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Environmental laws and regulations, such as those regulating agriculture, mining, oil and gas production, hydroelectric and nuclear power plants, and other water heavy industrial users designed to encourage or discourage the location and efficiency of their operations;
| ● | 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. | |
| ● | 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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Infrastructure limitations including existing water production, sourcing and transporting facilities designed to allow access to water from its sources to its usage points including but not limited to reservoirs, aqueducts, ground water wells, desalination plants, holding tanks, hydro, wind and solar pumping stations; and/or
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Seasonal fluctuations in the price of water that may cause risk to an investor because of the possibility that Share prices will be depressed because of the water replenishment cycle such as seasonal and/or unusually heavy rains and snowmelt. In the southwestern United States, the water market is normally at its weakest point, and water prices are lowest, shortly before and during the winter and spring months (between November and May), due to the plentiful supply and availability of water in the market. Conversely, water prices are generally highest during the Summer and Fall months (between June and October), when water is most heavily used. Seasonal water market peaks generally occur around Calendar Q2 or Calendar Q3. These normal market conditions are, however, often influenced by weather patterns, agricultural production, and domestic and global economic conditions, among other factors, and any specific year may not necessarily follow the traditional seasonal fluctuations described above. In the futures market, these seasonal fluctuations are typically reflected in contracts expiring in the relevant season (e.g., contracts expiring during the Winter and Spring months are typically priced lower than contracts expiring in the Summer and Fall). Thus, seasonal fluctuations could result in an investor incurring losses upon the sale of Fund Shares, particularly if the investor needs to sell Shares when the Benchmark Component Futures Contracts are, in whole or part, Water Futures Contracts expiring in the Winter and Spring Months.
The Water Futures Contracts are a new type of futures contract that has no trading and operational history. | ● | 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. |
The Water Futures Contracts are a new type of futures contract that has no trading and operational history. Accordingly the market for Water Futures Contracts may be riskier, less liquid, more volatile and more vulnerable to economic, market, industry, regulatory and other changes than more established futures contracts. The liquidity of the market for Water Futures Contracts will depend on, among other things, the supply and demand for Water Futures Contracts, speculative interest in the market for Water Futures Contracts and the potential ability to hedge against the price of water with Water Futures Contracts. | ● | 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 Benchmark,Underlying Funds’ Benchmarks, changes in the Fund’s NAV and the spot price of water.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 Benchmark;Underlying Funds’ Benchmarks; and/or changes in the price of the Underlying Funds’ Benchmark will not correlate with changes in the spot price of water.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 Benchmark isUnderlying Funds’ Benchmarks are not designed to correlate exactly with the spot price of water,the corresponding Specified Commodity, and this could cause the changes in the price of the Sharesan Underlying Fund’s shares to substantially vary from the changes in the spot price of water.the Specified Commodity. Therefore, you may not be able to effectively use the Fund to hedge against watercommodity related losses or to indirectly invest in water.agricultural commodities.
The Benchmark Component Futures Contracts that the Underlying Funds invest in reflect the price of water as determined by an index,a Specified Commodity for future delivery, not the current spot price of the Specified Commodity, so at best the correlation between changes in such Water Futures Contracts and the spot price of waterthe Specific Commodity will be only approximate. Weak correlation between thean Underlying Fund’s Benchmark and the spot price of waterthe corresponding Specified Commodity may result from the typical seasonal fluctuations in watercommodity 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 thean Underlying Fund’s Benchmark and the spot price of water,its corresponding Specified Commodity, then the price of the Shares may not accurately track the spot price of waterthe Specified Commodities and you may not be able to effectively use the Fund as a way to hedge the risk of losses in your watercommodity related transactions or as a way to indirectly invest in water.agricultural commodities.
Changes inThe Fund’s performance may not correlate well with the Fund’s NAVcombined performance of the Underlying Funds, and the performance of the Underlying Funds may not correlate well with changes in the price of the Benchmark.their Benchmarks. If this were to occur, you may not be able to effectively use the Fund as a way to hedge against watercommodity related losses or as a way to indirectly invest in water.agricultural commodities.
The Sponsor endeavors to invest the Fund’s assets as fully as possible in Benchmark Component Futures Contractsthe Underlying Funds so that the changesperformance 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 NAVperformance of each Underlying Funds closely correlates with the performance of its respective Benchmarks. However, the Fund’s performance may not correlate with the changes incombined performance of the Benchmark. However, changes inUnderlying Funds and the Fund’s NAVperformance of each Underlying Fund may not correlate with the changes in the Benchmarktheir Benchmarks for various reasons, including those set forth below.below:
| ● | The Fund incursmay 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. |
| ● | The Fund and Underlying Funds incur certain expenses in connection with itstheir operations, and holdsthe Underlying Funds hold most of itstheir assets (other than commodity interests) in income producing, short-term financial instrumentscash 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 changesthe 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’s NAV and changesFund will be higher than the cost of investing directly in the Benchmark.Underlying Funds’ shares. |
| ● | The Sponsor may not be able to invest thean 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 Water Futures Contract is for a specified amount of water,a Specified Commodity, and the Underlying Fund’s NAV and the proceeds from the sale of a Creation Basketcreation basket of an Underlying Fund is unlikely to be an exact multiple of that amount. In such case, the Underlying Fund mightcould not invest the entire proceeds from the purchase of the Creation Basketcreation basket in such futures contracts.Futures Contracts. (For example, assuming the Underlying Fund receives $350,000$1,000,000 for the sale of a Creation BasketBaskets and that the value (i.e.(i.e., the notional amount) of a Water Futures Contract relating to the Underlying Fund’s Specified Commodity is $17,920,$35,000, the Underlying Fund could only enter into 19 Water28 Futures Contracts with an aggregate value of $340,480)$980,000). While thean Underlying Fund may be better able to achieve the exact amount of exposure to the water market for its Specified Commodity through the use of over the counter other watercommodity interests, there is no assurance that the Sponsor will be able to continually adjust the Underlying Fund’s exposure to such other watercommodity interests to maintain such exact exposure. Any amounts not invested in Benchmark Component Futures Contracts are held in cash and cash equivalents. |
| ● | As Fund assets increase, there may be more or less correlation.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. |
If changes in the Fund’s NAV doperformance does not correlate with changes in the Benchmark,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 watercommodity related losses or indirectly invest in water.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 variation occurs, then you may not be able to effectively use the Fund to hedge against waterthe risk of losses in your agricultural related lossestransactions or to indirectly invest in water.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 priceprices of water,the Specified Commodities, even if thean Underlying Fund’s NAV waswere closely tracking movements in the spot price of water.the Specified Commodity. If this occurs, you may not be able to effectively use the Fund to hedge the risk of losses in your water relatedcommodity-related transactions or to indirectly invest in water.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 Benchmark,Underlying Funds’ Benchmarks and the spot priceprices of water.the Specified Commodities. The value of cash equivalents held by the Fund or the Underlying Funds generally movesmove 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 itstheir positions in itsthe investments at the desired price for reasons including, among others, insufficient trading volume, limits imposed by exchanges or other regulatory organizations, or lack of liquidity. As to futures contracts,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 position limits and price fluctuation limits, may contribute to a lack of liquidity with respect to some exchange-traded watercommodity interests. In addition, over the counter contractscommodity 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 thean Underlying Fund still may not be able to transfer an over the counter watercommodity 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 watercommodity production or usage,exports, or in another major water dependent 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 doesand 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 it holdsthey hold to meet itstheir liquidity needs. The anticipated value of the positions in Benchmark Component Futures Contractscommodity interests that the Sponsor will acquire or enter into for the FundUnderlying Funds increases the risk of illiquidity. Because Benchmark Component Futures Contractscommodity interests may be illiquid, the Fund’sUnderlying 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 watercommodity purchasers are the predominant hedgers in the market, the FundUnderlying Funds might have to reinvest at higher futures prices or choose other watercommodity interests.
The changing nature of the participants in the water market for an agricultural commodity will influence whether futures prices are above or below the expected future spot price. Holders of water rightsCommodity producers will typically seek to hedge against falling water prices by selling Water Futures Contracts. Therefore, if holders of water rightsproducers become the predominant hedgers in the futures market for a particular commodity, prices of Water Futures Contracts for that commodity will typically be below expected future spot prices. Conversely, if the predominant hedgers in the futures market are the [purchaserspurchasers of water rights]the commodity who purchase Water Futures Contracts to hedge against a rise in prices, prices of Water Futures Contracts for that commodity will likely be higher than expected future spot prices. This can have significant implications for the FundUnderlying Funds when it is time to sell a Water Futures Contract that is no longer a Benchmark Component Futures Contract and purchase a new Water Futures Contract or to sell a Water 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 Water Futures Contracts that will become the Underlying Funds’ Benchmark Component Futures Contracts on the next roll date will vary and may impact both the Fund’s total return and the degree to which itsthe Fund’s total return tracks that of watercommodity price indices.
The design of theeach Underlying Fund’s Benchmark is such that the Benchmark Component Futures Contracts will change [●]several times pera year, and the Underlying Fund’s investments maymust 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 water 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 water 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 FundFund) may benefit because it maywould be selling more expensive contracts and buying less expensive ones on an ongoing basis. Conversely, in the event of a water 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 water 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 maywould be selling less expensive contracts and buying more expensive ones. The impact of backwardation and contango may lead the total return of thean Underlying Fund to vary significantly from the total return of other price references, such as the spot price of water.its Specified Commodity. In the event of a prolonged period of contango, and absent the impact of rising or falling water 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 the commodity interests and commodity markets is extensive and constantly changing; future regulatory developments are impossible to predict but may significantly and adversely affect the Fund.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 Fund’s 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, natural disasters, embargoes, market disruptions, tariffs and other political events may have a larger impact on watercommodity and watercommodity 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 wateragricultural 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 term structureweighting or underlying components of the Benchmark in furtherance of the Fund’s investment objective if, due toof 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 exchangeexchanges rules, or the imposition of risk mitigation measures by a futures commission merchant restricts the ability of thean 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 isand the Underlying Funds are not a registered investment company,companies, so you do not have the protections of the Investment Company Act of 1940.
TheNeither the Fund is not annor the Underlying Funds are investment companycompanies 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 Fund has no operating history so there is no performance history to serve as a basis for you to evaluate an investment in the Fund.
The Fund is new and has no operating history. Therefore, you do not have the benefit of reviewing the past performance of the Fund as a basis to evaluate an investment in the Fund.
The Fund is newly formed and may not be successful in implementing its investment objective or attracting sufficient assets.
