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular predetermined
investments or instruments. The gross returns to be exchanged or “swapped”
between the parties are calculated with respect to a “notional amount,”
(i.e.,
the return on or increase in value of a particular dollar amount invested in a
basket of securities representing a particular index). Total return swaps are
swap agreements in which one party makes payments based on a set rate, either
fixed or variable, while the other party makes payments based on the return of
an underlying asset, to seek exposure to certain securities.
Forms
of swap agreements include interest rate caps, under which, in return for a
premium, one party agrees to make payments to the other to the extent that
interest rates exceed a specified rate, or “cap” interest rate floors, under
which, in return for a premium, one party agrees to make payments to the other
to the extent that interest rates fall below a specified level, or “floor;” and
interest rate collars, under which a party sells a cap and purchases a floor or
vice versa in an attempt to protect itself against interest rate movements
exceeding given minimum or maximum levels.
A
Fund’s obligations under a swap agreement will be accrued daily (offset against
any amounts owing to a Fund) and any accrued but unpaid net amounts owed to a
swap counterparty will be covered by segregating assets determined to be liquid.
Obligations under swap agreements so covered will not be construed to be “senior
securities” for purposes of a Fund’s investment restriction concerning senior
securities. Because they are two-party contracts which may have terms of greater
than seven days, swap agreements may be considered to be illiquid for purposes
of a Fund’s illiquid investment limitations. A Fund will not enter into any swap
agreement unless the Adviser believes that the other party to the transaction is
creditworthy. A Fund bears the risk of loss of the amount expected to be
received under a swap agreement in the event of the default or bankruptcy of a
swap agreement counterparty.
A
Fund may enter into swap agreements to invest in a market without owning or
taking physical custody of the underlying securities in circumstances in which
direct investment is restricted for legal reasons or is otherwise impracticable.
The counterparty to any swap agreement will typically be a bank, investment
banking firm or broker-dealer. The counterparty will generally agree to pay a
Fund the amount, if any, by which the notional amount of the swap agreement
would have increased in value had it been invested in the particular stocks,
plus the dividends that would have been received on those stocks. A Fund will
agree to pay to the counterparty a floating rate of interest on the notional
amount of the swap agreement plus the amount, if any, by which the notional
amount would have decreased in value had it been invested in such stocks.
Therefore, the return to a Fund on any swap agreement should be the gain or loss
on the notional amount plus dividends on the stocks less the interest paid by
the Fund on the notional amount.
Swap
agreements typically are settled on a net basis, which means that the two
payment streams are netted out, with a Fund receiving or paying, as the case may
be, only the net amount of the two payments. Payments may be made at the
conclusion of a swap agreement or periodically during its term. Other swap
agreements, may require initial premium (discount) payments as well as periodic
payments (receipts) related to the interest leg of the swap or to the default of
a reference obligation. A Fund will earmark and reserve assets necessary to meet
any accrued payment obligations when it is the buyer of a credit default swap.
If
a swap counterparty defaults, a Fund’s risk of loss consists of the net amount
of payments the Fund is contractually entitled to receive, if any, or the
failure of the counterparty to deliver the underlying security, depending on the
nature of the swap. The net amount of the excess, if any, of a Fund’s
obligations over its entitlements with respect to each equity swap will be
accrued on a daily basis and an amount of cash or liquid assets, having an
aggregate NAV at least equal to such accrued excess will be maintained in a
segregated account by the Fund’s custodian.
The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid in comparison with the markets for other similar instruments,
which are traded in the OTC market. The Adviser, under the supervision of the
Board, is responsible for determining and monitoring the liquidity of Fund
transactions in swap agreements.
The
use of swap agreements is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If a counterparty’s creditworthiness
declines, the value of the swap would likely decline. Moreover, there is no
guarantee that a Fund could eliminate its exposure under an outstanding swap
agreement by entering into an offsetting swap agreement with the same or another
party.
Commodity-Linked
Instruments.
The commodity futures contracts in which a Fund may invest are subject to the
regulatory jurisdiction and oversight of the CFTC, and the Fund and the
Subsidiary are considered commodity pools subject to regulation by the CFTC
under the CEA and applicable CFTC regulations. The Adviser is subject to
registration and regulation as a commodity pool operator (“CPO”) under the CEA
with respect to its service as investment adviser to the Fund and the
Subsidiary. Regulations imposed by the CFTC applicable to the Fund may cause the
Adviser and the Fund to incur additional compliance expenses or impede the
Fund’s ability to implement its investment program as contemplated.
There
are several additional risks associated with transactions in commodity futures
contracts, swaps on commodity futures contracts, commodity forward contracts and
other commodities instruments. In the commodity instruments markets, producers
of the underlying commodity may decide to hedge the price risk of selling the
commodity by selling commodity instruments today to lock in the price of the
commodity at delivery tomorrow. In order to induce speculators to purchase the
other side of the same commodity instrument, the commodity producer generally
must sell the commodity instrument at a lower price than the expected future
spot price. Conversely, if most hedgers in the commodity instruments market are
purchasing commodity instruments to hedge against a rise in prices, then
speculators will only sell the other side of the commodity instrument at a
higher future price than the expected future spot price of the commodity. The
changing nature of the hedgers and speculators in the commodity markets will
influence whether futures prices are above or below the expected future spot
price, which can have significant implications for a Fund. If the nature of
hedgers and speculators in commodity instrument markets has shifted when it is
time for a Fund to reinvest the proceeds of a maturing contract in a new
commodity instrument, such Fund might reinvest at a higher or lower future
price, or choose to pursue other investments. The commodities which underlie
commodity instruments may be subject to additional economic and non-economic
variables, such as drought, floods, weather, livestock disease, embargoes,
tariffs, and international economic, political and regulatory developments.
These factors may have a larger impact on commodity prices and commodity-linked
instruments than on traditional securities. Certain commodities are also subject
to limited pricing flexibility because of supply and demand factors. Others are
subject to broad price fluctuations as a result of the volatility of the prices
for certain raw materials and the instability of supplies of other materials.
These additional variables may create additional investment risks which subject
a Fund’s investments to greater volatility than investments in traditional
securities. Also, unlike the financial instruments markets, in the commodity
instruments markets there are costs of physical storage associated with
purchasing the underlying commodity. The price of the commodity instruments
contract will reflect the storage costs of purchasing the physical commodity,
including the time value of money invested in the physical commodity. To the
extent that the storage costs for an underlying commodity change while a Fund is
invested in instruments on that commodity, the value of the commodity instrument
may change proportionately. Pursuant to Rule 4.5 under the Commodity Exchange
Act of 1936, as amended (“CEA”), a Fund does not qualify for an exclusion from
the definition of a commodity pool. Accordingly, a Fund is registered as a
commodity pool and the Adviser is registered as a “commodity pool operator”
(“CPO”) under the CEA and U.S. Commodity Futures Trading Commission (“CFTC”)
rules with respect to such Fund.
The
CFTC possesses exclusive jurisdiction to regulate the activities of commodity
pool operators and commodity trading advisors with respect to “commodity
interests,” such as futures and swaps and options, and has adopted regulations
with respect to the activities of those persons and/or entities. The CFTC may
suspend the registration of a commodity pool operator (1) if the CFTC finds that
the operator’s trading practices tend to disrupt orderly market conditions, (2)
if any controlling person of the operator is subject to an order of the CFTC
denying such person trading privileges on any exchange, and (3) in certain other
circumstances. Suspension, restriction or termination of the Adviser’s
registration as a CPO would prevent it, until that registration were to be
reinstated, from managing a Fund, and might result in the termination of such
Fund. Neither the Trust nor a Fund is required to be registered with the CFTC in
any capacity.
Regulation
of Derivatives in Europe. The
European Markets and Infrastructure Regulation (“EMIR”) introduces uniform
requirements in respect of OTC derivative contracts by requiring certain
“eligible” OTC derivative contracts to be submitted for clearing to regulated
central clearing counterparties and by mandating the reporting of certain
details of OTC derivative contracts to trade repositories. In addition, EMIR
imposes requirements for appropriate procedures and arrangements to measure,
monitor and mitigate operational counterparty credit risk in respect of OTC
derivatives contracts which are not subject to mandatory clearing. These
requirements are likely to include the posting and segregation of collateral,
not only to and for, but also by, a Fund.
Many
provisions of EMIR require the adoption of delegated acts by the European
Commission before becoming fully effective. Accordingly, it is difficult to
predict the precise impact of EMIR on a Fund. However, investors should be aware
that the regulatory changes arising from EMIR may in due course adversely affect
a Fund’s ability to adhere to its investment approach and achieve its investment
objective.
Counterparty
Credit Risk.
A Fund is subject to counterparty credit risk with respect to its use of
derivative and short sale transactions. If a counterparty to a derivatives
contract becomes bankrupt or otherwise fails to perform its obligations due to
financial difficulties, a Fund may experience significant delays in obtaining
any recovery in a bankruptcy or other reorganization proceeding. A Fund may
obtain only a limited recovery or may obtain no recovery in such circumstances.
To partially mitigate this risk, the Adviser will seek to effect derivative
transactions only with counterparties that it believes are creditworthy.
However, there is no assurance that a counterparty will remain creditworthy or
solvent.
Equity
Securities
Equity
securities, such as the common stock of an issuer, are subject to stock market
fluctuations and therefore may experience volatile changes in value as market
conditions, consumer sentiment or the financial condition of the issuers change.
A decrease in value of the equity securities in a Fund’s portfolio also may
cause the value of such Fund’s Shares to decline.
An
investment in the Funds should be made with an understanding of the risks
inherent in an investment in equity securities, including the risk that the
financial condition of issuers may become impaired or that the general condition
of the stock market may deteriorate (either of which may cause a decrease in the
value of a Fund’s portfolio securities and therefore a decrease in the value of
Shares). Common stocks are susceptible to general stock market fluctuations and
to volatile increases and decreases in value as market confidence and
perceptions change. These investor perceptions are based on various and
unpredictable factors, including expectations regarding government, economic,
monetary and fiscal policies; inflation and interest rates; economic expansion
or contraction; and global or regional political, economic or banking
crises.
Holders
of common stocks incur more risk than holders of preferred stocks and debt
obligations because common stockholders, as owners of the issuer, generally have
inferior rights to receive payments from the issuer in comparison with the
rights of creditors or holders of debt obligations or preferred stocks. Further,
unlike debt securities, which typically have a stated principal amount payable
at maturity (whose value, however, is subject to market fluctuations prior
thereto), or preferred stocks, which typically have a liquidation preference and
which may have stated optional or mandatory redemption provisions, common stocks
have neither a fixed principal amount nor a maturity. Common stock values are
subject to market fluctuations as long as the common stock remains
outstanding.
Types
of Equity Securities:
Common
Stocks
— Common stocks represent units of ownership in a company. Common stocks usually
carry voting rights and earn dividends. Unlike preferred stocks, which are
described below, dividends on common stocks are not fixed but are declared at
the discretion of the company’s board of directors.
Preferred
Stocks —
Preferred stocks also are units of ownership in a company. Preferred stocks
normally have preference over common stock in the payment of dividends and the
liquidation of the company. However, in all other respects, preferred stocks are
subordinated to the liabilities of the issuer. Unlike common stocks, preferred
stocks are generally not entitled to vote on corporate matters. Types of
preferred stocks include adjustable-rate preferred stock, fixed dividend
preferred stock, perpetual preferred stock, and sinking fund preferred
stock.
Generally,
the market values of preferred stock with a fixed dividend rate and no
conversion element vary inversely with interest rates and perceived credit
risk.
Rights
and Warrants —
A right is a privilege granted to existing shareholders of a corporation to
subscribe to shares of a new issue of common stock before it is issued. Rights
normally have a short life of usually two to four weeks, are freely transferable
and entitle the holder to buy the new common stock at a lower price than the
public offering price. Warrants are securities that are usually issued together
with a debt security or preferred stock and that give the holder the right to
buy proportionate amount of common stock at a specified price. Warrants are
freely transferable and are traded on major exchanges. Unlike rights, warrants
normally have a life that is measured in years and entitles the holder to buy
common stock of a company at a price that is usually higher than the market
price at the time the warrant is issued. Corporations often issue warrants to
make the accompanying debt security more attractive.
An
investment in warrants and rights may entail greater risks than certain other
types of investments. Generally, rights and warrants do not carry the right to
receive dividends or exercise voting rights with respect to the underlying
securities, and they do not represent any
rights
in the assets of the issuer. In addition, their value does not necessarily
change with the value of the underlying securities, and they cease to have value
if they are not exercised on or before their expiration date. Investing in
rights and warrants increases the potential profit or loss to be realized from
the investment as compared with investing the same amount in the underlying
securities.
Large-Capitalization
Companies —
Investments in large-capitalization companies may go in and out of favor based
on market and economic conditions and may underperform other market segments.
Some large-capitalization companies may be unable to respond quickly to new
competitive challenges, such as changes in technology and consumer tastes, and
may not be able to attain the high growth rate of successful smaller companies,
especially during extended periods of economic expansion. As such, returns on
investments in stocks of large-capitalization companies could trail the returns
on investments in stocks of small- and mid-capitalization companies.
Small-
and Mid-Capitalization Companies —
The securities of small- and mid-capitalization companies may be more vulnerable
to adverse issuer, market, political, or economic developments than securities
of larger-capitalization companies. The securities of small- and
mid-capitalization companies generally trade in lower volumes and are subject to
greater and more unpredictable price changes than larger capitalization stocks
or the stock market as a whole. Some small- or mid-capitalization companies have
limited product lines, markets, and financial and managerial resources and tend
to concentrate on fewer geographical markets relative to larger capitalization
companies. There is typically less publicly available information concerning
small- and mid-capitalization companies than for larger, more established
companies. Small- and mid-capitalization companies also may be particularly
sensitive to changes in interest rates, government regulation, borrowing costs,
and earnings.
Tracking
Stocks —
A tracking stock is a separate class of common stock whose value is linked to a
specific business unit or operating division within a larger company and which
is designed to “track” the performance of such business unit or division. The
tracking stock may pay dividends to shareholders independent of the parent
company. The parent company, rather than the business unit or division,
generally is the issuer of tracking stock. However, holders of the tracking
stock may not have the same rights as holders of the company’s common stock.
Illiquid
Investments
A
Fund may not acquire any illiquid investment if, immediately after the
acquisition, the Fund would have invested more than 15% of its net assets in
illiquid investments. An illiquid investment means any investment that a Fund
reasonably expects cannot be sold or disposed of in current market conditions in
seven calendar days or less without the sale or disposition significantly
changing the market value of the investment. If illiquid investments exceed 15%
of the Fund’s net assets, certain remedial actions will be taken as required by
Rule 22e-4 under the 1940 Act and the Fund’s policies and procedures.
A
Fund may not be able to sell illiquid securities when the Adviser considers it
desirable to do so or may have to sell such securities at a price that is lower
than the price that could be obtained if the securities were more liquid. In
addition, the sale of illiquid securities also may require more time and may
result in higher dealer discounts and other selling expenses than does the sale
of securities that are not illiquid. Illiquid securities also may be more
difficult to value due to the unavailability of reliable market quotations for
such securities, and investment in illiquid securities may have an adverse
impact on NAV.
Investment
Company Securities
The
Funds may invest in the securities of other investment companies, including ETFs
and money market funds, subject to applicable limitations under
Section 12(d)(1) of the 1940 Act and the rules thereunder. Pursuant to
Section 12(d)(1), a Fund may invest in the securities of another investment
company (the “acquired company”) provided that such Fund, immediately after such
purchase or acquisition, does not own in the aggregate: (i) more than 3% of the
total outstanding voting stock of the acquired company; (ii) securities issued
by the acquired company having an aggregate value in excess of 5% of the value
of the total assets of such Fund; or (iii) securities issued by the acquired
company and all other investment companies (other than treasury stock of such
Fund) having an aggregate value in excess of 10% of the value of the total
assets of the applicable Fund. Under certain circumstances, including in
compliance with Rule 12d1-4 under the 1940 Act, the Funds may invest its assets
in securities of investment companies, including money market funds, in excess
of the limits discussed above.
Investing
in another pooled vehicle exposes a Fund to all the risks of that pooled
vehicle. In addition, if a Fund invests in and, thus, is a shareholder of,
another investment company, the Fund’s shareholders will indirectly bear the
Fund’s proportionate share of the fees and expenses paid by such other
investment company, including advisory fees, in addition to both the management
fees payable directly by the Fund to the Fund’s own investment adviser and the
other expenses that the Fund bears directly in connection with the Fund’s own
operations.
Other
Short-Term Instruments
The
Funds may invest in short-term instruments, including money market instruments,
on an ongoing basis to provide liquidity or for other reasons. Money market
instruments are generally short-term investments that may include but are not
limited to: (i) shares of money market funds; (ii) obligations issued
or guaranteed by the U.S. government, its agencies or instrumentalities
(including government-sponsored enterprises); (iii) negotiable certificates
of deposit (“CDs”), bankers’ acceptances, fixed time deposits and other
obligations of U.S. and foreign banks (including foreign branches) and similar
institutions; (iv) commercial paper rated at the date of
purchase
“Prime-1” by Moody’s or “A‑1” by S&P or, if unrated, of comparable quality
as determined by the Adviser; (v) non-convertible corporate debt securities
(e.g.,
bonds and debentures) with remaining maturities at the date of purchase of not
more than 397 days and that satisfy the rating requirements set forth in Rule
2a-7 under the 1940 Act; and (vi) short-term U.S. dollar-denominated
obligations of foreign banks (including U.S. branches) that, in the opinion of
the Adviser, are of comparable quality to obligations of U.S. banks which may be
purchased by a Fund. Any of these instruments may be purchased on a current or a
forward-settled basis. Money market instruments also include shares of money
market funds. Time deposits are non-negotiable deposits maintained in banking
institutions for specified periods of time at stated interest rates. Bankers’
acceptances are time drafts drawn on commercial banks by borrowers, usually in
connection with international transactions.
Repurchase
Agreements
Each
Fund may invest in repurchase agreements with commercial banks, brokers or
dealers to generate income from its excess cash balances and to invest
securities lending cash collateral. A repurchase agreement is an agreement under
which a Fund acquires a financial instrument (e.g.,
a security issued by the U.S. government or an agency thereof, a banker’s
acceptance or a certificate of deposit) from a seller, subject to resale to the
seller at an agreed upon price and date (normally, the next Business Day). A
repurchase agreement may be considered a loan collateralized by securities. The
resale price reflects an agreed upon interest rate effective for the period the
instrument is held by the applicable Fund and is unrelated to the interest rate
on the underlying instrument.
In
these repurchase agreement transactions, the securities acquired by a Fund
(including accrued interest earned thereon) must have a total value in excess of
the value of the repurchase agreement and are held by the Custodian until
repurchased. No more than an aggregate of 15% of a Fund’s net assets will be
invested in illiquid investments, including repurchase agreements having
maturities longer than seven days and securities subject to legal or contractual
restrictions on resale, or for which there are no readily available market
quotations.
The
use of repurchase agreements involves certain risks. For example, if the other
party to the agreement defaults on its obligation to repurchase the underlying
security at a time when the value of the security has declined, a Fund may incur
a loss upon disposition of the security. If the other party to the agreement
becomes insolvent and subject to liquidation or reorganization under the U.S.
Bankruptcy Code or other laws, a court may determine that the underlying
security is collateral for a loan by a Fund not within the control of the Fund
and, therefore, the Fund may not be able to substantiate its interest in the
underlying security and may be deemed an unsecured creditor of the other party
to the agreement.
Reverse
Repurchase Agreements
A
Fund may enter into reverse repurchase agreements, which involve the sale of
securities held by the Fund subject to its agreement to repurchase the
securities at an agreed-upon date or upon demand and at a price reflecting a
market rate of interest. Reverse repurchase agreements may be entered into only
with banks or securities dealers or their affiliates. While a reverse repurchase
agreement is outstanding, a Fund will, for all of its reverse repurchase
agreements, either (i) consistent with Section 18 of the 1940 Act, maintain
asset coverage of at least 300% of the value of the repurchase agreement or
(ii) treat the reverse repurchase agreement as a derivatives transaction
for purposes of Rule 18f-4, including, as applicable, the VaR-based limit on
leverage risk.
Reverse
repurchase agreements involve the risk that the buyer of the securities sold by
a Fund might be unable to deliver them when the Fund seeks to repurchase. If the
buyer of securities under a reverse repurchase agreement files for bankruptcy or
becomes insolvent, the buyer or trustee or receiver may receive an extension of
time to determine whether to enforce the Fund’s obligation to repurchase the
securities, and the Fund’s use of the proceeds of the reverse repurchase
agreement may effectively be restricted pending such decision.
Securities
Lending
Each
Fund may lend portfolio securities in an amount up to one-third of its total
assets to brokers, dealers and other financial institutions. In a portfolio
securities lending transaction, a Fund receives from the borrower an amount
equal to the interest paid or the dividends declared on the loaned securities
during the term of the loan as well as the interest on the collateral
securities, less any fees (such as finders or administrative fees) the Fund pays
in arranging the loan. A Fund may share the interest it receives on the
collateral securities with the borrower. The terms of each Fund’s loans permit
it to reacquire loaned securities on five business days’ notice or in time to
vote on any important matter. Loans are subject to termination at the option of
the applicable Fund or borrower at any time, and the borrowed securities must be
returned when the loan is terminated. The Funds may pay fees to arrange for
securities loans.
The
SEC currently requires that the following conditions must be met whenever a
Fund’s portfolio securities are loaned: (1) the Fund must receive at least 100%
cash collateral from the borrower; (2) the borrower must increase such
collateral whenever the market value of the securities rises above the level of
such collateral; (3) the Fund must be able to terminate the loan at any time;
(4) the Fund must receive reasonable interest on the loan, as well as any
dividends, interest or other distributions on the loaned securities, and any
increase in market value; (5) the Fund may pay only reasonable custodian fees
approved by the Board in connection with the loan; (6) while voting rights
on the loaned securities may pass to the borrower, the Board must terminate the
loan and regain the right to vote the securities if a material event adversely
affecting the investment occurs, and (7) the Fund may not loan its portfolio
securities so that the value of the loaned securities is more than one-third of
its total asset value, including collateral received from such loans. These
conditions may be subject to future modification. Such loans will be terminable
at any time upon specified notice. A Fund
might
experience the risk of loss if the institution with which it has engaged in a
portfolio loan transaction breaches its agreement with the Fund. In addition,
the Funds will not enter into any portfolio security lending arrangement having
a duration of longer than one year. The principal risk of portfolio lending is
potential default or insolvency of the borrower. In either of these cases, a
Fund could experience delays in recovering securities or collateral or could
lose all or part of the value of the loaned securities. As part of participating
in a lending program, the applicable Fund may be required to invest in
collateralized debt or other securities that bear the risk of loss of principal.
