As filed with the Securities and Exchange Commission on March 10,
2022
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF
1933
Teucrium Commodity Trust
(Registrant)
Delaware
(State or other jurisdiction of incorporation or
organization)
6799
(Primary Standard Industrial Classification Code
Number)
45-0602467
(I.R.S. Employer Identification No.)
c/o Teucrium Trading, LLC
Three Main Street
Suite 215
Burlington, VT 05401
Phone: (802) 540-0019
(Address, including zip code, and telephone number, including area
code, of Registrant’s principal executive
offices)
Sal Gilbertie
Chief Executive Officer
Teucrium Trading, LLC
Three Main Street
Suite 215
Burlington, VT 05401
Phone: (802) 540-0019
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
Copy to:
W. Thomas Conner, Esq.
VedderPrice P.C.
1401 New York Avenue
Washington, DC 20005
Approximate date of
commencement of proposed sale to the public: As soon as practicable
after the effective date of this Registration
Statement.
If any
of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933 check the following box. ☒
If this
Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same
offering. ☐
If this
Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier
effective registration statement for the same offering.
☐
If this
Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier
effective registration statement for the same offering.
☐
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer ☐
|
Accelerated
filer ☐
|
|
Non-accelerated
filer ☒
|
Smaller
reporting company ☒
Emerging
growth company ☐
|
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
The
registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states
that this Registration Statement shall thereafter become effective
in accordance with Section 8(a) of the Securities Act or until this
Registration Statement shall become effective on such date as the
Commission, acting pursuant to said Section 8(a), may
determine.
The information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities
and it is not soliciting an offer to buy these securities in any
jurisdiction where the offer or sale is not permitted.
Subject to Completion
Preliminary Prospectus dated March 10, 2022
Teucrium Agricultural Fund
Teucrium
Agricultural Fund (the “Fund” or “Us” or
“We” or “TAGS”) is designed to provide
investors with a cost-effective means to gain price exposure to
four agricultural commodity markets, specifically corn, soybeans,
wheat and sugar for future delivery. The Fund issues shares
(“Shares”) that trade on the NYSE Arca stock exchange
(“NYSE Arca”) under the symbol “TAGS” and
that can be purchased and sold by investors through their
broker-dealer. The Fund seeks to provide daily investment results
that reflect the combined daily performance of four other commodity
pools, specifically, the Teucrium Corn Fund, Teucrium Soybean Fund,
Teucrium Wheat Fund and Teucrium Sugar Fund (collectively, the
“Underlying Funds”). Under normal market conditions,
the Fund invests in shares of the Underlying Funds and, to a lesser
extent, cash equivalents. The sponsor to the Fund is Teucrium
Trading, LLC (the “Sponsor”), which receives a
management fee. The principal office address and telephone number
of both the Fund and the Sponsor is Three Main Street, Suite 215,
Burlington, Vermont 05401 and (802) 540-0019.
While
most investors will purchase and sell Shares through their
broker-dealer, the Fund continuously offers creation baskets
consisting of 12,500 Shares (“Creation Baskets”) at
their net asset value (“NAV”) to certain parties who
have entered into an agreement with the Sponsor (“Authorized
Purchasers”). Authorized Purchasers, in turn, may sell such
Shares, which are listed on NYSE Arca, to the public at per-Share
offering prices that are expected to reflect, among other factors,
the trading price of the Shares on the NYSE Arca, the NAV of the
Fund at the time the Authorized Purchaser purchased the Creation
Baskets and the NAV at the time of the offer of the Shares to the
public, the supply of and demand for Shares at the time of sale,
and the liquidity of the markets for agricultural commodity futures
contracts in which the Fund invests. A list of the Fund’s
Authorized Purchasers as of the date of this Prospectus can be
found under “Plan of Distribution – Distributor and Authorized
Purchasers,” on page 36. The prices of Shares offered
by Authorized Purchasers are expected to fall between the
Fund’s NAV and the trading price of the Shares on the NYSE
Arca at the time of sale. The Fund’s Shares may trade in the
secondary market on the NYSE Arca at prices that are lower or
higher than their NAV per Share.
This is
a best efforts offering; the distributor, Foreside Fund Services,
LLC (the “Distributor”), is not required to sell any
specific number or dollar amount of Shares but will use its best
efforts to sell Shares. An Authorized Purchaser is under no
obligation to purchase Shares. This is intended to be a continuous
offering that will terminate March 10, 2025, unless suspended or
terminated at any earlier time for certain reasons specified in
this prospectus or unless extended as permitted under the rules of
the Securities Act of 1933. See “Prospectus Summary –
The Shares” and “Creation and Redemption of Shares
– Rejection of Purchase Orders” below.
Investing
in the Fund involves significant risks. See “What Are the
Risk Factors Involved with an Investment in the Fund?”
beginning on page 9. The Fund is not a mutual fund registered under
the Investment Company Act of 1940 and is not subject to regulation
under such Act.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION (“SEC”) NOR ANY
STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE
SECURITIES OFFERED IN THIS PROSPECTUS OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Teucrium
Agricultural Fund is a commodity pool and Teucrium Trading, LLC is
a commodity pool operator subject to regulation by the Commodity
Futures Trading Commission and the National Futures Association
under the Commodity Exchange Act (“CEA”).
THE
COMMODITY FUTURES TRADING COMMISSION HAS NOT PASSED UPON THE MERITS
OF PARTICIPATING IN THIS POOL NOR HAS THE COMMISSION PASSED ON THE
ADEQUACY OR ACCURACY OF THIS DISCLOSURE DOCUMENT.
This
prospectus is in two parts: a disclosure document and a statement
of additional information. These parts are bound together, and both
contain important information.
Thank you for your interest in the Teucrium Agricultural
Fund.
The
date of this prospectus is March 10, 2022.
COMMODITY FUTURES TRADING COMMISSION
RISK DISCLOSURE STATEMENT
YOU
SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS
YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD BE
AWARE THAT COMMODITY INTEREST TRADING CAN QUICKLY LEAD TO LARGE
LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE
NET ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF YOUR
INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS MAY
AFFECT YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE
POOL.
FURTHER,
COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR
MANAGEMENT, AND ADVISORY AND BROKERAGE FEES. IT MAY BE NECESSARY
FOR THOSE POOLS THAT ARE SUBJECT TO THESE CHARGES TO MAKE
SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF
THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A COMPLETE
DESCRIPTION OF EACH EXPENSE TO BE CHARGED THIS POOL AT PAGE 33 AND
A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT
IS, TO RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, AT PAGE
6.
THIS
BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS
NECESSARY TO EVALUATE YOUR PARTICIPATION IN THIS COMMODITY POOL.
THEREFORE, BEFORE YOU DECIDE TO PARTICIPATE IN THIS COMMODITY POOL,
YOU SHOULD CAREFULLY STUDY THIS DISCLOSURE DOCUMENT, INCLUDING A
DESCRIPTION OF THE PRINCIPAL RISK FACTORS OF THIS INVESTMENT, AT
PAGE 4.
YOU
SHOULD ALSO BE AWARE THAT THIS COMMODITY POOL MAY TRADE FOREIGN
FUTURES OR OPTIONS CONTRACTS. TRANSACTIONS ON MARKETS LOCATED
OUTSIDE THE UNITED STATES, INCLUDING MARKETS FORMALLY LINKED TO A
UNITED STATES MARKET, MAY BE SUBJECT TO REGULATIONS WHICH OFFER
DIFFERENT OR DIMINISHED PROTECTION TO THE POOL AND ITS
PARTICIPANTS. FURTHER, UNITED STATES REGULATORY AUTHORITIES MAY BE
UNABLE TO COMPEL THE ENFORCEMENT OF THE RULES OF REGULATORY
AUTHORITIES OR MARKETS IN NON-UNITED STATES JURISDICTIONS WHERE
TRANSACTIONS FOR THE POOL MAY BE EFFECTED.
SWAPS
TRANSACTIONS, LIKE OTHER FINANCIAL TRANSACTIONS, INVOLVE A VARIETY
OF SIGNIFICANT RISKS. THE SPECIFIC RISKS PRESENTED BY A PARTICULAR
SWAP TRANSACTION NECESSARILY DEPEND UPON THE TERMS OF THE
TRANSACTION AND YOUR CIRCUMSTANCES. IN GENERAL, HOWEVER, ALL SWAPS
TRANSACTIONS INVOLVE SOME COMBINATION OF MARKET RISK, CREDIT RISK,
COUNTERPARTY CREDIT RISK, FUNDING RISK, LIQUIDITY RISK, AND
OPERATIONAL RISK.
HIGHLY
CUSTOMIZED SWAPS TRANSACTIONS IN PARTICULAR MAY INCREASE LIQUIDITY
RISK, WHICH MAY RESULT IN A SUSPENSION OF REDEMPTIONS. HIGHLY
LEVERAGED TRANSACTIONS MAY EXPERIENCE SUBSTANTIAL GAINS OR LOSSES
IN VALUE AS A RESULT OF RELATIVELY SMALL CHANGES IN THE VALUE OR
LEVEL OF AN UNDERLYING OR RELATED MARKET FACTOR.
IN
EVALUATING THE RISKS AND CONTRACTUAL OBLIGATIONS ASSOCIATED WITH A
PARTICULAR SWAP TRANSACTION, IT IS IMPORTANT TO CONSIDER THAT A
SWAP TRANSACTION MAY BE MODIFIED OR TERMINATED ONLY BY MUTUAL
CONSENT OF THE ORIGINAL PARTIES AND SUBJECT TO AGREEMENT ON
INDIVIDUALLY NEGOTIATED TERMS. THEREFORE, IT MAY NOT BE POSSIBLE
FOR THE COMMODITY POOL OPERATOR TO MODIFY, TERMINATE, OR OFFSET THE
POOL'S OBLIGATIONS OR THE POOL'S EXPOSURE TO THE RISKS ASSOCIATED
WITH A TRANSACTION PRIOR TO ITS SCHEDULED TERMINATION
DATE.
TEUCRIUM AGRICULTURAL FUND
TABLE OF CONTENTS
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PART
ONE – DISCLOSURE DOCUMENT
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1
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PROSPECTUS
SUMMARY
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3
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Principal Offices
of the Fund and the Sponsor
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3
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Breakeven
Point
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3
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Operation of the
Fund
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3
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Principal
Investment Risks of an Investment in the Fund
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4
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Determination of
NAV
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5
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Defined
Terms
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6
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Breakeven
Analysis
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6
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WHAT ARE THE RISK
FACTORS INVOLVED WITH AN INVESTMENT IN THE FUND?
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9
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Risks Associated
with Investing Directly or Indirectly in Agricultural
Commodities
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9
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The Fund’s
Operating Risks
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12
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Risk of Leverage
and Volatility
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20
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Over the counter
Contract Risk
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20
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Risk of Trading in
International Markets
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21
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Tax
Risks
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22
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THE
OFFERING
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24
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The Fund in
General
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24
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The
Sponsor
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24
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Prior Performance
of the Fund
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27
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The
Trustee
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28
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Operation of the
Fund
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28
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Futures
Contracts
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30
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Over the counter
Derivatives
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31
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Other Trading
Policies of the Fund
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31
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Benchmark
Performance
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32
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The Fund’s
Service Providers
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33
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Form of
Shares
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35
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Transfer of
Shares
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36
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Inter-Series
Limitation on Liability
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36
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Plan of
Distribution
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36
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Calculating
NAV
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37
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Creation and
Redemption of Shares
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38
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Secondary Market
Transactions
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41
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Use of
Proceeds
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41
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The Trust
Agreement
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42
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The Sponsor Has
Conflicts of Interest
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43
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Interests of Named
Experts and Counsel
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44
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Provisions of
Federal and State Securities Laws
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44
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Books and
Records
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44
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Statements,
Filings, and Reports to Shareholders
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45
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Fiscal
Year
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45
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Governing
Law
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45
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Security Ownership
of Principal Shareholders and Management
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45
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Legal
Matters
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46
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Privacy
Policy
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46
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U.S. Federal Income
Tax Considerations
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47
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Investment by ERISA
Accounts
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54
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INCORPORATION BY
REFERENCE OF CERTAIN INFORMATION
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57
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INFORMATION YOU
SHOULD KNOW
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58
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WHERE YOU CAN FIND
MORE INFORMATION
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59
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STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS
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60
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APPENDIX A -
Glossary of Defined Terms
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61
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|
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PART
TWO – STATEMENT OF ADDITIONAL INFORMATION
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64
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This is only a summary of the prospectus and, while it contains
material information about the Fund and its Shares, it does not
contain or summarize all of the information about the Fund and the
Shares contained in this prospectus that is material and/or which
may be important to you. You should read this entire prospectus,
including “What Are the Risk Factors Involved with an
Investment in the Fund?” beginning on page 9, before making
an investment decision about the Shares. In addition, this
prospectus includes a statement of additional information that
follows and is bound together with the primary disclosure document.
Both the primary disclosure document and the statement of
additional information contain important information.
Principal Offices of the Fund and the Sponsor
The
Fund is a series of Teucrium Commodity Trust (the
“Trust”). The principal offices of the Sponsor, the
Trust and the Fund are located at Three Main Street, Suite 215,
Burlington, Vermont 05401. The telephone number is (802)
540-0019.
Breakeven Point
The
amount of trading income required for the redemption value of a
Share at the end of one year to equal the selling price of the
Share, assuming a selling price of $29.96 (the NAV per Share as of
February 28, 2022), is $0.04 or 0.13% of the selling price. For
more information, see “Breakeven Analysis”
below.
Operation of the Fund
The
Fund is a commodity pool that issues Shares that may be purchased
and sold on the NYSE Arca stock exchange. The investment objective
of the Fund is to provide daily investment results that reflect the
combined daily performance of four other commodity pools that are
series of the Trust and sponsored by the Sponsor: the Teucrium Corn
Fund, Teucrium Wheat Fund, Teucrium Soybean Fund and Teucrium Sugar
Fund (collectively, the “Underlying Funds”). The
combined daily performance of each of the four Underlying Funds is
a weighted average of the performance of each Fund. The Benchmark
for the Fund is the Teucrium Agricultural Fund Index
(“TTAGS”). Under normal market conditions, the Fund
seeks to achieve its investment objective generally by investing
equally in shares of each Underlying Fund and, to a lesser extent,
cash equivalents. The Fund’s investments in shares of
Underlying Funds is rebalanced, generally on a daily basis, in
order to maintain approximately a 25% allocation of the
Fund’s assets to each Underlying Fund.
The
Fund is organized as a series of the Trust, a Delaware statutory
trust organized on September 11, 2009. The Trust and the Fund
operate pursuant to the Trust’s Fifth Amended and Restated
Declaration of Trust and Trust Agreement (the “Trust
Agreement”), dated April 26, 2019. The Trust Agreement may be
found on the SEC’s EDGAR filing database at https://www.sec.gov/Archives/edgar/data/1471824/000165495419004871/ex31.htm.
The Fund was formed and is managed and controlled by the Sponsor, a
limited liability company formed in Delaware on July 28, 2009. The
Sponsor is registered as a commodity pool operator
(“CPO”) and a commodity trading adviser
(“CTA”) with the Commodity Futures Trading Commission
(“CFTC”) and is a member of the National Futures
Association (“NFA”).
The
investment objective of each Underlying Fund is to have the daily
changes in the NAV of the Fund’s Shares reflect the daily
changes in a weighted average of the closing settlement prices for
certain futures contracts for the commodity specified in the
Underlying Fund’s name. (This weighted average is referred to
herein as the Underlying Fund’s “Benchmark,” the
Futures Contracts that at any given time make up an Underlying
Fund’s Benchmark are referred to herein as the Underlying
Fund’s “Benchmark Component Futures Contracts,”
and the commodity specified in the Underlying Fund’s name is
referred to herein as its “Specified Commodity.”) The
Benchmark Component Futures Contracts that comprise each Underlying
Fund’s Benchmark are described in “The Offering –
Operation of the Fund” below.
Each
Underlying Fund seeks to achieve its investment objectives
primarily by investing in its Benchmark Component Futures
Contracts. Under normal market conditions, each Underlying Fund
expects that 100% of its assets will be invested in Benchmark
Component Futures Contracts and in cash and cash equivalents. Each
Underlying Fund reserves the right to invest in swap agreements,
forward contracts and options, a brief description of which may be
found in “Appendix A- “Glossary of Defined
Terms.”
Consistent with
applicable provisions of the Trust Agreement and Delaware law, the
Fund has broad authority to make changes to the Fund’s
operations. Consistent with this authority, the Fund, in its sole
discretion and without shareholder approval or advance notice, may
change its investment objective, Benchmark or investment
strategies. The Fund has no current intention to make any such
change, and any change is subject to applicable regulatory
requirements, including, but not limited to, any requirement to
amend applicable listing rules of the NYSE.
The
reasons for and circumstances that may trigger any such changes may
vary widely and cannot be predicted. However, by way of example,
the Fund may change the weighting or underlying components of the
Benchmark in furtherance of the Fund’s investment objective
of tracking the combined daily performance of the Underlying Funds.
This could be done for a variety of market conditions, including a
potential or actual imposition of position limits by the CFTC or
futures exchange rules, or the imposition of risk mitigation
measures by a futures commission merchant restricts the ability of
an Underlying Fund to invest in its current Benchmark Component
Futures Contracts. The Fund and the applicable Underlying Fund
would file a current report on Form 8-K and a prospectus supplement
to describe any such change and the effective date of the change.
Shareholders may modify their holdings of the Fund’s shares
in response to any change by purchasing or selling Fund shares
through their broker-dealer.
The
Underlying Funds incur certain expenses in connection with their
operations and hold most of their assets in income producing cash
and cash equivalents for margin and other liquidity purposes and to
meet redemptions that may be necessary on an ongoing basis. These
expenses and income cause imperfect correlation between changes in
the Underlying Fund’s NAV and changes in each respective
Benchmark, because the Benchmarks do not reflect expenses or
income. Investors should be aware that because the Underlying Funds
incur certain expenses on an ongoing basis, they may incur a
partial or complete loss of their investment even when the
performance of the Benchmarks are positive.
While
the Fund expects to maintain substantially all of its assets in
shares of the Underlying Funds at all times, the Fund may hold some
residual amount of assets in cash equivalents, and/or merely hold
such assets in cash (generally in interest-bearing accounts). The
Underlying Funds invest in Benchmark Component Futures Contracts to
the fullest extent possible without being leveraged or unable to
satisfy their expected current or potential margin or collateral
obligations with respect to their investments in Benchmark
Component Futures Contracts. After fulfilling such margin and
collateral requirements, the Underlying Funds invest the remainder
of its proceeds from the sale of baskets in short term financial
instruments of the type commonly known as “cash and cash
equivalents.” Cash and cash equivalents may include
short-term Treasury bills, money market funds, demand deposit
account, and commercial paper.
The
Sponsor employs a “neutral” investment strategy to
provide daily investment results that reflect the combined daily
performance of the Underlying Funds, regardless of whether the
prices of the Underlying Funds go up or down. The Fund’s and
Underlying Funds’ “neutral” investment strategies
are designed to permit investors generally to purchase and sell the
Fund’s Shares for the purpose of investing indirectly in the
agricultural commodities market in a cost-effective manner. The
Sponsor endeavors to invest the Fund’s assets as fully as
possible in the Underlying Funds so that the performance of the
Fund closely correlates with the combined performance of the
Underlying Funds.
Investors
may purchase and sell Shares through their broker-dealers. However,
the Fund creates and redeems Shares only in blocks called
“Creation Baskets” and “Redemption
Baskets,” respectively, and only Authorized Purchasers may
purchase or redeem Creation Baskets or Redemption Baskets. An
Authorized Purchaser is under no obligation to create or redeem
baskets, and an Authorized Purchaser is under no obligation to
offer to the public Shares of any baskets it does create. Baskets
are generally created when there is a demand for Shares, including,
but not limited to, when the market price per share is at (or
perceived to be at) a premium to the NAV per Share. Similarly,
baskets are generally redeemed when the market price per share is
at (or perceived to be at) a discount to the NAV per Share. Retail
investors seeking to purchase or sell Shares on any day are
expected to effect such transactions in the secondary market, on
the NYSE Arca, at the market price per share, rather than in
connection with the creation or redemption of baskets.
The
Sponsor maintains a public website on behalf of the Fund,
www.teucrium.com, which contains information about the Trust, the
Fund, the Shares, and the Underlying Funds.
Note to Secondary Market Investors: Except when aggregated in Redemption Baskets,
Shares are not individually redeemable. Shares can be directly purchased from the Fund
only in Creation Baskets, and only by Authorized Purchasers. Each
Creation Basket consists of 12,500 Shares and therefore requires a
significant financial commitment to purchase. Accordingly,
investors who do not have such resources or who are not Authorized
Purchasers should be aware that some of the information contained
in this prospectus, including information about purchases and
redemptions of Shares directly with the Fund, is only relevant to
Authorized Purchasers. There is no guarantee that Shares will trade
at prices that are at or near the per-Share NAV. When buying or
selling Shares on the secondary market through a broker, most
investors incur customary brokerage commissions and
charges.
U.S. Federal Income Tax Considerations
As is
described more fully in “U.S. Federal Income Tax
Considerations,” it is intended that the Fund be classified
as a partnership not taxable as a corporation for U.S. federal
income tax purposes. Based in part upon representations of the
Sponsor and the Trust, the Fund has obtained a legal opinion that,
although the matter is not free from doubt, it is more likely than
not that the Fund will be so classified. Assuming that the Fund is
classified as a partnership not taxable as a corporation for U.S.
federal income tax purposes, the Fund will not incur a U.S. federal
income tax liability; rather, each Shareholder will be required to
take into account its allocable share of the Fund's income, gains,
losses, deductions, and other tax items. See “U.S. Federal Income Tax
Considerations” for information about the U.S. federal income
tax consequences of the purchase, ownership and disposition of
Shares.
As
noted, the Fund invests in Shares of the Teucrium Corn Fund,
Teucrium Wheat Fund, Teucrium Sugar Fund, and Teucrium Soybean
Fund. The Underlying Funds primarily invest in Futures Contracts on
corn, wheat, sugar and soybeans, respectively, including those
traded on the CBOT and the ICE Futures. The Fund expressly
disclaims any association with the CBOT or ICE Futures or
endorsement of the Fund by such exchanges and acknowledges that
“CBOT,” “Chicago Board of Trade,”
“ICE Futures,” and “ICE Futures US” are
registered trademarks of the respective exchanges.
Principal Investment Risks of an Investment in the
Fund
An
investment in the Fund involves a degree of risk and you could
incur a partial or total loss of your investment in the Fund. Some
of the risks you may face are summarized below. A more extensive
discussion of these risks appears beginning on page 9.
●
Unlike mutual
funds, commodity pools and other investment pools that manage their
investments so as to realize income and gains for distribution to
their investors, the Fund generally does not distribute dividends
to holders of Fund Shares (“Shareholders”). You should
not invest in the Fund if you will need cash distributions from the
Fund to pay taxes on your share of income and gains of the Fund, if
any, or for other purposes.
●
Investors may
choose to use the Fund as a means of investing indirectly in
agricultural commodities, and there are risks involved in this
investment strategy. The risks and hazards that are inherent in
agriculture may cause the price of agricultural commodities to
fluctuate widely.
●
Only an Authorized
Purchaser may engage in creation or redemption transactions with
the Fund. The Fund has a limited number of institutions that act as
Authorized Purchasers. To the extent that these institutions exit
the business or are unable or unwilling to proceed with creation
and/or redemption orders with respect to the Fund, Fund Shares may,
particularly in times of market stress, trade at a discount to the
NAV per Share and possibly face trading halts and/or
delisting.
●
The Fund seeks to
have its performance track the combined performance of Underlying
Funds rather than profit from speculative trading of Commodity
Futures Contracts or from the use of leverage (i.e., the Sponsor
manages the Fund and the Underlying Funds so that the aggregate
notional amount of an Underlying Fund’s exposure to losses
from its investments in Benchmark Component Futures Contracts at
any time will not exceed the value of the Underlying Fund’s
assets). There is no assurance that the Sponsor will successfully
implement this investment strategy, and if the Fund becomes
leveraged, you could lose all or a substantial portion of your
investment if the Underlying Fund’s trading positions
suddenly turn unprofitable.
●
The Underlying
Funds may invest in other commodity interests. To the extent that
these other commodity interests are contracts individually
negotiated between their parties, they may not be as liquid as
Benchmark Component Futures Contracts and will expose the
Underlying Funds (and, by extension, the Fund) to credit risk that
their counterparties may not be able to satisfy their obligations
to the Underlying Funds.
●
You will have no
rights to participate in the management of the Fund and will have
to rely on the duties and judgment of the Sponsor to manage the
Fund.
●
The Fund and the
Underlying Funds pay fees and expenses that are incurred regardless
of whether they are profitable.
●
The regulation of
commodity interest transactions in the United States has
historically been comprehensive and is a rapidly changing area of
law and is subject to ongoing modification by governmental and
judicial action. Future U.S. or foreign regulatory changes may
alter the nature of an investment in the Fund, or the ability of
the Fund to continue to implement its investment
strategy.
●
Failures or
breaches of the electronic systems of the Fund, the Sponsor, or
third parties or other events such as the recent COVID-19 pandemic
have the ability to cause disruptions and negatively impact the
Fund’s business operations, potentially resulting in
financial losses to the Fund and its shareholders.
●
If the Fund
experienced redemptions that caused the number of Shares
outstanding to decrease to the minimum level of Shares required to
be outstanding, until the minimum number of Shares is again
exceeded through the purchase of a new Creation Basket, there can
be no more redemptions by an Authorized Purchaser. In such case,
market makers may be less willing to purchase Shares from investors
in the secondary market, which may in turn limit the ability of
Shareholders of the Fund to sell their Shares in the secondary
market.
●
War and other
geopolitical events in eastern Europe, including but not limited to
Russia and Ukraine, may cause volatility in commodity prices
including energy and grain prices, due to the region’s
importance to these markets, potential impacts to global
transportation and shipping, and other supply chain disruptions.
These events are unpredictable and may lead to extended periods of
price volatility in the Fund and the Underlying Funds.
●
The Funds' FCM has
not placed maximum position constraints on the number of futures
contracts the Funds may purchase. However, the recent volatility in
the agricultural commodities futures market may lead the FCM to
impose risk mitigation procedures that could limit the Funds'
investment in agricultural commodities futures contracts beyond the
accountability and position limits imposed by futures contract
exchanges. As of the date of this prospectus, the Underlying Funds
are in the process of entering into an agreement with a new FCM.
Entering into such an agreement could be a protracted process. If
the current FCM were to impose position limits before retaining
another FCM, or that FCM also imposes limits, the Fund's and the
Underlying Funds' ability to meet their investment objectives could
be negatively impacted.
●
The occurrence of a
severe weather event, natural disaster, terrorist attack,
geopolitical events, outbreak or public health emergency as
declared by the World Health Organization, the continuation or
expansion of war or other hostilities, or a prolonged government
shutdown may have significant adverse effects on the Fund and its
investments and alter current assumptions and expectations. For
example, in late February 2022, Russia
invaded Ukraine, significantly amplifying already existing
geopolitical tensions among Russia and other countries in the
region and in the west. The responses of countries and political
bodies to Russia’s actions, the larger overarching tensions,
and Ukraine’s military response and the potential for wider
conflict may increase financial market volatility generally, have
severe adverse effects on regional and global economic markets, and
cause volatility in the price of agricultural commodities,
agricultural futures and the share price of the Fund and the
Underlying Funds.
●
The ability of
Authorized Participants to create or redeem shares may be suspended
for several reasons, including but not limited to the Fund
voluntarily imposing such restrictions. A suspension in the
ability of Authorized Participants would have no impact on the
Fund's investment objective – the Fund would continue to seek
to track its benchmark. However, with respect to the impact of a
suspension on the price of Fund shares in the secondary market,
investors may have to pay a higher price to buy shares and receive
a lower price when they sell their shares. This "spread" may
continue to widen the longer the suspension
lasts.
For
additional risks, see “What Are the Risk Factors Involved
with an Investment in the Fund?”
Determination of NAV
The
Fund’s NAV is determined as of the earlier of the close of
the New York Stock Exchange or 4:00 p.m. (EST) on each day that the
NYSE Arca is open for trading.
Defined Terms
For a
glossary of defined terms, see Appendix A.
Breakeven Analysis
The
breakeven analysis set forth below is a hypothetical illustration
of the approximate dollar returns and percentage returns for the
redemption value of a single share to equal the amount invested
twelve months after the investment is made. For purposes of this
breakeven analysis, an initial selling price of $29.96 per share,
which equals the NAV per share at the close of trading February 28,
2022, is assumed. The breakeven analysis is an approximation only
and assumes a constant month-end Net Asset Value. In order for a
hypothetical investment in shares to breakeven over the next 12
months, assuming a selling price of $29.96 per share, the
investment would have to generate a 0.13% or $0.04
return.
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Assumed initial
selling price per share (1)
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$29.96
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Management Fee
(2)
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N/A
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Estimated Brokerage
Commissions (3)
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$0.01
|
Other Fund Fees and
Expenses (4)
(5)
|
$0.03
|
Interest and Other
Income (6)
|
$N/A
|
Amount of trading
income (loss) required for the redemption value at the end of one
year to equal the initial selling price of the share
|
$0.04
|
Percentage of
initial selling price per share (7)
|
0.13%
|
(1) In order to show
how a hypothetical investment in shares would break even over the
next 12 months, this breakeven analysis uses an assumed initial
selling price of $29.96 per share, which is based on the NAV per
share of TAGS at the close of trading on February 28, 2022.
Investors should note that, because TAGS’s NAV changes on a
daily basis, the breakeven amount on any given day could be higher
or lower than the amount reflected here.
(2) The Sponsor does not receive a management fee from the
Fund. The Sponsor receives a management fee from each Underlying
Fund at the annual rate of 1.00% of such Underlying Fund’s
average daily net assets, payable monthly. The Sponsor can elect to
waive the payment of this fee for any Underlying Fund in any amount
at its sole discretion, at any time and from time to time, in order
to reduce the Fund’s expenses or for any other
purpose.
(3) Reflects estimated brokerage commissions and fees for
Fund transactions, which are estimated to be less than $0.005 per
share but are rounded to $0.01 for purposes of this breakeven
analysis.
(4) In connection with orders to create or redeem baskets,
Authorized Purchasers will pay a transaction fee in the amount of
$250 per order. Because these transaction fees are de minimis in
amount, are paid to the Fund’s custodian, U.S. Bank, N.A.
(the “Custodian”) and charged on a
transaction-by-transaction basis (and not on a Basket by Basket
basis), and are borne by the Authorized Participants, they have not
been included in the Breakeven Table. See “Creation and Redemption Transaction
Fees,” page 40.
(5) Other Fund Fees and Expenses are an estimate based on an
allocation to the Fund of the total estimated expenses anticipated
to be incurred by the Trust on behalf of the Fund, net of any
expenses or management fee waived by the Sponsor, and include:
Professional fees (primarily legal, auditing and tax-preparation
related costs); Custodian and Administrator fees and expenses,
Distribution and Marketing fees (primarily fees paid to the
Distributor, costs related to regulatory compliance activities and
other costs related to the trading activities of the Fund);
Business Permits and Licenses; General and Administrative expenses
(primarily insurance and printing), and Other Expenses. The
expenses presented are based on estimated expenses for the current
fiscal year, and do not represent the maximum amounts payable under
the contracts with third-party service providers, as discussed
below in the section of this disclosure document entitled
“Contractual Fees and Compensation Arrangements with the
Sponsor and Third-Party Service Providers.” The cost of these
fixed or estimated fees has been calculated assuming that the Fund
has $14.6 million in assets, which was the approximate amount of
assets as of February 28, 2022. The Sponsor can elect to pay (or
waive reimbursement for) certain fees or expenses that would
generally be paid by the Fund, although it has no contractual
obligation to do so. Any election to pay or waive reimbursement for
fees and expenses that would generally be paid by the Fund can be
changed at the discretion of the Sponsor.
(6) Because the Fund will not make significant investments
in interest-bearing securities or accounts, the Fund does not
expect to earn significant amounts of interest (less than $0.005
per share for purposes of this breakeven analysis).
(7) This represents the estimated approximate percentage for
the redemption value of a hypothetical initial investment in a
single share to equal the amount invested twelve months after the
investment was made. The estimated approximate percentage of
selling price before waived expenses is 1.67% or $0.50 per share,
based on the Fund assets, net asset value per share and shares
outstanding as of February 28, 2022. TAGS is a Fund of Funds and
the expenses from the Underlying Funds flow through to the investor
in TAGS. The fees waived by the Sponsor is an estimate, can be
applied to any expense related to the Fund, and may be terminated
at any time at the discretion of the Sponsor.
The Offering
Offering
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The
Fund’s Shares are listed on the NYSE Arca and investors may
purchase and sell Shares through their broker-dealer. The Fund only
offers Creation Baskets consisting of 12,500 Shares through the
Distributor to Authorized Purchasers. Authorized Purchasers may
purchase Creation Baskets consisting of 12,500 Shares at the
Fund’s NAV.
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Use of
Proceeds
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The
Sponsor applies substantially all of the Fund’s assets toward
investing in shares of the Underlying Funds, and each Underlying
Fund in turn invests substantially all of its assets in the
respective Benchmark Component Futures Contracts and cash
equivalents. The Sponsor deposits a portion of each Underlying
Fund’s net assets with its futures commission merchant
(“FCM”) or other financial institutions to be used to
meet its current or potential margin or collateral requirements in
connection with its investment in Benchmark Component Futures
Contracts. The Underlying Funds use only cash and cash equivalents
to satisfy these requirements. The Sponsor expects that all
entities that will hold or trade the Underlying Fund’s assets
will be based in the United States and will be subject to United
States regulations. The Sponsor believes that approximately 4-6% of
each Underlying Fund’s assets will normally be committed as
margin for Benchmark Component Futures Contracts. However, from
time to time, the percentage of assets committed as
margin/collateral may be substantially more, or less, than such
range. The remaining portion of the Underlying Funds’ assets,
and any residual portion of the Fund’s assets not invested in
Shares of the Underlying Funds, are held in cash or cash
equivalents. All interest or other income earned on these
investments is retained for the Fund’s or Underlying
Funds’ benefit.
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NYSE
Arca Symbol
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“TAGS”
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Creation
and Redemption
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Authorized
Purchasers pay a $250 fee per order to create Creation Baskets, and
a $250 fee per order for Redemption Baskets, which is paid to the
Custodian. Authorized Purchasers are not required to sell any
specific number or dollar amount of Shares. The per share price of
Shares offered in Creation Baskets is the total NAV of the Fund
calculated as of the close of the NYSE Arca on that day divided by
the number of issued and outstanding Shares.
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Inter-Series
Limitation on Liability
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While
the Fund is currently one of six separate series of the Trust,
additional series may be created in the future. The Trust has been
formed and will be operated with the goal that the Fund and any
other series of the Trust will be liable only for obligations of
such series, and a series will not be responsible for or affected
by any liabilities or losses of or claims against any other series.
If any creditor or shareholder in any particular series (such as
the Fund) were to successfully assert against a series a claim with
respect to its indebtedness or Shares, the creditor or shareholder
could recover only from that particular series and its assets.
Accordingly, the debts and other obligations incurred, contracted
for or otherwise existing solely with respect to a particular
series will be enforceable only against the assets of that series,
and not against any other series or the Trust generally or any of
their respective assets. The assets of the Fund and any other
series will include only those funds and other assets that are paid
to, held by or distributed to the series on account of and for the
benefit of that series, including, without limitation, amounts
delivered to the Trust for the purchase of Shares in a
series.
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Registration
Clearance and Settlement
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Individual
certificates are not issued for the Shares. Instead, Shares will be
represented by one or more global certificates, which will be
deposited by the transfer agent with the Depository Trust Company
(“DTC”) and registered in the name of Cede & Co.,
as nominee for DTC. The global certificates evidence all of the
Shares outstanding at any time. Beneficial interests in Shares are
held through DTC’s book-entry system, which means that
Shareholders are limited to: (1) participants in DTC such as banks,
brokers, dealers and trust companies (“DTC
Participants”), (2) those who maintain, either directly or
indirectly, a custodial relationship with a DTC Participant
(“Indirect Participants”), and (3) those who hold
interests in the Shares through DTC Participants or Indirect
Participants, in each case who satisfy the requirements for
transfers of Shares. DTC Participants acting on behalf of investors
holding Shares through such DTC Participants’ accounts in DTC
will follow the delivery practice applicable to securities eligible
for DTC’s Same-Day Funds Settlement System. Shares will be
credited to DTC Participants’ securities accounts following
confirmation of receipt of payment.
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Net
Asset Value
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The NAV
is calculated by taking the current market value of the
Fund’s total assets and subtracting any liabilities and
dividing the balance by the number of Shares. Under the
Fund’s current operational procedures, U.S. Bancorp Fund
Services, LLC, doing business as U.S. Bank Global Fund Services
(“Global Fund Services”), the Fund’s
“Administrator” calculates the NAV of the Fund as of
the earlier of 4:00 p.m. (EST) or the close of the New York Stock
Exchange each day. ICE Data Indices, LLC calculates an approximate
NAV every 15 seconds throughout each day that the Fund’s
Shares are traded on the NYSE Arca, for as long as the main pricing
mechanism of either the CBOT or ICE Futures is open.
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Fund
and Underlying Fund Expenses
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While
the Fund does not pay the Sponsor a management fee, it indirectly
pays its proportionate share of each Underlying Fund’s
management fee, which is paid at an annual rate of 1.00% of each
Underlying Fund’s average daily net assets.
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The
Fund is also responsible for other ongoing fees, costs and expenses
of its operations, including (i) brokerage and other fees and
commissions incurred in connection with its trading activities;
(ii) expenses incurred in connection with registering additional
Shares of the Fund or offering Shares of the Fund; (iii) the
routine expenses associated with the preparation and, if required,
the printing and mailing of monthly, quarterly, annual and other
reports required by applicable U.S. federal and state regulatory
authorities, Trust meetings and preparing, printing and mailing
proxy statements to Shareholders; (iv) the payment of any
distributions related to redemption of Shares; (v) payment for
routine services of the Trustee, legal counsel and independent
accountants; (vi) payment for routine accounting, bookkeeping,
custody and transfer agency services, whether performed by an
outside service provider or by Affiliates of the Sponsor; (vii)
postage and insurance; (viii) costs and expenses associated with
investor relations and services; (ix) costs of preparation of all
federal, state, local and foreign tax returns and any taxes payable
on the income, assets or operations of the Fund; (x) payment for
marketing services; (xi) extraordinary expenses (including, but not
limited to, legal claims and liabilities and litigation costs and
any indemnification related thereto).
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Each
Underlying Fund is also responsible for the ongoing fees, costs and
expenses of its operations as described in the foregoing
paragraph.
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The
estimated amount of fees and expenses that are anticipated to be
incurred in a single Share during the first twelve (12) months of
ownership is $0.04 or 0.13% of the selling price. The total
estimated fees and expenses are expressed as a percentage of the
net asset value as of February 28, 2022. The Sponsor may, in its
discretion, pay or reimburse the Fund or an Underlying Fund for, or
waive a portion of its management fee for an Underlying Fund to
offset, expenses that would otherwise be borne by the Fund or
Underlying Fund.
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General
expenses of the Trust will be allocated among the existing Teucrium
Funds and any future series of the Trust as determined by the
Sponsor in its discretion. The Trust may be required to indemnify
the Sponsor, and the Trust and/or the Sponsor may be required to
indemnify the Trustee, Distributor or Administrator, under certain
circumstances.
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Termination
Events
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The
Trust, the Fund and each Underlying Fund shall continue in
existence from the date of their formation in perpetuity, unless
the Trust, the Fund or an Underlying Fund, as the case may be, is
sooner terminated upon the occurrence of certain events specified
in the Trust Agreement, including the following: (1) the filing of
a certificate of dissolution or cancellation of the Sponsor or
revocation of the Sponsor’s charter or the withdrawal of the
Sponsor, unless shareholders holding a majority of the outstanding
shares of the Trust, voting together as a single class, elect
within ninety (90) days after such event to continue the business
of the Trust and appoint a successor Sponsor; (2) the occurrence of
any event which would make the existence of the Trust, the Fund or
an Underlying Fund unlawful; (3) the suspension, revocation, or
termination of the Sponsor’s registration as a CPO with the
CFTC or membership with the NFA; (4) the insolvency or bankruptcy
of the Trust, the Fund or an Underlying Fund; (5) a vote by the
Shareholders holding at least seventy-five percent (75%) of the
outstanding shares of the Trust, voting together as a single class,
to dissolve the Trust, subject to certain conditions; (6) the
determination by the Sponsor to dissolve the Trust, the Fund or an
Underlying Fund, subject to certain conditions; (7) the Trust is
required to be registered as an investment company under the
Investment Company Act of 1940; and (8) DTC is unable or unwilling
to continue to perform its functions and a comparable replacement
is unavailable. Upon termination of the Fund or an Underlying Fund,
the affairs of the Fund or Underlying Fund shall be wound up and
all of its debts and liabilities discharged or otherwise provided
for in the order of priority as provided by law. The fair market
value of the remaining assets of the Fund or Underlying Fund shall
then be determined by the Sponsor. Thereupon, the assets of the
Fund or Underlying Fund shall be distributed pro rata to the
Shareholders in accordance with their Shares.
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Authorized
Purchasers
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A list
of the Fund’s Authorized Purchasers as of the date of this
Prospectus can be found under “Plan of Distribution –
Distributor and Authorized Purchasers,” on page 36.
Authorized Purchasers must be (1) registered broker-dealers or
other securities market participants, such as banks and other
financial institutions, which are not required to register as
broker-dealers to engage in securities transactions, and (2) DTC
Participants. To become an Authorized Purchaser, a person must
enter into an Authorized Purchaser Agreement with the
Sponsor.
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WHAT ARE THE RISK FACTORS INVOLVED WITH AN INVESTMENT IN THE
FUND?
You should consider carefully the risks described below before
making an investment decision. You should also refer to the other
information included in this prospectus, and the Fund’s and
the Trust’s financial statements and the related notes
incorporated by reference herein. See “Incorporation by
Reference of Certain Information.”
Risks Associated with Investing Directly or Indirectly in
Agricultural Commodities
Investing in commodity interests subjects the Fund to the risks of
the agricultural commodities markets, and this could result in
substantial fluctuations in the price of the Fund’s
Shares.
The
Fund is subject to the risks and hazards of the agricultural
commodities markets because it invests indirectly in commodity
interests. The risks and hazards that are inherent in the
agricultural commodities markets may cause the price of those
commodities and the Fund’s Shares to fluctuate widely and you
could incur a partial or total loss of your investment in the
Fund.
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●
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The
price and availability of agricultural commodities is influenced by
economic and industry conditions, including but not limited to
supply and demand factors such as: crop disease; weed control;
water availability; various planting, growing, or harvesting
problems; severe weather conditions such as drought, floods, heavy
rains, frost, or natural disasters that are difficult to anticipate
and that cannot be controlled. The U.S. prices of certain
agricultural commodities such as soybeans and sugar are subject to
risks relating to the growth of such commodities in foreign
countries, such as: uncontrolled fires (including arson);
challenges in doing business with foreign companies; legal and
regulatory restrictions; transportation costs; interruptions in
energy supply; currency exchange rate fluctuations; and political
and economic instability. Additionally, demand for agricultural
commodities is affected by changes in consumer tastes, national,
regional and local economic conditions, and demographic
trends.
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●
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Agricultural
commodity production is subject to United States and foreign
policies and regulations that materially affect operations.
Governmental policies affecting the agricultural industry, such as
taxes, tariffs, duties, subsidies, incentives, acreage control, and
import and export restrictions on agricultural commodities and
commodity products, can influence the planting of certain crops,
the location and size of crop production, the volume and types of
imports and exports, and industry profitability. Additionally,
commodity production is affected by laws and regulations relating
to, but not limited to, the sourcing, transporting, storing and
processing of agricultural raw materials as well as the
transporting, storing and distributing of related agricultural
products. Agricultural commodity producers also may need to comply
with various environmental laws and regulations, such as those
regulating the use of certain pesticides, and local laws that
regulate the production of genetically modified crops. In addition,
international trade disputes can adversely affect agricultural
commodity trade flows by limiting or disrupting trade between
countries or regions.
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●
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Seasonal
fluctuations in the price of agricultural commodities may cause
risk to an investor because of the possibility that Share prices
will be depressed because of the relevant harvest cycles. In the
futures market, fluctuations are typically reflected in contracts
expiring in the harvest season (i.e., in the case of corn and soybeans,
contracts expiring during the fall are typically priced lower than
contracts expiring in the winter and spring, while in the case of
wheat and sugar, contracts expiring during the spring and early
summer are typically priced lowest). Thus, seasonal fluctuations
could result in an investor incurring losses upon the sale of Fund
Shares, particularly if the investor needs to sell Shares when an
Underlying Fund’s Benchmark Component Futures Contracts are,
in whole or part, Futures Contracts expiring in the harvest season
for the Specified Commodity.
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●
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Risks Specific to Corn. Demand for corn in the United States
to produce ethanol has also been a significant factor affecting the
price of corn. In turn, demand for ethanol has tended to increase
when the price of gasoline has increased and has been significantly
affected by United States governmental policies designed to
encourage the production of ethanol. Additionally, demand for corn
is affected by changes in consumer tastes, national, regional and
local economic conditions, and demographic trends. Finally, because
corn is often used as an ingredient in livestock feed, demand for
corn is subject to risks associated with the outbreak of livestock
disease.