The Fund is newly formed. Accordingly, investors in the Fund bear the risk that the Fund may not be successful in implementing its investment objective or may fail to attract sufficient assets, which could result in the Fund being liquidated at a time that may not be favorable to all shareholders or which could have negative tax consequences.
The Sponsor is leanly staffed and relies heavily on key personnel to manage trading activities.
In managing and directing the day to dayday-to-day activities and affairs of the Fund, the Sponsor relies almost entirely on a small number of individuals, including Mr. Sal Gilbertie, Mr. Steve Kahler and Ms. Cory Mullen-Rusin. If Mr. Gilbertie, Mr. Kahler or Ms. Mullen-Rusin were to leave or be unable to carry out their present responsibilities, it may have an adverse effect on the management of the Fund. To the extent that the Sponsor establishes additional commodity pools, even greater demands will be placed on these individuals.
The Sponsor has limited capital and may be unable to continue to manage the Fund if it sustains continued losses.
The Sponsor was formed for the purpose of managing the Trust, including the Fund, the other Teucrium Funds, and any other series of the Trust that may be formed in the future, and has been provided with capital primarily by its principals and a small number of outside investors. If the Sponsor operates at a loss for an extended period, its capital will be depleted, and it may be unable to obtain additional financing necessary to continue its operations. If the Sponsor were unable to continue to provide services to the Fund, the Fund would be terminated if a replacement sponsor could not be found. Any expenses related to the operation of the Fund would need to be paid by the Fund at the time of termination.
Position limits, accountability levels and daily price fluctuation limits set by the CFTC and the exchanges have the potential to cause tracking error, which could cause the price of SharesUnderlying Fund shares to substantially vary from the Benchmarktheir respective Benchmarks and prevent you from being able to effectively use the Fund as a way to hedge against water relatedcommodity-related losses or as a way to indirectly invest in water.agricultural commodities.
The CFTC and U.S. designated contract markets such as the CME, have establishedmay establish position limits and accountability levels on the maximum net long or net short Water Futures Contractsfutures 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 CME established position limit level for investments at any one time in WaterCorn Futures Contracts for theare 1,200 spot month which is defined as oncontracts, and after the second business day following the expiration of the regular option contract traded on the expiring futures contract, is [●], the accountability level for investments in CME Futures Contracts for any one month is [●], and the accountability level57,800 contracts total for all combined months is [●]. Whilemonths. 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 tofrom holding no more Water Futures Contractsfutures contracts or cleared swaps than the amount established by the accountability level. TheNo Underlying Fund does not intendintends to invest in Water Futures Contractsany commodity interests in excess of any applicable accountability levels.
Accountability levels differ from position limits in that they do not represent a fixed ceiling, but rather a threshold above which a futures exchange may exercise greater scrutiny and control over an investor’s positions. If a Fund were to exceed an applicable accountability level for investments in futures contracts, the exchange will monitor the Fund’s exposure and may ask for further information on its activities, including the total size of all positions, investment and trading strategy, and the extent of liquidity resources of the Fund. If deemed necessary by the exchange, the Fund could be ordered to reduce its aggregate net position back to the accountability level
In addition to position limits and accountability limits,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. Currently, CME has imposed maximum daily price fluctuation limits on Water Futures Contracts of the following:
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Outrights: $1.00 per acre foot equal to $10.00 per contract
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Spreads: $0.25 per acre foot equal to $2.50 per contract.
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.
OnAs published in the January 30, 2020,14, 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 regulations that would establish revised specific limits onits position limit rules and aggregation standards for speculative positions indue 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 optionand for any futures contracts and swapsoptions on futures contracts that are linked to those contracts. The 25 core referenced futures contracts include the nine “legacy” agricultural energycontracts that are currently subject to federal position limits and metals commodities (the “Proposed Position Limit Rules”). In general,16 additional non-legacy contracts. The Final Rule became effective on March 15, 2021, but a number of the Proposed Position Limit Rules, do not appear torequirements in the Final Rule have a substantial or adverse effect ongeneral compliance date of January 1, 2022, and later compliance date of January 1, 2023 with respect to swaps-related requirements and the Fund. However, if the total net assetselimination of the Fund were to increase significantly from current levels, the Position Limit Rules as proposed could negatively impact the ability of the Fund to meet its respective investment objectives through limits that may inhibit the Sponsor’s ability to sell additional Creation Baskets of the Fund. However, it is not expected that the Fund will reach asset levels that would cause these position limits to be reached in the near future.previously granted risk management exemptions.
There are technical and fundamental risks inherent in the trading system the Sponsor intends to employ.
The Sponsor’s trading system is quantitative in nature and it is possible that the Sponsor may make errors. Any errors or imperfections in the Sponsor’s trading system’s quantitative models, or in the data on which they are based, could adversely affect the Sponsor’s effective use of such trading systems. It is not possible or practicable for the Sponsor’s trading system to factor all relevant, available data into quantitative systems and/or trading decision. There is no guarantee that the Sponsor will use any specific data or type of data in making trading decisions on behalf of the Fund, nor is there any guarantee that the data actually utilized in making trading decisions on behalf of the Fund will be the most accurate data or free from errors. In addition, it is possible that a computer or software program may malfunction and cause an error in computation.
The Fund and the Sponsor may have conflicts of interest, which may cause them to favor their own interests to your detriment.
The Fund and the Sponsor may have inherent conflicts to the extent the Sponsor attempts to maintain the Fund’s asset size of the Underlying Funds in order to preserve its fee income and this may not always be consistent with the Fund’s objective of havingproviding daily investment results that reflect the valuecombined daily performance of its Shares’ NAV track changes in the Benchmark.Underlying Funds. The Sponsor’s officers and employees do not devote their time exclusively to the Fund.Fund or the Underlying Funds. These persons may be directors, officers or employees of other entities. Theyentities 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.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 Fund.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 in conflictconflicts 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 Fund’s 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.Fund and the Underlying Funds. If the Sponsor discontinues its activities on behalf of the Fund or another series of the Trust,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.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 itsthe 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 FundFund’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 of the Fund in additional Benchmark Component Futures Contracts or cash and cash equivalents rather than distributing cash to Shareholders. Therefore, unlike mutual funds, commodity pools or other investment pools that generally distribute income and gains to their investors, the Fund generally will not distribute cash to Shareholders. 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, it reserves the right to do so in the Sponsor’s sole discretion, in certain situations, including for example, if the income earned from its investments held directly or posted as margin may reach levels that merit distribution, e.g., at levels where such income is not necessary to support its underlying investments in Benchmark Component Futures Contracts and investors adversely react to being taxed on such income without receiving distributions that could be used to pay such tax. Cash distributions may be made in these and similar instances.
There is a risk that the Fund and the Underlying Funds will not have sufficient total net assets to compensate for the fees and expenses that itthey must pay and as such the expense ratio of the Fund and the Underlying Funds may be higher than that filed in this document.document or the documents of the Underlying Funds.
TheWhile 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), resulting in a total. The estimated net expense ratioapproximate percentage of approximately [●]% of netselling price before waived expenses is 2.14% or $0.47 per share, based on the Fund assets, net asset value per share and shares outstanding as of January 31, 2021. TAGS is a Fund of Funds and the expenses waived byfrom the Sponsor.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.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 the 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 Fund earnsUnderlying Funds seek to earn interest on cash balances available for investment. If actual interest rates earned were to continue to fall and if the Sponsor were not able to waive expenses sufficient to cover the deficit, the breakeven estimated by the FundUnderlying Funds in this prospectus could be higher.
The Fund is not actively managed.
The Fund is not actively managed and is designed to track a benchmark,the combined performance of the Underlying Funds, regardless of whether the price of the Underlying Funds’ Benchmark Component Futures Contracts isare 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 thean 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.
TheAn Underlying Fund’s NAV includes, in part, any unrealized profits or losses on open swap agreements, futures or forward contracts.commodity interests. Under normal circumstances, the NAV reflects the quoted CME settlement price of open futures contractsFutures Contracts on the date when the NAV is being calculated.calculated as quoted on the applicable exchange. In instances when the quoted settlement price of futures contractsFutures 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”fair value of a Futures Contract when the Futures Contract closes at its price fluctuation limit for the day.
An unanticipated number of redemption requests during a short period of time could have an adverse effect on the NAV of the Fund.
If a substantial number of requests for redemption of Redemption Baskets are received by the Fund during a relatively short period of time, the Fund may not be ablewill generally need to satisfysell shares of the requests fromUnderlying Funds, increasing its trading costs. To the extent that the Fund’s assets not committedsale of Underlying Fund shares on the secondary market results in redemption requests to trading. As a consequence,an Underlying Fund, the Underlying Fund’s trading costs will increase, and it couldmay 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. These minimum levels for the Fund are 50,000 Shares representing five baskets. The minimum level of Shares specified for the Fund is subject to change. The minimum level for the Fund is 50,000 Shares representing 4 baskets; as of February 28, 2021, there were 225,002 Shares outstanding. (The current number of Shares outstanding will beis posted daily on our website,www.teucrium.com. 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 thean 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 thean Underlying Fund’s exchange-traded watercommodity interests must maintain customers’ assets in a bulk segregated account. If a clearing broker fails to do so or is unable to satisfy a substantial deficit in a customer account, its other customers may be subject to risk of a substantial loss of their funds in the event of that clearing broker’s bankruptcy. In that event, the clearing broker’s customers, such as the Fund,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 FundUnderlying 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 watercommodity 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 thean 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 Fund’sUnderlying 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 FundUnderlying Funds holds cash and cash equivalents could result in a complete loss of the Fund’sUnderlying 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.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 tradingand 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 Fund’sthe 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 tradingand 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 dependsand 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 dependsand 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.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 thean Underlying Fund will closely track theits 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, 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 itsthe 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 Fund doesFunds do business, and the markets in which the Fund doesFunds 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 recent pandemic spread of the novel coronavirus known as COVID-19), or the continuation or expansion of war or other hostilities. Global terrorist attacks, anti-terrorism initiatives, and political unrest, as well as the adverse impact the COVID-19 pandemic will have on the global and U.S. markets and economy, continue to fuel this concern. For example, the COVID-19 pandemic may adversely impact the level of services currently provided by the U.S. government, could weaken the U.S. economy, interfere with the commodities markets that rely upon data published by U.S. federal government agencies, and prevent the Fund 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 itstheir investment objectiveobjectives 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 Fund trading in the secondary market. A widespread crisis may also affect the global economy in ways that cannot necessarily be foreseen at the current time. How long such events will last and whether they will continue or recur cannot be predicted. Impacts from these events could have significant impact on the Fund’sFund and Underlying Fund performance, resulting in losses to your investment. The past, current and future global economic shocks being experienced as of the date hereofimpact may cause the underlying assumptions and expectations of the Fund and the Underlying Funds to become outdated quickly or inaccurate, resulting in significant losses.