In addition, all investments made with the collateral received are subject to
the risks associated with such investments. If such investments lose value, a
Fund will have to cover the loss when repaying the collateral.
Any
loans of portfolio securities are fully collateralized based on values that are
marked-to-market daily. Any securities that a Fund may receive as collateral
will not become part of a Fund’s investment portfolio at the time of the loan
and, in the event of a default by the borrower, the Fund will, if permitted by
law, dispose of such collateral except for such part thereof that is a security
in which the Fund is permitted to invest. During the time securities are on
loan, the borrower will pay a Fund any accrued income on those securities, and
the Fund may invest the cash collateral and earn income or receive an
agreed-upon fee from a borrower that has delivered cash-equivalent
collateral.
Subsidiary
Risks
Each
Fund may invest up to 25% of its assets in a subsidiary that is wholly-owned by
such Fund and organized under the laws of the Cayman Islands (the “Subsidiary”).
A Fund is the sole shareholder of its applicable Subsidiary and does not expect
shares of the Subsidiary to be offered or sold to other investors.
Each
Fund will invest in its applicable Subsidiary in order to gain exposure to the
investment returns of commodities within the limitations of the federal tax law
requirements applicable to RICs. A Subsidiary may invest, to a greater extent
than its applicable Fund, in commodity-linked derivative instruments, including
commodity futures contracts, swap agreements, commodity-linked structured notes,
as well as other instruments intended to serve as margin or collateral for these
derivative instruments. A Subsidiary may invest in any type of investment in
which its applicable Fund is permitted to invest, as described in the Prospectus
and this SAI. A Fund’s investment in its applicable Subsidiary will not exceed
25% of the value of such Fund’s total assets (notwithstanding any subsequent
market appreciation in the Subsidiary’s value). Asset limitations are imposed by
the Code and are measured at each taxable year and quarter end. The Adviser also
serves as the investment adviser to the Subsidiaries.
A
Subsidiary is not registered under the 1940 Act but will be subject to certain
protections of the 1940 Act with respect to its applicable Fund, as described in
this SAI. All of a Fund’s investments in its applicable Subsidiary will be
subject to the investment policies and restrictions of such Fund, including
those related to leverage, collateral and segregation requirements, and
liquidity. In addition, the valuation and brokerage policies of a Fund will be
applied to its applicable Subsidiary. A Fund’s investments in its applicable
Subsidiary are not subject to all investor protection provisions of the 1940
Act. To the extent applicable, each Subsidiary otherwise is subject to the same
fundamental investment restrictions as its applicable Fund and, in particular,
to the same requirements relating to portfolio leverage, liquidity, and the
timing and method of valuation of portfolio investments and Fund shares.
Accordingly, references in this SAI to a Fund may also include its applicable
Subsidiary. By investing in its Subsidiary, each Fund may be considered to be
investing indirectly in the same investments as such Subsidiary and is
indirectly exposed to the risk associated with those investments. Because a Fund
is the sole investor in its applicable Subsidiary, it is not likely that such
Subsidiary will take any action that is contrary to the interests of its
applicable Fund and its respective shareholders.
Each
Subsidiary has a board of directors that oversees its activities. Each
Subsidiary has entered into a separate investment advisory agreement with the
Adviser. Each Subsidiary also has entered into agreements with its applicable
Fund’s service providers for the provision of administrative, accounting,
transfer agency, and custody services.
Each
Subsidiary is subject to regulation as a commodity pool under the CEA and the
CFTC rules and regulations. The Adviser serves as the CPO of each Subsidiary.
The Adviser is currently registered as a CPO with the CFTC and is a member of
the National Futures Association (“NFA”). There is no assurance that the Adviser
will remain a registered CPO with respect to a Subsidiary, or that a Subsidiary
will remain a commodity pool to the extent that one or more exclusions or
exemptions are available under applicable CFTC regulations. The Adviser
currently does not rely on an exclusion from the definition of CPO in CFTC Rule
4.5 with respect to the Funds. The Adviser is subject to dual regulation by the
CFTC and the SEC. The CFTC adopted regulations that seek to “harmonize” CFTC
regulations with overlapping SEC rules and regulations. The Adviser has availed
itself of the CFTC’s substituted compliance option under the harmonization
regulations with respect to each Fund by filing a notice with the National
Futures Association. The Adviser will remain subject to certain CFTC-mandated
disclosure, reporting and recordkeeping regulations.
The
financial information of a Subsidiary will be consolidated into its applicable
Fund’s financial statements, as contained within such Fund’s annual and
semi-annual reports provided to shareholders.
Regulatory
changes, including changes in the laws of the U.S. or the Cayman Islands, could
result in the inability of a Fund and/or a Subsidiary to operate as described in
the Funds’ Prospectus and this SAI. Such changes could potentially impact a
Fund’s ability to implement its investment strategy and could result in
decreased investment returns. In addition, in the event changes to the laws of
the Cayman Islands require a Subsidiary to pay taxes to a governmental
authority, such Fund would be likely to suffer decreased returns.
A
U.S. person, including a Fund, who owns (directly or indirectly) 10% or more of
the total combined voting power of all classes of stock of 10% or more of the
total value of shares of all classes of stock of a foreign corporation is a
“U.S. Shareholder” for purposes of the controlled foreign corporation (CFC)
provisions of the Code. A CFC is a foreign corporation that, on any day of its
taxable year, is owned (directly, indirectly, or constructively) more than 50%
(measured by voting power or value) by U.S. Shareholders. Because of its
investment in a Subsidiary, its applicable Fund is a U.S. Shareholder in a CFC.
As a U.S. Shareholder, a Fund is required to include in gross income for U.S.
federal income tax purposes for each taxable year of such Fund its pro rata
share of its CFC’s “Subpart F” income (discussed further below) and any “global
intangible low-taxed income” or (GILTI) for the CFC’s taxable year ending within
such Fund’s taxable year whether or not such income is actually distributed by
the CFC. GILTI generally includes the active operating profits of the CFC,
reduced by a deemed return on the tax basis of the CFC’s depreciable tangible
assets.
In
order to qualify as a RIC under Subchapter M of the Code and be eligible to
receive “pass-through” tax treatment, a Fund must, among other things, meet
certain requirements regarding the source of its income, the diversification of
its assets and the distribution of its income. Under the source of income test,
at least 90% of a RIC’s gross income each year must be “qualifying income,”
which generally consists of dividends, interest, gains on investment assets and
certain other categories of investment income. Qualifying income generally does
not include income derived directly from commodities, including certain
commodity-linked derivatives. A Fund’s investment in its applicable Subsidiary
is intended to provide such Fund with exposure to the commodities markets within
the limitations of the Code such that the Fund continues to qualify as a RIC.
The “Subpart F” income (defined in Section 951 of the Code to include passive
income, including from commodity-linked derivatives) of a Fund attributable to
its investment in its applicable Subsidiary is “qualifying income” to such Fund
to the extent that such income is derived with respect to the Fund’s business of
investing in stock, securities or currencies. A Fund expects its “Subpart F”
income attributable to its investment in its applicable Subsidiary to be derived
with respect to such Fund’s business of investing in stock, securities or
currencies and to be treated as “qualifying income.” The Adviser will carefully
monitor a Fund’s investments in its applicable Subsidiary to ensure that no more
than 25% of such Fund’s assets are invested in its applicable
Subsidiary.
Subpart
F income and GILTI are treated as ordinary income, regardless of the character
of the CFC’s underlying income. Net losses incurred by a CFC during a tax year
do not flow through to a Fund and thus will not be available to offset income or
capital gain generated from such Fund’s other investments. In addition, net
losses incurred by a CFC during a tax year generally cannot be carried forward
by the CFC to offset gains realized by it in subsequent taxable years. To the
extent a Fund invests in its applicable Subsidiary and recognizes “Subpart F”
income or GILTI in excess of actual cash distributions from such Subsidiary, if
any, such Fund may be required to sell assets (including when it is not
advantageous to do so) to generate the cash necessary to distribute as dividends
to its shareholders all of its income and gains and therefore to eliminate any
tax liability at the Fund level. “Subpart F” income also includes the excess of
gains over losses from transactions (including futures, forward and other
similar transactions) in commodities.
A
Fund’s recognition of any “Subpart F” income or GILTI from an investment in its
applicable Subsidiary will increase such Fund’s tax basis in the Subsidiary.
Distributions by a Subsidiary to its applicable Fund, including in redemption of
such Subsidiary’s shares, will be tax free, to the extent of the Subsidiary’s
previously undistributed “Subpart F” income or GILTI, and will correspondingly
reduce the Fund’s tax basis in its Subsidiary, and any distributions in excess
of the Fund’s tax basis in its Subsidiary will be treated as realized gain. Any
losses with respect to a Fund’s shares of its applicable Subsidiary will not be
currently recognized. A Fund’s investment in its applicable Subsidiary will
potentially have the effect of accelerating such Fund’s recognition of income
and causing its income to be treated as ordinary income, regardless of the
character of its Subsidiary’s income. If a net loss is realized by a Subsidiary,
such loss is generally not available to offset the income earned by its
applicable Fund. In addition, the net losses incurred during a taxable year by a
Subsidiary cannot be carried forward by such Subsidiary to offset gains realized
by it in subsequent taxable years. A Fund will not receive any credit in respect
of any non-U.S. tax borne by its applicable Subsidiary.
The
federal income tax treatment of a Fund’s income from its applicable Subsidiary
also may be negatively affected by future legislation, Treasury Regulations
(proposed or final), and/or other Internal Revenue Service (“IRS”) guidance or
authorities that could affect the character, timing of recognition, and/or
amount of such Fund’s investment company taxable income and/or net capital gains
and, therefore, the distributions it makes. If a Fund failed the source of
income test for any taxable year but was eligible to and did cure the failure,
it could incur potentially significant additional federal income tax expenses.
If, on the other hand, a Fund failed to qualify as a RIC for any taxable year
and was ineligible to or otherwise did not cure the failure, it would be subject
to federal income tax at the fund level on its taxable income at the regular
corporate tax rate (without reduction for distributions to shareholders), with
the consequence that its income available for distribution to shareholders would
be reduced and distributions from its current or accumulated earnings and
profits would generally be taxable to its shareholders as dividend
income.
Tax
Risks
As
with any investment, you should consider how your investment in Shares will be
taxed. The tax information in the Prospectus and this SAI is provided as general
information. You should consult your own tax professional about the tax
consequences of an investment in Shares.
A
Fund intends to qualify annually to be treated as a RIC under the Code. To
qualify as a RIC under the Code, a Fund must invest in assets which produce the
types of income specified in the Code and the Treasury regulations (“Qualifying
Income”). Whether the income from certain derivatives, swaps, commodity-linked
derivatives and other commodity/natural resource-related securities,
including
income from such Fund’s investment in its applicable Subsidiary, is Qualifying
Income is not entirely clear. A Fund’s investment in its applicable Subsidiary
is expected to provide such Fund with exposure to the commodities markets within
the limitations of the Code for qualification as a RIC, but there is a risk that
the IRS could assert that the income derived from the Fund’s investment in the
Subsidiary and certain commodity-linked structured notes will not be considered
Qualifying Income. For more information on the tax risks related to a
Subsidiary, see the section “Subsidiary Risks,” above.
An
investment in a Subsidiary generally may not exceed 25% of the value of its
applicable Fund’s total assets at the end of each quarter of such Fund’s taxable
year. If a Subsidiary does exceed 25% of the value of its applicable Fund’s
total assets, in any quarter, such Fund may fail to qualify as a RIC under the
Code. See “Federal Income Taxes” below for additional information related to
these restrictions.
In
addition, a Fund’s transactions in financial instruments, including, but not
limited to, options, futures contracts, and hedging transactions, will be
subject to special tax rules (which may include mark to market, constructive
sale, wash sale, and short sale rules), the effect of which may be to accelerate
income to such Fund, defer losses to such Fund, cause adjustments in the holding
periods of such Fund’s securities, convert long-term capital gains into
short-term capital gains or convert short-term capital losses into long-term
capital losses. These rules could, therefore, affect the amount, timing and
character of distributions to a Fund’s shareholders. A Fund’s use of such
transactions may result in it realizing more short-term capital gains and
ordinary income, in each case subject to U.S. federal income tax at higher
ordinary income tax rates, than it would if it did not engage in such
transactions.
As
with any investment, you should consider how your investment in Shares will be
taxed. The tax information in the Prospectus and this SAI is provided as general
information. You should consult your own tax professional about the tax
consequences of an investment in Shares.
U.S.
Government Securities
Each
Fund may invest in U.S. government securities. Securities issued or guaranteed
by the U.S. government or its agencies or instrumentalities include U.S.
Treasury securities, which are backed by the full faith and credit of the U.S.
Treasury and which differ only in their interest rates, maturities, and times of
issuance. U.S. Treasury bills have initial maturities of one-year or less; U.S.
Treasury notes have initial maturities of one to ten years; and U.S. Treasury
bonds generally have initial maturities of greater than ten years. Certain U.S.
government securities are issued or guaranteed by agencies or instrumentalities
of the U.S. government including, but not limited to, obligations of U.S.
government agencies or instrumentalities such as the Federal National Mortgage
Association (“Fannie Mae”), the Government National Mortgage Association
(“Ginnie Mae”), the Small Business Administration, the Federal Farm Credit
Administration, the Federal Home Loan Banks, Banks for Cooperatives (including
the Central Bank for Cooperatives), the Federal Land Banks, the Federal
Intermediate Credit Banks, the Tennessee Valley Authority, the Export-Import
Bank of the United States, the Commodity Credit Corporation, the Federal
Financing Bank, the Student Loan Marketing Association, the National Credit
Union Administration and the Federal Agricultural Mortgage Corporation (“Farmer
Mac”).
Some
obligations issued or guaranteed by U.S. government agencies and
instrumentalities, including, for example, Ginnie Mae pass- through
certificates, are supported by the full faith and credit of the U.S. Treasury.
Other obligations issued by or guaranteed by federal agencies, such as those
securities issued by Fannie Mae, are supported by the discretionary authority of
the U.S. government to purchase certain obligations of the federal agency, while
other obligations issued by or guaranteed by federal agencies, such as those of
the Federal Home Loan Banks, are supported by the right of the issuer to borrow
from the U.S. Treasury, while the U.S. government provides financial support to
such U.S. government-sponsored federal agencies, no assurance can be given that
the U.S. government will always do so, since the U.S. government is not so
obligated by law. U.S. Treasury notes and bonds typically pay coupon interest
semi- annually and repay the principal at maturity.
On
September 7, 2008, the U.S. Treasury announced a federal takeover of Fannie Mae
and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), placing the two
federal instrumentalities in conservatorship. Under the takeover, the U.S.
Treasury agreed to acquire $1 billion of senior preferred stock of each
instrumentality and obtained warrants for the purchase of common stock of each
instrumentality (the “Senior Preferred Stock Purchase Agreement” or
“Agreement”). Under the Agreement, the U.S. Treasury pledged to provide up to
$200 billion per instrumentality as needed, including the contribution of cash
capital to the instrumentalities in the event their liabilities exceed their
assets. This was intended to ensure that the instrumentalities maintain a
positive net worth and meet their financial obligations, preventing mandatory
triggering of receivership. On December 24, 2009, the U.S. Treasury announced
that it was amending the Agreement to allow the $200 billion cap on the U.S.
Treasury’s funding commitment to increase as necessary to accommodate any
cumulative reduction in net worth over the next three years. As a result of this
Agreement, the investments of holders, including a Fund, of mortgage-backed
securities and other obligations issued by Fannie Mae and Freddie Mac are
protected.
The
total public debt of the United States as a percentage of gross domestic product
has grown rapidly since the beginning of the 2008-2009 financial downturn.
Although high debt levels do not necessarily indicate or cause economic
problems, they may create certain systemic risks if sound debt management
practices are not implemented. A high national debt can raise concerns that the
U.S. government will not be able to make principal or interest payments when
they are due. In August 2011, S&P lowered its long-term sovereign credit
rating on the U.S. In explaining the downgrade at that time, S&P cited,
among other reasons, controversy over raising
the
statutory debt limit and growth in public spending. In August 2023, Fitch
Ratings also downgraded its U.S. debt rating from AAA to AA+, citing fiscal
deterioration over the next three years and repeated down-to-the-wire debt
ceiling negotiations.
An
increase in national debt levels also may necessitate the need for the U.S.
Congress to negotiate adjustments to the statutory debt ceiling to increase the
cap on the amount the U.S. government is permitted to borrow to meet its
existing obligations and finance current budget deficits. Future downgrades
could increase volatility in domestic and foreign financial markets, result in
higher interest rates, lower prices of U.S. Treasury securities and increase the
costs of different kinds of debt. Any controversy or ongoing uncertainty
regarding the statutory debt ceiling negotiations may impact the U.S. long-term
sovereign credit rating and may cause market uncertainty. As a result, market
prices and yields of securities supported by the full faith and credit of the
U.S. government may be adversely affected.
When-Issued
Securities
A
when-issued security is one whose terms are available and for which a market
exists, but which has not been issued. When a Fund engages in when-issued
transactions, it relies on the other party to consummate the sale. If the other
party fails to complete the sale, a Fund may miss the opportunity to obtain the
security at a favorable price or yield.
When
purchasing a security on a when-issued basis, a Fund assumes the rights and
risks of ownership of the security, including the risk of price and yield
changes. At the time of settlement, the value of the security may be more or
less than the purchase price. The yield available in the market when the
delivery takes place also may be higher than those obtained in the transaction
itself. Because a Fund does not pay for the security until the delivery date,
these risks are in addition to the risks associated with its other
investments.
Decisions
to enter into “when-issued” transactions will be considered on a case-by-case
basis when necessary to maintain continuity in a company’s index membership. A
Fund will segregate cash or liquid securities equal in value to commitments for
the when-issued transactions. A Fund will segregate additional liquid assets
daily so that the value of such assets is equal to the amount of the
commitments.
INVESTMENT
RESTRICTIONS
The
Trust has adopted the following investment restrictions as fundamental policies
with respect to the Funds. These restrictions cannot be changed with respect to
each Fund without the approval of the holders of a majority of that Fund’s
outstanding voting securities. For the purposes of the 1940 Act, a “majority of
outstanding shares” means the vote of the lesser of: (1) 67% or more of the
voting securities of a Fund present at the meeting if the holders of more than
50% of the Fund’s outstanding voting securities are present or represented by
proxy; or (2) more than 50% of the outstanding voting securities of a
Fund.
Except
with the approval of a majority of the outstanding voting securities, each Fund
may not:
1.Concentrate
its investments (i.e.,
hold more than 25% of its total assets) in any industry or group of related
industries, except that the Long-Short Agriculture Strategy ETF and Long-Short
Base Metals Strategy ETF will concentrate to approximately the same extent that
the Index concentrates in the securities of such particular industry or group of
industries. For purposes of this limitation, securities of the U.S. government
(including its agencies and instrumentalities), repurchase agreements
collateralized by U.S. government securities, registered investment companies,
and tax-exempt securities of state or municipal governments and their political
subdivisions are not considered to be issued by members of any
industry.*
2.Borrow
money or issue senior securities (as defined under the 1940 Act), except to the
extent permitted under the 1940 Act.
3.Make
loans, except to the extent permitted under the 1940 Act.
4.Purchase
or sell real estate unless acquired as a result of ownership of securities or
other instruments, except to the extent permitted under the 1940 Act. This shall
not prevent the Fund from investing in securities or other instruments backed by
real estate, REITs, or securities of companies engaged in the real estate
business.
5.Purchase
or sell physical commodities unless acquired as a result of ownership of
securities or other instruments, except to the extent permitted under the 1940
Act. This shall not prevent the Fund from purchasing or selling options and
futures contracts or from investing in securities or other instruments backed by
physical commodities.
6.Underwrite
securities issued by other persons, except to the extent permitted under the
1940 Act.
*
For purposes of this policy, the issuer of the underlying security will be
deemed to be the issuer of any respective depositary receipt.
The
following descriptions of certain provisions of the 1940 Act may assist
investors in understanding the above policies and restrictions:
Borrowing.
The 1940 Act presently allows a fund to borrow from any bank (including
pledging, mortgaging or hypothecating assets) in an amount up to 33 1/3% of its
total assets (not including temporary borrowings not in excess of 5% of its
total assets).
Senior
Securities.
For purposes of fundamental policy no. 2 above, senior securities may include
any obligation or instrument constituting a security issued by a Fund and
evidencing indebtedness or a future payment obligation. The 1940 Act generally
prohibits funds from issuing senior securities other than borrowing from a bank
subject to specific asset coverage requirements. The 1940 Act
prohibitions
and restrictions on the issuance of senior securities are designed to protect
shareholders from the potentially adverse effects of a fund’s issuance of senior
securities, including, in particular, the risks associated with excessive
leverage of a fund’s assets. Certain types of derivatives give rise to future
payment obligations and therefore, also may be considered to be senior
securities. Rule 18f-4 under the 1940 Act permits funds that comply with the
conditions therein to enter into certain types of derivatives transactions
notwithstanding the prohibitions and restrictions on the issuance of senior
securities under the 1940 Act. To the extent consistent with its investment
strategies, a Fund may invest in derivatives in compliance with the conditions
set forth in Rule 18f-4 under the 1940 Act.
Lending.
Under the 1940 Act, a fund may only make loans if expressly permitted by its
investment policies.
Real
Estate and Commodities.
The 1940 Act does not directly restrict an investment company’s ability to
invest in real estate or commodities, but does require that every investment
company have a fundamental investment policy governing such investments.
Underwriting.
Under the 1940 Act, underwriting securities involves a fund purchasing
securities directly from an issuer for the purpose of selling (distributing)
them or participating in any such activity either directly or indirectly.
If
a percentage limitation is adhered to at the time of investment or contract, a
later increase or decrease in percentage resulting from any change in value or
total or net assets will not result in a violation of such restriction, except
that the percentage limitation with respect to the borrowing of money will be
observed continuously.
EXCHANGE
LISTING AND TRADING
Shares
are listed for trading and trade throughout the day on the
Exchange.
There
can be no assurance that a Fund will continue to meet the requirements of the
Exchange necessary to maintain the listing of Shares. The Exchange will consider
the suspension of trading in, and will initiate delisting proceedings of, the
Shares under any of the following circumstances: (i) if any of the requirements
set forth in the Exchange rules are not continuously maintained, including
compliance with Rule 6c-11(c) under the 1940 Act; (ii) if, following the initial
12-month period beginning at the commencement of trading of a Fund, there are
fewer than 50 beneficial owners of the Shares of such Fund; or (iii)
if such other event shall occur or condition shall exist that, in the
opinion of the Exchange, makes further dealings on the Exchange inadvisable. The
Exchange will remove the Shares of a Fund from listing and trading upon
termination of such Fund.