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●
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Risks Specific to Wheat. Demand for food products made from
wheat flour is affected by changes in consumer tastes, national,
regional and local economic conditions, and demographic trends.
More specifically, demand for such food products in the United
States is relatively unaffected by changes in wheat prices or
disposable income but is closely tied to tastes and preferences.
For example, in recent years the increase in the popularity of
low-carbohydrate diets caused the consumption of wheat flour to
decrease rapidly before rebounding somewhat after 2005. Export
demand for wheat fluctuates yearly, based largely on crop yields in
the importing countries.
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●
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Risks Specific to Soybeans. The increased production of
soybean crops in South America and the rising demand for soybeans
in emerging nations such as China and India have increased
competition in the soybean market. Like the conversion of corn into
ethanol, soybeans can be converted into biofuels such as biodiesel.
Accordingly, the soybean market has become increasingly affected by
demand for biofuels and related legislation. The supply of soybeans
could be reduced by the spread of soybean rust, a wind-borne fungal
disease. Although soybean rust can be killed with chemicals,
chemical treatment increases production costs for farmers. Finally,
because processing soybean oil can create trans-fats, the demand
for soybean oil may decrease due to heightened governmental
regulation of trans-fats or trans-fatty acids. The U.S. Food and
Drug Administration currently requires food manufacturers to
disclose levels of trans-fats contained in their products, and
various local governments have enacted or are considering
restrictions on the use of trans-fats in restaurants. Several food
processors have either switched or indicated an intention to switch
to oil products with lower levels of trans-fats or trans-fatty
acids.
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●
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Risks Specific to Sugar. The spread of consumerism and the
rising affluence of emerging nations such as China and India have
created demand for sugar. An influx of people in developing
countries moving from rural to urban areas may create more
disposable income to be spent on sugar products and might also
reduce sugar production in rural areas on account of worker
shortages, all of which could result in upward pressure on sugar
prices. On the other hand, public health concerns regarding
obesity, heart disease and diabetes, particularly in developed
countries, may reduce demand for sugar. In light of the time it
takes to grow sugarcane and sugar beets and the cost of new
facilities for processing these crops, it may not be possible to
increase supply quickly or in a cost-effective manner in response
to an increase in demand.
|
An investment in the Fund is subject to correlation risk. Your
return on an investment in the Fund may differ from the return of
the Underlying Funds’ Benchmarks, changes in the Fund’s
NAV and the spot price of corn, soybean, wheat and
sugar.
There
is a risk that changes in the price of Shares on the NYSE Arca will
not correlate with changes in the Fund’s NAV; that changes in
the NAV will not correlate with changes in the price of the
Underlying Funds’ Benchmarks; and/or changes in the price of
the Underlying Funds’ Benchmark will not correlate with
changes in the spot price of the Specified Commodity. Depending on
certain factors associated with each of these correlations which
are discussed in more detail below, you could incur a partial or
total loss of your investment in the Fund.
The Underlying Funds’ Benchmarks are not designed to
correlate exactly with the spot price of the corresponding
Specified Commodity, and this could cause the changes in the price
of an Underlying Fund’s shares to substantially vary from the
changes in the spot price of the Specified Commodity. Therefore,
you may not be able to effectively use the Fund to hedge against
commodity related losses or to indirectly invest in agricultural
commodities.
The
Benchmark Component Futures Contracts that the Underlying Funds
invest in reflect the price of a Specified Commodity for future
delivery, not the current spot price of the Specified Commodity, so
at best the correlation between changes in such Futures Contracts
and the spot price of the Specific Commodity will be only
approximate. Weak correlation between an Underlying Fund’s
Benchmark and the spot price of the corresponding Specified
Commodity may result from the typical seasonal fluctuations in
commodity prices discussed above. Imperfect correlation may also
result from speculation in Benchmark Component Futures Contracts,
technical factors in the trading of Benchmark Component Futures
Contracts, and expected inflation in the economy as a whole. If
there is a weak correlation between an Underlying Fund’s
Benchmark and the spot price of its corresponding Specified
Commodity, then the price of the Shares may not accurately track
the spot price of the Specified Commodities and you may not be able
to effectively use the Fund as a way to hedge the risk of losses in
your commodity related transactions or as a way to indirectly
invest in agricultural commodities.
The Fund’s performance may not correlate well with the
combined performance of the Underlying Funds, and the performance
of the Underlying Funds may not correlate well with changes in
their Benchmarks. If this were to occur, you may not be able to
effectively use the Fund as a way to hedge against commodity
related losses or as a way to indirectly invest in agricultural
commodities.
The
Sponsor endeavors to invest the Fund’s assets as fully as
possible in the Underlying Funds so that the performance of the
Fund closely correlates with the combined performance of the
Underlying Funds. The Sponsor also endeavors to invest the
Underlying Funds’ assets as fully as possible in commodity
interests so that the performance of each Underlying Funds closely
correlates with the performance of its respective Benchmarks.
However, the Fund’s performance may not correlate with the
combined performance of the Underlying Funds and the performance of
each Underlying Fund may not correlate with the changes in their
Benchmarks for various reasons, including those set forth
below:
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The
Fund may not be able to maintain its targeted 25% allocation to
each Underlying Fund at all times. Furthermore, the Fund acquires
shares of the Underlying Funds in the secondary market at their
market prices, not at their NAV, so any changes in the value of the
Fund’s holdings in the Underlying Funds may not match changes
in the Underlying Funds’ NAVs.
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The
Fund and Underlying Funds incur certain expenses in connection with
their operations, and the Underlying Funds hold most of their
assets (other than commodity interests) in cash and cash
equivalents for margin and other liquidity purposes and to meet
redemptions that may be necessary on an ongoing basis. These
expenses and income cause imperfect correlation between the
Fund’s performance and the combined performance of the
Underlying Funds and the performance of the Underlying Funds and
their respective Benchmarks. Your cost of investing in the Fund
will be higher than the cost of investing directly in the
Underlying Funds’ shares.
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The
Sponsor may not be able to invest an Underlying Fund’s assets
in Benchmark Component Futures Contracts having an aggregate
notional amount exactly equal to the Underlying Fund’s NAV.
As a standardized contract, a single Futures Contract is for a
specified amount of a Specified Commodity, and the Underlying
Fund’s NAV and the proceeds from the sale of a creation
basket of an Underlying Fund is unlikely to be an exact multiple of
that amount. In such case, the Underlying Fund could not invest the
entire proceeds from the purchase of the creation basket in such
Futures Contracts. (For example, assuming the Underlying Fund
receives $1,000,000 for the sale of Creation Baskets and that the
value (i.e., the notional
amount) of a Futures Contract relating to the Underlying
Fund’s Specified Commodity is $35,000, the Underlying Fund
could only enter into 28 Futures Contracts with an aggregate value
of $980,000). While an Underlying Fund may be better able to
achieve the exact amount of exposure to the market for its
Specified Commodity through the use of over the counter other
commodity interests, there is no assurance that the Sponsor will be
able to continually adjust the Underlying Fund’s exposure to
such other commodity interests to maintain such exact
exposure.
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As Fund
assets increase, there may be more or less correlation between an
Underlying Fund’s NAV and its Benchmark as the Underlying
Fund’s assets increase. On the one hand, as an Underlying
Fund grows it should be able to invest in Benchmark Component
Futures Contracts with notional amounts that are closer on a
percentage basis to the Underlying Fund’s NAV. For example,
if the Underlying Fund’s NAV is equal to 4.9 times the value
of a single Futures Contract, it can purchase only four futures
contracts, which would cause only 81.6% of the Underlying
Fund’s assets to be exposed to the market for the Specified
Commodity. On the other hand, if the Underlying Fund’s NAV is
equal to 100.9 times the value of a single Futures Contract, it can
purchase 100 such contracts, resulting in 99.1% exposure. However,
at certain asset levels, an Underlying Fund may be limited in its
ability to purchase Futures Contracts due to position limits
imposed by the CFTC or position limits or accountability levels
imposed by the relevant exchanges. In such instances, the
Underlying Fund would likely invest to a greater extent in
commodity interests that are not subject to these position limits
or accountability levels. To the extent that an Underlying Fund
invests in other commodity interests, the correlation between the
Underlying Fund’s NAV and its Benchmark may be lower. In
certain circumstances, position limits or accountability levels
could limit the number of Creation Baskets that will be
sold.
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The
Funds' FCM has not placed maximum position constraints on the
number of futures contracts the Funds may purchase. However, the
recent volatility in the agricultural commodities futures market
may lead the FCM to impose risk mitigation procedures that could
limit the Funds' investment in agricultural commodities futures
contracts beyond the accountability and position limits imposed by
futures contract exchanges. As of the date of this prospectus, the
Underlying Funds are in the process of entering into an agreement
with a new FCM. Entering into such an agreement could be a
protracted process. If the current FCM were to impose position
limits before retaining another FCM, or that FCM also imposes
limits, the Fund's and the Underlying Funds' ability to meet their
investment objectives could be negatively
impacted.
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If the
Fund’s performance does not correlate with the combined
performance of the Underlying Funds or the performance of the
Underlying Funds does not correlate with the performance of their
respective Benchmarks, then investing in the Fund may not be an
effective way to hedge against commodity related losses or
indirectly invest in agricultural commodities.
Changes in the price of the Fund’s Shares on the NYSE Arca
may not correlate perfectly with changes in the NAV of the
Fund’s or the Underlying Funds’ Shares. If this occurs,
you may not be able to effectively use the Fund to hedge the risk
of losses in your agricultural related transactions or to
indirectly invest in agricultural commodities.
While
it is expected that the trading prices of the Shares will fluctuate
in accordance with the changes in the Fund’s NAV, the prices
of Shares may also be influenced by other factors, including the
supply of and demand for the Shares, whether for the short term or
the longer term. There is no guarantee that the Shares will not
trade at appreciable discounts from, and/or premiums to, the
Fund’s NAV. Even if the market price of an Underlying Fund
closely tracks changes in its NAV, there is no guarantee that the
market price of the Fund will similarly closely track changes in
the NAVs of the Underlying Funds. This could cause the changes in
the price of the Shares to substantially vary from the changes in
the spot prices of the Specified Commodities, even if an Underlying
Fund’s NAV were closely tracking movements in the spot price
of the Specified Commodity. If this occurs, you may not be able to
effectively use the Fund to hedge the risk of losses in your
commodity-related transactions or to indirectly invest in
agricultural commodities.
The Fund or an Underlying Fund may experience a loss if it is
required to sell cash equivalents at a price lower than the price
at which they were acquired.
If the
Fund or an Underlying Fund is required to sell its cash equivalents
at a price lower than the price at which they were acquired, the
Fund will experience a loss. This loss may adversely impact the
price of the Shares and may decrease the correlation between the
price of the Shares and the Underlying Funds’ Benchmarks and
the spot prices of the Specified Commodities. The value of cash
equivalents held by the Fund or the Underlying Funds generally move
inversely with movements in interest rates. The prices of longer
maturity securities are subject to greater market fluctuations as a
result of changes in interest rates. While the short-term nature of
the Fund’s and Underlying Funds’ investments in cash
equivalents should minimize the interest rate risk to which the
Fund is subject, it is possible that the cash equivalents held by
the Fund and the Underlying Funds will decline in
value.
Certain of the Fund’s and Underlying Funds’ investments
could be illiquid, which could cause large losses to investors at
any time or from time to time.
The
Fund and Underlying Funds may not always be able to liquidate their
positions in the investments at the desired price for reasons
including, among others, insufficient trading volume, limits
imposed by exchanges or other regulatory organizations, or lack of
liquidity. As to the Fund’s investments in the Underlying
Funds, the Underlying Funds are relatively new and may have trading
volumes that are insufficient for the needs of the Fund. As to
Futures Contracts, it may be difficult to execute a trade at a
specific price when there is a relatively small volume of buy and
sell orders in a market. Limits imposed by futures exchanges or
other regulatory organizations, such as position limits,
accountability levels and price fluctuation limits, may contribute
to a lack of liquidity with respect to some exchange-traded
commodity interests. In addition, over the counter commodity
interests may be illiquid because they are contracts between two
parties and generally may not be transferred by one party to a
third party without the counterparty’s consent. Conversely, a
counterparty may give its consent, but an Underlying Fund still may
not be able to transfer an over the counter commodity interest to a
third party due to concerns regarding the counterparty’s
credit risk.
A
market disruption, such as a foreign government taking political
actions that disrupt the market in its currency, its commodity
production or exports, or in another major export, can also make it
difficult to liquidate a position. Unexpected market illiquidity
may cause major losses to investors at any time or from time to
time. In addition, the Fund and the Underlying Funds do not intend
at this time to establish a credit facility, which would provide an
additional source of liquidity, but instead will rely only on the
short-term Treasury Securities, cash and cash equivalents that they
hold to meet their liquidity needs. The anticipated value of the
positions in commodity interests that the Sponsor will acquire or
enter into for the Underlying Funds increases the risk of
illiquidity. Because commodity interests may be illiquid, the
Underlying Funds’ holdings may be more difficult to liquidate
at favorable prices in periods of illiquid markets and losses may
be incurred during the period in which positions are being
liquidated.
If the nature of the participants in the futures market shifts such
that commodity purchasers are the predominant hedgers in the
market, the Underlying Funds might have to reinvest at higher
futures prices or choose other commodity interests.
The
changing nature of the participants in the market for an
agricultural commodity will influence whether futures prices are
above or below the expected future spot price. Commodity producers
will typically seek to hedge against falling prices by selling
Futures Contracts. Therefore, if producers become the predominant
hedgers in the futures market for a particular commodity, prices of
Futures Contracts for that commodity will typically be below
expected future spot prices. Conversely, if the predominant hedgers
in the futures market are the purchasers of the commodity who
purchase Futures Contracts to hedge against a rise in prices,
prices of Futures Contracts for that commodity will likely be
higher than expected future spot prices. This can have significant
implications for the Underlying Funds when it is time to sell a
Futures Contract that is no longer a Benchmark Component Futures
Contract and purchase a new Futures Contract or to sell a Futures
Contract to meet redemption requests. As a result, an Underlying
Fund may not be able to track its Benchmark, and this could have a
corresponding effect on the tracking of the Fund.
Storage costs could impact the value of the Benchmark Component
Futures Contracts.
Storage
costs associated with purchasing agricultural commodities could
result in costs and other liabilities that could impact the value
of Futures Contracts or certain other commodity interests. Storage
costs include the time value of money invested in a physical
commodity plus the actual costs of storing the commodity less any
benefits from ownership of the commodity that are not obtained by
the holder of a futures contract. In general, Futures Contracts
have a one-month delay for contract delivery and the pricing of
back month contracts (the back month is any future delivery month
other than the spot month) include storage costs. To the extent
that these storage costs change while an Underlying Fund holds
commodity interests, the value of the Benchmark Component Futures
Contracts, and therefore the Underlying Fund’s NAV, may
change as well.
The price relationship between the Underlying Funds’
Benchmark Component Futures Contracts at any point in time and the
Futures Contracts that will become the Underlying Funds’
Benchmark Component Futures Contracts on the next roll date will
vary and may impact the Fund’s total return and the degree to
which the Fund’s total return tracks that of commodity price
indices.
The
design of each Underlying Fund’s Benchmark is such that the
Benchmark Component Futures Contracts will change several times a
year, and the Underlying Fund’s investments must be rolled
periodically to reflect the changing composition of its Benchmark.
For example, when a second to expire Futures Contract becomes a
first to expire contract, such contract will no longer be a
Benchmark Component Futures Contract and the Underlying
Fund’s position in it will no longer be consistent with
tracking its Benchmark. In the event of a futures market where near
to expire contracts trade at a higher price than longer to expire
contracts, a situation referred to as “backwardation,”
then absent the impact of the overall movement in prices the value
of the Benchmark Component Futures Contracts would tend to rise as
they approach expiration. As a result, an Underlying Fund (and,
therefore, the Fund) may benefit because it would be selling more
expensive contracts and buying less expensive ones on an ongoing
basis. Conversely, in the event of a futures market where near to
expire contracts trade at a lower price than longer to expire
contracts, a situation referred to as “contango,” then
absent the impact of the overall movement in prices the value of
the Underlying Funds’ Benchmark Component Futures Contracts
would tend to decline as they approach expiration. As a result, the
Underlying Fund’s (and the Fund’s) total return may be
lower than might otherwise be the case because it would be selling
less expensive contracts and buying more expensive ones. The impact
of backwardation and contango may lead the total return of an
Underlying Fund to vary significantly from the total return of
other price references, such as the spot price of its Specified
Commodity. In the event of a prolonged period of contango, and
absent the impact of rising or falling prices, this could have a
significant negative impact on the Underlying Fund’s (and the
Fund’s) NAV and total return, and you could incur a partial
or total loss of your investment in the Fund.
Regulation of commodity interests and commodity markets is
extensive and constantly changing; future regulatory developments
are impossible to predict but may significantly and adversely
affect the Fund and the Underlying Funds.
The
regulation of futures markets, futures contracts and futures
exchanges has historically been comprehensive. The CFTC and the
exchanges are authorized to take extraordinary actions in the event
of a market emergency including, for example, the retroactive
implementation of speculative position limits, increased margin
requirements, the establishment of daily price limits and the
suspension of trading on an exchange or trading
facility.
The
regulation of commodity interest transactions in the United States
is a rapidly changing area of law and is subject to ongoing
modification by governmental and judicial action. Congress enacted
the Dodd-Frank Wall Street Reform and Consumer Protection Act (the
“Dodd-Frank Act”) in 2010. As the Dodd-Frank Act
continues to be implemented by the CFTC and the SEC, there is a
possibility of future regulatory changes within the United States
altering, perhaps to a material extent, the nature of an investment
in the Fund, or the ability for the Fund to continue to implement
its investment strategy. In addition, various national governments
outside of the United States have expressed concern regarding the
disruptive effects of speculative trading in the commodities
markets and the need to regulate the derivatives markets in
general. The effect of any future regulatory change on the Fund is
impossible to predict but could be substantial and
adverse.
If you are investing in the Fund for purposes of hedging, you might
be subject to several risks unique to the Fund, and the Fund may
not be appropriate for hedging purposes. The Fund was not designed
for hedging purposes; those using the Fund as a hedge of any kind
do so exclusively at their own risk.
An investment in the Fund may provide you little or no
diversification benefits. Thus, in a declining market, the Fund may
have no gains to offset your losses from other investments, and you
may suffer losses on your investment in the Fund at the same time
you incur losses with respect to other asset classes.
It
cannot be predicted to what extent the performance of the Benchmark
Component Futures Contracts will or will not correlate to the
performance of other broader asset classes such as stocks and
bonds. If the performance of the Fund or the Underlying Funds were
to move more directly with the financial markets, you will obtain
little or no diversification benefits from an investment in the
Shares. In such a case, the Fund may have no gains to offset your
losses from other investments, and you may suffer losses on your
investment in the Fund at the same time you incur losses with
respect to other investments.
Variables such as
drought, floods, weather, embargoes, market disruptions, tariffs
and other political events may have a larger impact on commodity
and commodity interest prices than on traditional securities and
broader financial markets. These additional variables may create
additional investment risks that subject the Underlying
Funds’ and, therefore, the Fund’s investments to
greater volatility than investments in traditional
securities.
Lower
correlation should not be confused with negative correlation, where
the performance of two asset classes would be opposite of each
other. There is no historic evidence that the spot price of
agricultural commodities and prices of other financial assets, such
as stocks and bonds, are negatively correlated. In the absence of
negative correlation, the Underlying Funds, and therefore the Fund,
cannot be expected to be automatically profitable during
unfavorable periods for the stock market, or vice
versa.
The Fund’s Operating Risks
The Fund and Underlying Funds may change its investment objective,
Benchmark or investment strategies at any time without shareholder
approval or advance notice.
Consistent with its
authority under the Trust Agreement and Delaware law, the Fund, in
its sole discretion and without shareholder approval or advance
notice, may change the Fund’s investment objective, Benchmark
or investment strategies, subject to applicable regulatory
requirements, including, but not limited to, any requirement to
amend applicable listing rules of the NYSE. The reasons for and
circumstances that may trigger any such changes may vary widely and
cannot be predicted. By way of example, the Fund may change the
weighting or underlying components of the Benchmark in furtherance
of the Fund’s investment objective of tracking the combined
daily performance of the Underlying Funds. This could be done for a
variety of market conditions, including a potential or actual
imposition of position limits by the CFTC or futures exchanges
rules, or the imposition of risk mitigation measures by a futures
commission merchant restricts the ability of an Underlying Fund to
invest in the current Benchmark Component Futures Contracts. The
Fund and the applicable Underlying Fund would file a current report
on Form 8-K and a prospectus supplement to describe any such change
and the effective date of the change. Shareholders may modify their
holdings of the Fund’s shares in response to any change by
purchasing or selling Fund shares through their broker-dealer.
Shareholders may experience losses on their investments in the Fund
as a result of such changes.
The Fund and the Underlying Funds are not registered investment
companies, so you do not have the protections of the Investment
Company Act of 1940.
Neither
the Fund nor the Underlying Funds are investment companies subject
to the Investment Company Act of 1940. Accordingly, you do not have
the protections afforded by that statute which, for example,
requires investment companies to have a board of directors with a
majority of disinterested directors and regulates the relationship
between the investment company and its investment
manager.
The Sponsor is leanly staffed and relies heavily on key personnel
to manage trading activities.
In
managing and directing the day-to-day activities and affairs of the
Fund, the Sponsor relies almost entirely on a small number of
individuals, including Mr. Sal Gilbertie, Mr. Steve Kahler and Ms.
Cory Mullen-Rusin. If Mr. Gilbertie, Mr. Kahler or Ms. Mullen-Rusin
were to leave or be unable to carry out their present
responsibilities, it may have an adverse effect on the management
of the Fund. To the extent that the Sponsor establishes additional
commodity pools, even greater demands will be placed on these
individuals.
The Sponsor has limited capital and may be unable to continue to
manage the Fund if it sustains continued losses.
The
Sponsor was formed for the purpose of managing the Trust, including
the Fund, the other Teucrium Funds, and any series of the Trust
that may be formed in the future, and has been provided with
capital primarily by its principals and a small number of outside
investors. If the Sponsor operates at a loss for an extended
period, its capital will be depleted, and it may be unable to
obtain additional financing necessary to continue its operations.
If the Sponsor were unable to continue to provide services to the
Fund, the Fund would be terminated if a replacement sponsor could
not be found. Any expenses related to the operation of the Fund
would need to be paid by the Fund at the time of
termination.
Position limits, accountability levels and daily price fluctuation
limits set by the CFTC and the exchanges have the potential to
cause tracking error, which could cause the price of Underlying
Fund shares to substantially vary from their respective Benchmarks
and prevent you from being able to effectively use the Fund as a
way to hedge against commodity-related losses or as a way to
indirectly invest in agricultural commodities.
The
CFTC and U.S. designated contract markets may establish position
limits on the maximum net long or net short futures contracts in
commodity interests that any person or group of persons under
common trading control (other than as a hedge meeting certain
requirements, which an investment by the Fund is not) may hold, own
or control. Specifically, the CFTC has established position limits
for Futures Contracts related to corn, wheat and soybeans. For
example, the current position limit for investments at any one time
in Corn Futures Contracts are 1,200 spot month contracts, and
57,800 contracts total for all months. These position limits are
fixed ceilings that the Fund would not be able to exceed without
specific CFTC authorization.
In
addition, U.S. designated contract markets have established
accountability levels on futures contracts and cleared swaps.
Accountability levels are not fixed ceilings, but they are
thresholds above which the exchange may exercise greater scrutiny
and control over an investor, including limiting an investor from
holding no more futures contracts or cleared swaps than the amount
established by the accountability level. No Underlying Fund intends
to invest in any commodity interests in excess of any applicable
accountability levels.
In
addition to position limits and accountability levels, the
exchanges set daily price fluctuation limits on futures contracts.
The daily price fluctuation limit establishes the maximum amount
that the price of futures contracts may vary either up or down from
the previous day’s settlement price. Once the daily price
fluctuation limit has been reached in a particular futures
contract, no trades may be made at a price beyond that
limit.
On
December 16, 2016, as mandated by the Dodd-Frank Act, the CFTC
adopted a final rule that aggregate all positions, for purposes of
position limits; such positions include futures contracts,
futures-equivalent positions, over the counter swaps and options
(i.e., contracts that are not traded on exchanges). These
aggregation requirements became effective on February 14, 2017 and
could limit the Underlying Funds’ and the Fund’s
ability to establish positions in commodity over the counter
instruments if the assets of the Fund were to grow
substantially.
As published in the
January 14, 2021 Federal Register, the Commodity Futures Trading
Commission (CFTC) voted to approve a final rule (Final Rule)
regarding position limits for certain futures contracts and
economically equivalent swaps. The
Final Rule ends a decade of rulemaking activity in which the CFTC
proposed, amended, and re-proposed its position limit rules and
aggregation standards for speculative positions due to certain
amendments to the Commodity Exchange Act (CEA) by the Dodd-Frank
Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank
Act). In the Final Rule, the CFTC confirmed that federal
speculative position limits are necessary for 25 core referenced
futures contracts and for any futures contracts and options on
futures contracts that are linked to those contracts. The
25 core referenced futures contracts include the nine
“legacy” agricultural contracts that are currently
subject to federal position limits and 16 additional non-legacy
contracts. The Final Rule became
effective on March 15, 2021, but a number of the requirements in
the Final Rule have a general compliance date of January 1, 2022,
and later compliance date of January 1, 2023 with respect to
swaps-related requirements and the elimination of previously
granted risk management exemptions. The Final Rule became
effective on March 15, 2021, but a number of the requirements in
the Final Rule have a general compliance date of January 1, 2022,
and later compliance date of January 1, 2023 with respect to
swaps-related requirements and the elimination of previously
granted risk management exemptions.
There are technical and fundamental risks inherent in the trading
system the Sponsor intends to employ.
The
Sponsor’s trading system is quantitative in nature and it is
possible that the Sponsor may make errors. Any errors or
imperfections in the Sponsor’s trading system’s
quantitative models, or in the data on which they are based, could
adversely affect the Sponsor’s effective use of such trading
systems. It is not possible or practicable for the Sponsor’s
trading system to factor all relevant, available data into
quantitative systems and/or trading decision. There is no guarantee
that the Sponsor will use any specific data or type of data in
making trading decisions on behalf of the Fund, nor is there any
guarantee that the data actually utilized in making trading
decisions on behalf of the Fund will be the most accurate data or
free from errors. In addition, it is possible that a computer or
software program may malfunction and cause an error in
computation.
The Fund and the Sponsor may have conflicts of interest, which may
cause them to favor their own interests to your
detriment.
The
Fund and the Sponsor may have inherent conflicts to the extent the
Sponsor attempts to maintain the asset size of the Underlying Funds
in order to preserve its fee income and this may not always be
consistent with the Fund’s objective of providing daily
investment results that reflect the combined daily performance of
the Underlying Funds. The Sponsor’s officers and employees do
not devote their time exclusively to the Fund or the Underlying
Funds. These persons may be directors, officers or employees of
other entities and thus could have a conflict between their
responsibilities to the Fund and the Underlying Funds on the one
hand and to those other entities on the other.
In
addition, the Sponsor’s principals, officers or employees may
trade securities and futures and related contracts for their own
accounts. A conflict of interest may exist if their trades are in
the same markets and occur at the same time as the Fund or an
Underlying Fund trades using the clearing broker to be used by the
Fund. A potential conflict also may occur if the Sponsor’s
principals, officers or employees trade their accounts more
aggressively or take positions in their accounts that are opposite
or ahead of the positions taken by the Underlying
Funds.
The
Sponsor has sole current authority to manage the investments and
operations of the Fund and the Underlying Funds, and this may allow
it to act in a way that furthers its own interests and conflicts
with your best interests, including the authority of the Sponsor to
allocate expenses to and between the Teucrium Funds. Shareholders
have very limited voting rights, which will limit the ability to
influence matters such as amendment of the Trust Agreement, changes
in the Fund’s basic investment policies, dissolution of the
Fund, or the sale or distribution of the Fund’s
assets.
Shareholders have only very limited voting rights and generally
will not have the power to replace the Sponsor. Shareholders will
not participate in the management of the Fund and do not control
the Sponsor so they will not have influence over basic matters that
affect the Fund.
Shareholders will
have very limited voting rights with respect to the Fund’s
affairs. Shareholders may elect a replacement sponsor only if the
current Sponsor resigns voluntarily or loses its corporate charter.
Shareholders will not be permitted to participate in the management
or control of the Fund or the conduct of its business. Furthermore,
any voting rights on Underlying Fund shares held by the Fund will
be exercised by the Sponsor, generally without seeking advice or
voting instructions from Fund Shareholders. Shareholders must
therefore rely upon the duties and judgment of the Sponsor to
manage the Fund’s and the Underlying Funds’
affairs.
The Sponsor may manage a large amount of assets, and this could
affect the Fund’s ability to trade profitably.
Increases in assets
under management may affect trading decisions. While the assets of
the Fund and those of the Underlying Funds are currently at
manageable levels, the Sponsor does not intend to limit the amount
of Fund assets or Underlying Fund assets. The more assets the
Sponsor manages for the Underlying Funds, the more difficult it may
be for it to trade profitably because of the difficulty of trading
larger positions without adversely affecting prices and
performance, and of managing risk associated with larger
positions.
The liability of the Sponsor and the Trustee are limited, and the
value of the Shares will be adversely affected if the Fund is
required to indemnify the Trustee or the Sponsor.
Under
the Trust Agreement, the Trustee and the Sponsor are not liable,
and have the right to be indemnified, for any liability or expense
incurred absent gross negligence or willful misconduct on the part
of the Trustee or Sponsor, as the case may be. That means the
Sponsor may require the assets of the Fund to be sold in order to
cover losses or liability suffered by the Sponsor or by the
Trustee. Any sale of that kind would reduce the NAV of the Fund and
the value of its Shares.
Although the Shares of the Fund are limited liability investments,
certain circumstances such as bankruptcy could increase a
Shareholder’s liability.
The
Shares of the Fund are limited liability investments; Shareholders
may not lose more than the amount that they invest plus any profits
recognized on their investment. However, Shareholders could be
required as a matter of bankruptcy law, to return to the estate of
the Fund any distribution they received at a time when the Fund was
in fact insolvent or that was made in violation of its Trust
Agreement.
You cannot be assured of the Sponsor’s continued services,
and discontinuance may be detrimental to the Fund.
You
cannot be assured that the Sponsor will be willing or able to
continue to service the Fund or the Underlying Funds for any length
of time. The Sponsor was formed for the purpose of sponsoring the
Fund, the Underlying Funds and other commodity pools, and has
limited financial resources and no significant source of income
apart from its management fees from such commodity pools to support
its continued service for the Fund and the Underlying Funds. If the
Sponsor discontinues its activities on behalf of the Fund or an
Underlying Fund, the Fund may be adversely affected. If the
Sponsor’s registrations with the CFTC or memberships in the
NFA were revoked or suspended, the Sponsor would no longer be able
to provide services to the Fund or the Underlying
Funds.
The Fund could terminate at any time and cause the liquidation and
potential loss of your investment and could upset the overall
maturity and timing of your investment portfolio.
The
Fund may terminate at any time, regardless of whether the Fund has
incurred losses, subject to the terms of the Trust Agreement. For
example, the dissolution or resignation of the Sponsor would cause
the Trust to terminate unless the Teucrium Funds’
shareholders, holding a majority of the outstanding shares of the
Fund; and each other fund that is a series of the Trust, voting
together as a single class, elect within 90 days of the event to
continue the Trust and appoint a successor Sponsor. In addition,
the Sponsor may terminate the Fund if it determines that the
Fund’s aggregate net assets in relation to its operating
expenses make the continued operation of the Fund unreasonable or
imprudent. As of the date of this prospectus, the Fund pays the
fees, costs, and expenses of its operations. If the Sponsor and the
Fund are unable to raise sufficient funds so that the Fund’s
expenses are reasonable in relation to the NAV, the Fund may be
forced to terminate, and investors may lose all or part of their
investment. Any expenses related to the operation of the Fund would
need to be paid by the Fund at the time of termination. However, no
level of losses will require the Sponsor to terminate the Fund. The
Fund’s termination would result in the liquidation of its
investments and the distribution of its remaining assets to the
Shareholders on a pro rata basis in accordance with their Shares,
and the Fund could incur losses in liquidating its investments in
connection with a termination. Termination could also negatively
affect the overall maturity and timing of your investment
portfolio.
Termination of an Underlying Fund could result in a change in the
nature of your investment in the Fund.
The
Sponsor may terminate an Underlying Fund for any of the reasons
that it may terminate the Fund. If an Underlying Fund is
terminated, the Sponsor may invest the Fund’s assets directly
in commodity interests in the Specified Commodity, but it is not
obligated to do so. The Sponsor also might choose to allocate the
assets of the Fund that had been invested in the terminated
Underlying Fund among the remaining Underlying Funds or to invest
such assets in another commodity pool investing in another
commodity. While you will generally receive notice of these
fundamental changes, you will not have voting rights with respect
to them or other ability to influence the Sponsor’s
decision.
The NYSE Arca may halt trading in the Shares of the Fund or the
shares of an Underlying Fund which would adversely impact your
ability to sell Shares.
Trading
in Shares of the Fund or shares of an Underlying Fund may be halted
due to market conditions or, in light of NYSE Arca rules and
procedures, for reasons that, in the view of the NYSE Arca, make
trading in Shares of the Fund or shares of an Underlying Fund
inadvisable. In addition, trading is subject to trading halts
caused by extraordinary market volatility pursuant to
“circuit breaker” rules that require trading to be
halted for a specified period based on a specific market decline.
There can be no assurance that the requirements necessary to
maintain the listing of the Shares of the Fund or the shares of an
Underlying Fund will continue to be met or will remain unchanged.
The Fund will be terminated if its Shares are
delisted.
The lack of active trading markets for the Shares of the Fund or
shares of an Underlying Fund may result in losses on your
investment in the Fund at the time of disposition of your
Shares.
Although the Shares
of the Fund will be listed and traded on the NYSE Arca, there can
be no guarantee that an active trading market for the Shares of the
Fund or the shares of an Underlying Fund will be maintained. If you
need to sell your Shares at a time when no active market for them
or the shares of an Underlying Fund exist, the price you receive
for your Shares, assuming that you are able to sell them, likely
will be lower than what you would receive if an active market did
exist.
As a Shareholder, you will not have the rights enjoyed by investors
in certain other types of entities.
As
interests in separate series of a Delaware statutory trust, the
Shares do not involve the rights normally associated with the
ownership of shares of a corporation (including, for example, the
right to bring shareholder oppression and derivative actions). In
addition, the Shares have limited voting and distribution rights
(for example, Shareholders do not have the right to elect
directors, as the Trust does not have a board of directors, and
generally will not receive regular distributions of the net income
and capital gains earned by the Fund). The Fund is also not subject
to certain investor protection provisions of the Sarbanes Oxley Act
of 2002 and the NYSE Arca governance rules (for example, audit
committee requirements).
A court could potentially conclude that the assets and liabilities
of the Fund are not segregated from those of another series of the
Trust, thereby potentially exposing assets in the Fund to the
liabilities of another series.
The
Fund is a series of a Delaware statutory trust and not itself a
legal entity separate from the other Teucrium Funds. The Delaware
Statutory Trust Act provides that if certain provisions are
included in the formation and governing documents of a statutory
trust organized in series and if separate and distinct records are
maintained for any series and the assets associated with that
series are held in separate and distinct records and are accounted
for in such separate and distinct records separately from the other
assets of the statutory trust, or any series thereof, then the
debts, liabilities, obligations and expenses incurred by a
particular series are enforceable against the assets of such series
only, and not against the assets of the statutory trust generally
or any other series thereof. Conversely, none of the debts,
liabilities, obligations and expenses incurred with respect to any
other series thereof is enforceable against the assets of such
series. The Sponsor is not aware of any court case that has
interpreted this inter-series limitation on liability or provided
any guidance as to what is required for compliance. The Sponsor
intends to maintain separate and distinct records for the Fund and
account for the Fund separately from any other Trust series, but it
is possible a court could conclude that the methods used do not
satisfy the Delaware Statutory Trust Act, which would potentially
expose assets in the Fund to the liabilities of one or more of the
Teucrium Funds and/or any other Trust series created in the
future.
The Sponsor and the Trustee are not obligated to prosecute any
action, suit or other proceeding in respect of any Fund or
Underlying Fund property.
Neither
the Sponsor nor the Trustee is obligated to, although each may in
its respective discretion, prosecute any action, suit or other
proceeding in respect of any Fund’s or Underlying
Fund’s property. The Trust Agreement does not confer upon
Shareholders the right to prosecute any such action, suit or other
proceeding.
The Fund does not expect to make cash distributions.
The
Sponsor intends to re-invest any income and realized gains rather
than distributing cash to Shareholders. Therefore, unlike mutual
funds, commodity pools or other investment pools that generally
distribute income and gains to their investors, the Fund generally
will not distribute cash to Shareholders. In addition, the
Underlying Funds generally will not distribute cash to their
shareholders because the Sponsor reinvests any income and related
gains of the Underlying Funds in Benchmark Component Futures
Contracts or cash and cash equivalents. As a result, the Fund does
not anticipate receiving cash distributions from the Underlying
Funds. You should not invest in the Fund if you will need cash
distributions from the Fund to pay taxes on your share of income
and gains of the Fund, if any, or for any other reason. Although
the Fund does not intend to make cash distributions, the income
earned from its investments held directly or posted as margin may
reach levels that merit distribution, e.g., at levels where such
income is not necessary to support its investments and investors
adversely react to being taxed on such income without receiving
distributions that could be used to pay such tax. Cash
distributions may be made in these and similar
instances.
There is a risk that the Fund and the Underlying Funds will not
have sufficient net assets to compensate for the fees and expenses
that they must pay and as such the expense ratio of the Fund and
the Underlying Funds may be higher than that filed in this document
or the documents of the Underlying Funds.
While
the Fund does not directly pay any management fees or certain other
types of expenses, the Fund does pay certain expenses directly,
including certain administrative and accounting expenses. In
addition, the Fund bears a proportionate share of Underlying Fund
expenses as a shareholder of the Underlying Funds. Each Underlying
Fund pays management fees at an annual rate of 1.00% of its average
net assets, brokerage commissions and various other expenses from
its ongoing operations (e.g., fees of the Administrator, Trustee
and Distributor). The estimated approximate percentage of selling
price before waived expenses is 1.67% or $0.50 per share, based on
the Fund assets, net asset value per share and shares outstanding
as of February 28, 2022. TAGS is a Fund of Funds and the expenses
from the Underlying Funds flow through to the investor in TAGS.
These fees and expenses must be paid in all events, regardless of
the Fund’s and Underlying Funds’ total net
assets.
The Fund and the Underlying Funds may incur higher fees and
expenses upon renewing existing or entering into new contractual
relationships.
The
arrangements between clearing brokers and counterparties on the one
hand and the Fund or an Underlying Fund, as applicable, on the
other generally are terminable by the clearing brokers or
counterparty upon notice to the Fund or Underlying Fund, as
applicable. In addition, the agreements between the Fund or an
Underlying Fund, as applicable, and its third-party service
providers, such as the Distributor and the Custodian, are generally
terminable at specified intervals. Upon termination, the Sponsor
may be required to renegotiate or make other arrangements for
obtaining similar services if the Fund or an Underlying Fund
intends to continue to operate. Comparable services from another
party may not be available, or even if available, these services
may not be available on terms as favorable as those of the expired
or terminated arrangements.
The Underlying Funds, and thus the Fund may experience a higher
breakeven if interest rates decline.
The
Underlying Funds seek to earn interest on cash balances available
for investment. If actual interest rates earned were to continue to
fall and the Sponsor were not able to waive expenses sufficient to
cover the deficit, the breakeven estimated by the Underlying Funds
in this prospectus could be higher.
The Fund is not actively managed.
The
Fund is not actively managed and is designed to track the combined
performance of the Underlying Funds, regardless of whether the
price of the Underlying Funds’ Benchmark Component Futures
Contracts are flat, declining or rising. As a result, the Fund may
sustain losses that may have been avoidable if the Fund was
actively managed.
The Net Asset Value calculation of an Underlying Fund may be
overstated or understated due to the valuation method employed when
a settlement price is not available on the date of the net asset
value calculation.
An
Underlying Fund’s NAV includes, in part, any unrealized
profits or losses on commodity interests. Under normal
circumstances, the NAV reflects the settlement price of open
Futures Contracts on the date when the NAV is being calculated as
quoted on the applicable exchange. In instances when the quoted
settlement price of Futures Contracts traded on an exchange may not
be reflective of fair value based on market condition, generally
due to the operation of daily limits or other rules of the exchange
or otherwise, the NAV may not reflect the fair value of open
futures contracts on such date. For purposes of financial
statements and reports related to the Fund and the Underlying
Funds, the Sponsor will recalculate the NAV where necessary to
reflect the fair value of a Futures Contract when the Futures
Contract closes at its price fluctuation limit for the
day.
An unanticipated number of redemption requests during a short
period of time could have an adverse effect on the NAV of the
Fund.
If a
substantial number of requests for redemption of Redemption Baskets
are received by the Fund during a relatively short period of time,
the Fund will generally need to sell shares of the Underlying
Funds, increasing its trading costs. To the extent that the
Fund’s sale of Underlying Fund shares on the secondary market
results in redemption requests to an Underlying Fund, the
Underlying Fund’s trading costs will increase, and it may be
necessary to liquidate the Underlying Fund’s trading
positions before the time that its trading strategies would
otherwise call for liquidation, resulting in an adverse effect on
the NAVs of the Fund and Underlying Fund, which may result in
losses.
Fund assets may be depleted if investment performance does not
exceed fees.
In
addition to certain fees paid to the Fund’s service
providers, the Fund pays the Sponsor a fee of 1.00% of asset under
management per annum, regardless of Fund performance. Over time,
the Fund’s assets could be depleted if investment performance
does not exceed such fees.
The liquidity of the Shares may be affected by the withdrawal from
participation of Authorized Purchasers, market makers, or other
significant secondary-market participants which could adversely
affect the market price of the Shares.
Only an
Authorized Purchaser may engage in creation or redemption
transactions directly with the Fund. The Fund has a limited number
of institutions that act as Authorized Purchasers. To the extent
that these institutions exit the business or are unable to proceed
with creation and/or redemption orders with respect to the Fund and
no other Authorized Purchaser is able to step forward to create or
redeem Creation Units, Fund shares may trade at a discount to NAV
and possibly face trading halts and/or delisting. In addition, a
decision by a market maker, lead market maker, or other large
investor to cease activities for the Fund or a decision by a
secondary market participant to sell a significant number of the
Fund’s Shares could adversely affect liquidity, the spread
between the bid and ask quotes, and potentially the price of the
Shares. The Sponsor can make no guarantees that participation by
Authorized Purchasers or market makers will continue.
If a minimum number of Shares is outstanding, market makers may be
less willing to purchase Shares in the secondary market which may
limit your ability to sell Shares.
There
is a minimum number of baskets and associated Shares specified for
the Fund. If the Fund experienced redemptions that caused the
number of Shares outstanding to decrease to the minimum level of
Shares required to be outstanding, until the minimum, number of
Shares is again exceeded through the purchase of a new Creation
Basket, there can be no more redemptions by an Authorized
Purchaser. In such case, market makers may be less willing to
purchase Shares from investors in the secondary market, which may
in turn limit the ability of Shareholders of the Fund to sell their
Shares in the secondary market. The minimum level of Shares
specified for the Fund is subject to change. The minimum level for
the Fund is 50,000 Shares representing 4 baskets; as of February
28, 2022, there were 487,502 Shares outstanding. (The current
number of Shares outstanding is posted daily on our website,
www.teucrium.com.)
The postponement, suspension or rejection of redemption orders
could adversely affect a shareholder redeeming their Shares in the
Fund.
The
resulting delay of any postponement, suspension or rejection may
adversely affect the value of the Shareholders’ redemption
proceeds if the NAV of the Fund declines during the period of
delay.
The failure or bankruptcy of a clearing broker could result in
substantial losses for an Underlying Fund; the clearing broker
could be subject to proceedings that impair its ability to execute
the Underlying Fund’s trades.
Under
CFTC regulations, a clearing broker with respect to an Underlying
Fund’s exchange-traded commodity interests must maintain
customers’ assets in a bulk segregated account. If a clearing
broker fails to do so or is unable to satisfy a substantial deficit
in a customer account, its other customers may be subject to risk
of a substantial loss of their funds in the event of that clearing
broker’s bankruptcy. In that event, the clearing
broker’s customers, such as the Underlying Funds, are
entitled to recover, even in respect of property specifically
traceable to them, only a proportional share of all property
available for distribution to all of that clearing broker’s
customers. The Underlying Funds (and, therefore, the Fund) also may
be subject to the risk of the failure of, or delay in performance
by, any exchanges and markets and their clearing organizations, if
any, on which commodity interests are traded.
From
time to time, the clearing brokers may be subject to legal or
regulatory proceedings in the ordinary course of their business. A
clearing broker’s involvement in costly or time-consuming
legal proceedings may divert financial resources or personnel away
from the clearing broker’s trading operations, which could
impair the clearing broker’s ability to successfully execute
and clear an Underlying Fund’s trades.
The failure or insolvency of the Fund’s Custodian or other
financial institution in which the Fund or the Underlying Funds has
deposits could result in a substantial loss of the Fund’s
assets.