Failures or breaches of electronic systems could disrupt the Fund’s trading activity and materially affect the Fund’s profitability.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 Water Futures Contracts or other watercommodity 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 Water Futures Contracts or other watercommodity interests are traded or cleared, or counterparties.
An investment in a Fund faces numerous risks from its shares being traded in the secondary market, any of which may lead to the Fund’s shares trading at a premium or discount to NAV.
Although the Fund’s shares are listed for trading on the NYSE Arca, there can be no assurance that an active trading market for such shares will develop or be maintained. Trading in the Fund’s shares may be halted due to market conditions or for reasons that, in the view of the NYSE Arca, make trading in shares inadvisable. There can be no assurance that the requirements of the NYSE Arca necessary to maintain the listing of the Fund will continue to be met or will remain unchanged or that the shares will trade with any volume, or at all. The NAV of the Fund’s shares will generally fluctuate with changes in the market value of the Fund’s portfolio holdings. The market prices of shares will generally fluctuate in accordance with changes in the Fund’s NAV and supply and demand of shares on the NYSE Arca. It cannot be predicted whether the Fund’s shares will trade below, at or above their NAV. Investors buying or selling Fund shares in the secondary market will pay brokerage commissions or other charges imposed by brokers as determined by that broker. Brokerage commissions are often a fixed amount and may be a significant proportional cost for investors seeking to buy or sell relatively small amounts of shares.
The NYSE Arca may halt trading in the Shares which would adversely impact your ability to sell Shares.
Trading in Shares of the Fund may be halted due to market conditions or, in light of NYSE Arca rules and procedures, for reasons that, in view of the NYSE Arca, make trading in Shares inadvisable. In addition, trading is subject to trading halts caused by extraordinary market volatility pursuant to “circuit breaker” rules that require trading to be halted for a specified period based on a specified market decline. There can be no assurance that the requirements necessary to maintain the listing of the Shares will continue to be met or will remain unchanged. The Fund will be terminated if its Shares are delisted.
The lack of active trading markets for the Shares of the Fund may result in losses on your investment in the Fund at the time of disposition of your Shares.
Although the Shares of the Fund will be listed and traded on the NYSE Arca, there can be no guarantee that an active trading market for the Shares of the Fund will be maintained. If you need to sell your Shares at a time when no active market for them exists, the price you receive for your Shares, assuming that you are able to sell them, likely will be lower than what you would receive if an active market did exist.
Risk of Leverage and Volatility
TheIf an Underlying Fund may becomebecomes leveraged, and may result inthe Fund could incur substantial losses on all or substantially all of your investment if the Underlying Fund’s trading positions suddenly turn unprofitable.
Commodity pools’ trading positions in futures contracts or other commodity interests are typically required to be secured by the deposit of margin funds or collateral that representrepresents only a small percentage of a futures contract’s (or otherthe commodity interest’s)interest’s entire market value. This feature permits commodity pools to “leverage” their assets by purchasing or selling futures contracts (or other commodity interests)interests with an aggregate notional amount in excess of the commodity pool’s assets. While this leverage can increase a pool’s profits, relatively small adverse movements in the price of the pool’s commodity interests can cause significant losses to the pool. While the Sponsor does not intend to leverage the Fund’s assets of any Underlying Fund, it is not prohibited from doing so under the Trust Agreement. If the Sponsor was to cause or permit thean Underlying Fund to become leveraged, youthe Fund could lose all or substantially all of your investmentincur substantial losses if thean Underlying Fund’s trading positions suddenly turn unprofitable.
The price of wateragricultural 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 wateragricultural commodities are influenced by, among other things, the environment, natural or man-made disasters,weather conditions, crop disease, crop failure, transportation and storage difficulties, production decisions, various planting, growing and harvesting problems, governmental oversightpolicies, various economic and regulation, demographics, economic conditions in the agricultural and industrial business sectors, infrastructure limitations, by existing and future technologic developments, and a variety of other factors now known and unknown, any and all of which can have an impact on the supply,monetary events, changing demand, and priceseasonal fluctuations in the water markets.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. Because the Fund investsis exposed primarily into interests in a single commodity,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 watercommodity 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 FundUnderlying Funds will be subject to credit risk with respect to counterparties to over the counter contracts entered into by the Fund.Underlying Funds.
The Fund facesUnderlying Funds face the risk of non-performance by the counterparties to the over the counter contracts. Unlike in futures contracts, the counterparty to these contracts is generally a single bank or other financial institution, rather than a clearing organization backed by a group of financial institutions. As a result, there will be greater counterparty credit risk in these transactions. A counterparty may not be able to meet its obligations to thean 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 FundUnderlying 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 Water 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 FundUnderlying Funds to credit and regulatory risk.
Currently,A significant portion of the Water Futures Contracts entered into by the Fund areUnderlying Funds will be traded on the CME, a United States exchange.exchanges including the CBOT and ICE Futures. However, in the future, a portion of the Fund’sUnderlying 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 Fund,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 Fund hasUnderlying Funds have less legal and regulatory protection than it doesthey do when it tradesthey 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 foreseeable future.
In some of these non-U.S. markets, the performance on a futures contract is the responsibility of the counterparty and is not backed by an exchange or clearing corporation and therefore exposes thean 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 would subject the FundUnderlying Funds to foreign exchange risk.
The price of any non-U.S. watercommodity 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 FundUnderlying 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 CFTC’s implementation of its regulations under the Dodd-Frank Act may further affect the Fund’s ability to enter into foreign exchange contracts and to hedge its exposure to foreign exchange losses.
InternationalUnderlying Funds’ international trading could expose the Fundthem 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 FundUnderlying 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 RiskRisks
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 orfrom the amount of any distributions.Fund. Therefore, the tax liability resulting from your ownership of Shares may exceed the amount of cash or value of property (if any) distributed.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 and(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 penaltiespenalties) 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 United StatesU.S. federal income tax purposes. The U.S. tax rules pertaining to entities taxed as partnerships are complex and their application to publicly traded partnerships, such as the Fund, is in many respects uncertain. The Fund will applyapplies 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.
TheIn 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 taxestax 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 sharesShares 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, the cost of such withholding may be borne by all Shareholders.
Under certain circumstances, the Fund may be required to pay withholding tax with respect to allocations to Non-U.S. Shareholders. Although the Trust Agreement provides that any such withholding will be treated as being distributed to the Non-U.S. Shareholder, the Fund may not be able to cause the economic cost of such withholding to be borne by the Non-U.S. Shareholder on whose behalf such amounts were withheld since the Fund does not intend to make any distributions. Under such circumstances, the economic cost of the withholding may be borne by all Shareholders, not just the Shareholders on whose behalf such amounts were withheld. This could have a material impact on the value of your Shares.
The Fund could be treated as a corporation for federal income tax purposes, which may substantially reduce the value of your Shares.
The Trust expects to receivehas 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 thethat 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-efficientcost-effective way to gain price exposure to the water market.a weighted average of four agricultural commodity markets for future delivery. The Sponsor developed theeach Underlying Fund’s Benchmark as a representation of the water market.corn, soybean, wheat, or sugar market for future delivery.
Under normal market conditions, the Fund will invest in the Benchmark Component Futures ContractsShares of the Underlying Funds and, cash andto a lesser extent, cash equivalents. The Sponsor believes that by investing in Benchmark Component Futures Contracts,the Underlying Funds, the Fund’s net asset value (“NAV”) will closely track the Benchmark.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 water market, as measured bycommodities markets for future delivery in which the Benchmark.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 term structureweighting or underlying components of the Benchmark in furtherance of the Fund’s investment objective of tracking the pricecombined daily performance of the Benchmark Water Futures Contracts if, due toUnderlying 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 thean Underlying Fund to invest in theits 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 sixfive 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 and the Teucrium Water 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 [____], 2020April 26, 2019 and grants full management control to the Sponsor.
THE FUND HAS NOT COMMENCED TRADING AND DOES NOT HAVE ANY PERFORMANCE HISTORY.See “Prior Performance of the Fund” on page 35 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 isare located at Three Main Street, Suite 215, Burlington, Vermont 05401.05401. 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 receives adoes not receive any management fee asor other fee or compensation forfrom the Fund. For services performed under the Trust Agreement. The Sponsor’sAgreement, the Sponsor receives a fee, accruesaccrued daily and is paid monthly, at an annual rate of 1.00% of the average daily net assets of theeach Underlying Fund. The Fund is newly organized and asEach of the date of this prospectus has not paid any management fees toFund and the Sponsor. The Fund is alsoUnderlying Funds are responsible for other ongoing fees, costs and expenses of itstheir respective operations, including brokerage fees, SEC and FINRA registration fees and legal, printing, accounting, custodial, administration and transfer agency costs, although the Sponsor has borne or will bearbears the costs and expenses related to the initial offer and sale of Shares.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 totaledtotal approximately $[●], were or$293,650, are chargeable to the Fund, and the Sponsor did not and may not recover any of these costs and expenses from the Fund.
Shareholders have no right to elect the Sponsor on an annual or any other continuing basis or to remove the Sponsor. If the Sponsor voluntarily withdraws, the holders of a majority of the Trust’s outstanding Sharesshares 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 Shareholdersholders 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 membersMembers 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 60 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 33 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 has primary responsibility for the Trade Operations for the Funds. He maintains his main business office at 13520 Excelsior Blvd., Minnetonka, MN 55345. Mr. Kahler was registered as an Associated Person of the Sponsor on November 25, 2011, approved as a Branch Manager of the Sponsor on March 16, 2012 and approved by the NFA as a Principal of the Sponsor on May 16, 2012. These NFA registrations were withdrawn on September 7, 2018 and then he re-registered as an Associated Person and Branch Office Manager of the Sponsor on October 5, 2018 and as a Principal of the Sponsor on October 16, 2018. Since January 18, 2012, Mr. Kahler has been an associated person of the Distributor under the terms of the SASA between the Sponsor and the Distributor. Additional information regarding the SASA can be found in the section of this disclosure document entitled “Plan of Distribution.” Prior to his employment with the Sponsor, Mr. Kahler worked for Cargill Inc., an international producer and marketer of food, agricultural, financial and industrial products and services, from April 2006 until November 2011 in the Energy Division as Senior Petroleum Trader. In October 2006 and while employed at Cargill Inc., Mr. Kahler was approved as an Associated Person of Cargill Commodity Services Inc., a commodity trading affiliate of Cargill Inc. from September 13, 2006 to November 9, 2011. Mr. Kahler graduated from the University of Minnesota with a Bachelors of Agricultural Business Administration and is 53 years old. Mr. Kahler is primarily responsible for making trading and investment decisions for the Fund and other Teucrium Funds, and for directing Fund and other Teucrium Fund trades for execution.