The
Trust reserves the right to adjust the price levels of Shares in the future to
help maintain convenient trading ranges for investors. Any adjustments would be
accomplished through stock splits or reverse stock splits, which would have no
effect on the net assets of the applicable Fund.
MANAGEMENT
OF THE TRUST
Board
Responsibilities. The
management and affairs of the Trust and its series are overseen by the Board,
which elects the officers of the Trust who are responsible for administering the
day-to-day operations of the Trust and the Funds. The Board has approved
contracts, as described below, under which certain companies provide essential
services to the Trust.
The
day-to-day business of the Trust, including the management of risk, is performed
by third-party service providers, such as the Adviser, the Distributor, or the
Administrator. The Board is responsible for overseeing the Trust’s service
providers and, thus, has oversight responsibility with respect to risk
management performed by those service providers. Risk management seeks to
identify and address risks, i.e.,
events or circumstances that could have material adverse effects on the
business, operations, shareholder services, investment performance or reputation
of a Fund. The Funds and their service providers employ a variety of processes,
procedures and controls to identify various of those possible events or
circumstances, to lessen the probability of their occurrence and/or to mitigate
the effects of such events or circumstances if they do occur. Each service
provider is responsible for one or more discrete aspects of the Trust’s business
(e.g.,
the Adviser is responsible for the day-to-day management of each Fund’s
portfolio investments) and, consequently, for managing the risks associated with
that business. The Board has emphasized to the Funds’ service providers the
importance of maintaining vigorous risk management.
The
Board’s role in risk oversight begins before the inception of the Funds, at
which time certain of the Funds’ service providers present the Board with
information concerning the investment objectives, strategies and risks of the
Funds as well as proposed investment limitations for the Funds. Additionally,
the Adviser provides the Board with an overview of, among other things, its
investment philosophy, brokerage practices and compliance infrastructure.
Thereafter, the Board continues its oversight function of various personnel,
including the Trust’s Chief Compliance Officer, as well as personnel of the
Adviser, and other service providers such as the Funds’ independent registered
public accounting firm, make periodic reports to the Audit Committee or to the
Board with respect to various aspects of risk management. The Board and the
Audit Committee oversee efforts by management and service providers to manage
risks to which the Funds may be exposed.
The
Board is responsible for overseeing the nature, extent, and quality of the
services provided to the Funds by the Adviser and receives information about
those services at its regular meetings. In addition, on an annual basis
(following the initial two-year period), in connection with its consideration of
whether to renew the Advisory Agreement (defined below) with the Adviser, the
Board or its designee may meet with the Adviser to review such services. Among
other things, the Board regularly considers the Adviser’s
adherence
to each Fund’s investment restrictions and compliance with various Fund policies
and procedures and with applicable securities regulations. The Board also
reviews information about each Fund’s performance and investments, including,
for example, portfolio holdings schedules.
The
Trust’s Chief Compliance Officer reports regularly to the Board to review and
discuss compliance issues and Fund and Adviser risk assessments. At least
annually, the Trust’s Chief Compliance Officer provides the Board with a report
reviewing the adequacy and effectiveness of the Trust’s policies and procedures
and those of its service providers, including the Adviser. The report addresses
the operation of the policies and procedures of the Trust and each service
provider since the date of the last report; any material changes to the policies
and procedures since the date of the last report; any recommendations for
material changes to the policies and procedures; and any material compliance
matters since the date of the last report.
The
Board receives reports from the Funds’ service providers regarding operational
risks and risks related to the valuation and liquidity of portfolio securities.
Annually, the Funds’ independent registered public accounting firm reviews with
the Audit Committee its audit of the Funds’ financial statements, focusing on
major areas of risk encountered by the Funds and noting any significant
deficiencies or material weaknesses in the Funds’ internal controls.
Additionally, in connection with its oversight function, the Board oversees Fund
management’s implementation of disclosure controls and procedures, which are
designed to ensure that information required to be disclosed by the Trust in its
periodic reports with the SEC are recorded, processed, summarized, and reported
within the required time periods. The Board also oversees the Trust’s internal
controls over financial reporting, which comprise policies and procedures
designed to provide reasonable assurance regarding the reliability of the
Trust’s financial reporting and the preparation of the Trust’s financial
statements.
From
their review of these reports and discussions with the Adviser, the Chief
Compliance Officer, the independent registered public accounting firm and other
service providers, the Board and the Audit Committee learn in detail about the
material risks of each Fund, thereby facilitating a dialogue about how
management and service providers identify and mitigate those risks.
The
Board recognizes that not all risks that may affect a Fund can be identified
and/or quantified, that it may not be practical or cost-effective to eliminate
or mitigate certain risks, that it may be necessary to bear certain risks (such
as investment-related risks) to achieve a Fund’s goals, and that the processes,
procedures and controls employed to address certain risks may be limited in
their effectiveness. Moreover, reports received by the Board as to risk
management matters are typically summaries of the relevant information. Most of
the Funds’ investment management and business affairs are carried out by or
through the Adviser, and other service providers, each of which has an
independent interest in risk management but whose policies and the methods by
which one or more risk management functions are carried out may differ from the
Funds’ and each other’s in the setting of priorities, the resources available or
the effectiveness of relevant controls. As a result of the foregoing and other
factors, the Board’s ability to monitor and manage risk, as a practical matter,
is subject to limitations.
Members
of the Board.
There are four members of the Board, three of whom are not interested persons of
the Trust, as that term is defined in the 1940 Act (the “Independent Trustees”).
The Chairman of the Board, Paul R. Fearday, is an interested person of the Trust
as that term is defined in the 1940 Act.
The
Board is comprised of a super-majority (75 percent) of Independent Trustees.
There is an Audit Committee of the Board that is chaired by an Independent
Trustee and comprised solely of Independent Trustees. The Audit Committee chair
presides at the Audit Committee meetings, participates in formulating agendas
for Audit Committee meetings, and coordinates with management to serve as a
liaison between the Independent Trustees and management on matters within the
scope of responsibilities of the Audit Committee as set forth in its
Board-approved charter. The Trust has not designated a lead Independent Trustee
but has determined its leadership structure is appropriate given the specific
characteristics and circumstances of the Trust. The Trust made this
determination in consideration of, among other things, the fact that the
Independent Trustees of the Trust constitute a super-majority of the Board, the
number of Independent Trustees that constitute the Board, the amount of assets
under management in the Trust, and the number of funds overseen by the Board.
The Board also believes that its leadership structure facilitates the orderly
and efficient flow of information to the Independent Trustees from Fund
management.
Additional
information about each Trustee of the Trust is set forth below. The address of
each Trustee of the Trust is c/o U.S. Bank Global Fund Services,
615 East Michigan Street, Milwaukee, Wisconsin 53202.
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Name
and Year of Birth |
Position
Held with the Trust |
Term
of Office and Length of Time Served |
Principal
Occupation(s) During Past 5 Years |
Number
of Portfolios in Fund Complex* Overseen by Trustee |
Other
Directorships Held by Trustee During Past 5 Years |
Independent
Trustees |
John
L. Jacobs Year of birth: 1959 |
Trustee
and Audit Committee Chair |
Indefinite
term; since 2017 |
Chairman
of VettaFi, LLC (since June 2018); Founder and CEO of Q3 Advisors, LLC
(financial consulting firm) (since 2015); Executive Director of Center for
Financial Markets and Policy (2016–2022); Distinguished Policy Fellow and
Executive Director, Center for Financial Markets and Policy, Georgetown
University (2015–2022); Senior Advisor, Nasdaq OMX Group (2015–2016);
Executive Vice President, Nasdaq OMX Group (2013–2015) |
55 |
Independent
Trustee, SHP ETF Trust (since 2021) (2 portfolios); Director, tZERO Group,
Inc. (since 2020); Independent Trustee, Procure ETF Trust II (since 2018)
(1 portfolio); Independent Trustee, Horizons ETF Trust I
(2015-2019) |
Koji
Felton Year of birth: 1961 |
Trustee |
Indefinite
term; since 2019 |
Retired;
formerly Counsel, Kohlberg Kravis Roberts & Co. L.P. (investment firm)
(2013–2015); Counsel, Dechert LLP (law firm) (2011–2013) |
55 |
Independent
Trustee, Series Portfolios Trust (since 2015)
(10 portfolios) |
Pamela
H. Conroy Year of birth: 1961 |
Trustee
and Nominating and Governance Committee Chair |
Indefinite
term; since 2019 |
Retired;
formerly Executive Vice President, Chief Operating Officer & Chief
Compliance Officer, Institutional Capital Corporation (investment firm)
(1994–2008) |
55 |
Independent
Trustee, Frontier Funds, Inc. (since 2020)
(6 portfolios) |
Interested
Trustee** |
Paul
R. Fearday, CPA Year of birth: 1979 |
Trustee
and Chairman |
Indefinite
term; since 2019 |
Senior
Vice President, U.S. Bank, N.A. (since 2022); Senior Vice President, U.S.
Bancorp Fund Services, LLC (2008–2022) |
55 |
None |
* The
Trust is the only registered investment company in the Fund Complex.
** Mr.
Fearday is deemed to be an “interested person” of the Trust under the 1940 Act
by reason of his position with the parent company of the Trust’s administrator,
U.S. Bancorp Fund Services, LLC, which also provides other third-party services
to the Trust.
Individual
Trustee Qualifications.
The Trust has concluded that each of the Trustees should serve on the Board
because of their ability to review and understand information about the Funds
provided to them by management, to identify and request other information they
may deem relevant to the performance of their duties, to question management and
other service providers regarding material factors bearing on the management and
administration of the Funds, and to exercise their business judgment in a manner
that serves the best interests of the Funds’ shareholders. The Trust has
concluded that each of the Trustees should serve as a Trustee based on his or
her own experience, qualifications, attributes and skills as described below.
The
Trust has concluded that Mr. Jacobs should serve as a Trustee because of his
substantial industry experience. He most recently served as the CEO of Q3
Advisors, LLC and as the Distinguished Policy Fellow and Executive Director of
the Center for Financial Markets and Policy, and as Adjunct Professor of Finance
at the McDonough School of Business at Georgetown University. He also served as
Senior Advisor and principal consultant to Nasdaq’s CEO and President. Mr.
Jacobs has been determined to qualify as an Audit Committee Financial Expert for
the Trust.
The
Trust has concluded that Mr. Felton should serve as a Trustee because of his
substantial industry experience, including over two decades working in the asset
management industry providing legal, regulatory compliance, governance and risk
management advice to registered investment companies, their advisers and boards.
Prior to that, he gained experience and perspective as a regulator while serving
as an enforcement attorney and branch chief for the SEC. He also represented
public companies and their boards of directors in securities class actions,
derivative litigation and SEC investigations as a litigation associate at a
national law firm. Mr. Felton currently serves as an independent trustee and
chair of the nominating and governance committee of a mutual fund complex.
The
Trust has concluded that Ms. Conroy should serve as a Trustee because of her
substantial industry experience, including over 25 years of achievements at both
a large, multi-location financial institution as well as a small,
entrepreneurial firm. She has expertise in all facets of portfolio accounting,
securities processing, trading operations, marketing, as well as legal and
compliance.
The
Trust has concluded that Mr. Fearday should serve as Trustee because of the
experience he gained as a senior officer of U.S. Bancorp Fund Services, LLC,
doing business as U.S. Bank Global Fund Services, since 2008, and in his past
role with a national audit firm.
In
its periodic assessment of the effectiveness of the Board, the Board considers
the complementary individual skills and experience of the individual Trustees
primarily in the broader context of the Board’s overall composition so that the
Board, as a body, possesses the appropriate (and appropriately diverse) skills
and experience to oversee the business of the series of the Trust.
Board
Committees.
The Board has established the following standing committees of the
Board:
Audit
Committee.
The Board has a standing Audit Committee that is composed of each of the
Independent Trustees of the Trust. The Audit Committee operates under a written
charter approved by the Board. The principal responsibilities of the Audit
Committee include: recommending which firm to engage as the Funds’ independent
registered public accounting firm and when and whether to terminate this
relationship, as necessary; reviewing the independent registered public
accounting firm’s compensation, the proposed scope and terms of its engagement,
and the firm’s independence; pre-approving audit and non-audit services provided
by the Funds’ independent registered public accounting firm to the Trust and
certain other affiliated entities; serving as a channel of communication between
the independent registered public accounting firm and the Trustees; reviewing
the results of each external audit, including any qualifications in the
independent registered public accounting firm’s opinion, any related management
letter, management’s responses to recommendations made by the independent
registered public accounting firm in connection with the audit, reports
submitted to the Audit Committee by the internal auditing department of the
Trust’s Administrator that are material to the Trust as a whole, if any, and
management’s responses to any such reports; reviewing the Funds’ audited
financial statements and considering any significant disputes between the
Trust’s management and the independent registered public accounting firm that
arose in connection with the preparation of those financial statements;
considering, in consultation with the independent registered public accounting
firm and the Trust’s senior internal accounting executive, if any, the
independent registered public accounting firms’ report on the adequacy of the
Trust’s internal financial controls; reviewing, in consultation with the Funds’
independent registered public accounting firm, major changes regarding auditing
and accounting principles and practices to be followed when preparing the Funds’
financial statements; and other audit related matters. During the fiscal year
ended April 30, 2023, the Audit Committee has met five times.
The
Audit Committee also serves as the Qualified Legal Compliance Committee (“QLCC”)
for the Trust for the purpose of compliance with Rules 205.2(k) and 205.3(c) of
the Code of Federal Regulations, regarding alternative reporting procedures for
attorneys retained or employed by an issuer who appear and practice before the
SEC on behalf of the issuer (the “issuer attorneys”). An issuer attorney who
becomes aware of evidence of a material violation by the Trust, or by any
officer, director, employee, or agent of the Trust, may report evidence of such
material violation to the QLCC as an alternative to the reporting requirements
of Rule 205.3(b) (which requires reporting to the chief legal officer and
potentially “up the ladder” to other entities).
Nominating
and Governance Committee.
The Board has a standing Nominating and Governance Committee that is composed of
each of the Independent Trustees of the Trust. The Nominating and Governance
Committee operates under a written charter approved by the Board. The principal
responsibility of the Nominating and Governance Committee is to consider,
recommend and nominate candidates to fill vacancies on the Board, if any. The
Nominating and Governance Committee generally will not consider nominees
recommended by shareholders. The Nominating and Governance Committee meets
periodically, as necessary. During the fiscal year ended April 30, 2023, the
Nominating and Governance Committee has met one time.
Principal
Officers of the Trust
The
officers of the Trust conduct and supervise the Trust’s and each Fund’s daily
business. The address of each officer of the Trust is c/o U.S. Bank Global Fund
Services, 615 East Michigan Street, Milwaukee, Wisconsin 53202. Additional
information about each officer of the Trust is as follows:
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Name
and Year of Birth |
Position(s)
Held with the Trust |
Term
of Office and Length of Time Served |
Principal
Occupation(s) During Past 5 Years |
Gregory
C. Bakken Year of birth: 1983 |
President
and Principal Executive Officer |
Indefinite
term, February 2019 |
Vice
President, U.S. Bancorp Fund Services, LLC (since 2006) |
Travis
G. Babich Year of birth: 1980 |
Treasurer
and Principal Financial Officer |
Indefinite
term, September 2019 |
Vice
President, U.S. Bancorp Fund Services, LLC (since 2005) |
Kacie
G. Briody Year of birth: 1992 |
Assistant
Treasurer |
Indefinite
term, March 2019 |
Assistant
Vice President, U.S. Bancorp Fund Services, LLC (since 2021); Officer,
U.S. Bancorp Fund Services, LLC (2014 to 2021) |
Kent
P. Barnes Year of birth: 1968 |
Secretary |
Indefinite
term, February 2019 |
Vice
President, U.S. Bancorp Fund Services, LLC (since 2018); Chief Compliance
Officer, Rafferty Asset Management, LLC (2016 to 2018); Vice President,
U.S. Bancorp Fund Services, LLC (2007 to 2016) |
Christi
C. James Year of birth: 1974 |
Chief
Compliance Officer and Anti-Money Laundering Officer |
Indefinite
term, July 2022 |
Senior
Vice President, U.S. Bancorp Fund Services, LLC (since 2022); Principal
Consultant, ACA Group (2021 to 2022); Lead Manager, Communications
Compliance, T. Rowe Price Investment Services, Inc. (2018 to 2021);
Compliance & Legal Manager, CR Group LP (2017 to 2018) |
Jay
S. Fitton Year of birth: 1970 |
Assistant
Secretary |
Indefinite
term, May 2023 |
Vice
President, U.S. Bancorp Fund Services, LLC (since 2022); Assistant Vice
President, U.S. Bancorp Fund Services, LLC (2019 to 2022); Partner,
Practus, LLP (2018 to 2019); Counsel, Drinker Biddle & Reath LLP (2016
to 2018) |
Trustee
Ownership of Shares.
The Funds are required to show the dollar amount ranges of each Trustee’s
“beneficial ownership” of Shares and each other series of the Trust as of the
end of the most recently completely calendar year. Dollar amount ranges
disclosed are established by the SEC. “Beneficial ownership” is determined in
accordance with Rule 16a-1(a)(2) under the Securities Exchange Act of 1934 (the
“Exchange Act”). As of December 31, 2022, no Trustee or officer of the Trust
owned Shares of the Funds or any other fund within the Trust’s Fund
Complex.
Board
Compensation. Effective
January 1, 2023, each Independent Trustee receives an annual stipend of $85,000
and reimbursement for all reasonable travel expenses relating to their
attendance at Board Meetings. The chair of the Audit Committee receives an
annual stipend of $5,000 and the chair of the Nominating and Governance
Committee receives an annual stipend of $2,500. The Interested Trustee is not
compensated for his service as a Trustee. Pursuant to the Advisory Agreement,
the Adviser has agreed to pay all expenses of the Funds, except those specified
in the Funds’ Prospectus. As a result, the Adviser is responsible for
compensating the Independent Trustees. Trustee compensation disclosed in the
table does not include reimbursed reasonable travel expenses relating to their
attendance at Board Meetings. The following table shows the compensation earned
by each Trustee during the fiscal year ended April 30, 2023.
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Name |
Aggregate
Compensation from the Funds |
Total
Compensation from Fund Complex* Paid to Trustees |
Interested
Trustee |
Paul
R. Fearday |
$0 |
$0 |
Independent
Trustees |
John.
L. Jacobs |
$0 |
$71,250 |
Koji
Felton |
$0 |
$66,250 |
Pamela
H. Conroy |
$0 |
$68,750 |
* The
Trust is the only registered investment company in the Fund
Complex.
PRINCIPAL
SHAREHOLDERS, CONTROL PERSONS, AND MANAGEMENT OWNERSHIP
A
principal shareholder is any person who owns of record or beneficially 5% or
more of the outstanding shares of a fund. A control person is a shareholder that
owns beneficially or through controlled companies more than 25% of the voting
securities of a company or acknowledges the existence of control. Shareholders
owning voting securities in excess of 25% may determine the outcome of any
matter affecting and voted on by shareholders of a fund. As of August 1, 2023,
the Trustees and officers, as a group, owned less than 1% of the Shares of the
Funds, and the following shareholders were considered to be principal
shareholders of each Fund:
Teucrium
Agricultural Strategy No K-1 ETF
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Name
and Address |
%
Ownership |
Type
of Ownership |
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| |
Charles
Schwab & Co., Inc. 211 Main Street San Francisco, CA
94105-1905 |
20.84% |
Record |
Citibank,
N.A.
388
Greenwich Street
New
York, NY 10113 |
17.31% |
Record |
National
Financial Services, LLC 200 Liberty Street New York, NY
10281 |
13.01% |
Record |
TD
Ameritrade, Inc. 200 South 108th Avenue Omaha, NE
68103-2226 |
12.64% |
Record |
BOFA
Securities, Inc. One Bryant Park New York, NY 10036 |
7.11% |
Record |
Jane
Street Capital, LLC 250 Vesey Street New York, NY 10281 |
5.50% |
Record |
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| |
Teucrium
AiLA Long-Short Agriculture Strategy ETF
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Name
and Address |
%
Ownership |
Type
of Ownership |
|
| |
National
Financial Services, LLC 200 Liberty Street New York, NY
10281 |
59.70% |
Record |
BOFA
Securities, Inc. One Bryant Park New York, NY 10036 |
27.23% |
Record |
J.P.
Morgan Securities, LLC/JPMC 383 Madison Avenue New York, NY
10179 |
8.75% |
Record |
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Teucrium
AiLA Long-Short Base Metals Strategy ETF
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| |
Name
and Address |
%
Ownership |
Type
of Ownership |
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| |
National
Financial Services, LLC 200 Liberty Street New York, NY
10281 |
61.66% |
Record |
BOFA
Securities, Inc. One Bryant Park New York, NY 10036 |
31.85% |
Record |
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CODES
OF ETHICS
The
Trust and Adviser have each adopted codes of ethics pursuant to Rule 17j-1 of
the 1940 Act. These codes of ethics are designed to prevent affiliated persons
of the Trust and the Adviser from engaging in deceptive, manipulative or
fraudulent activities in connection with securities held or to be acquired by
the Funds (which also may be held by persons subject to the codes of ethics).
Each code of ethics permits personnel subject to that code of ethics to invest
in securities for their personal investment accounts, subject to certain
limitations, including limitations related to securities that may be purchased
or held by the Funds. The Distributor (as defined below) relies on the principal
underwriters exception under Rule 17j-1(c)(3), specifically where the
Distributor is not affiliated with the Trust or the Adviser, and no officer,
director, or general partner of the Distributor serves as an officer, director,
or general partner of the Trust or the Adviser.
There
can be no assurance that the codes of ethics will be effective in preventing
such activities. Each code of ethics may be examined at the office of the SEC in
Washington, D.C. or on the Internet at the SEC’s website at
http://www.sec.gov.
PROXY
VOTING POLICIES
The
Funds have delegated proxy voting responsibilities to the Adviser, subject to
the Board’s oversight. In delegating proxy responsibilities, the Board has
directed that proxies be voted consistent with each Fund’s and its shareholders’
best interests and in compliance with all applicable proxy voting rules and
regulations. The Adviser has engaged Institutional Shareholder Services Inc.
(“ISS”) to make recommendations to the Adviser on the voting of proxies relating
to securities held by each Fund and has adopted the ISS Proxy Voting Guidelines
as part of the Adviser’s proxy voting policies (the “Proxy Voting Policies”) for
such purpose. A copy of the ISS Proxy Voting Guidelines is set forth in
Appendix
A
to this SAI. The Trust’s Chief Compliance Officer is responsible for monitoring
the effectiveness of the Proxy Voting Policies. The Proxy Voting Policies have
been adopted by the Trust as the policies and procedures that the Adviser will
use when voting proxies on behalf of the Funds.