As
noted above, the vast majority of the Underlying Funds’
assets are held in cash and cash equivalents with the Custodian and
other financial institutions, if applicable. The insolvency of the
Custodian and any financial institution in which the Underlying
Funds holds cash and cash equivalents could result in a complete
loss of the Underlying Funds’ assets. The Fund does not
maintain large cash and/or cash equivalent deposits due to the
nature of the investment in the shares of the Underlying
Funds.
Third parties may infringe upon or otherwise violate intellectual
property rights or assert that the Sponsor has infringed or
otherwise violated their intellectual property rights, which may
result in significant costs, litigation, and diverted attention of
Sponsor’s management.
Third
parties may assert that the Sponsor has infringed or otherwise
violated their intellectual property rights. Third parties may
independently develop business methods, trademarks or proprietary
software and other technology similar to that of the Sponsor and
claim that the Sponsor has violated their intellectual property
rights, including their copyrights, trademark rights, trade names,
trade secrets and patent rights. As a result, the Sponsor may have
to litigate in the future to determine the validity and scope of
other parties’ proprietary rights or defend itself against
claims that it has infringed or otherwise violated other
parties’ rights. Any litigation of this type, even if the
Sponsor is successful and regardless of the merits, may result in
significant costs, divert resources from the Fund, or require the
Sponsor to change its proprietary software and other technology or
enter into royalty or licensing agreements.
The
Sponsor has a patent on certain business methods and procedures
used with respect to the Fund and the Underlying Funds. The Sponsor
utilizes certain proprietary software. Any unauthorized use of such
proprietary software, business methods and/or procedures could
adversely affect the competitive advantage of the Sponsor or the
Fund and/or require the Sponsor to take legal action to protect its
rights.
The Fund may experience substantial losses on transactions if the
computer or communications system fails.
The
Fund’s and Underlying Funds’ activities depend on the
integrity and performance of the computer and communications
systems supporting them. Extraordinary transaction volume, hardware
or software failure, power or telecommunications failure, a natural
disaster, cyber-attack or other catastrophe could cause the
computer systems to operate at an unacceptably slow speed or even
fail. Any significant degradation or failure of the systems that
the Sponsor uses to gather and analyze information, enter orders,
process data, monitor risk levels and otherwise engage in trading
activities may result in substantial losses on transactions,
liability to other parties, lost profit opportunities, damages to
the Sponsor’s, the Fund’s and the Underlying
Funds’ reputations, increased operational expenses and
diversion of technical resources.
If the computer and communications systems are not upgraded when
necessary, the Fund’s financial condition could be
harmed.
The
development of complex computer and communications systems and new
technologies may render the existing computer and communications
systems supporting the Fund’s and Underlying Funds’
activities obsolete. In addition, these computer and communications
systems must be compatible with those of third parties, such as the
systems of exchanges, clearing brokers and the executing brokers.
As a result, if these third parties upgrade their systems, the
Sponsor will need to make corresponding upgrades to effectively
continue its trading activities. The Sponsor may have limited
financial resources for these upgrades or other technological
changes. The Fund’s future success may depend on the
Sponsor’s ability to respond to changing technologies on a
timely and cost-effective basis.
The Fund and the Underlying Funds depend on the reliable
performance of the computer and communications systems of third
parties, such as brokers and futures exchanges, and may experience
substantial losses on transactions if they fail.
The
Fund and Underlying Funds depend on the proper and timely function
of complex computer and communications systems maintained and
operated by the futures exchanges, brokers and other data providers
that the Sponsor uses to conduct trading activities. Failure or
inadequate performance of any of these systems could adversely
affect the Sponsor’s ability to complete transactions,
including its ability to close out positions, and result in lost
profit opportunities and significant losses on commodity interest
transactions. This could have a material adverse effect on revenues
and materially reduce the Fund’s available capital of the
Fund or an Underlying Fund. For example, unavailability of price
quotations from third parties may make it difficult or impossible
for the Sponsor to conduct trading activities so that an Underlying
Fund will closely track its Benchmark. Unavailability of records
from brokerage firms may make it difficult or impossible for the
Sponsor to accurately determine which transactions have been
executed or the details, including price and time, of any
transaction executed. This unavailability of information also may
make it difficult or impossible for the Sponsor to reconcile its
records of transactions with those of another party or to
accomplish settlement of executed transactions.
The occurrence of a severe weather event, natural disaster,
terrorist attack, geopolitical events, outbreak or public health
emergency as declared by the World Health Organization, the
continuation or expansion of war or other hostilities, or a
prolonged government shutdown may have significant adverse effects
on the Fund and the Underling Funds and their investments and alter
current assumptions and expectations.
The
operations of the Fund and the Underlying Funds, the exchanges,
brokers and counterparties with which the Funds do business, and
the markets in which the Funds do business could be severely
disrupted in the event of a severe weather event, natural disaster,
major terrorist attack, cyber-attack, data breach, outbreak or
public health emergency as declared by the World Health
Organization (such as the spread of the novel coronavirus known as
COVID-19), or the continuation or expansion of war or other
hostilities.
War and
other geopolitical events in eastern Europe, including but not
limited to Russia and Ukraine, may cause volatility in commodity
prices including energy and grain prices, due to the region’s
importance to these markets, potential impacts to global
transportation and shipping, and other supply chain disruptions.
These events are unpredictable and may lead to extended periods of
price volatility.
Global
terrorist attacks, anti-terrorism initiatives, and political
unrest, as well as the adverse impact the COVID-19 pandemic has had
on the global and U.S. markets and economy, continue to fuel
concerns. For example, the COVID-19 pandemic may continue to
adversely impact the level of services currently provided by the
U.S. government, could weaken the U.S. economy, interfere with the
commodities markets that rely upon data published by U.S. federal
government agencies, and prevent the Fund and the Underlying Funds
from receiving necessary regulatory review or approvals. The types
of events discussed above, including the COVID-19 pandemic, are
highly disruptive to economies and markets and have recently led,
and may continue to lead, to increased market volatility and
significant market losses.
More
generally, a climate of uncertainty and panic, including the
contagion of the COVID-19 virus and other infectious viruses or
diseases, may adversely affect global, regional, and local
economies and reduce the availability of potential investment
opportunities, and increases the difficulty of performing due
diligence and modeling market conditions, potentially reducing the
accuracy of financial projections. Under these circumstances, the
Fund and the Underlying Funds may have difficulty achieving their
investment objectives which may adversely impact performance.
Further, such events can be highly disruptive to economies and
markets, significantly disrupt the operations of individual
companies (including, but not limited to, the Fund’s and the
Underlying Funds’ Sponsor and third party service providers),
sectors, industries, markets, securities and commodity exchanges,
currencies, interest and inflation rates, credit ratings, investor
sentiment, and other factors affecting the value of the
Fund’s and the Underlying Funds’ investments. These
factors could cause substantial market volatility, exchange trading
suspensions and closures that could impact the ability of the Fund
and the Underlying Funds to complete redemptions and otherwise
affect Fund and Underlying Fund performance and trading in the
secondary market. A widespread crisis may also affect the global
economy in ways that cannot necessarily be foreseen at the current
time. How long such events will last and whether they will continue
or recur cannot be predicted. Impacts from these events could have
significant impact on Fund and Underlying Fund performance,
resulting in losses to your investment. The current and future
global economic impact may cause the underlying assumptions and
expectations of the Fund and the Underlying Funds to become
outdated quickly or inaccurate, resulting in significant
losses.
In
late February 2022, Russia invaded Ukraine, significantly
amplifying already existing geopolitical tensions among Russia and
other countries in the region and in the west. The responses of
countries and political bodies to Russia’s actions, the
larger overarching tensions, and Ukraine’s military response
and the potential for wider conflict may increase financial market
volatility generally, have severe adverse effects on regional and
global economic markets, and cause volatility in the price of
agricultural products, including agricultural futures, and the
share price of the Fund.
Failures or breaches of electronic systems could disrupt the
trading activity and materially affect the profitability of the
Underlying Funds and the Fund.
Failures or
breaches of the electronic systems of the Underlying Fund and/or
the Fund, the Sponsor, the Custodian or other financial
institutions in which the Underlying Funds or the Fund invests, or
the Fund’s other service providers, market makers, Authorized
Purchasers, NYSE Arca, exchanges on which Futures Contracts or
other commodity interests are traded or cleared, or counterparties
have the ability to cause disruptions and negatively impact the
Fund’s business operations, potentially resulting in
financial losses to the Fund and its shareholders. Such failures or
breaches may include intentional cyber-attacks that may result in
an unauthorized party gaining access to electronic systems in order
to misappropriate the Fund’s assets or sensitive information.
While the Fund has established business continuity plans and risk
management systems seeking to address system breaches or failures,
there are inherent limitations in such plans and systems.
Furthermore, the Fund cannot control the cyber security plans and
systems of the Custodian or other financial institutions in which
the Fund invests, or the Fund’s other service providers,
market makers, Authorized Purchasers, NYSE Arca, exchanges on which
Futures Contracts or other commodity interests are traded or
cleared, or counterparties.
An investment in a Fund faces numerous risks from its shares being
traded in the secondary market, any of which may lead to the
Fund’s shares trading at a premium or discount to
NAV.
Although the
Fund’s shares are listed for trading on the NYSE Arca, there
can be no assurance that an active trading market for such shares
will develop or be maintained. Trading in the Fund’s shares
may be halted due to market conditions or for reasons that, in the
view of the NYSE Arca, make trading in shares inadvisable. There
can be no assurance that the requirements of the NYSE Arca
necessary to maintain the listing of the Fund will continue to be
met or will remain unchanged or that the shares will trade with any
volume, or at all. The NAV of the Fund’s shares will
generally fluctuate with changes in the market value of the
Fund’s portfolio holdings. The market prices of shares will
generally fluctuate in accordance with changes in the Fund’s
NAV and supply and demand of shares on the NYSE Arca. It cannot be
predicted whether the Fund’s shares will trade below, at or
above their NAV. Investors buying or selling Fund shares in the
secondary market will pay brokerage commissions or other charges
imposed by brokers as determined by that broker. Brokerage
commissions are often a fixed amount and may be a significant
proportional cost for investors seeking to buy or sell relatively
small amounts of shares.
The NYSE Arca may halt trading in the Shares which would adversely
impact your ability to sell Shares.
Trading
in Shares of the Fund may be halted due to market conditions or, in
light of NYSE Arca rules and procedures, for reasons that, in view
of the NYSE Arca, make trading in Shares inadvisable. In addition,
trading is subject to trading halts caused by extraordinary market
volatility pursuant to “circuit breaker” rules that
require trading to be halted for a specified period based on a
specified market decline. There can be no assurance that the
requirements necessary to maintain the listing of the Shares will
continue to be met or will remain unchanged. The Fund will be
terminated if its Shares are delisted.
The event of a suspension in the ability of Authorized Participants
to create or redeem shares.
The
ability of Authorized Participants to create or redeem shares may
be suspended for several reasons, including but not limited to the
Fund or the Underlying Fund voluntarily imposing such restrictions.
A suspension in the ability of Authorized Participants to create or
redeem Shares would have no impact on the Fund's investment
objective; the Fund's investment objective would remain the same
– to provide daily investment results that reflect the
combined daily performance of the Underlying Funds, as measured by
a benchmark. Nor would the Benchmark change – the benchmark
would remain the same.
With
respect to the impact of a suspension on the price of Fund shares
in the secondary market, Authorized Participants and other groups
that make a market in shares of the Fund would likely continue to
actively trade the Fund's shares. However, in such a situation,
Authorized Participants and other market makers may seek to adjust
the market they make in the shares. Specifically, such market
participants may increase the spread between the prices that they
quote for offers to buy and sell shares to allow them to adjust to
the potential uncertainty as to when they might be able to create
or redeem additional shares. In addition, Authorized Participants
may be less willing to offer to quote offers to buy or sell shares
in large numbers. The potential impact of either wider spreads
between bid and offer prices, or reduced number of shares on which
quotes may be available, could increase the trading costs to
investors in the Fund compared to the quotes and the number of
shares on which bids and offers are made if the Authorized
Participants still were able to freely create new baskets of
shares. In addition, there could be a significant increase in the
premium/discount between the market price at which shares are
traded and the shares’ net asset value. The net asset value is the price at
which the Fund can be created or redeemed by Authorized
Participants.
The lack of active trading markets for the Shares of the Fund may
result in losses on your investment in the Fund at the time of
disposition of your Shares.
Although the Shares
of the Fund will be listed and traded on the NYSE Arca, there can
be no guarantee that an active trading market for the Shares of the
Fund will be maintained. If you need to sell your Shares at a time
when no active market for them exists, the price you receive for
your Shares, assuming that you are able to sell them, likely will
be lower than what you would receive if an active market did
exist.
Risk of Leverage and Volatility
If an Underlying Fund becomes leveraged, the Fund could incur
substantial losses if the Underlying Fund’s trading positions
suddenly turn unprofitable.
Commodity
pools’ trading positions in commodity interests are typically
required to be secured by the deposit of margin funds or collateral
that represents only a small percentage of the commodity
interest’s entire market value. This feature permits
commodity pools to “leverage” their assets by
purchasing or selling commodity interests with an aggregate
notional amount in excess of the commodity pool’s assets.
While this leverage can increase a pool’s profits, relatively
small adverse movements in the price of the pool’s commodity
interests can cause significant losses to the pool. While the
Sponsor does not intend to leverage the assets of any Underlying
Fund, it is not prohibited from doing so under the Trust Agreement.
If the Sponsor were to cause or permit an Underlying Fund to become
leveraged, the Fund could incur substantial losses if an Underlying
Fund’s trading positions suddenly turn
unprofitable.
The price of agricultural commodities can be volatile which could
cause large fluctuations in the price of Shares.
Movements in the
price of agricultural commodities are outside of the
Sponsor’s control and may not be anticipated by the Sponsor.
As discussed in more detail above, price movements for agricultural
commodities are influenced by, among other things, weather
conditions, crop disease, crop failure, transportation and storage
difficulties, production decisions, various planting, growing and
harvesting problems, governmental policies, various economic and
monetary events, changing demand, and seasonal fluctuations in
supply. More generally, commodity prices may also be influenced by
economic and monetary events such as changes in interest rates,
changes in balances of payments and trade, U.S. and international
inflation rates, currency valuations and devaluations, U.S. and
international economic events, and changes in the philosophies and
emotions of market participants. Additionally, war and other geopolitical events in
eastern Europe, including but not limited to Russia and Ukraine,
may cause volatility in commodity prices including energy and
grains prices, due to the region’s importance to these
markets, impacts to global transportation and shipping, and other
supply chain disruptions. These events are unpredictable and may
lead to extended periods of price volatility. Because the
Fund is exposed primarily to interests in agricultural commodities,
it is not a diversified investment vehicle, and therefore may be
subject to greater volatility than a diversified portfolio of
stocks or bonds or a more diversified commodity pool.
Over the counter Contract Risk
Over the counter transactions are subject to changing
regulation.
A
portion of the Fund’s assets may be used to trade over the
counter commodity interests of the Underlying Funds, such as
forward contracts or swaps. The markets for over the counter
contracts will continue to rely upon the integrity of market
participants in lieu of the additional regulation imposed by the
CFTC on participants in the futures markets. To date, the forward
markets have been largely unregulated, except for anti-manipulation
and anti-fraud provisions, forward contracts have been executed
bi-laterally and, in general historically, forward contracts have
not been cleared or guaranteed by a third party. While increased
regulation of over the counter commodity interests is likely to
result from changes that are required to be effectuated by the
Dodd-Frank Act, there is no guarantee that such increased
regulation will be effective to reduce these risks.
The Underlying Funds will be subject to credit risk with respect to
counterparties to over the counter contracts entered into by the
Underlying Funds.
The
Underlying Funds face the risk of non-performance by the
counterparties to over the counter contracts. Unlike in futures
contracts, the counterparty to these contracts is generally a
single bank or other financial institution, rather than a clearing
organization backed by a group of financial institutions. As a
result, there will be greater counterparty credit risk in these
transactions. A counterparty may not be able to meet its
obligations to an Underlying Fund, in which case the Underlying
Fund could suffer significant losses on these
contracts.
If a
counterparty becomes bankrupt or otherwise fails to perform its
obligations due to financial difficulties, the Underlying Fund may
experience significant delays in obtaining any recovery in a
bankruptcy or other reorganization proceeding. During any such
period, the Underlying Fund may have difficulty in determining the
value of its contracts with the counterparty, which in turn could
result in the overstatement or understatement of the Underlying
Fund’s NAV and, indirectly, the Fund’s NAV. The
Underlying Fund may eventually obtain only limited recovery or no
recovery in such circumstances. Failure by an Underlying Fund to
recover sufficient amounts in the event of a counterparty default
could result in losses to the Underlying Fund and impact its NAV,
which could result in corresponding adverse effects on the
Fund.
The Underlying Funds may be subject to liquidity risk with respect
to over the counter contracts.
Over
the counter contracts may have terms that make them less marketable
than Futures Contracts. Over the counter contracts are less
marketable because they are not traded on an exchange, do not have
uniform terms and conditions, and are entered into based upon the
creditworthiness of the parties and the availability of credit
support, such as collateral, and in general, they are not
transferable without the consent of the counterparty. These
conditions make such contracts less liquid than standardized
futures contracts traded on a commodities exchange and diminish the
ability to realize the full value of such contracts. In addition,
even if collateral is used to reduce counterparty credit risk,
sudden changes in the value of over the counter transactions may
leave a party open to financial risk due to a counterparty default
since the collateral held may not cover a party’s exposure on
the transaction in such situations.
In
general, valuing OTC derivatives is less certain than valuing
actively traded financial instruments such as exchange traded
futures contracts and securities because the price and terms on
which such OTC derivatives are entered into or can be terminated
are individually negotiated, and those prices and terms may not
reflect the best price or terms available from other sources. In
addition, while market makers and dealers generally quote
indicative prices or terms for entering into or terminating OTC
contracts, they typically are not contractually obligated to do so,
particularly if they are not a party to the transaction. As a
result, it may be difficult to obtain an independent value for an
outstanding OTC derivatives transaction.
The
foregoing liquidity risks could impact adversely affect the
Fund’s ability to meet its investment objective.
In
addition, regulations adopted by global prudential regulators that
are now in effect require certain prudentially regulated entities
and certain of their affiliates and subsidiaries (including swap
dealers) to include in their derivatives contracts and certain
other financial contracts, terms that delay or restrict the rights
of counterparties (such as the Funds) to terminate such contracts,
foreclose upon collateral, exercise other default rights or
restrict transfers of credit support in the event that the
prudentially regulated entity and/or its affiliates are subject to
certain types of resolution or insolvency proceedings. Similar
regulations and laws have been adopted in non-US jurisdictions that
may apply to a Fund’s counterparties located in those
jurisdictions. It is possible that these new requirements, as well
as potential additional related government regulation, could
adversely affect a Fund’s ability to terminate existing
derivatives contracts, exercise default rights or satisfy
obligations owed to it with collateral received under such
contracts.
Risk of Trading in International Markets
Trading in international markets would expose the Underlying Funds
to credit and regulatory risk.
A
significant portion of the Futures Contracts entered into by the
Underlying Funds will be traded on United States exchanges
including the CBOT and ICE Futures. However, a portion of the
Underlying Funds’ trades may take place on markets or
exchanges outside the United States. Some non-U.S. markets present
risks because they are not subject to the same degree of regulation
as their U.S. counterparts. None of the CFTC, NFA, or any domestic
exchange regulates activities of any foreign boards of trade or
exchanges, including the execution, delivery and clearing of
transactions, has the power to compel enforcement of the rules of a
foreign board of trade or exchange or of any applicable non-U.S.
laws. Similarly, the rights of market participants, such as the
Underlying Funds, in the event of the insolvency or bankruptcy of a
non-U.S. market or broker are also likely to be more limited than
in the case of U.S. markets or brokers. As a result, in these
markets, the Underlying Funds have less legal and regulatory
protection than they do when they trade domestically. Currently the
Fund does not place any trades for the Fund or the Underlying Funds
on any markets or exchanges outside of the United States and does
not anticipate doing so in the near future.
In some
of these non-U.S. markets, the performance on a futures contract is
the responsibility of the counterparty and is not backed by an
exchange or clearing corporation and therefore exposes an
Underlying Fund to credit risk. Additionally, trading on non-U.S.
exchanges is subject to the risks presented by exchange controls,
expropriation, increased tax burdens and exposure to local economic
declines and political instability. An adverse development with
respect to any of these variables could reduce the profit or
increase the loss earned on trades in the affected international
markets.
International trading activities subject the Underlying Funds to
foreign exchange risk.
The
price of any non-U.S. commodity interest and, therefore, the
potential profit and loss on such investment, may be affected by
any variance in the foreign exchange rate between the time the
order is placed and the time it is liquidated, offset or exercised.
However, a portion of the trades for Fund or the Underlying Funds
may take place in markets and on exchanges outside of the U.S. Some
non-U.S. markets present risks because they are not subject to the
same degree of regulation as their U.S. counterparts. As a result,
changes in the value of the local currency relative to the U.S.
dollar may cause losses to the Underlying Fund even if the contract
is profitable.
The Underlying Funds’ international trading could expose them
to losses resulting from non-U.S. exchanges that are less developed
or less reliable than United States exchanges.
Some
non-U.S. exchanges also may be in a more developmental stage so
that prior price histories may not be indicative of current price
dynamics. In addition, the Underlying Funds may not have the same
access to certain positions on foreign trading exchanges as do
local traders, and the historical market data on which the Sponsor
bases its strategies may not be as reliable or accessible as it is
for U.S. exchanges.
The
CFTC’s implementation of its regulations under the Dodd-Frank
Act may further affect the Underlying Funds’ ability to enter
into foreign exchange contracts and to hedge exposure to foreign
exchange losses.
Tax Risks
Please
refer to “U.S. Federal Income Tax Considerations” for
information regarding the U.S. federal income tax consequences of
the purchase, ownership and disposition of Shares.
Your tax liability from holding Shares may exceed the amount of
distributions, if any, on your Shares.
Cash or
property will be distributed by the Fund at the sole discretion of
the Sponsor, and the Sponsor currently does not intend to make cash
or other distributions with respect to Shares. You will be required
to pay U.S. federal income tax and, in some cases, state, local, or
foreign income tax, on your allocable share of the Fund’s
taxable income, without regard to whether you actually receive
distributions from the Fund. Therefore, the tax liability resulting
from your ownership of Shares may exceed the amount of cash or
value of property (if any) distributed by the Fund.
Your allocable share of income or loss for U.S. federal income tax
purposes may differ from your economic income or loss on your
Shares.
Due to
the application of the assumptions and conventions applied by the
Fund and the Underlying Funds in making allocations for U.S.
federal income tax purposes and other factors, your allocable share
of the Fund’s income, gain, deduction or loss may be
different than your economic profit or loss from your Shares for a
taxable year. This difference could be temporary or permanent and,
if permanent, could result in your being taxed on amounts in excess
of your economic income.
Items of income, gain, deduction, loss and credit with respect to
Shares could be reallocated (or for taxable years beginning after
December 31, 2017, the Fund itself could be liable for U.S. federal
income tax along with any interest or penalties) if the IRS does
not accept the assumptions and conventions applied by the Fund in
allocating those items, with potential adverse tax consequences for
you.
The
Fund (and each Underlying Fund) intends to be treated as a
partnership for U.S. federal income tax purposes. The U.S. tax
rules pertaining to entities taxed as partnerships are complex and
their application to publicly traded partnerships, such as the
Fund, is in many respects uncertain. The Fund applies certain
assumptions and conventions in an attempt to comply with the intent
of the applicable rules and to report taxable income, gains,
deductions, losses and credits in a manner that properly reflects
Shareholders’ economic gains and losses. These assumptions
and conventions may not fully comply with all aspects of the
Internal Revenue Code of 1986, as amended (the “Code”),
and applicable Treasury Regulations, however, and it is possible
that the U.S. Internal Revenue Service (the “IRS”) will
successfully challenge our allocation methods and require us to
reallocate items of income, gain, deduction, loss or credit in a
manner that adversely affects you. If this occurs, you may be
required to file an amended tax return and to pay additional taxes
plus deficiency interest.
In
addition, for taxable years beginning after December 31, 2017, the
Fund may be liable for U.S. federal income tax on any
“imputed underpayment” of tax resulting from an
adjustment as a result of an IRS audit. The amount of the imputed
underpayment generally includes increases in allocations of items
of income or gains to any investor and decreases in allocations of
items of deduction, loss, or credit to any investor without any
offset for any corresponding reductions in allocations of items of
income or gain to any investor or increases in allocations of items
of deduction, loss, or credit to any investor. If the Fund is
required to pay any U.S. federal income tax on any imputed
underpayment, the resulting tax liability would reduce the net
assets of the Fund and would likely have an adverse impact on the
value of the Shares. In such a case, the tax liability would in
effect be borne by Shareholders that own Shares at the time of such
assessment, which may be different persons, or persons with
different ownership percentages, than persons owning Shares for the
tax year under audit. Under certain circumstances, the Fund may be
eligible to make an election to cause Shareholders to take into
account the amount of any imputed underpayment, including any
interest and penalties. The ability of a publicly traded
partnership such as the Fund to make this election is uncertain. If
the election is made, the Fund would be required to provide
Shareholders who owned beneficial interests in the Shares in the
year to which the adjusted allocations relate with a statement
setting forth their proportionate shares of the adjustment
(“Adjusted K-1s”). The investors would be required to
take the adjustment into account in the taxable year in which the
Adjusted K-1s are issued. For an additional discussion please see
“U.S. Federal Income Tax Considerations – Other Tax
Matters.”
If the Fund is required to withhold tax with respect to any
Non-U.S. Shareholders, all Shareholders may bear the cost of such
withholding.
Under
certain circumstances, the Fund may be required to pay withholding
tax with respect to allocations to Non-U.S. Shareholders. Although
the Trust Agreement provides that any such withholding will be
treated as being distributed to the Non-U.S. Shareholder, the Fund
may not be able to cause the economic cost of such withholding to
be borne by the Non-U.S. Shareholder on whose behalf such amounts
were withheld since the Fund does not intend to make any
distributions. Under such circumstances, all Shareholders may bear
the economic cost of the withholding, not just the Shareholders on
whose behalf such amounts were withheld. This could have a material
impact on the value of your Shares.
The Fund could be treated as a corporation for federal income tax
purposes, which may substantially reduce the value of your
Shares.
The
Trust has received an opinion of counsel that, under current U.S.
federal income tax laws, it is more likely than not that the Fund
will be treated as a partnership that is not taxable as a
corporation for U.S. federal income tax purposes, provided that,
among other things, (i) at least 90 percent of the Fund’s
(and each Underlying Fund’s) annual gross income consists of
“qualifying income” as defined in the Code, (ii) the
Fund is organized and operated in accordance with its governing
agreements and applicable law, and (iii) the Fund does not elect to
be taxed as a corporation for U.S. federal income tax purposes.
Although the Sponsor anticipates that the Fund has satisfied and
will continue to satisfy the “qualifying income”
requirement for all of its taxable years, that result cannot be
assured. The Fund has not requested and will not request any ruling
from the IRS with respect to its classification as a partnership
not taxable as a corporation for U.S. federal income tax purposes.
If the IRS were to successfully assert that the Fund is taxable as
a corporation for U.S. federal income tax purposes in any taxable
year, rather than passing through its income, gains, losses and
deductions proportionately to Shareholders, the Fund would be
subject to tax on its net income for the year at corporate tax
rates. In addition, although the Sponsor does not currently intend
to make distributions with respect to Shares, any distributions
would be taxable to Shareholders as dividend income to the extent
of the Fund’s current and accumulated earnings and profits,
then treated as a tax-free return of capital to the extent of the
Shareholder’s basis in the Shares (and will reduce that
basis), and, to the extent it exceeds a Shareholder’s basis
in such Shares, as capital gain for Shareholders who hold their
Shares as capital assets. Taxation of the Fund as a corporation
could materially reduce the after-tax return on an investment in
Shares and could substantially reduce the value of your
Shares.
Tax legislation that has been or could be enacted may affect you
with respect to your investment in the Fund.
Legislative,
regulatory or administrative changes could be enacted or
promulgated at any time, either prospectively or with retroactive
effect, and may adversely affect the Fund and its Shareholders.
Please consult a tax advisor regarding the implications of an
investment in Shares of the Teucrium Funds, including without
limitation the federal, state, local and foreign tax
consequences.
PROSPECTIVE INVESTORS ARE STRONGLY URGED TO CONSULT THEIR OWN TAX
ADVISORS WITH RESPECT TO THE POSSIBLE TAX CONSEQUENCES TO THEM OF
AN INVESTMENT IN SHARES; SUCH TAX CONSEQUENCES MAY DIFFER IN
RESPECT OF DIFFERENT INVESTORS.
THE OFFERING
The Fund in General
The
Fund’s investment objective is to provide investors with a
cost-effective way to gain price exposure to a weighted average of
four agricultural commodity markets for future delivery. The
Sponsor developed each Underlying Fund’s Benchmark as a
representation of the corn, soybean, wheat, or sugar market for
future delivery.
Under
normal market conditions, the Fund will invest in the Shares of the
Underlying Funds and, to a lesser extent, cash equivalents. The
Sponsor believes that by investing in the Underlying Funds, the
Fund’s net asset value (“NAV”) will closely track
the combined performance of the Underlying Fund. The Sponsor also
believes that because of market arbitrage opportunities, the market
price at which investors will purchase and sell Shares through
their broker-dealer will closely track the Fund’s NAV. The
Sponsor believes that the net effect of these relationships is that
the Fund’s market price on the NYSE Arca at which investors
purchase and sell Shares will closely track the commodities markets
for future delivery in which the Underlying Funds
invest.
Consistent with
applicable provisions of the Trust Agreement and Delaware law, the
Fund has broad authority to make changes to the Fund’s
operations. Consistent with this authority, the Fund, in its sole
discretion and without shareholder approval or advance notice, may
change its investment objective, Benchmark or investment
strategies. The Fund has no current intention to make any such
change, and any change is subject to applicable regulatory
requirements, including, but not limited to, any requirement to
amend applicable listing rules of the NYSE.
The
reasons for and circumstances that may trigger any such changes may
vary widely and cannot be predicted. However, by way of example,
the Fund may change the weighting or underlying components of the
Benchmark in furtherance of the Fund’s investment objective
of tracking the combined daily performance of the Underlying Funds.
This could be done for a variety of market conditions, including a
potential or actual imposition of position limits by the CFTC or
futures exchange rules, or the imposition of risk mitigation
measures by a futures commission merchant restricts the ability of
an Underlying Fund to invest in its current Benchmark Component
Futures Contracts. The Fund and the applicable Underlying Fund
would file a current report on Form 8-K and a prospectus supplement
to describe any such change and the effective date of the change.
Shareholders may modify their holdings of the Fund’s shares
in response to any change by purchasing or selling Fund shares
through their broker-dealer.
The
Fund is organized as a series of the Teucrium Commodity Trust, a
statutory trust organized under the laws of the State of Delaware
on September 11, 2009. Currently, the Trust has five series that
are separate operating commodity pools: the Teucrium Corn Fund, the
Teucrium Wheat Fund, the Teucrium Soybean Fund, the Teucrium Sugar
Fund, and the Teucrium Agricultural Fund. Additional series of the
Trust may be created in the future at the Sponsor’s
discretion. The Fund maintains its main business office at Three
Main Street, Suite 215, Burlington Vermont 05401. The Fund is a
commodity pool. It operates pursuant to the terms of the Trust
Agreement, which is dated as of April 26, 2019 and grants full
management control to the Sponsor.
See
“Prior Performance of the Fund” on page 27 for more
information about prior performance of the Fund.
The Sponsor
The Sponsor of the
Trust is Teucrium Trading, LLC, a Delaware limited liability
company. The principal office of the Sponsor and the Trust are
located at Three Main Street, Suite 215, Burlington, Vermont 05401.
The Sponsor registered as a CPO and a CTA
with the CFTC and became a member of the NFA on November 10,
2009. The Sponsor registered as a
Commodity Trading Advisor (“CTA”) with the CFTC
effective September 8, 2017.
Aside
from establishing the series of the Trust, operating those series
that have commenced offering their shares, and obtaining capital
from a small number of outside investors in order to engage in
these activities, the Sponsor has not engaged in any other business
activity prior to the date of this prospectus. Under the Trust
Agreement, the Sponsor is solely responsible for management and
conducts or directs the conduct of the business of the Trust, the
Fund, and any series of the Trust that may from time to time be
established and designated by the Sponsor. The Sponsor is required
to oversee the purchase and sale of Shares by Authorized Purchasers
and to manage the Fund’s investments, including to evaluate
the credit risk of FCMs and swap counterparties and to review daily
positions and margin/collateral requirements. The Sponsor has the
power to enter into agreements as may be necessary or appropriate
for the offer and sale of the Fund’s Shares and the conduct
of the Trust’s activities. Accordingly, the Sponsor is
responsible for selecting the Trustee, Administrator, Distributor,
the independent registered public accounting firm of the Trust, and
any legal counsel employed by the Trust. The Sponsor is also
responsible for preparing and filing periodic reports on behalf of
the Trust with the SEC and will provide any required certification
for such reports. No person other than the Sponsor and its
principals was involved in the organization of the Trust or the
Fund.
The
Sponsor may determine to engage marketing agents who will assist
the Sponsor in marketing the Shares. See “Plan of
Distribution” for more information.
The
Sponsor maintains a public website on behalf of the Fund and the
Underlying Funds, www.teucrium.com, which
contains information about the Trust, the Fund and the Shares, and
oversees certain services for the benefit of
Shareholders.
The
Sponsor has discretion to appoint one or more of its affiliates as
additional Sponsors.
The
Sponsor does not receive any management fee or other fee or
compensation from the Fund. For services performed under the Trust
Agreement, the Sponsor receives a fee, accrued daily and paid
monthly, at an annual rate of 1.00% of the average daily net assets
of each Underlying Fund. Each of the Fund and the Underlying Funds
are responsible for other ongoing fees, costs and expenses of their
respective operations, including brokerage fees, SEC and FINRA
registration fees and legal, printing, accounting, custodial,
administration and transfer agency costs, although the Sponsor
bears the costs and expenses related to the initial offer and sale
of Shares of the Fund and the shares each Underlying Fund. None of
the costs and expenses related to the initial registration, offer
and sale of Shares, which total approximately $293,650, are
chargeable to the Fund, and the Sponsor may not recover any of
these costs and expenses from the Fund.
Shareholders have
no right to elect the Sponsor on an annual or any other continuing
basis or to remove the Sponsor. If the Sponsor voluntarily
withdraws, the holders of a majority of the outstanding shares of
the Fund and each other fund that is a series of the Trust voting
together as a single class (excluding for purposes of such
determination Shares owned by the withdrawing Sponsor and its
affiliates) may elect its successor. Prior to withdrawing, the
Sponsor must give ninety days’ written notice to the holders
of the Trust’s outstanding Shares and the
Trustee.
Ownership or
“membership” interests in the Sponsor are owned by
persons referred to as “members.” The Sponsor currently
has three voting or “Class A” members – Mr. Sal
Gilbertie, Mr. Dale Riker and Mr. Carl N. Miller III – and a
small number of non-voting or “Class B” members who
have provided working capital to the Sponsor. Messrs. Gilbertie and
Riker each currently own 45.7% of the Sponsor’s Class A
membership interests, while Mr. Miller holds the remainder, which
is 8.52%.
The
Sponsor has an information security program and policy in place.
The program takes reasonable care to look beyond the security and
controls developed and implemented for the Trust and the Funds
directly to the platforms and controls in place for the key service
providers. Such review of cybersecurity and information technology
plans of key service providers are part of the Sponsor’s
disaster recovery and business continuity planning. The Sponsor
provides regular training to all employees of the Sponsor regarding
cybersecurity topics, in addition to real-time dissemination of
information regarding cybersecurity matters as needed. The
information security plan is reviewed and updated as needed, but at
a minimum on an annual basis.
Management of the Sponsor
In
general, under the Sponsor’s Amended and Restated Limited
Liability Company Operating Agreement, as amended from time to
time, the Sponsor (and as a result the Trust and each Fund) is
managed by the officers of the Sponsor. The Chief
Executive Officer of the Sponsor is responsible for the overall
strategic direction of the Sponsor and has general control of its
business. The Chief Investment Officer and President of the Sponsor
is primarily responsible for new investment product development
with respect to the Funds. The Chief Operating Officer has primary
responsibility for trade operations, trade execution, and portfolio
activities with respect to the Fund. The Chief Financial Officer,
Chief Accounting Officer and Chief Compliance Officer acts as the
Sponsor’s principal financial and accounting officer.
Furthermore, certain fundamental actions regarding the Sponsor,
such as the removal of officers, the addition or substitution of
members, or the incurrence of liabilities other than those incurred
in the ordinary course of business and de minimis liabilities, may not be
taken without the affirmative vote of a majority of the Class A
members (which is generally defined as the affirmative vote of Mr.
Gilbertie and one of the other two Class A members). The
Sponsor has no board of directors, and the Trust has no board of
directors or officers. The three Class A Members of the Sponsor are
Sal Gilbertie, Dale Riker and Carl N. Miller III.
The
Officers of the Sponsor, one of whom is a Class A Member of the
Sponsor, are the following:
Sal Gilbertie has been the President of the Sponsor since
its inception, its Chief Investment Officer since September 2011,
and its Chief Executive Officer and Secretary since September 17,
2018, and was approved by the NFA as a principal of the Sponsor on
September 23, 2009 and registered as an associated person of the
Sponsor on November 10, 2009. He maintains his main business
office at 65 Adams Road, Easton, Connecticut 06612. Effective
July 16, 2012, Mr. Gilbertie was registered with the NFA as the
Branch Manager for this location. Since October 18, 2010, Mr.
Gilbertie has been an associated person of the Distributor under
the terms of the Securities Activities and Services Agreement
(“SASA”) between the Sponsor and the Distributor.
Additional information regarding the SASA can be found in the
section of this disclosure document entitled “Plan of
Distribution.” From October 2005 until December 2009,
Mr. Gilbertie was employed by Newedge USA, LLC, an FCM and
broker-dealer registered with the CFTC and the SEC, where he headed
the Renewable Fuels/Energy Derivatives OTC Execution Desk and was
an active futures contract and over the counter derivatives trader
and market maker in multiple classes of commodities. (Between
January 2008 and October 2008, he also held a comparable position
with Newedge Financial, Inc., an FCM and an affiliate of Newedge
USA, LLC.) From October 1998 until October 2005, Mr.
Gilbertie was principal and co-founder of Cambial Asset Management,
LLC, an adviser to two private funds that focused on equity
options, and Cambial Financing Dynamics, a private boutique
investment bank. While at Cambial Asset Management, LLC and
Cambial Financing Dynamics, Mr. Gilbertie served as principal and
managed the day to day activities of the business and the portfolio
of both companies. Mr. Gilbertie is 61 years old.
Cory Mullen-Rusin has been the Chief Financial Officer,
Chief Accounting Officer and Chief Compliance Officer of the
Sponsor since September 17, 2018 and Ms. Mullen-Rusin has primary
responsibility for the financial management, compliance and
reporting of the Sponsor and is in charge of its books of account
and accounting records, and its accounting procedures. She
maintains her main business office at Three Main Street, Suite 215,
Burlington, Vermont 05401. Ms. Mullen-Rusin was approved by the NFA
as a Principal of the Sponsor on October 8, 2018. Ms. Mullen-Rusin
began working for the Sponsor in September 2011 and worked directly
with the former CFO at Teucrium for seven years. Her
responsibilities included aspects of financial planning, financial
operations, and financial reporting for the Trust and the Sponsor.
Additionally, Ms. Mullen-Rusin assisted in developing, instituting,
and monitoring the effectiveness of processes and procedures to
comply with all regulatory agency requirements. Ms. Mullen-Rusin
graduated from Boston College with a Bachelor of Arts and Science
in Communications in 2009, where she was a four-year scholarship
player on the NCAA Division I Women’s Basketball team.
In 2017, she earned a Master of Business Administration from
Nichols College. Ms. Mullen-Rusin is 34 years old.
Steve Kahler, Chief Operating Officer, began working for the
Sponsor in November 2011 as Managing Director in the trading
division. He became the Chief Operating Officer on May 24, 2012 and
served in that capacity through September 6, 2018, at which time he
resigned. Mr. Kahler was unemployed from September 7, 2018 until
October 10, 2018, when he was reappointed as Chief Operating
Officer. Mr. Kahler is primarily responsible for making trading and
investment decisions for the Funds, and for directing each
Fund’s trades for execution. He maintains his main business
office at 13520 Excelsior Blvd., Minnetonka, MN 55345. Mr. Kahler
was registered as an Associated Person of the Sponsor on November
8, 2011 to September 7, 2018 and re-registered as an Associated
Person on October 5, 2018. Mr. Kahler was registered as a Branch
Manager of the Sponsor on March 16, 2012 to September 7, 2018 and
was registered again from October 5, 2018 to September 29, 2021.
Prior to his employment with the Sponsor, Mr. Kahler worked for
Cargill Inc., an international producer and marketer of food,
agricultural, financial and industrial products and services, from
April 2006 until November 2011 in the Energy Division as Senior
Petroleum Trader. In October 2006 and while employed at Cargill
Inc., Mr. Kahler was approved as an Associated Person of Cargill
Commodity Services Inc., a commodity trading affiliate of Cargill
Inc. from September 13, 2006 to November 9, 2011. Mr. Kahler
graduated from the University of Minnesota with a Bachelors of
Agricultural Business Administration and is 54 years
old.
Messrs.
Gilbertie, Riker, Kahler and Ms. Mullen-Rusin are individual
“principals,” as that term is defined in CFTC Rule 3.1,
of the Sponsor. These individuals are principals due to their
positions and/or due to their ownership interests in the Sponsor.
Beneficial ownership interests of the principals, if any, are shown
under the section entitled “Security Ownership of Principal
Shareholders and Management” below and any of the principals
may acquire beneficial interests in the Fund in the future. GFI
Group LLC is a principal for the Sponsor under CFTC Rules due to
its ownership of certain non-voting securities of the Sponsor.
NMSIC Classic LLC is a principal of the Sponsor under CFTC Rules
due to its greater than 10% capital contribution to the
Sponsor.
Market Price of Shares
The
Fund’s Shares have traded on the NYSE Arca under the symbol
TAGS since March 28, 2012. The following table sets forth the range
of reported high and low sales prices of the Shares as reported on
NYSE Arca for the periods indicated below.
Fiscal Year Ended December 31,
2021:
|
|
|
Quarter
Ended
|
|
|
March 31,
2021
|
$23.50
|
$21.38
|
June 30,
2021
|
$27.12
|
$22.27
|
September 30,
2021
|
$27.21
|
$24.42
|
December 31,
2021
|
$27.96
|
$25.83
|
Fiscal Year Ended December 31,
2020:
|
|
|
Quarter
Ended
|
|
|
March 31,
2020
|
$19.90
|
$16.14
|
June 30,
2020
|
$17.31
|
$15.81
|
September 30,
2020
|
$18.63
|
$16.89
|
December 31,
2020
|
$21.21
|
$18.44
|
As of
December 31, 2021, the Fund had approximately 2,035
Shareholders.
Prior Performance of the Fund
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE
RESULTS
The
Teucrium Agricultural Fund commenced trading and investment
operations on March 28, 2012. The Teucrium Agricultural Fund is
listed on NYSE Arca and is neither: (i) a privately offered pool
pursuant to Section 4(a)(2) of the Securities Act of 1933, as
amended; (ii) a multi-advisor pool as defined in CFTC Regulation
4.10(d)(2); or (iii) a principal-protected pool as defined in CFTC
Regulation 4.10(d)(3).
Units of beneficial
interest issued (from inception until February 28,
2022)
|
975,000
|
Aggregate gross
sale price for units issued
|
$34,874,435
|
Pool NAV as of
February 28, 2022
|
$14,605,313
|
NAV per Share as of
February 28, 2022
|
$29.96
|
Largest monthly
percentage drawdown*
|
|
Worst peak to
valley drawdown**
|
-70.07%
/ Jul 2012 - Apr 2020
|
* A
drawdown is a loss experienced by the fund over a specified period.
Drawdowns are measured on the basis of monthly returns only and do
not reflect intra-month figures. The worst monthly percentage
drawdown reflects the largest single month loss sustained over the
most recent five calendar years and the current year to
date.