Messrs. Gilbertie, Riker, and Kahler and Ms. 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, 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 |
Fiscal Year Ended December 31, 2019: | | |
Quarter Ended | | |
March 31, 2019 | $20.92 | $19.16 |
June 30, 2019 | $20.73 | $18.19 |
September 30, 2019 | $20.31 | $17.92 |
December 31, 2019 | $19.68 | $18.67 |
As of December 31, 2020, the Fund had approximately 349 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, 2021) | 537,500 |
Aggregate gross sale price for units issued | $21,916,576 |
Pool NAV as of February 28, 2021 | $5,123,473 |
NAV per Share as of February 28, 2021 | $22.77 |
Largest monthly percentage drawdown* | |
Worst peak to valley drawdown** | -70.07% / Jul 2012 - Apr 2021 |
* 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.
THE FUND HASPAST PERFORMANCE IS NOT COMMENCED TRADING AND DOES NOT HAVE ANY PERFORMANCE HISTORY.NECESSARILY INDICATIVE OF FUTURE RESULTS
Rates of Return* |
Month | 2016 | | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | |
January | (1.54) | % | 3.34 | % | 0.57 | % | 2.61 | % | (2.19) | % | 4.18 | % |
February | (1.72) | % | (0.29) | % | 2.67 | % | (3.98) | % | (2.75) | % | 3.46 | % |
March | 3.93 | % | (5.97) | % | (2.98) | % | (2.60) | % | (7.41) | % | | % |
April | 5.65 | % | (2.16) | % | 0.09 | % | (3.59) | % | (4.63) | % | | % |
May | 1.03 | % | (2.32) | % | 1.32 | % | 6.17 | % | 0.03 | % | | % |
June | 0.91 | % | 2.91 | % | (8.65) | % | 0.85 | % | 1.21 | % | | % |
July | (6.28) | % | 1.00 | % | 1.47 | % | (3.94) | % | 1.99 | % | | % |
August | (3.82) | % | (6.47) | % | (4.48) | % | (5.42) | % | 4.23 | % | | % |
September | 4.78 | % | (0.72) | % | (2.20) | % | 3.86 | % | 3.50 | % | | % |
October | 1.65 | % | (1.27) | % | 3.65 | % | 0.59 | % | 1.39 | % | | % |
November | (4.41) | % | (0.47) | % | 0.34 | % | (0.87) | % | 4.29 | % | | % |
December | (0.38) | % | (1.60) | % | (2.31) | % | 4.05 | % | 8.28 | % | | % |
Annual Rate of Return | (0.98) | % | (13.60) | % | (10.64) | % | (3.02) | % | 7.14 | % | 7.79 | %** |
* 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 theeach Underlying Fund is to have the daily changes in thepercentage terms of its Shares’ NAV reflect the daily changes in the pricepercentage terms of the Underlying Fund’s Benchmark. Specifically, the Teucrium Corn Fund’s Benchmark Wateris: (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 ais: (1) the second to expire Sugar No. 11 Futures Contract traded on ICE Futures, weighted average35%, (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 closing settlement prices for the Benchmark Component Futures Contracts:third to expire contract, weighted 35%.
TheEach Underlying Fund seeks to achieve its investment objective by investing under normal market conditions in Benchmark Component Futures Contracts. Under normal market conditions, theContracts or, in certain circumstances, in other Futures Contracts for its Specified Commodity. In addition, and to a limited extent, an Underlying Fund expects that 100% of the Fund’s assets will be used to trade Wateralso may invest in exchange-traded options on Futures Contracts and invest in cash and cash equivalents. The Fund reservesCleared Swaps for its Specified Commodity in furtherance of the rightUnderlying 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 swap agreements, forward contracts and options, a brief descriptionother commodity interests on its Specified Commodity. See “The Offering – Futures Contracts” below. By utilizing certain or all of which may be found in “Appendix A – Glossarythese investments, the Sponsor endeavors to cause each Underlying Fund's performance to closely track that of Defined Terms”.its Benchmark.
The Fund investsUnderlying Funds invest in Benchmark Component Futures Contractscommodity interests to the fullest extent possible without being leveraged or unable to satisfy itstheir current or potential margin or collateral obligations with respect to its investments in Benchmark Component Futures Contracts.commodity interests. After fulfilling such margin and collateral requirements, the Fund investsUnderlying 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 it has been authorized by the Trust to retain, establish the terms of retention for, and terminate third-party commodity trading advisors to provide such management. The Sponsor has substantial discretion in managing the Fund’s 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, including money-market funds, investment grade commercial paper, and/or merely holds such assets in cash in interest-bearing accounts. The Fund earns interest and other income from the cash equivalents that it purchases, and on the cash it holds at financial institutions.equivalents.
TheEach Underlying Fund seeks to achieve its investment objectiveobjectives primarily by investing in Benchmark Component Futures Contracts such that the changes in its NAV are expected towill be closely track the changes in theits Benchmark. TheEach 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 Benchmark. 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 Fund’s 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 commodity futures contract heldUnderlying Fund and those that are pending,each cash equivalent, and the valueamount of cash, and cash equivalents held in the Fund. The Fund’s website also includes the NAV, the 4 p.m. Bid/Ask Midpoint as reported by the NYSE Arca, the last trade price as reported by the NYSE Arca, the shares outstanding, the shares available for issuance,portfolio, and the shares created or redeemed on that day. The prospectus, Monthly Statementsname and value of Account, Quarterly Performanceeach Futures Contract and Cleared Swap, the specific types of other commodity interests and characteristics of such other commodity interests, the Midpoint versus the NAV (as required by the CFTC),name and value of each short-term Treasury Security and cash equivalent, and the Roll Dates, as well as Forms 10-Q, Forms 10-K, and other SEC filings for the Fund, are also posted on the website.amount of cash held in each Underlying Fund’s portfolio. The Fund’s website is publicly accessible at no charge.
In seeking to achieve the Fund’s investment objective of tracking the Benchmark, the Sponsor reserves the right to enter into or hold Water Futures Contracts other than the Benchmark Component Futures Contracts and/or other water interests on behalf of the Fund. Over the counter water interests can generally be structured as the parties to the contract desire. Therefore, the Fund might enter into multiple over the counter water interests intended to exactly replicate the performance of each of the three Benchmark Component Futures Contracts, or a single over the counter water interest designed to replicate the performance of the Benchmark as a whole. Assuming that there is no default by a counterparty to an over the counter water interest, the performance of the water interest will necessarily correlate exactly with the performance of the Benchmark or the applicable Benchmark Component Futures Contract. The Fund might also enter into or hold water interests other than the Benchmark Component Futures Contracts to facilitate effective trading, consistent with the discussion of the Fund’s “roll” strategy discussed in the preceding paragraph. In addition, the Fund might enter into or hold water interests that would be expected to alleviate overall deviation between the Fund’s performance and that of the Benchmark that may result from certain market and trading inefficiencies or other reasons.
The Sponsor endeavors to place the Fund’s trades in Benchmark Component Futures Contracts and otherwise manage the Fund’s investments so that the Fund’s average daily tracking error against the Benchmark is less than 10 percent over any period of 30 trading days.
The Fund’s investment objective is to provide investors with a cost-efficient way to gain exposure to the water market. The Sponsor developed the Benchmark as a representation of the water market. Under normal market conditions, the Fund will invest in the Benchmark Component Futures Contracts. The Sponsor believes that by investing in Benchmark Component Futures Contracts, the Fund’s net asset value (“NAV”) will closely track the Benchmark. The Sponsor also believes that because of market arbitrage opportunities, the market price at which investors will purchase and sell Shares through their broker-dealer will closely track the Fund’s NAV. The Sponsor believes that the net effect of these relationships is that the Fund’s market price on the NYSE Arca at which investors purchase and sell Shares will closely track the water market, as measured by the Benchmark.
An investment in the Shares provides a means for diversifying an investor’s portfolio or hedging exposure to changes in water prices. An investment in the Shares allows both retail and institutional investors to easily gain this exposure to the water market in a transparent, cost-effective manner.
The Sponsor employs a “neutral” investment strategy intended to track changes in the Benchmark regardless of whether the Benchmark goes up or goes down. The Fund’s “neutral” investment strategy is designed to permit investors generally to purchase and sell the Fund’s Shares for the purpose of investing indirectly in the water market in a cost-effective manner. Such investors may include participants in the agricultural industry and other industries seeking to hedge the risk of losses in their water related transactions, as well as investors seeking exposure to the water market. Accordingly, depending on the investment objective of an individual investor, the risks generally associated with investing in the water market and/or the risks involved in hedging may exist. In addition, the Fund does not expect there to be any meaningful correlation between the performance of the Fund’s investments in cash and cash equivalents and the changes in the price of water or Benchmark Component Futures Contracts. While the level of interest earned on, or the market price of, these investments may in some respects correlate to changes in the price of water, this correlation is not anticipated as part of the Fund’s efforts to meet its objective. This and certain risk factors discussed in this prospectus may cause a lack of correlation between changes in the Fund’s NAV and changes in the price of water.
The Shares issued by the Fund may only be purchased by Authorized Purchasers and only in blocks of 10,00012,500 Shares called Creation Baskets. The amount of the purchase payment for a Creation Basket is equal to the totalaggregate NAV of Shares in the Creation Basket. Similarly, only Authorized Purchasers may redeem Shares and only in blocks of 10,00012,500 Shares called Redemption Baskets. The amount of the redemption proceeds for a Redemption Basket is equal to the totalaggregate NAV of Shares in the Redemption Basket. The purchase price for Creation Baskets and the redemption price for Redemption Baskets are the actual NAV calculated at the end of the business day when a request for a purchase or redemption is received by the Fund. The NYSE Arca publishes an approximate NAV intra-day based on the prior day’s NAV and the current price of the Benchmark Component Futures Contracts, but the price of Creation Baskets and Redemption Baskets is determined based on the actual NAV calculated at the end of each trading day.
While the Fund issues Shares only in Creation Baskets, Shares may also be purchased and sold in much smaller increments on the NYSE Arca. These transactions, however, are effected at the bid and ask prices established by the specialist firm(s). Like any listed security, Shares can be purchased and sold at any time a secondary market is open.