The
Proxy Voting Policies address, among other things, material conflicts of
interest that may arise between the interests of the Funds and the interests of
the Adviser. The Proxy Voting Policies will ensure that all issues brought to
shareholders are analyzed in light of the Adviser’s fiduciary responsibilities.
When
available, information on how the Funds voted proxies relating to portfolio
securities during the most recent 12-month period ended June 30 will be
available (1) without charge, upon request, by calling 800-617-0004, and (2) on
the SEC’s website at https://www.sec.gov.
INVESTMENT
MANAGEMENT
Investment
Adviser
Teucrium
Investment Advisors, LLC, a Delaware limited liability company located at Three
Main Street, Suite 215, Burlington, Vermont 05401, serves as the investment
adviser to the Funds. The Adviser is wholly-owned by Teucrium Trading, LLC.
Teucrium Trading, LLC developed and offers a product suite of 1940 Act and
Securities Act registered ETFs focused solely on U.S. agricultural commodities.
In addition, the Adviser provides investment advisory and sub-advisory services
to U.S. ETFs.
The
Adviser arranges for transfer agency, custody, fund administration, and all
other non-distribution related services necessary for the Funds to operate. The
Adviser is responsible for the day-to-day operations of the Funds, subject to
the general supervision and oversight of the Board of the Trust. The Adviser is
responsible for the management each Fund in accordance with its investment
objective, policies, and limitations. For the services it provides to the Funds,
the Adviser is entitled to a unified management fee, which is calculated daily
and paid monthly, at an annual rate based on each Fund’s average daily net
assets as set forth in the table below.
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Fund |
Management
Fee |
Teucrium
Agricultural Strategy No K-1 ETF |
1.49%* |
Teucrium
AiLA Long-Short Agriculture Strategy ETF |
1.49% |
Teucrium
AiLA Long-Short Base Metals Strategy ETF |
1.49% |
*
The Adviser has contractually agreed to a reduction of the Agriculture Strategy
No K-1 ETF’s management fee to 0.89% of its average daily net assets for
successive one-year periods. This agreement may be terminated only by, or with
the consent of, the Board.
Pursuant
to an investment advisory agreement between the Trust, on behalf of the Funds,
and the Adviser (the “Advisory Agreement”), the Adviser has agreed to pay all
expenses of the Funds except the fee payable to the Adviser under the Advisory
Agreement, interest charges on any borrowings, dividends and other expenses on
securities sold short, taxes, brokerage commissions and other expenses incurred
in placing orders for the purchase and sale of securities and other investment
instruments, acquired fund fees and expenses, accrued deferred tax liability,
extraordinary expenses, and distribution fees and expenses paid by the Trust
under any distribution plan adopted pursuant to Rule 12b-1 under the 1940 Act.
The
Advisory Agreement with respect to each Fund will continue in force for an
initial period of two years. Thereafter, the Advisory Agreement will be
renewable from year to year with respect to each Fund, so long as its
continuance is approved at least annually (1) by the vote, cast in person
at a meeting called for that purpose, of a majority of those Trustees who are
not “interested persons” of the Adviser or the Trust; and (2) by the majority
vote of either the full Board or the vote of a majority of the outstanding
Shares. The Advisory Agreement automatically terminates on assignment and is
terminable on a 60-day written notice either by the Trust or the
Adviser.
The
Adviser shall not be liable to the Trust or any shareholder for anything done or
omitted by it, except acts or omissions involving willful misfeasance, bad
faith, negligence or reckless disregard of the duties imposed upon it by its
agreement with the Trust or for any losses that may be sustained in the
purchase, holding or sale of any security.
The
table below shows advisory fees paid by the Funds for the fiscal periods ended
April 30, as applicable to each Fund:
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Teucrium
Agricultural Strategy No K-1 ETF(1) |
Teucrium
AiLA Long-Short Agriculture Strategy ETF(2) |
Teucrium
AiLA Long-Short Base Metals Strategy ETF(3) |
Gross
Advisory Fees |
$984,155 |
$27,820 |
$4,510 |
Advisory
Fees Waived |
(398,238) |
(1,136) |
(181) |
Net
Advisory Fees |
$585,917 |
$26,684 |
$4,329 |
(1)
For the fiscal period May 16, 2022 (commencement of operations) through April
30, 2023.
(2)
For the fiscal period December 19, 2022 (commencement of operations) through
April 30, 2023.
(3)
For the fiscal period April 4, 2023 (commencement of operations) through April
30, 2023.
Management
of the Subsidiaries
The
Adviser also serves as the investment adviser to wholly-owned and controlled
subsidiaries of each Fund organized under the laws of the Cayman Islands as an
exempted company pursuant to an investment advisory agreement with each
Subsidiary. The Adviser has contractually agreed to waive the management fee it
receives from each Fund in an amount equal to the management fee paid to the
Adviser by its applicable Subsidiary.
Because
each Subsidiary is not registered under the 1940 Act, it is not subject to the
regulatory protections of the 1940 Act and its applicable Fund, as an investor
in its Subsidiary, will not have all of the protections offered to investors in
registered investment companies. Because each Fund wholly owns and controls its
applicable Subsidiary, and the Adviser is subject to the oversight of the Board,
it is unlikely that a Subsidiary will take action contrary to the interests of
its applicable Fund or its respective shareholders.
PORTFOLIO
MANAGERS
Steve
Kahler and Springer Harris serve as the Funds’ portfolio managers (the
“Portfolio Managers”). This section includes information about the Portfolio
Managers, including information about compensation, other accounts managed, and
the dollar range of Shares owned.
Share
Ownership
The
Funds are required to show the dollar ranges of a portfolio manager’s
“beneficial ownership” of Shares as of the end of the most recently completed
fiscal year or a more recent date for a new portfolio manager. Dollar amount
ranges disclosed are established by the SEC. “Beneficial ownership” is
determined in accordance with Rule 16a-1(a)(2) under the Exchange Act. As of
April 30, 2023, Mr. Kahler did not beneficially own Shares of any Fund, and
Mr. Harris owned between $1 - $10,000 of Shares of Long-Short Agriculture
Strategy ETF.
Other
Accounts
In
addition to the Funds, the Portfolio Managers co-managed the following other
accounts for the Adviser, as of April 30, 2023, none of which were subject to a
performance-based fee:
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| |
Registered
Investment
Companies |
Other
Pooled
Investment
Vehicles |
Other
Accounts |
Number
of Accounts |
Total
Assets in the Accounts |
Number
of Accounts |
Total
Assets in the Accounts |
Number
of Accounts |
Total
Assets in the Accounts |
0 |
$0 |
7 |
$345.85
million |
0 |
$0 |
Compensation
The
Funds’ Portfolio Managers receive a fixed base salary and discretionary bonus
that are not tied to the performance of the Funds.
Conflicts
of Interest
A
Portfolio Manager’s management of “other accounts” may give rise to potential
conflicts of interest in connection with his management of a Fund’s investments,
on the one hand, and the investments of the other accounts, on the other. The
other accounts may have similar investment objectives or strategies as the
Funds. A potential conflict of interest may arise as a result, whereby a
portfolio manager could favor one account over another. Another potential
conflict could include a Portfolio Manager’s knowledge about the size, timing,
and possible market impact of Fund trades, whereby the Portfolio Manager could
use this information to the advantage of other accounts and to the disadvantage
of the Funds. However, the Adviser has established policies and procedures to
ensure that the purchase and sale of securities among all accounts the Adviser
manages are fairly and equitably allocated.
DISTRIBUTOR
The
Trust and Foreside Fund Services, LLC, a wholly-owned subsidiary of Foreside
Financial Group, LLC (doing business as ACA Group) (the “Distributor”), are
parties to a distribution agreement (the “Distribution Agreement”), whereby the
Distributor acts as principal underwriter for the Trust and distributes Shares
of each Fund. Shares are continuously offered for sale by the Distributor only
in Creation Units. The Distributor will not distribute Shares in amounts less
than a Creation Unit and does not maintain a secondary market in Shares. The
principal business address of the Distributor is Three Canal Plaza, Suite 100,
Portland, Maine 04101.
Under
the Distribution Agreement, the Distributor, as agent for the Trust, will
receive orders for the purchase and redemption of Creation Units, provided that
any subscriptions and orders will not be binding on the Trust until accepted by
the Trust. The Distributor is a broker-dealer registered under the Exchange Act
and a member of the Financial Industry Regulatory Authority
(“FINRA”).
The
Distributor also may enter into agreements with securities dealers (“Soliciting
Dealers”) who will solicit purchases of Creation Units of Shares. Such
Soliciting Dealers also may be Authorized Participants (as discussed in
“Procedures
for Purchase of Creation Units”
below) or DTC participants (as defined below).
The
Distribution Agreement will continue for two years from its effective date and
is renewable annually thereafter. The continuance of the Distribution Agreement
must be specifically approved at least annually (i) by the vote of the Trustees
or by a vote of the shareholders of a Fund and (ii) by the vote of a majority of
the Independent Trustees who have no direct or indirect financial interest in
the operations of the Distribution Agreement or any related agreement, cast in
person at a meeting called for the purpose of voting on such approval. The
Distribution Agreement is terminable without penalty by the Trust on 60 days’
written notice when authorized either by majority vote of its outstanding voting
Shares or by a vote of a majority of the Board (including a majority of the
Independent Trustees), or by the Distributor on 60 days’ written notice, and
will automatically terminate in the event of its assignment. The Distribution
Agreement provides that in the absence of willful misfeasance, bad faith or
gross negligence on the part of the Distributor, or reckless disregard by it of
its obligations thereunder, the Distributor shall not be liable for any action
or failure to act in accordance with its duties thereunder.
Intermediary
Compensation.
The
Adviser, or its affiliates, out of their own resources and not out of Fund
assets (i.e., without
additional cost to a Fund or its shareholders), may pay certain broker dealers,
banks and other financial intermediaries (“Intermediaries”) for certain
activities related to a Fund, including participation in activities that are
designed to make Intermediaries more knowledgeable about exchange-traded
products, including the Fund, or for other activities, such as marketing and
educational training or support. These arrangements are not financed by a Fund
and, thus, do not result in increased Fund expenses. They are not reflected in
the fees and expenses listed in the fees and expenses sections of a Fund’s
Prospectus and they do not change the price paid by investors for the purchase
of Shares or the amount received by a shareholder as proceeds from the
redemption of Shares.
Such
compensation may be paid to Intermediaries that provide services to a Fund,
including marketing and education support (such as through conferences, webinars
and printed communications). The Adviser will periodically assess the
advisability of continuing to make these payments. Payments to an Intermediary
may be significant to the Intermediary, and amounts that Intermediaries pay to
your adviser, broker or other investment professional, if any, also may be
significant to such adviser, broker or investment professional. Because an
Intermediary may make decisions about what investment options it will make
available or recommend, and what services to provide in connection with various
products, based on payments it receives or is eligible to receive, such payments
create conflicts of interest between the Intermediary and its clients. For
example, these financial incentives may cause the Intermediary to recommend a
Fund rather than other investments. The same conflict of interest exists with
respect to your financial adviser, broker or investment professional if he or
she receives similar payments from his or her Intermediary firm.
Intermediary
information is current only as of the date of this SAI. Please contact your
adviser, broker, or other investment professional for more information regarding
any payments his or her Intermediary firm may receive. Any payments made by the
Adviser or its affiliates to an Intermediary may create the incentive for an
Intermediary to encourage customers to buy Shares.
If
you have any additional questions, please call 1-800-617-0004.
Distribution
and Service Plan. The
Board has adopted a Distribution and Service Plan (the “Plan”) in accordance
with the provisions of Rule 12b-1 under the 1940 Act, which regulates
circumstances under which an investment company may directly or indirectly bear
expenses relating to the distribution of its shares. No payments pursuant to the
Plan are expected to be made during the twelve (12) month period from the date
of this SAI. Rule 12b-1 fees to be paid by a Fund under the Plan may only be
imposed after approval by the Board.
Continuance
of the Plan must be approved annually by a majority of the Trustees of the Trust
and by a majority of the Trustees who are not interested persons (as defined in
the 1940 Act) of the Trust and have no direct or indirect financial interest in
the Plan or in any agreements related to the Plan (“Qualified Trustees”). The
Plan requires that quarterly written reports of amounts spent under the Plan and
the purposes of such expenditures be furnished to and reviewed by the Trustees.
The Plan may not be amended to increase materially the amount that may be spent
thereunder without approval by a majority of the outstanding shares of a Fund.
All material amendments of the Plan will require approval by a majority of the
Trustees of the Trust and of the Qualified Trustees.
The
Plan provides that each Fund pays the Distributor an annual fee of up to a
maximum of 0.25% of the average daily net assets of its Shares. Under the Plan,
the Distributor may make payments pursuant to written agreements to financial
institutions and intermediaries such as banks, savings and loan associations and
insurance companies including, without limit, investment counselors,
broker-dealers and the Distributor’s affiliates and subsidiaries (collectively,
“Agents”) as compensation for services and reimbursement of expenses incurred in
connection with distribution assistance. The Plan is characterized as a
compensation plan since the distribution fee will be paid to the Distributor
without regard to the distribution expenses incurred by the Distributor or the
amount of payments made to other financial institutions and intermediaries. The
Trust intends to operate the Plan in accordance with its terms and with FINRA’s
rules concerning sales charges.
Under
the Plan, subject to the limitations of applicable law and regulations, each
Fund is authorized to compensate the Distributor up to the maximum amount to
finance any activity primarily intended to result in the sale of Creation Units
of the Fund or for providing or arranging for others to provide shareholder
services and for the maintenance of shareholder accounts. Such activities may
include, but are not limited to: (i) delivering copies of a Fund’s then current
reports, prospectuses, notices, and similar materials, to prospective purchasers
of Creation Units; (ii) marketing and promotional services, including
advertising; (iii) paying the costs of and compensating others, including
Authorized Participants with whom the Distributor has entered into written
Authorized Participant Agreements, for performing shareholder servicing on
behalf of a Fund; (iv) compensating certain Authorized Participants for
providing assistance in distributing the Creation Units of a Fund, including the
travel and communication expenses and salaries and/or commissions of sales
personnel in connection with the distribution of the Creation Units of a Fund;
(v) payments to financial institutions and intermediaries such as banks, savings
and loan associations, insurance companies and investment counselors,
broker-dealers, mutual fund supermarkets and the affiliates and subsidiaries of
the Trust’s service providers as compensation for services or reimbursement of
expenses incurred in connection with distribution assistance; (vi) facilitating
communications with beneficial owners of Shares, including the cost of providing
(or paying others to provide) services to beneficial owners of Shares,
including, but not limited to, assistance in answering inquiries related to
Shareholder accounts; and (vii) such other services and obligations as are set
forth in the Distribution Agreement.
ADMINISTRATOR,
INDEX RECEIPT AGENT, AND TRANSFER AGENT
U.S.
Bancorp Fund Services, LLC, doing business as U.S. Bank Global Fund Services
(“Fund Services” or the “Transfer Agent”), located at 615 East Michigan Street,
Milwaukee, Wisconsin 53202, serves as the Funds’ transfer agent, index receipt
agent, and administrator.
Pursuant
to a fund servicing agreement between the Trust and Fund Services, Fund Services
provides the Trust with administrative and management services (other than
investment advisory services) and accounting services, including portfolio
accounting services, tax accounting services, and furnishing financial reports.
In this capacity, Fund Services does not have any responsibility or authority
for the management of the Funds, the determination of investment policy, or for
any matter pertaining to the distribution of Shares. As compensation for the
administration, accounting and management services, the Adviser pays Fund
Services a fee based on each Fund’s average daily net assets, subject to a
minimum annual fee. Fund Services also is entitled to certain out-of-pocket
expenses for the services mentioned above, including pricing expenses.
The
Adviser was responsible for paying the amounts in the table below to Fund
Services for the fiscal periods ended April 30, as applicable to each
Fund:
|
|
|
|
| |
Fund |
2023 |
Teucrium
Agricultural Strategy No K-1 ETF |
$52,849(1) |
Teucrium
AiLA Long-Short Agriculture Strategy ETF |
$6,778(2) |
Teucrium
AiLA Long-Short Base Metals Strategy ETF |
$1,253(3) |
(1)
For the fiscal period May 16, 2022 (commencement of operations) through April
30, 2023.
(2)
For the fiscal period December 19, 2022 (commencement of operations) through
April 30, 2023.
(3)
For the fiscal period April 4, 2023 (commencement of operations) through April
30, 2023.
CUSTODIAN
Pursuant
to a custody agreement between the Trust and U.S. Bank National Association
(“U.S. Bank” or the “Custodian”) (the “Custody Agreement”), U.S. Bank, located
at 1555 North Rivercenter Drive, Suite 302, Milwaukee, Wisconsin 53212, serves
as the custodian of the Funds’ assets. The Custodian holds and administers the
assets in each Fund’s portfolio. Pursuant to the Custody Agreement, U.S. Bank
receives an annual fee from the Adviser based on the Trust’s total average daily
net assets, subject to a minimum annual fee, and certain settlement charges. The
Custodian also is entitled to certain out-of-pocket expenses.
LEGAL
COUNSEL
Morgan,
Lewis & Bockius LLP, located at 1111 Pennsylvania Avenue, NW, Washington, DC
20004-2541, serves as legal counsel for the Trust.
INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Cohen
& Company, Ltd., located at 1350 Euclid Avenue, Suite 800, Cleveland, Ohio
44115, serves as the independent registered public accounting firm for the
Funds.
PORTFOLIO
HOLDINGS DISCLOSURE POLICIES AND PROCEDURES
The
Board has adopted a policy regarding the disclosure of information about each
Fund’s security holdings. Each Fund’s entire portfolio holdings are publicly
disseminated each day a Fund is open for business and may be available through
financial reporting and news services, including publicly available internet web
sites. In addition, the composition of the Deposit Securities is publicly
disseminated daily prior to the opening of the Exchange via the facilities of
the National Securities Clearing Corporation (“NSCC”).
DESCRIPTION
OF SHARES
The
Declaration of Trust authorizes the issuance of an unlimited number of funds and
shares. Each share represents an equal proportionate interest in the applicable
Fund with each other share. Shares are entitled upon liquidation to a pro rata
share in the net assets of the applicable Fund. Shareholders have no preemptive
rights. The Declaration of Trust provides that the Trustees may create
additional series or classes of shares. All consideration received by the Trust
for shares of any additional funds and all assets in which such consideration is
invested would belong to that fund and would be subject to the liabilities
related thereto. Share certificates representing Shares will not be issued.
Shares, when issued, are fully paid and non-assessable.
Each
Share has one vote with respect to matters upon which a shareholder vote is
required, consistent with the requirements of the 1940 Act and the rules
promulgated thereunder. Shares of all funds in the Trust vote together as a
single class, except that if the matter being voted on affects only a particular
fund it will be voted on only by that fund and if a matter affects a particular
fund differently from other funds, that fund will vote separately on such
matter. As a Delaware statutory trust, the Trust is not required, and does not
intend, to hold annual meetings of shareholders. Approval of shareholders will
be sought, however, for certain changes in the operation of the Trust and for
the election of Trustees under certain circumstances. Upon the written request
of shareholders owning at least 10% of the Trust’s shares, the Trust will call
for a meeting of shareholders to consider the removal of one or more Trustees
and other certain matters. In the event that such a meeting is requested, the
Trust will provide appropriate assistance and information to the shareholders
requesting the meeting.
Under
the Declaration of Trust, the Trustees have the power to liquidate a Fund
without shareholder approval. While the Trustees have no present intention of
exercising this power, they may do so if a Fund fails to reach a viable size
within a reasonable amount of time or for such other reasons as may be
determined by the Board.
LIMITATION
OF TRUSTEES’ LIABILITY
The
Declaration of Trust provides that a Trustee shall be liable only for his or her
own willful misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of the office of Trustee and shall not be
liable for errors of judgment or mistakes of fact or law. The Trustees shall not
be responsible or liable in any event for any neglect or wrongdoing of any
officer, agent, employee, adviser or principal underwriter of the Trust, nor
shall any Trustee be responsible for the act or omission of any other Trustee.
The Declaration of Trust also provides that the Trust shall indemnify each
person who is, or has been, a Trustee, officer, employee or agent of the Trust,
any person who is serving or has served at the Trust’s request as a Trustee,
officer, trustee, employee or agent of another organization in which the Trust
has any interest as a shareholder, creditor or otherwise to the extent and in
the manner provided in the Amended and Restated By-laws. However, nothing in the
Declaration of Trust shall protect or indemnify a Trustee against any liability
for his or her willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of the office of Trustee.
Nothing contained in this section attempts to disclaim a Trustee’s individual
liability in any manner inconsistent with the federal securities
laws.
BROKERAGE
TRANSACTIONS
The
policy of the Trust regarding purchases and sales of securities for a Fund is
that primary consideration will be given to obtaining the most favorable prices
and efficient executions of transactions. Consistent with this policy, when
securities transactions are effected on a stock exchange, the Trust’s policy is
to pay commissions which are considered fair and reasonable without necessarily
determining
that the lowest possible commissions are paid in all circumstances. The Trust
believes that a requirement always to seek the lowest possible commission cost
could impede effective portfolio management and preclude the Funds from
obtaining a high quality of brokerage and research services. In seeking to
determine the reasonableness of brokerage commissions paid in any transaction,
the Adviser will rely upon its experience and knowledge regarding commissions
generally charged by various brokers and on its judgment in evaluating the
brokerage services received from the broker effecting the transaction. Such
determinations are necessarily subjective and imprecise, as in most cases, an
exact dollar value for those services is not ascertainable. The Trust has
adopted policies and procedures that prohibit the consideration of sales of
Shares as a factor in the selection of a broker or dealer to execute its
portfolio transactions.
The
Adviser owes a fiduciary duty to its clients to seek to provide best execution
on trades effected. In selecting a broker/dealer for each specific transaction,
the Adviser chooses the broker/dealer deemed most capable of providing the
services necessary to obtain the most favorable execution. “Best execution” is
generally understood to mean the most favorable cost or net proceeds reasonably
obtainable under the circumstances. The full range of brokerage services
applicable to a particular transaction may be considered when making this
judgment, which may include, but is not limited to: liquidity, price,
commission, timing, aggregated trades, capable floor brokers or traders,
competent block trading coverage, ability to position, capital strength and
stability, reliable and accurate communications and settlement processing, use
of automation, knowledge of other buyers or sellers, arbitrage skills,
administrative ability, underwriting and provision of information on a
particular security or market in which the transaction is to occur. The specific
criteria will vary depending upon the nature of the transaction, the market in
which it is executed, and the extent to which it is possible to select from
among multiple broker/dealers. The Adviser also will use electronic crossing
networks (“ECNs”) when appropriate.