** The
worst peak to valley drawdown is the largest percentage decline in
the NAV per unit over the most recent five calendar years and the
current year to date. This need not be a continuous decline but can
be a series of positive and negative returns. Worst peak to valley
drawdown represents the greatest percentage decline from any
month-end NAV per unit that occurs without such month-end NAV per
unit being equaled or exceeded as of a subsequent month-end. For
example, if the NAV per unit declined by $1 in each of January and
February, increased by $1 in March and declined again by $2 in
April, a “peak to valley drawdown” analysis conducted
as of the end of April would consider that “drawdown”
to be continuing and to be $3 in amount, whereas if the NAV per
unit had increased by $2 in March, the drawdown would have ended as
of the end of February at the $2 level.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE
RESULTS
|
Rates of Return*
|
Month
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
January
|
3.34
|
%
|
0.57
|
%
|
2.61
|
%
|
(2.19)
|
%
|
4.18
|
%
|
2.22
|
%
|
February
|
(0.29)
|
%
|
2.67
|
%
|
(3.98)
|
%
|
(2.75)
|
%
|
3.46
|
%
|
8.52
|
%
|
March
|
(5.97)
|
%
|
(2.98)
|
%
|
(2.60)
|
%
|
(7.41)
|
%
|
(1.53)
|
%
|
|
%
|
April
|
(2.16)
|
%
|
0.09
|
%
|
(3.59)
|
%
|
(4.63)
|
%
|
13.71
|
%
|
|
%
|
May
|
(2.32)
|
%
|
1.32
|
%
|
6.17
|
%
|
0.03
|
%
|
(1.02)
|
%
|
|
%
|
June
|
2.91
|
%
|
(8.65)
|
%
|
0.85
|
%
|
1.21
|
%
|
3.26
|
%
|
|
%
|
July
|
1.00
|
%
|
1.47
|
%
|
(3.94)
|
%
|
1.99
|
%
|
(1.21)
|
%
|
|
%
|
August
|
(6.47)
|
%
|
(4.48)
|
%
|
(5.42)
|
%
|
4.23
|
%
|
2.70
|
%
|
|
%
|
September
|
(0.72)
|
%
|
(2.20)
|
%
|
3.86
|
%
|
3.50
|
%
|
(0.60)
|
%
|
|
%
|
October
|
(1.27)
|
%
|
3.65
|
%
|
0.59
|
%
|
1.39
|
%
|
2.16
|
%
|
|
%
|
November
|
(0.47)
|
%
|
0.34
|
%
|
(0.87)
|
%
|
4.29
|
%
|
(1.70)
|
%
|
|
%
|
December
|
(1.60)
|
%
|
(2.31)
|
%
|
4.05
|
%
|
8.28
|
%
|
2.34
|
%
|
|
%
|
Annual Rate of Return
|
(13.60)
|
%
|
(10.64)
|
%
|
(3.02)
|
%
|
7.14
|
%
|
27.85
|
%
|
10.93
|
%**
|
* The
monthly rate of return is calculated by dividing the ending NAV for
a given month by the ending NAV for the previous month, subtracting
1 and multiplying this number by 100 to arrive at a percentage
increase or decrease.
** Not
annualized.
The Trustee
The
sole Trustee of the Trust is Wilmington Trust Company, a Delaware
banking corporation. The Trustee’s principal offices are
located at 1100 North Market Street, Wilmington, Delaware
19890-0001. The Trustee is unaffiliated with the Sponsor. The
Trustee’s duties and liabilities with respect to the offering
of Shares and the management of the Trust and the Fund are limited
to its express obligations under the Trust Agreement.
The
Trustee will accept service of legal process on the Trust in the
State of Delaware and will make certain filings under the Delaware
Statutory Trust Act. The Trustee does not owe any other duties to
the Trust, the Sponsor or the Shareholders. The Trustee is
permitted to resign upon at least sixty (60) days’ notice to
the Sponsor. If no successor trustee has been appointed by the
Sponsor within such sixty-day period, the Trustee may, at the
expense of the Trust, petition a court to appoint a successor. The
Trust Agreement provides that the Trustee is entitled to reasonable
compensation for its services from the Sponsor or an affiliate of
the Sponsor (including the Trust), and is indemnified by the
Sponsor against any expenses it incurs relating to or arising out
of the formation, operation or termination of the Trust, or any
action or inaction of the Trustee under the Trust Agreement, except
to the extent that such expenses result from the gross negligence
or willful misconduct of the Trustee. The Sponsor has the
discretion to replace the Trustee.
The
Trustee has not signed the registration statement of which this
prospectus is a part and is not subject to issuer liability under
the federal securities laws for the information contained in this
prospectus and under federal securities laws with respect to the
issuance and sale of the Shares. Under such laws, neither the
Trustee, either in its capacity as Trustee or in its individual
capacity, nor any director, officer or controlling person of the
Trustee is, or has any liability as, the issuer or a director,
officer or controlling person of the issuer of the
Shares.
Under
the Trust Agreement, the Trustee has delegated to the Sponsor the
exclusive management and control of all aspects of the business of
the Trust and the Fund. The Trustee has no duty or liability
to supervise or monitor the performance of the Sponsor, nor does
the Trustee have any liability for the acts or omissions of the
Sponsor.
Because
the Trustee has delegated substantially all of its authority over
the operation of the Trust to the Sponsor, the Trustee itself is
not registered in any capacity with the CFTC.
Operation of the Fund
The
Fund seeks to provide daily investment results that reflect the
combined daily performance of the Underlying Funds. Under normal
market conditions, the Fund seeks to achieve its investment
objective generally by investing equally in shares of each
Underlying Fund and, to a lesser extent, cash equivalents. The
Fund’s investments in shares of Underlying Funds is
rebalanced, generally on a daily basis, in order to maintain
approximately a 25% allocation of the Fund’s assets to each
Underlying Fund.
The
investment objective of each Underlying Fund is to have the daily
changes in percentage terms of its Shares’ NAV reflect the
daily changes in percentage terms of the Underlying Fund’s
Benchmark. Specifically, the Teucrium Corn Fund’s Benchmark
is: (1) the second to expire Futures Contract for corn traded on
the CBOT, weighted 35%, (2) the third to expire CBOT corn Futures
Contract, weighted 30%, and (3) the CBOT Corn Futures Contract
expiring in the December following the expiration month of the
third to expire contract, weighted 35%. The Teucrium Wheat
Fund’s Benchmark is: (1) the second to expire CBOT Wheat
Futures Contract, weighted 35%, (2) the third to expire CBOT wheat
Futures Contract, weighted 30%, and (3) the CBOT Wheat Futures
Contract expiring in the December following the expiration month of
the third to expire contract, weighted 35%. The Teucrium Soybean
Fund’s Benchmark is: (1) the second to expire CBOT Soybean
Futures Contract, weighted 35%, (2) the third to expire CBOT
Soybean Futures Contract, weighted 30%, and (3) the CBOT Soybean
Futures Contract expiring in the November following the expiration
month of the third to expire contract, weighted 35%, except that
CBOT Soybean Futures Contracts expiring in August and September
will not be part of the Teucrium Soybean Fund’s Benchmark
because of the less liquid market for these Futures Contracts. The
Teucrium Sugar Fund’s Benchmark is: (1) the second to expire
Sugar No. 11 Futures Contract traded on ICE Futures, weighted 35%,
(2) the third to expire ICE Futures Sugar No. 11 Futures Contract,
weighted 30%, and (3) the ICE Futures Sugar No. 11 Futures Contract
expiring in the March following the expiration month of the third
to expire contract, weighted 35%.
Each
Underlying Fund seeks to achieve its investment objective by
investing under normal market conditions in Benchmark Component
Futures Contracts or, in certain circumstances, in other Futures
Contracts for its Specified Commodity. In addition, and to a
limited extent, an Underlying Fund also may invest in
exchange-traded options on Futures Contracts and in Cleared Swaps
for its Specified Commodity in furtherance of the Underlying Fund's
investment objective. Once position limits or accountability levels
on Futures Contracts on an Underlying Fund’s Specified
Commodity are applicable, each Underlying Fund's intention is to
invest in other commodity interests on its Specified Commodity. See
“The Offering – Futures Contracts” below. By
utilizing certain or all of these investments, the Sponsor
endeavors to cause each Underlying Fund's performance to closely
track that of its Benchmark.
The Underlying
Funds invest in commodity interests to the fullest extent possible
without being leveraged or unable to satisfy their current or
potential margin or collateral obligations with respect to its
investments in commodity interests. After fulfilling such margin
and collateral requirements, the Underlying Funds invest the
remainder of its proceeds from the sale of baskets in short-term
Treasury Securities, cash and/or cash equivalents, including money
market funds and investment grade commercial paper. Therefore, the
focus of the Sponsor in managing the Underlying Funds is investing
in Commodity interests and in cash and/or cash equivalents. The
Sponsor expects to manage the Fund’s and Underlying
Funds’ investments directly, although itthe
Trust has been
authorized by the
Trustit to retain,
establish the terms of retention for, and terminate third-party
commodity trading advisors to provide such management. The Sponsor
has substantial discretion in managing the Fund’s and
Underlying Funds’ investments consistent with meeting their
investment objectives, including the discretion: (1) to choose
whether to invest an Underlying Fund’s assets in the
Benchmark Component Futures Contracts or other Futures Contracts or
other commodity interests with similar investment characteristics;
(2) to choose when to “roll” the Underlying
Fund’s positions in commodity interests as described below,
and (3) to manage the Fund’s and Underlying Funds’
investments in short-term Treasury Securities and cash and cash
equivalents.
Each
Underlying Fund seeks to achieve its investment objectives
primarily by investing in Benchmark Component Futures Contracts
changes in its NAV will be closely track the changes in its
Benchmark. Each Underlying Fund’s positions in Benchmark
Component Futures Contracts are changed or “rolled” on
a regular basis in order to track the changing nature of its
Benchmark. For example, several times a year (on the dates on which
Futures Contracts on the Underlying Fund’s Specified
Commodity specific commodity expire), a particular Futures Contract
will no longer be a Benchmark Component Futures Contract, and the
Underlying Fund’s investments will have to be changed
accordingly. In order that the Underlying Funds’ trading does
not cause unwanted market movements and to make it more difficult
for third parties to profit by trading based on such expected
market movements, the Underlying Funds’ investments may not
be rolled entirely on that day, but rather may be rolled over a
period of days.
The
total portfolio composition of the Fund and Underlying Funds is
disclosed each business day that the NYSE Arca is open for trading
on the Fund’s website at www.teucrium.com. The website
disclosure of portfolio holdings is made daily and includes, as
applicable, the name and value of each Underlying Fund and each
cash equivalent, and the amount of cash, held in the Fund’s
portfolio, and the name and value of each Futures Contract and
Cleared Swap, the specific types of other commodity interests and
characteristics of such other commodity interests, the name and
value of each short-term Treasury Security and cash equivalent, and
the amount of cash held in each Underlying Fund’s portfolio.
The Fund’s website is publicly accessible at no
charge.
The
Shares issued by the Fund may only be purchased by Authorized
Purchasers and only in blocks of 12,500 Shares called Creation
Baskets. The amount of the purchase payment for a Creation Basket
is equal to the aggregate NAV of Shares in the Creation Basket.
Similarly, only Authorized Purchasers may redeem Shares and only in
blocks of 12,500 Shares called Redemption Baskets. The amount of
the redemption proceeds for a Redemption Basket is equal to the
aggregate NAV of Shares in the Redemption Basket. The purchase
price for Creation Baskets and the redemption price for Redemption
Baskets are the actual NAV calculated at the end of the business
day when a request for a purchase or redemption is received by the
Fund. The NYSE Arca publishes an approximate NAV intra-day based on
the prior day’s NAV and the current price of the Benchmark
Component Futures Contracts, but the price of Creation Baskets and
Redemption Baskets is determined based on the actual NAV calculated
at the end of each trading day.
While
the Fund issues Shares only in Creation Baskets, Shares may also be
purchased and sold in much smaller increments on the NYSE Arca.
These transactions, however, are effected at the bid and ask prices
established by the specialist firm(s). Like any listed security,
Shares can be purchased and sold at any time a secondary market is
open.
The Investment Strategies of the Fund and the Underlying
Funds
In
managing the Fund’s and Underlying Funds’ assets, the
Sponsor does not use a technical trading system that automatically
issues buy and sell orders. Instead, each time one or more baskets
of Fund Shares are purchased or redeemed, the Sponsor will purchase
or sell shares of the Underlying Funds in the secondary market.
While the Fund will not cause Authorized Purchasers to purchase or
redeem baskets on its behalf, the demand for Underlying Fund shares
caused by the Fund’s trades may cause an Authorized Purchaser
to create independently one or more baskets of one or more of the
Underlying Funds. When one or more baskets of shares of an
Underlying Fund are purchased or redeemed, commodity interests are
purchased or sold with an aggregate market value that approximates
the amount of cash received or paid upon the purchase or redemption
of the basket(s).
As an
example, assume that a Creation Basket is sold by the Fund, that
the closing NAV per Share is $25.00, and that the basket size for
the Fund is 12,500 shares. In that case, the Fund would receive
$312,500 in proceeds from the sale of the Creation Basket ($25.00
NAV per Share multiplied by 12,500 Shares and ignoring any Creation
Basket fee). If one were to assume further that the Sponsor wants
to invest the entire proceeds from the Creation Basket in Shares of
the Underlying Funds and that the NAV of each share is $18, the
Fund would be unable to buy an exact number of Shares with an
aggregate market value equal to $312,500. Instead, the Fund would
be able to purchase 17,361 Shares with an aggregate market value of
$312,498. The remainder of the proceeds from the sale of the
Creation Basket, $2.00, would remain invested in cash and/or cash
equivalents, as determined by the Sponsor from time to time based
on factors such as anticipated redemptions.
The
Sponsor does not anticipate letting the Underlying Funds’
Futures Contracts expire and taking delivery of a Specified
Commodity. Instead, the Sponsor closes out existing positions,
e.g., in response to ongoing changes in an Underlying Fund’s
Benchmark or if it otherwise determines it would be appropriate to
do so and reinvest the proceeds in new commodity interests.
Positions may also be closed out to meet orders for Redemption
Baskets, in which case the proceeds from closing the positions will
not be reinvested.
Futures Contracts
Futures
Contracts are agreements between two parties that are executed on a
designated contract market (“DCM”), i.e., a commodity
futures exchange, and that are cleared and margined through a
derivatives clearing organization (“DCO”), i.e., a
clearing house. One party agrees to buy a commodity from the other
party at a later date at a price and quantity; agreed upon when the
contract is made. In market terminology, a party who purchases a
Futures Contract is long in the market and a party who sells a
Futures Contract is short in the market. The contractual
obligations of a buyer or seller may generally be satisfied by
taking or making physical delivery of the underlying commodity or
by making an offsetting sale or purchase of an identical Futures
Contract on the same or linked exchange before the designated date
of delivery. The difference between the price at which the Futures
Contract is purchased or sold and the price paid for the offsetting
sale or purchase, after allowance for brokerage commissions,
constitutes the profit or loss to the trader.
If the
price of the commodity increases after the original Futures
Contract is entered into, the buyer of the Futures Contract will
generally be able to sell a Futures Contract to close out its
original long position at a price higher than that at which the
original contract was purchased, generally resulting in a profit to
the buyer. Conversely, the seller of a Futures Contract will
generally profit if the price of the underlying commodity
decreases, as it will generally be able to buy a Futures Contract
to close out its original short position at a price lower than that
at which the original contract was sold. Because the Underlying
Funds seek to track their Benchmarks directly and profit when the
price of the Specified Commodity and, as a likely result of an
increase in the price of the Specified Commodity, the price of
Futures Contracts on the Specified Commodity specific commodity
increases, each Underlying Fund will generally be long in the
market for its Specified Commodity and will generally sell Futures
Contracts only to close out existing long positions.
Futures
Contracts are typically traded on futures exchanges (i.e., DCMs)
such as the CBOT and ICE Futures, which provide centralized market
facilities in which multiple persons may trade contracts. Members
of a particular futures exchange and the trades executed on such
exchange are subject to the rules of that exchange. Futures
exchanges and their related clearing organizations (i.e., DCOs) are
given reasonable latitude in promulgating rules and regulations to
control and regulate their members.
Trades
on a futures exchange are generally cleared by the DCO, which
provides services designed to mutualize or transfer the credit risk
arising from the trading of contracts on an exchange. The clearing
organization effectively becomes the other party to the trade, and
each clearing member party to the trade looks only to the clearing
organization for performance.
Futures
Contracts on corn, wheat and soybeans are traded on the CBOT (which
is part of the CME Group) in units of 5,000 bushels, and Sugar No.
11 Futures Contracts are traded on ICE Futures and the New York
Mercantile Exchange in units of 112,000 pounds. Generally, Futures
Contracts traded on an exchange are priced by floor brokers and
other exchange members through an electronic, screen-based system
that determines the price by electronically matching offers to
purchase and sell. Futures Contracts may also be based on commodity
indices, in that they call for a cash payment based on the change
in the value of the specified index during a specified period. No
Futures Contracts based on an index of prices of a Specified
Commodity are currently available, although an Underlying Fund
could enter into such contracts should they become available in the
future.
Certain
typical and significant characteristics of Futures Contracts are
discussed below. Additional risks of investing in Futures Contracts
are included in “What are the Risk Factors Involved with an
Investment in the Fund?”
Impact of Position Limits, Accountability Levels, and Price
Fluctuation Limits
Position Limits,
Accountability Levels, and Price Fluctuation Limits may potentially
cause a tracking error between the price of an Underlying
Fund’s shares and its Benchmark. This may in turn prevent you
from being able to effectively use the Fund as a way to hedge
against commodity related losses or as a way to indirectly invest
in agricultural commodities.
It
cannot be predicted whether the Fund and the Underlying Funds
shares will trade below at, or above their NAV. However, when
futures contracts in the Underlying Fund’s benchmark are
halted or locked limit up or down, it is likely that the Fund and
Underlying Fund’s shares will trade at a premium or discount
to the Fund and Underlying Fund’s published NAV. Such premium
or discount may be elevated and may or may not reflect current
market conditions of the price of futures compared to normal market
conditions. These conditions could cause the Fund and Underlying
Funds to experience prolonged tracking error from its
Benchmark.
The
Fund and the Underlying Funds do not intend to limit the size of
their offerings and will attempt to expose substantially all of
their proceeds to the agricultural commodities market either
directly through commodity interests or, in the case of the Fund,
indirectly through the Underlying Funds. If an Underlying Fund
encounters position limits or price fluctuation limits for Futures
Contracts on U.S. exchanges, it may then, if permitted under
applicable regulatory requirements, purchase other commodity
interests and/or Futures Contracts listed on foreign exchanges.
However, the Futures Contracts available on such foreign exchanges
may have different underlying sizes, deliveries, and prices than
the Underlying Funds’ Benchmark Component Futures Contracts.
In addition, the Futures Contracts available on these exchanges may
be subject to their own position limits or similar restrictions. In
any case, notwithstanding the potential availability of these
instruments in certain circumstances, position limits could force
the Fund and the Underlying Funds to limit the number of Creation
Baskets that they sell.
Price Volatility
Despite
daily price limits, the price volatility of futures contracts
generally has been historically greater than that for traditional
securities such as stocks and bonds. Price volatility often is
greater day-to-day as opposed to intra-day. Economic factors that
may cause volatility in Futures Contracts include changes in
interest rates; governmental, agricultural, trade, fiscal, monetary
and exchange control programs and policies; weather and climate
conditions; changing supply and demand relationships; changes in
balances of payments and trade; U.S. and international rates of
inflation; currency devaluations and revaluations; U.S. and
international political and economic events; global trade
disruption due to outbreaks or public health emergency as declared
by the World Health Organization; and changes in philosophies and
emotions of market participants. Because the Underlying Funds
invest a significant portion of their assets in Futures Contracts,
the assets of the Underlying Funds, and therefore the price of
shares of the Underlying Funds and the Fund’s Shares, may be
subject to greater volatility than traditional
securities.
Term Structure of Futures Contracts and the Impact on Total
Return
Over
time, the price of a commodity will fluctuate based on a number of
market factors, including demand for the commodity relative to its
supply. The value of Futures Contracts will likewise fluctuate in
reaction to a number of market factors. Because the Underlying
Funds seek to maintain their holdings in Futures Contracts with a
roughly constant expiration profile and not take delivery of the
Specified Commodity agricultural commodities, the Underlying Funds
must periodically “roll” futures contract positions,
closing out soon to expire contracts that are no longer part of the
Benchmark and entering into subsequent to expire contracts. One
factor determining the total return from investing in futures
contracts is the price relationship between soon to expire
contracts and later to expire contracts.
If the
futures market is in a state of backwardation (i.e., when the price
of the Specified Commodity in the future is expected to be less
than the current price), an Underlying Fund will buy later to
expire contracts for a lower price than the sooner to expire
contracts that it sells. Hypothetically, and assuming no changes to
either prevailing commodity prices or the price relationship
between immediate delivery, soon to expire contracts and later to
expire contracts, the value of a contract will rise as it
approaches expiration. Over time, if backwardation remained
constant, the differences would continue to increase. If the
futures market is in contango, an Underlying Fund will buy later to
expire contracts for a higher price than the sooner to expire
contracts that it sells. Hypothetically, and assuming no other
changes to either prevailing commodity prices or the price
relationship between the immediate delivery, soon to expire
contracts and later to expire contracts, the value of a contract
will fall as it approaches expiration. Over time, if contango
remained constant, the difference would continue to increase.
Historically, the commodity futures markets have experienced
periods of both contango and backwardation. Frequently, whether
contango or backwardation exists is a function, among other
factors, of the seasonality of the agricultural commodity markets.
All other things being equal, a situation involving prolonged
periods of contango may adversely impact the returns of an
Underlying Fund (and therefore, the Fund); conversely a situation
involving prolonged periods of backwardation may positively impact
the returns of an Underlying Fund.
Margin Requirements and Marking to Market Futures
Positions
“Initial
margin” is an amount of funds that must be deposited by a
commodity interest trader with the trader’s broker to
initiate an open position in Futures Contracts. A margin deposit is
like a cash performance bond. It helps assure the trader’s
performance of the Futures Contracts that he or she purchases or
sells. Futures Contracts are customarily bought and sold on initial
margin that represents a small percentage of the aggregate purchase
or sales price of the contract. The amount of margin required in
connection with a particular Futures Contract is set by the
exchange on which the contract is traded. Brokerage firms, such as
the Underlying Funds’ FCM, carrying accounts for traders in
commodity interest contracts may require higher amounts of margin
as a matter of policy to further protect themselves.
Futures
Contracts are marked to market at the end of each trading day and
the margin required with respect to such contracts is adjusted
accordingly. This process of marking to market is designed to
prevent losses from accumulating in any futures account. Therefore,
if an Underlying Fund’s futures positions have declined in
value, the Underlying Fund may be required to post “variation
margin” to cover this decline. Alternatively, if the
Underlying Fund’s futures positions have increased in value,
this increase will be credited to the Underlying Fund’s
account.
Over the counter Derivatives
Under
normal market conditions, the Fund expects that 100% of the
Underlying Funds’ assets will be used to trade futures
contracts and invest in cash equivalents; however, the Underlying
Funds may trade over the counter contracts and swaps. A description
of such over the counter derivatives is included the statement of
additional information that is part of this prospectus under the
heading “Over the counter Derivatives.”
Other Trading Policies of the Fund
Exchange for Related Position
An
“exchange for related position” (“EFRP”)
can be used by the Fund or an Underlying Fund as a technique to
facilitate the exchanging of a futures hedge position against a
creation or redemption order, and thus the Fund or an Underlying
Fund may use an EFRP transaction in connection with the creation
and redemption of shares. The market specialist/market maker that
is the ultimate purchaser or seller of shares in connection with
the creation or redemption basket, respectively, agrees to sell or
purchase a corresponding offsetting shares or futures position
which is then settled on the same business day as a cleared futures
transaction by the FCMs. The Fund or the Underlying Fund will
become subject to the credit risk of the market specialist/market
maker until the EFRP is settled within the business day, which is
typically 7 hours or less. The Fund and the Underlying Funds
reports all activity related to EFRP transactions under the
procedures and guidelines of the CFTC and the exchanges on which
the futures are traded.
EFRPs
are subject to specific rules of the CME and CFTC guidance. It is
likely that EFRP mechanisms will significantly change in the future
which may make it uneconomical or impossible from a regulatory
perspective for the Fund to utilize these mechanisms.
Options on Futures Contracts
An
option on a Futures Contract gives the buyer of the option the
right, but not the obligation, to buy or sell a Futures Contract at
a specified price on or before a specified date. The option buyer
deposits the purchase price or “premium” for the option
with his broker, and the money goes to the option seller.
Regardless of how much the market swings, the most an option buyer
can lose is the option premium and the commissions and fees
associated with the transaction. However, the buyer will typically
lose the premium if the exercise price of the option is above (in
the case of an option to buy or “call” option) or below
(in the case of an option to sell or “put” option) the
market value at the time of exercise. Option sellers, on the other
hand, face risks similar to participants in the futures markets.
For example, since the seller of a call option is assigned a short
futures position if the option is exercised, his risk is the same
as someone who initially sold a futures contract. Because no one
can predict exactly how the market will move, the option seller
posts margin to demonstrate his ability to meet any potential
contractual obligations.
In
addition to Futures Contracts, there are also a number of options
on Futures Contracts relating to the Specified Commodities listed
on the CBOT and ICE Futures. These contracts offer investors and
hedgers another set of financial vehicles to use in managing
exposure to the commodities market. An Underlying Fund may purchase
and sell (write) options on Futures Contracts in pursuing its
investment objective, except that it will not sell call options
when it does not own the underlying Futures Contract. An Underlying
Fund would make use of options on Futures Contracts if, in the
opinion of the Sponsor, such an approach would cause the Underlying
Fund to track its Benchmark more closely or if it would lead to an
overall lower cost of trading to achieve a given level of economic
exposure to movements in the prices of the Underlying Fund’s
Specified Commodity.
Liquidity
The
Underlying Funds invest only in Futures Contracts that, in the
opinion of the Sponsor, are traded in sufficient volume to permit
the ready taking and liquidation of positions in these financial
interests and in over the counter commodity interests that, in the
opinion of the Sponsor, may be readily liquidated with the original
counterparty or through a third party assuming the Underlying
Fund’s position.
Spot Commodities
While
most Futures Contracts can be physically settled, the Fund and the
Underlying Funds do not intend to take or make physical delivery.
However, the Underlying Funds may from time to time trade in other
commodity interests based on the spot price of a Specified
Commodity.
Leverage
The Sponsor
endeavors to have the value of each Underlying Fund’s cash
and cash equivalents, whether held by the Underlying Fund or posted
as margin or collateral, at all times approximate the aggregate
market value of its obligations under its Benchmark Component
Futures Contracts. Commodity pools’ trading positions in
futures contracts are typically required to be secured by the
deposit of margin funds that represent only a small percentage of a
futures contract’s (or other commodity interest’s)
entire market value.
Borrowings
The
Fund and the Underlying Funds do not intend to nor foresee the need
to borrow money or establish credit lines. Each Underlying Fund
maintains cash and cash equivalents, either held by the Underlying
Fund or posted as margin or collateral, with a value that at all
times approximates the aggregate market value of its obligations
under Benchmark Component Futures Contracts. The Fund meets its
liquidity needs in the normal course of business from the proceeds
of the sale of its investments in the Underlying Funds or from any
cash and/or cash equivalents that it holds.intends
to hold at all times.
Benchmark Performance
The
chart below shows the percent change in the NAV per share for the
Fund, the market price of the Fund shares, represented by the
closing price of the Fund on the NYSE Arca, and the Benchmark for
five specific periods. The Benchmark does not reflect any impact of
expenses, which would generally reduce the Fund’s NAV, or
interest income, which would generally increase the NAV. The actual
results for the NAV include the impacts of both expenses and
interest income.
Teucrium
Agricultural Fund Performance as
of 12/31/2021
|
|
|
|
|
|
NAV
|
2.78%
|
27.85%
|
9.93%
|
0.51%
|
-6.11%
|
Price
|
2.34%
|
27.05%
|
9.48%
|
0.96%
|
-6.14%
|
Benchmark
(TTAGS)
|
2.90%
|
29.10%
|
10.70%
|
1.12%
|
-5.55%
|
The Service Providers of the Fund and Underlying Funds
Contractual Arrangements with the Sponsor and Third-Party Service
Providers
Sponsor
The
Sponsor is responsible for investing the assets of the Fund in
accordance with the objectives and policies of the Fund. In
addition, the Sponsor arranges for one or more third parties to
provide administrative, custodial, accounting, transfer agency and
other necessary services to the Fund. For these third party
services, the Fund pays the fees set forth in the table below
entitled “Contractual Fees and Compensation Arrangements with
the Sponsor and Third-Party Service Providers.” For the
Sponsor’s services, the Fund is contractually obligated to
pay a monthly management fee to the Sponsor, based on average daily
net assets, at a rate equal to 1.00% per annum. The Sponsor can
elect to waive the payment of this fee in any amount at its sole
discretion, at any time and from time to time, in order to reduce
the Fund’s expenses or for any other purpose.
Custodian, Registrar, Transfer Agent, Fund Accountant, and Fund
Administrator
In its
capacity as the Fund’s custodian, the Custodian, currently
U.S. Bank, N.A., holds the Fund’s securities, cash and/or
cash equivalents pursuant to a custodial agreement. U.S. Bancorp Fund Services, LLC, doing business as
U.S. Bank Global Fund Services, (“Global Fund Services”), an
entity affiliated with U.S. Bank, N.A., is the registrar and
transfer agent for the Fund’s Shares. In addition, Global
Fund Services also serves as Administrator for the Fund, performing
certain administrative, accounting services and preparing certain
SEC and CFTC reports on behalf of the Fund.
The Custodian is located at 1555 North Rivercenter
Drive, Suite 302, Milwaukee, WisconsinWI
53212. U.S. Bank N.A. is a nationally chartered bank, regulated by
the Office of the Comptroller of the Currency, Department of the
Treasury, and is subject to regulation by the Board of Governors of
the Federal Reserve System. The principal address for Global Fund
Services is 615 East Michigan Street, Milwaukee, Wisconsin,
53202
U.S.
Bancorp Fund Services is the broker for some, but not all, of the
equity transactions related to the purchase and sale of the
Underlying Funds for the Fund.
Distributor
The
Fund employs Foreside Fund Services, LLC as the Distributor for the
Fund. Pursuant to a Consulting Services Agreement, Foreside
Consulting Services, LLC, performs certain consulting support
services for the Trust’s Sponsor, Teucrium Trading, LLC.
Additionally, Foreside Distributors, LLC performs certain
distribution consulting services pursuant to a Distribution
Consulting Agreement with the Trust’s Sponsor, Teucrium
Trading, LLC.
The
Distribution Services Agreement among the Distributor, the Sponsor,
and the Trust calls for the Distributor to work with the Custodian
in connection with the receipt and processing of orders for
Creation Baskets and Redemption Baskets and the review and approval
of all Fund sales literature and advertising materials. The
Distributor and the Sponsor have also entered into a Securities
Activities and Service Agreement (the “SASA”) under
which certain employees and officers of the Sponsor are licensed as
registered representatives or registered principals of the
Distributor, under the FINRA rules (“Registered
Representatives”). As Registered Representatives of the
Distributor, these persons are permitted to engage in certain
marketing activities for the Fund that they would otherwise not be
permitted to engage in. Under the SASA, the Sponsor is obligated to
ensure that such marketing activities comply with applicable law
and are permitted by the SASA and the Distributor’s internal
procedures.
The
Distributor’s principal business address is Three Canal
Plaza, Suite 100, Portland, Maine 04101. The Distributor is a
broker-dealer registered with the U.S. Securities and Exchange
Commission (“SEC”) and a member of FINRA.
Clearing Broker
The
Fund purchases and sells shares of the Underlying Funds through
broker-dealers selected on a trade by trade basis. Commissions and
other transactions costs for such transactions are negotiated
separately with each such broker-dealer.
E D
& F Man Capital Markets, Inc. (“E D & F Man”)
serves as the Fund’s clearing broker to execute and clear the
Fund’s futures and provide other brokerage related services.
E D & F Man is registered as an FCM with the CFTC, is a member
of the National Futures Association (“NFA”) and is a
clearing member of all major U.S. futures exchanges. E D & F
Man’s Designated Self-Regulatory Organization is the Chicago
Mercantile Exchange Inc. (www.cmegroup.com).
E D & F Man is also registered as a broker-dealer
(“BD”) with the U.S. Securities and Exchange Commission
(“SEC”) and is a member of the Financial Industry
Regulatory Authority, Inc. (“FINRA”).
Except
as indicated below, there have been no material civil,
administrative, or criminal proceedings pending, on appeal, or
concluded against E D & F Man Capital Markets Inc. or its
principals in the past five (5) years.
United States District Court for the Southern District of New York,
Civil Action No. 19-CV-8217
In a
private litigation, plaintiffs allege, among other things, that E D
& F Man made certain fraudulent misrepresentations to them that
they relied upon in connection with a futures account carried by
the firm in its capacity as a futures commission merchant. The
plaintiffs allege claims of common law fraud, negligence, breach of
fiduciary duty, breach of contract, breach of the duty of good
faith and fair dealing and misrepresentation/omission and seek
compensatory damages of approximately $2,029,659 plus interest,
costs, attorneys’ fees and punitive damages. E D & F Man
filed an Amended Answer and a Counterclaim in which the firm denies
the substantive allegations against it and asserted a counterclaim
for breach of contract, indemnification and legal fees. On June 30,
2021, E D & F Man received the Opinion and Order in which the
judge ruled against the plaintiffs and in favor of the firm.
Judgment was entered in favor of the firm in the amount of
$1,762,266.57, plus prejudgment interest and attorney’s fees
and costs. On September 29, 2021, E D & F Man received an
Opinion and Order in which the judge awarded the firm $1,402,234.32
in attorneys’ fees and costs.
For a
list of concluded actions, please go to http://www.nfa.futures.org/basicnet/welcome.aspx.
This link will take you to the Welcome Page of the NFA’s
Background Affiliation Status Information
Center(“BASIC”). At this page, there is a box where you
can enter the NFA ID of E D & F Man Capital Markets Inc.
(0002613) and then click “Go”. You will be transferred
to the NFA’s information specific to E D & F Man Capital
Markets Inc. Under the heading “Regulatory Actions,”
click “details” and you will be directed to the full
list of regulatory actions brought by the CFTC and
exchanges.
E D
& F Man, in its capacity as a registered FCM, will serve as the
Fund's clearing broker and, as such, will arrange for the execution
and clearing of the Fund's futures and options on futures
transactions. E D & F Man acts as clearing broker for many
other funds and individuals.
The
investor should be advised that E D & F Man is not affiliated
with and does not act as a supervisor of the Fund or the Fund's
Sponsor, investment managers, members, officers, administrators,
transfer agents, registrars or organizers. Additionally, E D &
F Man is not acting as an underwriter or sponsor of the offering of
any shares or interests in the Fund and has not passed upon the
adequacy of this prospectus, the merits of participating in this
offering or on the accuracy of the information contained
herein.
Additionally, E D
& F Man does not provide any commodity trading advice regarding
the Fund's trading activities. Investors should not rely upon E D
& F Man in deciding whether to invest in the Fund or retain
their interests in the Fund. Investors should also note that the
Fund may select additional clearing brokers or replace E D & F
Man as the Fund's clearing broker.
Payments to Certain Third Parties
The
Sponsor employs Thales Capital Partners LLC (“Thales”)
for distribution and solicitation-related services. Thales is
registered as a broker-dealer with the SEC and is a member of the
Financial Industry Regulatory Authority (FINRA) and SIPC. Thales
receives a quarterly fee of $18,750 or 0.10% of new assets raised
in referred accounts for distribution and solicitation-related
services. This fee based on new assets raised is determined by an
agreed upon level of assets at the time of signing the
contract.
Commodity Trading Advisor
Currently, the
Sponsor does not employ commodity trading advisors. If, in the
future, the Sponsor does employ commodity trading advisors, it will
choose each advisor based on arm’s length negotiations and
will consider the advisor’s experience, fees, and
reputation.
Contractual Fees and Compensation Arrangements with the Sponsor and
Third-Party Service Providers
Service Provider
|
|
Compensation Paid by the Fund and the Underlying Funds
|
Teucrium
Trading, LLC, Sponsor
|
|
None,
for the Fund.
1.00%
of average net assets annually for the Underlying
Funds
|
U.S.
Bank, N.A., Custodian
|
|
For
custody services: 0.0075% of average gross assets up to $1 billion,
and .0050% of average gross assets over $1 billion, annually, plus
certain per-transaction charges
|
U.S.
Bancorp Fund Services, LLC, doing business as U.S. Bank Global Fund
Services, Transfer Agent, Fund Accountant and Fund
Administrator
|
|
For
Transfer Agency, Fund Accounting and Fund Administration services,
based on the total assets for all the Funds in the Trust: 0.05% of
average gross assets on the first $500 million, 0.04% on the next
$500 million, 0.03% on the next $2 billion and 0.02% on the balance
over $3 billion annually.
A
combined minimum annual fee of $47,000 for custody, transfer
agency, accounting and administrative services is assessed per
Fund.
|
Foreside
Fund Services, LLC, Distributor
|
|
Subject
to a maximum of $625,812 for the Trust for the two-year period of
May 1, 2021 to May 1, 2023 (the “two year offering
period”), the Distributor receives: 0.01% of the Fund’s
average daily net assets, and an aggregate annual fee of $100,000
for all Teucrium Funds. For the two year offering period, the
Distributor also receives expense reimbursements for sales and
advertising review fees subject to a maximum of $6,000 per
fund.
Under
the Securities Activities and Service Agreement (the
“SASA”), the Distributor receives compensation from the
fund for its activities on behalf of all the Teucrium Funds. For
the two year offering period, the Distributor will not exceed
$78,000 for all Teucrium Funds and will receive reimbursements
relating to the registration, continuing education and other
administrative expenses of the Registered Representatives for each
offering, not to exceed $54,000 for all Teucrium
Funds.
|
|
|
|
Broker-Dealers
|
|
As
negotiated with the particular broker-dealer for the
Fund.
|
|
|
|
Wilmington
Trust Company, Trustee
|
|
$3,300
annually for the Trust
|
|
|
|
Employees
of the Sponsor Registered with the Distributor (the
“Registered Representatives”)
|
|
For
non-marketing services to all Teucrium Funds, approximately
$132,350 and, for marketing and wholesaling purposes, approximately
$397,050. These amounts include expenses that will be reimbursed to
the Registered Representatives for continuing education, travel,
and other expenses related to their activities for the
Fund.
|
Other Non-Contractual Payments by the Fund
The
Fund pays for all brokerage fees, taxes and other expenses,
including licensing fees for the use of intellectual property,
registration or other fees paid to the SEC, FINRA, or any other
regulatory agency in connection with the offer and sale of
subsequent Shares after its initial registration and all legal,
accounting, printing and other expenses associated therewith. The
Fund also pays its portion of the fees and expenses for services
directly attributable to the Fund such as accounting, financial
reporting, regulatory compliance and trading activities, which the
Sponsor elected not to outsource. Certain aggregate expenses common
to all Teucrium Funds within the Trust are allocated by the Sponsor
to the respective funds based on activity drivers deemed most
appropriate by the Sponsor for such expenses, including but not
limited to relative assets under management and creation order
activity. These aggregate common expenses include, but are not
limited to, legal, auditing, accounting and financial reporting,
tax-preparation, regulatory compliance, trading activities, and
insurance costs, as well as fees paid to the Distributor. A portion
of these aggregate common expenses are related to the Sponsor or
related parties of principals of the Sponsor; these are necessary
services to the Teucrium Funds, which are primarily the cost of
performing certain accounting and financial reporting, regulatory
compliance, and trading activities that are directly attributable
to the Fund and are included, primarily, in distribution and
marketing fees.
|
Year
Ended
December 31,
2021
|
Year
Ended
December 31,
2020
|
Year
Ended
December 31,
2019
|
Recognized Related
Party Transactions
|
$51,117
|
$10,906
|
$13,711
|
Waived Related
Party Transactions
|
$46,063
|
$9,518
|
$11,641
|
The
Sponsor can elect to pay (or waive reimbursement for) certain fees
or expenses that would generally be paid for by the Fund, although
it has no contractual obligation to do so. Any election to pay or
waive reimbursement for fees that would generally be paid by the
Fund, can be changed at the discretion of the Sponsor. All
asset-based fees and expenses are calculated on the prior day's net
assets.
The
contractual and non-contractual fees and expenses paid by the Fund
as described above (exclusive of estimated brokerage fees) are as
follows, net of any expenses waived by the Sponsor. These are also
the “Other Fund Fees and Expenses” included in the
section entitled “Breakeven Analysis” in this
prospectus on page 4.
|
|
Professional
Fees1
|
$-
|
Distribution and
Marketing Fees2
|
$0.03
|
Custodian Fees and
Expenses3
|
$-
|
General and
Administrative Fees4
|
$-
|
Business Permits
and Licenses
|
$-
|
Other
Expenses
|
$-
|
Total
Other Fund Fees and Expenses
|
$0.03
|
(1)
Professional fees consist of primarily, but not entirely, legal,
auditing and tax-preparation related costs.
(2)
Distribution and marketing fees consist of primarily, but not
entirely, fees paid to the Distributor (Foreside Fund Services,
LLC), costs related to regulatory compliance activities, costs
related to marketing and solicitation services, and other costs
related to the trading activities of the Fund.
(3)
Custodian and Administrator fees consist of fees to the
Administrator and the Custodian for accounting, transfer agent and
custodian activities.
(4)
General and Administrative fees consist of primarily, but not
entirely, insurance and printing costs.
Asset-based
fees are calculated on a daily basis (accrued at 1/365 of the
applicable percentage of NAV on that day) and paid on a monthly
basis. NAV is calculated by taking the current market value of the
Fund’s total assets and subtracting any
liabilities.
Form of Shares
Registered Form
Shares
are issued in registered form in accordance with the Trust
Agreement. Global Fund Services has been appointed registrar and
transfer agent for the purpose of transferring Shares in
certificated form. Global Fund Services keeps a record of all
Shareholders and holders of the Shares in certificated form in the
registry (“Register”). The Sponsor recognizes transfers
of Shares in certificated form only if done in accordance with the
Trust Agreement. The beneficial interests in such Shares are held
in book-entry form through participants and/or accountholders in
DTC.
Book Entry
Individual
certificates are not issued for the Shares. Instead, Shares are
represented by one or more global certificates, which are deposited
by the Administrator with DTC and registered in the name of Cede
& Co., as nominee for DTC. The global certificates evidence all
of the Shares outstanding at any time. Shareholders are limited to
(1) participants in DTC such as banks, brokers, dealers and trust
companies (“DTC Participants”), (2) those who maintain,
either directly or indirectly, a custodial relationship with a DTC
Participant (“Indirect Participants”), and (3) those
who hold interests in the Shares through DTC Participants or
Indirect Participants, in each case who satisfy the requirements
for transfers of Shares. DTC Participants acting on behalf of
investors holding Shares through such participants’ accounts
in DTC will follow the delivery practice applicable to securities
eligible for DTC’s Same-Day Funds Settlement System. Shares
are credited to DTC Participants’ securities accounts
following confirmation of receipt of payment.
DTC
DTC is
a limited purpose trust company organized under the laws of the
State of New York and is a member of the Federal Reserve System, a
“clearing corporation” within the meaning of the New
York Uniform Commercial Code and a “clearing agency”
registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934 (the “Exchange Act”).
DTC holds securities for DTC Participants and facilitates the
clearance and settlement of transactions between DTC Participants
through electronic book-entry changes in accounts of DTC
Participants.
Transfer of Shares
The
Shares are only transferable through the book-entry system of DTC.
Shareholders who are not DTC Participants may transfer their Shares
through DTC by instructing the DTC Participant holding their Shares
(or by instructing the Indirect Participant or other entity through
which their Shares are held) to transfer the Shares. Transfers are
made in accordance with standard securities industry
practice.
Transfers of
interests in Shares with DTC are made in accordance with the usual
rules and operating procedures of DTC and the nature of the
transfer. DTC has established procedures to facilitate transfers
among the participants and/or accountholders of DTC. Because DTC
can only act on behalf of DTC Participants, who in turn act on
behalf of Indirect Participants, the ability of a person or entity
having an interest in a global certificate to pledge such interest
to persons or entities that do not participate in DTC, or otherwise
take actions in respect of such interest, may be affected by the
lack of a certificate or other definitive document representing
such interest.
DTC has
advised us that it will take any action permitted to be taken by a
Shareholder (including, without limitation, the presentation of a
global certificate for exchange) only at the direction of one or
more DTC Participants in whose account with DTC interests in global
certificates are credited and only in respect of such portion of
the aggregate principal amount of the global certificate as to
which such DTC Participant or Participants has or have given such
direction.
Inter-Series Limitation on Liability
Because
the Trust was established as a Delaware statutory trust, each
Teucrium Fund and each other series that may be established under
the Trust in the future will be operated so that it will be liable
only for obligations attributable to such series and will not be
liable for obligations of any other series or affected by losses of
any other series. If any creditor or shareholder of any particular
series (such as the Fund) asserts against the series a valid claim
with respect to its indebtedness or shares, the creditor or
shareholder will only be able to obtain recovery from the assets of
that series and not from the assets of any other series or the
Trust generally. The assets of the Fund and any other series will
include only those funds and other assets that are paid to, held by
or distributed to the series on account of and for the benefit of
that series, including, without limitation, amounts delivered to
the Trust for the purchase of shares in a series. This limitation
on liability is referred to as the Inter-Series Limitation on
Liability. The Inter-Series Limitation on Liability is expressly
provided for under the Delaware Statutory Trust Act, which provides
that if certain conditions (as set forth in Section 3804(a)) are
met, then the debts of any particular series will be enforceable
only against the assets of such series and not against the assets
of any other series or the Trust generally. In furtherance of the
Inter-Series Limitation on Liability, every party providing
services to the Trust, the Fund or the Sponsor on behalf of the
Trust or the Fund, will acknowledge and consent in writing to the
Inter-Series Limitation on Liability with respect to such
party’s claims.
The
existence of a Trustee should not be taken as an indication of any
additional level of management or supervision over the Fund or any
Underlying Fund. Consistent with Delaware law, the Trustee acts in
an entirely passive role, delegating all authority for the
management and operation of the Fund and the Trust to the Sponsor.
The Trustee does not provide custodial services with respect to the
assets of the Fund or any Underlying Fund.