The Fund’s Investment StrategyStrategies 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 purchaseswill purchase or sells Benchmark Component Futures Contractssell 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, and that the Fund’s 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 10,00012,500 Shares and ignoring theany Creation Basket fee of $[●])fee). If one were to assume further that the Sponsor wants to invest the entire proceeds from the Creation Basket in Shares of the Benchmark Component Futures ContractsUnderlying Funds and that the market valueNAV of each such Benchmark Component Futures Contractsshare is $[●] (or otherwise not a round number),$18, the Fund would be unable to buy an exact number of Water Futures ContractsShares with an aggregate market value equal to $[●].$312,500. Instead, the Fund would be able to purchase [●] Benchmark Component Futures Contracts17,361 Shares with an aggregate market value of approximately $[●]. Assuming a margin requirement equal to [●]% of the value of the Water Futures Contracts (although the actual percentage is approximately [●]%), the Fund would be required to deposit $[●] in cash with the FCM through which the Water Futures Contracts were purchased.$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 potential calls for margin or anticipated redemptions.
The specific water interests purchased depend on various factors, includingSponsor does not anticipate letting the Underlying Funds’ Futures Contracts expire and taking delivery of a judgment bySpecified Commodity. Instead, the Sponsor as to the appropriate diversification of the Fund’s investments. While the Sponsor anticipates that, under normal market conditions, a substantial majority of the Fund’s assets will be invested in CME Water Futures Contracts and cash and cash equivalents, the Sponsor reserves the right to enter into other water interests on behalf of the Fund, including swaps in the over the counter market.
The Benchmark Component Futures Contracts are cash-settled and the Fund will not be required to take delivery of water. However, prior to expiration of a contract, the Sponsor may choose to closecloses out existing positions, e.g., in response to ongoing changes in thean Underlying Fund’s Benchmark or if it otherwise determines it would be appropriate to do so and reinvest the proceeds in new Benchmark Component Futures Contracts.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 contractsContracts are agreements between two parties that are executed on a designated contract market (“DCM”), i.e., a commodity futures exchange, and that are cleared and margined through a derivatives clearing organization (“DCO”), i.e., a clearing house. One party agrees to buy a commodity such as water from the other party at a later date at a price and quantityquantity; agreed upon when the contract is made. In market terminology, a party who purchases a futures contractFutures Contract is long in the market and a party who sells a futures contractFutures 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 contractFutures Contract on the same or linked exchange before the designated date of delivery. The difference between the price at which the futures contractFutures 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 contractFutures Contract is entered into, the buyer of the futures contractFutures Contract will generally be able to sell a futures contractFutures 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 contractFutures Contract will generally profit if the price of the underlying commodity decreases, as it will generally be able to buy a futures contractFutures Contract to close out its original short position at a price lower than that at which the original contract was sold. Because the Fund seeksUnderlying Funds seek to track the Benchmarktheir Benchmarks directly and profit when the price of water increasesthe Specified Commodity and, as a likely result of an increase in the price of water,the Specified Commodity, the price of Water Futures Contracts on the Specified Commodity specific commodity increases, theeach Underlying Fund will generally be long in the market for waterits Specified Commodity and will generally sell Water Futures Contracts only to close out existing long positions.
Futures contractsContracts are typically traded on futures exchanges (i.e., DCMs) such as the CME,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.
The Water Futures ContractContracts 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 new futures contractcash payment based on the Nasdaq Veles California Water Index Futures. This contract is financially settled with each contract representing 10 acre-feet of water. The Nasdaq Veles California Water Index Futures track the spot rate price of waterchange in the statevalue of California,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 volume-weighted averagefuture.
Certain typical and significant characteristics of Futures Contracts are discussed below. Additional risks of investing in Futures Contracts are included in “What are the transaction pricesRisk Factors Involved with an Investment in California’s five largest and most actively traded water markets.the Fund?”
Impact of Position Limits, Accountability Levels, and Price Fluctuation Limits.Limits
Position Limits, Accountability Levels, and Price Fluctuation Limits may potentially cause a tracking error between the price of the Sharesan Underlying Fund’s shares and theits Benchmark. This may in turn prevent you from being able to effectively use the Fund as a way to hedge against watercommodity related losses or as a way to indirectly invest in water.agricultural commodities.
The Fund doesand the Underlying Funds do not intend to limit the size of the offeringtheir offerings and will attempt to expose substantially all of itstheir proceeds to Benchmark Component Futures Contracts and cash and cash equivalents.the agricultural commodities market either directly through commodity interests or, in the case of the Fund, indirectly through the Underlying Funds. If thean Underlying Fund encounters position limits accountability levels, or price fluctuation limits for Water Futures Contracts on U.S. exchanges, it may then, if permitted under applicable regulatory requirements, purchase other watercommodity interests and/or other Water Futures Contracts listed on exchanges other than the CME or foreign exchanges. However, the Water Futures Contracts available on such foreign exchanges may have different underlying sizes, deliveries, and prices.prices than the Underlying Funds’ Benchmark Component Futures Contracts. In addition, the Water Futures Contracts available on these exchanges may be subject to their own position limits and accountability levels.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 it sells.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 dayday-to-day as opposed to intra-day. Economic factors that may cause volatility in Water Futures Contracts include but are not limitedchanges 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 environment, natural or man-made disasters; governmental oversight World Health Organization;and regulation; demographics; economic conditionschanges in the agriculturalphilosophies and industrial business sectors; infrastructure limitations; and existing and future technologic developments. There are also various other factors now known and unknown, any and allemotions of which can have an impact on the supply, demand, and price fluctuations in the water markets, including water availability; access problems; Governmental oversight and/or regulation; geopolitical risks such as civil unrest, California and/or other Western States splitting into multiple states or seceding; United States federal, state, and local policies and regulations that materially affect the agricultural, electric, mining, crude oil/natural gas production, and other heavy use water utilities and industries,; environmental laws and regulations; and seasonal fluctuations in the price of water. See “Risks Associated with Investing Directly or Indirectly in Water.”market participants. Because the Fund investsUnderlying Funds invest a significant portion of itstheir assets in futures contracts,Futures Contracts, the assets of the Fund,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 water fluctuatesa commodity will fluctuate based on a number of market factors, including demand for waterthe commodity relative to its supply. The value of Water Futures Contracts will likewise fluctuatesfluctuate in reaction to a number of market factors. Because the Fund seeksUnderlying Funds seek to maintain itstheir holdings in Water Futures Contracts with a roughly constant expiration profile and not take delivery of the FundSpecified 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 waterthe Specified Commodity in the future is expected to be less than the current price), thean 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 watercommodity 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, thean 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 watercommodity prices or the price relationship between the spot price,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 watercommodity 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 water market and government policy.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;Fund); conversely a situation involving prolonged periods of backwardation may positively impact the returns of thean 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.Futures Contracts. A margin deposit is like a cash performance bond. It helps assure the trader’s performance of the futures contractsFutures Contracts that he or she purchases or sells. Futures contractsContracts 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 contractFutures Contract is set by the exchange on which the contract is traded. Brokerage firms, such as the Fund’s clearing broker,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 contractsContracts 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 thean 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 DerivativesDerivatives
Under normal market conditions, the Fund expects that 100% of the Fund’sUnderlying Funds’ assets will be used to trade futures contracts and invest in cash and cash equivalents; however, the Fund has the ability toUnderlying 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.”
The Fund’s Investments in Cash and Cash Equivalents
The Fund seeks to have the aggregate “notional” amount of the Benchmark Component Futures Contracts it holds approximate at all times the Fund’s total NAV. At any given time, however, most of the Fund’s investments are in cash and cash equivalents that support the Fund’s positions in Benchmark Component Futures Contracts. For example, the purchase of a Water Futures Contract with a stated or notional amount of $[●] million would not require the Fund to pay $[●] million upon entering into the contract; rather, only a margin deposit, approximately [x-x]% of the notional amount, would be required. To secure its Water Futures Contract obligations, the Fund would deposit the required margin with the FCM and would separately hold its remaining assets through its Custodian or other financial institution in cash and cash equivalents, specifically in demand deposits, in short-term Treasury Securities held by the FCM, in money-market funds or in commercial paper. Such remaining assets may be used to meet future margin payments that the Fund is required to make on its Water Futures Contracts. Other water interests typically also involve collateral requirements that represent a small fraction of their notional amounts, so most of the Fund’s assets dedicated to these water interests are also held in short-term Treasury Securities, cash, and cash equivalents.
The Fund earns interest and other income from the cash equivalents that it purchases, and on the cash, it holds through the Custodian or other financial institutions. The earned interest and other income increase the Fund’s NAV. The Fund applies the earned interest and other income to the acquisition of additional investments or uses it to pay its expenses. When the Fund reinvests the earned interest and other income, it makes investments that are consistent with its investment objectives.
Any cash equivalent invested in by the Fund will have a remaining maturity of less than 3 months at the time of investment or will be subject to a demand feature that enables that Fund to sell the security within that time period at approximately the security’s face value (plus accrued interest). Any cash equivalents invested in by the Fund will be or will be deemed by the Sponsor to be of investment grade credit quality.
Other Trading Policies of the Fund
Exchange for Related Position
An “exchange for related position” (“EFRP”) can be used by the Fund 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 contractFutures Contract gives the buyer of the option the right, but not the obligation, to buy or sell a futures contractFutures 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 Water Futures Contracts, there may beare also a number of options on Water Futures Contracts relating to the Specified Commodities listed on the [_______] Exchange.CBOT and ICE Futures. These contracts offer investors and hedgers another set of financial vehicles to use in managing exposure to the commodities market. TheAn Underlying Fund may purchase and sell (write) options on Water Futures Contracts in pursuing its investment objective, except that it will not sell call options when it does not own the underlying Water Futures Contract. TheAn Underlying Fund would make use of options on Water Futures Contracts if, in the opinion of the Sponsor, such an approach would cause the Underlying Fund to more closely track its Benchmark or if it would lead to an overall lower cost of trading to achieve a given level of economic exposure to movements in water prices.the prices of the Underlying Fund’s Specified Commodity.
Liquidity
The Fund investsUnderlying Funds invest only in Water 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 contractsFutures Contracts can be physically settled, the Fund doesand the Underlying Funds do not intend to take or make physical delivery. However, the FundUnderlying Funds may from time to time trade in other watercommodity interests based on the spot price of water.a Specified Commodity.