Subject
to the foregoing policies, brokers or dealers selected to execute a Fund’s
portfolio transactions may include such Fund’s Authorized Participants (as
discussed in “Procedures for Purchase of Creation Units” below) or their
affiliates. An Authorized Participant or its affiliates may be selected to
execute a Fund’s portfolio transactions in conjunction with an all-cash creation
unit order or an order including “cash-in-lieu” (as described below under
“Purchase and Redemption of Shares in Creation Units”), so long as such
selection is in keeping with the foregoing policies. As described below under
“Purchase and Redemption of Shares in Creation Units— Creation Transaction Fee”
and “—Redemption Transaction Fee”, each Fund may determine to not charge a
variable fee on certain orders when the Adviser has determined that doing so is
in the best interests of Fund shareholders, e.g.,
for creation orders that facilitate the rebalance of the applicable Fund’s
portfolio in a more tax efficient manner than could be achieved without such
order, even if the decision to not charge a variable fee could be viewed as
benefiting the Authorized Participant or its affiliate selected to execute a
Fund’s portfolio transactions in connection with such orders.
The
Adviser may use a Fund’s assets for, or participate in, third-party soft dollar
arrangements, in addition to receiving proprietary research from various
full-service brokers, the cost of which is bundled with the cost of the broker’s
execution services. The Adviser does not “pay up” for the value of any such
proprietary research. Section 28(e) of the Exchange Act permits the Adviser,
under certain circumstances, to cause a Fund to pay a broker or dealer a
commission for effecting a transaction in excess of the amount of commission
another broker or dealer would have charged for effecting the transaction in
recognition of the value of brokerage and research services provided by the
broker or dealer. The Adviser may receive a variety of research services and
information on many topics, which it can use in connection with its management
responsibilities with respect to the various accounts over which it exercises
investment discretion or otherwise provides investment advice. The research
services may include qualifying order management systems, portfolio attribution
and monitoring services and computer software and access charges which are
directly related to investment research. Accordingly, a Fund may pay a broker
commission higher than the lowest available in recognition of the broker’s
provision of such services to the Adviser, but only if the Adviser determines
the total commission (including the soft dollar benefit) is comparable to the
best commission rate that could be expected to be received from other brokers.
The amount of soft dollar benefits received depends on the amount of brokerage
transactions effected with the brokers. A conflict of interest exists because
there is an incentive to: 1) cause clients to pay a higher commission than the
firm might otherwise be able to negotiate; 2) cause clients to engage in
more securities transactions than would otherwise be optimal; and 3) only
recommend brokers that provide soft dollar benefits.
The
Adviser faces a potential conflict of interest when it uses client trades to
obtain brokerage or research services. This conflict exists because the Adviser
can use the brokerage or research services to manage client accounts without
paying cash for such services, which reduces the Adviser’s expenses to the
extent that the Adviser would have purchased such products had they not been
provided by brokers. Section 28(e) permits the Adviser to use brokerage or
research services for the benefit of any account it manages. Certain accounts
managed by the Adviser may generate soft dollars used to purchase brokerage or
research services that ultimately benefit other accounts managed by the Adviser,
effectively cross subsidizing the other accounts managed by the Adviser that
benefit directly from the product. The Adviser may not necessarily use all of
the brokerage or research services in connection with managing a Fund whose
trades generated the soft dollars used to purchase such products.
The
Adviser is responsible, subject to oversight by the Board, for placing orders on
behalf of each Fund for the purchase or sale of portfolio securities. If
purchases or sales of portfolio securities of a Fund and one or more other
investment companies or clients supervised by the Adviser are considered at or
about the same time, transactions in such securities are allocated among the
several investment companies and clients in a manner deemed equitable and
consistent with its fiduciary obligations to all by the Adviser. In some cases,
this procedure could have a detrimental effect on the price or volume of the
security so far as a Fund is concerned.
However,
in other cases, it is possible that the ability to participate in volume
transactions and to negotiate lower brokerage commissions will be beneficial to
a Fund. The primary consideration is prompt execution of orders at the most
favorable net price.
A
Fund may deal with affiliates in principal transactions to the extent permitted
by exemptive order or applicable rule or regulation.
The
table below shows the aggregate brokerage commissions paid by the Funds for the
fiscal periods ended April 30, as applicable to each Fund:
|
|
|
|
| |
Fund |
2023 |
Teucrium
Agricultural Strategy No K-1 ETF |
$21,981(1) |
Teucrium
AiLA Long-Short Agriculture Strategy ETF |
$5,676(2) |
Teucrium
AiLA Long-Short Base Metals Strategy ETF |
$1,204(3) |
(1)
For the fiscal period May 16, 2022 (commencement of operations) through April
30, 2023.
(2)
For the fiscal period December 19, 2022 (commencement of operations) through
April 30, 2023.
(3)
For the fiscal period April 4, 2023 (commencement of operations) through April
30, 2023.
Directed
Brokerage. For
the fiscal year ended April 30, 2023, the Funds did not pay any commissions on
brokerage transactions directed to brokers pursuant to an agreement or
understanding whereby the broker provides research or other brokerage services
to the Adviser.
Brokerage
with Fund Affiliates.
A Fund may execute brokerage or other agency transactions through registered
broker-dealer affiliates of the Funds, the Adviser, or the Distributor for a
commission in conformity with the 1940 Act, the Exchange Act and rules
promulgated by the SEC. These rules require that commissions paid to the
affiliate by the Funds for exchange transactions not exceed “usual and
customary” brokerage commissions. The rules define “usual and customary”
commissions to include amounts which are “reasonable and fair compared to the
commission, fee or other remuneration received or to be received by other
brokers in connection with comparable transactions involving similar securities
being purchased or sold on a securities exchange during a comparable period of
time.” The Trustees, including those who are not “interested persons” of the
Funds, have adopted procedures for evaluating the reasonableness of commissions
paid to affiliates and review these procedures periodically. During the fiscal
year ended April 30, 2023, the Funds did not pay brokerage commissions to any
registered broker-dealer affiliates of the Funds, the Adviser, or the
Distributor.
Securities
of “Regular Broker-Dealers.” Each
Fund is required to identify any securities of its “regular brokers or dealers”
(as such term is defined in the 1940 Act) that it may hold at the close of its
most recent fiscal year. “Regular brokers or dealers” of a Fund are the ten
brokers or dealers that, during the most recent fiscal year: (i) received the
greatest dollar amounts of brokerage commissions from the Fund’s portfolio
transactions; (ii) engaged as principal in the largest dollar amounts of
portfolio transactions of the Fund; or (iii) sold the largest dollar amounts of
Shares. As of April 30, 2023, the Funds did not hold any securities of its
“regular broker-dealers.”
PORTFOLIO
TURNOVER RATE
Portfolio
turnover may vary from year to year, as well as within a year. High turnover
rates are likely to result in comparatively greater brokerage expenses. The
overall reasonableness of brokerage commissions is evaluated by the Adviser
based upon its knowledge of available information as to the general level of
commissions paid by other institutional investors for comparable services.
For
the fiscal years ended December 31, the Funds’ portfolio turnover rates
were:
|
|
|
|
| |
Fund |
2023 |
Teucrium
Agricultural Strategy No K-1 ETF |
0%(1) |
Teucrium
AiLA Long-Short Agriculture Strategy ETF |
0%(2) |
Teucrium
AiLA Long-Short Base Metals Strategy ETF |
0%(3) |
(1)
For the fiscal period May 16, 2022 (commencement of operations) through April
30, 2023.
(2)
For the fiscal period December 19, 2022 (commencement of operations) through
April 30, 2023.
(3)
For the fiscal period April 4, 2023 (commencement of operations) through April
30, 2023.
BOOK
ENTRY ONLY SYSTEM
The
Depository Trust Company (“DTC”) acts as securities depositary for Shares.
Shares are represented by securities registered in the name of DTC or its
nominee, Cede & Co., and deposited with, or on behalf of, DTC. Except in
limited circumstances set forth below, certificates will not be issued for
Shares.
DTC
is a limited-purpose trust company that was created to hold securities of its
participants (the “DTC Participants”) and to facilitate the clearance and
settlement of securities transactions among the DTC Participants in such
securities through electronic book-entry changes in accounts of the DTC
Participants, thereby eliminating the need for physical movement of securities
certificates. DTC
Participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations, some of whom (and/or their
representatives) own DTC. More specifically, DTC is owned by a number of its DTC
Participants and by the New York Stock Exchange (“NYSE”) and FINRA. Access to
the DTC system also is available to others such as banks, brokers, dealers, and
trust companies that clear through or maintain a custodial relationship with a
DTC Participant, either directly or indirectly (the “Indirect
Participants”).
Beneficial
ownership of Shares is limited to DTC Participants, Indirect Participants, and
persons holding interests through DTC Participants and Indirect Participants.
Ownership of beneficial interests in Shares (owners of such beneficial interests
are referred to in this SAI as “Beneficial Owners”) is shown on, and the
transfer of ownership is effected only through, records maintained by DTC (with
respect to DTC Participants) and on the records of DTC Participants (with
respect to Indirect Participants and Beneficial Owners that are not DTC
Participants). Beneficial Owners will receive from or through the DTC
Participant a written confirmation relating to their purchase of Shares. The
Trust recognizes DTC or its nominee as the record owner of all Shares for all
purposes. Beneficial Owners of Shares are not entitled to have Shares registered
in their names and will not receive or be entitled to physical delivery of Share
certificates. Each Beneficial Owner must rely on the procedures of DTC and any
DTC Participant and/or Indirect Participant through which such Beneficial Owner
holds its interests, to exercise any rights of a holder of Shares.
Conveyance
of all notices, statements, and other communications to Beneficial Owners is
effected as described in the ensuing paragraphs. DTC will make available to the
Trust upon request and for a fee a listing of Shares held by each DTC
Participant. The Trust shall obtain from each such DTC Participant the number of
Beneficial Owners holding Shares, directly or indirectly, through such DTC
Participant. The Trust shall provide each such DTC Participant with copies of
such notice, statement, or other communication, in such form, number and at such
place as such DTC Participant may reasonably request, in order that such notice,
statement or communication may be transmitted by such DTC Participant, directly
or indirectly, to such Beneficial Owners. In addition, the Trust shall pay to
each such DTC Participant a fair and reasonable amount as reimbursement for the
expenses attendant to such transmittal, all subject to applicable statutory and
regulatory requirements.
Share
distributions shall be made to DTC or its nominee, Cede & Co., as the
registered holder of all Shares. DTC or its nominee, upon receipt of any such
distributions, shall credit immediately DTC Participants’ accounts with payments
in amounts proportionate to their respective beneficial interests in a Fund as
shown on the records of DTC or its nominee. Payments by DTC Participants to
Indirect Participants and Beneficial Owners of Shares held through such DTC
Participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers in bearer
form or registered in a “street name,” and will be the responsibility of such
DTC Participants.
The
Trust has no responsibility or liability for any aspect of the records relating
to or notices to Beneficial Owners, or payments made on account of beneficial
ownership interests in Shares, or for maintaining, supervising, or reviewing any
records relating to such beneficial ownership interests, or for any other aspect
of the relationship between DTC and the DTC Participants or the relationship
between such DTC Participants and the Indirect Participants and Beneficial
Owners owning through such DTC Participants.
DTC
may determine to discontinue providing its service with respect to a Fund at any
time by giving reasonable notice to the Fund and discharging its
responsibilities with respect thereto under applicable law. Under such
circumstances, the applicable Fund shall take action either to find a
replacement for DTC to perform its functions at a comparable cost or, if such
replacement is unavailable, to issue and deliver printed certificates
representing ownership of Shares, unless the Trust makes other arrangements with
respect thereto satisfactory to the Exchange.
PURCHASE
AND REDEMPTION OF CREATION UNITS
Each
Fund issues and redeems its shares on a continuous basis, at NAV, only in a
large, specified number of shares called a “Creation Unit,” either principally
in-kind for securities or in cash for the value of such securities. The NAV of a
Fund’s Shares is determined once each Business Day, as described below under
“Determination
of Net Asset Value.”
The Creation Unit size may change. Authorized Participants will be notified of
such change.
Purchase
(Creation).
The Trust issues and sells Shares only in Creation Units on a continuous basis
through the Distributor, without a sales load (but subject to transaction fees,
if applicable), at the NAV per share next determined after receipt, on any
Business Day, of an order in proper form. The NAV of Shares is calculated each
Business Day as of the scheduled close of regular trading on the NYSE, generally
4:00 p.m., Eastern time. The Funds will not issue fractional Creation Units. A
“Business Day” is any day on which the NYSE is open for business. As of the date
of this SAI, the NYSE observes the following holidays: New Year’s Day, Martin
Luther King, Jr. Day, President’s Day (Washington’s Birthday), Good Friday,
Memorial Day, Juneteenth Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.
Fund
Deposit.
Each Fund has adopted policies and procedures governing the process of
constructing baskets of Deposit Securities (defined below), Fund Securities
(defined below) and/or cash, and acceptance of the same (the “Basket
Procedures”). The consideration for purchase of a Creation Unit of a Fund
generally consists of either: (i) the in-kind deposit of a designated portfolio
of securities (the “Deposit Securities”) per each Creation Unit, constituting a
substantial replication, or a portfolio sampling representation, of the
securities included in a Fund’s portfolio and the Cash Component (defined
below), computed as described below, or (ii) the cash value of the Deposit
Securities (“Deposit Cash”) and the Cash Component to replace any Deposit
Security.
When
accepting purchases of Creation Units for cash, a Fund may incur additional
costs associated with the acquisition of Deposit Securities that would otherwise
be provided by an in-kind purchaser. These additional costs may be recoverable
from the purchaser of Creation Units.
Together,
the Deposit Securities or Deposit Cash, as applicable, and the Cash Component
constitute the “Fund Deposit,” which represents the minimum initial and
subsequent investment amount for a Creation Unit of a Fund. The “Cash Component”
is an amount equal to the difference between the NAV of Shares (per Creation
Unit) and the market value of the Deposit Securities or Deposit Cash, as
applicable. If the Cash Component is a positive number (i.e.,
the NAV per Creation Unit exceeds the value of the Deposit Securities or Deposit
Cash, as applicable), the Cash Component shall be such positive amount. If the
Cash Component is a negative number (i.e.,
the NAV per Creation Unit is less than the value of the Deposit Securities or
Deposit Cash, as applicable), the Cash Component shall be such negative amount
and the creator will be entitled to receive cash in an amount equal to the Cash
Component. The Cash Component serves the function of compensating for any
differences between the NAV per Creation Unit and the market value of the
Deposit Securities or Deposit Cash, as applicable. Computation of the Cash
Component excludes any stamp duty or other similar fees and expenses payable
upon transfer of beneficial ownership of the Deposit Securities, if applicable,
which shall be the sole responsibility of the Authorized Participant (as defined
below).
The
Funds, through NSCC, makes available on each Business Day, prior to the opening
of business on the Exchange (currently, 9:30 a.m., Eastern time), the list of
the names and the required number of Shares of each Deposit Security or the
required amount of Deposit Cash, as applicable, to be included in the current
Fund Deposit (based on information at the end of the previous Business Day) for
a Fund. Such Fund Deposit is subject to any applicable adjustments as described
below, to effect purchases of Creation Units of a Fund until such time as the
next-announced composition of the Deposit Securities or the required amount of
Deposit Cash, as applicable, is made available.
The
identity and number of Shares of the Deposit Securities or the amount of Deposit
Cash, as applicable, required for a Fund Deposit for a Fund may be changed from
time to time by the Adviser, in accordance with the Basket Procedures, with a
view to the investment objective of such Fund. Information regarding the Fund
Deposit necessary for the purchase of a Creation Unit is made available to
Authorized Participants and other market participants seeking to transact in
Creation Unit aggregations. The composition of the Deposit Securities also may
change in response to portfolio adjustments, interest payments and corporate
action events.
The
Trust reserves the right to permit or require the substitution of Deposit Cash
to replace any Deposit Security, which shall be added to the Cash Component,
including, without limitation, in situations where the Deposit Security: (i) may
not be available in sufficient quantity for delivery; (ii) may not be eligible
for transfer through the systems of DTC for corporate securities and municipal
securities; (iii) may not be eligible for trading by an Authorized Participant
or the investor for which it is acting; (iv) would be restricted under the
securities laws or where the delivery of the Deposit Security to the Authorized
Participant would result in the disposition of the Deposit Security by the
Authorized Participant becoming restricted under the securities laws; or (v) in
certain other situations (collectively, “custom orders”). The Trust also
reserves the right to permit or require the substitution of Deposit Securities
in lieu of Deposit Cash.
Cash
Purchase. The
Trust may at its discretion permit full or partial cash purchases of Creation
Units of a Fund. When full or partial cash purchases of Creation Units are
available or specified for a Fund, they will be effected in essentially the same
manner as in-kind purchases thereof. In the case of a full or partial cash
purchase, the Authorized Participant must pay the cash equivalent of the Deposit
Securities it would otherwise be required to provide through an in-kind
purchase, plus the same Cash Component required to be paid by an in-kind
purchaser together with a creation transaction fee and non-standard charges, as
may be applicable.
Procedures
for Purchase of Creation Units.
To be eligible to place orders with the Distributor to purchase a Creation Unit
of a Fund, an entity must be (i) a “Participating Party” (i.e.,
a broker-dealer or other participant in the clearing process through the
Continuous Net Settlement System of the NSCC (the “Clearing Process”)), a
clearing agency that is registered with the SEC; or (ii) a DTC Participant (see
“Book
Entry Only System”).
In addition, each Participating Party or DTC Participant (each, an “Authorized
Participant”) must execute a Participant Agreement that has been agreed to by
the Distributor, and that has been accepted by the Transfer Agent, with respect
to purchases and redemptions of Creation Units. Each Authorized Participant will
agree, pursuant to the terms of a Participant Agreement, on behalf of itself or
any investor on whose behalf it will act, to certain conditions, including that
it will pay to the Trust, an amount of cash sufficient to pay the Cash Component
together with the creation transaction fee (described below), if applicable, and
any other applicable fees and taxes.
All
orders to purchase Shares directly from a Fund, including custom orders, must be
placed for one or more Creation Units and in the manner and by the time set
forth in the Participant Agreement and/or applicable order form. With respect to
the Agriculture Strategy No K-1 ETF, the order cut-off time for orders to
purchase Creation Units is 12:00 p.m. Eastern time, which time may be modified
by the Fund from time-to-time by amendment to the Participant Agreement and/or
applicable order form. With respect to the Long-Short Agriculture Strategy ETF,
the order cut-off time for orders to purchase Creation Units is 11:00 a.m.
Eastern time, which time may be modified by the Fund from time-to-time by
amendment to the Participant Agreement and/or applicable order form. With
respect to the Long-Short Base Metals Strategy ETF, the order cut-off time for
orders to purchase Creation Units is 10:00 a.m. Eastern time, which time may be
modified by the Fund from time-to-time by amendment to the Participant Agreement
and/or applicable order form. The
date
on which an order to purchase Creation Units (or an order to redeem Creation
Units, as set forth below) is received and accepted is referred to as the “Order
Placement Date.”
An
Authorized Participant may require an investor to make certain representations
or enter into agreements with respect to the order (e.g.,
to provide for payments of cash, when required). Investors should be aware that
their particular broker may not have executed a Participant Agreement and that,
therefore, orders to purchase Shares directly from a Fund in Creation Units have
to be placed by the investor’s broker through an Authorized Participant that has
executed a Participant Agreement. In such cases there may be additional charges
to such investor. At any given time, there may be only a limited number of
broker-dealers that have executed a Participant Agreement and only a small
number of such Authorized Participants may have international
capabilities.
On
days when the Exchange closes earlier than normal, the Funds may require orders
to create Creation Units to be placed earlier in the day. In addition, if a
market or markets on which a Fund’s investments are primarily traded is closed,
such Fund also will generally not accept orders on such day(s). Orders must be
transmitted by an Authorized Participant by telephone or other transmission
method acceptable to the Transfer Agent pursuant to procedures set forth in the
Participant Agreement and in accordance with the applicable order form. On
behalf of the Funds, the Transfer Agent will notify the Custodian of such order.
The Custodian will then provide such information to the appropriate local
sub-custodian(s). Those placing orders through an Authorized Participant should
allow sufficient time to permit proper submission of the purchase order to the
Transfer Agent by the cut-off time on such Business Day. Economic or market
disruptions or changes, or telephone or other communication failure may impede
the ability to reach the Transfer Agent or an Authorized
Participant.
Fund
Deposits must be delivered by an Authorized Participant through the Federal
Reserve System (for cash) or through DTC (for corporate securities), through a
subcustody agent (for foreign securities) and/or through such other arrangements
allowed by the Trust or its agents. With respect to foreign Deposit Securities,
the Custodian shall cause the subcustodian of the applicable Fund to maintain an
account into which the Authorized Participant shall deliver, on behalf of itself
or the party on whose behalf it is acting, such Deposit Securities (or Deposit
Cash for all or a part of such securities, as permitted or required), with any
appropriate adjustments as advised by the Trust. Foreign Deposit Securities must
be delivered to an account maintained at the applicable local subcustodian. A
Fund Deposit transfer must be ordered by the Authorized Participant in a timely
fashion to ensure the delivery of the requisite number of Deposit Securities or
Deposit Cash, as applicable, to the account of the applicable Fund or its agents
by no later than 12:00 p.m. Eastern time (or such other time as specified by the
Trust) on the Settlement Date. If a Fund or its agents do not receive all of the
Deposit Securities, or the required Deposit Cash in lieu thereof, by such time,
then the order may be deemed rejected and the Authorized Participant shall be
liable to such Fund for losses, if any, resulting therefrom. The “Settlement
Date” for a Fund is generally the next Business Day after the Order Placement
Date. All questions as to the number of Deposit Securities or Deposit Cash to be
delivered, as applicable, and the validity, form and eligibility (including time
of receipt) for the deposit of any tendered securities or cash, as applicable,
will be determined by the Trust, whose determination shall be final and binding.
The amount of cash represented by the Cash Component must be transferred
directly to the Custodian through the Federal Reserve Bank wire transfer system
in a timely manner to be received by the Custodian no later than the Settlement
Date. If the Cash Component and the Deposit Securities or Deposit Cash, as
applicable, are not received by the Custodian in a timely manner by the
Settlement Date, the creation order may be cancelled. Upon written notice to the
Transfer Agent, such canceled order may be resubmitted the following Business
Day using a Fund Deposit as newly constituted to reflect the then current NAV of
the applicable Fund.