Plan of Distribution
Buying and Selling Shares
Most
investors buy and sell Shares of the Fund in secondary market
transactions through brokers. Shares trade on the NYSE Arca under
the ticker symbol “TAGS.” Shares are bought and sold
throughout the trading day like other publicly traded securities.
When buying or selling Shares through a broker, most investors
incur customary brokerage commissions and charges. Investors are
encouraged to review the terms of their brokerage account for
details on applicable charges and, as discussed below under
“U.S. Federal Income Tax Considerations,” any
provisions authorizing the broker to borrow Shares held on your
behalf.
The Distributor and Authorized Purchasers
The
offering of the Fund’s Shares is a best efforts offering. The
Fund continuously offers Creation Baskets consisting of 12,500
Shares at their NAV through the Distributor to Authorized
Purchasers. Merrill Lynch Professional Clearing Corp was the
initial Authorized Purchaser. The initial Authorized Purchaser
purchased one Creation Basket of 50,000 units, which was the
Creation Basket size at the time of the initial offering, at a per
unit price of $50.00 on March 27, 2012. All Authorized Purchasers
pay a $250 fee for each Creation Basket order.
The
following entities have entered into Authorized Purchaser
Agreements with respect to the Fund: J.P. Morgan Securities
LLC, Merrill
Lynch Professional Clearing Corp., Goldman Sachs & Co., Citadel
Securities, LLC, and Virtu Americas LLC. Effective October 16,
2020, Deutsche Bank Securities Inc. terminated their agreement as
an Authorized Purchaser for the Fund.
In
order to increase the amount of outstanding Shares, the Sponsor or
the Fund may compensate certain persons, including broker-dealers,
for purchasing Creation Baskets themselves or for locating others
to purchase Creation Baskets. Assets under management derived from
such purchases may represent a significant proportion of total
assets in the Fund. Any such compensation paid to FINRA member
firms will not exceed, in the aggregate, $500,000 over the expected
two-year offering period. The Sponsor believes that increasing the
assets under management of the Fund is in the best interest of
shareholders because it creates economies of scale in the operation
of the Fund and allows the Fund the visibility to reach a broader
group of investors. For example, some advisers require funds to
have a certain level of assets under management before considering
them for recommendation. Furthermore, a larger number of Shares
outstanding should increase liquidity because there will be more
Shares available for investors to buy and sell in the secondary
market. A smaller number of Shares outstanding, conversely, may
inhibit trading on the secondary market by limiting Shares
available for purchase at any given time.
Because
new Shares can be created and issued on an ongoing basis, at any
point during the life of the Fund, a “distribution,” as
such term is used in the 1933 Act, will be occurring. Authorized
Purchasers, other broker-dealers and other persons are cautioned
that some of their activities may result in their being deemed
participants in a distribution in a manner that would render them
statutory underwriters and subject them to the prospectus-delivery
and liability provisions of the 1933 Act. For example, an
Authorized Purchaser, other broker-dealer firm or its client will
be deemed a statutory underwriter if it purchases a basket from the
Fund, breaks the basket down into the constituent Shares and sells
the Shares to its customers; or if it chooses to couple the
creation of a supply of new Shares with an active selling effort
involving solicitation of secondary market demand for the Shares.
In contrast, Authorized Purchasers may engage in secondary market
or other transactions in Shares that would not be deemed
“underwriting.” For example, an Authorized Purchaser
may act in the capacity of a broker or dealer with respect to
Shares that were previously distributed by other Authorized
Purchasers. A determination of whether a particular market
participant is an underwriter must take into account all the facts
and circumstances pertaining to the activities of the broker-dealer
or its client in the particular case, and the examples mentioned
above should not be considered a complete description of all the
activities that would lead to designation as an underwriter and
subject them to the prospectus-delivery and liability provisions of
the 1933 Act.
Dealers
who are neither Authorized Purchasers nor
“underwriters” but are nonetheless participating in a
distribution (as contrasted to ordinary secondary trading
transactions), and thus dealing with Shares that are part of an
“unsold allotment” within the meaning of Section
4(a)(3)(C) of the 1933 Act, would be unable to take advantage of
the prospectus delivery exemption provided by Section 4(a)(3) of
the 1933 Act.
The
Sponsor expects that any broker-dealers selling Shares will be
members of FINRA. Investors intending to create or redeem baskets
through Authorized Purchasers in transactions not involving a
broker-dealer registered in such investor’s state of domicile
or residence should consult their legal advisor regarding
applicable broker-dealer regulatory requirements under the state
securities laws prior to such creation or redemption.
While
the Sponsor may indemnify the Authorized Purchasers, they will not
be entitled to receive a discount or commission from the Trust or
the Sponsor for their purchases of Creation Baskets.
Calculating NAV
The
Fund’s NAV per Share is calculated by:
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taking
the current market value of its total assets, and
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subtracting
any liabilities and dividing the balance by the number of
Shares.
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Global
Fund Services, in its capacity as the “Administrator,”
calculates the NAV of the Fund once each trading day. It calculates
NAV as of the earlier of the close of the New York Stock Exchange
or 4:00 p.m. (EST). The NAV for a particular trading day is
released after 4:15 p.m. (EST).
For
purposes of determining the Fund’s NAV, the Fund’s
investments in the Underlying Funds will be valued based on the
Underlying Funds’ NAVs. In turn, in determining the value of
the Futures Contracts held by the Underlying Funds, the
Administrator will use the closing price on the exchange on which
they are traded, except that the “fair value” of a
Futures Contract (as described in more detail below) may be used
when the Futures Contract close at its price fluctuation limit for
the day. The Administrator will determine the value of all other
Fund and Underlying Fund investments as of the earlier of the close
of the New York Stock Exchange or 4:00 p.m. (EST), in accordance
with the current Services Agreement between the Administrator and
the Trust. The value of over the counter commodity interests will
be determined based on the value of the commodity or Futures
Contract underlying such commodity interest, except that a fair
value may be determined if the Sponsor believes that the Underlying
Fund is subject to significant credit risk relating to the
counterparty to such commodity Interest. Cash equivalents held by
the Fund or Underlying Funds are valued by the Administrator using
values received from recognized third party vendors (such as
Reuters) and dealer quotes. NAV includes any unrealized profit or
loss on open commodity interests and any other credit or debit
accruing to the Fund but unpaid or not received by the
Fund.
The
fair value of a commodity interest shall be determined by the
Sponsor in good faith and in a manner that assesses the commodity
interest’s value based on a consideration of all available
facts and information on the valuation date. When a Futures
Contract has closed at its price fluctuation limit, the fair value
determination attempts to estimate the price at which such Futures
Contract would be trading in the absence of the price fluctuation
limit (either above such limit when an upward limit has been
reached or below such limit when a downward limit has been
reached). Typically, this estimate will be made primarily by
reference to the price of comparable commodity interests trading in
the over the counter market. The fair value of a commodity interest
may not reflect such instrument’s market value or the amount
an Underlying Fund might reasonably expect to receive upon closing
out the instrument.
In
addition, in order to provide updated information relating to the
Fund for use by investors and market professionals, ICE Data
Indices, LLC calculates and disseminates throughout the trading day
an updated “indicative fund value.” The indicative fund
value is calculated by using the prior day’s closing NAV per
Share of the Fund as a base and updating that value throughout the
trading day to reflect changes in the indicative fund
values of the Underlying Funds’ shares. Changes in the value
of cash and cash equivalents are not included in the calculation of
indicative fund value. For this and other reasons, the indicative
fund value disseminated during the NYSE Arca trading hours should
not be viewed as an actual real time update of the NAV. NAV is
calculated only once at the end of each trading day.
The
indicative fund value for the Fund and each Underlying Fund is
disseminated by one or more major market data vendors on a per
Share basis every 15 seconds during the NYSE Arca Core Trading
Session. The normal trading hours for Futures Contracts may begin
after 9:30 a.m. and end before 4:00 p.m. (EST), and there is a gap
in time at the beginning and the end of each day during which the
Underlying Funds’ shares are traded on the NYSE Arca, but
real-time trading prices for at least some of the Futures Contracts
held by the Underlying Funds are not available. As a result, during
those gaps there is no update to the indicative fund values of the
Underlying Funds and such indicative fund values, therefore, will
be static.
ICE
Data Indices, LLC disseminates the indicative fund value through
the facilities of CTA/CQ High Speed Lines. In addition, the
indicative fund value is available through on-line information
services such as Bloomberg and Reuters.
Dissemination of
the indicative fund value provides additional information that is
not otherwise available to the public and is useful to investors
and market professionals in connection with the trading of Fund
Shares on the NYSE Arca. Investors and market professionals are
able throughout the trading day to compare the market price of the
Fund and the indicative fund value. If the market price of Fund
Shares diverges significantly from the indicative fund value,
market professionals may have an incentive to execute arbitrage
trades. For example, if the Fund appears to be trading at a
discount compared to the indicative fund value, a market
professional could buy Fund Shares on the NYSE Arca, aggregate them
into Redemption Baskets, and receive the NAV of such Shares by
redeeming them to the Trust provided that there are not a minimum
number of shares outstanding. Such arbitrage trades can tighten the
tracking between the market price of the Fund and the indicative
fund value and thus can be beneficial to all market
participants.
Creation and Redemption of Shares
The
Fund creates and redeems Shares from time to time, but only in one
or more Creation Baskets or Redemption Baskets. The creation and
redemption of baskets are only made in exchange for delivery to the
Fund or the distribution by the Fund of the amount of cash, cash
equivalents and/or Underlying Fund shares equal to the combined NAV
of the number of Shares included in the baskets being created or
redeemed determined as of 4:00 p.m. (EST) on the day the order to
create or redeem baskets is properly received.
Authorized
Purchasers are the only persons that may place orders to create and
redeem baskets. Authorized Purchasers must be (1) either registered
broker-dealers or other securities market participants, such as
banks and other financial institutions, which are not required to
register as broker-dealers to engage in securities transactions as
described below, and (2) DTC Participants. To become an Authorized
Purchaser, a person must enter into an Authorized Purchaser
Agreement with the Sponsor. The Authorized Purchaser Agreement
provides the procedures for the creation and redemption of baskets
and for the delivery of the cash, cash equivalents and/or
Underlying Fund shares required for such creations and redemptions.
The Authorized Purchaser Agreement and the related procedures
attached thereto may be amended by the Sponsor, without the consent
of any Shareholder or Authorized Purchaser. Authorized Purchasers
pay a transaction fee of $250 to the Custodian for each creation
order they place and a fee of $250 per order for redemptions.
Authorized Purchasers who make deposits with the Fund in exchange
for baskets receive no fees, commissions or other form of
compensation or inducement of any kind from either the Trust or the
Sponsor, and no such person will have any obligation or
responsibility to the Trust or the Sponsor to effect any sale or
resale of Shares.
Certain
Authorized Purchasers are expected to be capable of investing
directly in the Specified Commodities or the commodity interest
markets. Some Authorized Purchasers or their affiliates may from
time to time buy or sell the Specified Commodity or commodity
interests and may profit in these instances.
Each
Authorized Purchaser will be required to be registered as a
broker-dealer under the Exchange Act and a member in good standing
with FINRA or exempt from being or otherwise not required to be
registered as a broker-dealer or a member of FINRA and will be
qualified to act as a broker or dealer in the states or other
jurisdictions where the nature of its business so requires. Certain
Authorized Purchasers may also be regulated under federal and state
banking laws and regulations. Each Authorized Purchaser has its own
set of rules and procedures, internal controls and information
barriers as it determines is appropriate in light of its own
regulatory regime.
Under
the Authorized Purchaser Agreement, the Sponsor has agreed to
indemnify the Authorized Purchasers against certain liabilities,
including liabilities under the 1933 Act, and to contribute to the
payments the Authorized Purchasers may be required to make in
respect of those liabilities.
The
following description of the procedures for the creation and
redemption of baskets is only a summary and an investor should
refer to the relevant provisions of the Trust Agreement and the
form of Authorized Purchaser Agreement for more detail, each of
which has been filed as an exhibit to the registration statement of
which this prospectus is a part. See “Where You Can Find More
Information” for information about where you can obtain the
registration statement.
Creation Procedures
On any
business day, an Authorized Purchaser may place an order with
Global Fund Services in their capacity as the transfer agent to
create one or more baskets. For purposes of processing purchase and
redemption orders, a “business day” means any day other
than a day when any of the NYSE Arca, CBOT, ICE, or the New York
Stock Exchange is closed for regular trading. Purchase orders must
be placed by 12:00 p.m. (EST) or the close of regular trading on
the New York Stock Exchange, whichever is earlier. The day on which
the Distributor receives a valid purchase order is referred to as
the purchase order date.
By
placing a purchase order, an Authorized Purchaser agrees to deposit
cash, cash equivalents, Underlying Fund shares, or a combination of
cash, cash equivalents and Underlying Fund shares with the Fund, as
described below. Prior to the delivery of baskets for a purchase
order, the Authorized Purchaser must also have wired to the Sponsor
the non-refundable transaction fee due for the purchase order.
Authorized Purchasers may not withdraw a purchase order without the
prior consent of the Sponsor in its discretion.
Determination of Required Deposits
The
total deposit required to create each basket (“Creation
Basket Deposit”) is the amount of cash, cash equivalents
and/or Underlying Fund shares that is in the same proportion to the
total assets of the Fund (net of estimated accrued but unpaid fees,
expenses and other liabilities) on the purchase order date as the
number of Shares to be created under the purchase order is in
proportion to the total number of Shares outstanding on the
purchase order date. The Sponsor determines, directly in its sole
discretion or in consultation with the Custodian and the
Administrator, the requirements for cash, cash equivalents, and/or
Underlying Fund shares, including the remaining maturities of the
cash equivalents and/or Underlying Fund shares, which may be
included in deposits to create baskets. If cash equivalents are to
be included in a Creation Basket Deposit for orders placed on a
given business day, the Administrator will publish an estimate of
the Creation Basket Deposit requirements at the beginning of such
day.
Delivery of Required Deposits
An
Authorized Purchaser who places a purchase order is responsible for
transferring to the Fund’s account with the Custodian the
required amount of cash, cash equivalents, and/or Underlying Fund
shares by the end of the next business day following the purchase
order date, or by the end of such later business day, not to exceed
two business days after the purchase order date as agreed to
between the Authorized Purchaser and the Custodian when the
purchase order is placed (the “Purchase Settlement
Date”). Upon receipt of the deposit amount, the Custodian
directs DTC to credit the number of baskets ordered to the
Authorized Purchaser’s DTC account on the Purchase Settlement
Date.
Because
orders to purchase baskets must be placed by noon, (EST), but the
total payment required to create a basket during the continuous
offering period will not be determined until 4:00 p.m., (EST), on
the date the purchase order is received, Authorized Purchasers will
not know the total amount of the payment required to create a
basket at the time they submit an irrevocable purchase order for
the basket. The Fund’s NAV and the total amount of the
payment required to create a basket could rise or fall
substantially between the time an irrevocable purchase order is
submitted and the time the amount of the purchase price in respect
thereof is determined.
Rejection of Purchase Orders
The
Sponsor acting by itself or through the Distributor or Custodian
may reject a purchase order or a Creation Basket Deposit
if:
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it
determines that, due to position limits or otherwise, investment
alternatives that will enable the Fund to meet its investment
objective are not available or practicable at that
time;
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it
determines that the purchase order or the Creation Basket Deposit
is not in proper form;
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it
believes that acceptance of the purchase order or the Creation
Basket Deposit would have adverse tax consequences to the Fund or
its Shareholders;
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the
acceptance or receipt of the Creation Basket Deposit would, in the
opinion of counsel to the Sponsor, be unlawful;
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circumstances
outside the control of the Sponsor, Distributor or transfer agent
make it, for all practical purposes, not feasible to process
creations of baskets;
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there
is a possibility that any or all of the Benchmark Component Futures
Contracts of an Underlying Fund on the futures exchange from which
the NAV of that Underlying Fund is calculated will be priced at a
daily price limit restriction; or
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if, in
the sole discretion of the Sponsor, the execution of such an order
would not be in the best interest of the Fund or its
Shareholders.
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None of
the Sponsor, Distributor or transfer agent will be liable for the
rejection of any purchase order or Creation Basket
Deposit.
Redemption Procedures
The procedures by
which an Authorized Purchaser can redeem one or more baskets mirror
the procedures for the creation of baskets. On any business day, an
Authorized Purchaser may place an order with the transfer agent to
redeem one or more baskets. Redemption orders must be placed by
noon (EST) or the close of regular trading on the New York Stock
Exchange, whichever is earlier. A redemption order so received will
be effective on the date it is received in satisfactory form by the
transfer agent and
the Distributor. The redemption procedures allow Authorized
Purchasers to redeem baskets and do not entitle an individual
Shareholder to redeem any Shares in an amount less than a
Redemption Basket, or to redeem baskets other than through an
Authorized Purchaser. By placing a redemption order, an Authorized
Purchaser agrees to deliver the baskets to be redeemed through
DTC’s book-entry system to the Fund by the end of
athe
next business day following the effective date of the redemption
order or by the end of such later business day. Prior to the
delivery of the redemption distribution for a redemption order, the
Authorized Purchaser must also have wired to the Sponsor’s
account at the Custodian the non-refundable transaction fee due for
the redemption order. An Authorized Purchaser may not withdraw a
redemption order without the prior consent of the Sponsor in its
discretion.
Determination of Redemption Distribution
The
redemption distribution from the Fund consists of a transfer to the
redeeming Authorized Purchaser of an amount of cash, cash
equivalents and/or Underlying Fund shares that is in the same
proportion to the total assets of the Fund (net of estimated
accrued but unpaid fees, expenses and other liabilities) on the
date the order to redeem is properly received as the number of
Shares to be redeemed under the redemption order is in proportion
to the total number of Shares outstanding on the date the order is
received. The Sponsor, directly or in consultation with the
Custodian and Administrator, determines the requirements for cash,
cash equivalents, and/or Underlying Fund shares, including the
remaining maturities of the cash, cash equivalents and/or
Underlying Fund shares, which may be included in distributions to
redeem baskets. If cash equivalents are to be included in a
redemption distribution for orders placed on a given business day,
the Custodian and Administrator will publish an estimate of the
redemption distribution composition as of the beginning of such
day.
Delivery of Redemption Distribution
The
redemption distribution due from a Fund will be delivered to the
Authorized Purchaser on the Redemption Settlement Date if the
Fund’s DTC account has been credited with the baskets to be
redeemed. If the Fund’s DTC account has not been credited
with all of the baskets to be redeemed by the end of such date, the
redemption distribution will be delivered to the extent of whole
baskets received. Any remainder of the redemption distribution will
be delivered on the next business day after the Redemption
Settlement Date to the extent of remaining whole baskets received.
Pursuant to information from the Sponsor, the Custodian will also
be authorized to deliver the redemption distribution
notwithstanding that the baskets to be redeemed are not credited to
the Fund’s DTC account by noon (EST) on the Redemption
Settlement Date if the Authorized Purchaser has collateralized its
obligation to deliver the baskets through DTC’s book
entry-system on such terms as the Sponsor may from time to time
determine.
Suspension or Rejection of Redemption Orders
The
Sponsor may, in its discretion, suspend the right of redemption, or
postpone the redemption settlement date, (1) for any period during
which the NYSE Arca, CBOT or ICE is closed other than customary
weekend or holiday closings, or trading on the NYSE Arca, CBOT or
ICE, is suspended or restricted, (2) for any period during which an
emergency exists as a result of which delivery, disposal or
evaluation of cash equivalents is not reasonably practicable, (3)
for such other period as the Sponsor determines to be necessary for
the protection of the Shareholders, (4) if there is a possibility
that any or all of the Benchmark Component Futures Contracts of the
Underlying Funds on the CBOT or ICE from which the NAV of the Fund
is calculated will be priced at a daily price limit restriction, or
(5) if, in the sole discretion of the Sponsor, the execution of
such an order would not be in the best interest of the Fund or its
Shareholders. For example, the Sponsor may determine that it is
necessary to suspend redemptions to allow for the orderly
liquidation of the Fund’s assets at an appropriate value to
fund a redemption. If the Sponsor has difficulty liquidating the
Fund’s positions, e.g., because of a market disruption event
in the futures markets or an unanticipated delay in the liquidation
of a position in an over the counter contract, it may be
appropriate to suspend redemptions until such time as such
circumstances are rectified. None of the Sponsor, the Distributor,
or the transfer agent will be liable to any person or in any way
for any loss or damages that may result from any such suspension or
postponement.
Redemption orders
must be made in whole baskets. The Sponsor will reject a redemption
order if the order is not in proper form as described in the
Authorized Purchaser Agreement or if the fulfillment of the order,
in the opinion of its counsel, might be unlawful. The Sponsor may
also reject a redemption order if the number of Shares being
redeemed would reduce the remaining outstanding Shares to 50,000
Shares (i.e., four baskets of 12,500 Shares each) or less, unless
the Sponsor has reason to believe that the placer of the redemption
order does in fact possess all the outstanding Shares of the Fund
and can deliver them.
Creation and Redemption Transaction Fees
To
compensate for expenses in connection with the creation and
redemption of baskets, an Authorized Purchaser is required to pay a
transaction fee of $250 per order to the Custodian. The transaction
fees may be reduced, increased or otherwise changed by the
Sponsor.
Tax Responsibility
Authorized
Purchasers are responsible for any transfer tax, sales or use tax,
stamp tax, recording tax, value added tax or similar tax or
governmental charge applicable to the creation or redemption of
baskets, regardless of whether or not such tax or charge is imposed
directly on the Authorized Purchaser, and agree to indemnify the
Sponsor and the Fund if they are required by law to pay any such
tax, together with any applicable penalties, additions to tax and
interest thereon.
Secondary Market Transactions
As
noted, the Fund will create and redeem Shares from time to time,
but only in one or more Creation Baskets or Redemption Baskets. The
creation and redemption of baskets are only made in exchange for
delivery to the Fund or the distribution by the Fund of the amount
of cash, cash equivalents and/or Underlying Fund shares to the
aggregate NAV of the number of Shares included in the baskets being
created or redeemed determined on the day the order to create or
redeem baskets is properly received.
As
discussed above, Authorized Purchasers are the only persons that
may place orders to create and redeem baskets. Authorized
Purchasers must be registered broker-dealers or other securities
market participants, such as banks and other financial institutions
that are not required to register as broker-dealers to engage in
securities transactions. An Authorized Purchaser is under no
obligation to create or redeem baskets, and an Authorized Purchaser
is under no obligation to offer to the public Shares of any baskets
it does create. Authorized Purchasers that do offer to the public
Shares from the baskets they create will do so at per-Share
offering prices that are expected to reflect, among other factors,
the trading price of the Shares on the NYSE Arca, the NAV of the
Shares at the time the Authorized Purchaser purchased the Creation
Baskets, the NAV of the Shares at the time of the offer of the
Shares to the public, the supply of and demand for Shares at the
time of sale, and the liquidity of the commodity interest markets.
The prices of Shares offered by Authorized Purchasers are expected
to fall between the Fund’s NAV and the trading price of the
Shares on the NYSE Arca at the time of sale. Shares initially
comprising the same basket but offered by Authorized Purchasers to
the public at different times may have different offering prices.
An order for one or more baskets may be placed by an Authorized
Purchaser on behalf of multiple clients. Shares are expected to
trade in the secondary market on the NYSE Arca. Shares may trade in
the secondary market at prices that are lower or higher relative to
their NAV per Share. The amount of the discount or premium in the
trading price relative to the NAV per Share may be influenced by
various factors, including the number of investors who seek to
purchase or sell Shares in the secondary market and the liquidity
of the commodity interest markets. While the Shares trade on the
NYSE Arca until 4:00 p.m. (EST), liquidity in the markets for
commodity interests may be reduced after the close of regular
trading for Futures Contracts (the closing hours of the CBOT and
the ICE Futures are adjusted periodically by those Exchanges and
can be confirmed by accessing the websites of those same). As a
result, during this time, trading spreads, and the resulting
premium or discount, on the Shares may widen.
Use of Proceeds
The
Sponsor causes the Fund to transfer the proceeds of the sale of
Creation Baskets to the Custodian or another financial institution
for use in trading activities and/or investment in shares of the
Underlying Funds or in cash equivalents. Under normal market
conditions, the Sponsor invests substantially all of the
Fund’s assets in shares of the Underlying Funds, although
some residual amount of Fund assets may be held in cash and/or cash
equivalents. The Sponsor invests the Underlying Funds’ assets
in Futures Contracts, other commodity interests, cash and cash
equivalents. When the Underlying Funds purchase Futures Contracts
and certain other commodity Interests that are exchange-traded, the
Underlying Fund is required to deposit with the FCM on behalf of
the exchange a portion of the value of the contract or other
interest as security to ensure payment for the obligation under the
Commodity Interests at maturity. This deposit is known as initial
margin. Counterparties in transactions in over the counter
commodity interests will generally impose similar collateral
requirements on the Underlying Funds. The Sponsor invests the
Underlying Funds’ assets that remain after margin and
collateral is posted in short-term Treasury Securities, cash,
and/or cash equivalents. Subject to these margin and collateral
requirements, the Sponsor has sole authority to determine the
percentage of assets that will be:
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held as
margin or collateral with FCMs or other custodian;
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used
for other investments; and
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held in
bank accounts to pay current obligations and as
reserves.
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In
general, the Underlying Funds expect that they will be required to
post approximately 4-6% of the notional amount of a commodity
interest as initial margin when entering into such commodity
interest. Ongoing margin and collateral payments will generally be
required for both exchange-traded and over the counter commodity
interests based on changes in the value of the commodity interests.
Furthermore, ongoing collateral requirements with respect to over
the counter commodity interests are negotiated by the parties, and
may be affected by overall market volatility, volatility of the
underlying commodity or index, the ability of the counterparty to
hedge its exposure under the commodity interest, and each
party’s creditworthiness. In light of the differing
requirements for initial payments under exchange-traded and over
the counter commodity interests and the fluctuating nature of
ongoing margin and collateral payments, it is not possible to
estimate what portion of the Underlying Funds’ assets will be
posted as margin or collateral at any given time. Cash and cash
equivalents held by the Underlying Fund constitute reserves that
are available to meet ongoing margin and collateral requirements.
All interest and other income received by an Underlying Fund is
used for such Underlying Fund’s benefit.
An FCM,
counterparty, government agency or commodity exchange could
increase margin or collateral requirements applicable to the Fund
to hold trading positions at any time. Moreover, margin is merely a
security deposit and has no bearing on the profit or loss potential
for any positions held. Further, under recently adopted CFTC rules,
the Fund may be obligated to post initial and variation margin with
respect to swaps (and options that qualify as swaps) and traded
over the counter, and, where applicable, on SEFs.
The
approximate 4-6% of the assets of the Underlying Funds that are
held by the FCM are held in segregation pursuant to the CEA and
CFTC regulations.
The Trust Agreement
The
following paragraphs are a summary of certain provisions of the
Trust Agreement. The following discussion is qualified in its
entirety by reference to the Trust Agreement.
Authority of the Sponsor
The
Sponsor is generally authorized to perform all acts deemed
necessary to carry out the purposes of the Trust and to conduct the
business of the Trust. The Trust, the Fund and the Underlying Funds
will continue to exist until terminated in accordance with the
Trust Agreement.
The Sponsor’s Obligations
In
addition to the duties imposed by the Delaware Trust Statute, under
the Trust Agreement the Sponsor has obligations as a sponsor of the
Trust, which include, among others, responsibility for certain
organizational and operational requirements of the Trust, as well
as fiduciary responsibility for the safekeeping and use of the
Trust’s assets, whether or not in the Sponsor’s
immediate possession or control.
To the
extent that, at law (common or statutory) or in equity, the Sponsor
has duties (including fiduciary duties) and liabilities relating
thereto to the Trust, the Fund, the Shareholders or to any other
person, the Sponsor will not be liable to the Trust, the Fund, the
Shareholders or to any other person for its good faith reliance on
the provisions of the Trust Agreement or this prospectus unless
such reliance constitutes gross negligence or willful misconduct on
the part of the Sponsor. The provisions of the Trust Agreement, to
the extent they restrict or eliminate the duties and liabilities of
the Sponsor otherwise existing at law or in equity, replace such
other duties and liabilities of the Sponsor.
Liability and Indemnification
Under
the Trust Agreement, the Sponsor, the Trustee and their respective
Affiliates (collectively, “Covered Persons”) shall have
no liability to the Trust, the Fund or any other Teucrium Fund or
any Shareholder for any loss suffered by the Trust, the Fund or any
other Teucrium Fund which arises out of any action or inaction of
such Covered Person if such Covered Person, in good faith,
determined that such course of conduct was in the best interest of
the Trust, the Fund or any other Teucrium Fund and such course of
conduct did not constitute gross negligence or willful misconduct
of such Covered Person. Subject to the foregoing, neither the
Sponsor nor any other Covered Person shall be personally liable for
the return or repayment of all or any portion of the capital or
profits of any Shareholder or assignee thereof, it being expressly
agreed that any such return of capital or profits made pursuant to
the Trust Agreement shall be made solely from the assets of the
applicable Teucrium Fund without any rights of contribution from
the Sponsor or any other Covered Person. A Covered Person shall not
be liable for the conduct or willful misconduct of any
administrator or other delegate selected by the Sponsor with
reasonable care, provided, however, that the Trustee and its
Affiliates shall not, under any circumstances be liable for the
conduct or willful misconduct of any administrator or other
delegate or any other person selected by the Sponsor to provide
services to the Trust.
The
Trust Agreement also provides that the Sponsor shall be indemnified
by the Trust (or by a series separately to the extent the matter in
question relates to a single series or disproportionately affects a
specific series in relation to other series) against any losses,
judgments, liabilities, expenses and amounts paid in settlement of
any claims sustained by it in connection with its activities for
the Trust, provided that (i) the Sponsor was acting on behalf of or
performing services for the Trust and has determined, in good
faith, that such course of conduct was in the best interests of the
Trust and such liability or loss was not the result of gross
negligence, willful misconduct, or a breach of the Trust Agreement
on the part of the Sponsor and (ii) any such indemnification will
only be recoverable from the assets of the applicable series. The
Sponsor’s rights to indemnification permitted under the Trust
Agreement shall not be affected by the dissolution or other
cessation to exist of the Sponsor, or the withdrawal, adjudication
of bankruptcy or insolvency of the Sponsor, or the filing of a
voluntary or involuntary petition in bankruptcy under Title 11 of
the Bankruptcy Code by or against the Sponsor.
Notwithstanding the
above, the Sponsor shall not be indemnified for any losses,
liabilities or expenses arising from or out of an alleged violation
of U.S. federal or state securities laws unless (i) there has been
a successful adjudication on the merits of each count involving
alleged securities law violations as to the particular indemnitee
and the court approves the indemnification of such expenses
(including, without limitation, litigation costs), (ii) such claims
have been dismissed with prejudice on the merits by a court of
competent jurisdiction as to the particular indemnitee and the
court approves the indemnification of such expenses (including,
without limitation, litigation costs), or (iii) a court of
competent jurisdiction approves a settlement of the claims against
a particular indemnitee and finds that indemnification of the
settlement and related costs should be made.
The
payment of any indemnification shall be allocated, as appropriate,
among the Trust’s series. The Trust and its series shall not
incur the cost of that portion of any insurance which insures any
party against any liability, the indemnification of which is
prohibited under the Trust Agreement.
Expenses incurred
in defending a threatened or pending action, suit or proceeding
against the Sponsor shall be paid by the Trust in advance of the
final disposition of such action, suit or proceeding, if (i) the
legal action relates to the performance of duties or services by
the Sponsor on behalf of the Trust; (ii) the legal action is
initiated by a party other than the Trust; and (iii) the Sponsor
undertakes to repay the advanced funds with interest to the Trust
in cases in which it is not entitled to
indemnification.
The
Trust Agreement provides that the Sponsor and the Trust shall
indemnify the Trustee and its successors, assigns, legal
representatives, officers, directors, shareholders, employees,
agents and servants (the “Trustee Indemnified Parties”)
against any liabilities, obligations, losses, damages, penalties,
taxes (excluding any taxes on compensation received for services as
Trustee or on indemnity payments received), claims, actions, suits,
costs, expenses or disbursements which may be imposed on a Trustee
Indemnified Party relating to or arising out of the formation,
operation or termination of the Trust, the execution, delivery and
performance of any other agreements to which the Trust is a party,
or the action or inaction of the Trustee under the Trust Agreement
or any other agreement, except for expenses resulting from the
gross negligence or willful misconduct of a Trustee Indemnified
Party. Further, certain officers of the Sponsor are insured against
liability for certain errors or omissions which an officer may
incur or that may arise out of his or her capacity as
such.
In the
event the Trust is made a party to any claim, dispute, demand or
litigation or otherwise incurs any liability or expense as a result
of or in connection with any Shareholder’s (or
assignee’s) obligations or liabilities unrelated to the Trust
business, such Shareholder (or assignees cumulatively) is required
under the Trust Agreement to indemnify the Trust for all such
liability and expense incurred, including attorneys’ and
accountants’ fees.
Withdrawal of the Sponsor
The
Sponsor may withdraw voluntarily as the Sponsor of the Trust only
upon ninety (90) days’ prior written notice to the holders of
the Trust’s outstanding shares and the Trustee. If the
withdrawing Sponsor is the last remaining Sponsor, shareholders
holding a majority (over 50%) of the outstanding shares of the
Teucrium Funds voting together as a single class (not including
shares acquired by the Sponsor through its initial capital
contribution) may vote to elect a successor Sponsor. The successor
Sponsor will continue the business of the Trust. Shareholders have
no right to remove the Sponsor.
In the
event of withdrawal, the Sponsor is entitled to a redemption of the
shares it acquired through its initial capital contribution to any
of the series of the Trust at their NAV per Share. If the Sponsor
withdraws and a successor Sponsor is named, the withdrawing Sponsor
shall pay all expenses as a result of its withdrawal.
Meetings
Meetings of the
Trust’s shareholders may be called by the Sponsor and will be
called by it upon the written request of Shareholders holding at
least 25% of the outstanding Shares of the Trust or the Fund, as
applicable (not including Shares acquired by the Sponsor through
its initial capital contribution. The Sponsor shall deposit in the
United States mail or electronically transmit written notice to all
Shareholders of the Fund of the meeting and the purpose of the
meeting, which shall be held on a date not less than 30 nor more
than 60 days after the date of mailing of such notice, at a
reasonable time and place. Where the meeting is called upon the
written request of the shareholders of the Fund, or any other
Teucrium Fund, as applicable, such written notice shall be mailed
or transmitted not more than 45 days after such written request for
a meeting was received by the Sponsor.
Voting Rights
Shareholders have
no voting rights with respect to the Trust or the Fund except as
expressly provided in the Trust Agreement. The Trust Agreement
provides that shareholders representing at least a majority (over
50%) of the outstanding shares of the Teucrium Funds voting
together as a single class (excluding shares acquired by the
Sponsor in connection with its initial capital contribution to any
Trust series) may vote to (i) continue the Trust by electing a
successor Sponsor as described above, and (ii) approve amendments
to the Trust Agreement that impair the right to surrender
Redemption Baskets for redemption. (Trustee consent to any
amendment to the Trust Agreement is required if the Trustee
reasonably believes that such amendment adversely affects any of
its rights, duties or liabilities.) In addition, shareholders
holding shares representing seventy-five percent (75%) of the
outstanding shares of the Teucrium Funds, voting together as a
single class (excluding shares acquired by the Sponsor in
connection with its initial capital contribution to any Trust
series) may vote to dissolve the Trust upon not less than ninety
(90) days’ notice to the Sponsor.
Limited Liability of Shareholders
Shareholders shall
be entitled to the same limitation of personal liability extended
to stockholders of private corporations for profit organized under
the general corporation law of Delaware, and no Shareholder shall
be liable for claims against, or debts of the Trust or the Fund in
excess of his share of the Fund’s assets. The Trust or the
Fund shall not make a claim against a Shareholder with respect to
amounts distributed to such Shareholder or amounts received by such
Shareholder upon redemption unless, under Delaware law, such
Shareholder is liable to repay such amount.
The
Trust or the Fund shall indemnify to the full extent permitted by
law and the Trust Agreement, each Shareholder (excluding the
Sponsor to the extent of its ownership of any Shares acquired
through its initial capital contribution) against any claims of
liability asserted against such Shareholder solely because of its
ownership of Shares (other than for taxes on income from Shares for
which such Shareholder is liable).
The
Trust Agreement provides that every written note, bond, contract,
instrument, certificate or undertaking made or issued by or on
behalf of the Fund shall give notice to the effect that the
obligations of such instrument are not binding upon the
Shareholders individually but are binding only upon the assets and
property of the Fund.
The Sponsor Has Conflicts of Interest
There
are present and potential future conflicts of interest in the
Trust’s structure and operation you should consider before
you purchase Shares. The Sponsor may use this notice of conflicts
as a defense against any claim or other proceeding
made.
The
Sponsor’s principals, officers and employees, do not devote
their time exclusively to the Funds. Notwithstanding obligations
and expectations related to the management of the Sponsor, the
Sponsor’s principals, officers and employees may be
directors, officers or employees of other entities, and may manage
assets of other entities, including the other Teucrium Funds,
through the Sponsor or otherwise. As a result, the principals could
have a conflict between responsibilities to the Fund on the one
hand and to those other entities on the other.
The
Sponsor and its principals, officers and employees may trade
securities, futures and related contracts for their own accounts,
creating the potential for preferential treatment of their own
accounts. Shareholders will not be permitted to inspect the trading
records of such persons or any written policies of the Sponsor
related to such trading. A conflict of interest may exist if their
trades are in the same markets and at approximately the same times
as the trades for the Fund or Underlying Funds. A potential
conflict also may occur when the Sponsor’s principals trade
their accounts more aggressively or take positions in their
accounts which are opposite, or ahead of, the positions taken by
the Underlying Funds.
The
Sponsor has sole current authority to manage the investments and
operations of the Fund and the Underlying Funds, and this may allow
it to act in a way that furthers its own interests which may create
a conflict with your best interests, including the authority of the
Sponsor to allocate expenses to and between the Teucrium Funds.
Shareholders have very limited voting rights with respect to the
Fund, which will limit the ability to influence matters such as
amendment of the Trust Agreement, change in the Fund’s basic
investment policies, or dissolution of the Fund or the Trust.
Shareholders have no voting rights with respect to the Underlying
Funds.
The
Sponsor serves as the Sponsor to the Teucrium Funds and may in the
future serve as the Sponsor or investment adviser to commodity
pools other than the Teucrium Funds. The Sponsor may have a
conflict to the extent that its trading decisions for the Fund may
be influenced by the effect they would have on the other pools it
manages.
In
addition, the Sponsor may be required to indemnify the officers and
directors of the other pools, if the need for indemnification
arises. This potential indemnification will cause the
Sponsor’s assets to decrease. If the Sponsor’s other
sources of income are not sufficient to compensate for the
indemnification, it could cease operations, which could in turn
result in Fund losses and/or termination of the Fund.
If the
Sponsor acquires knowledge of a potential transaction or
arrangement that may be an opportunity for the Fund, it shall have
no duty to offer such opportunity to the Fund. The Sponsor will not
be liable to the Fund or the Shareholders for breach of any
fiduciary or other duty if the Sponsor pursues such opportunity or
directs it to another person or does not communicate such
opportunity to the Fund and is not required to share income or
profits derived from such business ventures with the
Fund.
Resolution of Conflicts Procedures
The
Trust Agreement provides that whenever a conflict of interest
exists between the Sponsor or any of its Affiliates, on the one
hand, and the Trust, any shareholder of a Trust series, or any
other person, on the other hand, the Sponsor shall resolve such
conflict of interest, take such action or provide such terms,
considering in each case the relative interest of each party
(including its own interest) to such conflict, agreement,
transaction or situation and the benefits and burdens relating to
such interests, any customary or accepted industry practices, and
any applicable generally accepted accounting practices or
principles.
In the
absence of bad faith by the Sponsor, the resolution, action or
terms so made, taken or provided by the Sponsor shall not
constitute a breach of the Trust Agreement or any other agreement
contemplated therein or of any duty or obligation of the Sponsor at
law or in equity or otherwise.
Interests of Named Experts and Counsel
No
expert hired by the Fund to give advice on the preparation of this
offering document has been hired on a contingent fee basis, nor do
any of them have any present or future expectation of interest in
the Sponsor, Distributor, Authorized Purchasers,
Custodian/Administrator or other service providers to the
Fund.
Provisions of Federal and State Securities Laws
This
offering is made pursuant to federal and state securities laws. The
SEC and state securities agencies take the position that
indemnification of the Sponsor that arises out of an alleged
violation of such laws is prohibited unless certain conditions are
met. Those conditions require that no indemnification of the
Sponsor or any underwriter for the Fund may be made in respect of
any losses, liabilities or expenses arising from or out of an
alleged violation of federal or state securities laws unless: (i)
there has been a successful adjudication on the merits of each
count involving alleged securities law violations as to the party
seeking indemnification and the court approves the indemnification;
(ii) such claim has been dismissed with prejudice on the merits by
a court of competent jurisdiction as to the party seeking
indemnification; or (iii) a court of competent jurisdiction
approves a settlement of the claims against the party seeking
indemnification and finds that indemnification of the settlement
and related costs should be made, provided that, before seeking
such approval, the Sponsor or other indemnitee must apprise the
court of the position held by regulatory agencies against such
indemnification.
Books and Records
The
Trust keeps its books of record and account at its office located
at, Three Main Street, Suite 215, Burlington, VT 05401, or at the
offices of the Administrator, U.S. Bancorp Fund Services, LLC,
doing business as U.S. Bank Global Fund Services, located at 777 E.
Wisconsin Ave, Milwaukee, Wisconsin 53202, or such office,
including of an administrative agent, as it may subsequently
designate upon notice. The books of account of the Fund are open to
inspection by any Shareholder (or any duly constituted designee of
a Shareholder) at all times during the usual business hours of the
Fund upon reasonable advance notice to the extent such access is
required under CFTC rules and regulations. In addition, the Trust
keeps a copy of the Trust Agreement on file in its office which
will be available for inspection by any Shareholder at all times
during its usual business hours upon reasonable advance
notice.
Statements, Filings, and Reports to Shareholders
The
Trust will furnish to DTC Participants for distribution to
Shareholders annual reports (as of the end of each fiscal year) for
the Fund as are required to be provided to Shareholders by the CFTC
and the NFA. These annual reports will contain financial statements
prepared by the Sponsor and audited by an independent registered
public accounting firm designated by the Sponsor. The Trust will
also post monthly reports to the Fund’s website (www.teucrium.com).
These monthly reports will contain certain unaudited financial
information regarding the Fund, including the Fund’s NAV. The
Sponsor will furnish to the Shareholders other reports or
information which the Sponsor, in its discretion, determines to be
necessary or appropriate. In addition, under SEC rules the Trust
will be required to file quarterly and annual reports for the Fund
with the SEC, which need not be sent to Shareholders but will be
publicly available through the SEC. The Trust will post the same
information that would otherwise be provided in the Trust’s
CFTC, NFA and SEC reports on the Fund’s website www.teucrium.com.
The
accountants’ report on its audit of the Fund’s
financial statements will be furnished by the Trust to Shareholders
upon request. The Trust will file such tax returns, and prepare,
disseminate and file such tax reports for the Fund, as it is
advised by its counsel or accountants are from time to time
required by any applicable statute, rule or regulation and will
make such tax elections for the Fund as it deems
advisable.
PricewaterhouseCoopers
(“PwC”), 2001 Ross Avenue, Suite 1800, Dallas, Texas
75201-2997, will provide tax information in accordance with the
Code and applicable U.S. Treasury Regulations. Persons treated as
intermediaries for purposes of these regulations may obtain tax
information regarding the Fund from PwC or from the Fund’s
website, www.teucrium.com.
Fiscal Year
The
fiscal year of the Fund is the calendar year.
Governing Law
The
rights of the Sponsor, the Trust, the Fund, DTC (as registered
owner of the Fund’s global certificate for Shares) and the
Shareholders are governed by the laws of the State of Delaware,
except with respect to causes of action for violations of U.S.
federal or state securities laws. The Trust Agreement and the
effect of every provision thereof shall control over any contrary
or limiting statutory or common law of the State of Delaware, other
than the Delaware Trust Statute.
Security Ownership of Principal Shareholders and
Management
The
following table sets forth information with respect to each person
or entity known to own beneficially more than 5% of the outstanding
shares of TAGS as of December 31, 2021, based on information known
to the Sponsor.
(1)
Title of Class
|
(2)
Name and Address
of Beneficial Owner
|
(3)
Amount
and Nature of Beneficial Ownership
|
(4)
Percent of Class
|
TAGS
|
Citibank
Private Bank NA
New
York, NY
|
51,500
common units (1)
|
9.80%
|
(1) These individuals and entities have not filed any public
reports with the SEC.
The
following table sets forth information regarding the beneficial
ownership of shares of TAGS by the executive officers of the
Sponsor as of February 28, 2022. Except as listed, no other
executive officer of the Sponsor is a beneficial owner of shares of
the Fund.
(1)
Title of Class
|
(2)
Name of Beneficial Owner
|
(3)
Amount and nature of Beneficial Ownership
|
(4)
Percent of Class
|
TAGS
|
Sal
Gilbertie
|
300
common units
|
*
|
*Less
than 1%.
Legal Matters
Litigation and Claims
On
November 30, 2020, certain officers and members of Teucrium
Trading, LLC (the “Sponsor”), along with the Sponsor,
filed a Verified Complaint (as amended through the Amended Verified
Complaint filed on February 18, 2021) (the “Gilbertie
complaint”) in the Delaware Court of Chancery, C.A. No.