Leverage
The Sponsor endeavors to have the value of theeach 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 the Fund’sits 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 doesand the Underlying Funds do not intend to nor foresee the need to borrow money or establish credit lines. TheEach 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 theany cash andand/or cash equivalents that it intends to hold at all times. holds.
Benchmark Performance
The Water Marketchart 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.
Water is the natural resource required to sustain all life on the planet, arguably making it the most important commodity on Earth. U.S. water usage falls into three major categories: residential, agricultural and industrial use. Therefore, a primary challenge confronting the United States, particularly the Western States, is water scarcity which can be attributed to increased demand from population growth, economic expansion, agricultural production, and climate change resulting in rapidly changing and variable weather patterns.Teucrium Agricultural ETF Performance as of 12/31/2020
| | | | | |
NAV | 14.50% | 7.14% | -2.44% | -4.50% | -9.36% |
Price | 15.20% | 8.21% | -1.37% | -4.34% | -9.32% |
Benchmark (TTAGS) | 14.73% | 7.66% | -1.91% | -3.94% | -8.86% |
The U.S. ranks first globally in per capita water consumption and second globally in total water consumption behind only China. California ranks first in U.S. demand. Competition continues to increase between domestic use, agriculture, and industrial use. Food production and urban expansion could both be threatened by water scarcity, and it is becoming increasingly difficult and expensive to balance the water needs of farmers growing crops in many partsService Providers of the country with water demands created by expanding urban population centers. As water availability becomes increasingly variable, stateFund and local governments will have increasing roles in rationing and disbursing water.
California is one of the most active water trading markets in the U.S. Water prices tend to trade in cycles generally tied to rain/snowfall patterns. Western Sates receive most annual precipitation from winter storms. Beyond that they must rely on spring rainstorms. Western statewide precipitation occurs from November through March. Approximately half occurs from December through February, coinciding winter storms. A few storms during the winter season can determine if the year will be wet or dry. Droughts occur when dry conditions persist long enough to impact natural water levels.
Water trading has become a fast-growing activity throughout the Western United States; California, Washington, Arizona, Colorado, and Texas are among the most active places where water rights are transacted. As climate change continues to impact the planet, urban, industrial and agricultural expansion will likely increase the demand for water, increasing the need for the most efficient allocation of water possible among competing users. The trading of water rights is a practical and effective tool available to all participants in their continued efforts at securing water.
The Fund’s Service ProvidersUnderlying 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-partythird 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 and accounting services and preparing certain SEC and CFTC reports on behalf of the Fund.
The Custodian is located at 1555 North Rivercenter Drive, Suite 302, Milwaukee, Wisconsin 53212. U.S. Bank N.A. is a nationally chartered bank, regulated by the Office of the Comptroller of the Currency, Department of the Treasury, and is subject to regulation by the Board of Governors of the Federal Reserve System. The principal address for Global Fund Services is 615 East Michigan Street, Milwaukee, WI,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 “FINRA”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.
Currently, ED&FE D & F Man Capital Markets, Inc. (“ED&FE D & F Man”) serves as the Fund’s clearing broker to execute and clear the Fund’s futures and provide other brokerage-related services. ED&FE 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. The Firm’sE D & F Man’s Designated Self-Regulatory Organization is the Chicago Mercantile Exchange Inc. (www.cmegroup.com). The FirmE D & F Man is also registered as a broker-dealer (“BD”) with the U.S. Securities and Exchange Commission (“SEC”)SEC and is a member of the Financial Industry Regulatory Authority, Inc. (“FINRA”).
ThereExcept as indicated below, there have been no material civil, administrative, or criminal proceedings pending, on appeal, or concluded against ED&FE 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 E D & F Man 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 E D & F Man denies the substantive allegations against it and asserted a counterclaim for breach of contract, indemnification and legal fees.
For a list of concluded actions, please go to http://www.nfa.futures.org/basicnet/welcome.aspx.welcome.aspx. This link will take you to the Welcome Page of the NFA’s Background Affiliation Status Information Center (“BASIC”). At this page, there is a box where you can enter the NFA ID of ED&FE D & F Man Capital Markets Inc. (0002613) and then click “Go”. You will be transferred to the NFA’s information specific to ED&FE 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.
ED&FEffective in 2019, U.S. Bank N.A. became the broker for some, but not all, of the equity transactions related to the purchase and sale of the Underlying Funds for TAGS. The Bank of New York Mellon Capital Markets was previously the broker since inception of the TAGS Fund.
E D & F Man, in its capacity as a registered FCM, will serve as the Fund’sFund's clearing broker and, as such, will arrange for the execution and clearing of the Fund’sFund's futures and options on futures transactions. ED&FE D & F Man acts as clearing broker for many other funds and individuals.
The investor should be advised that ED&FE D & F Man is not affiliated with and does not act as a supervisor of the Fund or the Fund’sFund's Sponsor, investment managers, members, officers, administrators, transfer agents, registrars or organizers. Additionally, ED&FE 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, ED&FE D & F Man does not provide any commodity trading advice regarding the Fund’sUnderlying Funds’ trading activities. Investors should not rely upon ED&FE D & F Man in deciding whether to invest in the FundUnderlying Funds or retain their interests in the Fund.Funds. Investors should also note that the FundUnderlying Funds may select additional clearing brokers or replace ED&FE D & F Man as the Fund’sFunds’ clearing broker.
Payments to Certain Third Parties
Marketing Agent
Currently,The Sponsor employs Thales Capital Partners LLC (TCP) serves as the Fund’s Marketing Agent. TCP(Thales) for distribution and solicitation-related services. Thales is registered as a Broker-Dealer with the SEC and a member of Financial Industry Regulatory Authority (FINRA) and SIPC. The Fund pays the Marketing AgentThales receives an annual fee for distributionof $90,000 and solicitation-related services. Additionally, the Marketing Agent will receive an additional [●]% 0.0015% of the Fund’s average daily net assets in referred accounts.accounts for distribution and solicitation-related services. This additional fee 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 | | Compensation Paid by the Underlying Funds |
Teucrium Trading, LLC, Sponsor | | None. | | 1.00% of average net assets annually |
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 | | 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 custody services: [●]% of average gross assets up to $[●], and [●]% of average gross assets over $[●], annually, plus certain per-transaction charges
| | For Transfer Agency, Fund Accounting and Fund Administration services, based on the total assets for all the Teucrium Funds in the Trust: [●]%0.05% of average gross assets on the first $[●], [●]%$500 million, 0.04% on the next $[●], [●]%$500 million, 0.03% on the next $[●]$2 billion and [●]%0.02% on the balance over $[●] annually$3 billion annually. A combined minimum annual fee of $[●]$47,000 for custody, transfer agency, accounting and administrative services is assessed per Fund. | | 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 | | For reimbursement of expenses including sales and advertising FINRA filing fees, and other miscellaneous expenses incurred in connection with the provision of distribution services on behalf of the Fund, not to exceed $6,000 for the two-year period of May 1, 2020 to May 1, 2022 (the “two year offering period”). The fees which will be paid to the Distributor by the Fund for distribution services will not exceed $21,500 for the two-year offering period. The total amount of the SASA fee allocated to the Fund is estimated to be approximately $500 for the two-year offering period. The total amount of expenses to be reimbursed under the SASA allocated to the Fund is estimated to be approximately $400 for the two-year offering period. | | The Distributor receives a fee of [●]%0.01% of the Fund’s average daily net assets and an aggregate annual fee of $[●]$100,000 for all Teucrium Funds, along with certain expense reimbursements. Expense reimbursements consist of costs for sales and advertising review fees and will not exceed $[●]$24,000 for the two-year period of [●]May 1, 2020 to [●] (the “two year offering period”). May 1, 2022. The asset-based fees which will be paid to the Distributor by the Fund for distribution services will not exceed $[●]total maximum base fee and basis point fee for the two-year offering period.period equals $500,000. Therefore, the maximum amount of fees the Distributor could receive from the Underlying Funds for distribution services with respect to this offering equals $500,000. Under the Securities Activities and Service Agreement, (the “SASA”), the Distributor receives compensation from the fund for its activities on behalf of all the Teucrium Funds. The fees paidFunds, which is estimated not to exceed an aggregate for the Distributor pursuant to the SASA for this offering will not exceed $[●]Teucrium Funds of $25,500 per year and $51,000 for the two-year offering period. The total expenses payableOf this $51,000 mentioned above, all will be allocated to the Underlying Funds. In addition, the Distributor receives certain expense reimbursements relating to the registration, continuing education and other administrative expenses of the Registered Representatives for this offering will not exceed $[●]in relation to the Teucrium Funds, currently estimated at $20,950 per year and $41,900 for the two-year offering period. In sum, the total fees the Distributor will receive over the two-year offering period for Of this $41,900 mentioned above, all of its services will not exceed $[●]. The total expenses that will be reimbursedallocated to the Distributor over the two-year offering period for all of its services will not exceed $[●], $[●] of which are issuer costs for sales and advertising materials.
Underlying Funds. |
Thales Capital Partners LLC,
Marketing Agent
ED&F Man Capital Markets, Inc., Futures Commission Merchant and Clearing Broker
| The marketing agent shall receive an annual fee of $[●]. Additionally, the marketing agent will receive an additional [●]% of the Fund’s average daily net assets in referred accounts. This additional fee is determined by an agreed upon level of assets at the time of signing the contract.
$[●] per Water Futures Contract half-turn
| | | |
Broker-Dealers | | As negotiated with the particular broker-dealer. | | N/A |
| | | | |
Wilmington Trust Company, Trustee | | None | | $3,300 annually |
| | | | |
Employees of the Sponsor Registered with the Distributor (the “Registered Reprsentatives”Representatives”) | $[●] annually for the Trust
| For non-marketing services provided to the Fund, $[●] and,$7,500, such amount to be paid by the Sponsor; for marketing and wholesaling purposes, $[●]. These amounts include expenses that will be reimbursedservices, $2,000, such amount to the Registered Representatives for travel and other expenses related to their activities for the Fund. Of the total amount, approximately $[●] will be paid by the Sponsor, the rest by the Fund. Registered Representatives will also receive continuing education valued at a maximum of $[●] for the two-year offering period.Sponsor. | | N/A |
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. As of the date of this prospectus, none of the expenses discussed above have been charged to the Fund.
| Year Ended December 31, 2020 | Year Ended December 31, 2019 | Year Ended December 31, 2018 |
Recognized Related Party Transactions | $10,906 | $13,711 | $18,186 |
Waived Related Party Transactions | $9,518 | $11,641 | $13,526 |
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’sday'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 7.
| Per Share |
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.