The
order shall be deemed to be received on the Business Day on which the order is
placed provided that the order is placed in proper form prior to the applicable
cut-off time and the federal funds in the appropriate amount are deposited with
the Custodian on the Settlement Date. If the order is not placed in proper form
as required, or federal funds in the appropriate amount are not received on the
Settlement Date, then the order may be deemed to be rejected and the Authorized
Participant shall be liable to the applicable Fund for losses, if any, resulting
therefrom. A creation request is in “proper form” if all procedures set forth in
the Participant Agreement, order form and this SAI are properly
followed.
Issuance
of a Creation Unit. Except
as provided in this SAI, Creation Units will not be issued until the transfer of
good title to the Trust of the Deposit Securities or payment of Deposit Cash, as
applicable, and the payment of the Cash Component have been completed. When the
subcustodian has confirmed to the Custodian that the required Deposit Securities
(or the cash value thereof) have been delivered to the account of the relevant
subcustodian or subcustodians, the Distributor and the Adviser shall be notified
of such delivery, and the Trust will issue and cause the delivery of the
Creation Units. The delivery of Creation Units so created generally will occur
no later than the second Business Day following the day on which the purchase
order is deemed received by the Transfer Agent. The Authorized Participant shall
be liable to the applicable Fund for losses, if any, resulting from unsettled
orders.
In
instances where the Trust accepts Deposit Securities for the purchase of a
Creation Unit, the Creation Units may be purchased in advance of receipt by the
Trust of all or a portion of the applicable Deposit Securities as described
below. In these circumstances, the initial deposit will have a value greater
than the NAV of Shares on the date the order is placed in proper form since, in
addition to available Deposit Securities, cash must be deposited in an amount
equal to the sum of (i) the Cash Component, plus (ii) an additional amount of
cash equal to a percentage of the value as set forth in the Participant
Agreement, of the undelivered Deposit Securities (the “Additional Cash
Deposit”), which shall be maintained in a separate non-interest bearing
collateral account. The Authorized Participant must deposit with the Custodian
the Additional Cash Deposit, as applicable, by 12:00 p.m. Eastern time (or such
other time as specified by the Trust) on the Settlement Date. If a Fund or its
agents do not receive the Additional Cash Deposit in the appropriate
amount,
by such time, then the order may be deemed rejected and the Authorized
Participant shall be liable to the applicable Fund for losses, if any, resulting
therefrom. An additional amount of cash shall be required to be deposited with
the Trust, pending delivery of the missing Deposit Securities to the extent
necessary to maintain the Additional Cash Deposit with the Trust in an amount at
least equal to the applicable percentage, as set forth in the Participant
Agreement, of the daily market value of the missing Deposit Securities. The
Participant Agreement will permit the Trust to buy the missing Deposit
Securities at any time. Authorized Participants will be liable to the Trust for
the costs incurred by the Trust in connection with any such purchases. These
costs will be deemed to include the amount by which the actual purchase price of
the Deposit Securities exceeds the value of such Deposit Securities on the day
the purchase order was deemed received by the Transfer Agent plus the brokerage
and related transaction costs associated with such purchases. The Trust will
return any unused portion of the Additional Cash Deposit once all of the missing
Deposit Securities have been properly received by the Custodian or purchased by
the Trust and deposited into the Trust. In addition, a transaction fee, as
described below under “Creation Transaction Fee,” may be charged and additional
variable charge also may be applied, as described below. The delivery of
Creation Units so created generally will occur no later than the Settlement
Date.
Acceptance
of Orders of Creation Units.
Provided that such action does not result in a suspension of sales of Creation
Units in contravention of Rule 6c-11 under the 1940 Act and the SEC’s positions
thereunder, the Trust reserves the right to reject an order for Creation Units
transmitted in respect of a Fund at its discretion, including, without
limitation, if (a) the order is not in proper form or the Fund Deposit delivered
does not consist of the securities the Custodian specified; (b) the investor(s),
upon obtaining the Shares ordered, would own 80% or more of the currently
outstanding Shares of the Fund; (c) the Deposit Securities or Deposit Cash, as
applicable, delivered by the Authorized Participant are not as disseminated
through the facilities of the NSCC for that date by the Custodian; (d) the
acceptance of the Fund Deposit would, in the opinion of counsel, be unlawful;
(e) the acceptance or receipt of the order for a Creation Unit would, in the
opinion of counsel, be unlawful; or (f) in the event that circumstances outside
the control of the Trust, the Custodian, the Transfer Agent, the Distributor
and/or the Adviser make it for all practical purposes not feasible to process
orders for Creation Units. Examples of such circumstances include acts of God or
public service or utility problems such as fires, floods, extreme weather
conditions and power outages resulting in telephone, telecopy and computer
failures; market conditions or activities causing trading halts; systems
failures involving computer or other information systems affecting the Trust,
the Distributor, the Custodian, the Transfer Agent, DTC, NSCC, Federal Reserve
System, or any other participant in the creation process, and other
extraordinary events. The Trust or its agents shall communicate to the
Authorized Participant its rejection of an order. The Trust, the Transfer Agent,
the Custodian and the Distributor are under no duty, however, to give
notification of any defects or irregularities in the delivery of Fund Deposits
nor shall either of them incur any liability for the failure to give any such
notification. The Trust, the Transfer Agent, the Custodian and the Distributor
shall not be liable for the rejection of any purchase order for Creation Units.
Given the importance of the ongoing issuance of Creation Units to maintaining a
market price that is at or close to the underlying NAV of a Fund, the Trust does
not intend to suspend the acceptance of orders for Creation Units, unless it
believes doing so would be in the best interests of the Fund.
All
questions as to the number of shares of each security in the Deposit Securities
and the validity form, eligibility and acceptance for deposit of any securities
to be delivered shall be determined by the Trust, and the Trust’s determination
shall be final and binding.
Creation
Unit Transaction Fee.
A fixed purchase (i.e.,
creation) transaction fee, payable to the Funds’ custodian, may be imposed for
the transfer and other transaction costs associated with the purchase of
Creation Units (“Creation Order Costs”). The standard fixed creation unit
transaction fee for each Fund, regardless of the number of Creation Units
created in the transaction, can be found in the table below. Each Fund may
adjust the standard fixed creation unit transaction fee from time to time. The
fixed creation unit transaction fee may be waived on certain orders if the
applicable Fund’s custodian has determined to waive some or all of the Creation
Order Costs associated with the order or another party, such as the Adviser, has
agreed to pay such fee.
In
addition, a variable fee, payable to the Funds, of up to the maximum percentage
listed in the table below of the value of the Creation Units subject to the
transaction may be imposed for cash purchases, non-standard orders, or partial
cash purchases of Creation Units. The variable charge is primarily designed to
cover additional costs (e.g.,
brokerage, taxes) involved with buying the securities with cash. Each Fund may
determine to not charge a variable fee on certain orders when the Adviser has
determined that doing so is in the best interests of Fund shareholders,
e.g.,
for creation orders that facilitate the rebalance of the applicable Fund’s
portfolio in a more tax efficient manner than could be achieved without such
order.
|
|
|
|
|
|
|
| |
Fund |
Fixed
Creation Transaction Fee |
Maximum
Variable Transaction Fee |
Teucrium
Agricultural Strategy No K-1 ETF |
$300 |
2% |
Teucrium
AiLA Long-Short Agriculture Strategy ETF |
$300 |
2% |
Teucrium
AiLA Long-Short Base Metals Strategy ETF |
$300 |
2% |
Investors
who use the services of a broker or other such intermediary may be charged a fee
for such services. Investors are responsible for the fixed costs of transferring
the Fund Securities from the Trust to their account or on their order.
Risks
of Purchasing Creation Units.
There are certain legal risks unique to investors purchasing Creation Units
directly from a Fund. Because Shares may be issued on an ongoing basis, a
“distribution” of Shares could be occurring at any time. Certain activities that
a
shareholder
performs as a dealer could, depending on the circumstances, result in the
shareholder being deemed a participant in the distribution in a manner that
could render the shareholder a statutory underwriter and subject to the
prospectus delivery and liability provisions of the Securities Act. For example,
a shareholder could be deemed a statutory underwriter if it purchases Creation
Units from a Fund, breaks them down into the constituent Shares, and sells those
Shares directly to customers, or if a shareholder chooses to couple the creation
of a supply of new Shares with an active selling effort involving solicitation
of secondary-market demand for Shares. Whether a person is an underwriter
depends upon all of the facts and circumstances pertaining to that person’s
activities, and the examples mentioned here should not be considered a complete
description of all the activities that could cause you to be deemed an
underwriter.
Dealers
who are not “underwriters” but are participating in a distribution (as opposed
to engaging in ordinary secondary-market transactions), and thus dealing with
Shares as part of an “unsold allotment” within the meaning of Section 4(a)(3)(C)
of the Securities Act, will be unable to take advantage of the prospectus
delivery exemption provided by Section 4(a)(3) of the Securities
Act.
Redemption.
Shares may be redeemed only in Creation Units at their NAV next determined after
receipt of a redemption request in proper form by a Fund through the Transfer
Agent and only on a Business Day. EXCEPT UPON LIQUIDATION OF A FUND, THE TRUST
WILL NOT REDEEM SHARES IN AMOUNTS LESS THAN CREATION UNITS. Investors must
accumulate enough Shares in the secondary market to constitute a Creation Unit
in order to have such Shares redeemed by the Trust. There can be no assurance,
however, that there will be sufficient liquidity in the public trading market at
any time to permit assembly of a Creation Unit. Investors should expect to incur
brokerage and other costs in connection with assembling a sufficient number of
Shares to constitute a redeemable Creation Unit.
With
respect to the Funds, the Custodian, through the NSCC, makes available prior to
the opening of business on the Exchange (currently, 9:30 a.m., Eastern time) on
each Business Day, the list of the names and Share quantities of each Fund’s
portfolio securities that will be applicable (subject to possible amendment or
correction) to redemption requests received in proper form (as defined below) on
that day (“Fund Securities”). Fund Securities received on redemption may not be
identical to Deposit Securities.
Redemption
proceeds for a Creation Unit are paid either in-kind or in cash, or a
combination thereof, as determined by the Trust in accordance with the Basket
Procedures. With respect to in-kind redemptions of a Fund, redemption proceeds
for a Creation Unit will consist of Fund Securities—as announced by the
Custodian on the Business Day of the request for redemption received in proper
form plus cash in an amount equal to the difference between the NAV of Shares
being redeemed, as next determined after a receipt of a request in proper form,
and the value of the Fund Securities (the “Cash Redemption Amount”), less a
fixed redemption transaction fee, as applicable, and additional variable charge
as set forth below. In the event that the Fund Securities have a value greater
than the NAV of Shares, a compensating cash payment equal to the differential is
required to be made by or through an Authorized Participant by the redeeming
shareholder. Notwithstanding the foregoing, at the Trust’s discretion, an
Authorized Participant may receive the corresponding cash value of the
securities in lieu of the in-kind securities value representing one or more Fund
Securities.
Cash
Redemption. Full
or partial cash redemptions of Creation Units will be effected in essentially
the same manner as in-kind redemptions thereof. In the case of full or partial
cash redemptions, the Authorized Participant receives the cash equivalent of the
Fund Securities it would otherwise receive through an in-kind redemption, plus
the same Cash Redemption Amount to be paid to an in-kind redeemer.
Redemption
Transaction Fee.
A fixed redemption transaction fee, payable to the Funds’ custodian, may be
imposed for the transfer and other transaction costs associated with the
redemption of Creation Units (“Redemption Order Costs”). The standard fixed
redemption transaction fee for each Fund, regardless of the number of Creation
Units redeemed in the transaction, can be found in the table below. Each Fund
may adjust the redemption transaction fee from time to time. The fixed
redemption fee may be waived on certain orders if the applicable Fund’s
custodian has determined to waive some or all of the Redemption Order Costs
associated with the order or another party, such as the Adviser, has agreed to
pay such fee.
In
addition, a variable fee, payable to the Funds, of up to the maximum percentage
listed in the table below of the value of the Creation Units subject to the
transaction may be imposed for cash redemptions, non-standard orders, or partial
cash redemptions (when cash redemptions are available) of Creation Units. The
variable charge is primarily designed to cover additional costs (e.g.,
brokerage, taxes) involved with selling portfolio securities to satisfy a cash
redemption. Each Fund may determine to not charge a variable fee on certain
orders when the Adviser has determined that doing so is in the best interests of
Fund shareholders, e.g.,
for redemption orders that facilitate changes to the Funds’ portfolio in a more
tax efficient manner than could be achieved without such order.
|
|
|
|
|
|
|
| |
Fund |
Fixed
Redemption Transaction Fee |
Maximum
Variable Transaction Fee |
Teucrium
Agricultural Strategy No K-1 ETF |
$300 |
2% |
Teucrium
AiLA Long-Short Agriculture Strategy ETF |
$300 |
2% |
Teucrium
AiLA Long-Short Base Metals Strategy ETF |
$300 |
2% |
Investors
who use the services of a broker or other such intermediary may be charged a fee
for such services. Investors are responsible for the fixed costs of transferring
the Fund Securities from the Trust to their account or on their order.
Procedures
for Redemption of Creation Units.
With respect to the Agriculture Strategy No K-1 ETF, orders to redeem Creation
Units must be submitted in proper form to the Transfer Agent prior to 12:00 p.m.
Eastern time. With respect to the Long-Short Agriculture Strategy ETF, orders to
redeem Creation Units must be submitted in proper form to the Transfer Agent
prior to 11:00 a.m. Eastern time. With respect to the Long-Short Base Metals
Strategy ETF, orders to redeem Creation Units must be submitted in proper form
to the Transfer Agent prior to 10:00 a.m. Eastern time. A redemption request is
considered to be in “proper form” if (i) an Authorized Participant has
transferred or caused to be transferred to the Trust’s Transfer Agent the
Creation Unit(s) being redeemed through the book-entry system of DTC so as to be
effective by the time as set forth in the Participant Agreement and (ii) a
request in form satisfactory to the Trust is received by the Transfer Agent from
the Authorized Participant on behalf of itself or another redeeming investor
within the time periods specified in the Participant Agreement. If the Transfer
Agent does not receive the investor’s Shares through DTC’s facilities by the
times and pursuant to the other terms and conditions set forth in the
Participant Agreement, the redemption request shall be rejected.
The
Authorized Participant must transmit the request for redemption, in the form
required by the Trust, to the Transfer Agent in accordance with procedures set
forth in the Authorized Participant Agreement. Investors should be aware that
their particular broker may not have executed an Authorized Participant
Agreement, and that, therefore, requests to redeem Creation Units may have to be
placed by the investor’s broker through an Authorized Participant who has
executed an Authorized Participant Agreement. Investors making a redemption
request should be aware that such request must be in the form specified by such
Authorized Participant. Investors making a request to redeem Creation Units
should allow sufficient time to permit proper submission of the request by an
Authorized Participant and transfer of the Shares to the Transfer Agent; such
investors should allow for the additional time that may be required to effect
redemptions through their banks, brokers or other financial intermediaries if
such intermediaries are not Authorized Participants.
Additional
Redemption Procedures. In
connection with taking delivery of Shares of Fund Securities upon redemption of
Creation Units, a redeeming shareholder or Authorized Participant acting on
behalf of such shareholder must maintain appropriate custody arrangements with a
qualified broker-dealer, bank, or other custody providers in each jurisdiction
in which any of the Fund Securities are customarily traded, to which account
such Fund Securities will be delivered. Deliveries of redemption proceeds
generally will be made within a business day of the trade date.
The
Trust may, in its discretion and in accordance with the Basket Procedures,
exercise its option to redeem such Shares in cash, and the redeeming investor
will be required to receive its redemption proceeds in cash. In addition, an
investor may request a redemption in cash that a Fund may, in its sole
discretion, permit. In either case, the investor will receive a cash payment
equal to the NAV of its Shares based on the NAV of Shares of the applicable Fund
next determined after the redemption request is received in proper form (minus a
redemption transaction fee, if applicable, and additional charge for requested
cash redemptions specified above, to offset the Trust’s brokerage and other
transaction costs associated with the disposition of Fund Securities). A Fund
also may, in its sole discretion, and in accordance with the Basket Procedures,
upon request of a shareholder, provide such redeemer a portfolio of securities
that differs from the exact composition of the Fund Securities but does not
differ in NAV.
Redemptions
of Shares for Fund Securities will be subject to compliance with applicable
federal and state securities laws and the Funds (whether or not it otherwise
permits cash redemptions) reserves the right to redeem Creation Units for cash
to the extent that the Trust could not lawfully deliver specific Fund Securities
upon redemptions or could not do so without first registering the Fund
Securities under such laws. An Authorized Participant or an investor for which
it is acting subject to a legal restriction with respect to a particular
security included in the Fund Securities applicable to the redemption of
Creation Units may be paid an equivalent amount of cash. The Authorized
Participant may request the redeeming investor of the Shares to complete an
order form or to enter into agreements with respect to such matters as
compensating cash payment. Further, an Authorized Participant that is not a
“qualified institutional buyer,” (“QIB”) as such term is defined under Rule 144A
of the Securities Act, will not be able to receive Fund Securities that are
restricted securities eligible for resale under Rule 144A. An Authorized
Participant may be required by the Trust to provide a written confirmation with
respect to QIB status to receive Fund Securities.
Because
the portfolio securities of the Funds may trade on other exchanges on days that
the Exchange is closed or are otherwise not Business Days for such Fund,
shareholders may not be able to redeem their Shares, or to purchase or sell
Shares on the Exchange, on days when the NAV of the applicable Fund could be
significantly affecting by events in the relevant foreign markets.
The
right of redemption may be suspended or the date of payment postponed with
respect to a Fund (1) for any period during which the Exchange is closed (other
than customary weekend and holiday closings); (2) for any period during which
trading on the Exchange is suspended or restricted; (3) for any period during
which an emergency exists as a result of which disposal of the Shares of the
applicable Fund or determination of the NAV of the Shares is not reasonably
practicable; or (4) in such other circumstance as is permitted by the SEC.
DETERMINATION
OF NET ASSET VALUE
NAV
per Share for a Fund is computed by dividing the value of the net assets of the
applicable Fund (i.e.,
the value of its total assets less total liabilities) by the total number of
Shares outstanding, rounded to the nearest cent. Expenses and fees, including
the management fees, are accrued daily and taken into account for purposes of
determining NAV. The NAV of each Fund is calculated by Fund Services and
determined at the scheduled close of the regular trading session on the NYSE
(ordinarily 4:00 p.m., Eastern time)
on
each day that the NYSE is open, provided that fixed-income assets may be valued
as of the announced closing time for trading in fixed-income instruments on any
day that the Securities Industry and Financial Markets Association (“SIFMA”)
announces an early closing time.
In
calculating each Fund’s NAV per Share, the Fund’s investments are generally
valued using market quotations to the extent such market quotations are readily
available. If market quotations are not readily available or, are deemed to be
unreliable by the Adviser, a Fund will value such investments at fair value, as
determined by the Adviser, for purposes of calculating such Fund’s NAV. Pursuant
to Rule 2a-5 under the 1940 Act, the Board has designated the Adviser to perform
the fair value determinations for each Fund’s portfolio holdings subject to the
Board’s oversight. The Adviser has established procedures for its fair valuation
of each Fund’s portfolio investments. These procedures address, among other
things, determining when market quotations are not readily available or reliable
and the methodologies to be used for determining the fair value of investments,
as well as the use and oversight of third-party pricing services for fair
valuation. The Adviser’s fair value determinations will be carried out in
compliance with Rule 2a-5 and based on fair value methodologies established and
applied by the Adviser and periodically tested to ensure such methodologies are
appropriate and accurate with respect to a Fund’s portfolio investments. The
Adviser’s fair value methodologies may involve obtaining inputs and prices from
third-party pricing services.
When
fair value pricing is employed, the prices of securities used by the Funds to
calculate their NAV may differ from quoted or published prices for the same
securities. Due to the subjective and variable nature of fair value pricing, it
is possible that the fair value determined for a particular security may be
materially different (higher or lower) from the price of the security quoted or
published by others, or the value when trading resumes or is realized upon its
sale. There may be multiple methods that can be used to value a portfolio
investment when market quotations are not readily available. The value
established for any portfolio investment at a point in time might differ from
what would be produced using a different methodology or if it had been priced
using market quotations.
DIVIDENDS
AND DISTRIBUTIONS
The
following information supplements and should be read in conjunction with the
section in the Prospectus entitled “Dividends, Distributions and
Taxes.”
General
Policies.
Dividends from net investment income, if any, are declared and paid at least
annually by each Fund. Distributions of net realized securities gains, if any,
generally are declared and paid once a year, but a Fund may make distributions
on a more frequent basis to improve index tracking for the Fund or to comply
with the distribution requirements of the Code, in all events in a manner
consistent with the provisions of the 1940 Act.
Dividends
and other distributions on Shares are distributed, as described below, on a pro
rata basis to Beneficial Owners of such Shares. Dividend payments are made
through DTC Participants and Indirect Participants to Beneficial Owners then of
record with proceeds received from the Trust.
Each
Fund makes additional distributions to the extent necessary (i) to distribute
the entire annual taxable income of the applicable Fund, plus any net capital
gains and (ii) to avoid imposition of the excise tax imposed by Section 4982 of
the Code. Management of the Trust reserves the right to declare special
dividends if, in its reasonable discretion, such action is necessary or
advisable to preserve a Fund’s eligibility for treatment as a RIC or to avoid
imposition of income or excise taxes on undistributed income.
Dividend
Reinvestment Service.
The Trust will not make the DTC book-entry dividend reinvestment service
available for use by Beneficial Owners for reinvestment of their cash proceeds,
but certain individual broker-dealers may make available the DTC book-entry
Dividend Reinvestment Service for use by Beneficial Owners of the Funds through
DTC Participants for reinvestment of their dividend distributions. Investors
should contact their brokers to ascertain the availability and description of
these services. Beneficial Owners should be aware that each broker may require
investors to adhere to specific procedures and timetables to participate in the
dividend reinvestment service and investors should ascertain from their brokers
such necessary details. If this service is available and used, dividend
distributions of both income and realized gains will be automatically reinvested
in additional whole Shares issued by the Trust of the applicable Fund at NAV per
Share. Distributions reinvested in additional Shares will nevertheless be
taxable to Beneficial Owners acquiring such additional Shares to the same extent
as if such distributions had been received in cash.
FEDERAL
INCOME TAXES
The
following is only a summary of certain important U.S. federal income tax
considerations generally affecting a Fund and its shareholders that supplements
the discussion in the Prospectus. No attempt is made to present a comprehensive
explanation of the federal, state, local or foreign tax treatment of a Fund or
its shareholders, and the discussion here and in the Prospectus is not intended
to be a substitute for careful tax planning. In particular, it does not address
tax consequences to investors subject to special rules, such as investors who
hold Shares through individual retirement accounts (“IRAs”), 401(k)s, or other
tax-advantaged accounts.