2020-1018-AGB. The Gilbertie complaint asserts various
claims against Dale Riker, the Sponsor’s former Chief
Executive Officer and Barbara Riker, the Sponsor’s former
Chief Financial Officer and Chief Compliance Officer. Sal Gilbertie v. Dale
Riker, et
al., C.A. No. 2020-1018-AGB (Del. Ch.)
(the “Gilbertie case”)
Among
other things, the Gilbertie complaint responded to and addressed
certain allegations that Mr. Riker had made in a draft complaint
that he threatened to file (and subsequently did file) in New York
Supreme Court. See Dale Riker v.
Sal Gilbertie, et al., No. 656794-2020 (N.Y. Sup. Ct.). On
April 22, 2021, the Supreme Court of the State of New York, New
York County dismissed Mr. Riker’s case without prejudice to
the case being refiled after the conclusion of the Gilbertie case in Delaware Chancery
Court. See Dale Riker, et al. v.
Teucrium Trading, LLC et al, Decision + Order on Motions,
No. 6567943-2020 (N.Y. Sup. Ct) (Apr. 22, 2021).
The
Gilbertie complaint asserts claims for a declaration concerning the
effects of the final order and judgment in an earlier books and
records action; for a declaration concerning Mr. Riker’s
allegation that Mr. Gilbertie had entered into an agreement to
purchase Mr. Riker’s equity in the Sponsor; for an order
compelling the return of property from Mr. Riker; for a declaration
concerning Mr. Riker’s allegations that the Sponsor and
certain of the plaintiffs had improperly removed him as an officer
and caused purportedly false financial information to be published;
for breach of Ms. Riker’s separation agreement with the
Sponsor; for tortious interference by Mr. Riker with Ms.
Riker’s separation agreement; for a declaration concerning
the releases that had been provided to Ms. Riker through her
separation agreement; for breach of the Sponsor’s Operating
Agreement by Mr. Riker; and for breach of fiduciary duty by Mr.
Riker.
On June
29, 2021, Dale Riker, individually and derivatively on behalf of
the Sponsor, filed a new suit in the Court of Chancery of the State
of Delaware against the Sponsor’s officers and certain of the
Sponsor’s Class A Members. See Dale Riker v. Salvatore Gilbertie et
al., C.A. No. 2021-0561-LWW. (the “Riker case”). On September 7,
2021, Dale Riker and Barbara Riker filed their answers to the
Gilbertie complaint. As a
result of the Court having ordered the consolidation of the
Gilbertie case and
Riker case, the claims in
the Riker case were
re-filed as counterclaims in the Gilbertie case, which accompanied the
Rikers’ answers. The now-consolidated Gilbertie case and the Riker case is captioned Sal Gilbertie, Cory Mullen-Rusin, Steve
Kahler, Carl Miller III, and Teucrium Trading LLC v. Dale Riker and
Barbara Riker, C.A. No. 2020-1018-LWW.
Through
their counterclaims, the Rikers assert direct and derivative claims
for breach of fiduciary duty, breach of contract, declaratory
relief, specific performance, unjust enrichment, fraud, and
conspiracy to commit fraud. The Sponsor intends to pursue its
claims and defend vigorously against the Rikers’
counterclaims in Delaware.
Except
as described above, within the past 10 years of the date of this
prospectus, there have been no material administrative, civil or
criminal actions against the Sponsor, the Trust or the Fund, or any
principal or affiliate of any of them. This includes any actions
pending, on appeal, concluded, threatened, or otherwise known to
them.
Legal Opinion
Vedder
Price P.C. (“Vedder Price”) has been retained to advise
the Trust and the Sponsor with respect to the Shares being offered
hereby and has passed upon the validity of the Shares being issued
hereunder. Vedder Price has also provided the Sponsor with its
opinion with respect to U.S. federal income tax matters addressed
below in “U.S. Federal Income Tax
Considerations.”.
Experts
The
financial statements of the Trust and the Fund incorporated by
reference in this prospectus and elsewhere in the registration
statement have been so incorporated by reference in reliance upon
the reports of Grant Thornton LLP (“Grant Thornton”),
independent registered public accountants, upon the authority of
said firm as experts in accounting and auditing.
Privacy Policy
The
following discussion is qualified in its entirety by reference to
the privacy policy. A copy of the privacy policy is available at
www.teucrium.com.
The
Sponsor, the Trust, and the Teucrium Funds have adopted a privacy
policy relating to the collection, maintenance, and use of
nonpublic personal information about the Teucrium Funds’
current and former investors, as required under federal law.
Federal law gives investors the
right to limit some but not all sharing of their nonpublic personal
information. Federal law also requires the Sponsor to tell
investors how it collects, shares, and protects such nonpublic
personal information.
Collection of Nonpublic Personal Information
The
Sponsor may collect or have access to nonpublic personal
information about current and former Fund investors for certain
purposes relating to the operation of the Funds. This information
may include information received from investors, such as their
name, social security number, telephone number, and address, and
information about investors’ holdings and transactions in
shares of the Teucrium Funds.
Use and Disclosure of Nonpublic Personal Information
The
Sponsor does not sell nonpublic personal information to any third
parties. The Sponsor primarily uses investors’ nonpublic
personal information to complete financial transactions that may be
requested. The Sponsor may disclose investors’ nonpublic
personal information to third parties under specific circumstances
described in the privacy policy. These circumstances include, among
others, information needed to complete financial transactions,
information released at the direction of an investor, and certain
information requested by courts, regulators, law enforcement, or
tax authorities. Investors may not opt out of these
disclosures.
Investors’
nonpublic personal information, particularly information about
investors’ holdings and transactions in shares of the
Teucrium Funds, may be shared between and amongst the Sponsor and
the Teucrium Funds. An investor
cannot opt-out of the sharing of nonpublic personal information
between and amongst the Sponsor and the Teucrium Funds.
However, the Sponsor and the Teucrium Funds will not use this
information for any cross-marketing purposes. In other words, all investors will be treated
as having “opted out” of receiving marketing
solicitations from Teucrium Funds other than the Teucrium Fund(s)
in which it invests.
Protection of Nonpublic Personal Information
As
described in the privacy policy, the Sponsor takes safeguards to
protect investors’ nonpublic personal information, which
include, among others, restricting access to such information,
requiring third parties to follow appropriate standards of security
and confidentiality, and maintaining physical, technical,
administrative, and procedural safeguards.
Teucrium’s
Website is hosted in the United States and any data provided to
Teucrium is stored in the United States. If you choose to provide
Personal Data from regions outside of the United States, then by
your submission of such data, you acknowledge and agree that: (a)
you are transferring your personal information outside of those
regions to the United States voluntarily and with consent; (b) the
laws and regulations of the United States shall govern your use of
the provision of your information, which laws and regulations may
differ from those of your country of residence; and (c) you permit
your personal information to be used for the purposes herein and in
the Privacy Policy above.
U.S. Federal Income Tax Considerations
The
following discussion summarizes the material U.S. federal income
tax consequences of the purchase, ownership and disposition of
Shares of the Fund and the U.S. federal income tax treatment of the
Fund. Except where otherwise noted, this discussion deals
only with the U.S. federal income tax consequences relating to
Shares held as capital assets by U.S. Shareholders (as defined
below) who are not subject to special tax treatment. For
example, in general it does not address the tax consequences, such
as, but not limited to (i) dealers in securities, currencies, or
commodities, (ii) traders in securities, or dealers or traders in
commodities, that elect to use a mark-to-market method of
accounting, (iii) financial institutions, (iv) tax-exempt entities
(except as discussed below), (v) insurance companies, (vi) persons
holding Shares as a part of a position in a “straddle”
or as part of a “hedging,” “conversion,” or
other integrated transaction for U.S. federal income tax purposes,
(vii) persons with “applicable financial statements”
within the meaning of Section 451(b) of the Internal Revenue Code
of 1986, as amended (the “Code”), or (viii) holders of
Shares whose “functional currency” is not the U.S.
dollar. Furthermore, the discussion that follows below is
based on the provisions of the Code, and regulations
(“Treasury Regulations”), rulings, and judicial
decisions thereunder as of the date hereof, and such authorities
may be repealed, revoked, or modified (possibly with retroactive
effect) so as to result in U.S. federal income tax consequences
different from the consequences discussed below.
The
Sponsor has received the opinion of Vedder Price, counsel to the
Trust, that the material U.S. federal income tax consequences to
the Fund and to U.S. Shareholders and Non-U.S. Shareholders (as
defined below) will be as described in the following paragraphs. In
rendering its opinion, Vedder Price has relied on the facts and
assumptions described in this prospectus as well as certain factual
representations made by the Trust, the Fund and the Sponsor.
This opinion is not binding on the Internal Revenue Service (the
“IRS”) and is not a guarantee of the results. No
ruling has been requested from the IRS with respect to any matter
affecting the Fund or prospective investors. The IRS may
disagree with the tax positions taken by the Trust, and, if the IRS
were to challenge the Trust’s tax positions in litigation,
they might not be sustained by the courts.
As used
herein, the term “U.S. Shareholder” means a Shareholder
that is, for U.S. federal income tax purposes, (i) a citizen or
resident of the U.S., (ii) a corporation created or organized in or
under the laws of the United States or any political subdivision
thereof, (iii) an estate the income of which is subject to U.S.
federal income taxation regardless of its source or (iv) a trust
that (a) is subject to the supervision of a court within the U.S.
and the control of one or more United States persons as described
in section 7701(a)(30) of the Code or (b) has a valid election in
effect under applicable Treasury Regulations to be treated as a
United States person. A “Non-U.S.
Shareholder” is a holder that is not a U.S.
Shareholder. If a partnership or other entity or
arrangement treated as a partnership holds our Shares, the tax
treatment of a partner will generally depend upon the status of the
partner and the activities of the partnership. If you are a partner
of a partnership holding our Shares, the discussion below may not
be applicable to you and, you should consult your own tax advisor
regarding the tax consequences of acquiring, owning and disposing
of Shares.
EACH
PROSPECTIVE INVESTOR IS ADVISED TO CONSULT ITS OWN TAX ADVISOR
REGARDING THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF AN INVESTMENT
IN SHARES, AS WELL AS ANY APPLICABLE STATE, LOCAL, OR FOREIGN TAX
CONSEQUENCES, IN LIGHT OF ITS PARTICULAR
CIRCUMSTANCES.
Tax Classification of the Trust and the Fund
The
Trust is organized and will be operated as a statutory trust in
accordance with the provisions of the Trust Agreement and
applicable Delaware law. Notwithstanding the Trust’s
status as a statutory trust and the Fund’s status as a series
of the Trust, due to the nature of the Fund’s activities, the
Fund will be classified as a “business entity” rather
than as a trust for U.S. federal income tax purposes. In
addition, the trading of Shares on the NYSE Arca will cause the
Fund to be classified as a “publicly traded
partnership” for U.S. federal income tax purposes.
Under the Code, a publicly traded partnership generally is taxable
as a corporation. In the case of a business entity (such as
the Fund) not registered under the Investment Company Act of 1940,
as amended, and not meeting certain other conditions, however, an
exception to this general rule applies if at least 90% of the
entity’s gross income is “qualifying income” for
each taxable year of its existence (the “qualifying income
exception”). For this purpose, qualifying income is
defined as including, in pertinent part, interest (other than from
a financial business), dividends, and gains from the sale or
disposition of capital assets held for the production of interest
or dividends. In the case of a partnership of which a
principal activity is the buying and selling of commodities other
than as inventory, or futures, forwards, and options with respect
to commodities, “qualifying income” also includes
income and gains from commodities and from such futures, forwards,
options, and, provided the partnership is a trader or investor with
respect to such assets, swaps and other notional principal
contracts with respect to commodities.
The
Trust and the Sponsor have made the following representations (the
“Representations”) to Vedder Price:
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At
least 90% of each Underlying Fund’s gross income for each
taxable year will constitute “qualifying income” within
the meaning of Code section 7704 (as described above);
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Each of
the Underlying Funds is classified as a partnership for U.S.
federal income tax purposes and has not elected, and will not
elect, to be taxed as a corporation for U.S. federal income tax
purposes;
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In
addition to holding shares of the Underlying Funds, the only other
assets the Fund may hold are residual amounts in cash equivalents
and/or cash (generally in interest-bearing accounts);
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At
least 90% of the Fund’s gross income for each taxable year
will consist of (i) qualifying income derived by the Fund with
respect to the Fund’s interests in the Underlying Funds, and
(ii) interest income;
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The
Fund is organized and will be operated in accordance with its
governing documents and applicable law; and
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The
Fund has not elected, and will not elect, to be classified as a
corporation for U.S. federal income tax purposes.
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Based
in part on the Representations, Vedder Price is of the opinion
that, although the matter is not free from doubt, it is more likely
than not that (i) at least 90% of the Fund’s gross income for
each taxable year will constitute “qualifying income”
within the meaning of Code section 7704 and (ii) the Fund will be
treated as a partnership that it is not taxable as a corporation
for U.S. federal income tax purposes. The Fund’s
taxation as a partnership rather than as a corporation will require
the Sponsor to conduct the Fund’s business activities in such
a manner that the Fund satisfies the requirements of the qualifying
income exception on a continuing basis. No assurances
can be given that the Fund’s operations for any given year
will produce income that satisfies these
requirements. Vedder Price will not review the
Fund’s ongoing compliance with these requirements or with the
Representations and will have no obligation to advise the Trust,
the Fund or the Fund’s Shareholders in the event of any
subsequent change in the facts, representations or applicable law
relied upon in reaching its opinion.
If the Fund failed
to satisfy the qualifying income exception in any year, other than
a failure that is determined by the IRS to be inadvertent and that
is cured within a reasonable time after discovery (in which case,
as a condition of relief, the Fund could be required to pay the
government amounts determined by the IRS), the Fund would be
taxable as a corporation for U.S. federal income tax purposes and
would pay U.S. federal income tax on its income at regular
corporate rates. In that
event, Shareholders would not report their share of the
Fund’s income or loss on their tax returns. Distributions by the Fund (if any)
would be treated as dividend income to the Shareholders to the
extent of the Fund’s current and accumulated earnings and
profits, then treated as a tax-free return of capital to the extent
of the Shareholder’s basis in the Shares (and will reduce
thatthe
basis), and, to the extent it exceeds a Shareholder’s basis
in such Shares, as capital gain for Shareholders who hold their
Shares as capital assets.
Accordingly, if the Fund were to be taxable as a corporation, it
would likely have a
material adverse effect on the economic return from an investment
in the Fund and on the value of the Shares.
The
remainder of this summary assumes that the Fund (and each
Underlying Fund) is classified for U.S. federal income tax purposes
as a partnership that it is not taxable as a
corporation.
U.S. Shareholders
Tax Consequences of Ownership of Shares
Taxation of the Fund’s
Income. No U.S. federal income tax is paid by the Fund
on its income. Instead, the Fund files annual partnership
returns, and each U.S. Shareholder is required to report on its
U.S. federal income tax return its allocable share of the income,
gain, loss, deductions, and credits reflected on such partnership
returns. The Fund’s income, gain, loss, deduction, or
credits will include its allocable share of those items derived
from its interests in the Underlying Funds. If the Fund
recognizes income for a taxable year, including interest and/or net
capital gains from the cash settlement of commodity interests as a
result of its investment in an Underlying Fund, Shareholders must
report their share of these items even though the Fund makes no
distributions of cash or property during the taxable
year. Consequently, a Shareholder may be taxable on income or
gain recognized by the Fund (including the Fund’s allocable
share of income or gain derived from the Underlying Funds) but
receive no cash distribution with which to pay the resulting tax
liability or may receive a distribution that is insufficient to pay
such tax liability. Because the Sponsor currently does not
intend to make distributions, it is likely that a U.S. Shareholder
that realizes net income or gain with respect to Shares for a
taxable year will be required to pay any resulting tax from sources
other than Fund distributions. Additionally, individuals with
modified adjusted gross income in excess of $200,000 ($250,000 in
the case of married individuals filing jointly) and certain estates
and trusts are subject to an additional 3.8% tax on their
“net investment income,” which generally includes net
income from interest, dividends, annuities, royalties, and rents,
and net capital gains (other than certain amounts earned from
trades or businesses). Also included as income subject to the
additional 3.8% tax is income from businesses involved in the
trading of financial instruments or commodities. Shareholders
subject to this provision may be required to pay this 3.8% surtax
on interest income and capital gains allocated to them by the
Fund.
Monthly Conventions for Allocations of the
Fund’s Profit and Loss and Capital Account
Restatements. Under Code section 704, the
determination of a partner’s distributive share of any item
of income, gain, loss, deduction, or credit is governed by the
applicable organizational document unless the allocation provided
by such document lacks “substantial economic
effect.” An allocation that lacks substantial
economic effect nonetheless will be respected if it is in
accordance with the partners’ interests in the partnership,
determined by considering all facts and circumstances relating to
the economic arrangements among the partners. Subject to the
possible exception for certain conventions to be used by the Fund,
as discussed below, allocations pursuant to the Trust Agreement
should be considered as having substantial economic effect or being
in accordance with Shareholders’ interests in the
Fund.
In
situations where a partner’s interest in a partnership is
redeemed or sold during a taxable year, the Code generally requires
that partnership tax items for the year be allocated to the partner
using either an interim closing of the books or a daily proration
method. The Fund intends to allocate tax items using an
interim closing of the book’s method under which income,
gains, losses, and deductions will be determined on a monthly
basis, taking into account the Fund’s accrued income,
deductions, gains, and losses (both realized and unrealized) for
the month. The tax items for each month during a taxable year
will then be allocated among the holders of Shares in proportion to
the number of Shares owned by them as of the close of trading on
the last trading day of the immediately preceding month (the
“monthly allocation convention”).
Under the monthly
allocation convention, an investor who disposes of a Share during
the current month will be treated as disposing of the Share as of
the end of the last day of the calendar month. For example,
an investor who buys a Share on April 10 of a year and sells it on
May 20 of the same year will be allocated all of the tax items
attributable to May (because it is deemed to hold the Share through
the last day of May) but none of the tax items attributable to
April. The tax items attributable to that Share for April
will be allocated to the person who held the Share as of the close
of trading on the last trading day of March. Under the
monthly allocation convention, an investor who purchases and sells
a Share during the same month, and therefore does not hold (and is
not deemed to hold) the Share at the close of the last trading day
of either that month or the previous month, will receive no
allocations with respect to that Share for any period.
Accordingly, investors may receive no allocations with respect to
Shares that they actually held, or they may receive allocations
with respect to Shares attributable to periods that they did not
actually hold the Shares.
Each of
the Underlying Funds applies an allocation method for its
partnership items that is essentially identical to the monthly
allocation convention. Therefore, the amounts allocated among
Shareholders by the Underlying Fund themselves are based on
simplifying assumptions and conventions that may not precisely
reflect the Fund’s economic income or loss from an investment
in the Underlying Funds.
By
investing in Shares, a U.S. Shareholder agrees that, in the absence
of new legislation, regulatory or administrative guidance, or
judicial rulings to the contrary, it will file its U.S. federal
income tax returns in a manner that is consistent with the monthly
allocation convention as described above and with the IRS Schedule
K-1 or any successor form provided to Shareholders by the Fund or
the Trust.
For any month in
which a Creation Basket is issued or a Redemption Basket is
redeemed, the Fund will credit or debit the “book”
capital accounts of existing Shareholders with the amount of any
unrealized gain or loss, respectively, on Fund assets. For
this purpose, the Fund will use a convention whereby unrealized
gain or loss will be computed based on the lowest NAV of the
Fund’s assets during the month in which Shares are issued or
redeemed, which may be different than the value of the assets on
the date of an issuance or redemption. The capital accounts
as adjusted in this manner will be used in making tax allocations
intended to account for differences between the tax basis and fair
market value of the property owned by the Fund at the time new
Shares are issued or outstanding Shares are redeemed (so-called
“reverse Code section 704(c) allocations”). The
intended effect of these adjustments is to equitably allocate among
Shareholders any unrealized appreciation or depreciation in the
Fund’s assets existing at the time of a contribution or
redemption for book and tax purposes.
The
conventions used by the Fund, as noted above, in making tax
allocations may cause a Shareholder to be allocated more or less
income or loss for U.S. federal income tax purposes than its
proportionate share of the economic income or loss realized by the
Fund during the period such Shareholder held its Shares. This
mismatch between taxable and economic income or loss in some cases
may be temporary, reversing itself in a later year when the Shares
are sold, but could be permanent. As one example, a
Shareholder could be allocated income accruing after it sold its
Shares, resulting in an increase in the basis of the Shares (see
“Tax Basis of Shares
” below). In connection with the disposition of the
Shares, the additional basis might produce a capital loss the
deduction of which may be limited (see “Limitations on Deductibility of Losses and
Certain Expenses” below).
Section 754 election. The Fund
(and each of the Underlying Funds) has made the election permitted
by Code section 754 (a “section 754 election”), which
election is irrevocable without the consent of the IRS. The
effect of this election is that, when a secondary market sale of
Shares occurs, the Fund adjusts the purchaser’s proportionate
share of the tax basis of the Fund’s assets to fair market
value, as reflected in the price paid for the Shares, as if the
purchaser had made a direct acquisition of an interest in the
Fund’s assets. The section 754 election is intended to
eliminate disparities between a partner’s basis in its
partnership interest and its share of the tax basis of the
partnership’s assets, so that the partner’s allocable
share of taxable gain or loss on a disposition of an asset will
correspond to the partner’s share of the appreciation or
depreciation in the value of the asset since the partner acquired
its interest. Depending on the price paid for Shares and the
tax basis of the Fund’s assets at the time of the purchase,
the effect of the section 754 election on a purchaser of Shares may
be favorable or unfavorable. In order to make the appropriate
basis adjustments in a cost-effective manner, the Fund will use
certain simplifying conventions and assumptions. In
particular, the Fund will obtain information regarding secondary
market transactions in its Shares and use this information to
adjust the Shareholders’ indirect basis in the Fund’s
assets. It is possible the IRS could be successful in
asserting that the conventions and assumptions applied are improper
and require different basis adjustments to be made, which could
adversely affect some Shareholders. If the Fund acquires
shares of an Underlying Fund on the secondary market, the
Underlying Fund will adjust the Fund’s share of the tax basis
of the Underlying Fund’s assets using the conventions and
assumptions described above.
Section 1256 Contracts. Under the
Code, special rules apply to instruments constituting
“section 1256 contracts.” Section 1256
requires that such instruments held at the end of a taxable year be
treated as if they were sold for their fair market value on the
last business day of the taxable year (i.e., “marked to
market”). Moreover, any gain or loss realized from a
disposition, termination or marking-to-market of section 1256
contracts is treated as long-term capital gain or loss to the
extent of 60% thereof, and as short-term capital gain or loss to
the extent of 40% thereof, without regard to the actual holding
period (“60-40 Treatment”). The term
“section 1256 contract” generally includes, in relevant
part: (1) a ”regulated futures contract,”
defined as a contract (a) that is traded on or subject to the rules
of a national securities exchange that is registered with the SEC,
a domestic board of trade designated as a contract market by the
CFTC, or any other board of trade or exchange designated by the
Secretary of the Treasury (a “qualified board or
exchange”), and (b) with respect to which the amount required
to be deposited and the amount that may be withdrawn depends on a
system of “marking to market”; and (2) a non-equity
option traded on or subject to the rules of a qualified board or
exchange.
Many of
the Underlying Funds’ Futures Contracts will qualify as
“section 1256 contracts” under the Code, as will some
other commodity interests that are cleared through a qualified
board or exchange. Any gain or loss recognized by the
Underlying Funds with respect to section 1256 contracts will be
subject to 60-40 Treatment and will be allocated to shareholders of
the Underlying Fund (including the Fund) in accordance with the
monthly allocation convention. Commodity swaps will most likely not
qualify as section 1256 contracts. If a commodity swap is not
taxable as a section 1256 contract, any gain or loss on the swap
will be recognized at the time of disposition or termination as
long-term or short-term capital gain or loss depending on the
holding period of the swap in the Underlying Fund’s
hands.
Foreign
exchange gains and losses realized by an Underlying Fund in
connection with certain transactions involving foreign
currency-denominated debt securities, certain futures contracts,
forward contracts, options and similar investments denominated in a
foreign currency, and payables or receivables denominated in a
foreign currency are subject to section 988 of the Code, which
generally causes such gain and loss to be treated as ordinary
income or loss. To the extent an Underlying Fund hold foreign
investments, it may be subject to withholding and other taxes
imposed by foreign countries. Tax treaties between certain
countries and the United States may reduce or eliminate such taxes.
Because the amount of an Underlying Fund’s investments in
various countries will change from time to time, it is not possible
to determine the effective rate of such taxes in
advance.
Limitations on Deductibility of Losses and
Certain Expenses. A number of different provisions of
the Code may defer or disallow the deduction of losses or expenses
allocated to Shareholders by the Fund, including but not limited to
those described below.
A
Shareholder’s deduction of its allocable share of any loss of
the Fund (including its allocable share of any loss of an
Underlying Fund) is limited to the lesser of (1) the tax basis in
its Shares or (2) in the case of a Shareholder that is an
individual or a closely held corporation, the amount that the
Shareholder is considered to have “at risk” with
respect to the Fund’s activities. In general, the
amount at risk initially will be a Shareholder’s invested
capital. Losses in excess of the amount at risk must be
deferred until years in which the Fund generates additional taxable
income against which to offset such carryover losses or until
additional capital is placed at risk.
Individuals and
other non-corporate taxpayers are permitted to deduct capital
losses only to the extent of their capital gains for the taxable
year plus $3,000 of other income. Unused capital losses can
be carried forward and used in future years, subject to these same
limitations. In addition, an individual taxpayer may elect to
carry back net losses on section 1256 contracts to each of the
three preceding years and use them to offset section 1256 contract
gains in those years, subject to certain limitations.
Corporate taxpayers generally may deduct capital losses only to the
extent of capital gains, subject to special carryback and
carryforward rules.
The
deduction for expenses incurred by non-corporate taxpayers
constituting “miscellaneous itemized deductions,”
generally including investment-related expenses (other than
interest and certain other specified expenses), is suspended for
taxable years beginning after December 31, 2017 and before January
1, 2026. During these taxable years, non-corporate taxpayers will
not be able to deduct miscellaneous itemized deductions. Provided
the suspension is not extended for taxable years ending on or after
January 1, 2026, miscellaneous itemized deductions are deductible
only to the extent that they exceed 2% of the taxpayer’s
adjusted gross income for the year. Although the matter is
not free from doubt, the Sponsor believes that the expenses of the
Fund (including its allocable share of the expenses of the
Underlying Funds) will constitute investment-related expenses
subject to this miscellaneous itemized deduction limitation, rather
than expenses incurred in connection with a trade or business, and
the Fund will report these expenses consistent with that
interpretation. For taxable years beginning on or after January 1,
2026, the Code imposes additional limitations on the amount of
certain itemized deductions allowable to individuals with adjusted
gross income in excess of certain amounts by reducing the otherwise
allowable portion of such deductions by an amount equal to the
lesser of:
●
3% of the individual’s adjusted gross income in excess of
certain threshold amounts; or
●
80% of the amount of certain itemized deductions otherwise
allowable for the taxable year.
Non-corporate
Shareholders generally may deduct “investment interest
expense” only to the extent of their “net investment
income.” Investment interest expense of a
Shareholder will generally include any interest expense accrued by
the Fund (or an Underlying Fund) and any interest paid or accrued
on direct borrowings by a Shareholder to purchase or carry its
Shares, such as interest with respect to a margin account.
Net investment income generally includes gross income from property
held for investment (including “portfolio income” under
the passive loss rules but not, absent an election, long-term
capital gains or certain qualifying dividend income) less
deductible expenses other than interest directly connected with the
production of investment income.
If the Fund incurs
indebtedness that is treated as allocable to a trade or business,
the Fund’s ability to deduct interest on such indebtedness is
limited to an amount equal to the sum of (1) the Fund’s
business interest income during the year and (2) 30% of the
Fund’s adjusted taxable income for such taxable year. If the
Fund is not entitled to fully deduct its business interest in any
taxable year, such excess business interest expense will be
allocated to each Shareholder as excess business interest and can
be carried forward by the Shareholder to successive taxable years
and used to offset any excess taxable income allocated by the Fund
to such Shareholder. Any excess business interest expense allocated
to a Shareholder will reduce such Shareholder’s basis in its
Shares in the year of the allocation even if the expense does not
give rise to a deduction to the Shareholder in that year.
Immediately prior to a Shareholder’s disposition of its
Shares, the Shareholder’s basis will be increased by the
amount by which such basis reduction exceeds the excess interest
expense that has been deducted by such Shareholder. This limitation
also applies to any indebtedness incurred by an Underlying Fund
with respect to its trade or business, if any.
To the
extent that the Fund allocates losses or expenses to a Shareholder
that are deferred or disallowed as a result of the limitations
described above or other limitations in the Code, the Shareholder
may be taxed on income in excess of its economic income or
distributions (if any) on its Shares. As one example, a
Shareholder could be allocated and required to pay tax on its share
of interest income accrued by the Fund for a particular taxable
year and, in the same year, be allocated a share of a capital loss
that the Shareholder cannot deduct currently because it has
insufficient capital gains against which to offset the loss.
As another example, a Shareholder could be allocated and required
to pay tax on its share of interest income and capital gain for a
year but be unable to deduct some or all of its share of Fund
expenses and/or margin account interest incurred by the Shareholder
with respect to its Shares. Each Shareholder is urged to
consult its own tax advisor regarding the effect of limitations
under the Code on the ability to deduct its allocable share of the
Fund’s losses and expenses.
Tax Basis of Shares
A
Shareholder’s tax basis in its Shares is important in
determining (1) the amount of taxable gain or loss that it will
realize on the sale or other disposition of its Shares, (2) the
amount of non-taxable distributions that it may receive from the
Fund, and (3) its ability to utilize its distributive share of any
losses of the Fund on its federal income tax return. A
Shareholder’s initial tax basis of its Shares will equal its
cost for the Shares plus its share of the Fund’s liabilities
(if any) at the time of purchase. In general, a
Shareholder’s “share” of the Fund’s
liabilities will equal the sum of (i) the entire amount of any
otherwise nonrecourse liability of the Fund as to which the
Shareholder or certain affiliates of the Shareholder is the
creditor (a “partner nonrecourse liability”) and (ii) a
pro rata share of any nonrecourse liabilities of the Fund that are
not partner nonrecourse liabilities as to any Shareholder.
For this purpose, the Fund’s liabilities will include its
share of any liabilities of an Underlying Fund.
A
Shareholder’s tax basis in its Shares generally will be (1)
increased by (a) its allocable share of the Fund’s taxable
income and gain and (b) any additional contributions by the
Shareholder to the Fund and (2) decreased (but not below zero) by
(a) its allocable share of the Fund’s tax deductions and
losses and (b) distributions (if any) by the Fund to the
Shareholder. For this purpose, an increase in a
Shareholder’s share of the Fund’s liabilities will be
treated as a contribution of cash by the Shareholder to the Fund
and a decrease in that share will be treated as a distribution of
cash by the Fund to the Shareholder. Pursuant to certain IRS
rulings, a Shareholder will be required to maintain a single,
“unified” basis in all Shares that it owns. As a
result, when a Shareholder that acquired its Shares at different
prices sells less than all of its Shares, such Shareholder will not
be entitled to specify particular Shares (e.g., those with a higher basis) as
having been sold. Rather, the Shareholder must determine its
gain or loss on the sale by using an “equitable
apportionment” method to allocate a portion of its unified
basis in its Shares to the Shares sold.
Treatment of Fund Distributions.
If the Fund makes non-liquidating distributions to Shareholders,
such distributions generally will not be taxable to any particular
Shareholder for U.S. federal income tax purposes except to the
extent that the amount of money distributed exceeds the
Shareholder’s adjusted basis of its interest in the Fund
immediately before the distribution. Any money distributed
that is in excess of a Shareholder’s tax basis generally will
be treated as gain from the sale or exchange of Shares. For
purposes of determining the gain recognized on a distribution from
a partnership, a marketable security distributed to a partner is
generally treated as money. This treatment, however, does not apply
to distributions to “eligible partners” of an
“investment partnership,” as those terms are defined in
the Code. Similar rules apply to non-liquidating distributions
received by the Fund from an Underlying Fund.
Tax Consequences of Disposition of Shares
If a
Shareholder sells its Shares, it will recognize gain or loss equal
to the difference between the amount realized and its adjusted tax
basis for the Shares sold. A Shareholder’s amount
realized will be the sum of the cash or the fair market value of
other property received plus its share of the Fund's liabilities
(including an allocable share of any Underlying Fund's
liabilities).
Gain or
loss recognized by a Shareholder on the sale or exchange of Shares
held for more than one year generally will be taxable as long-term
capital gain or loss; otherwise, such gain or loss generally will
be taxable as short-term capital gain or loss. A special
election is available under the Treasury Regulations that allows
Shareholders to identify and use the actual holding periods for the
Shares sold for purposes of determining whether the gain or loss
recognized on a sale of Shares will give rise to long-term or
short-term capital gain or loss. It is expected that most
Shareholders will be eligible to elect, and generally will elect,
to identify and use the actual holding period for Shares
sold. If a Shareholder who has different holding periods for
its Shares fails to make the election or is not able to identify
the holding periods of the Shares sold, the Shareholder may have a
split holding period in the Shares sold. Under such
circumstances, a Shareholder will be required to determine its
holding period in the Shares sold by first determining the portion
of its entire interest in the Fund that would give rise to
long-term capital gain or loss if its entire interest were sold and
the portion that would give rise to short-term capital gain or loss
if the entire interest were sold. The Shareholder then would
treat each Share sold as giving rise to long-term capital gain or
loss and short-term capital gain or loss in the same proportions as
if it had sold its entire interest in the Fund.
Under
Code section 751, a portion of a Shareholder’s gain or loss
from the sale of Shares (regardless of the holding period for such
Shares), will be computed separately and taxed as ordinary income
or loss to the extent attributable to “unrealized
receivables” or “inventory” owned by the Fund (or
by an Underlying Fund). The term “unrealized
receivables” includes, among other things, market discount
bonds and short-term debt instruments to the extent that such items
would give rise to ordinary income if sold by the Fund (or by an
Underlying Fund). However, the short-term capital gain on section
1256 contracts resulting from 60-40 Treatment, described above,
should not be subject to this rule.
If some
or all of a Shareholder’s Shares are lent by its broker or
other agent to a third party—for example, for use by the
third party in covering a short sale—the Shareholder may be
considered as having made a taxable disposition of the loaned
Shares, in which case—
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The
Shareholder may recognize taxable gain or loss to the same extent
as if it had sold the Shares for cash;
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Any of
the income, gain, loss, or deduction allocable to those Shares
during the period of the loan is not reportable by the Shareholder
for U.S. federal income tax purposes; and
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Any
distributions that the Shareholder receives with respect to the
Shares under the loan agreement will be fully taxable to the
Shareholder, most likely as ordinary income.
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Shareholders
desiring to avoid these and other possible consequences of a deemed
disposition of their Shares should consider modifying any
applicable brokerage account agreements to prohibit the lending of
their Shares.
Other U.S. Federal Income Tax Matters
Information Reporting. The
Fund provides tax information to Shareholders and to the IRS, as
required. Shareholders are treated as partners for U.S.
federal income tax purposes. Accordingly, the Fund will
furnish Shareholders each year with tax information on IRS Schedule
K-1 (Form 1065), which will be used by the Shareholders in
completing their tax returns. The IRS has ruled that
assignees of partnership interests that have not been admitted to a
partnership as partners but who have the capacity to exercise
substantial dominion and control over the assigned partnership
interests will be considered partners for U.S. federal income tax
purposes. On the basis of this ruling, except as otherwise
provided herein, the Fund will treat as a Shareholder any person
whose shares are held on their behalf by a broker or other nominee
if that person has the right to direct the nominee in the exercise
of all substantive rights attendant to the ownership of the
Shares.
Persons
who hold an interest in the Fund as a nominee for another person
are required to furnish to the Fund the following
information: (1) the name, address, and taxpayer
identification number of the beneficial owner and the nominee; (2)
whether the beneficial owner is (a) a person that is not a U.S.
person, (b) a foreign government, an international organization, or
any wholly-owned agency or instrumentality of either of the
foregoing, or (c) a tax-exempt entity; (3) the number and a
description of Shares acquired or transferred for the beneficial
owner; and (4) certain information including the dates of
acquisitions and transfers, means of acquisitions and transfers,
and acquisition cost for purchases, as well as the amount of net
proceeds from sales. Brokers and financial institutions are
required to furnish additional information, including whether they
are U.S. persons and certain information on Shares that they
acquire, hold, or transfer for their own account. A penalty
of $250 per failure (as adjusted for inflation), up to a maximum of
$3,000,000 per calendar year (as adjusted for inflation), is
imposed by the Code for failure to report such information
correctly to the Fund. If the failure to furnish such
information correctly is determined to be willful, the per failure
penalty increases to $500 (as adjusted for inflation) or, if
greater, 10% of the aggregate amount of items required to be
reported, and the $3,000,000 maximum does not apply. The nominee is
required to supply the beneficial owner of the Shares with the U.S.
federal income tax information furnished by the
Fund.
Partnership Audit Procedures.
The IRS may audit the U.S. federal income tax returns filed
by the Fund (or by an Underlying Fund). Adjustments resulting
from any such audit may require a Shareholder to adjust a prior
year’s tax liability and could result in an audit of the
Shareholder’s own return. Any audit of a
Shareholder’s return could result in adjustments of
non-partnership items as well as Fund items. Partnerships
generally are treated as separate entities for purposes of U.S.
federal income tax audits, judicial review of administrative
adjustments by the IRS, and tax settlement proceedings. The
tax treatment of partnership items of income, gain, loss, and
deduction are determined at the partnership level in a unified
partnership proceeding rather than in separate proceedings with the
partners. The Code provides for one partner to be designated
as the “tax matters partner” and to represent the
partnership at these proceedings. The Trust Agreement
appoints the Sponsor as the tax matters partner of the
Fund.
The
Bipartisan Budget Act of 2015 adopted a new partnership-level audit
and assessment procedure for all entities treated as partnerships
for U.S. federal income tax purposes. These new rules generally
apply to partnership taxable years beginning after December 31,
2017. Under these rules, tax deficiencies (including interest and
penalties) that arise from an adjustment to partnership items
generally would be assessed and collected from the partnership
(rather than from the partners), and generally would be calculated
using maximum applicable tax rates (although such partnership level
tax may be reduced or eliminated under limited circumstances). A
narrow category of partnerships (generally, partnerships having no
more than 100 partners that consist exclusively of individuals, C
corporations, S corporations and estates) are permitted to elect
out of the new partnership-level audit rules. As an alternative to
partnership-level tax liability, a partnership may elect to furnish
adjusted Schedule K-1s to the IRS and to each person who was a
partner in the audit year, stating such partner’s share of
any partnership adjustments, and each such partner would then take
the adjustments into account on its tax returns in the year in
which it receives its adjusted Schedule K-1 (rather than by
amending their tax returns for the audited year). If the Fund were
subject to a partnership level tax as a result of these new rules,
the economic return of all Shareholders (including Shareholders
that did not own Shares in the Fund during the taxable year to
which the audit relates) may be affected.
To
address these new rules, the Sponsor amended the Trust Agreement so
that if the Fund becomes subject to any tax as a result of any
adjustment to taxable income, gain, loss, deduction or credit for
any taxable year of the Fund (pursuant to a tax audit or
otherwise), such Shareholder (and each former Shareholder) is
obligated to indemnify the Fund and the Sponsor against any such
taxes (including any interest and penalties) to the extent such tax
(or portion thereof) is properly attributable to such Shareholder
(or former Shareholder). In addition, the Sponsor, on behalf of the
Fund, will be authorized to take any action permitted under
applicable law to avoid the assessment of any such taxes against
the Fund (including an election to issue adjusted Schedule K-1s to
the Shareholders (and/or former Shareholders) which takes such
adjustments to taxable income, gain, loss, deduction or credit into
account. If
an Underlying Fund becomes subject to tax as a result of
adjustments to income, gain, loss deduction or credit, the Fund as
a shareholder or former shareholder of the Underlying Fund could
have liability for its allocable share of such tax or could have to
take into account adjustments from the Underlying
Fund.
Reportable Transaction Rules.
In certain circumstances, the Code and Treasury Regulations
require that the IRS be notified of transactions through a
disclosure statement attached to a taxpayer’s U.S. federal
income tax return. These disclosure rules may apply to
transactions irrespective of whether they are structured to achieve
particular tax benefits, and they could require disclosure by the
Trust or Shareholders if a Shareholder incurs a loss in excess of a
specified threshold from a sale or redemption of its Shares and
possibly in other circumstances. While these rules generally
do not require disclosure of a loss recognized on the disposition
of an asset in which the taxpayer has a “qualifying
basis” (generally a basis equal to the amount of cash paid by
the taxpayer for such asset), they apply to a loss recognized with
respect to interests in a pass-through entity, such as the Shares
or the Shares of an Underlying Fund, even if the taxpayer’s
basis in such interests is equal to the amount of cash that it paid
for such interests. In addition, significant monetary
penalties may be imposed in connection with a failure to comply
with these reporting requirements. Investors should consult
their own tax advisor concerning the application of these reporting
requirements to their specific situation.
Tax-Exempt Organizations.
Subject to numerous exceptions, qualified retirement plans
and individual retirement accounts, charitable organizations, and
certain other organizations that otherwise are exempt from U.S.
federal income tax (collectively “exempt
organizations”) nonetheless are subject to the tax on
unrelated business taxable income (“UBTI”).
Generally, UBTI means the gross income derived by an exempt
organization from a trade or business that it regularly carries on,
the conduct of which is not substantially related to the exercise
or performance of its exempt purpose or function, less allowable
deductions directly connected with that trade or business. If
the Fund (or an Underlying Fund) were to regularly carry on
(directly or indirectly) a trade or business that is unrelated to
the exercise or performance of the exempt purpose or function of an
exempt organization Shareholder, then, in computing its UBTI, that
Shareholder would have to include its share of (1) the Fund’s
gross income (including the Fund’s allocable share of the
gross income of an Underlying Fund) from the unrelated trade or
business, whether or not distributed, and (2) the Fund’s
allowable deductions directly connected with that gross income. An
exempt organization that has more than one unrelated trade or
business generally must compute its UBTI separately for each such
trade or business.
UBTI
generally does not include dividends, interest, payments with
respect to securities loans, or gains from the sale of property
(other than property held for sale to customers in the ordinary
course of a trade or business). Nonetheless, income on, and
gain from the disposition of, “debt-financed property”
is UBTI. Debt-financed property generally is income-producing
property (including securities) the use of which is not
substantially related to the exempt organization’s tax-exempt
purpose or function, and with respect to which there is
“acquisition indebtedness” at any time during the
taxable year (or, if the property was disposed of during the
taxable year, the 12-month period ending with the
disposition). Acquisition indebtedness includes debt incurred
to acquire property, debt incurred before the acquisition of
property if the debt would not have been incurred but for the
acquisition, and debt incurred subsequent to the acquisition of
property if the debt would not have been incurred but for the
acquisition and, at the time of acquisition, the incurrence of debt
was foreseeable. The portion of the income from debt-financed
property attributable to acquisition indebtedness is equal to the
ratio of the average outstanding principal amount of acquisition
indebtedness over the average adjusted basis of the property for
the tax year. The Sponsor currently does not anticipate that
the Fund (or any Underlying Fund) will borrow money to acquire
investments; however, it cannot be certain that the Fund (or an
Underlying Fund) will not borrow for such purpose in the future,
which could result in an exempt organization Shareholder having
UBTI. In addition, an exempt organization Shareholder that
incurs acquisition indebtedness to purchase its Shares in the Fund
may have UBTI.
The
U.S. federal income tax rate applicable to an exempt organization
Shareholder on its UBTI generally will be either the corporate or
trust tax rate, depending upon the Shareholder’s form of
organization. The Fund may report to each such Shareholder
information as to the portion, if any, of the Shareholder’s
income and gains from the Fund for any year that will be treated as
UBTI; the calculation of that amount is complex, and there can be
no assurance that the Fund’s calculation of UBTI will be
accepted by the IRS. An exempt organization Shareholder will
be required to make payments of estimated U.S. federal income tax
with respect to its UBTI.
Regulated Investment Companies.
Interests in and income from “qualified publicly traded
partnerships” satisfying certain gross income tests are
treated as qualifying assets and income, respectively, for purposes
of determining eligibility under the Code for regulated investment
company (“RIC”) status. A RIC may invest up to
25% of its assets in interests in qualified publicly traded
partnerships. The determination of whether a publicly traded
partnership such as the Fund is a qualified publicly traded
partnership is made on an annual basis. The Fund expects to
be a qualified publicly traded partnership in each of its taxable
years. However, such qualification is not
assured.