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 DaySame-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.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 “WWTR.“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 10,00012,500 Shares at their NAV through the Distributor to Authorized Purchasers. [●] is expected to beMerrill Lynch Professional Clearing Corp was the initial Authorized Purchaser. It is expected that on the effective date, theThe initial Authorized Purchaser will purchasepurchased one or moreCreation Basket of 50,000 units, which was the Creation Basket size at the time of the initial Creation Baskets of [●] Sharesoffering, at a per Shareunit price of $25.00. The initial offering price of $25.00 was set as an appropriate and convenient price that would facilitate secondary market trading of Shares, and the Shares of the Fund acquired by the Sponsor in connection with its initial capital contribution were purchased at a price of $25.00 per Share.$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 deliveryprospectus-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 deliveryprospectus-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 Authorized Purchasers may be indemnified by the Sponsor, they will not be entitled to receive a discount or commission from the Trust or the Sponsor for their purchases of Creation Baskets.
The Fund’s NAV per Share is calculated by:
| ● | taking the current market value of its total assets, and |
| ● | subtracting any liabilities and dividing the balance by the number of Shares. |
Global Fund Services, in its capacity as the Administrator“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 Waterthe Futures Contracts held by the Underlying Funds, the Administrator useswill use the Water Futures Contract settlementclosing price on the exchange on which the contract isthey are traded, except that the “fair value” of Watera Futures ContractsContract (as described in more detail below) may be used when Waterthe Futures ContractsContract close at theirits price fluctuation limit for the day. The Administrator determineswill 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 Water Interests iscommodity interests will be determined based on the value of the commodity or Futures Contract underlying such watercommodity 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 water interest.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 watercommodity interests and any other credit or debit accruing to the Fund but unpaid or not received by the Fund.
The fair value of a watercommodity interest isshall be determined by the Sponsor in good faith and in a manner that assesses the watercommodity interest’s value based on a consideration of all available facts and all available information on the valuation date. When a Water Futures Contract has closed at its price fluctuation limit, the fair value determination attempts to estimate the price at which such Water 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 watercommodity interests trading in the over the counter market. The fair value of a watercommodity interest may not reflect such security’sinstrument’s market value or the amount that thean Underlying Fund might reasonably expect to receive forupon closing out the water interest upon its current sale.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 valueindicative fund values of the Fund’s water interests during the trading day.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 regularthe NYSE Arca trading hours of 9:30 a.m. (EST) to 4:00 p.m. (EST).Core Trading Session. The normal trading hours for Water Futures Contracts on CME are generally shorter than those of the NYSE Arca. This means thatmay 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 Fund’s SharesUnderlying Funds’ shares are traded on the NYSE Arca, but real-time CME trading prices for Waterat least some of the Futures Contracts traded on such exchangeheld by the Underlying Funds are not available. As a result, during those gaps there is no update to the indicative fund value. The trading hours forvalues of the CME canUnderlying Funds and such indicative fund values, therefore, will be found at: https://www.cmegroup.com/education/articles-and-reports/nasdaq-veles-california-water-index-futures-faq.html#hours.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 published on the NYSE Arca’s website and is available through on-line information services such as Bloomberg and Reuters.
Dissemination of the indicative fund value provides additional information that is not otherwise available to the public and is useful to investors and market professionals in connection with the trading of Fund Shares on the NYSE Arca. Investors and market professionals are able throughout the trading day to compare the market price of the Fund and the indicative fund value. If the market price of Fund Shares diverges significantly from the indicative fund value, market professionals may have an incentive to execute arbitrage trades. For example, if the Fund appears to be trading at a discount compared to the indicative fund value, a market professional could buy Fund Shares on the NYSE Arca, aggregate them into Redemption Baskets, and receive the NAV of such Shares by redeeming them to the Trust provided that there isare not a minimum number of shares outstanding for the Fund.outstanding. Such arbitrage trades can tighten the tracking between the market price of the Fund and the indicative fund value.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 commodity futuresUnderlying 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, that are not required to register as broker-dealers to engage in securities transactions as described below, and (2) DTC Participants. To become an Authorized Purchaser, a person must enter into an Authorized Purchaser Agreement with the Sponsor. The Authorized Purchaser Agreement provides the procedures for the creation and redemption of baskets and for the delivery of the cash, cash equivalents and/or commodity futuresUnderlying 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 and the related procedures may generally be amended by the Sponsor without the consent of theor 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 participatinginvesting directly in the physical water andSpecified Commodities or the watercommodity interest markets. Some Authorized Purchasers or their affiliates may from time to time buy or sell waterthe Specified Commodity or watercommodity interests and may profit in these instances.
Each Authorized Purchaser will be required to be registered as a broker-dealer under the Exchange Act and a member in good standing with FINRA or be exempt from being or otherwise not required to be registered as a broker-dealer or a member of FINRA and will be qualified to act as a broker or dealer in the states or other jurisdictions where the nature of its business so requires. Certain Authorized Purchasers may also be regulated under federal and state banking laws and regulations. Each Authorized Purchaser has its own set of rules and procedures, internal controls and information barriers as it deemsdetermines 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 incorporated by referencefiled 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, the CME,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, commodity futures and/Underlying Fund shares, or a combination thereofof 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 commodity futuresUnderlying 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 commodity futures,Underlying Fund shares, including the remaining maturities of the cash equivalents and/or Underlying Fund shares, that may be included in deposits to create baskets. If cash equivalents are to be included in a Creation Basket Deposit for orders placed on a given business day, the Administrator will publish an estimate of the Creation Basket Deposit requirements at the beginning of such day.
Delivery of Required Deposits
An Authorized Purchaser who places a purchase order is responsible for transferring to the Fund’s account with the Custodian the required amount of cash, cash equivalents, and/or commodity futuresUnderlying 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 threetwo 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 12:00 p.m.,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:
| ● | it determines that, due to position limits or otherwise, investment alternatives that will enable the Fund to meet its investment objective are not available or practicable at that time; |
| ● | it determines that the purchase order or the Creation Basket Deposit is not in proper form; |
| ● | it believes that acceptance of the purchase order or the Creation Basket Deposit would have adverse tax consequences to the Fund or its Shareholders; |
| ● | the acceptance or receipt of the Creation Basket Deposit would, in the opinion of counsel to the Sponsor, be unlawful; |
| ● | circumstances outside the control of the Sponsor, Distributor or transfer agent make it, for all practical purposes, not feasible to process creations of baskets; |
| ● | there is a possibility that any or all of the Benchmark Component Futures Contracts of thean Underlying Fund on the CMEfutures exchange from which the NAV of thethat Underlying Fund is calculated will be priced at a daily price limit restriction; or |
| ● | if, in the sole discretion of the Sponsor, the execution of such an order would not be in the best interest of the Fund or its Shareholders. |
None of the Sponsor, Distributor or transfer agent will be liable for the rejection of any purchase order or Creation Basket Deposit.
Redemption Procedures
The procedures by which an Authorized Purchaser can redeem one or more baskets mirror the procedures for the creation of baskets. On any business day, an Authorized Purchaser may place an order with the transfer agent to redeem one or more baskets. Redemption orders must be placed by 12:00 p.m.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 the next business day following the effective date of the redemption order or by the end of sucha 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 commodity futuresUnderlying 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 the Administrator, determines the requirements for cash, cash equivalents, and/or commodity futures,Underlying Fund shares, including the remaining maturities of the cash, cash equivalents and cash,and/or Underlying Fund shares, that may be included in distributions to redeem baskets. If cash equivalents are to be included in a redemption distribution for orders placed on a given business day, the Custodian and 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 systembook 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 CMEICE is closed other than customary weekend or holiday closings, or trading on the NYSE Arca, CBOT or CMEICE, 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 FundUnderlying Funds on the CMECBOT 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 10,00050,000 Shares (i.e., fivefour baskets of 50,00012,500 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 commodity futures equalUnderlying Fund shares to the totalaggregate 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 Shareper-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 watercommodity 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 watercommodity interest markets. While the Shares trade on the NYSE Arca until 4:00 p.m. (EST), liquidity in the markets for watercommodity interests may be reduced after the close of regular trading for Futures Contracts (the closing hours of the CME.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 Benchmark Component Futures Contracts and cash andshares of the Underlying Funds or in cash equivalents. Under normal market conditions, the Sponsor invests substantially all of the Fund’s assets in Benchmark Componentshares 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, andother commodity interests, cash and cash equivalents. When the Fund purchases Benchmark ComponentUnderlying 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 Benchmark Component Futures ContractsCommodity Interests at maturity. This deposit is known as initial margin. Counterparties in transactions in over the counter watercommodity interests will generally impose similar collateral requirements on the Fund.Underlying Funds. The Sponsor invests the Fund’sUnderlying Funds’ assets that remain after margin and collateral is posted in short-term Treasury Securities, cash, andand/or cash equivalents. Subject to these margin and collateral requirements, the Sponsor has sole authority to determine the percentage of assets that will be:
| ● | held as margin or collateral with FCMs or other custodian; |
| ● | used for other investments; and |
| ● | held in bank accounts to pay current obligations and as reserves. |
In general, the Fund expectsUnderlying Funds expect that itthey will be required to post approximately [x-x]%4-6% of the notional amount of a Benchmark Component Futures Contractscommodity interest as initial margin when entering into such Benchmark Component Futures Contracts.commodity interest. Ongoing margin and collateral payments will generally be required for both exchange-traded and over the counter watercommodity interests based on changes in the value of the watercommodity interests. Furthermore, ongoing collateral requirements with respect to over the counter watercommodity 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 watercommodity interest, and each party’s creditworthiness. In light of the differing requirements for initial payments under exchange-traded and over the counter watercommodity interests and the fluctuating nature of ongoing margin and collateral payments, it is not possible to estimate what portion of the Fund’sUnderlying 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 orand other income received by an Underlying Fund is used for thesuch 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 both initial and variation margin with respect to swaps (and options that qualify as swaps) and traded over-the -counter,over the counter, and, where applicable, on SEFs.
The approximate [x-x]%4-6% of the Fund’s 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 FundUnderlying 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 Sponsorsponsor 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 toany other Teucrium Fund or any Shareholder for any loss suffered by the Trust, the Fund or theany 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 theany 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 the compensation received for services as Trustee or on indemnity payments received), claims, actions, suits, costs, expenses or disbursements which may be imposed on a Trustee Indemnified Party relating to or arising out of the formation, operation or termination of the Trust, the execution, delivery and performance of any other agreements to which the Trust is a party, or the action or inaction of the Trustee under the Trust Agreement or any other agreement, except for expenses resulting from the gross negligence or willful misconduct of a Trustee Indemnified Party. Further, certain officers of the Sponsor are insured against liability for certain errors or omissions which an officer may incur or that may arise out of his or her capacity as such.