The
following general discussion of certain U.S. federal income tax consequences is
based on provisions of the Code and the regulations issued thereunder as in
effect on the date of this SAI. New legislation, as well as administrative
changes or court decisions, may significantly change the conclusions expressed
herein, and may have a retroactive effect with respect to the transactions
contemplated herein.
Unless
your investment in Shares is made through a tax-exempt entity or tax-deferred
retirement account, such as an IRA, you need to be aware of the possible tax
consequences when the Fund makes distributions or you sell Shares.
Shareholders
are urged to consult their own tax advisers regarding the application of the
provisions of tax law described in this SAI in light of the particular tax
situations of the shareholders and regarding specific questions as to federal,
state, foreign or local taxes.
Taxation
of the Funds.
Each Fund intends to qualify each year to be treated as a separate RIC under
Subchapter M of the Code. As such, the Funds should not be subject to federal
income taxes on their net investment income and capital gains, if any, to the
extent that they timely distribute such income and capital gains to their
shareholders. To qualify for treatment as a RIC, a Fund must distribute annually
to its shareholders at least the sum of 90% of its net investment income
(generally including dividends, taxable interest, and the excess of net
short-term capital gains over net long-term capital losses, less operating
expenses) and at least 90% of its net tax-exempt interest income, if any (the
“Distribution Requirement”) and must meet several additional requirements. Among
these requirements are the following: (i) at least the sum of 90% of a Fund’s
gross income each taxable year must be derived from dividends, interest,
payments with respect to certain securities loans, gains from the sale or other
disposition of stock, securities or foreign currencies, or other income derived
with respect to its business of investing in such stock, securities or foreign
currencies and net income derived from interests in qualified publicly traded
partnerships (the “Qualifying Income Requirement”); and (ii) at the end of each
quarter of such Fund’s taxable year, such Fund’s assets must be diversified so
that (a) at least 50% of the value of the Fund’s total assets is represented by
cash and cash items, U.S. government securities, securities of other RICs, and
other securities, with such other securities limited, in respect to any one
issuer, to an amount not greater in value than 5% of the value of the Fund’s
total assets and to not more than 10% of the outstanding voting securities of
such issuer, including the equity securities of a qualified publicly traded
partnership, and (b) not more than 25% of the value of its total assets is
invested, including through corporations in which the Fund owns a 20% or more
voting stock interest, in the securities (other than U.S. government securities
or securities of other RICs) of any one issuer, the securities (other than
securities of other RICs) of two or more issuers which such Fund controls and
which are engaged in the same, similar, or related trades or businesses, or the
securities of one or more qualified publicly traded partnerships (the
“Diversification Requirement”).
To
the extent a Fund makes investments that may generate income that is not
qualifying income, including certain derivatives, the Fund will seek to restrict
the resulting income from such investments so that such Fund’s non-qualifying
income does not exceed 10% of its gross income.
Although
the Funds intend to distribute substantially all of their net investment income
and may distribute their capital gains for any taxable year, the Funds will be
subject to federal income taxation to the extent any such income or gains are
not distributed. Each Fund is treated as a separate corporation for federal
income tax purposes. A Fund therefore is considered a separate entity in
determining its treatment under the rules for RICs described herein,
i.e.,
losses in one Fund do not offset gains in another. The requirements (other than
certain organizational requirements) for qualifying RIC status are determined at
the Fund level rather than at the Trust level.
If
a Fund fails to satisfy the Qualifying Income Requirement or the Diversification
Requirement in any taxable year, such Fund may be eligible for relief provisions
if the failures are due to reasonable cause and not willful neglect and if a
penalty tax is paid with respect to each failure to satisfy the applicable
requirements. Additionally, relief is provided for certain de
minimis
failures of the Diversification Requirement where a Fund corrects the failure
within a specified period of time. To be eligible for the relief provisions with
respect to a failure to meet the Diversification Requirement, a Fund may be
required to dispose of certain assets. If these relief provisions were not
available to a Fund and it were to fail to qualify for treatment as a RIC for a
taxable year, all of its taxable income would be subject to federal income tax
at the regular 21% corporate rate without any deduction for distributions to
shareholders, and its distributions (including capital gains distributions)
generally would be taxable to the shareholders of the applicable Fund as
ordinary income dividends to the extent of the Fund’s current and accumulated
earnings and profits, subject to the dividends received deduction for corporate
shareholders and the lower tax rates on qualified dividend income received by
non-corporate shareholders, subject to certain limitations. To requalify for
treatment as a RIC in a subsequent taxable year, a Fund would be required to
satisfy the RIC qualification requirements for that year and to distribute any
earnings and profits from any year in which the applicable Fund failed to
qualify for tax treatment as a RIC. If a Fund failed to qualify as a RIC for a
period greater than two taxable years, it would generally be required to pay a
Fund-level tax on certain net built in gains recognized with respect to certain
of its assets upon disposition of such assets within five years of qualifying as
a RIC in a subsequent year. The Board reserves the right not to maintain the
qualification of a Fund for treatment as a RIC if it determines such course of
action to be beneficial to shareholders. If a Fund determines that it will not
qualify as a RIC, the applicable Fund will establish procedures to reflect the
anticipated tax liability in the Fund’s NAV.
A
Fund may elect to treat part or all of any “qualified late year loss” as if it
had been incurred in the succeeding taxable year in determining such Fund’s
taxable income, net capital gain, net short-term capital gain, and earnings and
profits. The effect of this election is to treat any such “qualified late year
loss” as if it had been incurred in the succeeding taxable year in
characterizing Fund distributions for any calendar year. A “qualified late year
loss” generally includes net capital loss, net long-term capital loss, or net
short-term capital loss incurred after October 31 of the current taxable year
(commonly referred to as “post-October losses”) and certain other late-year
losses.
Capital
losses in excess of capital gains (“net capital losses”) are not permitted to be
deducted against a RIC’s net investment income. Instead, for U.S. federal income
tax purposes, potentially subject to certain limitations, a Fund may carry a net
capital loss from any taxable year forward indefinitely to offset its capital
gains, if any, in years following the year of the loss. To the extent subsequent
capital gains are offset by such losses, they will not result in U.S. federal
income tax liability to the applicable Fund and may not be distributed as
capital gains to its shareholders. Generally, a Fund may not carry forward any
losses other than net capital losses. The carryover of capital losses may be
limited under the general loss limitation rules if a Fund experiences an
ownership change as defined in the Code.
For
the fiscal period ended April 30, 2023, the Funds did not have short-term or
long-term capital loss carryforwards to offset future realized capital gains in
their respective portfolios.
A
Fund will be subject to a nondeductible 4% federal excise tax on certain
undistributed income if it does not distribute to its shareholders in each
calendar year an amount at least equal to 98% of its ordinary income for the
calendar year plus 98.2% of its capital gain net income for the one-year period
ending on October 31 of that year, subject to an increase for any shortfall in
the prior year’s distribution. For this purpose, any ordinary income or capital
gain net income retained by a Fund and subject to corporate income tax will be
considered to have been distributed. The Funds intend to declare and distribute
dividends and distributions in the amounts and at the times necessary to avoid
the application of the excise tax but can make no assurances that all such tax
liability will be eliminated. A Fund may in certain circumstances be required to
liquidate Fund investments to make sufficient distributions to avoid federal
excise tax liability at a time when the investment adviser might not otherwise
have chosen to do so, and liquidation of investments in such circumstances may
affect the ability of the Fund to satisfy the requirement for qualification as a
RIC.
If
a Fund meets the Distribution Requirement but retains some or all of its income
or gains, it will be subject to federal income tax to the extent any such income
or gains are not distributed. A Fund may designate certain amounts retained as
undistributed net capital gain in a notice to its shareholders, who (i) will be
required to include in income for U.S. federal income tax purposes, as long-term
capital gain, their proportionate shares of the undistributed amount so
designated, (ii) will be entitled to credit their proportionate shares of the
income tax paid by the Fund on that undistributed amount against their federal
income tax liabilities and to claim refunds to the extent such credits exceed
their tax liabilities, and (iii) will be entitled to increase their tax basis,
for federal income tax purposes, in their Shares by an amount equal to the
excess of the amount of undistributed net capital gain included in their
respective income over their respective income tax credits.
Taxation
of Shareholders – Distributions.
Each Fund intends to distribute annually to its shareholders substantially all
of its investment company taxable income (computed without regard to the
deduction for dividends paid), its net tax-exempt income, if any, and any net
capital gain (net recognized long-term capital gains in excess of net recognized
short-term capital losses, taking into account any capital loss carryforwards).
The distribution of investment company taxable income (as so computed) and net
realized capital gain will be taxable to Fund shareholders regardless of whether
the shareholder receives these distributions in cash or reinvests them in
additional Shares. Distributions from a Fund’s net capital gain will be taxable
to shareholders at long-term capital gains rates, regardless of how long
shareholders have held their Shares.
Each
Fund (or your broker) will report to shareholders annually the amounts of
dividends paid from ordinary income, the amount of distributions of net capital
gain, the portion of dividends which may qualify for the dividends received
deduction for corporations, and the portion of dividends which may qualify for
treatment as qualified dividend income, which, subject to certain limitations
and requirements, is taxable to non-corporate shareholders at rates of up to
20%. Distributions from a Fund’s net capital gain will be taxable to
shareholders at long-term capital gains rates, regardless of how long
shareholders have held their Shares.
Qualified
dividend income includes, in general, subject to certain holding period and
other requirements, dividend income from taxable domestic corporations and
certain foreign corporations. Subject to certain limitations, eligible foreign
corporations include those incorporated in possessions of the United States,
those incorporated in certain countries with comprehensive tax treaties with the
United States, and other foreign corporations if the stock with respect to which
the dividends are paid is readily tradable on an established securities market
in the United States. Dividends received by a Fund from an underlying fund
taxable as a RIC or from a REIT may be treated as qualified dividend income
generally only to the extent so reported by such underlying fund or REIT. If 95%
or more of a Fund’s gross income (calculated without taking into account net
capital gain derived from sales or other dispositions of stock or securities)
consists of qualified dividend income, the Fund may report all distributions of
such income as qualified dividend income. Each Fund’s investment strategies will
significantly limit the amount of dividends eligible to be reported as qualified
dividend income.
Fund
dividends will not be treated as qualified dividend income if a Fund does not
meet holding period and other requirements with respect to dividend paying
stocks in its portfolio, and the shareholder does not meet holding period and
other requirements with respect to the Shares on which the dividends were paid.
Distributions by a Fund of its net short-term capital gains will be taxable as
ordinary income. Distributions from a Fund’s net capital gain will be taxable to
shareholders at long-term capital gains rates, regardless of how long
shareholders have held their Shares. Distributions may be subject to state and
local taxes.
In
the case of corporate shareholders, certain dividends received by a Fund from
U.S. corporations (generally, dividends received by the Fund in respect of any
share of stock (1) with a tax holding period of at least 46 days during the
91-day period beginning on the date that is 45 days before the date on which the
stock becomes ex-dividend as to that dividend and (2) that is held in an
unleveraged
position)
and distributed and appropriately so reported by the Fund may be eligible for
the 50% dividends received deduction. Certain preferred stock must have a
holding period of at least 91 days during the 181-day period beginning on the
date that is 90 days before the date on which the stock becomes ex-dividend as
to that dividend to be eligible. Capital gain dividends distributed to a Fund
from other RICs and dividends distributed to a Fund from REITs are generally not
eligible for the dividends received deduction. To qualify for the deduction,
corporate shareholders must meet the minimum holding period requirement stated
above with respect to their Shares, taking into account any holding period
reductions from certain hedging or other transactions or positions that diminish
their risk of loss with respect to their Shares, and, if they borrow to acquire
or otherwise incur debt attributable to Shares, they may be denied a portion of
the dividends received deduction with respect to those Shares. Each Fund’s
investment strategies will significantly limit its ability to distribute
dividends eligible for the dividends received deduction for corporate
shareholders.
Although
dividends generally will be treated as distributed when paid, any dividend
declared by a Fund in October, November or December and payable to shareholders
of record in such a month that is paid during the following January will be
treated for U.S. federal income tax purposes as received by shareholders on
December 31 of the calendar year in which it was declared.
Shareholders
who have not held Shares for a full year should be aware that a Fund may report
and distribute, as ordinary dividends or capital gain dividends, a percentage of
income that is not equal to the percentage of a Fund’s ordinary income or net
capital gain, respectively, actually earned during the applicable shareholder’s
period of investment in the Fund. A taxable shareholder may wish to avoid
investing in a Fund shortly before a dividend or other distribution, because the
distribution will generally be taxable even though it may economically represent
a return of a portion of the shareholder’s investment.
To
the extent that a Fund makes a distribution of income received by such Fund in
lieu of dividends (a “substitute payment”) with respect to securities on loan
pursuant to a securities lending transaction, such income will not constitute
qualified dividend income to individual shareholders and will not be eligible
for the dividends received deduction for corporate shareholders.
If
a Fund’s distributions exceed its current and accumulated earnings and profits
for the taxable year (as calculated for federal income tax purposes), all or a
portion of the distributions made for the taxable year may be recharacterized as
a return of capital to shareholders. A return of capital distribution will
generally not be taxable but will reduce each shareholder’s cost basis in a Fund
and result in a higher capital gain or lower capital loss when the Shares on
which the distribution was received are sold. After a shareholder’s basis in the
Shares has been reduced to zero, distributions in excess of earnings and profits
will be treated as gain from the sale of the shareholder’s Shares.
Taxation
of Shareholders – Sale or Exchange of Shares.
A sale or exchange of Shares may give rise to a gain or loss. Assuming a
shareholder holds Shares as capital assets, any gain or loss realized upon a
taxable disposition of Shares will be treated as long-term capital gain or loss
if Shares have been held for more than 12 months. Otherwise, the gain or loss on
the taxable disposition of Shares will generally be treated as short-term
capital gain or loss. Any loss realized upon a taxable disposition of Shares
held for six months or less will be treated as long-term capital loss, rather
than short-term capital loss, to the extent of any amounts treated as
distributions to the shareholder of long-term capital gain (including any
amounts credited to the shareholder as undistributed capital gains). All or a
portion of any loss realized upon a taxable disposition of Shares may be
disallowed if substantially identical Shares of a Fund are acquired (through the
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the disposition. In such a case, the basis of
the newly acquired Shares will be adjusted to reflect the disallowed
loss.
The
cost basis of Shares acquired by purchase will generally be based on the amount
paid for Shares and then may be subsequently adjusted for other applicable
transactions as required by the Code. The difference between the selling price
and the cost basis of Shares generally determines the amount of the capital gain
or loss realized on the sale or exchange of Shares. Contact the broker through
whom you purchased your Shares to obtain information with respect to the
available cost basis reporting methods and elections for your
account.
An
Authorized Participant who exchanges securities for Creation Units generally
will recognize a gain or a loss. The gain or loss will be equal to the
difference between the market value of the Creation Units at the time and the
sum of the exchanger’s aggregate basis in the securities surrendered plus the
amount of cash paid for such Creation Units. The ability of Authorized
Participants to receive a full or partial cash redemption of Creation Units of a
Fund may limit the tax efficiency of the Fund. An Authorized Participant who
redeems Creation Units will generally recognize a gain or loss equal to the
difference between the exchanger’s basis in the Creation Units and the sum of
the aggregate market value of any securities received plus the amount of any
cash received for such Creation Units. The IRS, however, may assert that a loss
realized upon an exchange of securities for Creation Units cannot currently be
deducted, under the rules governing “wash sales” (for a person who does not
mark-to-market its portfolio) or, on the basis that there has been no
significant change in economic position.
The
Trust, on behalf of the Funds, has the right to reject an order for Creation
Units if the purchaser (or a group of purchasers) would, upon obtaining the
Creation Units so ordered, own 80% or more of the outstanding Shares and if,
pursuant to Section 351 of the Code, a Fund would have a basis in the deposit
securities different from the market value of such securities on the date of
deposit. The Trust also has the right to require the provision of information
necessary to determine beneficial Share ownership for purposes of the 80%
determination. If a Fund does issue Creation Units to a purchaser (or a group of
purchasers) that would, upon obtaining the Creation Units so ordered, own 80% or
more of the outstanding Shares, the purchaser (or a group of purchasers) will
not recognize gain or loss upon the exchange of securities for Creation
Units.
Authorized
Participants purchasing or redeeming Creation Units should consult their own tax
advisers with respect to the tax treatment of any creation or redemption
transaction and whether the wash sales rule applies and when a loss may be
deductible.
Taxation
of Shareholders – Net Investment Income Tax.
U.S. individuals with adjusted gross income (subject to certain adjustments)
exceeding certain threshold amounts ($250,000 if married filing jointly or if
considered a “surviving spouse” for federal income tax purposes, $125,000 if
married filing separately, and $200,000 in other cases) are subject to a 3.8%
tax on all or a portion of their “net investment income,” which includes taxable
interest, dividends, and certain capital gains (generally including capital gain
distributions and capital gains realized on the sale of Shares). This 3.8% tax
also applies to all or a portion of the undistributed net investment income of
certain shareholders that are estates and trusts.
Foreign
Investments.
Dividends and interest received by a Fund from sources within foreign countries
may be subject to withholding and other taxes imposed by such countries. Tax
treaties between certain countries and the United States may reduce or eliminate
such taxes. Each Fund does not expect to satisfy the requirements for passing
through to its shareholders any share of foreign taxes paid by the Fund, with
the result that shareholders will not include such taxes in their gross incomes
and will not be entitled to a tax deduction or credit for such taxes on their
own tax returns.
If
more than 50% of the value of a Fund’s assets at the close of any taxable year
consists of stock or securities of foreign corporations, which for this purpose
may include obligations of foreign governmental issuers, the Fund may elect, for
U.S. federal income tax purposes, to treat any foreign income or withholding
taxes paid by the Fund as paid by its shareholders. For any year that a Fund is
eligible for and makes such an election, each shareholder of the Fund will be
required to include in income an amount equal to his or her allocable share of
qualified foreign income taxes paid by the Fund, and shareholders will be
entitled, subject to certain holding period requirements and other limitations,
to credit their portions of these amounts against their U.S. federal income tax
due, if any, or to deduct their portions from their U.S. taxable income, if any.
No deductions for foreign taxes paid by a Fund may be claimed, however, by
non-corporate shareholders who do not itemize deductions. No deduction for such
taxes will be permitted to individuals in computing their alternative minimum
tax liability. Shareholders that are not subject to U.S. federal income tax, and
those who invest in a Fund through tax-advantaged accounts (including those who
invest through IRAs or other tax-advantaged retirement plans), generally will
receive no benefit from any tax credit or deduction passed through by the Fund.
Foreign taxes paid by a Fund will reduce the return from the Fund’s investments.
If a Fund makes the election, the Fund’s shareholders will be notified annually
by the Fund (or their broker) of the respective amounts per share of the Fund’s
income from sources within, and taxes paid to, foreign countries and U.S.
possessions. If a Fund does not hold sufficient foreign securities to meet the
above threshold, then shareholders will not be entitled to claim a credit or
further deduction with respect to foreign taxes paid by the Fund.
If
a Fund holds shares in a “passive foreign investment company” (“PFIC”), it may
be subject to U.S. federal income tax on a portion of any “excess distribution”
or gain from the disposition of such shares even if such income is distributed
as a taxable dividend by the Fund to its shareholders. Additional charges in the
nature of interest may be imposed on a Fund in respect of deferred taxes arising
from such distributions or gains.
Each
Fund may be eligible to treat a PFIC as a “qualified electing fund” (“QEF”)
under the Code in which case, in lieu of the foregoing requirements, the Fund
will be required to include in income each year a portion of the ordinary
earnings and net capital gains of the qualified electing fund, even if not
distributed to the Fund, and such amounts will be subject to the 90% and excise
tax distribution requirements described above. In order to make this election, a
Fund would be required to obtain certain annual information from the PFICs in
which it invests, which may be difficult or impossible to obtain. Alternatively,
a Fund may make a mark-to-market election that will result in such Fund being
treated as if it had sold and repurchased its PFIC stock at the end of each
year. In such case, a Fund would report any gains resulting from such deemed
sales as ordinary income and would deduct any losses resulting from such deemed
sales as ordinary losses to the extent of previously recognized gains. The
election must be made separately for each PFIC owned by a Fund and, once made,
is effective for all subsequent taxable years, unless revoked with the consent
of the IRS. By making the election, a Fund could potentially ameliorate the
adverse tax consequences with respect to its ownership of shares in a PFIC, but
in any particular year may be required to recognize income in excess of the
distributions it receives from PFICs and its proceeds from dispositions of PFIC
stock. A Fund may have to distribute this excess income to satisfy the 90%
distribution requirement and to avoid imposition of the 4% excise tax. In order
to distribute this income and avoid a tax at the fund level, a Fund might be
required to liquidate portfolio securities that it might otherwise have
continued to hold, potentially resulting in additional taxable gain or loss.
Each Fund intends to make the appropriate tax elections, if possible, and take
any additional steps that are necessary to mitigate the effect of these rules.
Amounts included in income each year by a Fund arising from a QEF election, will
be “qualifying income” under the Qualifying Income Requirement (as described
above) even if not distributed to such Fund, if such Fund derives such income
from its business of investing in stock, securities or currencies.
Each
Fund may invest up to 25% of its total assets in its applicable Subsidiary,
which the Fund expects to be treated as a CFC under the Code. Each Fund’s
investment in its applicable Subsidiary is expected to provide the Fund with
exposure to the commodities markets within the limitations of the federal tax
requirements of Subchapter M of the Code for qualification as a RIC. The
“Subpart F” income (defined in Section 951 of the Code to include passive
income, including from commodity-linked derivatives) of a Fund attributable to
its investment in its applicable Subsidiary is “qualifying income” to the Fund
to the extent that such income is derived with respect to the Fund’s business of
investing in stock, securities or currencies. Each Fund expects its “Subpart F”
income attributable to its investment in its applicable Subsidiary to be derived
with respect to the Fund’s business of investing in stock,
securities
or currencies and to be treated as “qualifying income.” The Adviser will
carefully monitor each Fund’s investments in its applicable Subsidiary to ensure
that no more than 25% of the Fund’s assets are invested in its
Subsidiary.
Subpart
F income and GILTI are treated as ordinary income, regardless of the character
of the CFC’s underlying income. Net losses incurred by a CFC during a tax year
do not flow through to a Fund and thus will not be available to offset income or
capital gain generated from such Fund’s other investments. In addition, net
losses incurred by a CFC during a tax year generally cannot be carried forward
by the CFC to offset gains realized by it in subsequent taxable years. To the
extent a Fund invests in its applicable Subsidiary and recognizes “Subpart F”
income or GILTI in excess of actual cash distributions from such Subsidiary, if
any, it may be required to sell assets (including when it is not advantageous to
do so) to generate the cash necessary to distribute as dividends to its
applicable shareholders all of its income and gains and therefore to eliminate
any tax liability at the Fund level. “Subpart F” income also includes the excess
of gains over losses from transactions (including futures, forward and other
similar transactions) in commodities.