Non-U.S. Shareholders
Generally, non-U.S.
persons who derive U.S.-source income or gain from investing or
engaging in a U.S. trade or business are taxable on two categories
of income. The first category consists of amounts that are
fixed or determinable, annual or periodic income, such as interest,
dividends, and rent that are not connected with the operation of a
U.S. trade or business (“FDAP”). The second
category is income that is effectively connected with the conduct
of a U.S. trade or business (“ECI”). FDAP income
(other than interest that is considered “portfolio
interest,” as discussed below) generally is subject to a 30%
U.S. withholding tax, which may be reduced for certain categories
of income by a treaty between the U.S. and the recipient’s
country of residence. In contrast, ECI generally is subject
to U.S. federal income tax on a net basis at graduated rates upon
the filing of a U.S. federal income tax return. Where a
non-U.S. person has ECI as a result of an investment in a
partnership, the ECI is currently subject to a withholding tax at a
rate of 37% for individual Shareholders and a rate of 21% for
corporate Shareholders. The tax withholding on ECI, which is
the highest tax rate under Code section 1 for non-corporate
Non-U.S. Shareholders and Code section 11(b) for corporate Non-U.S.
Shareholders, may increase in future tax years if tax rates
increase from their current levels.
Withholding on Allocations and
Distributions. The Code provides that a non-U.S.
person who is a partner in a partnership that is engaged in a U.S.
trade or business during a taxable year also will be considered to
be engaged in a U.S. trade or business during that year.
Classifying an activity by a partnership as an investment or an
operating business is a factual determination. Under certain
safe harbors in the Code, an investment fund whose activities
consist of trading in stocks, securities, or commodities for its
own account generally will not be considered to be engaged in a
U.S. trade or business unless it is a dealer in such stocks,
securities, or commodities. This safe harbor applies to
investments in commodities only if (i) the commodities are of a
kind customarily dealt in on an organized commodity exchange and
(ii) the transaction is of a kind customarily consummated at such
place. Although the matter is not free from doubt, in light
of the activities currently contemplated for the Fund and each of
the Underlying Funds, neither the Fund nor any Underlying Fund
should be engaged in a trade or business within the United
States. However, there can be no assurance that the IRS would
not be successful in asserting that the Fund or an Underlying Fund
is engaged in a U.S. trade or business.
In the event that
the Fund or an Underlying Fund is considered to be engaged in a
U.S. trade or business, the Fund would be required to withhold at
the highest rate specified in Code section 1 (currently 37%) on
allocations of its ECI (including its allocable share of any ECI of
an Underlying Fund) to non-corporate Non-U.S. Shareholders and the
highest rate specified in Code section 11(b) (currently 21%) on
allocations of its ECI (including its allocable share of any ECI of
an Underlying Fund) to corporate Non-U.S. Shareholders, when such
income is distributed. Non-U.S.
Shareholders would also be subject to a 10% withholding tax on the
consideration payable upon a sale or exchange of such Non-U.S.
Shareholder’s Shares, although the IRS has temporarily
suspended this withholding for transfers of interests in publicly
traded partnerships that occur before January 1, 2023. Such
withholding will be required on transactions occurring on or after
January 1, 2023. In the case of a transfer made through a broker,
the obligation to withhold will generally be imposed on the
transferor’s broker A Non-U.S. Shareholder with ECI
generally will be required to file a U.S. federal income tax
return, and the return will provide the Non-U.S. Shareholder with
the mechanism to seek a refund of any withholding in excess of such
Shareholder’s actual U.S. federal income tax
liability.
Even if
the Fund and each of the Underlying Funds did not realize ECI, a
Non-U.S. Shareholder nevertheless may be treated as having FDAP
income, which would be subject to a 30% U.S. withholding tax
(possibly subject to reduction by treaty), with respect to some or
all of its distributions from the Fund or its allocable share of
Fund income (including its allocable share of any FDAP income of an
Underlying Fund).
Amounts
withheld by the Fund or an Underlying Fund on behalf of a Non-U.S.
Shareholder will be treated as being distributed to such
Shareholder to the extent possible. In some cases, the Fund
or an Underlying Fund may not be able to match the economic cost of
satisfying its withholding obligations to a particular Non-U.S.
Shareholder, which may result in that cost being borne by the Fund
or the Underlying Fund, generally, and accordingly, by all
Shareholders (including the Fund with respect to its investment in
an Underlying Fund) proportionately.
To the
extent that any interest income allocated to a Non-U.S. Shareholder
that otherwise constitutes FDAP is considered “portfolio
interest,” neither the allocation of such interest income to
the Non-U.S. Shareholder nor a subsequent distribution of such
interest income to the Non-U.S. Shareholder will be subject to
withholding, provided that the Non-U.S. Shareholder is not
otherwise engaged in a trade or business in the U.S. and provides
the Fund with a timely and properly completed and executed IRS Form
W-8BEN or other applicable form. In general, portfolio
interest is interest paid on debt obligations issued in registered
form, unless the recipient owns 10% or more of the voting power of
the issuer. A Non-U.S. Shareholder’s allocable share of
interest on U.S. bank deposits, certificates of deposit and
discount obligations with maturities from original issue of 183
days or less should also not be subject to withholding. Generally,
other interest from U.S. sources paid to the Fund (or Underlying
Funds) and allocable to Non-U.S. Shareholders will be subject to
withholding.
In
order for the Fund to avoid withholding on any interest income
allocable to Non-U.S. Shareholders that would qualify as portfolio
interest, it will be necessary for all Non-U.S. Shareholders to
provide the Fund with a timely and properly completed and executed
Form W-8BEN (or other applicable form).
Gain from Sale of Shares.
Gain from the sale or exchange of Shares may be taxable to a
Non-U.S. Shareholder if the Non-U.S. Shareholder is a nonresident
alien individual who is present in the U.S. for 183 days or more
during the taxable year. In such case, the nonresident alien
individual may be subject to a 30% U.S. withholding tax on the
amount of such individual’s gain.
Branch Profits Tax on Corporate Non-U.S.
Shareholders. In addition to the taxes noted above, any
Non-U.S. Shareholders that are corporations may also be subject to
an additional tax, the branch profits tax, at a rate of 30%. The
branch profits tax is imposed on a non-U.S. corporation’s
dividend equivalent amount, which generally consists of the
corporation’s after-tax earnings and profits that are
effectively connected with the corporation’s U.S. trade or
business but are not reinvested in a U.S. business. This tax may be
reduced or eliminated by an income tax treaty between the United
States and the country in which the Non-U.S. Shareholder is a
“qualified resident.”
Foreign Account Tax Compliance
Act. Legislation commonly referred to as the
Foreign Account Tax Compliance Act or "FATCA" generally imposes a
30% U.S. withholding tax on payments of certain types of income to
foreign financial institutions that fail to enter into an agreement
with the United States Treasury to report certain required
information with respect to accounts held by U.S. persons (or held
by foreign entities that have U.S. persons as substantial
owners). The types of income subject to the withholding tax
include U.S.-source interest and dividends and the gross proceeds
from the sale of any property that could produce U.S.-source
interest or dividends. Proposed Treasury Regulations,
however, generally eliminate withholding under FATCA on gross
proceeds. Taxpayers generally may rely on these proposed Treasury
Regulations until final Treasury Regulations are issued. The
information required to be reported includes the identity and
taxpayer identification number of each account holder that is a
U.S. person and transaction activity within the holder’s
account. In addition, subject to certain exceptions, this
legislation also imposes a 30% U.S. withholding tax on payments to
foreign entities that are not financial institutions unless the
foreign entity certifies that it does not have a greater than 10%
U.S. owner or provides the withholding agent with identifying
information on each greater than 10% U.S. owner. Depending on
the status of a Non-U.S. Shareholder and the status of the
intermediaries through which it holds Shares, a Non-U.S.
Shareholder could be subject to this 30% U.S. withholding tax with
respect to distributions on its Shares. Under certain
circumstances, a Non-U.S. Shareholder may be eligible for a refund
or credit of such taxes.
Prospective
Non-U.S. Shareholders should consult their own tax advisor
regarding these and other tax issues unique to Non-U.S.
Shareholders.
Backup Withholding
The
Fund may be required to withhold U.S. federal income tax
(“backup withholding”) from payments to: (1)
any Shareholder who fails to furnish the Fund with his, her or its
correct taxpayer identification number or a certificate that the
Shareholder is exempt from backup withholding, and (2) any
Shareholder with respect to whom the IRS notifies the Fund that the
Shareholder is subject to backup withholding. Backup
withholding is not an additional tax and may be returned or
credited against a taxpayer’s regular U.S. federal income tax
liability if appropriate information is provided to the IRS.
The backup withholding rate is the fourth lowest rate applicable to
individuals under Code section 1(c) (currently 24%) and may
increase in future tax years.
Other Tax Considerations
In
addition to U.S. federal income taxes, Shareholders may be subject
to other taxes, such as state and local income taxes,
unincorporated business taxes, business franchise taxes, and
estate, gift, inheritance, or intangible taxes that may be imposed
by the various jurisdictions in which the Fund does business or
owns property or where the Shareholder resides. Although an
analysis of those various taxes is not presented here, each
prospective Shareholder should consider their potential impact on
its investment in the Fund. It is each Shareholder’s
responsibility to file the appropriate U.S. federal, state, local,
and foreign tax returns. Vedder Price has not provided an
opinion concerning any aspects of state, local, or foreign tax or
U.S. federal tax other than those U.S. federal income tax issues
discussed under the heading “U.S. Federal Income Tax
Considerations.”
Investment by ERISA Accounts
General
Most
employee benefit plans and individual retirement accounts
(“IRAs”) are subject to the Employee Retirement Income
Security Act of 1974, as amended (“ERISA”), or the
Code, or both. This section discusses certain considerations that
arise under ERISA and the Code that a fiduciary of: (i) an employee
benefit plan as defined in ERISA; (ii) a plan as defined in Section
4975 of the Code; or (iii) any collective investment vehicle,
business trust, investment partnership, pooled separate account or
other entity the assets of which are treated as comprised (at least
in part) of “plan assets” under the ERISA “plan
assets” rules (“plan asset entity”) who has
investment discretion should take into account before deciding to
invest the plan’s assets in the Fund. Employee benefit plans
under ERISA, plans under the Code and plan asset entities are
collectively referred to below as “plans,” and
fiduciaries with investment discretion are referred to below as
“plan fiduciaries.”
This
summary is based on the provisions of ERISA and the Code as of the
date hereof. This summary is not intended to be complete, but only
to address certain questions under ERISA and the Code likely to be
raised by your advisors. The summary does not include state or
local law.
Potential plan investors are urged to consult with their own
advisors concerning the appropriateness of an investment in the
Fund and the manner in which Shares should be
purchased.
Special Investment Considerations
Each
plan fiduciary must consider the facts and circumstances that are
relevant to an investment in the Fund, including the role that an
investment in the Fund would play in the plan’s overall
investment portfolio. Each plan fiduciary, before deciding to
invest in the Fund, must be satisfied that the investment is
prudent for the plan, that the investments of the plan are
diversified so as to minimize the risk of large losses, and that an
investment in the Fund complies with the terms of the plan. The
Sponsor is not undertaking to provide investment advice, or to give
advice in a fiduciary capacity, in connection with a plan’s
investment in the Fund.
The Fund and Plan Assets
A
regulation issued under ERISA contains rules for determining when
an investment by a plan in an equity interest of a statutory trust
will result in the underlying assets of the statutory trust being
deemed plan assets for purposes of ERISA and Section 4975 of the
Code. Those rules provide that assets of a statutory trust will not
be plan assets of a plan that purchases an equity interest in the
statutory trust if the equity interest purchased is a publicly
offered security. If the underlying assets of a statutory trust are
considered to be assets of any plan for purposes of ERISA or
Section 4975 of the Code, the operations of that trust would be
subject to and, in some cases, limited by the provisions of ERISA
and Section 4975 of the Code.
The
publicly offered security exception described above applies if the
equity interest is a security that is:
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(1)
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freely
transferable (determined based on the relevant facts and
circumstances);
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(2)
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part of
a class of securities that is widely held (meaning that the class
of securities is owned by 100 or more investors independent of the
issuer and of each other); and
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(3)
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either
(a) part of a class of securities registered under Section 12(b) or
12(g) of the Exchange Act or (b) sold to the plan as part of a
public offering pursuant to an effective registration statement
under the 1933 Act and the class of which such security is a part
is registered under the Exchange Act within 120 days (or such later
time as may be allowed by the SEC) after the end of the fiscal year
of the issuer in which the offering of such security
occurred.
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The
plan asset regulations under ERISA state that the determination of
whether a security is freely transferable is to be made based on
all the relevant facts and circumstances. In the case of a security
that is part of an offering in which the minimum investment is
$10,000 or less, the following requirements, alone or in
combination, ordinarily will not affect a finding that the security
is freely transferable: (1) a requirement that no transfer or
assignment of the security or rights relating to the security be
made that would violate any federal or state law; and (2) a
requirement that no transfer or assignment be made without advance
written notice given to the entity that issued the
security.
The
Sponsor believes that the conditions described above are satisfied
with respect to the Shares. The Sponsor believes that the Shares
therefore constitute publicly offered securities, and the
underlying assets of the Fund should not be considered to
constitute plan assets of any plan that purchases
Shares.
Prohibited Transactions
ERISA
and the Code generally prohibit certain transactions involving a
plan and persons who have certain specified relationships to the
plan. In general, Shares may not be purchased with the assets of a
plan if the Sponsor, the clearing brokers, the trading advisors (if
any), or any of their affiliates, agents or employees
either:
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●
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exercise
any discretionary authority or discretionary control with respect
to management of the plan;
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●
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exercise
any authority or control with respect to management or disposition
of the assets of the plan;
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●
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render
investment advice for a fee or other compensation, direct or
indirect, with respect to any moneys or other property of the
plan;
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●
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have
any authority or responsibility to render investment advice with
respect to any monies or other property of the plan;
or
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●
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have
any discretionary authority or discretionary responsibility in the
administration of the plan.
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Also, a
prohibited transaction may occur under ERISA or the Code when
circumstances indicate that (1) the investment in Shares is made or
retained for the purpose of avoiding application of the fiduciary
standards of ERISA, (2) the investment in Shares constitutes an
arrangement under which the Fund is expected to engage in
transactions that would otherwise be prohibited if entered into
directly by the plan purchasing the Shares, (3) the investing plan,
by itself, has the authority or influence to cause the Fund to
engage in such transactions, or (4) a person who is prohibited from
transacting with the investing plan may, but only with the aid of
certain of its affiliates and the investing plan, cause the Fund to
engage in such transactions with such person.
Special IRA Rules
IRAs
are not subject to ERISA’s fiduciary standards, but are
subject to their own rules, including the prohibited transaction
rules of Section 4975 of the Code, which generally mirror
ERISA’s prohibited transaction rules. For example, IRAs are
subject to special custody rules and must maintain a qualifying IRA
custodial arrangement separate and distinct from the Fund and its
custodial arrangement. If a separate qualifying custodial
arrangement is not maintained, an investment in the Shares will be
treated as a distribution from the IRA. Second, IRAs are prohibited
from investing in certain commingled investments, and the Sponsor
makes no representation regarding whether an investment in Shares
is an inappropriate commingled investment for an IRA. Third, in
applying the prohibited transaction provisions of Section 4975 of
the Code, in addition to the rules summarized above, the individual
for whose benefit the IRA is maintained is also treated as the
creator of the IRA. For example, if the owner or beneficiary of an
IRA enters into any transaction, arrangement, or agreement
involving the assets of his or her IRA to benefit the IRA owner or
beneficiary (or his or her relatives or business affiliates)
personally, or with the understanding that such benefit will occur,
directly or indirectly, such transaction could give rise to a
prohibited transaction that is not exempted by any available
exemption. Moreover, in the case of an IRA, the consequences of a
non-exempt prohibited transaction are that the IRA’s assets
will be treated as if they were distributed, causing immediate
taxation of the assets (including any early distribution penalty
tax applicable under Section 72 of the Code), in addition to any
other fines or penalties that may apply.
Exempt Plans
Certain
employee benefit plans may be governmental plans or church plans.
Governmental plans and church plans are generally not subject to
ERISA, nor do the prohibited transaction provisions described above
apply to them. These plans are, however, subject to prohibitions
against certain related-party transactions under Section 503 of the
Code, which are similar to the prohibited transaction rules
described above. In addition, the fiduciary of any governmental or
church plan must consider any applicable state or local laws and
any restrictions and duties of common law imposed upon the
plan.
No view
is expressed as to whether an investment in the Fund (and any
continued investment in the Fund), or the operation and
administration of the fund, is appropriate or permissible for any
governmental plan or church plan under Code Section 503, or under
any state, county, local or other law relating to that type of
plan.
Allowing
an investment in the Fund is not to be construed as a
representation by the Trust, the Fund, the Sponsor, any trading
advisor, any clearing broker, the Distributor or legal counsel or
other advisors to such parties or any other party that this
investment meets some or all of the relevant legal requirements
with respect to investments by any particular plan or that this
investment is appropriate for any such particular plan. The person
with investment discretion should consult with the plan’s
attorney and financial advisors as to the propriety of an
investment in the Fund in light of the circumstances of the
particular plan, current tax law and ERISA.
INCORPORATION BY REFERENCE OF CERTAIN INFORMATION
We are
a reporting company and file annual, quarterly and current reports
and other information with the SEC. The rules of the SEC allow us
to “incorporate by reference” information that we file
with them, which means that we can disclose important information
to you by referring you to those documents. The information
incorporated by reference is an important part of this prospectus.
This prospectus incorporates by reference the documents set forth
below that have been previously filed with the SEC and any future
filings that the Trust makes with the SEC under Section 13(a),
13(c), 14 and 15(d) of the Securities Exchange Act of 1934 (in each
case other than those documents or portions of those documents not
deemed to have been filed in accordance with SEC rules) between the
date of this prospectus and the termination of the offering of the
securities to be issued under the registration
statement::
●
our Annual Report on Form 10-K for the fiscal year ended December
31, 2020, filed with the SEC on March 16, 2021; and
●
our Quarterly Report on Form 10-Q for the quarter ended March 31,
2021, filed with the SEC on May 10, 2021; and
●
our Quarterly Report on Form 10-Q for the quarter ended June 30,
2021, filed with the SEC on August 9, 2021; and
● our
Quarterly Report on Form 10-Q for the quarter ended September 30,
2021, filed with the SEC on November 9, 2021.
Any
statement contained in a document incorporated by reference in this
prospectus shall be deemed to be modified or superseded for
purposes of this prospectus to the extent that a statement
contained in this prospectus or in any other subsequently filed
document that also is or is deemed to be incorporated by reference
in this prospectus modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as
so modified or superseded, to constitute a part of this
prospectus.
We will
provide to each person to whom a prospectus is delivered, including
any beneficial owner, a copy of any document incorporated by
reference in the prospectus (excluding any exhibits to those
documents unless the exhibit is specifically incorporated by
reference as an exhibit in that document) at no cost, upon written
or oral request at the following address or telephone
number:
Teucrium
Agricultural Fund
Attention:
Cory Mullen-Rusin
Three
Main Street, Suite 215
Burlington,
VT 05401
(802)
540-0019
Our
Internet website is www.teucrium.com. We make our
electronic filings with the SEC, including our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K and amendments to these reports available on our website free
of charge as soon as practicable after we file or furnish them with
the SEC. The information contained on our website is not
incorporated by reference in this prospectus and should not be
considered a part of this prospectus.
INFORMATION YOU SHOULD KNOW
This
prospectus contains information you should consider when making an
investment decision about the Shares. You should rely only on the
information contained in this prospectus or any applicable
prospectus supplement. None of the Trust, the Fund or the Sponsor
has authorized any person to provide you with different information
and, if anyone provides you with different or inconsistent
information, you should not rely on it. This prospectus is not an
offer to sell the Shares in any jurisdiction where the offer or
sale of the Shares is not permitted.
The
information contained in this prospectus was obtained from us and
other sources believed by us to be reliable.
You
should disregard anything we said in an earlier document that is
inconsistent with what is included in this prospectus or any
applicable prospectus supplement. Where the context requires, when
we refer to this “prospectus,” we are referring to this
prospectus and (if applicable) the relevant prospectus
supplement.
You
should not assume that the information in this prospectus or any
applicable prospectus supplement is current as of any date other
than the date on the front page of this prospectus or the date on
the front page of any applicable prospectus
supplement.
We
include cross references in this prospectus to captions in these
materials where you can find further related discussions. The table
of contents tells you where to find these captions.
WHERE YOU CAN FIND MORE INFORMATION
The
Trust has filed on behalf of the Fund a registration statement on
Form S-1 with the SEC under the 1933 Act. This prospectus does not
contain all of the information set forth in the registration
statement (including the exhibits to the registration statement),
parts of which have been omitted in accordance with the rules and
regulations of the SEC. For further information about the Trust,
the Fund or the Shares, please refer to the registration statement,
which you may inspect online at www.sec.gov. Information about the
Trust, the Fund and the Shares can also be obtained from the
Fund’s website, which is www.teucrium.com. The
Fund’s website address is only provided here as a convenience
to you and the information contained on or connected to the website
is not part of this prospectus or the registration statement of
which this prospectus is part. The Trust is subject to the
informational requirements of the Exchange Act and will file
certain reports and other information with the SEC under the
Exchange Act. The Sponsor will file an updated prospectus annually
for the Fund pursuant to the 1933 Act. The reports and other
information can be inspected online at www.sec.gov,
which is the Internet site maintained by the SEC that contains
reports, proxy and information statements and other information
regarding issuers that file electronically with the
SEC.
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This
prospectus includes “forward-looking statements” which
generally relate to future events or future performance. In some
cases, you can identify forward-looking statements by terminology
such as “may,” “will,”
“should,” “expect,” “plan,”
“anticipate,” “believe,”
“estimate,” “predict,”
“potential” or the negative of these terms or other
comparable terminology. All statements (other than statements of
historical fact) included in this prospectus that address
activities, events or developments that will or may occur in the
future, including such matters as movements in the commodities
markets and indexes that track such movements, the Fund’s
operations, the Sponsor’s plans and references to the
Fund’s future success and other similar matters, are
forward-looking statements. These statements are only predictions.
Actual events or results may differ materially. These statements
are based upon certain assumptions and analyses the Sponsor has
made based on its perception of historical trends, current
conditions and expected future developments, as well as other
factors appropriate in the circumstances. Whether or not actual
results and developments will conform to the Sponsor’s
expectations and predictions, however, is subject to a number of
risks and uncertainties, including the special considerations
discussed in this prospectus, general economic, market and business
conditions, changes in laws or regulations, including those
concerning taxes, made by governmental authorities or regulatory
bodies, and other world economic and political developments. See
“What Are the Risk Factors Involved with an Investment in the
Fund?” Consequently, all the forward-looking statements made
in this prospectus are qualified by these cautionary statements,
and there can be no assurance that actual results or developments
the Sponsor anticipates will be realized or, even if substantially
realized, that they will result in the expected consequences to, or
have the expected effects on, the Fund’s operations or the
value of its Shares.
APPENDIX A
Glossary of Defined Terms
In this
prospectus, each of the following terms have the meanings set forth
after such term:
Administrator: U.S.
Bancorp Fund Services, LLC, doing business as U.S. Bank
Global Fund Services
|
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Authorized Purchaser: One that purchases or redeems Creation
Baskets or Redemption Baskets, respectively, from or to the
Fund.
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Benchmark: A
weighted average of the closing settlement prices for three Futures
Contracts the daily changes in which each Underlying Fund attempts
to track.
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Benchmark Component Futures Contracts: The three Futures Contracts that at any
given time make up an Underlying Fund’s
Benchmark.
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Business Day: Any
day other than a day when any of the NYSE Arca, CBOT, ICE, or the
New York Stock Exchange is closed for regular
trading.
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|
CFTC: Commodity
Futures Trading Commission, an independent federal agency with the
mandate to regulate commodity futures and options in the United
States.
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Chicago Board of Trade (CBOT): The primary exchange on which corn,
wheat and soybean Futures Contracts are traded in the U.S. The Fund
expressly disclaims any association with the CBOT or endorsement of
the Fund by the CBOT and acknowledges that “CBOT” and
“Chicago Board of Trade” are registered trademarks of
such exchange. The CBOT is part of the CMR
Group.
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Code: Internal
Revenue Code of 1986, as amended.
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Commodity interests: Futures Contracts, Cleared Swaps and
Other Commodity interests.
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Commodity Pool: An
enterprise in which several individuals contribute funds in order
to trade futures contracts or options on futures contracts
collectively.
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Commodity Pool Operator or CPO: Any person engaged in a business which
is of the nature of an investment trust, syndicate, or similar
enterprise, and who, in connection therewith, solicits, accepts, or
receives from others, funds, securities, or property, either
directly or through capital contributions, the sale of stock or
other forms of securities, or otherwise, for the purpose of trading
in any swap or commodity for future delivery or commodity option on
or subject to the rules of any contract market.
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Creation Basket: A
block of 12,500 Shares used by the Fund to issue
Shares.
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Custodian: U.S.
Bank, N.A.
|
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Distributor:
Foreside Fund Services, LLC
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DTC: The Depository
Trust Company. DTC will act as the securities depository for the
Shares.
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DTC Participant: An
entity that has an account with DTC.
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Exchange Act: The
Securities Exchange Act of 1934.
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Exchange for Related Position: A privately negotiated and simultaneous
exchange of a futures contract position for a swap or other over
the counter instrument on the corresponding
commodity.
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FINRA: Financial
Industry Regulatory Authority.
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|
Forward Contract: an over the counter bilateral contract for
the purchase or sale of a specified quantity of a commodity at a
specified price, on a specified date and at a specified location.
Forwards are almost always settled by delivery of the underlying
commodity. Although possible, it is unusual to settle a Forward
financially; therefore, Forwards are generally
illiquid.
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|
Futures Contracts: an exchange-traded
contract traded with standard terms that calls for the delivery of
a specified quantity of a commodity at a specified price, on a
specified date and at a specified location. Typically, a futures
contract is traded out or rolled on an exchange before delivery or
receipt of the underlying commodity is required. Futures contracts for corn, wheat,
soybeans or sugar that are traded on U.S. or foreign
exchanges.
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ICE Futures: The
primary exchange on which Sugar No. 11 Futures Contracts are traded
in the U.S. The Fund expressly disclaims any association with ICE
Futures or endorsement of the Fund by ICE Futures and acknowledges
that “ICE Futures” and “ICE Futures US” are
registered trademarks of such exchange.
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Indirect Participants: Banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship
with a DTC Participant, either directly or
indirectly.
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|
Limited Liability Company (LLC): A type of business ownership combining
several features of corporation and partnership
structures.
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|
Margin: The amount
of equity required for an investment in Futures
Contracts.
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|
NAV: Net Asset Value
of the Fund.
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New York Mercantile Exchange (NYMEX): An exchange on which Futures Contracts
are traded in the U.S. The Fund expressly disclaims any association
with the NYMEX or endorsement of the Fund by the NYMEX and
acknowledges that “NYMEX” and “New York
Mercantile Exchange” are registered trademarks of such
exchange.
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NFA: National
Futures Association.
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|
NSCC: National
Securities Clearing Corporation.
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|
1933 Act: The
Securities Act of 1933.
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|
Option: The right,
but not the obligation, to buy or sell a futures contract, swap
agreement, forward contract or commodity, as applicable, at a
specified price on or before a specified date.
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Over the Counter Derivative: A financial contract, whose value is
designed to track the return on stocks, bonds, currencies,
commodities, or some other benchmark, that is traded over the
counter or off organized exchanges.
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Redemption Basket: A
block of 12,500 Shares used by the Fund to redeem
Shares.
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SEC: Securities and
Exchange Commission.
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|
Secondary Market: The stock exchanges and the over the
counter market. Securities are first issued as a primary offering
to the public. When the securities are traded from that first
holder to another, the issues trade in these secondary
markets.
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Shareholders: Holders of Shares.
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|
Shares: Common units
representing fractional undivided beneficial interests in the
Fund.
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|
Sponsor: Teucrium
Trading, LLC, a Delaware limited liability company, which is
registered as a Commodity Pool Operator, who controls the
investments and other decisions of the Fund and the Underlying
Funds.
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|
Spot Contract: A
cash market transaction in which the buyer and seller agree to the
immediate purchase and sale of a commodity, usually with a two-day
settlement.
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|
Swap Agreement: An
over the counter derivative that generally involves an exchange of
a stream of payments between the contracting parties based on a
notional amount and a specified index.
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|
Tracking Error: Possibility that the performance of the
Fund will not track the combined performance of the Underlying
Funds.
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Trust Agreement: The
Fifth Amended and Restated Declaration of Trust and Trust Agreement
of the Trust effective as of April 26, 2019.
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Underlying Fund: The
commodity pools in which the Fund invests — specifically, the
Teucrium Corn Fund, Teucrium Wheat Fund, Teucrium Soybean Fund and
Teucrium Sugar Fund.
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Valuation Day: Any
day as of which the Fund calculates its NAV.
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You: The owner of
Shares.
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STATEMENT OF ADDITIONAL INFORMATION
TEUCRIUM AGRICULTURAL FUND
This
statement of additional information is the second part of a
two-part document. The first part is the Fund’s disclosure
document. The disclosure document and this statement of additional
information are bound together, and both parts contain important
information. This statement of additional information should be
read in conjunction with the disclosure document. To obtain a copy
of the disclosure document without charge, call the Fund at (802)
540-0019. Before you decide whether to invest, you should read the
entire prospectus carefully and consider the risk factors beginning
on page 6.
This
statement of additional information and accompanying disclosure
document are both dated March 10, 2022.
TEUCRIUM AGRICULTURAL FUND
TABLE OF CONTENTS
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Market Outlook
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66
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Over the counter Derivatives
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77
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Commodity Market
Participants
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78
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Regulation
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78
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Potential
Advantages of Investment
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81
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Fund
Performance
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82
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Market Outlook
The Corn Market
Corn is currently the most widely produced
livestock feed grain in the United States. The two largest demands
of the United States’ corn crop are used in livestock feed
and ethanol production. Corn is also processed into food and
industrial products, including starch, sweeteners, corn oil,
beverages and industrial alcohol. The United States Department of
Agriculture (“USDA”) publishes weekly, monthly,
quarterly and annual updates for U.S. domestic and worldwide corn
production and consumption, and for other grains such as soybeans
and wheat which can be used in some cases as a substitute for corn.
These reports are available on the USDA’s website,
www.usda.gov, at no charge. The outlook provided below is from the
January 12, 2022 USDA report. However,
as discussed immediately below, there have been significant
geopolitical developments since the issuance of the January 12th
USDA Report that may significantly alter assumptions and
expectations and the potential for resulting volatility and
losses.
As
a general matter, the occurrence of a severe weather event, natural
disaster, terrorist attack, geopolitical events, outbreak or public
health emergency as declared by the World Health Organization, the
continuation or expansion of war or other hostilities, or a
prolonged government shutdown may have significant adverse effects
on the Fund and its investments and alter current assumptions and
expectations. For example, in late February 2022, Russia invaded
Ukraine, significantly amplifying already existing geopolitical
tensions among Russia and other countries in the region and in the
west. The responses of countries and political bodies to
Russia’s actions, the larger overarching tensions, and
Ukraine’s military response and the potential for wider
conflict may increase financial market volatility generally, have
severe adverse effects on regional and global economic markets, and
cause volatility in the price of corn, corn futures, and the share
price of the Fund.
The price
per bushel of corn in the United States is primarily a function of
both U.S. and global production and demand. Long term impacts from
sanctions, shipping disruptions, collateral war damage, and a
potential expansion of the conflict between Russia and Ukraine
could further disrupt the availability of corn supplies. Ukraine
was the fifth largest global exporter of corn last season
(accounting for approximately thirteen percent of total global corn
exports) and prior to commencement of the Black Sea conflict was
expected by the USDA to have become the third largest global
exporter of corn this season. Ukraine was the largest global
supplier of corn to China last year. Currently, the conflict has
halted exports of Ukraine’s corn crop that was harvested last
season. Now at question is the ability of farmers in both countries
to plant this season’s corn crop in spring of 2022. As such,
volatility, trading volumes, and prices in global corn markets have
risen dramatically and are expected to continue indefinitely at
extreme elevated levels. Given all of the above factors, the
Sponsor has no ability to discern when current high levels of
volatility will subside.
The United States is the world’s leading
producer and exporter of corn. For the Crop Year 2021-22, the
United States Department of Agriculture (“USDA”)
estimates that the U.S. will produce approximately 32% of all the
corn globally, of which about 16% will be exported. For 2021-2022,
based on the January 12, 2022 USDA reports, global consumption of
1,196 Million Metric Tons (MMT) is expected to be slightly lower
than global production of 1,207 MMT. If the global demand for corn
is not equal to global supply, this may have an impact on the price
of corn. Besides the United States, other principal world corn
exporters include Argentina, Brazil, Russia, South Africa and
Ukraine. Major import nations include Mexico, Japan, the European
Union (EU), South Korea, Egypt and parts of Southeast Asia.
China’s production at 273 MMT is approximately 8% less than
its domestic usage.
According to the USDA, global corn consumption
has increased just over 607% from crop year 1960/1961 to 2021/2022
as demonstrated by the graph below and is projected to continue to
grow in coming years. Consumption growth is the result of a
combination of many factors including: 1) global population growth,
which, according to the U.S. Census Department, is estimated to
reach 9.7 billion by 2050; 2) a growing global middle class which
is increasing the demand for protein and meat-based products
globally and most significantly in developing countries; and 3)
increased use of biofuels, including ethanol in the United
States.
Global corn consumption may fluctuate
year over year due to any number of reasons which may include, but
is not limited to, economic conditions, global health concerns,
international trade policy. Corn is a staple commodity used
pervasively across the globe so that any contractions in
consumption may only be temporary as has historically been the
case.
While global consumption of corn has increased
over the 1960/1961-2021/2022 period, so has production, driven by
increases in acres planted and yield per acre. However, according
to the USDA and United Nations, future growth in planted acres and
yield may be inhibited by lower productive land, and lack of
infrastructure and transportation. In addition, agricultural crops
such as corn are highly weather dependent for yield and therefore
susceptible to changing weather patterns. In addition, given the
current production/consumption patterns, nearly 100% of all corn
produced globally is consumed which leaves minimal excess inventory
if production issues arise.
The price per bushel of corn in the United
States is primarily a function of both U.S. and global production,
as well as U.S. and global demand. The graph below shows the USDA
published price per bushel by month for the period January 2007 to
January 2022.
On February 9, 2022, the USDA released its
monthly World Agricultural Supply and Demand Estimates (WASDE) for
the Crop Year 2021-22. The exhibit below provides a summary of
historical and current information for United States corn
production.
Standard Corn Futures Contracts trade on the
CBOT in units of 5,000 bushels, although 1,000 bushels
“mini-corn” Corn Futures Contracts also trade. Three
grades of corn are deliverable under CBOT Corn Futures Contracts:
Number 1 yellow, which may be delivered at 1.5 cents over the
contract price; Number 2 yellow, which may be delivered at the
contract price; and Number 3 yellow, which may be delivered at 1.5
cents under the contract price for all contract months prior to
March 2022 or may be delivered between 2 and 4 cents per bushel
under the contract price for all contract months commencing with
March 2022 and beyond. There are five months each year in which
CBOT Corn Futures Contracts expire: March, May, July, September and
December.
If the futures market is in a state of
backwardation (i.e., when the price of corn in the future is
expected to be less than the current price), the Fund will buy
later to expire contracts for a lower price than the sooner to
expire contracts that it sells. Hypothetically, and assuming no
changes to either prevailing corn prices or the price relationship
between immediate delivery, soon to expire contracts and later to
expire contracts, the value of a contract will rise as it
approaches expiration. Over time, if backwardation remained
constant, the differences would continue to increase. If the
futures market is in contango, the Fund will buy later to expire
contracts for a higher price than the sooner to expire contracts
that it sells. Hypothetically, and assuming no other changes to
either prevailing corn prices or the price relationship between the
spot price, soon to expire contracts and later to expire contracts,
the value of a contract will fall as it approaches expiration. Over
time, if contango remained constant, the difference would continue
to increase. Historically, the corn futures markets have
experienced periods of both contango and backwardation. Frequently,
whether contango or backwardation exists is a function, among other
factors, of the seasonality of the corn market and the corn harvest
cycle. All other things being equal, a situation involving
prolonged periods of contango may adversely impact the returns of
the Fund; conversely a situation involving prolonged periods of
backwardation may positively impact the returns of the
Fund.
Futures contracts may be either bought or sold
long or short. The U.S Commodity Futures Trading Commission weekly
releases the “Commitment of Traders” (COT) report,
which depicts the open interest as well as long and short positions
in the market. Market participants may use this report to gauge
market sentiment.
The Soybean Market
Global soybean production is concentrated in the
U.S., Brazil, Argentina and China. The United States Department of
Agriculture (“USDA”) has estimated that, for the Crop
Year 2021-22, the United States will produce approximately 121 MMT
of soybeans or approximately 32% of estimated world production,
with Brazil production at 139 MMT. Argentina is projected to
produce about 47 MMT. For 2021-22, based on the January 12, 2022
USDA report, global consumption of 375 MMT is estimated slightly
higher than global production of 373 MMT. If the global demand for
soybeans is not equal to global supply, this may have an impact on
the price of soybeans. Global soybean consumption may fluctuate
year over year due to any number of reasons which may include, but
is not limited to, economic conditions, global health concerns,
international trade policy. Soybeans are a staple commodity used
pervasively across the globe so that any contractions in
consumption may only be temporary as has historically been the
case. The USDA publishes weekly, monthly, quarterly and annual
updates for U.S. domestic and worldwide soybean production and
consumption. These reports are available on the USDA’s
website, www.usda.gov, at no charge. The outlook provided below is
from the January 12, 2022 USDA report.
As a
general matter, the occurrence of a severe weather event, natural
disaster, terrorist attack, geopolitical events, outbreak or public
health emergency as declared by the World Health Organization, the
continuation or expansion of war or other hostilities, or a
prolonged government shutdown may have significant adverse effects
on the Fund and its investments and alter current assumptions and
expectations. For example, in late February 2022, Russia invaded
Ukraine, significantly amplifying already existing geopolitical
tensions among Russia and other countries in the region and in the
west. The responses of countries and political bodies to
Russia’s actions, the larger overarching tensions, and
Ukraine’s military response and the potential for wider
conflict may increase financial market volatility generally, have
severe adverse effects on regional and global economic markets, and
cause volatility in the price of agricultural products, including
agricultural futures, and the share price of the Fund.
The price
per bushel of soybeans in the United States is primarily a function
of both U.S. and global production and demand. Long term impacts
from sanctions, shipping disruptions, collateral war damage, and a
potential expansion of the conflict between Russia and Ukraine
could further disrupt the availability of agricultural products and
supplies. Ukraine was the fifth largest global exporter of
corn last season (accounting for approximately thirteen percent of
total global corn exports) and prior to commencement of the Black
Sea conflict was expected by the USDA to have become the third
largest global exporter of corn this season. Ukraine was the
largest global supplier of corn to China last year. China is also
the largest importer of soybeans in the world. Because corn and
soybeans are planted on the same acres, farmers must choose which
crop to plant each year. If corn prices rise enough to incentivize
the planting of corn over soybeans, the supply and price of
soybeans could be affected. Currently, the conflict has halted
exports of Ukraine’s corn crop that was harvested last
season. Now at question is the ability of farmers in both countries
to plant this season’s corn crop in spring of 2022. As such,
volatility, trading volumes, and prices in global corn and soybean
markets have risen dramatically and are expected to continue
indefinitely at extreme elevated levels. Given all of the above
factors, the Sponsor has no ability to discern when current high
levels of volatility will subside.
The soybean processing industry converts
soybeans into soybean meal, soybean hulls, and soybean oil. Soybean
meal and soybean hulls are processed into soy flour or soy protein,
which are used, along with other commodities, by livestock
producers and the fish farming industry as feed. Soybean oil is
sold in multiple grades and is used by the food, petroleum and
chemical industries. The food industry uses soybean oil in cooking
and salad dressings, baking and frying fats, and butter
substitutes, among other uses. In addition, the soybean industry
continues to introduce soy-based products as substitutes to various
petroleum-based products including lubricants, plastics, inks,
crayons and candles. Soybean oil is also converted to biodiesel and
renewable diesel for use as fuel.
Standard Soybean Futures Contracts trade on the
CBOT in units of 5,000 bushels, although 1,000 bushel
“mini-sized” Soybean Futures Contracts also trade.
Three grades of soybeans are deliverable under CBOT Soybean Futures
Contracts: Number 1 yellow, which may be delivered at 6 cents per
bushel over the contract price; Number 2 yellow, which may be
delivered at the contract price; and Number 3 yellow, which may be
delivered at 6 cents per bushel under the contract price. There are
seven months each year in which CBOT Soybean Futures Contracts
expire: January, March, May, July, August, September and
November.
If the futures market is in a state of
backwardation (i.e., when the price of soybeans in the future is
expected to be less than the current price), the Fund will buy
later to expire contracts for a lower price than the sooner to
expire contracts that it sells. Hypothetically, and assuming no
changes to either prevailing soybean prices or the price
relationship between immediate delivery, soon to expire contracts
and later to expire contracts, the value of a contract will rise as
it approaches expiration. If the futures market is in contango, the
Fund will buy later to expire contracts for a higher price than the
sooner to expire contracts that it sells. Hypothetically, and
assuming no other changes to either prevailing soybean prices or
the price relationship between the spot price, soon to expire
contracts and later to expire contracts, the value of a contract
will fall as it approaches expiration. Historically, the soybeans
futures markets have experienced periods of both contango and
backwardation. Frequently, whether contango or backwardation exists
is a function, among other factors, of the seasonality of the
soybean market and the soybean harvest cycle. All other things
being equal, a situation involving prolonged periods of contango
may adversely impact the returns of the Fund; conversely a
situation involving prolonged periods of backwardation may
positively impact the returns of the Fund.
The price per bushel of soybeans in the United
States is primarily a function of both U.S. and global production,
as well as U.S. and global demand. The graph below shows the USDA
published price per bushel by month for the period January 2007 to
January 2022.
On February 9, 2022, the USDA released its
monthly World Agricultural Supply and Demand Estimates (WASDE) for
the Crop Year 2021-22. The exhibit below provides a summary of
historical and current information for United States soybean
production.
The Sugar Market
Sugarcane accounts for nearly
80% of the world’s sugar production, while sugar beets
account for the remainder of the world’s sugar production.
Sugar manufacturers use sugar beets and sugarcane as the raw
material from which refined sugar (sucrose) for industrial and
consumer use is produced. Sugar is produced in various forms,
including granulated, powdered, liquid, brown, and molasses. The
food industry (in particular, producers of baked goods, beverages,
cereal, confections, and dairy products) uses sugar and sugarcane
molasses to make sugar-containing food products. Sugar beet pulp
and molasses products are used as animal feed ingredients. Ethanol
is an important by-product of sugarcane processing. Additionally,
the material that is left over after sugarcane is processed is used
to manufacture paper, cardboard, and “environmentally
friendly” eating utensils.
As a general matter, in late
February 2022, Russia invaded Ukraine, significantly amplifying
already existing geopolitical tensions among Russia and other
countries in the region and in the west. The responses of countries
and political bodies to Russia’s actions, the larger
overarching tensions, and Ukraine’s military response and the
potential for wider conflict may increase financial market
volatility generally, have severe adverse effects on regional and
global economic markets, and cause volatility in the price of
agricultural products, including agricultural futures, and the
share price of the Fund.
The
price per pound of sugar in the United States is primarily a
function of both U.S. and global production and demand as well as
expansive protectionist policies implemented by the US Government.
Long term impacts from sanctions, shipping disruptions, collateral
war damage, and a potential expansion of the conflict between
Russia and Ukraine could further disrupt the availability of
agricultural products and supplies. Russian production of
sugar comes primarily from sugar beets, accounting for
approximately three percent or less of total global sugar
production. Ukraine’s sugar production is small and
relatively inconsequential to global sugar markets. Currently, the
conflict has dramatically reduced exports of Russian sugar. Now at
question is the ability of farmers in both countries to plant this
season’s sugar beet crop in 2022. Volatility, trading
volumes, and prices in global sugar markets have risen dramatically
and are expected to continue indefinitely at extreme elevated
levels. Given all of the above factors, the Sponsor has no ability
to discern when current high levels of volatility will
subside.
The Sugar No. 11 Futures Contract is the world
benchmark contract for raw sugar trading. This contract prices the
physical delivery of raw cane sugar, delivered to the
receiver’s vessel at a specified port within the country of
origin of the sugar. Sugar No. 11 Futures Contracts trade on ICE
Futures US and the NYMEX in units of 112,000 pounds.
The United States Department of Agriculture
(“USDA”) publishes two major reports annually on U.S.
domestic and worldwide sugar production and consumption. These are
usually released in November and May. In addition, the USDA
publishes periodic, but not as comprehensive, reports on sugar
monthly. These reports are available on the USDA’s website,
www.usda.gov, at no charge. The USDA’s November 2021 report
for the 2021/22 Marketing year estimated global production of 181
MMT, with the drop in Brazil expected to be offset by gains in
European Union, India, Russia, and Thailand. Consumption is
expected to rise due to growth in markets including China, India,
and Russia. Stocks are lowered due to a drop in China, Indonesia,
and Thailand. Exports are expected to be flat as the steep rise in
Thailand trade is offset by lower shipments from Brazil. Global
sugar consumption may fluctuate year over year due to any number of
reasons which may include, but is not limited to, economic
conditions, global health concerns, international trade policy.
Sugar is a staple commodity used pervasively across the globe so
that any contractions in consumption may only be temporary as has
historically been the case.
If the
futures market is in a state of backwardation (i.e., when the price
of sugar in the future is expected to be less than the current
price), the Fund will buy later to expire contracts for a lower
price than the sooner to expire contracts that it sells.