In the event the Trust is made a party to any claim, dispute, demand or litigation or otherwise incurs any liability or expense as a result of or in connection with any Shareholder’s (or assignee’s) obligations or liabilities unrelated to the Trust business, such Shareholder (or assignees cumulatively) is required under the Trust Agreement to indemnify the Trust for all such liability and expense incurred, including attorneys’ and accountants’ fees.
Withdrawal of the Sponsor
The Sponsor may withdraw voluntarily as the Sponsor of the Trust only upon ninety (90) days’ prior written notice to the holders of the Trust’s outstanding shares and the Trustee. If the withdrawing Sponsor is the last remaining Sponsor, shareholders holding a majority (over 50%) of the outstanding shares of the Teucrium Funds voting together as a single class (not including shares acquired by the Sponsor through its initial capital contribution) may vote to elect a successor Sponsor. The successor Sponsor will continue the business of the Trust. Shareholders have no right to remove the Sponsor.
In the event of withdrawal, the Sponsor is entitled to a redemption of the shares it acquired through its initial capital contribution to any of the series of the Trust at their NAV per Share. If the Sponsor withdraws and a successor Sponsor is named, the withdrawing Sponsor shall pay all expenses as a result of its withdrawal.
Meetings
Meetings of the Trust’s shareholders may be called by the Sponsor and will be called by it upon the written request of Shareholders holding at least 25% of the outstanding Shares of the Trust or the Fund, as applicable (not including Shares acquired by the Sponsor through its initial capital contribution).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.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 Fund.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. While the Sponsor will attempt to maintain the equal allocation of Fund assets among the four Underlying Funds, the Sponsor may have an incentive to purchase shares of or trade in a particular Underlying Fund relative to the other Underlying Funds.
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: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 middlemen 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, 2020, 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 | Jane Street Capital LLC New York, NY | 9,571 common units (1) | 12.76% |
TAGS | Gregory A. Toufayan Saddle River, NJ | 5,000 common units (1) | 6.67% |
TAGS | Yuqian Xu and Chunhua Qian Shanghai, China | 4,400 common units (1) | 5.87% |
The following table sets forth information regarding the beneficial ownership of shares of TAGS by the executive officers of the Sponsor as of January 31, 2021. 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 | 2,300 common units | 1.67% |
______________________
Legal Matters
Litigation and Claims
Within Sal Gilbertie, et al. vs. Dale Riker and Barbara Riker: On November 30, 2020, certain Company officers and members, along with the Sponsor, filed a Verified Complaint in the Delaware Court of Chancery, C.A. No. 2020-1018-AGB, asserting 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. Among other things, the Action 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 below discussion of that New York action). Through this Action, as amended through an Amended Verified Complaint filed on February 18, 2021, the plaintiffs assert claims for a declaration concerning the effects of the final order and judgment in the Riker 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 Company; 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 Company’s LLC agreement by Mr. Riker; and for breach of fiduciary duty by Mr. Riker.
Dale Riker vs. Sal Gilbertie, et al.: On November 24, 2020, Mr. Riker, through counsel, threatened to file an action in New York Supreme Court against Mr. Gilbertie, Ms. Mullen-Rusin, Mr. Kahler, and Mr. Miller, providing a copy of the draft complaint that he threatened to file. On December 7, 2020, Mr. Riker filed a version of his threatened complaint in the New York Supreme Court, New York County, Index No. 656794/2020, asserting both direct claims on his own behalf and derivative claims on behalf of the Company (the “Riker v. Gilbertie Action”). Through the Riker v. Gilbertie Action, Mr. Riker asserts derivative claims for breach of fiduciary duty against Mr. Gilbertie, Mr. Kahler, Ms. Mullen-Rusin, and Mr. Miller; a direct claim for defamation against Messrs. Miller and Gilbertie; a direct claim against Messrs. Miller and Gilbertie seeking a declaration concerning the validity of actions taken by Company Class A members; a direct claim for breach of the implied covenant of good faith and fair dealing against Messrs. Miller and Gilbertie; a direct claim against Mr. Gilbertie seeking specific performance of an alleged agreement for Mr. Gilbertie to purchase Mr. Riker’s equity in the Company; a derivative claim against Mr. Gilbertie, Mr. Kahler, and Ms. Mullen-Rusin for unjust enrichment; and a direct claim against Mr. Gilbertie, Mr. Miller, and Ms. Mullen-Rusin for an equitable accounting. The complaint did not seek any damages against the Sponsor.
The Sponsor intends to pursue its claims in Delaware and defend vigorously against Mr. Riker’s claims in New York.
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 federal income tax matters addressed below in “U.S. Federal Income Tax Considerations.”.
Experts
The financial statements of the Trust and management’s assessment of the effectiveness of internal control over financial reporting of the TrustFund incorporated by reference in this prospectus and elsewhere in the registration statement have been so incorporated by reference in reliance upon the reportsreport of [_____]Grant Thornton LLP (“Grant Thornton”), independent registered public accountants, upon the authority of said firm as experts in accounting and auditing. The financial statements of the Fund included in this prospectus have been so included in reliance upon the reports of [_____], independent registered public accountants, upon the authority of said firm as experts in accounting and auditing.
Privacy Policy
The following discussion is qualified in its entirety by reference to the privacy policy. A copy of the privacy policy is available at www.teucrium.com.
The Sponsor, the Trust, and the Teucrium Funds have adopted a privacy policy relating to the collection, maintenance, and use of nonpublic personal information about the Teucrium Funds’ current and former investors, as required under federal law. Federal law gives investors the right to limit some but not all sharing of their nonpublic personal information. Federal law also requires the Sponsor to tell investors how it collects, shares, and protects such nonpublic personal information.
Collection of Nonpublic Personal Information
The Sponsor may collect or have access to nonpublic personal information about current and former Fund investors for certain purposes relating to the operation of the Funds. This information may include information received from investors, such as their name, social security number, telephone number, and address, and information about investors’ holdings and transactions in shares of the Teucrium Funds.
Use and Disclosure of Nonpublic Personal Information
The Sponsor does not sell nonpublic personal information to any third parties. The Sponsor primarily uses investors’ nonpublic personal information to complete financial transactions that may be requested. The Sponsor may disclose investors’ nonpublic personal information to third parties under specific circumstances described in the privacy policy. These circumstances include, among others, information needed to complete financial transactions, information released at the direction of an investor, and certain information requested by courts, regulators, law enforcement, or tax authorities. Investors may not opt out of these disclosures.
Investors’ nonpublic personal information, particularly information about investors’ holdings and transactions in shares of the Teucrium Funds, may be shared between and amongst the Sponsor and the Teucrium Funds. An investor cannot opt-out of the sharing of nonpublic personal information between and amongst the Sponsor and the Teucrium Funds. However, the Sponsor and the Teucrium Funds will not use this information for any cross-marketing purposes. In other words, all investors will be treated as having “opted out” of receiving marketing solicitations from Teucrium Funds other than the Teucrium Fund(s) in which it invests.
Protection of Nonpublic Personal Information
As described in the privacy policy, the Sponsor takes safeguards to protect investors’ nonpublic personal information, which include, among others, restricting access to such information, requiring third parties to follow appropriate standards of security and confidentiality, and maintaining physical, technical, administrative, and procedural safeguards.
Teucrium’s Website is hosted in the United States and any data provided to Teucrium is stored in the United States. If you choose to provide Personal Data from regions outside of the United States, then by your submission of such data, you acknowledge and agree that: (a) you are transferring your personal information outside of those regions to the United States voluntarily and with consent; (b) the laws and regulations of the United States shall govern your use of the provision of your information, which laws and regulations may differ from those of your country of residence; and (c) you permit your personal information to be used for the purposes herein and in the Privacy Policy above.
U.S. Federal Income Tax Considerations
The following discussion summarizes the material U.S. federal income tax consequences of the purchase, ownership and disposition of Shares of the Fund and the U.S. federal income tax treatment of the Fund. Except where otherwise noted, otherwise, itthis 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, or currencies, or commodities, (ii) traders in securities, or dealers or traders in commodities, that elect to use a mark to marketmark-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”“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 thosethe consequences discussed below.
The Sponsor expects to receivehas 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 will relyhas 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 willis not be binding on the Internal Revenue Service (the “IRS”) and willis not be a guarantee of the results. No ruling has been requested from the IRS with respect to any matter affecting the Fund or prospective investors, and theinvestors. The IRS may disagree with the tax positions taken by the Trust. IfTrust, 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 United StatesU.S. federal income tax purposes, (i) a citizen or resident of the United States, (ii) a corporation created or organized in or under the laws of the United States or any political subdivision thereof, (iii) an estate the income of which is subject to United StatesU.S. federal income taxation regardless of its source or (iv) a trust that (a) is subject to the supervision of a court within the United States and the control of one or more United States persons as described in section 7701(a)(30) of the Code or (b) has a valid election in effect under applicable Treasury Regulations to be treated as a United States person. A “Non-U.S. Shareholder” is a holder that is not a U.S. Shareholder. If a partnership or other entity or arrangement treated as a partnership holds our Shares, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are a partner of a partnership holding our Shares, the discussion below may not be applicable to you and, you should consult your own tax advisor regarding the tax consequences of acquiring, owning and disposing of Shares.
EACH PROSPECTIVE INVESTOR IS ADVISED TO CONSULT ITS OWN TAX ADVISOR REGARDING THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF AN INVESTMENT IN SHARES, AS WELL AS ANY APPLICABLE STATE, LOCAL, OR FOREIGN TAX CONSEQUENCES, IN LIGHT OF ITS PARTICULAR CIRCUMSTANCES.
Tax Classification of the Trust and the Fund
The Trust is organized and will be operated as a statutory trust in accordance with the provisions of the Trust Agreement and applicable Delaware law. Notwithstanding the Trust’s status as a statutory trust and the Fund’s status as a series of the Trust, due to the nature of itsthe Fund’s activities, the Fund will be treatedclassified as a partnership“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 generally taxable as a corporation. In the case of ana 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 of futures, forwards, and options with respect to commodities, “qualifying income” also includes income and gains from commodities and from such futures, forwards, options, and, provided the partnership is a trader or investor with respect to such assets, swaps and other notional principal contracts with respect to commodities.
The Trust and the Sponsor expect to representhave made the following representations (the “Representations”) to Vedder Price:
| ● | atAt least 90% of theeach 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; |