A
Fund’s recognition of any “Subpart F” income or GILTI from an investment in its
applicable Subsidiary will increase the Fund’s tax basis in its Subsidiary.
Distributions by a Subsidiary to its applicable Fund, including in redemption of
the Subsidiary’s shares, will be tax free, to the extent of the Subsidiary’s
previously undistributed “Subpart F” income or GILTI, and will correspondingly
reduce the Fund’s tax basis in its Subsidiary, and any distributions in excess
of the Fund’s tax basis in its Subsidiary will be treated as realized gain. Any
losses with respect to a Fund’s shares of its applicable Subsidiary will not be
currently recognized. A Fund’s investment in its applicable Subsidiary will
potentially have the effect of accelerating the Fund’s recognition of income and
causing its income to be treated as ordinary income, regardless of the character
of its applicable Subsidiary’s income. If a net loss is realized by a
Subsidiary, such loss is generally not available to offset the income earned by
its applicable Fund. In addition, the net losses incurred during a taxable year
by a Subsidiary cannot be carried forward by the Subsidiary to offset gains
realized by it in subsequent taxable years. A Fund will not receive any credit
in respect of any non-U.S. tax borne by its applicable Subsidiary.
A
U.S. person, including a Fund, who owns (directly or indirectly) 10% or more of
the total combined voting power of all classes of stock of 10% or more of the
total value of shares of all classes of stock of a foreign corporation is a
“U.S. Shareholder” for purposes of the CFC provisions of the Code. A CFC is a
foreign corporation that, on any day of its taxable year, is owned (directly,
indirectly, or constructively) more than 50% (measured by voting power or value)
by U.S. Shareholders. Because of its investment in a Subsidiary, a Fund is a
U.S. Shareholder in a CFC. As a U.S. Shareholder, a Fund is required to include
in gross income for U.S. federal income tax purposes for each taxable year of
the Fund its pro rata share of its CFC’s “Subpart F” income (discussed further
below) and any GILTI for the CFC’s taxable year ending within the Fund’s taxable
year whether or not such income is actually distributed by the CFC. GILTI
generally includes the active operating profits of the CFC, reduced by a deemed
return on the tax basis of the CFC’s depreciable tangible assets.
Under
Section 988 of the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time a Fund accrues income or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time the Fund actually collects such income or receivables or
pays such expenses or liabilities generally are treated as ordinary income or
loss. Similarly, on disposition of debt securities denominated in a foreign
currency and on disposition of certain other financial instruments (such as
forward currency contracts and currency swaps), gains or losses attributable to
fluctuations in the value of the foreign currency between the date of
acquisition of the security or contract and the date of settlement or
disposition are also treated as ordinary gain or loss. The gains and losses may
increase or decrease the amount of a Fund’s income to be distributed to its
shareholders as ordinary income. A Fund may elect out of the application of
Section 988 of the Code with respect to the tax treatment of each of its foreign
currency forward contracts to the extent that (i) such contract is a capital
asset in the hands of the Fund and is not part of a straddle transaction and
(ii) the Fund makes an election by the close of the day the contract is entered
into to treat the gain or loss attributable to such contract as capital gain or
loss.
Tax
Treatment of Complex Securities.
Certain
of a Fund’s investments may be subject to complex provisions of the Code
(including provisions relating to hedging transactions, straddles, integrated
transactions, foreign currency contracts, forward foreign currency contracts,
and notional principal contracts) that, among other things, may affect a Fund’s
ability to qualify as a RIC, may affect the character of gains and losses
realized by the applicable Fund (e.g.,
may affect whether gains or losses are ordinary or capital), accelerate
recognition of income to the applicable Fund and defer losses. These rules could
therefore affect the character, amount and timing of distributions to
shareholders. These provisions also may require a Fund to mark to market certain
types of positions in its portfolio (i.e.,
treat them as if they were closed out) which may cause a Fund to recognize
income without the applicable Fund receiving cash with which to make
distributions in amounts sufficient to enable the applicable Fund to satisfy the
RIC distribution requirements for avoiding income and excise taxes. Each Fund
intends to monitor its transactions, intends to make appropriate tax elections,
and intends to make appropriate entries in its books and records to mitigate the
effect of these rules and preserve the applicable Fund’s qualification for
treatment as a RIC.
Certain
of a Fund’s investments, such as commodity futures contracts and other
commodity-related derivative instruments, may not produce qualifying income to
the Fund. To the extent a Fund invests in such investments, the Fund will seek
to restrict its income from such instruments that do not generate qualifying
income to a maximum of 10% of its gross income (when combined with its other
investments that produce non-qualifying income).
A
Fund is required for federal income tax purposes to mark to market and recognize
as income for each taxable year its net unrealized gains and losses on certain
futures and options contracts subject to section 1256 of the Code (“Section 1256
Contracts”) as of the end of the year as well as those actually realized during
the year. Gain or loss from Section 1256 Contracts on broad-based indexes
required to be marked to market will be 60% long-term and 40% short-term capital
gain or loss. Application of this rule may alter the timing and character of
distributions to shareholders. A Fund may be required to defer the recognition
of losses on Section 1256 Contracts to the extent of any unrecognized gains on
offsetting positions held by the applicable Fund. These provisions also may
require a Fund to mark-to-market certain types of positions in its portfolio
(i.e.,
treat them as if they were closed out), which may cause the applicable Fund to
recognize income without receiving cash with which to make distributions in
amounts necessary to satisfy the Distribution Requirement and for avoiding the
excise tax discussed above. Accordingly, to avoid certain income and excise
taxes, a Fund may be required to liquidate its investments at a time when the
investment adviser might not otherwise have chosen to do so.
The
U.S. Treasury Department has authority to issue regulations that would exclude
foreign currency gains from the Qualifying Income Requirement described above if
such gains are not directly related to a Fund’s business of investing in stock
or securities (or options and futures with respect to stock or securities).
Accordingly, regulations may be issued in the future that could treat some or
all of a Fund’s non-U.S. currency gains as non-qualifying income, thereby
potentially jeopardizing the Fund’s status as a RIC for all years to which the
regulations are applicable.
Backup
Withholding.
Each Fund will be required in certain cases to withhold (as “backup
withholding”) on amounts payable to any shareholder who (1) fails to provide a
correct taxpayer identification number certified under penalty of perjury; (2)
is subject to backup withholding by the IRS for failure to properly report all
payments of interest or dividends; (3) fails to provide a certified statement
that he or she is not subject to “backup withholding”; or (4) fails to provide a
certified statement that he or she is a U.S. person (including a U.S. resident
alien). The backup withholding rate is currently 24%. Backup withholding is not
an additional tax and any amounts withheld may be credited against the
shareholder’s ultimate U.S. tax liability. Backup withholding will not be
applied to payments that have been subject to the 30% withholding tax on
shareholders who are neither citizens nor permanent residents of the U.S.
Non-U.S.
Shareholders.
Any non-U.S. investors in a Fund may be subject to U.S. withholding and estate
tax and are encouraged to consult their tax advisers prior to investing in the
Fund. Foreign shareholders (i.e.,
nonresident alien individuals and foreign corporations, partnerships, trusts and
estates) are generally subject to U.S. withholding tax at the rate of 30% (or a
lower tax treaty rate) on distributions derived from taxable ordinary income.
Each Fund may, under certain circumstances, report all or a portion of a
dividend as an “interest-related dividend” or a “short-term capital gain
dividend,” which would generally be exempt from this 30% U.S. withholding tax,
provided certain other requirements are met. Short-term capital gain dividends
received by a nonresident alien individual who is present in the U.S. for a
period or periods aggregating 183 days or more during the taxable year are not
exempt from this 30% withholding tax. Gains realized by foreign shareholders
from the sale or other disposition of Shares of a Fund generally are not subject
to U.S. taxation, unless the recipient is an individual who is physically
present in the U.S. for 183 days or more per year. Foreign shareholders who fail
to provide an applicable IRS form may be subject to backup withholding on
certain payments from a Fund. Backup withholding will not be applied to payments
that are subject to the 30% (or lower applicable treaty rate) withholding tax
described in this paragraph. Different tax consequences may result if the
foreign shareholder is engaged in a trade or business within the United States.
In addition, the tax consequences to a foreign shareholder entitled to claim the
benefits of a tax treaty may be different than those described above.
Under
legislation generally known as “FATCA” (the Foreign Account Tax Compliance Act),
a Fund is required to withhold 30% of certain ordinary dividends it pays to
shareholders that fail to meet prescribed information reporting or certification
requirements. In general, no such withholding will be required with respect to a
U.S. person or non-U.S. person that timely provides the certifications required
by a Fund or its agent on a valid IRS Form W-9 or applicable series of IRS Form
W-8, respectively. Shareholders potentially subject to withholding include
foreign financial institutions (“FFIs”), such as non-U.S. investment funds, and
non-financial foreign entities (“NFFEs”). To avoid withholding under FATCA, an
FFI generally must enter into an information sharing agreement with the IRS in
which it agrees to report certain identifying information (including name,
address, and taxpayer identification number) with respect to its U.S. account
holders (which, in the case of an entity shareholder, may include its direct and
indirect U.S. owners), and an NFFE generally must identify and provide other
required information to a Fund or other withholding agent regarding its U.S.
owners, if any. Such non-U.S. shareholders also may fall into certain exempt,
excepted or deemed compliant categories as established by regulations and other
guidance. A non-U.S. shareholder resident or doing business in a country that
has entered into an intergovernmental agreement with the United States to
implement FATCA will be exempt from FATCA withholding provided that the
shareholder and the applicable foreign government comply with the terms of the
agreement.
A
non-U.S. entity that invests in a Fund will need to provide the fund with
documentation properly certifying the entity’s status under FATCA in order to
avoid FATCA withholding. Non-U.S. investors in the Funds should consult their
tax advisers in this regard.
Tax-Exempt
Shareholders.
Certain tax-exempt shareholders, including qualified pension plans, IRAs, salary
deferral arrangements, 401(k) plans, and other tax-exempt entities, generally
are exempt from federal income taxation except with respect to their unrelated
business taxable income (“UBTI”). Tax-exempt entities are not permitted to
offset losses from one unrelated trade or business against the income or gain of
another unrelated trade or business. Certain net losses incurred prior to
January 1, 2018 are permitted to offset gain and income created by an
unrelated trade or business, if otherwise available. Under current law, each
Fund generally serves to
block
UBTI from being realized by its tax-exempt shareholders with respect to their
shares of Fund income. However, notwithstanding the foregoing, tax-exempt
shareholders could realize UBTI by virtue of their investment in a Fund if, for
example, (i) the Fund invests in residual interests of Real Estate Mortgage
Investment Conduits (“REMICs”), (ii) the Fund invests in a REIT that is a
taxable mortgage pool (“TMP”) or that has a subsidiary that is a TMP or that
invests in the residual interest of a REMIC, or (iii) Shares constitute
debt-financed property in the hands of the tax-exempt shareholders within the
meaning of section 514(b) of the Code. Charitable remainder trusts are subject
to special rules and should consult their tax advisers. The IRS has issued
guidance with respect to these issues and prospective shareholders, especially
charitable remainder trusts, are strongly encouraged to consult with their tax
advisers regarding these issues.
A
Fund’s shares held in a tax-qualified retirement account will generally not be
subject to federal taxation on income and capital gains distributions from the
Fund until a shareholder begins receiving payments from their retirement
account.
Certain
Potential Tax Reporting Requirements.
Under U.S. Treasury regulations, if a shareholder recognizes a loss on
disposition of Shares of $2 million or more for an individual shareholder or $10
million or more for a corporate shareholder (or certain greater amounts over a
combination of years), the shareholder must file with the IRS a disclosure
statement on IRS Form 8886. Direct shareholders of portfolio securities are in
many cases excepted from this reporting requirement, but under current guidance,
shareholders of a RIC are not excepted. Significant penalties may be imposed for
the failure to comply with the reporting requirements. The fact that a loss is
reportable under these regulations does not affect the legal determination of
whether the taxpayer’s treatment of the loss is proper. Shareholders should
consult their tax advisers to determine the applicability of these regulations
in light of their individual circumstances.
Other
Issues.
In those states which have income tax laws, the tax treatment of a Fund and of
Fund shareholders with respect to distributions by such Fund may differ from
federal tax treatment.
The
foregoing discussion is based on U.S. federal tax laws and regulations which are
in effect on the date of this SAI. Such laws and regulations may be changed by
legislative or administrative action. Shareholders are advised to consult their
tax advisers concerning their specific situations and the application of
foreign, federal, state, or local taxes.
FINANCIAL
STATEMENTS
The
Annual Report for the Funds for the fiscal year ended April 30, 2023 is a
separate document and the financial statements and accompanying notes appearing
therein are incorporated by reference into this SAI. You may request a copy of
the Funds’ Annual
Report
at no charge by calling 800-617-0004, or through the Funds’ website at
www.teucrium.com.
APPENDIX
A
Proxy
Voting/Class Action Litigation
Background
An
investment adviser owes a duty of care and loyalty to its clients with respect
to monitoring corporate events and exercising proxy authority in the best
interests of such clients. The Company will adhere to Rule 206(4)-6 of the
Advisers Act and applicable laws and regulations in regard to the voting of
proxies. As a result, investment advisers must conduct a reasonable review into
matters on which the adviser votes and to vote in the best interest of the
client. The Company does not typically manage securities and other instruments
that involve proxy statement and obligations. The following policies and
procedures are included only in circumstances where the Company may have such
obligations.
Policies
and Procedures
The
Company has the authority to vote proxies with respect of securities in client
accounts (“Client Securities”) over which the Company has voting discretion. In
such cases, the Company will cast proxy votes in a manner that is consistent
with the best interests of the Company’s clients. Where the Company undertakes
proxy voting responsibilities on behalf of multiple clients, it shall consider
whether it should have different voting policies for some or all of these
different clients, depending on the investment strategy and objectives of each
client. These proxy voting policies and procedures are designed to deal with the
complexities which may arise in cases where the Company’s interests conflict or
appear to conflict with the interests of its clients and to provide a copy of
proxy voting and these procedures upon client request. The Company will also
make available the record of the Company’s votes promptly upon
request.
Unless
contractually obligated to vote in a certain manner, the Company will reach its
voting decisions independently, after appropriate investigation. It does not
generally intend to delegate its decision-making or to rely on the
recommendations of any third party, although it may take such recommendations
into consideration. Where the Company deviates from the guidelines listed below,
or depends upon a third party to make the decision, the reasons shall be
documented. The Company may consult with such other experts, such as CPA’s,
investment bankers, attorneys, etc., as it deems necessary to help reach
informed decisions.
The
CCO is responsible for monitoring the effectiveness of this policy.
The
Company generally will monitor proposed corporate actions and proxy issues
regarding client securities and may take any of the following actions based on
the best interests of its clients: (i) determine how to vote the proxies; (ii)
abstain; or (iii) follow the recommendations of an independent proxy voting
service in voting the proxies.
In
general, the Company will determine how to vote proxies based on reasonable
judgment of the vote most likely to produce favorable financial results for its
clients. Proxy votes generally will be cast in favor of proposals that maintain
or strengthen the shared interests of shareholders. Proxy votes generally will
be cast against proposals having the opposite effect. The Company will always
consider each side of each proxy issue.
Non-Voting
of Proxies
The
Company will generally not vote proxies in the following
situations:
•Where
the Company and client have agreed in advance to limit the conditions under
which the Company would exercise voting authority;
•Proxies
are received for equity securities where, at the time of receipt, the Company’s
position, across all clients that it advises, is less than, or equal to, 1% of
the total outstanding voting equity (an “immaterial position”); or
•Where
the Company has determined that refraining is in the best interest of the
client, such as when the cost to the client of voting the proxy is greater than
the expected benefit of voting (e.g. voting a foreign security that is required
to be made in person).
•Proxies
are received for equity securities where, at the time of receipt, the Company’s
clients no longer hold that position.
Management
Proposals
Absent
good reason to the contrary, the Company will generally give substantial weight
to management recommendations regarding voting. This is based on the view that
management is usually in the best position to know which corporate actions are
in the best interests of common shareholders as a whole.
The
Company will generally vote for routine matters proposed by issuer management,
such as setting a time or place for an annual meeting, changing the name or
fiscal year of the company, or voting for directors in favor of the management
proposed slate. Other routine matters in which the Company will generally vote
along with company management include: appointment of auditors; fees paid to
board members; and change in the board structure. The Company will generally
vote along with management as long as the proposal does not: i) measurably
change the structure, management, control or operations of the company; ii)
measurably change the
terms
of, or fees or expenses associated with, an investment in the company; and (iii)
the proposal is consistent with customary industry standards and practices, as
well as the laws of the state of incorporation applicable to the company.
Routine matters may not necessitate the same level of analysis than non-routine
matters.
Non-Routine
Matters
Non-routine
matters include such things as:
•Amendments
to management incentive plans;
•The
authorization of additional common or preferred stock;
•Initiation
or termination of barriers to takeover or acquisition;
•Mergers
or acquisitions;
•Changes
in the state of incorporation;
•Corporate
reorganizations;
•Term
limits for board members; and
•“Contested”
director slates.
In
non-routine matters, the Company will attempt to be generally familiar with the
questions at issue. Non-routine matters will be voted on a case-by-case basis
given the complexity of many of these issues. When determining how to vote
non-routine matters the Company shall conduct an issue-specific analysis, giving
consideration to the potential effect on the value of a client’s investments,
documentation of the analysis shall be maintained in the Company’s proxy voting
files.
Processing
Proxy Votes
The
CCO will be responsible for determining whether each proxy is for a “routine”
matter, as described above, and whether the policy and procedures set forth
herein actually address the specific issue. For proxies that are not clearly
“routine”, the Company, in conjunction with the CCO, will determine how to vote
each such proxy by applying these policies and procedures. Upon making a
decision, the proxy will be executed and returned for submission to the issuer.
The Company’s proxy voting record will be updated at the time the proxy is
submitted.
An
independent proxy voting advisory and research firm may be appointed as a “Proxy
Service” for voting the Company’s proxies after approval by the
CCO.
Periodic
Testing
The
Company shall evaluate compliance by periodically sampling the proxy votes it
casts on behalf of its clients by sampling proxy votes that relate to proposals
that are non-routine matters and require more issue-specific analysis (e.g.,
mergers and acquisition transactions, dissolutions, conversions, or
consolidations).
Conflicts
of Interest
Conflicts
of interest between the Company or a principal of the Company and the Company’s
clients with respect to a proxy issue conceivably may arise, for example, from
personal or professional relationships with an issuer or with the directors,
candidates for director, or senior executives of an issuer.
Potential
conflicts of interest between the Company and its clients may arise when the
Company’s relationships with an issuer or with a related third party actually
conflict, or appear to conflict, with the best interests of the Company’s
clients.
If
the issue is specifically addressed in these policies and procedures, the
Company will vote in accordance with these policies. In a situation where the
issue is not specifically addressed in these policies and procedures and an
apparent or actual conflict exists, the Company shall either: i) delegate the
voting decision to an independent third party; ii) inform clients of the
conflict of interest and obtain advance consent of a majority of such clients
for a particular voting decision; or iii) obtain approval of a voting decision
from the Company’s CCO, who will be responsible for documenting the rationale
for the decision made and voted.
In
all such cases, the Company will make disclosures to clients of all material
conflicts and will keep documentation supporting its voting
decisions.
If
the CCO determines that a material conflict of interest exists, the following
procedures shall be followed:
1.The
Company may disclose the existence and nature of the conflict to the client(s)
owning the securities, and seek directions on how to vote the proxies;
2.The
Company may abstain from voting, particularly if there are conflicting client
interests (for example, where client accounts hold different client securities
in a competitive merger situation); or
3.The
Company may follow the recommendations of an independent proxy voting service in
voting the proxies.
Disclosure
to Clients
A
summary of the Company’s proxy voting policy will be included in the Company’s
Disclosure Brochure. The full text of the Company’s proxy voting policy will be
provided to clients upon request.
Proxy
Advisory Firm
When
the Company retains a proxy advisory firm to provide research, voting
recommendations or voting execution services, the Company shall conduct
reasonable oversight to ensure the proxy advisor’s recommendations are
consistent with the Company’s proxy voting policies and in the best interest of
the Company’s clients and investors. The level of oversight may vary depending
on (1) the scope of the investment adviser’s voting authority, and (2) the type
of functions and services that the investment adviser has retained the proxy
advisory firm to perform.
Periodic
Advisory Firm Testing
The
Company shall periodically evaluate the proxy services provided by third party
providers which should consider the services, recommendations made by the
provider and how the provider voted, as applicable, and consider the steps
enumerated below.
When
conducting oversight of a proxy advisory firm, the Company should consider
taking the following steps:
•whether
the proxy advisory firm has the capacity and competency to adequately analyze
the matters for which the investment adviser is responsible for voting including
the adequacy and quality of the proxy advisory firm’s staffing, personnel,
and/or technology;
•the
adequacy of disclosures the proxy advisory firm has provided regarding its
methodologies in formulating voting recommendations, such that the Company can
understand the factors underlying the proxy advisory firm’s voting
recommendations
•the
effectiveness of the proxy advisory firm’s policies and procedures for obtaining
current and accurate information relevant to matters included in its research
and on which it makes voting recommendations;
•the
Company’s access to the proxy advisory firm’s sources of information and
methodologies used in formulating voting recommendations or executing voting
instructions;
•the
nature of any third-party information sources that the proxy advisory firm uses
as a basis for its voting recommendations;
•whether
the proxy advisory firm has adequate policies and procedures to identify,
disclose, and address actual and potential conflicts of interest.
Form
NP-X - RIC Clients
For
RIC clients, in conjunction with the preparation and filing of Form N-PX each
year, the Company will review the Form for accuracy.
Class
Action Lawsuits
From
time to time, securities held in the accounts of clients will be the subject of
class action lawsuits. The Company has no obligation to determine if securities
held by the client are subject to a pending or resolved class action lawsuit. It
also has no duty to evaluate a client’s eligibility or to submit a claim to
participate in the proceeds of a securities class action settlement or verdict.
Furthermore, the Company has no obligation or responsibility to initiate
litigation to recover damages on behalf of clients who may have been injured
because of actions, misconduct, or negligence by corporate management of issuers
whose securities are held by clients.
Where
the Company receives written or electronic notice of a class action lawsuit,
settlement, or verdict directly relating to a client account, it will forward
all notices, proof of claim forms, and other materials, to the client.
Electronic mail is acceptable where appropriate if the client has authorized
contact in this manner.