Hypothetically, and assuming no changes to either prevailing sugar
prices or the price relationship between immediate delivery, soon
to expire contracts and later to expire contracts, the value of a
contract will rise as it approaches expiration. If the futures
market is in contango, the Fund will buy later to expire contracts
for a higher price than the sooner to expire contracts that it
sells. Hypothetically, and assuming no other changes to either
prevailing sugar prices or the price relationship between the spot
price, soon to expire contracts and later to expire contracts, the
value of a contract will fall as it approaches expiration.
Historically, the sugar futures markets have experienced periods of
both contango and backwardation. Frequently, whether contango or
backwardation exists is a function, among other factors, of the
seasonality of the sugar market and the sugar harvest cycle. All
other things being equal, a situation involving prolonged periods
of contango may adversely impact the returns of the Funds;
conversely a situation involving prolonged periods of backwardation
may positively impact the returns of the Funds.
Futures contracts may be either bought or sold
long or short. The U.S Commodity Futures Trading Commission weekly
releases the “Commitment of Traders” (COT) report,
which depicts the open interest as well as long and short positions
in the market. Market participants may use this report to gauge
market sentiment.
The Wheat Market
Wheat is used to produce
flour, the key ingredient for breads, pasta, crackers and many
other food products, as well as several industrial products such as
starches and adhesives. Wheat by-products are used in livestock
feeds. Wheat is the principal food grain produced in the United
States, and the United States’ output of wheat is typically
exceeded only by that of China, the European Union, Russia, and
India. The United States Department of Agriculture
(“USDA”) estimates that for 2021-22, the principal
global producers of wheat will be the EU, Russia, Ukraine, China,
India, the United States, Australia and Canada. The U.S. generates
approximately 6% of global production, with approximately 50% of
that being exported. For 2021-22, based on the January 12, 2022
USDA report, global consumption of 787 MMT is estimated to be
slightly higher than production of 779 MMT. If the global demand of
wheat is not equal to global supply, this may have an impact on the
price of wheat. Global wheat consumption may fluctuate year over
year due to any number of reasons which may include, but is not
limited to, economic conditions, global health concerns,
international trade policy. Wheat is a staple commodity used
pervasively across the globe so that any contractions in
consumption may only be temporary as has historically been the
case. The USDA publishes weekly, monthly, quarterly and annual
updates for U.S. domestic and worldwide wheat production and
consumption. These reports are available on the USDA’s
website, www.usda.gov, at no charge. The outlook provided herein is
from the January 12, 2022 USDA report. However, as discussed
immediately below, there have been significant geopolitical
developments since the issuance of the January 12th USDA Report
that may significantly alter assumptions and expectations and the
potential for resulting volatility and losses. –
As a
general matter, the occurrence of a severe weather event, natural
disaster, terrorist attack, geopolitical events, outbreak or public
health emergency as declared by the World Health Organization, the
continuation or expansion of war or other hostilities, or a
prolonged government shutdown may have significant adverse effects
on the Fund and its investments and alter current assumptions and
expectations. For example, in late February 2022, Russia invaded
Ukraine, significantly amplifying already existing geopolitical
tensions among Russia and other countries in the region and in the
west. The responses of countries and political bodies to
Russia’s actions, the larger overarching tensions, and
Ukraine’s military response and the potential for wider
conflict may increase financial market volatility generally, have
severe adverse effects on regional and global economic markets, and
cause volatility in the price of wheat, wheat futures and the share
price of the Fund.
The
price per bushel of wheat in the United States is primarily a
function of both U.S. and global wheat production and demand.
Russia and Ukraine constitute the top export supply of wheat by
volume (approximately 30 percent of total global wheat exports) to
the world. The escalating conflict between the two countries,
including but not limited to, sanctions, shipping disruptions, and
collateral war damage could further disrupt the availability of
wheat supplies. The conflict has halted exports of the wheat crop
that was harvested last season and is currently in storage. If
tensions continue, there is risk in the ability for farmers to
harvest the current wheat crop which will come to maturity in early
summer of 2022. As such, volatility, trading volumes, and prices in
global wheat markets have risen dramatically and are expected to
continue indefinitely at extreme elevated levels. Given all of the
above factors, the Sponsor has no ability to discern when current
high levels of volatility will subside.
There
are several types of wheat grown in the U.S., which are classified
in terms of color, hardness, and growing season. CBOT Wheat Futures
Contracts call for delivery of #2 soft red winter wheat, which is
generally grown in the eastern third of the United States, but
other types and grades of wheat may also be delivered (Grade #1
soft red winter wheat, Hard Red Winter, Dark Northern Spring and
Northern Spring wheat may be delivered at 3 cents premium per
bushel over the contract price and #2 soft red winter wheat, Hard
Red Winter, Dark Northern Spring and Northern Spring wheat may be
delivered at the contract price.) Winter wheat is planted in the
fall and is harvested in the late spring or early summer of the
following year, while spring wheat is planted in the spring and
harvested in late summer or fall of the same year. Standard Wheat
Futures Contracts trade on the CBOT in units of 5,000 bushels,
although 1,000 bushel “mini-wheat” Wheat Futures
Contracts also trade. There are five months each year in which CBOT
Wheat Futures Contracts expire: March, May, July, September and
December.
If the
futures market is in a state of backwardation (i.e., when the price
of wheat in the future is expected to be less than the current
price), the Fund will buy later to expire contracts for a lower
price than the sooner to expire contracts that it sells.
Hypothetically, and assuming no changes to either prevailing wheat
prices or the price relationship between immediate delivery, soon
to expire contracts and later to expire contracts, the value of a
contract will rise as it approaches expiration. If the futures
market is in contango, the Fund will buy later to expire contracts
for a higher price than the sooner to expire contracts that it
sells. Hypothetically, and assuming no other changes to either
prevailing wheat prices or the price relationship between the spot
price, soon to expire contracts and later to expire contracts, the
value of a contract will fall as it approaches expiration.
Historically, the wheat futures markets have experienced periods of
both contango and backwardation. Frequently, whether contango or
backwardation exists is a function, among other factors, of the
seasonality of the wheat market and the wheat harvest cycle. All
other things being equal, a situation involving prolonged periods
of contango may adversely impact the returns of the Fund;
conversely a situation involving prolonged periods of backwardation
may positively impact the returns of the Fund.
Futures
contracts may be either bought or sold long or short. The U.S
Commodity Futures Trading Commission weekly releases the
“Commitment of Traders” (COT) report, which depicts the
open interest as well as long and short positions in the market.
Market participants may use this report to gauge market
sentiment.
The
price per bushel of wheat in the United States is primarily a
function of both U.S. and global production, as well as U.S. and
global demand. The graph below shows the USDA published price per
bushel by month for the period January 2007 to January
2022.
On
February 9, 2022, the USDA released its monthly World Agricultural
Supply and Demand Estimates (WASDE) for the Crop Year 2020-21. The
exhibit below provides a summary of historical and current
information for United States wheat production.
Standard Wheat
Futures Contracts trade on the CBOT in units of 5,000 bushels,
although 1,000 bushel “mini-wheat” Wheat Futures
Contracts also trade. There are several types of wheat grown in the
U.S., which are classified in terms of color, hardness, and growing
season. CBOT Wheat Futures Contracts call for delivery of #2 soft
red winter wheat, which is generally grown in the eastern third of
the United States, but other types and grades of wheat may also be
delivered (Grade #1 soft red winter wheat, Hard Red Winter, Dark
Northern Spring and Northern Spring wheat may be delivered at 3
cents premium per bushel over the contract price and #2 soft red
winter wheat, Hard Red Winter, Dark Northern Spring and Northern
Spring wheat may be delivered at the contract price.) Winter wheat
is planted in the fall and is harvested in the late spring or early
summer of the following year, while spring wheat is planted in the
spring and harvested in late summer or fall of the same year. There
are five months each year in which CBOT Wheat Futures Contracts
expire: March, May, July, September and December.
Over the Counter Derivatives
In
addition to futures contracts, options on Futures Contracts,
derivative contracts that are tied to various commodities are
entered into outside of public exchanges. These “over the
counter” contracts are entered into between two parties in
private contracts or on a recently formed swap execution facility
(“SEF”) for certain standardized swaps. Unlike futures
contracts, which are guaranteed by a clearing organization, each
party to an over the counter derivative contract bears the credit
risk of the other party (unless such over the counter swap is
cleared through a DCO), i.e., the risk that the other party will
not be able to perform its obligations under its
contract.
Some
over the counter derivatives contracts contain relatively
standardized terms and conditions and are available from a wide
range of participants. Others have highly customized terms and
conditions and are not as widely available. While the Underlying
Funds may enter into these more customized contracts, the
Underlying Funds will only enter into over the counter contracts
containing certain terms and conditions, as discussed further
below, that are designed to minimize the credit risk to which the
Underlying Fund will be subject and only if the terms and
conditions of the contract are consistent with achieving the
Underlying Fund’s investment objective of tracking its
Benchmark. The over the counter contracts that the Underlying Funds
may enter into will take the form of either forward contracts,
swaps or options.
A
forward contract is a contractual obligation to purchase or sell a
specified quantity of a commodity at or before a specified date in
the future at a specified price and, therefore, is economically
similar to a futures contract except that, unlike a futures
contract it cannot be financially settled (i.e., one must intend to
make or take delivery of a commodity under a forward contract.)
Unlike futures contracts, however, forward contracts are typically
privately negotiated or are traded in the over the counter markets.
Forward contracts for a given commodity are generally available for
various amounts and maturities and are subject to individual
negotiation between the parties involved. Moreover, generally there
is no direct means of offsetting or closing out a forward contract
by taking an offsetting position as one would a Futures Contract on
a U.S. exchange. If a trader desires to close out a forward
contract position, he generally will establish an opposite position
in the contract but will settle and recognize the profit or loss on
both positions simultaneously on the delivery date. Thus, unlike in
the futures contract market where a trader who has offset positions
will recognize profit or loss immediately, in the forward market a
trader with a position that has been offset at a profit will
generally not receive such profit until the delivery date, and
likewise a trader with a position that has been offset at a loss
will generally not have to pay money until the delivery date.
However, in some very limited instances such contracts may provide
a right of look out that will allow for the receipt of profit and
payment for losses prior to the delivery date.
An over
the counter swap agreement is a bilateral contract to exchange a
periodic stream of payments determined by reference to a notional
amount, with payment typically made between the parties on a net
basis. For instance, an Underlying Fund may be obligated to pay a
fixed price per bushel of a commodity multiplied by a notional
number of bushels and be entitled to receive an amount per bushel
equal to the current value of an index of that commodity’s
prices, the price of a specified Futures Contract, or the average
price of a group of Futures Contracts such as the Underlying
Fund’s Benchmark. Each party to the swap is subject to the
credit risk of the other party. The Underlying Funds will only
enter into over the counter swaps on a net basis, where the two
payment streams are netted out on a daily basis, with the parties
receiving or paying, as the case may be, only the net amount of the
two payments. Like cleared swaps, over the counter swaps do not
generally involve the delivery of underlying assets or principal
and re therefore financially settled. Accordingly, an Underlying
Fund’s risk of loss with respect to an over the counter swap
will generally be limited to the net amount of payments that its
counterparty is contractually obligated to make less any collateral
the Underlying Fund is holding from its counterparty.
To
reduce the credit risk that arises in connection with over the
counter contracts, the Underlying Funds will generally enter into
agreements with each counterparty based on the Master Agreement
published by the International Swaps and Derivatives Association,
Inc. that provides for the netting of an Underlying Fund’s
overall exposure to each counterparty and for daily collateral
transfers based on the marked to market value of the
contract.
The
Sponsor will assess the creditworthiness of each potential
counterparty. The Sponsor assesses or reviews, as appropriate, the
creditworthiness of each potential or existing counterparty to an
over the counter contract pursuant to guidelines approved by the
Sponsor. The Sponsor will periodically review the creditworthiness
of existing counterparties. The Sponsor’s President, Chief
Investment Officer, and Chief Executive Officer has over 25 years
of experience in over the counter derivatives trading, including
the counterparty creditworthiness analysis inherent therein. There
is no guarantee that the Sponsor’s creditworthiness analysis
will be successful and that counterparties selected for Fund
transactions will not default on their contractual
obligations.
The
Underlying Funds also may require that a counterparty be highly
rated and/or provide collateral or other credit support. The
Sponsor on behalf of the Underlying Funds may enter into over the
counter contracts with various types of counterparties, including;
(a) entities registered as swap dealers (“SD”) or major
swap participants (“MSP”), or (b) any other entities
that qualify as eligible contract participants
(“ECP”).
After
the enactment of the Dodd-Frank Act, swaps (and options that are
regulated as swaps) are subject to the CFTC’s exclusive
jurisdiction and are regulated as rigorously as futures. Generally,
however, if a swap is entered into with an SD or MSP, such
counterparty will conduct all necessary compliance with respect to
swaps and options under the Dodd-Frank Act.
Commodity Market Participants
The two
broad classes of persons who trade commodities are hedgers and
speculators. Hedgers include financial institutions that manage or
deal in interest rate-sensitive instruments, foreign currencies or
stock portfolios, and commercial market participants, such as
farmers and manufacturers, that market or process commodities.
Hedging is a protective procedure designed to effectively lock in
prices that would otherwise change due to an adverse movement in
the price of the underlying commodity, such as the adverse price
movement between the time a merchandiser or processor enters into a
contract to buy or sell a raw or processed commodity at a certain
price and the time he must perform the contract. For example, if a
hedger contracts to physically sell the commodity at a future date,
he may simultaneously buy a futures or forward contract for the
necessary equivalent quantity of the commodity. At the time for
performance of the physical contract, the hedger may accept
delivery under his futures contract and sell the commodity quantity
as required by the physical contract or he may buy the actual
commodity, sell it under the physical contract and close out his
futures contract position by making an offsetting
sale.
The
Commodity Interest markets enable the hedger to shift the risk of
price fluctuations. The usual objective of the hedger is to protect
the profit that he expects to earn from farming, merchandising, or
processing operations rather than to profit from his trading.
However, at times the impetus for a hedge transaction may result in
part from speculative objectives and hedgers can end up paying
higher prices than they would have if they did not enter into a
Commodity Interest transaction if current market prices are lower
than the locked-in price.
Unlike
the hedger, the speculator generally expects neither to make nor
take delivery of the underlying commodity. Instead, the speculator
risks his capital with the hope of making profits from price
fluctuations in the commodities. The speculator is, in effect, the
risk bearer who assumes the risks that the hedger seeks to avoid.
Speculators rarely make or take delivery of the underlying
commodity; rather they attempt to close out their positions prior
to the delivery date. A speculator who takes a long position
generally will make a profit if the price of the underlying
commodity goes up and incur a loss if the price of the underlying
commodity goes down, while a speculator who takes a short position
generally will make a profit if the price of the underlying
commodity goes down and incur a loss if the price of the underlying
commodity goes up.
Regulation
The
regulation of futures markets, futures contracts, and futures
exchanges has historically been comprehensive. The CFTC and the
exchanges are authorized to take extraordinary actions in the event
of a market emergency including, for example, the retroactive
implementation of speculative position limits, increased margin
requirements, the establishment of daily price limits and the
suspension of trading on an exchange or trading
facility.
Pursuant to
authority in the CEA, the NFA has been formed and registered with
the CFTC as a registered futures association. At the present time,
the NFA is the only SRO for commodity interest professionals, other
than futures exchanges. The CFTC has delegated to the NFA
responsibility for the registration of CPOs and FCMs and their
respective associated persons. The Sponsor and the Fund’s
clearing broker are members of the NFA. As such, they will be
subject to NFA standards relating to fair trade practices,
financial condition and consumer protection. The NFA also
arbitrates disputes between members and their customers and
conducts registration and fitness screening of applicants for
membership and audits of its existing members. Neither the Trust
nor the Teucrium Funds are required to become a member of the NFA.
The regulation of commodity interest transactions in the United
States is a rapidly changing area of law and is subject to ongoing
modification by governmental and judicial action. Considerable
regulatory attention has been focused on non-traditional investment
pools that are publicly distributed in the United States. There is
a possibility of future regulatory changes within the United States
altering, perhaps to a material extent, the nature of an investment
in the Fund, or the ability of a Fund to continue to implement its
investment strategy. In addition, various national governments
outside of the United States have expressed concern regarding the
disruptive effects of speculative trading in the commodities
markets and the need to regulate the derivatives markets in
general. The effect of any future regulatory change on the Teucrium
Funds is impossible to predict but could be substantial and
adverse.
The
CFTC possesses exclusive jurisdiction to regulate the activities of
commodity pool operators and commodity trading advisors with
respect to "commodity interests," such as futures, swaps, and
options, and has adopted regulations with respect to the activities
of those persons and/or entities. Under the Commodity Exchange Act
(“CEA”), a registered commodity pool operator, such as
the Sponsor, is required to make annual filings with the CFTC and
the NFA describing its organization, capital structure, management
and controlling persons. In addition, the CEA authorizes the CFTC
to require and review books and records of, and documents prepared
by, registered commodity pool operators. Pursuant to this
authority, the CFTC requires commodity pool operators to keep
accurate, current and orderly records for each pool that they
operate. The CFTC may suspend the registration of a commodity pool
operator (1) if the CFTC finds that the operator’s trading
practices tend to disrupt orderly market conditions, (2) if any
controlling person of the operator is subject to an order of the
CFTC denying such person trading privileges on any exchange, and
(3) in certain other circumstances. Suspension, restriction or
termination of the Sponsor’s registration as a commodity pool
operator would prevent it, until that registration were to be
reinstated, from managing the Fund, and might result in the
termination of the Fund if a successor sponsor is not elected
pursuant to the Trust Agreement. Neither the Trust nor the Fund is
required to be registered with the CFTC in any
capacity.
The
Fund’s investors are afforded prescribed rights for
reparations under the CEA. Investors may also be able to maintain a
private right of action for violations of the CEA. The CFTC has
adopted rules implementing the reparation provisions of the CEA,
which provide that any person may file a complaint for a
reparations award with the CFTC for violation of the CEA against a
floor broker or an FCM, introducing broker, commodity trading
advisor, CPO, and their respective associated persons.
The
regulations of the CFTC and the NFA prohibit any representation by
a person registered with the CFTC or by any member of the NFA, that
registration with the CFTC, or membership in the NFA, in any
respect indicates that the CFTC or the NFA has approved or endorsed
that person or that person’s trading program or objectives.
The registrations and memberships of the parties described in this
summary must not be considered as constituting any such approval or
endorsement. Likewise, no futures exchange has given or will give
any similar approval or endorsement.
Trading
venues in the United States are subject to varying degrees of
regulation under the CEA depending on whether such exchange is a
designated contract market (i.e. a futures exchange) or a swap
execution facility. Clearing organizations are also subject to the
CEA and the rules and regulations adopted thereunder as
administered by the CFTC. The CFTC’s function is to implement
the CEA’s objectives of preventing price manipulation and
excessive speculation and promoting orderly and efficient commodity
interest markets. In addition, the various exchanges and clearing
organizations themselves as SROs exercise regulatory and
supervisory authority over their member firms.
The
Dodd-Frank Wall Street Reform and Consumer Protection Act (the
“Dodd-Frank Act”) was enacted in response to the
economic crisis of 2008 and 2009 and it significantly altered the
regulatory regime to which the securities and commodities markets
are subject. To date, the CFTC has issued proposed or final
versions of almost all of the rules it is required to promulgate
under the Dodd-Frank Act, and it continues to issue proposed
versions of additional rules that it has authority to promulgate.
Provisions of the new law include the requirement that position
limits be established on a wide range of commodity interests,
including agricultural, energy, and metal-based commodity futures
contracts, options on such futures contracts and uncleared swaps
that are economically equivalent to such futures contracts and
options (“Reference Contracts”); new registration and
recordkeeping requirements for swap market participants; capital
and margin requirements for “swap dealers” and
“major swap participants,” as determined by the new law
and applicable regulations; reporting of all swap transactions to
swap data repositories; and the mandatory use of clearinghouse
mechanisms for sufficiently standardized swap transactions that
were historically entered into in the over the counter market, but
are now designated as subject to the clearing requirement; and
margin requirements for over the counter swaps that are not subject
to the clearing requirements.
In
addition, considerable regulatory attention has recently been
focused on non-traditional publicly distributed investment pools
such as the Fund. Furthermore, various national governments have
expressed concern regarding the disruptive effects of speculative
trading in certain commodity markets and the need to regulate the
derivatives markets in general. The effect of any future regulatory
change on the Teucrium Funds is impossible to predict but could be
substantial and adverse.
The
Dodd-Frank Act was intended to reduce systemic risks that may have
contributed to the 2008/2009 financial crisis. Since the first
draft of what became the Dodd-Frank Act, supporters and opponents
have debated the scope of the legislation. As the Administrations
of the U.S. change, the interpretation and implementation will
change along with them. Nevertheless, regulatory reform of any kind
may have a significant impact on U.S. regulated
entities.
Position Limits, Aggregation Limits, Price Fluctuation
Limits
The
CFTC and U.S. futures exchanges impose limits on the maximum net
long or net short speculative positions that any person may hold or
control in any particular futures or options contracts traded on US
futures exchanges. For example, the CFTC currently imposes
speculative position limits on a number of agricultural commodities
(e.g., corn, oats, wheat, soybeans and cotton) and US futures
exchanges currently impose speculative position limits on many
other commodities. A Fund could be required to liquidate positions
it holds in order to comply with position limits or may not be able
to fully implement trading instructions generated by its trading
models, in order to comply with position limits. Any such
liquidation or limited implementation could result in substantial
costs to a Fund.
The
Dodd-Frank Act significantly expanded the CFTC’s authority to
impose position limits with respect to futures contracts and
options on futures contracts, swaps that are economically
equivalent to futures or options on futures, and swaps that are
traded on a regulated exchange and certain swaps that perform a
significant price discovery function. On December 16, 2016, the
CFTC issued a final rule to amend part 150 of the CFTC’s
regulations with respect to the policy for aggregation under the
CFTC’s position limits regime for futures and option
contracts on nine agricultural commodities (“the Aggregation
Requirements”). This final rule addressed the circumstances
under which market participants would be required to aggregate all
their positions, for purposes of the position limits, of all
positions in Reference Contracts of the 9 agricultural commodities
held by a single entity and its affiliates, regardless of whether
such positions exist on US futures exchanges, non-US futures
exchanges, or in over the counter swaps. An affiliate of a market
participant is defined as two or more persons acting pursuant to an
express or implied agreement or understanding. The Aggregation
Requirements became effective on February 14, 2017. On August 10,
2017, the CFTC issued a No-Action Relief Letter No. 17-37 to
clarify several provisions under Regulation 150.4, regarding
position aggregation filing requirements of market participants.
The Sponsor does not anticipate that this order will have an impact
on the ability of a Fund to meet its respective investment
objectives.
As
published in the January 14, 2021 Federal Register, the Commodity
Futures Trading Commission (CFTC) voted to approve a final rule
(Final Rule) regarding position limits for certain futures
contracts and economically equivalent swaps. The Final Rule
ends a decade of rulemaking activity in which the CFTC proposed,
amended, and re-proposed its position limit rules and aggregation
standards for speculative positions due to certain amendments to
the Commodity Exchange Act (CEA) by the Dodd-Frank Wall Street
Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). In the
Final Rule, the CFTC confirmed that federal speculative position
limits are necessary for 25 core referenced futures contracts and
for any futures contracts and options on futures contracts that are
linked to those contracts. The 25 core referenced futures
contracts include the nine “legacy” agricultural
contracts that are currently subject to federal position limits and
16 additional non-legacy contracts.
The
aggregate position limits currently in place under the current
position limits and the Aggregation Requirements are as follows for
each of the commodities traded by the Funds:
Commodity Future
|
Spot Month Position Limit
|
All Month Aggregate Position Limit
|
corn
|
1,200
contracts
|
57,800
contracts
|
soybean
|
1,200
contracts
|
27,300
contracts
|
sugar
|
5,000
contracts
|
Only
Accountability Limits
|
wheat
|
1,200
contracts
|
19,300
contracts
|
The
nine legacy contracts are subject to two types of position limits:
(1) a position limit that applies in the spot month only and (2) a
position limit that applies in any single non-spot month as well as
all months combined. Both types of position limits have been
updated by the Final Rule. Significantly, the new spot month
position limit is higher than or equal to current federal and
exchange-set spot month position limits. The new single non-spot
month and all-months-combined position limits are also higher than
or equal to the respective current federal and exchange-set limits.
For a discussion generally regarding the risks that position limits
may pose for the Fund, see the risk factor in “WHAT ARE THE
RISK FACTORS INVOLVED WITH AN INVESTMENT IN THE FUND”
regarding position limits, accountability levels and daily price
fluctuation limits.
The
CFTC also adopted federal position limits on cash-settled futures
and options on futures that are directly or indirectly linked to
physically settled contracts in order to further the statutory
objective in Section 4a(a)(3)(B)(iv) of the CEA—the
deterrence and prevention of market manipulation. In taking
this step, the CFTC stated that, in the absence of position limits,
an entity with positions in both the physically delivered and
cash-settled contracts may have an increased ability and an
increased incentive to manipulate one of these contracts to benefit
positions in the other contract.
To
prevent evasion through the creation of economically equivalent
futures contracts that do not directly reference the price of the
core referenced futures contracts, the CFTC determined that futures
contracts and options on futures contracts that are indirectly
linked to the core referenced futures contracts will be subject to
the position limits in the same manner as the referenced futures
contracts. Futures that settle to the price of a referenced
contract but not to the price of a core referenced futures contract
would be indirectly linked to the core referenced futures contract
as “economically equivalent swaps.”
The
Final Rule clarifies the applicable standard for market
participants seeking a bona fide hedging exemption from position
limits. A bona fide hedging transaction may exceed the federal
position limits only if the transaction satisfies each of the
following elements:
1.
the position
represents a substitute for transactions or positions made or to be
made at a later time in a physical marketing channel (temporary
substitute test);
2.
the position is
economically appropriate to the reduction of price risks in the
conduct and management of a commercial enterprise (economically
appropriate test); and
3.
the position arises
from the potential change in value of actual or anticipated assets,
liabilities, or services (change in value
requirement).
Notably, this
definition tightens the “temporary substitute test”
such that a bona fide hedge must be connected to the production,
sale, or use of a physical cash-market commodity in all cases,
rather than “normally” connected to such activities. As
noted above, this adjustment is intended to restrict market
participants from treating “risk management” positions
as bona fide hedges, except for pass-through or offset positions
related to another transaction that is itself a bona fide hedge.
The Final Rule also expands the list of enumerated bona fide
hedges, which means that any market participant utilizing such a
hedge need not notify the CFTC because the enumerated bona fide
hedges are self-effectuating. However, a market participant
would still need to notify the relevant exchange if executing a
bona fide hedge would exceed an exchange set position
limit.
In
addition, the Final Rule elaborates on how and when a market
participant may measure risk on a gross basis rather than on a net
basis. Currently, market participants generally may only hedge
positions on a net basis. However, the Final Rule permits hedge
positions on a gross basis so long as the risk calculations are
done consistently over time and not with the intent of evading
federal position limits.
The
Final Rule became effective on March 15, 2021, but a number of the
requirements in the Final Rule have a general compliance date of
January 1, 2022, and later compliance date of January 1, 2023 with
respect to swaps-related requirements and the elimination of
previously granted risk management exemptions. In particular,
January 1, 2022 is the implementation date of federal speculative
position limits for 16 non-legacy core referenced futures contracts
and any referenced futures contracts (other than economically
equivalent swaps) relating to those 16 core referenced futures
contracts and for exchanges to establish limits and exemptions,
including collecting cash market information from market
participants in connection with bona fide hedge exemptions. January
1, 2023 is the implementation date of federal speculative position
limits for economically equivalent swaps and for the elimination of
previously granted risk management exemptions. The CFTC also will
reevaluate the ability of the exchanges to establish and implement
appropriate surveillance mechanisms with respect to economically
equivalent swaps.
It is
unknown at this time the effect that such passage, adoption or
modification will have, positively or negatively, on our industry
or on a Fund. The size or duration of positions available to a Fund
may be severely limited. Pursuant to the CFTC’s and the
exchanges’ aggregation requirements, all accounts owned or
managed by the Sponsor are likely to be combined for speculative
position limits purposes. The Funds could be required to liquidate
positions it holds in order to comply with such limits or may not
be able to fully implement trading instructions generated by its
trading models, in order to comply with such limits. Any such
liquidation or limited implementation could result in substantial
costs to a Fund.
These
new regulations and the resulting increased costs and regulatory
oversight requirements may result in market participants being
required or deciding to limit their trading activities, which could
lead to decreased market liquidity and increased market volatility.
In addition, transaction costs incurred by market participants are
likely to be higher due to the increased costs of compliance with
the new regulations. These consequences could adversely affect a
Fund’s returns.
Accountability
levels differ from position limits in that they do not represent a
fixed ceiling, but rather a threshold above which a futures
exchange may exercise greater scrutiny and control over an
investor’s positions. If a Fund were to exceed an applicable
accountability level for investments in futures contracts, the
exchange will monitor the Fund’s exposure and may ask for
further information on its activities, including the total size of
all positions, investment and trading strategy, and the extent of
liquidity resources of the Fund. If deemed necessary by the
exchange, the Fund could be ordered to reduce its aggregate net
position back to the accountability level.
In
addition to position limits and accountability levels, the
exchanges set daily price fluctuation limits on futures contracts.
The daily price fluctuation limit establishes the maximum amount
that the price of futures contracts may vary either up or down from
the previous day’s settlement price. Once the daily price
fluctuation limit has been reached in a particular futures
contract, no trades may be made at a price beyond that
limit.
Margin for OTC Uncleared Swaps
During
2015 and 2016, the CFTC and the US bank prudential regulators
completed their rulemakings under the Dodd-Frank Act on margin for
uncleared over the counter swaps (and option agreements that
qualify as swaps). Margin requirements went into effect for the
largest swap entities in September 2016 and went into effect for
financial end users in March 2017. Under these regulations, swap
dealers (such as sell-side counterparties to swaps), major swap
participants, and financial end users (such as buy-side
counterparties to swaps who are not physical traders) are required
in most instances, to post and collect initial and variation
margin, depending on the regulatory classification of their
counterparty. European and Asian regulators are also implementing
similar regulations, which were scheduled to become effective on
the same dates as the US-promulgated rules. As a result of these
requirements, additional capital will be required to be committed
to the margin accounts to support transactions involving uncleared
over the counter swaps and, consequently, these transactions may
become more expensive. While the Fund currently does not generally
engage in uncleared over the counter swaps, to the extent they do
so in the future, the additional margin required to be posted could
adversely impact the profitability (if any) to the Fund from
entering into these transactions.
Potential Advantages of Investment
Interest Income and Expense
Unlike
some alternative investment funds, the Fund and the Underlying
Funds do not borrow money in order to obtain leverage, so the Fund
and the Underlying Funds do not incur any interest expense. Rather,
the Fund’s residual cash and the Underlying Funds’
margin deposits and cash reserves are maintained in cash and cash
equivalents, and interest is generally earned on available assets,
which include unrealized profits credited to the Underlying
Funds’ accounts.
Fund Performance
The
following graph sets forth the historical performance of the Fund
from commencement of operations on March 28, 2012 through February
28, 2022.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE
RESULTS.
PART II
Information Not Required in the Prospectus
Item 13.
|
Other Expenses of Issuance and Distribution.
|
Set
forth below is an estimate (except as indicated) of the amount of
fees and expenses (other than underwriting commissions and
discounts) payable by the registrant in connection with the
issuance and distribution of the units pursuant to the prospectus
contained in this registration statement.
|
|
SEC registration
fee (actual)
|
(1)
|
NYSE Arca Listing
Fee (actual)
|
n/a
|
FINRA filing fees
(actual)
|
n/a
|
Blue Sky
expenses
|
n/a
|
Auditor’s
fees and expenses
|
$3,000
|
Legal fees and
expenses
|
$10,000
|
Printing
expenses
|
$1,500
|
Miscellaneous
expenses
|
n/a
|
Total
|
(2)
|
(1) Applicable SEC registration fees have been deferred in
accordance with Rules 456(d) and 457(u) of the Securities Act and
will be paid on an annual net basis no later than 90 days after the
end of each fiscal year and are therefore not estimable at this
time.
(2) Because an indeterminable amount of securities is covered by
this registration statement, the total expenses in connection with
the issuance and distribution of the securities are, therefore, not
currently determinable.
Item 14.
|
Indemnification of Directors and Officers.
|
The
Trust’s Fifth Amended and Restated Declaration of Trust and
Trust Agreement (the “Trust Agreement”) provides that
the Sponsor shall be indemnified by the Trust (or, by a series of
the Trust separately to the extent the matter in question relates
to a single series or disproportionately affects a series in
relation to other series) against any losses, judgments,
liabilities, expenses and amounts paid in settlement of any claims
sustained by it in connection with its activities for the Trust,
provided that (i) the Sponsor was acting on behalf of or performing
services for the Trust and has determined, in good faith, that such
course of conduct was in the best interests of the Trust and such
liability or loss was not the result of gross negligence, willful
misconduct, or abreach of the Trust Agreement on the part of the
Sponsor and (ii) any such indemnification will only be recoverable
from the applicable trust estate or trust estates. All rights to
indemnification permitted by the Trust Agreement and payment of
associatedexpenses shall not be affected by the dissolution or
other cessation to exist of the Sponsor, or the withdrawal,
adjudication of bankruptcy or insolvency of the Sponsor, or the
filing of a voluntary or involuntary petition in bankruptcy under
Title 11 of the Bankruptcy Code by or against the
Sponsor.
Notwithstanding the
foregoing, the Sponsor shall not be indemnified for any losses,
liabilities or expenses arising from or out of an alleged violation
of U.S. federal or state securities laws unless (i) there has been
a successful adjudication on the merits of each count involving
alleged securities law violations as to the particular indemnitee
and the court approves the indemnification of such expenses
(including, without limitation, litigation costs), (ii)such claims
have been dismissed with prejudice on the merits by a court of
competent jurisdiction as to the particular indemnitee and the
court approves the indemnification of such expenses (including,
without limitation, litigation costs) or (iii) a court of competent
jurisdiction approves a settlement of the claims against a
particular indemnitee and finds that indemnification of the
settlement and related costs should be made.
The
Trust and its series shall not incur the cost of that portion of
any insurance which insures any party against any liability, the
indemnification of which is prohibited by the Trust
Agreement.
Expenses incurred
in defending a threatened or pending civil, administrative or
criminal action, suit or proceeding against the Sponsor shall be
paid by the Trust or the applicable series of the Trust in advance
of the final disposition of such action, suit or proceeding, if (i)
the legal action relates to the performance of duties or services
by the Sponsor on behalf of the Trust or a series of the Trust;
(ii) the legal action is initiated by a party other than the Trust;
and (iii) the Sponsor undertakes to repay the advanced funds with
interest to the Trust or the applicable series of the Trust in
cases in which it is not entitled to indemnification under the
Trust Agreement.
For
purposes of the indemnification provisions of the Trust Agreement,
the term “Sponsor” includes, in addition to the
Sponsor, any other covered person performing services on behalf of
the Trust and acting within the scope of the Sponsor’s
authority as set forth in the Trust Agreement.
In the
event the Trust or a series of the Trust is made a party to any
claim, dispute, demand or litigation or otherwise incurs any loss,
liability, damage, cost or expense as a result of or in connection
with any Shareholder’s (or assignee’s) obligations or
liabilities unrelated to Trust business, such Shareholder (or
assignees cumulatively) shall indemnify, defend, hold harmless, and
reimburse the Trust or the applicable series of the Trust for all
such loss, liability, damage, cost and expense incurred, including
attorneys’ and accountants’ fees.
The
payment of any amount pursuant to the Trust Agreement shall take
into account the allocation of liabilities and other amounts, as
appropriate, among the series of the Trust.
Item 15
|
Recent Sales of Unregistered Securities.
|
Not
applicable.
Item 16
|
Exhibits and Financial Statement Schedules.
|
(a)
Exhibits
|
3.1
|
Fifth
Amended and Restated Declaration of Trust and Trust Agreement.
(1)
|
|
3.2
|
Certificate
of Trust of the Registrant. (2)
|
|
3.3
|
Instrument
Establishing the Fund. (3)
|
|
5.1
|
Opinion
of Vedder Price P.C. relating to the legality of the
Shares.*
|
|
8.1
|
Opinion
of Vedder Price P.C. with respect to federal income tax
consequences.*
|
|
10.1
|
Form of
Authorized Purchaser Agreement (included as Exhibit B to the Fifth
Amended and Restated Declaration of Trust and Trust Agreement).
(1)
|
|
10.2
|
Amended
and Restated Distribution Services Agreement. (4)
|
|
10.3
|
Amendment
to Amended and Restated Distribution Services Agreement.
(5)
|
|
10.4
|
Second
Amendment to Amended and Restated Distribution Services Agreement.
(6)
|
|
10.5
|
Third
Amendment to Amended and Restated Distribution Services Agreement.
(7)
|
|
10.6
|
Fourth
Amendment to Amended and Restated Distribution Services Agreement.
(8)
|
|
10.7
|
Fifth
Amendment to Amended and Restated Distribution Services Agreement.
(15)
|
|
10.7
|
Custody
Agreement. (9)
|
|
10.8
|
First
Amendment to the Custody Agreement. (14)
|
|
10.9
|
Fund
Accounting Servicing Agreement. (10)
|
|
10.10
|
First
Amendment to the Accounting Servicing Agreement. (14)
|
|
10.11
|
Transfer
Agent Servicing Agreement. (11)
|
|
10.12
|
First
Amendment to the Transfer Agent Servicing Agreement.
(14)
|
|
10.13
|
Fund
Administration Servicing Agreement. (12)
|
|
10.14
|
First
Amendment to the Fund Administration Servicing Agreement.
(14)
|
|
23.1
|
Consents
of Vedder Price P.C. (included in Exhibits 5.1 and
8.1).*
|
|
23.2
|
Consent
of Grant Thornton LLP, Independent Registered Public Accounting
Firm.*
|
|
24.1
|
Power
of Attorney (included on signature page to this Registration
Statement as filed herein).
|
|
107
|
Filing
Fee Table. *
|
* Filed
herein.
(1)
Previously filed as Exhibit 3.1 to Pre-Effective Amendment No. 2 to
Registrant’s Registration Statement on Form S-1 (333-230626),
filed on April 26, 2019 and incorporated by reference
herein.
(2)
Previously filed as Exhibit 3.2 to Registrant’s Registration
Statement on Form S-1 (333-162033), filed on September 21, 2009 and
incorporated by reference herein.
(3)
Previously filed as Exhibit 3.3 to Pre-Effective Amendment No. 1 to
Registrant’s Registration Statement on Form S-1 (333-167591),
filed on March 9, 2011 and incorporated by reference
herein.
(4)
Previously filed as Exhibit 10.2(1) to the Registrant’s
Current Report on Form 8-K for the Teucrium Corn Fund (File No.
001-34765), filed on November 1, 2011 and incorporated by reference
herein.
(5)
Previously filed as Exhibit 10.2(2) to the Registrant’s
Current Report on Form 8-K for the Teucrium Corn Fund (File No.
001-34765), filed on November 1, 2011 and incorporated by reference
herein.
(6)
Previously filed as Exhibit 10.2(3) to the Registrant’s
Current Report on Form 8-K for the Teucrium Corn Fund (File No.
001-34756), filed on November 1, 2011 and incorporated by reference
herein.
(7)
Previously filed as like-numbered exhibit to Pre-Effective
Amendment No. 1 to Registrant’s Registration Statement on
Form S-1 (333-187463), filed on April 26, 2013 and incorporated by
reference herein.
(8)
Previously filed as Exhibit 10.9 to Registrant’s Registration
Statement on Form S-1 (File No. 333-201953) filed on February 9,
2015 and incorporated by reference herein.
(9)
Previously filed as Exhibit 10.8 to the Registrant’s Annual
Report on Form 10-K for the year ended December 31, 2015, filed on
March 15, 2016, and incorporated by reference herein.
(10)
Previously filed as Exhibit 10.9 to the Registrant’s Annual
Report on Form 10-K for the year ended December 31, 2015, filed on
March 15, 2016, and incorporated by reference herein.
(11)
Previously filed as Exhibit 10.10 to the Registrant’s Annual
Report on Form 10-K for the year ended December 31, 2015, filed on
March 15, 2016, and incorporated by reference herein.
(12)
Previously filed as Exhibit 10.11 to the Registrant’s Annual
Report on Form 10-K for the year ended December 31, 2015, filed on
March 15, 2016, and incorporated by reference herein.
(13)
Previously filed as like-numbered exhibits to the
Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2020, filed on March 16, 2021, and incorporated by
reference herein.
(14)
Previously filed as Exhibit 10.1 to the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2021,
filed on May 10, 2021, and incorporated by reference
herein.
(b)
Financial Statement
Schedules
The
financial statement schedules are either not applicable or the
required information is included in the financial statements and
footnotes related thereto.
(a) The
undersigned registrant hereby undertakes:
(1) To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration
statement:
(i) To
include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To
reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form
of prospectus filed with the Securities and Exchange Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than 20 percent change in the maximum
aggregate offering price set forth in the “Calculation of
Registration Fee” table in the effective registration
statement.
(iii)
To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
Provided, however,
that paragraphs (a)(1)(i), (ii), and (iii) of this section do not
apply if the registration statement is on Form S-1, Form S-3, Form
SF-3 or Form F-3 and the information required to be included in a
post-effective amendment by those paragraphs is contained in
reports filed with or furnished to the Commission by the registrant
pursuant to section 13 or section 15(d) of the Securities Exchange
Act of 1934 that are incorporated by reference in the registration
statement, or, as to a registration statement on Form S-3, is
contained in a form of prospectus filed pursuant to §
230.424(b) that is part of the registration statement.
(2)
That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(3) To
remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
(4)
That, for the purpose of determining liability under the Securities
Act of 1933 to any purchaser:
(i) If
the registrant is subject to Rule 430C, each prospectus filed
pursuant to Rule 424(b) as part of a registration statement
relating to an offering, other than registration statements relying
on Rule 430B or other than prospectuses filed in reliance on Rule
430A, shall be deemed to be part of and included in the
registration statement as of the date it is first used after
effectiveness. Provided, however, that no statement made in a
registration statement or prospectus that is part of the
registration statement or made in a document incorporated or deemed
incorporated by reference into the registration statement or
prospectus that is part of the registration statement will, as toa
purchaser with a time of contract of sale prior to such first use,
supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement
or made in any such document immediately prior to such date of
first use.
(5)
That, for the purpose of determining liability of the registrant
under the Securities Act of 1933 to any purchaser in the initial
distribution of the securities: The undersigned registrant
undertakes that in a primary offering of securities of the
undersigned registrant pursuant to this registration statement,
regardless of the underwriting method used to sell the securities
to the purchaser, if the securities are offered or sold to such
purchaser by means of any of the following communications, the
undersigned registrant will be a seller to the purchaser and will
be considered to offer or sell such securities to such
purchaser:
(i) Any
preliminary prospectus or prospectus of the undersigned registrant
relating to the offering required to be filed pursuant to Rule
424;
(ii)
Any free writing prospectus relating to the offering prepared by or
on behalf of the undersigned registrant or used or referred to by
the undersigned registrant;
(iii)
The portion of any other free writing prospectus relating to the
offering containing material information about the undersigned
registrant or its securities provided by or on behalf of the
undersigned registrant; and
(iv)
Any other communication that is an offer in the offering made by
the undersigned registrant to the purchaser.
(6)
That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the registrant’s
annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan’s annual report pursuant to Section
15(d) of the Securities Exchange Act of 1934) that is incorporated
by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(7)
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
Pursuant
to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized,
in the city of Burlington, State of Vermont, on March 10,
2022.
|
|
|
Teucrium Commodity Trust
|
|
By:
Teucrium Trading, LLC, Sponsor
|
|
|
By:
|
/s/ Sal
Gilbertie
|
Date:
March 10, 2022
|
|
Sal
Gilbertie
Principal
Executive Officer, Secretary and Member
|
|
Pursuant
to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in
the capacities and on the dates as indicated. The document may be
executed by signatories hereto on any number of counterparts, all
of which shall constitute one and the same instrument. The
undersigned members and officers of Teucrium Trading, LLC, the
sponsor of Teucrium Commodity Trust, hereby constitute and appoint
Sal Gilbertie, Cory Mullen Rusin and Steve Kahler and each of them
with full power to act withfull power of substitution and
resubstitution, our true and lawful attorneys-in-fact with full
power to execute in our name and behalf in the capacities indicated
below this Registration Statement on Form S-1 and any and all
amendments thereto, including post-effective amendments to this
Registration Statement and to sign any and all additional
registration statements relating to the same offering of securities
as this Registration Statement that are filed pursuant to Rule
462(b) of the Securities Act of 1933, as amended, and to file the
same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission and thereby
ratify and confirm that such attorneys-in-fact, or any of them, or
their substitutes shall lawfully do or cause to be done by virtue
hereof.
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
/s/ Sal
Gilbertie
Sal
Gilbertie
|
|
President/Chief
Executive Officer/Chief Investment Officer/Member of the
Sponsor
|
|
March
10, 2022
|
|
|
|
/s/
Cory Mullen-Rusin
Cory
Mullen-Rusin
|
|
Chief
Financial Officer/Chief Accounting Officer/Chief Compliance
Officer/Principal Financial Officer
|
|
March
10, 2022
|
|
|
|
/s/
Steve Kahler
Steve
Kahler
|
|
Chief
Operating Officer
|
|
March
10, 2022
|
|
|
|
Exhibit Index